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...

Let’s get something straight right off the bat. We all know there is a certain level of fraud sleight of hand in the financial industry. I have called many banks insolvent in the past. Some have pooh-poohed these proclamations, while others have looked in wonder, saying “How the hell did he know that?”

• Is this the Breaking of the Bear? It wasn’t hard to see Bear Stearns collapsing 3 month before bankruptcy. Why didn’t our regulators see what I saw?
• As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades It wasn’t hard to see that nearly all of these 32 banks would be facing the threat of insolvency. Why didn’t our regulators see what I saw?
• The Commercial Real Estate Crash Cometh, and I know who is leading the way! It wasn’t hard to see that commercial real estate was ready to implode and that GGP was about to collapse under its own weight. Why didn’t our regulators see what I saw?
• Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide Countrywide and Washington Mutual’s collapse were visible AT LEAST a year in advance!
• The Next Shoe to Drop: Credit Default Swaps (CDS) and Counterparty Risk – Beware what lies beneath! ‘Nuff said…
• … and even Lehman Brothers: Is Lehman a Lying Lemming?

The list above is a small, relevant sampling of at least dozens of similar calls. Trust me, dear reader, what some may see as divine premonition is nothing of the sort. It is definitely not a sign of superior ability, insider info, or heavenly intellect. I would love to consider myself a hyper-intellectual, but alas, it just ain’t so and I’m not going to lie to you. The truth of the matter is I sniffed these incongruencies out because  2+2 never did equal 46, and it probably never will either. An objective look at each and every one of these situations shows that none of them added up. In each case, there was someone (or a lot of people) trying to get you to believe that 2=2=46.xxx. They justified it with theses that they alleged were too complicated for the average man to understand (and in business, if that is true, then it is probably just too complicated to work in the long run as well). They pronounced bold new eras, stating “This time is different”, “There is a new math” (as if there was something wrong with the old math), etc. and so on and associated bullshit.

So, the question remains, why is it that a lowly blogger and small time
individual investor with a skeleton staff of analysts can uncover
systemic risks, frauds and insolvencies at a level that it appears the
SEC hasn’t even gleaned as of yet? Two words, “Regulatory Capture”. You
see, and as I reluctantly admitted, it is not that I am so smart, it is
that the regulator’s goals are not the same as mine. My efforts are
designed to ferret out the truth for enlightenment, profit and gain.
Regulators’ goals are to serve a myriad constituency that does not
necessarily have the individual tax payer at the top of the heirachal
pyramid. Before we go on, let me excerpt from a piece that I wrote on
the topic at hand so we are all on the same page: How
Regulatory Capture Turns Doo Doo Deadly

First off, some definitions:

• The Doo Doo, as in the Doo
  Doo 32: A  list of 32 banks that I created on May 22, 2008 which set the stage for my investment
  thesis of shorting the regional banks. At that time, I was one of the
  very few, if not one of the only, to warn that the regional banks would
  hit the fan.
• Regulatory capture (adopted from Wikipedia): A
  term used to refer to situations in which a government regulatory
  agency created to act in the public interest instead acts in favor of
  the commercial or special interests that dominate in the industry or
  sector it is charged with regulating. Regulatory capture is an
  explicit manifestation of government failure in that it not only
  encourages, but actively promotes the activities of large firms that
  produce negative externalities. For public
  choice theorists, regulatory capture occurs because groups or
  individuals with a high-stakes interest in the outcome of policy or
  regulatory decisions can be expected to focus their resources and
  energies in attempting to gain the policy outcomes they prefer, while
  members of the public, each with only a tiny individual stake in the
  outcome, will ignore it altogether. Regulatory capture is when this
  imbalance of focused resources devoted to a particular policy outcome
  is successful at “capturing” influence with the staff or commission
  members of the regulatory agency, so that the preferred policy
  outcomes of the special interest are implemented. The risk of
  regulatory capture suggests that regulatory agencies should be
  protected from outside influence as much as possible, or else not
  created at all. A captured regulatory agency that serves the interests
  of its invested patrons with the power of the government behind it is
  often worse than no regulation whatsoever.

About a year and a half ago, after sounding the alarm on the
regionals, I placed strategic bearish positions in the sector which
paid off extremely well. The only problem is, it really shouldn’t have.
Why? Because the problems of these banks were visible a mile away. I
started warning friends and family as far back as 2004, I announced it
on my blog in 2007, and I even offered a free report in early 2008.

Well, here comes another warning. One of the Doo Doo 32 looks to be
ready to collapse some time soon. Most investors and pundits won’t
realize it because a) they don’t read BoomBustblog, and b) due to
regulatory capture, the bank has been given the OK by its regulators to
hide the fact that it is getting its insides gutted out by CDOs and
losses on loans and loan derivative products. Alas, I am getting ahead
of myself. Let’s take a quick glance at regulatory capture, graphically
encapsulated, then move on to look at the recipients of the Doo Doo
Award as they stand now…

A picture is worth a thousand words…

So, how does this play into today’s big headlines in the alternative,
grass roots media? Well, on the front page of the Huffington
Post and ZeroHedge, we have a damning expose of Lehman
Brothers (we told you this in the first quarter of 2008, though),
detailing their use of REPO 105 financing to basically lie about their
liquidity positions and solvency. The most damning and most interesting
tidbit lies within a more obscure ZeroHedge article that details
findings from the recently released Lehman papers, though:

On September 11, JPMorgan executives met to discuss significant
valuation problems with securities that Lehman had posted as collateral
over the summer. JPMorgan concluded that the collateral was not worth
nearly what Lehman had claimed it was worth, and decided to request an
additional $5 billion in cash collateral from Lehman that day. The
request was communicated in an executive?level phone call, and Lehman
posted $5 billion in cash to JPMorgan by the afternoon of Friday,
September 12. Around the same time, JPMorgan learned that a security
known as Fenway,which
Lehman had posted to JPMorgan at a stated value of $3 billion, was actually asset?backed
commercial paper credit?enhanced by Lehman (that is, it was Lehman,
rather than a third party, that effectively guaranteed principal and
interest payments). JPMorgan concluded that Fenway was worth
practically nothing as collateral.

Hold up! Lehman was pledging as collateral allegedly “investment grade”,
“credit enhanced” securities that were enhanced by Lehman, who was
insolvent and in need of liquidity, itself. For anybody who is not
following me, how much is life insurance on yourself worth if it is
backed up by YOU paying out the proceeds after you die bankrupt? Lehman
was allowed to get away with such nonsense because it was allowed to
value its OWN securities. Think about this for a second. You are in big
financial trouble, you have only a $10 bill to your name, but your
favorite congressman (whom you have given $10 bills to in the past) has
given you the okay to erase that number 10 on the $bills and put
whatever number on it you feel is “reasonable”. So, when your creditors
come a callin’ , looking for $20 in collateral, what number would you
deem reasonable to put on that $10 bill.

Ladies and gentlemen, in the short paragraph above, we have just
encapsulated the majority of the mark to market argument. Let’s delve
farther into the ZH article:

 

By early August 2008, JPMorgan had learned that Lehman had pledged
self-priced CDOs as collateral over the course of the summer. By August
9, to meet JPMorgan’s margin requirements, Lehman had pledged $9.7
billion of collateral, $5.8 billion of which were CDOs priced
by Lehman, mostly at face value. JPMorgan expressed
concern as to the quality of the assets that Lehman had pledged and,
consequently, Lehman offered to review its valuations. Although JPMorgan
remained concerned that the CDOs were not acceptable collateral, Lehman informed JPMorgan that
it had no other collateral to pledge. The
fact that Lehman did not have other assets to pledge raised some
concerns at JPMorgan about Lehman’s liquidity

 

Hmmm!!! Three day old fish has a fresher scent, does it not? So where
was the SEC, the NY Fed, or anybody the hell else who’s supposed to
safeguard us against this malfeasance? Even bloggers picked up on this
months before it collapsed. The answer, dear readers: REGULATORY
CAPTURE!

Again, from ZH:

 

The SEC was not aware of any significant issues with Lehman’s liquidity
pool until September 12, 2008, when officials learned that a large
portion of Lehman’s liquidity pool had been allocated to its clearing
banks to induce them to continue providing essential clearing services.
In a September 12, 2008 e?mail, one SEC analyst
wrote: Key point: Lehman’s
liquidity pool is almost totally locked up with clearing banks to cover
intraday credit ($15bnjpm, $10bn with others like citi and bofa). withThis is a really big
problem.

 

BoomBustBlog featured several warnings starting January of 2008!

One would think that after all of this, the problem would have been
rectified. To the contrary, it has been made worse. Congress has
pressured FASB to institutionalize and make acceptable the lies that
Lehman told its investors, counterparties and regulators. That’s right,
not only will no one get in trouble for this blatant lying, the practice
is now actually endorsed by the government – that is until somebody
blows up again. At that point there will be a bunch of finger pointing
and allegations and claims such as “But who could have seen this
coming”.

Do you not believe me, dear reader. Reference

About the Politically Malleable FASB, Paid for Politicians,
and Mark to Myth Accounting Rules: the nonsense is unfolding and
collapsing right now, even as I type this sentence.

The next place to look??? Who knows? Maybe someone should take an An
Independent Look into JP Morgan .. or maybe even an unbiased
gander at Wells Fargo (see

The Wells Fargo 4th Quarter Review is Available, and Its a
Doozy!). After all, If
a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear
It?

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

Canadian Dollar Too Strong? Bloomberg.com:

• Minority opposition in Canadian Parliament is growing over strengthening Loonie
• Leaders fear fallout in exports from CAD nearly at parity with USD
• CAD strength is directly tied to Chinese commodity demand (is the CAD bubblicious, too?)

Relevant BoomBustBlog content (we gave you an explicit warning of this in early January): China's Most Expensive Export: Price Inflation

Ukraine is dangerously close to the brink http://www.bloomberg.com/apps/news?pid=20601095&sid=aNw4Q7ntlMqc

• Ukraine is about to use up the remainder of a $16.4 billion IMF loan
• Premier Mykola Arazov has applied for another loan to "reform the economy" (what the hell did they do with the first $16.4 billion?)
• Ukraine has needed assistance to make good with about 20 lenders

We have went through this in exquisite detail, both in the public sections of the blog and particularly in the subscriber-only content. See The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! Professional and institutional subscribers should carefully reference "Banks Exposed to CEE & SEE" while all paying subscribers should review the "Greek Banking Industry Tear Sheet".

Implied volatility for the big banks is down across the board, just about where it was before the system went into convulsions. This implies the coast is clear, as do the share prices of many banks.

Hard core forensic and fundamental analysis implies otherwise. So does the Fed's actions, which still incorporates ZIRP policy, as well as the waffling at FASB. We will either have smooth sailing from this point on out or there is a nasty surprise waiting (on and off balance sheet) for bank investors in the near future. I invite readers to weigh in with their opinions.

As you can see, we are just about where we were in 2007 in terms of average volatility.

On March 26, EU endorsed the proposal of extending aid to Greece (in case it faces shortage of funds to meet the refinancing and new debt requirements) wherein each euro nation would provide loans to Greece at bend over market rates based on its stake in the European Central Bank. EU would provide more than half the loans and the IMF would provide the rest. The official estimates for the size of the planned assistance have not been disclosed since it would depend on Greece's actual need. Erik Nielsen, Chief European Economist at GS, estimates Greece will need an 18-month package of as much as €25 billion, with the IMF providing about €10 billion of that. The French newspaper Le Figaro reports that German officials are estimating the total assistance of nearly €22 billion.

Ireland has finally admitted the horrendous condition of its banking system. I actually give the government kudos for this, and await the moment when the US, China and the UK come forth with such frankness. That being said, things are a mess, I have forewarned of this mess for some time now.First, the lastest from Bloomberg: Ireland's Banks Will Need $43 Billion in Capital After `Appalling' Lending

 

March 31 (Bloomberg) -- Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse. The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system. The central bank set new capital buffers for Allied Irish Banks Plc and Bank of Ireland Plc and gave them 30 days to say how they will raise the funds.

“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”

Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros. Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively.

‘Truly Shocking’

The asset agency aims to cleanse banks of toxic loans, the legacy of plunging real-estate prices and the country’s deepest recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy. Lenihan said the information from NAMA on the banks was “truly shocking.”

...

Capital Target

Lenders must have an 8 percent core Tier 1 capital ratio, a key measure of financial strength, by the end of the year, according to the regulator. The equity core Tier 1 capital must increase to 7 percent.

AIB’s equity core tier 1 ratio stood at 5 percent at the end of 2009 and Bank of Ireland’s at 5.3 percent. Those ratios exclude a government investment of 3.5 billion euros in each bank, made at the start of 2009.

...

Credit-default swaps insuring Allied Irish Bank’s debt against default fell 6.5 basis points to 195.5, according to CMA DataVision prices at 8:45 a.m. Contracts protecting Bank of Ireland’s debt fell 7 basis points to 191 and swaps linked to Anglo Irish Bank’s bonds were down 3.5 basis points at 347.5.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A decline signals improving perceptions of credit quality.

State Aid

If Allied Irish can’t raise enough funds privately, the state will step in with aid, Lenihan said. It is “probable” the government will then end up with a majority stake, he said.

...

Ireland may not be able to afford to pump more money into the banks. The budget deficit widened to 11.7 percent of gross domestic product last year, almost four times the European Union limit, and the government spent the past year trying to convince investors the state is in control of its finances.

The premium investors charge to hold Irish 10-year debt over the German equivalent was at 139 basis points today compared with 284 basis points in March 2009, a 16-year high.

Ireland’s debt agency said it doesn’t envisage additional borrowing this year related to the bank recapitalization. It is sticking to its 2010 bond issuance forecast of about 20 billion euros, head of funding Oliver Whelan said in an interview.

“The bank losses, awful as they are, represent a one-off hit. It’s water under the bridge,” said Ciaran O’Hagan, a Paris-based fixed-income strategist at Societe Generale SA. [What is the logic behind this statement? Has the real estate market started increasing in value? Are the banks credits now increasing in quality? Will the stringent austerity plans of the government create an inflationary environment in lieu of a deflationary one for the bank's customer's assets???] “What’s of more concern for investors in government bonds is the budget deficit. Slashing the chronic overspending and raising taxation by the Irish state is vital.” [This is a circular argument. If the government raises taxes significantly in a weak economic environment, it will put pressure on the bank's lending consituents and the economy in general, presaging a possible furthering of bank losses!]

and...

Juckes Says Outlook `Frightening'
March 31 (Bloomberg) -- Kit Juckes, chief economist at ECU Group Plc, talks with Bloomberg's Linzie Janis about the outlook for Ireland's banks after the government set out plans to revive the country's financial system.

Now, notice how prescient my post of several months ago was, The Coming Pan-European Sovereign Debt Crisis:

From Capital.gr: Moody's Downgrades Five Greek Banks

Moody’s Investors Service said Wednesday it downgraded the deposit and debt ratings of five of the nine Moody’s-rated Greek banks due to a weakening in the banks’ stand-alone financial strength and anticipated additional pressures stemming from the country’s challenging economic prospects in the foreseeable future. [Moody's is late to the party, but their logic is solid, see "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire! followed by our forecast of the weaker vs. stronger Greek banks (premium content subscribers only) - Greek Banking Fundamental Tear Sheet]

The affected banks are: National Bank of Greece (to A2 from A1), EFG Eurobank Ergasias SA (to A3/Prime-2 from A2/Prime-1), Alpha Bank AE (to A3/Prime-2 from A2/Prime-1), and Piraeus Bank (to Baa1/Prime-2 from A2/Prime-1). Moody’s has also downgraded the deposit and debt ratings of Emporiki Bank of Greece SA (to A3/Prime-2 from A2/Prime-1), but as a result of a reassessment of the credit enhancement associated with systemic support for this institution. The outlook on all five banks’ ratings remains negative. This action concludes the review of these banks initiated on 3 March 2010. [It looks as if Moody's peaked at the blog's subscription content :-)]

Ireland has finally admitted the horrendous condition of its banking system. I actually give the government kudos for this, and await the moment when the US, China and the UK come forth with such frankness. That being said, things are a mess, I have forewarned of this mess for some time now.First, the lastest from Bloomberg: Ireland's Banks Will Need $43 Billion in Capital After `Appalling' Lending

March 31 (Bloomberg) -- Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse. The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system. The central bank set new capital buffers for Allied Irish Banks Plc and Bank of Ireland Plc and gave them 30 days to say how they will raise the funds.

“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”

Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros.Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively.

‘Truly Shocking’

The asset agency aims to cleanse banks of toxic loans, the legacy of plungingreal-estate prices and the country’s deepest recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy. Lenihan said the information from NAMA on the banks was “truly shocking.”

...

Capital Target

Lenders must have an 8 percent core Tier 1 capital ratio, a key measure of financial strength, by the end of the year, according to the regulator. The equity core Tier 1 capital must increase to 7 percent.

AIB’s equity core tier 1 ratio stood at 5 percent at the end of 2009 and Bank of Ireland’s at 5.3 percent. Those ratios exclude a government investment of 3.5 billion euros in each bank, made at the start of 2009.

...

Credit-default swaps insuring Allied Irish Bank’s debt against default fell 6.5 basis points to 195.5, according to CMA DataVision prices at 8:45 a.m. Contracts protecting Bank of Ireland’s debt fell 7 basis points to 191 and swaps linked to Anglo Irish Bank’s bonds were down 3.5 basis points at 347.5.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A decline signals improving perceptions of credit quality.

State Aid

If Allied Irish can’t raise enough funds privately, the state will step in with aid, Lenihan said. It is “probable” the government will then end up with a majority stake, he said.

...

Ireland may not be able to afford to pump more money into the banks. The budget deficit widened to 11.7 percent of gross domestic product last year, almost four times the European Union limit, and the government spent the past year trying to convince investors the state is in control of its finances.

The premium investors charge to hold Irish 10-year debt over the German equivalent was at 139 basis points today compared with 284 basis points in March 2009, a 16-year high.

Ireland’s debt agency said it doesn’t envisage additional borrowing this year related to the bank recapitalization. It is sticking to its 2010 bond issuance forecast of about 20 billion euros, head of funding Oliver Whelan said in an interview.

“The bank losses, awful as they are, represent a one-off hit. It’s water under the bridge,” said Ciaran O’Hagan, a Paris-based fixed-income strategist at Societe Generale SA. [What is the logic behind this statement? Has the real estate market started increasing in value? Are the banks credits now increasing in quality? Will the stringent austerity plans of the government create an inflationary environment in lieu of a deflationary one for the bank's customer's assets???] “What’s of more concern for investors in government bonds is the budget deficit. Slashing the chronic overspending and raising taxation by the Irish state is vital.” [This is a circular argument. If the government raises taxes significantly in a weak economic environment, it will put pressure on the bank's lending consituents and the economy in general, presaging a possible furthering of bank losses!]

 

and...

Juckes Says Outlook `Frightening' 
March 31 (Bloomberg) -- Kit Juckes, chief economist at ECU Group Plc, talks with Bloomberg's Linzie Janis about the outlook for Ireland's banks after the government set out plans to revive the country's financial system.

Now, notice how prescient my post of several months ago was, The Coming Pan-European Sovereign Debt Crisis: