Wednesday, May 5, 2010

Crisis Panel to Probe Window-Dressing at Banks $GS $DB $BAC $WFC

iconIt’s an open secret on Wall Street that many big banks routinely — and legally — fudge their quarterly books.
But now Washington is taking a hard look at a range of maneuvers that help banks dress up their financial statements, and raising some uncomfortable questions about banks’ bookkeeping, Louise Story writes in The New York Times.
The techniques in question, which are normally relegated to the shadows of finance, are expected to be thrust into a public spotlight on Wednesday by the federal committee that is investigating the causes of the financial crisis. The Financial Crisis Inquiry Commission is expected to focus most sharply on the way banks slim down their balance sheets before reporting their results and on loans they receive from entities like special-purpose vehicles and hedge funds, which are allowed to operate with little public disclosure.
What is perhaps surprising is that many of the practices that enabled investment banks like Lehman Brothers to mask their deteriorating finances during the crisis are still wide open — and still being employed by other banks.

Before it collapsed, Lehman crossed the line with a stratagem that enabled it to hide $50 billion, according to a report on the bankruptcy releas ed earlier this year by a court-appointed examiner.
The big question is the extent to which other major banks used, and still use, creative financing techniques, and whether they, like Lehman, broke any rules.
The Securities and Exchange Commission is examining the borrowing practices of nearly two dozen financial companies. It is unclear if the S.E.C. will turn up any wrongdoing.
But industry analysts say that, even now, many financial companies routinely obscure their assets and risks in their quarterly financial statements through a variety of practices.
“Do financial institutions window-dress? Yes,” said Brad Hintz, an analyst with Sanford C. Bernstein & Company, who was Lehman’s chief financial officer in the 1990s. “You have close client relationships that you deal with to bring your balance sheet up and down. Absolutely. That’s part of the process.” This wizardry is typically carried out in a variety of ways on a bank’s trading floor.
In what is known as “netting,” for instance, banks that swap similar shares with each other, or their clients, can avoid recording those assets on their financial statements.
Banks also routinely lend out shares that they own in return for cash, thus temporarily removing those shares from their books. Total-return swaps — part of a family of financial derivatives that played a role in fomenting the crisis — are used to achieve similar results.
The Jefferies Group, a midsize investment bank, has gone so far as to shift the timing of its own financial reports this year so that, for a price, it can open its balance sheet to other banks looking to massage their numbers, industry analysts said. A Jefferies spokesman declined to comment.

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