If You're Going to Do Something Illegal in America, Do Something Spectacularly Illegal
If you want to avoid facing a tough prosecution for malfeasance, be a banker, not a biker.
That appears to be the lesson of Saturday’s Wall Street Journal, where the lead story was about how Bank of America repeatedly hid its massive bad debt holdings from regulators and investors through a creative accounting device called “repurchase agreements.” A second story just above the fold told how US Food and Drug Administration prosecutors are “Casting a Wider Net” investigating the use of steroids by competitive cyclists.
According to the BofA story, the bank, during a Securities and Exchange Commission investigation into the real financial condition of the nation’s biggest financial institutions, admitted that at the ends of all the quarterly reporting periods from 2007 through 2009, it had used repurchase agreements, or “repos,” to temporarily shed bad debt before drawing up and releasing its required public filings. That is to say, the bank lied about and hid from view its weakened liquidity position all through the financial crisis.
Astonishingly, the Wall Street Journal article reports that this practice, known euphemistically in financial industry parlance as “window dressing,” is “not illegal in itself,” unless it is done with the intent of misleading investors. The article is quick to note that “BofA said its incorrect accounting wasn’t intentional.” (The newspaper didn’t go to the SEC or to any independent source such as an academic expert or lawyer for comment on this laughable whopper.)
Every three months, BofA was transferring mortgage-backed securities briefly to a trading partner in return for a simultaneous agreement to repurchase similar securities from the same partner, once the required SEC filing had been shipped out in the mail. As the Wall Street Journal’s reporter Michael Rapoport writes, “The practice amounts to a bank renting out its balance sheet for short periods; the bank gets fees, and the client on the other end of the trade gets short-time cash.”
If this kind of thing is not deliberate fraud I don’t know what is. Yet the bank, in its statement to the Wall Street Journal, claims the “effort to manage its balance sheet” was “appropriate” and that the intent behind the shell game was not to mislead investors or regulators, but rather was “to reduce the specific business unit’s balance sheet to meet its internal quarter-end limits for balance sheet capacity.”
How’s that for financial mumbo jumbo?