Mr. Robinhood. „What are the near and far legs in a buyout contract?“ Access on August 14, 2020. Pension transactions are generally considered a reduction in teineram credit risk. The biggest risk in a repo is that the seller does not maintain his contract by not repuring the securities he sold on the due date. In these cases, the purchaser of the guarantee can then liquidate the guarantee in an attempt to recover the money he originally paid. However, the reason this is an inherent risk is that the value of the warranty may have decreased since the first sale and therefore cannot leave the buyer with any choice but to maintain the security he never wanted to maintain in the long term, or to sell it for a loss. On the other hand, this transaction also poses a risk to the borrower; If the value of the guarantee increases beyond the agreed terms, the creditor cannot resell the guarantee. The University of Manhattan. „Buyout Contracts and the Law: How Legislative Amendments Fueled the Housing Bubble,“ page 3. Access on August 14, 2020. To explain the difference between the sales bill and the secure loan, look at the example of Lehman Brothers, which used major repo programs before finally going bankrupt in 2008. His practices are described in more detail in „How Lehman Brothers and MF Global`s Misuse of Repurchase Agreements Reformed Accounting Standards“ on page 44 of this issue.
In short, Lehman`s goal in using repo operations was to reduce the overall size of its balance sheet and reduce its leverage ratio, both of vital importance to maintaining a good credit rating. Guaranteed credit accounting does not achieve this objective and would result in unchanged leverage ratios. As a result, Lehman held a sales accounting with a buyout agreement. In this treatment, there is no recognition of a contractual obligation to repurchase in the balance sheet. The securities are debited at the time of return, the call option is removed and the cash returned to the lender includes an interest payment. Exhibits 1 and 2 illustrate this approach. In total, Repos Lehman helped remove up to $50 billion of debt from the balance sheet, which had little or no impact on other financial statements.