Big Banks Mask Risk Levels (18 Banks Understated Debt Levels)

[kpete]

Source: Wall Street Journal

Big Banks Mask Risk Levels
Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review


By KATE KELLY, TOM MCGINTY and DAN FITZPATRICK

Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—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.

Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.

That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.

Read more: http://online.wsj.com/article_email/SB10001424052702304830104575172280848939898-lMyQjAxMTAwMDAwOTEwNDkyWj.html

[lunatica]

1. Why is understating your debt to fool lenders be legal?

I bet it I did that I wouldn't be able to get away with it without some penalty.

[naaman fletcher]

4. It's only legal when you are GS, or C, and you own the government. nt.

[earcandle]

2. How could it not be frauding the investors and the public?

semantics suck. 

[naaman fletcher]

3. Geithner's role? The real scandal.

Normally a bank, to engage in such a massive repo deal, would use another bank as counter-party. Yet, all the big U.S. banks did the same trade, so who was on the other side?

Perhaps the Treasury in which case you have Geithner actively participating in accounting fraud. Another possibility is foreign banks, but surely Geithner would still have known about it.

The point is that there is no difference between the big banks and the Treasury. They are one and the same.

It reminds me of Alexander Hamilton and his banker patrons and how it lead to the Whiskey Rebellion.

[Demeter]

5. I don't think it is legal, regardless of the WSJ

And unfortunately, I don't think there will be any consequences, either.

Move Your Money--that's our only hope to bring down these criminal enterprises.

[gratuitous]

6. That's not a good narrative

Let's go back to how low-income people "forced" banks to write all those overpriced loans for overvalued property.

[dixiegrrrrl]

7. So it was not just Lehman that did that.

And most likely not just "our" big banks, it is got to be a global fraud.

"Full faith and value" no longer exists, does it?

[Zenlitened]

8. It's not just the banks. Many, if not most, of the big stock-issuing companies...

... have been doing this for years and years.

GE, anyone? "Imagination At Work" is not merely a clever slogan. It's the Prime Directive of GE's financial reporting department.