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U.S. Banks Hid Risk by Lowering Debt Before Reporting, WSJ Says

By Chris Peterson and James Gunsalus | Bloomberg | April 9, 2010

U.S. banks masked their true risk levels by temporarily lowering debt before reporting it, the Wall Street Journal said, citing data provided by the Federal Reserve Bank of New York.

Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and 13 other banks all understated the amount of debt used to pay for securities trades by cutting them by an average of 42 percent at the end of five quarterly periods; the debt levels were then boosted midway through each quarter, the newspaper said.

After the collapse of Lehman Brothers Holdings Inc., spurred in part by excessive borrowing, in 2008, banks have become more concerned that reporting high debt levels could jeopardize share prices and credit ratings, the Journal said. While not illegal, the practice can distort investors’ impression of risk being taken by banks, the report said.

Hong Kong-based spokespeople for Goldman Sachs, Morgan Stanley, JPMorgan and Citigroup declined to comment on the Fed data or the report. Banks not identified in the report confirmed that they temporarily cut borrowings at the end of a quarter and some noted their regulatory filings tell investors debt levels can rise and fall during the quarter, the Journal said.

Regulation of the financing activity data documented by the New York Fed falls under the auspice of the Securities and Exchange Commission, the U.S. brokerage watchdog, the report said, citing an unidentified official at the Federal Reserve Board. The New York Fed declined to comment, it said.

The SEC has inquired with about 24 large financial firms about the practice, indicating the agency is interested in finding accounting techniques that could mask a firm’s risk- taking, according to the Journal.

Fed data that captures the accounting shows it has occurred periodically since recording started in 2001, though not as consistently as in 2009, the paper said.

To contact the reporters responsible for this story: Chris Peterson at cpeterson@bloomberg.net; James Gunsalus at jgunsalus@bloomberg.net

April 10, 2010 - Posted by | Corruption, Deception

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