Citing data from the Federal Reserve Bank of New York, the Wall Street Journal reported that 18 banks, including giant banks Citigroup (NYSE:C), Goldman Sachs Group (NYSE:GS), Morgan Stanley (NYSE:MS), J.P. Morgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC), hid debt levels before having to report their quarterly results over the last five quarters.
According to the report, the banks would lower their debt levels on a temporary basis to give the appearance of being much more sound they they in reality were and are.
Manipulating data isn’t anything new to the banks, but if these reports are true, it could unveil what many have been talking about concerning the true conditions of the banks – which aren’t as near as healthy as they’re being let on as being – are worse than expected.
Considering the debt is reported at 42 percent below what it actually is, makes this a huge story, and when you spread that across 18 banks, it helps us understand the enormous risk still inherent in the banking system, and they are going about doing business as usual as far as lack of transparency in doing business.
I find it incredible that in this economic and regulatory environment they’re willing to take this type of risk to make themselves appear healthy when they in fact aren’t near as healthy as the reports are saying, and are in far deeper debt and partaking in more risky behavior than is being revealed.
Why hide the facts and take that type of risk? For the most part it has to do with credit ratings, which if lowered, would result in costing more to gain access to capital because of higher interest rates.
But when you think about it, this is similar practices which people who got mortgages they couldn’t afford got into, as they would put all sorts of numbers on the application which weren’t checked out in many cases, or outright ignored, and received the loan on the properties anyway. We all know where that ended up.
The other element the stock price of the banks would also take a hit, but that’s too bad in my estimation. If these banks are again entering into shady practices in order to present themselves as being much stronger than they really are, it’s a lie that will come back to haunt them, as all investors have the right to have accurate information at their fingertips to make the best decision they can.
To hide data to make things look better than they are is not only unethical, but could result in a plethora of lawsuits if the banks struggle and people again start to lose their money based on the appearance everything was doing great, when in truth the foundation is shaky and they’re continuing to hide the facts.
