10 July 2010

The Banque de France

There's a fascinating story in Thursday's Financial Times about the central bank of France and the role it may have played in the shenanigans leading up to the collapse of Lehman Brothers in Septemnber 2008.

Regular readers in the econoblogosphere will not need to be reminded that part of the Lehman decline-and-fall involved an instrument known (at first internally, now to the world!) as Repo 105.

Repo 105, and its cousin Repo 108, were transactions designed to remove certain assets from the balance sheet, usually for a period of less than two weeks. As the term suggests, these "repos" were quite similar to standard repurchase deals, used to secure short-term financing. There was just one big difference ... Lehman did not account for Repo 105 transactions as financing transactions, but instead treated them as true sales.

Here's the intriguing part. Nobody can do a Repo, or a "Repo 105" for that matter, alone. There has to be a counter-party.

The FT tells us Thursday, "In the final months ... the French central bank was often on the other side of the bank's deals, taking collateral in the process." We know what was in it for Lehman. They could lessen the degree to which they (seemed) over-leveraged during key snapshot periods. But what was in it for the Banque de France?

The FT's Henny Sender seems baffled.

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