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!

From Banks, Brokers, & Bullsh1+ part 1:

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...

More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture:

From Banks, Brokers, & Bullsh1+ part 1:

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...

More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture:

Sunday, 31 January 2010 18:00

The Volcker Rule Has Merit

Volcker is correct in that banks conflicts of interests need to be stemmed. One would not have to worry about over regulation if one does not attempt to regulate every single act or attempt to guess what might go wrong. What needs to be done is to use regulation to disincentivize banks from engaging in activities that engender systemic risks and/or harm clients. By putting everybody on the same side of the table, you don't have to worry about outsmarting the private sector. 

 From CNBC:
Sunday, 31 January 2010 18:00

The Volcker Rule Has Merit

Volcker is correct in that banks conflicts of interests need to be stemmed. One would not have to worry about over regulation if one does not attempt to regulate every single act or attempt to guess what might go wrong. What needs to be done is to use regulation to disincentivize banks from engaging in activities that engender systemic risks and/or harm clients. By putting everybody on the same side of the table, you don't have to worry about outsmarting the private sector. 

 From CNBC:

Well, it looks like Blankein, Dimon, et. al. really should have tried harder to make that meeting with the President a couple of weeks ago. It appeared as if he may have had something important to discuss. As my readers and subscribers know, I have been very bearish on the big money center banks since 2007, and quite profitably so. The last 3 quarters saw a much larger trend reversal than I expected, that resulted in the disgorgement of a decent amount of those profits - a disgorgement that I am still beating myself up over. You see, as a fundamental investor, I don't do well when reality diverges from the fundamentals for too long a period. Luckily for me, fundamentals always return, and they usually return with a vengeance. To keep things in perspective though, I am still up on a cumulative basis many, many multiples over the S&P (which is still negative, may I add) as well as your average fund manager. Why? How was I able to do this? Well, its not because I am supersmart, or well connected. It is because I keep things in perspective. Those that look at the records that I publish say, "Well he was down the last couple of quarters, so..." while disregarding what happened the 8 or even 40 or so quarters before that. Such a short term horizon will probably not be able to appreciate the longer term perspective and foresight that enabled me to see this entire malaise coming years ago and profit from it. No, I am not perfect and I do mess up on occasion, but I also do pay attention to the facts.

These facts pointed to a massive overvalutation in banks throughout the bulk of last year, again! I made it clear to my subscribers that the banks simply have too many things going against them: political headwinds, nasty assets, diminishing revenue drivers, over-indebted consumers, and a soft economic cycle. I also warned explicitly that I didn't think Obama would be nearly as lenient on the banks as Bush was. Well, the headwinds are stiffening. On that note, let's take an empirical look at just what this means in terms of valuation (note, I will following this up with a full forensic re-valuation for all subscribers, incuding a scenario analysis of varying extents of principal trading limits). Some of these banks are I-N-S-A-N-E-L-Y overvalued at these post bear market rally levels considering the aforementioned headwinds. Methinks fundamental analysis will make a comeback in a big way for 2010 as it meets the momentum and algo traders in a mutual BEAR feast on the big investment banks cum hedge funds. I can't guarantee it will happen, but the numbers dictate that it should. We shall see in the upcoming quarters.

We have retrieved information about trading revenues for GS, MS, JPM and BoFA. We have also retrieved some balance sheet data to reflect the trend in investment holdings and the level of leverage, but I will address that in a future post for the sake of expediency. While the banks don't break out the P&L for principal trading, we can sort of back into it. Remember, traders are fed bonuses off of net revenue, not profit.

Well, it looks like Blankein, Dimon, et. al. really should have tried harder to make that meeting with the President a couple of weeks ago. It appeared as if he may have had something important to discuss. As my readers and subscribers know, I have been very bearish on the big money center banks since 2007, and quite profitably so. The last 3 quarters saw a much larger trend reversal than I expected, that resulted in the disgorgement of a decent amount of those profits - a disgorgement that I am still beating myself up over. You see, as a fundamental investor, I don't do well when reality diverges from the fundamentals for too long a period. Luckily for me, fundamentals always return, and they usually return with a vengeance. To keep things in perspective though, I am still up on a cumulative basis many, many multiples over the S&P (which is still negative, may I add) as well as your average fund manager. Why? How was I able to do this? Well, its not because I am supersmart, or well connected. It is because I keep things in perspective. Those that look at the records that I publish say, "Well he was down the last couple of quarters, so..." while disregarding what happened the 8 or even 40 or so quarters before that. Such a short term horizon will probably not be able to appreciate the longer term perspective and foresight that enabled me to see this entire malaise coming years ago and profit from it. No, I am not perfect and I do mess up on occasion, but I also do pay attention to the facts.

These facts pointed to a massive overvalutation in banks throughout the bulk of last year, again! I made it clear to my subscribers that the banks simply have too many things going against them: political headwinds, nasty assets, diminishing revenue drivers, over-indebted consumers, and a soft economic cycle. I also warned explicitly that I didn't think Obama would be nearly as lenient on the banks as Bush was. Well, the headwinds are stiffening. On that note, let's take an empirical look at just what this means in terms of valuation (note, I will following this up with a full forensic re-valuation for all subscribers, incuding a scenario analysis of varying extents of principal trading limits). Some of these banks are I-N-S-A-N-E-L-Y overvalued at these post bear market rally levels considering the aforementioned headwinds. Methinks fundamental analysis will make a comeback in a big way for 2010 as it meets the momentum and algo traders in a mutual BEAR feast on the big investment banks cum hedge funds. I can't guarantee it will happen, but the numbers dictate that it should. We shall see in the upcoming quarters.

We have retrieved information about trading revenues for GS, MS, JPM and BoFA. We have also retrieved some balance sheet data to reflect the trend in investment holdings and the level of leverage, but I will address that in a future post for the sake of expediency. While the banks don't break out the P&L for principal trading, we can sort of back into it. Remember, traders are fed bonuses off of net revenue, not profit.

I have been advocating this limitation for some time.

For those that listen to CNBC pundits knocking the separation of deposit taking entities from trading risk assuming entities, here are some common sense rebuttals.

This proposal would not have stopped the AIG failure

No, it would not have. It would have prevented deposit taking institutions such as Citibank and JP Morgan from trading on a speculative basis with AIG though. Theoretically, it would have allowed those that would have got jerked on the AIG to have sunk or swam on their own accord. We never had to stop AIG, we had to stop the repercussions of what an AIG would have caused.