A repo transaction involves a firm selling assets to another company, while agreeing to buy them back at a slightly higher price after a short period.
This can take as little as overnight, so the transaction becomes a short-term loan with the assets the collateral.
Because the term is short, there is little risk the collateral will lose its value. The lender or firm making the purchase thus takes a low interest rate.
With repo transactions, a borrower can get funds more cheaply than it could with one long-term loan that would put the lender at greater risk.
Under standard accounting rules, ordinary repos are considered loans, and the assets remain on the firm's books, But if a borrower could find a way that removed the assets from its books, often just before the end of the quarterly financial reporting period, the move temporarily made the firm's debt levels appear lower than they really were.
That is where investment banking bookkeeping disputes arose during the 2008/2009 financial debacle. ( See the Earl J. Weinreb NewsHole® comments.)
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