Stephen Foley: Wall Street's habit of 'window dressing' isn't illegal – it's just wrong


US Outlook: Even regulators have taken to using the phrase "window dressing" to describe Wall Street banks' habit of reducing their short-term borrowings for a few days around the end of each quarter, in order to make themselves look less risky than they really are.

Window dressing is too benign a term. What banks, led by Lehman Brothers, but also including Bank of America and Citigroup, have been doing is much worse than simply dressing up their finest wares in the shop-front window. It is more like finding an Oscar de la Renta dress in the window of a Wal-Mart. It is misleading, and often deliberately so.

Thanks to an examiner's report commissioned by the bankruptcy courts, we know that Lehman even had a name for the accounting trick: Repo 105. At the end of each quarter before its collapse in 2008, Lehman was able to make its balance sheet look $50bn (£32bn) lighter than it really was, deceiving worried investors who were pressing it to reduce its leverage.

Wall Street's apologists argue that there are lots of operational reasons why short-term borrowings, which are volatile, might fall at the quarter-end, but they don't add up to a full explanation. According to one analysis, broker-dealers report debts that are an average of 42 per cent below their peak in the quarter.

Since the Lehman report alerted regulators to the trickery, Bank of America and Citigroup have restated quarter-end results to add on billions of dollars of hidden debt. They say the errors were not material.

Now the Securities & Exchange Commission is proposing new rules that would make it harder for banks and other financial institutions to get away with the practice. Quarterly reports will have to include a number for the average short-term debt level over the period, not just a number for whatever level the traders and accountants have managed to get debt down to on reporting day.

One of the lessons of the credit crisis is that short-term borrowings are wont to evaporate in a panic, so measuring them accurately is vital for investors who want to assess how risky their investment might be. They will also play an increasing role in regulators' assessments of banks, now that liquidity rules have moved to the top of the international agenda.

Mary Schapiro, who chairs the SEC, was at pains to say the Commission was "not suggesting there is anything wrong with these borrowing practices", when she introduced the new rules on window dressing yesterday. What she meant was that there is no suggestion there is anything illegal. That is not the same thing as wrong.



Government money well spent on banks

You won't find a single American politician this election season who will praise the Wall Street bailout, which was mooted two years ago today. You might get some grumbly comments about the bailout being a "necessary evil" by the defensive Congressmen who voted for it, but no one is going to actually, proudly tell the truth: the bailout was the single best investment of government money ever in peacetime.

The Troubled Asset Relief Program, Tarp, as the bailout was misnamed, will be closed for new spending from 3 October, and the Congressional Oversight Panel established to monitor the scheme has just put out an end-of-term report. The main theme of its latest report is that mis-communication and policy swerves have led to such public disillusion with the whole idea of bailouts that government may have much less room to manoeuvre in future crises. That is a terrifying prospect.

Shame, then, that the report is so mealy mouthed when it comes to what Tarp achieved, and in particular about the fact that major parts of the scheme not only didn't cost a dime in the end, they made money for US taxpayers. Of the $475bn allocated to recapitalise hundreds of US banks, refinance two major car makers and the insurance giant AIG, reliquify the securitisation market and help struggling homeowners, the latest guess is that all but $66bn will be returned to taxpayers.

Most of that $66bn loss is the cost of paying mortgage lenders not to foreclose on underwater borrowers, ie nothing to do with subsidising Wall Street. And with every passing day, government-owned AIG and General Motors are healing their businesses. If the Treasury can resist the temptation to sell down its shares at a loss, in early flotations, even these money sucks might pay out in the end.

Never forget what Tarp saved: the horrifying costs of a financial collapse and a second Great Depression in the US – in tax money lost, social spending that would have been needed, and economic competitiveness wrecked, possibly for good.

Far from costing $700bn – the initial sum for which Treasury Secretary Hank Paulson asked two years ago this weekend – Tarp was a vastly profitable investment in the US economy, and one on which its recipients have not defaulted.



Barnes & Noble brought to book

The shareholder uprising at Barnes & Noble reaches its showdown next week, when the world's biggest book retailer hosts its annual meeting. Supermarket billionaire Ron Burkle wants board seats and an end to the nasty poison pill defence that B&N used to stop him raising his stake.

Let's hope he wins, so he can shake up a board that took too long to face up to the realities of the digital world, and which has behaved in a self-serving and disingenuous manner throughout this battle.

B&N tried to shift the blame for its latest profit warning to Mr Burkle, citing the costs of defending the company from him, even though it was hardly under an obligation to launch the poison pill. Now it has been spending like crazy to persuade voters to back existing management, penning three letters to shareholders in as many weeks.

Time for the company to turn over a new leaf.

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
News
news
PROMOTED VIDEO
New Articles
i100
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam