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.

A Russian hunter at the Medved bear-hunting lodge in Siberia
Save the tigerWildlife charities turn to those who kill animals to help save them
Davis says: 'My career has been about filling a niche - there were fewer short actors and fewer roles – but now I'm being offered all kinds of things'
PeopleWarwick Davis on Ricky Gervais, Harry Potter and his perfect role
Frank Lampard will pass Billy Wright and equal Bobby Charton’s caps tally of 106 caps against
sportFormer Chelsea midfielder in Etihad stopgap before New York contract
Arts and Entertainment
The first film introduced Daniel Radcliffe to our screens, pictured here as he prepares to board the train to Hogwarts for the first time.
booksHow reading Harry Potter helps children grow up to be gay-friendly
Arts and Entertainment
A scene from Aladdin is performed at the Tony Awards in New York in June
theatreBrit producer Lythgoe makes kids' musical comedy a Los Angeles hit
Usain Bolt of Jamaica smiles and shakes hands with a competitor after Jamaica won their first heat in the men's 4x100m relay
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
Life and Style
A small bag of the drug Ecstasy
Life and Style
Floral-print swim shorts, £26, by Topman,; sunglasses, £215, by Paul Smith,
FashionBag yourself the perfect pair
ebookA unique anthology of reporting and analysis of a crucial period of history
Netherlands' goalkeeper Tim Krul fails to make a save from Costa Rica's midfielder Celso Borges during a penalty shoot-out in the quarter-final between Netherlands and Costa Rica during the 2014 FIFA World Cup
newsGoalkeepers suffer from 'gambler’s fallacy' during shoot-outs
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmReview: A week late, Secret Cinema arrives as interactive screening goes Back to the Future
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Financial Analyst - Forecasting - Yorkshire

£300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...

Business Architect - Bristol - £500 per day

£500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...

Regulatory Reporting-MI-Bank-Cardiff-£300/day

£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Day In a Page

Save the Tiger: Meet the hunters tasked with protecting Russia's rare Amur tiger

Hunters protect Russia's rare Amur tiger

In an unusual move, wildlife charities have enlisted those who kill animals to help save them. Oliver Poole travels to Siberia to investigate
Transfers: How has your club fared in summer sales?

How has your club fared in summer sales?

Who have bagged the bargain buys and who have landed the giant turkeys
Warwick Davis: The British actor on Ricky Gervais, how the Harry Potter set became his office, and why he'd like to play a spy

'I'm a realist; I know how hard this business is'

Warwick Davis on Ricky Gervais, Harry Potter and his perfect role
The best swim shorts for men: Bag yourself the perfect pair and make a splash this summer

The best swim shorts for men

Bag yourself the perfect pair and make a splash this summer
Has Ukip’s Glastonbury branch really been possessed by the devil?

Has Ukip’s Glastonbury branch really been possessed by the devil?

Meet the couple blamed for bringing Lucifer into local politics
Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup