Lehman and Greece Weren’t Alone in Cooking the Books
As it if weren’t enough that Greece and Lehman Brothers were caught shifting their debts off the books with the help of a variety of irregular accounting measures, today’s news is that Bank of America has likely been doing it, too. John Hempton of Bronte Capital discovered that, in the same way Lehman used its Repo 105 transactions to move bad debts off its books overnight (and thus appear more sound) for regulatory authorities, Bank of America was relying on similar transactions to move its debts off its financial statements at the end of every quarter. In looking at their 2006 Annual Report, Hempton found something funny:
You will notice that the end period assets were always lower than the average assets. Moreover it was not obvious unless you really looked because the quarterly earnings releases did not include average assets (but you could work it out because they stated return on average assets). It was not just 2006 either – this had been happening for a while. Bank of America was parking its assets off balance sheet at the end of every quarter for some time and had been obscuring the fact.
Hempton speculates that BofA parked those assets (in effect, securitized debts) with the Mitsubishi UFJ Financial Group, though he has yet to confirm that information.
Marian Wang at ProPublica asked BofA whether that was true, and received this response:
“Efforts to manage the size of our balance sheet are routine and appropriate, and we believe our actions are consistent with all applicable accounting and legal requirements.”
In other words, they were doing exactly that, but it was completely legal. Somehow, I doubt that makes BofA’s customers or investors feel any better about either the bank or the SEC’s vaunted disclosure requirements, which are supposed to protect investors from companies manipulating their annual reports.
Anyone who still believes that Sarbanes-Oxley resolved the accounting issues and loopholes that led to the collapse of Enron is probably fooling themselves.