The Wall Street Journal continues its excellent work on the Wall Street “window dressing” story, which it broke early last month.
Michael Rapoport and Tom McGinty find that Bank of America, Citigroup, and Deutsche Bank—too big to fail goliaths all—have systematically lowered their debt levels before quarterly reporting periods in order to obscure how much they have.
Over the past 10 quarters, the three banks have lowered their net borrowings in the “repurchase,” or repo, market by an average of 41% at the ends of the quarters, compared with their average net repo borrowings for the entire quarter, according to an analysis of Federal Reserve data. Once a new quarter begins, they boost those levels.
The difference between this story and the first one is that the Journal actually zeroes in on eight big banks and their borrowing levels. The original calculated an average of eighteen banks to show how the biggest ones were reducing their debt at quarter’s end and raising it again once the new period began. Both of them are enterprise stories dug out by reporters doing the numbers themselves.
This is good context:
Intentionally masking debt to deceive investors violates Securities and Exchange Commission guidelines. Before sliding into bankruptcy in 2008, Lehman Brothers Holdings Inc. reduced its reported quarter-end borrowing by classifying repo loans as sales, a bankruptcy examiner found—creating what the examiner said was a “materially misleading” picture of Lehman’s financial condition.
Other banks have denied using the same kind of transaction, which Lehman dubbed “Repo 105s.”
The WSJ clears Goldman Sachs, JPMorgan Chase, and Morgan Stanley, saying they “haven’t regularly lowered their quarter-end borrowing.” Of the three it focuses on, Citigroup does the most futzing around, but Bank of America has had some wild swings, too:
During the first quarter of 2010, Bank of America’s average net repo debt rose to an average $130.1 billion, then dropped 61%, to $50.6 billion, at the end of the same quarter.
One thing that’s not clear to me from this piece is just how much these moves reduce the banks’ overall debt levels and leverage ratios. The piece is vague on the latter here:
The banks’ overall “leverage”—that is, their use of borrowed funds to boost returns—frequently has declined at the end of quarterly periods as well, the analysis shows.
But it’s still good work.
Ryan, I love the Audit, but have to disagree with you here. This WSJ piece is much ado about nothing and certainly not worthy of a front page story on the WSJ.
The Repo 105 story was huge, because Lehman only reported "ending" balance sheet numbers (they did not report "average" balance sheets), so any shenanigans they were pulling to shrink the balance sheet at the end of each quarter remained hidden from investors and counterparties, and it was not possible for anyone to discover this.
The WSJ story however, focuses on banks that report average and ending balance sheets. If a bank pulls repo 105 shenanigans at the qtr end, their average balance sheet will still show a very large balance sheet (on 89 of the 90 days), no matter how small their balance sheet ended the quarter at on the 90th day.
This is a HUGE difference between Lehman and these banks, and something barely mentioned in the WSJ story, since it negates the entire argument of their front page "expose". It's impossible to "deceive" investors with a small quarter ending balance sheet, when in the same 10Q you are releasing your quarterly average balance sheet, showing your true leverage.
This article (and its placement on pg A1) is just one more example of the once smart, business savvy and trustworthy WSJ slipping towards sensationalist, biased, rabble-rousing Murdochian stories that imply things that are simply not true.
#1 Posted by Tyler, CJR on Wed 26 May 2010 at 08:52 PM