Stephen Foley: Wall Street's habit of 'window dressing' isn't illegal – it's just wrong
Saturday 18 September 2010
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.
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