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Repo

A 'repo' is standard sale and repurchase agreement.

A 'repo' is standard sale and repurchase agreement. A repo can be treated in two ways by a firm. If assets are genuinely sold, with just a small chance of being bought back later, then a sale is booked, the assets are taken off the balance sheet and no liability to repurchase them is recorded.

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If the seller plans to repurchase the assets, they stay on the balance sheet along with any 'sales proceeds' and a matching liability is recorded. In short, the deal is treated as a secured loan rather than a sale. In Lehman's case, repos that were in reality loans were treated as sales. That way it improved its balance sheet leverage ratios ahead of quarterly results.

Watch Tim Bennett's video tutorial: What is a repo?

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