S.E.C. Allows Major Banks To Cook The Books

S.E.C. Chairman, Mary Schapiro has a past history of sleeping at the regulatory wheel. Apparently, she is dosing up again on Tylenol PM, passed out at the S.E.C. wheel, as several major  banks cook their books to window-dress their end-of-quarter reports.

According to studies by The Wall Street Journal, reported on May 26, 2010, 18 major banks – known as primary dealers because they trade directly with the Federal Reserve –  routinely reduce their short-term borrowings at quarters-end in order to provide a false published impression that they are carrying acceptable levels of risk.  They load up again once each new quarter is under way.  This manipulation is far from minor.  End- of -quarter reductions in short-term borrowings have averaged 42 per cent, by comparison with quarterly peaks, for these 18 institutions over the past five quarters.

Intentionally masking debt in order to deceive investors violates the guidelines of the Securities and Exchange Commission. Under questioning following this WSJ disclosure, Mary Schapiro merely indicated that the SEC would ‘consider introducing’ stricter disclosure rules. In reality, the rules are already on the books, but have been ignored by a sleeping chairman. The probability that stricter rules will be introduced and enforced is all but zero. The sleeping pills may well be being force-fed down Mary Schapiro’s reluctant throat by Ben Bernanke and Timothy Geithner, both perhaps trying to hide the fact that the 2009 bank stress tests were completely rigged.

The banks mask their true indebtedness by lowering their net borrowings in the ‘repurchase’ or ‘repo’ market. Once the new quarter begins, they boost their leverage once again to increase returns (and risk). This follows a pattern not far distant from that used by Lehman in 2008, when it reduced its quarter-end borrowing by classifying repo loans as sales. Oh, yes, among the major culprits in end-of-quarter window-dressing are to be found Bank of America and Citigroup,  both teetering on insolvency and both the biggest recipients of taxpayer subsidies.

Surely the banks will never learn while regulators remain asleep at the wheel. Wake up, Mary Schapiro, wake up and earn your salary. And if Ben Bernanke and Timothy Geithnner harass you on the issue, report them to Fox News.

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