Banks Masked Risk Levels
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According to data from the Federal Reserve Bank of New York, highlighted in the Wall Street Journal, major banks on Wall Street have lowered their debt before reported to the public by masking their risk levels over the past five quarters.
Among the 18 banks that understated debt levels were Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C).
The banks lowered their debt levels used to fund securities trades by an average of 42 percent in each of the past five quarters towards the end of the period. The banks would then boost debt levels towards the middle of the next quarter.
While this is a legal practice, it may also give investors delusions of the actual risk levels of large financial firms. Some of the banks have publicly said that borrowing levels can move dramatically during a given quarter.
"The efforts to manage the size of our balancing sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman told the Wall Street Journal.
The data from the New York Fed showed that net repo borrowings among the group of 18 banks were 42 percent below the peak in net borrowing in a given quarter than at the end. The repo market makes up a small piece of overall bank activity, but it does show the show the trading risks that banks are willing to take.
The Securities and Exchange Commission is currently investigating nearly two dozen financial institutions regarding the repo market in an effort to uncover accounting techniques that may mask risk taking.
The SEC recently uncovered that Lehman Brothers mask $50 billion in debt before its collapse in 2008 by using repos. Lehman used an accounting technique known as "Repo 105" to mask its debt and keep it away from the firm's balance sheet.
Among the 18 banks that understated debt levels were Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C).
The banks lowered their debt levels used to fund securities trades by an average of 42 percent in each of the past five quarters towards the end of the period. The banks would then boost debt levels towards the middle of the next quarter.
While this is a legal practice, it may also give investors delusions of the actual risk levels of large financial firms. Some of the banks have publicly said that borrowing levels can move dramatically during a given quarter.
"The efforts to manage the size of our balancing sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman told the Wall Street Journal.
The data from the New York Fed showed that net repo borrowings among the group of 18 banks were 42 percent below the peak in net borrowing in a given quarter than at the end. The repo market makes up a small piece of overall bank activity, but it does show the show the trading risks that banks are willing to take.
The Securities and Exchange Commission is currently investigating nearly two dozen financial institutions regarding the repo market in an effort to uncover accounting techniques that may mask risk taking.
The SEC recently uncovered that Lehman Brothers mask $50 billion in debt before its collapse in 2008 by using repos. Lehman used an accounting technique known as "Repo 105" to mask its debt and keep it away from the firm's balance sheet.
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