News headline: “Major U.S. banks masked risk levels”.
Wait while I feign surprise … there, did you see it?
The Wall Street Journal has this story today, but by the time you get to this you may well have to pay to read it. It’s pretty easy to grasp what’s going on here. According to the Journal:
“A group of 18 banksâ€”which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.â€”understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.”
Confronted with this data, what say the banks?
“Though some banks privately confirm that they temporarily reduce their borrowings at quarter’s end, representatives at Goldman, Morgan Stanley, J.P. Morgan and Citigroup declined to comment specifically on the New York Fed data. Some noted that their firm’s financial filings include language saying borrowing levels can fluctuate during the quarter.
“‘The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements,’ a Bank of America spokesman said.’”
What a ringing endorsement of the policy. “Hey, it’s legal.” Right. And therein perhaps lies part of the problem.
“The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.
“The repo market played a role in recent accusations leveled by an examiner in Lehman’s bankruptcy case. But rather than reducing quarter-end debt, Lehman took steps to hide it.”
Oh, so if you take steps to hide the debt, that’s bad. Just moving it around as part of the normal course of business - you know, at the end of every quarter - that’s OK. I think I get it now.
The Journal story also details a trade at Bank of America at the end of the first quarter in 2009. According to a bank spokesperson: “… the team was aware of and worked within its risk limits.”