Liars Lexicon

Repo is agreeing with another party that you will ‘sell’ them something they agree to sell back to you at an agreed price on an agreed date. It’s not complicated, only, on the face of it, seemingly pointless. But Repos have their uses. Repos are a useful and legal way of regulating short term cash flow.For example central banks use them to withdraw money from the financial system. They ‘sell’ assets to the banks. The banks pay with cash. That cash is ‘out’ of the system. The money supply is ‘tightened’. But it’s not a sale in the way that the corner shop sells sweets to children, because the goods and the money are both going to be returned at a set date at an agreed price/profit.

Another use is how Lehman used it in the run up to their bankruptcy. And in fact is now seen as part of the trigger for their collapse and the crisis in general.

Lehman used what they called Repo 105 and it’s suddenly causing a stink, because now that shit is starting to fly about, people it might stick to, want to be seen to be surprised, outraged, horrified and indignant. And hopefully all of the above and more. What they don’t want to seem is complicit.

This is what Lehman did. They used repos but pretended they were in fact sales. And this is naughty and dangerous. Like playing with fireworks with the box open.

When they had need to prove to somebody, a creditor, auditor, regulator, taxman or client that they were as solvent as solvent can be, they repo’d what assets they could to another bank in return for cash. The other bank agreed because they knew they weren’t really buying the assets only holding them against borrowed cash. But Lehman didn’t show them as repos. They showed them as sales. Which made it seem that Lehman had found buyers for stuff, were correspondingly less leveraged and more ‘solvent’. The new cash, they would then also use to pay down debts and liabilities also making them look much healthier than they in fact were.

When the regulator went away, or they had published their quarter-end results, they would then reverse the whole process. The whole thing would cost them the whatever the other bank had charged them. All through 2007 and ’08 Lehman did this to make it look like they were less leveraged, had less debt and more cash than they had. The stink is over how much of this was actually known by the NY FED at the time. Guess who was head of the NY FED? Mr Timothy Geithner! But that’s another story.

It does seem however than Lehman was not alone in this Repo practice. Most of the other big banks were doing it too.

Which brings me to Lloyds. They have been accused by their own former head of tax compliance, Andrew Constantine, of using repos to avoid taxes! The same taxes they have greedily taken as a bail-out from those who DO PAY their taxes – you and me.

Mr Constantine claims (and others agree with him) that Lloyds used repos not to get cash but to get rid of it. Now I have to be careful here to point out that nothing I say from here on refers to Lloyds.

But imagine a business that had made lots of profit. It was lying around in bundles and the tax man was due any day. What to do? Call Captain Repo! This is what Captain Repo might have advised. Agree to repo some assets. BUT show them as lets say ‘investments’ or ‘loans’ or ‘purchases’. And even better if you can do it off-shore where scrutiny is not allowed. Client confidentiality and all that old boy! Suddenly a taxable profit becomes a liability. No tax.

Only because it was really a repo you get the cash back after that man in the simply dreadfully cheap suit goes away and takes his sandwich box with him.

To put it in ordinary person terms, imagine you had made a profit in your business and had all the cash in the bank. The tax man say he’s on his way. You phone a friendly second hand car dealer. He agrees to repo you a car. You give him your cash, he gives you his car. You agree to return car and cash – minus a small commission for his trouble once the tax man leaves. You then carefully and deliberately show the transaction not as a repo but as having bought a car. You need one. Suddenly you have no profits for the tax man to tax. Your tax bill disappears and so does Her Majesty’s inspector – feeling downcast and troubled.

Now this would be TAX AVOIDANCE if you’re middle class and TAX CHEATING if you working class. One get a fine, the other a short stay at Her Majesty’s pleasure.

At the moment Lloyds, however, is having its well heeled lawyers argue that what they did was just clever but fully compliant.

This is just one part of the Liars lexicon. Other terms we could cover are ‘impaired asset’, ‘non-functioning market’, ‘mark to model’, ‘liquidity problem’ or even QE and ‘stimulus’. George Orwell would have marveled.