How Lehman Brothers and MF Global's Misuse of Repurchase Agreements Reformed Accounting Standards

Carolyn Hartwell, PhD, CPA

Repurchase agreements, or repos, have existed since 1917 and play an important role in the short-term liquidity markets. Although the purpose of a typical repo is to provide a short-term loan between two parties, accounting standards have permitted the transaction to be recorded as a sale under certain circumstances. Repos became headline news in 2008 when Lehman Brothers went bankrupt, shedding a light on their particular accounting methods for these transactions. Three years later, the use of repos-to-maturity was blamed for the collapse of MF Global. This article describes how Lehman Brothers and MF Global manipulated and exploited the sale accounting method for repo agreements and the subsequent revisions to accounting standards.