A report from the Wall Street Journal states that based on data gathered from the Federal Reserve, Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Deutsche Bank (NYSE:DB) are the worst offenders for removing debt from their books just before they report their quarterly earnings.
Citigroup and the Federal Reserve had no comment on the story, while Bank of America said this to the Wall Street Journal:
“From time to time, the size of our balance sheet will fluctuate due to market liquidity, client financing needs, the company’s risk appetite and balance-sheet-management functions.”
Deutsche Bank said to the financial newspaper, that Deutsche Bank told the newspaper that repos are “just one aspect of our liability-management program” and that the bank “regularly adjusts the mix of its secured and unsecured short-term borrowing to optimize its funding.”
At this time the reason the banks and market in general shrugged off the revelation is that the practice is nothing new, and smart investors always take with a grain of salt the numbers put up by any company in their quarterly reports.
What makes this different and a story worthy of more consideration, is the banks slashed their net borrowings by 41 percent when averaged out, buy going to the repo market, according to the Journal.
The current economic weakness also changes the narrative, and banks that continue these practices at the levels some of them are doing, provide a story that isn’t a real one, and one based on creative accounting to make them look much more sound than they really are.
Again, this is standard industry practice for many public firms, but in times like these, financial institutions reporting they are much more healthy than they really are is a danger to not only those investing in them, but to those making decisions in other areas based on assumptions the giant banks are safe now.
Just on Monday, Weiss Ratings came out with similar concerns, saying the failure rate of banks could rise even further than expected, based on the numbers which say they aren’t near as healthy as they let on.
What repo rates entail are the borrowing of short-term funds in order to make larger trades, using securities as collateral. Failed trades can devastate a company making the wrong moves, and investors and shareholders may not be able to see it in the number in order to prepare for it.