JPMorgan Chase recorded some repurchase trades as sales, the same accounting gimmick that spawned Lehman Brothers’ now-infamous “Repo 105s”, suggesting that the failed bank was not alone in its interpretation of a new accounting rule.
Unlike Lehman, which never disclosed the effects of its repo deals on the firm’s balance sheet, JPMorgan detailed the year-end values of its repo sales and purchases in annual reports beginning in 2001, after a new accounting rule was introduced.
The practice ended in 2005 when the company merged with Bank One. “The transactions were done in very small amounts and were fully disclosed,” a spokesman said.
Lehman’s use of repo sales as a means to shrink its balance sheet was revealed last week by Anton Valukas, who was appointed in January 2009 by a US court to determine the causes of what was the largest bankruptcy filing in US history.
Mr Valukas reported that Lehman’s Repo 105 volumes spiked sharply at the end of a quarter as executives tried to shrink the balance sheet to make the bank appear stronger.
Repo trades have long been a vital source of funding for investment banks, and typically remain on the firms’ books. But under certain circumstances banks can account for the trades as a sale and thereby remove them from their books.
JPMorgan’s accounts list sales – the sort of deals Lehman undertook – and purchases, which imply it acted as a counterparty for others doing the same trades.
Its counterparty is not thought to have been Lehman, and JPMorgan was not named in Mr Valukas’s report.
The bank said the deals were part of an individual trading strategy, not a balance sheet management tool. Although Lehman channelled its deals through its London office to take advantage of a local legal opinion, JPMorgan’s trades were conducted in New York.
Unlike a broker-dealer such as Lehman, whose balance sheets were a literal snapshot of its positions at the end of each quarter, a commercial bank like JPMorgan reports average figures, making quarter-end “window-dressing” irrelevant.
In 2004, the last year the trades were done, JPMorgan reported $20bn in sales and $15bn in purchases. At the time, its balance sheet had swollen to more than $1,200bn following the acquisition of Bank One, a US regional lender.
JPMorgan Chase bought Bank One in 2004 to bolster its consumer-lending businesses and insulate the company from the often-volatile results of its investment and corporate banking operations. The deal also gave William Harrison, JPMorgan’s chief executive at the time, a success he had failed to cultivate himself; Jamie Dimon, a former Citigroup executive who had run Bank One, was named president.
Not longer after Mr Dimon’s arrival, he began to gut the combined company’s management team, replacing Mr Harrison’s deputies with his own longtime lieutenants. Three months after the JPMorgan-Bank One deal closed, Mr Dimon removed David Coulter as investment-banking chief and Dina Dublon as chief financial officer.