US Bank Accounting 'Masks True Debt Levels’:

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7572887/US-bank-accounting-masks-true-debt-levels.html

US bank accounting 'masks true debt levels’

By James Quinn, US Business Editor
Published: 6:00AM BST 10 Apr 2010

Major Wall Street banks are using accounting techniques similar to those utilised by Lehman Brothers in its final days to mask the size of their balance sheets at the end of reporting periods.

The banks – which include Goldman Sachs – use complex but perfectly legitimate transactions in order to present investors and the wider market with a brighter assessment of their financial health.

Data analysed by the Wall Street Journal found that 18 major banks were, on average, able to reduce debt levels used to fund securities tradesby 42pc over the last five quarters using repurchase agreements, also known as “repo” trades. Under certain circumstances, some repurchase trades can be booked as “sales” and used to reduce debt.

The assessment, based on data from the Federal Reserve Bank of New York, highlights the extent to which advanced accounting is still in use, even in the wake of the crippling financial crisis.

In Lehman’s case, the court-appointed investigator’s report into the bank’s September 2008 downfall found that the bank had used “Repo 105” – the name given to the technique within the bank – to significantly mask its borrowing, so decreasing its apparent risk profile.

According to the report, the ruse allowed Lehman to claim its liabilities were $50bn (£33bn) lower than they actually were by May 2008, just months before the bank collapsed.

The US Securities and Exchange Commission (SEC) is now looking into how widespread the use of such techniques actually is.

At the end of March, the US financial regulator dispatched letters giving America’s24 largest banking and insurance firms two weeks to hand over detailed information on how the repurchase agreements are used, as well as how such agreements are accounted for and disclosed to investors.

It is not known what the SEC intends to do with the data once it has received it, or indeed whether it will ever be made public.

Whatever the outcome, the latest revelations about the extent of the use of repo-financing should worry investors in the financial sector, as it suggests that banks are continuing to take pre-crisis level risks in spite of the events of the last two years.

A Goldman Sachs spokesman said: “Normal fluctuations in the size of our balance sheet… as well as fluctuations in specific line items, are fully disclosed in our quarterly and annual SEC filings.”