New details have emerged from a letter that Bank of America sent to the Securities and Exchange Commission (SEC) where the bank admits to hiding debt.
The letter was in response to an SEC inquiry to all major financial institutions following the discovery that Lehman played games with hiding debt in what Lehman classified as ‘Repo 105’ transactions. What Lehman was found to have been doing before their demise was essentially moving debt off of the books prior to earnings statements by reclassifying certain assets. And it was this activity that the SEC was looking into at other financial firms.
Bank of America’s response to the SEC states that they “mistakenly” hid debt in six separate transactions.
Bank of America Corp. admitted to making six transactions that incorrectly hid from view billions of dollars of debt, following a bid to cut the size of a unit’s balance sheet and meet internal financial targets.
The disclosure, made in a letter to the Securities and Exchange Commission, comes as the agency prepares to unveil the results of an inquiry into banks’ accounting for borrowing deals known as repurchase agreements, or "repos."
BofA’s letter was sent in April in response to the inquiry, but this is the first time the details of the six trades in question have been disclosed. The bank had acknowledged in its last quarterly report that its accounting for the transactions, made at the ends of quarters from 2007 to 2009, was incorrect.
The bank’s disclosure also suggests the trades may be an example of end-of-quarter "window dressing" on Wall Street, in which banks temporarily shed debt just before reporting their finances to the public. The practice, which The Wall Street Journal has uncovered in a series of articles, suggests the banks are carrying more risk most of the time than their investors or customers can easily see, and then juggling it during quarter-end reporting of financials. {…}
Window dressing is as old as Wall Street. But what Bank of America has done is commit fraud in my opinion. Companies moving funds around within the company to clean up the balance sheet prior to earnings is common, but when it is done without disclosure in the financial statements then it is fraud plain and simple.
In its letter to the SEC, which has been posted as a regulatory filing, BofA disclosed details of how it erroneously classified some short-term repos as sales when they should have been classified as borrowings over the past few years {…}
{…} In the letter, the bank said its incorrect accounting for the six trades wasn’t intentional. "We do not deliberately structure transactions that are economically disadvantageous simply for the purpose of recording a sale or reducing recorded liabilities." {…} (WSJ)
Oh come on Bank of America, do you really expect intelligent people to believe that those transactions, which made Bank of America’s balance sheet look a little better than it actually was is just an oversight?
When one cockroach is discovered it usually means there are hundreds in hiding. Did former CEO Ken Lewis retire because he knew about the cockroaches and wanted to get out before someone turned on the lights?
Occam’s Razor – The simplest explanation is usually the correct one
