Um, I don't think Repo 105 represents a 'hole' in the balance sheet in the usual sense. I mean it doesn't negatively impact on the solvency of the firm given it is a short-term swap of cash for good quality assets.

Granted, there is a 5% mismatch between the value of the cash and the collateral, which means the $50bn in Repo 105 resulted in an effective loss of $2.5bn - which 1) is recouped when the repo matures and you underpay by 5% when you repurchase the collateral; 2) is just 1% of the "hole" and, I suppose, 3) is a fair price to pay to reduce your leverage ratio.

If the amount of assets in the Repo 105 program had stayed constant (by rolling all the repos) rather than increasing at the time of closing the quarterly books the claim of intentional fraud would be much less plausible, and Lehman would just be taking a $2.5bn loss to permanently (as long as counterparties rolled the repos) shrink its leverage ratio.

The brainless should not be in banking -- Willem Buiter

Banks lend long-term assets, and fund themselves short-term (be it deposits or borrowing in the money markets). This is in the nature of things as is unavoidable. Therefore, any bank is vulnerable to a run, which is defined as an inability to secure short-term funding to meet maturing liabilities (in other words, an inability to roll maturing short-term credit). In August 2007 the 3-month interbank market completely dried up for weeks, taking Northern Rock with it. Lehman Brothers, being a broker-dealer, had no deposits and also funded itself exclusively in the short-term money markets (repos, not Repo 105, would be an example of this). The run on the money markets took with it Bear Stearns and eventually Lehman Brothers, which I seem to recall was the smallest and by far the most highly leveraged of the four big US investment banks (Goldman Sachs, Morgan Stanley and Merrill Lynch being the other three).

In the frame of Hyman Minsky's Stabilizing an Unstable Economy banks are by definition speculative, borrowing to pay the interest on their loans (this is what rolling short-term liabilities amounts to). When their leverage exceeds a certain threshold (which is lower if interest rates rise, which is what happened in the run on interbank credit 2 years ago) they become ponzi finance (ponzi finance is not a term of abuse in Minsky, just a name for a situation where you have to borrow to pay down the principal as well as the interest).

The brainless should not be in banking -- Willem Buiter