Great to see CBS’ 60 Minutes about Lehman. I wrote about Repo 105 over two years ago.

The entry most relevant to Japan was here, March 15, 2010.

The 60 Minutes piece wondered why the American SEC hasn’t done any prosecuting of Lehman Brothers officers. I wonder about it, too. My theory, though, is that they can’t pin individuals to individual acts.

When you step back, it’s clear that something fraudulent was going on. But, if you look at the individual actors, it’s hard to show a conspiracy. As far as the gang in Tokyo went, many of them were 25-Watters. I got brought in to figure out their yen carry trade, which was hard enough to explain to the back office—once it was clear that the Japan unit was borrowing yen to invest abroad. Imagine them getting a wrap around Repo 105.

Repo 105 was a trade where Lehman put up 105% of collateral to borrow 100% of money. This was really a secured, short-term borrowing, where the liability should have shown on the balance sheet. But Linklaters, a law firm in the UK, said that this was actually a “true sale” because no one regular trader would put up so much collateral (105%) to borrow the money.

So the cash was booked, but not the fact that it was borrowed via what amounted to over-secured lending.

Matthew Lee felt that the transaction smelled. I remember the name Matthew Lee from my own forensics about the yen carry trade. Lehman was a mess much earlier than what the general public is aware of.

This is what happens when you don’t have regulation.