The Wall Street Journal has reported that major U.S. banks temporarily masked their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky.
The paper, which cites a report based on data from the Federal Reserve Bank of New York, said that 18 banks, including Goldman Sachs (GS), Morgan Stanley (MS), J.P. Morgan Chase (JPM), Bank of America (BAC), and Citigroup (C), understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each quarterly period. The banks then increased the debt levels in the middle of successive quarters. The Journal said that the practice –privately confirmed by some banks — was legal but gave investors a skewed impression of the level of risk that financial firms take on regular basis.
According to the NY Fed data, which highlights the banks’ levels in the repo market, the banks’ outstanding net repo borrowings at the end of each of the past five Q’s were on average 42% below their peak in net borrowings in the same quarters.
WSJ: The SEC now is seeking detailed information from nearly two dozen large financial firms about repos, signaling that the agency is looking for accounting techniques that could hide a firm’s risk-taking. The SEC’s inquiry follows recent disclosures that Lehman (LEHMQ) used repos to mask some $50 billion in debt before it collapsed…
Overborrowing by banks was one of the major causes of the financial crisis and one that led to the catastrophic bank runs in 2008.
Due to the credit crisis, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished, the Journal said.