Here Comes the Flood of Lies and Obfuscation
Earnings season for the all-powerful financial giants is an exercise in trickery and opacity. I have decried for years now the blatant deception inherent in the accounting practices of the financials ... and indeed of all the corporate holders of toxic derivative exposures that have been permitted to lie their way out of crisis by marking those assets to fanciful notions of presumed value under normalized conditions rather than writing them down to the pennies on the dollar the would fetch on the market even this many months into the OTC meltdown. All they have done is kick the can down the road, and permitted trusting investors to essentially forget about their very existence.
When insight emerged into Lehman's repo practices and other accounting tricks used to mask the true nature of its exposure and ultimate insolvency, I pointed out how far-fetched it would be to presume that Lehman would have been alone in such practices. As we now know, such activities remain the industry standard, and no one seems to care.
You may recall this rare gem of investigative reporting from the WSJ
Here's the same story in graph form.
"A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters."
Good ole BOA had this to say: "The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman said." Well... that's comforting. As David Weidner reports in one of the best financial commentaries I've seen in a long time: "Late last week, Bank of America Corp. became the latest big financial firm to cop to manipulating end-of-the-quarter earnings. In a letter to the Securities and Exchange Commission, B. of A. said it masked debt levels between 2007 and 2009 by making six trades designed to shine up the numbers on earnings day." So which is it BOA? Were your accounting practices "appropriate"? ... or were they specifically designed to obfuscate the degree of risk-taking underlying those golden profits that bank investors have been so enamored with in recent quarters? I think it's pretty clear ... use of the word "appropriate" was grossly inappropriate.
I can't say enough good things about this article from Weidner. I find his hard-hitting, no nonsense approach very inspiring. Here are some of the juiciest excerpts, but please be sure to click to the article for a full read ... it's well worth your time.
Wall Street banks and brokerages are readying second-quarter numbers for mass digestion. They'll show healthy balance sheets, tolerable risk levels and have all the trappings of well-run companies.
Don't believe a word of it.
You would think this kind of window dressing would raise the ire of analysts whose rosy analysis of Wall Street firms including American International Group Inc., Bear Stearns, Lehman Brothers and Merrill Lynch were made to look foolish by opaque and misleading balance sheets. Think again. Most analysts still read the suspect financial data they're handed every three months and take it as gospel.
Take a look at the usual suspects. Since the start of the year, analysts have issued six ratings upgrades to Citigroup, six to Goldman, four to Morgan Stanley and nine to Bank of America, according to FactSet. Combined, analysts have only issued five downgrades.
Regardless of Eliot Spitzer's personal failings and his lasting impact as a reformer, at least he had the gumption to challenge practices on the grounds of common sense and evenhandedness. Unfortunately, no one seems to have taken up the mantle of championing fairness in the markets. [So True!]
Even after the financial crisis, financial firms still take short cuts behind the scenes, the analysts keep playing it straight, investors continue to follow the analysts and credit ratings agencies. Not only does the emperor have no clothes, no one in the kingdom cares.
Maybe lie is too strong a word for the game big finance plays at the end of the quarter. It is, after all, trickery played inside the lines. But here's something you should refuse to call it: the truth.