Reports Regulators Probing Banks Use of Repo 105

Charlie Gasparino of FOX Business News has learned that securities regulators have begun investigating the extent that Wall Street and big banks used Repo 105 transactions to mask the facts of the amounts of leverage, or borrowing, that was used to finance trading operations.

The investigation includes regulators from the Federal Reserve and the Financial Services Association of the U.K. examining the full involvement of financial institutions in Repo 105 transactions.

The high amount of leverage by big banks is considered a main cause of the financial crisis that resulted in a global economic recession. Some banks on Wall Street borrowed as much as 30 times or more than the assets that they held at the time.

The Repo 105 transactions came to light in a recent report from the bankruptcy examiner investigating the collapse of Lehman Brothers Holdings. Lehman was accused of masking its massive leverage, but the firm sought a legal opinion and received approval from auditor Ernest & Young on the strategy.

The regulators are now looking to see what other firms may have used the transaction, according to FOX Business, including Morgan Stanley (NYSE: MS). The firm allegedly thought of using the Repo 105 strategy, but later decided not to.

The report from Gasparino also added that a CEO of a major investment bank acknowledged of at least one firm that during the worst times of the economic meltdown, used Repo 105 transactions.

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