After having just stating in an interview earlier this week that although many banks are probably guilty of what Lehman was caught doing with Repo 105's pursuing those actions based upon semantics may be fruitless (it may be called depo 106?), Reuters comes out with this interesting story: Major US banks masked risk levels: report

(Reuters) - Major U.S. banks temporarily lowered their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky, the Wall Street Journal said, citing data from the Federal Reserve Bank of New York.

The paper said on Friday 18 banks, including Goldman Sachs Group , Morgan Stanley , J.P. Morgan Chase Bank of America and Citigroup , understated the debt levels used to fund securities trades by lowering them an average of 42 percent at the end of each period.

The banks had increased their debt in the middle of successive quarters, it said.

Citi, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley were not immediately available for comment when contacted by Reuters outside regular U.S. business hours.

Excessive leverage by the banks was one of the causes that led to the global financial crisis in 2008.

Due to the credit crisis, banks have become more sensitive about showing high levels of debt and risk, worried their stocks and credit ratings could be punished, the Journal said.

Federal Reserve Bank of New York could not be immediately reached for comment by Reuters.

 

The Wall Street Journal (see their interactive model) and ZeroHedge broke a similar storty with some meat behind it to justify the allegations. Ahhh!!! The return of real reporting, and not just from blogs!

After having just stating in an interview earlier this week that although many banks are probably guilty of what Lehman was caught doing with Repo 105's pursuing those actions based upon semantics may be fruitless (it may be called depo 106?), Reuters comes out with this interesting story: Major US banks masked risk levels: report

(Reuters) - Major U.S. banks temporarily lowered their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky, the Wall Street Journal said, citing data from the Federal Reserve Bank of New York.

The paper said on Friday 18 banks, including Goldman Sachs Group , Morgan Stanley , J.P. Morgan Chase Bank of America and Citigroup , understated the debt levels used to fund securities trades by lowering them an average of 42 percent at the end of each period.

The banks had increased their debt in the middle of successive quarters, it said.

Citi, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley were not immediately available for comment when contacted by Reuters outside regular U.S. business hours.

Excessive leverage by the banks was one of the causes that led to the global financial crisis in 2008.

Due to the credit crisis, banks have become more sensitive about showing high levels of debt and risk, worried their stocks and credit ratings could be punished, the Journal said.

Federal Reserve Bank of New York could not be immediately reached for comment by Reuters.

 

The Wall Street Journal (see their interactive model) and ZeroHedge broke a similar storty with some meat behind it to justify the allegations. Ahhh!!! The return of real reporting, and not just from blogs!

Wednesday, 20 January 2010 18:00

Op-Ed Email from a Subscriber

An op-ed email from a subscriber:

Hi Reggie:

Just a note to say your opinions as expressed in recent posts on
Boombustblog and ZH seem to make a lot of sense!  Have you sent them to the editorial pages of the WSJ or FT?

Also, I'm surprised there has been no discussion about the ethical and political ramifications of banks, etc using Federal funding and guarantees, whether implicit or explicit, to pursue proprietary trading strategies.  That is to say, to the extent that the business of assisting clients in funding economically useful endeavors that help grow the economy in a sustainable manner is being replaced by proprietary trading in a strictly a zero sum game, it seems a dubious path for a nation to follow.  In this situation, as Janet Tavakoli has pointed out, the concept of assisting a "client" in funding economic growth that can be shared throughout the economy is, instead, replaced by having a "counterparty" from whom money can be won through trading schemes.  It would be interesting to see the debate that ensues about whether the economic value of trading exceeds the cost of dividing market participants (including the unwitting ones who depend upon the actions of their pension fund and retirement fund managers) into those who win (e.g. GS) and those who lose.
Wednesday, 20 January 2010 18:00

Op-Ed Email from a Subscriber

An op-ed email from a subscriber:

Hi Reggie:

Just a note to say your opinions as expressed in recent posts on
Boombustblog and ZH seem to make a lot of sense!  Have you sent them to the editorial pages of the WSJ or FT?

Also, I'm surprised there has been no discussion about the ethical and political ramifications of banks, etc using Federal funding and guarantees, whether implicit or explicit, to pursue proprietary trading strategies.  That is to say, to the extent that the business of assisting clients in funding economically useful endeavors that help grow the economy in a sustainable manner is being replaced by proprietary trading in a strictly a zero sum game, it seems a dubious path for a nation to follow.  In this situation, as Janet Tavakoli has pointed out, the concept of assisting a "client" in funding economic growth that can be shared throughout the economy is, instead, replaced by having a "counterparty" from whom money can be won through trading schemes.  It would be interesting to see the debate that ensues about whether the economic value of trading exceeds the cost of dividing market participants (including the unwitting ones who depend upon the actions of their pension fund and retirement fund managers) into those who win (e.g. GS) and those who lose.

Of the many issues that I have been warning about concerning banks, their balance sheets and the risks that they take, one of the (and there are a few) most underappreciated is the currency risk of the "mother of all carry trades". See Roubini Not Alone in Fearing Dollar Carry Trade and Roubini Sees `Huge' Asset Bubbles Growing in `Mother of All Carry Trades'.

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said.

“The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.”

As has been the case at least twice in the past, I am in agreement with the man. The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.png

See the following for a backgrounder on my opinion before we move on to the risks of currency volatility and interest rate swaps in the "Too Big To Fail, but Too Big to Let Survive Intact" club:

 

Of the many issues that I have been warning about concerning banks, their balance sheets and the risks that they take, one of the (and there are a few) most underappreciated is the currency risk of the "mother of all carry trades". See Roubini Not Alone in Fearing Dollar Carry Trade and Roubini Sees `Huge' Asset Bubbles Growing in `Mother of All Carry Trades'.

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said.

“The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.”

As has been the case at least twice in the past, I am in agreement with the man. The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.png

See the following for a backgrounder on my opinion before we move on to the risks of currency volatility and interest rate swaps in the "Too Big To Fail, but Too Big to Let Survive Intact" club:

 

OCC Reports Second Quarter Bank Trading Revenue of $5.2 Billion

WASHINGTON — U.S. commercial banks reported trading revenues of $5.2 billion in the second quarter of 2009, compared to record revenues of $9.8 billion in the first quarter of 2009, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

“After such a strong first quarter, we expected to see a seasonal decline in trading revenues, and indeed that occurred,” Deputy Comptroller for Credit and Market Risk Kathryn E. Dick said. “Still, second quarter trading revenues were the sixth strongest since we’ve been keeping records.” With the advent of the relaxation of the mark to market rules, I am suspect of some of this trading revenue gain. I know the reduced competitive landscape led to higher spreads which leads to higher profits, but the ability to print your own profits with the adjustment of assumptions is scary, to say the least.

 

OCC Reports Second Quarter Bank Trading Revenue of $5.2 Billion

WASHINGTON — U.S. commercial banks reported trading revenues of $5.2 billion in the second quarter of 2009, compared to record revenues of $9.8 billion in the first quarter of 2009, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

“After such a strong first quarter, we expected to see a seasonal decline in trading revenues, and indeed that occurred,” Deputy Comptroller for Credit and Market Risk Kathryn E. Dick said. “Still, second quarter trading revenues were the sixth strongest since we’ve been keeping records.” With the advent of the relaxation of the mark to market rules, I am suspect of some of this trading revenue gain. I know the reduced competitive landscape led to higher spreads which leads to higher profits, but the ability to print your own profits with the adjustment of assumptions is scary, to say the least.

 

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