This morning, The Wall Street Journal* *breaksthe unfortunate if unsurprising news that big Wall Street banks routinely lower their debt levels shortly before reporting their quarterly statements, making the banks seem less leveraged than they are. A total of 18 banks, including Bank of America, Goldman Sachs and Citigroup, use the repurchaseagreement, or repo, market to lower their debt temporarily. The repo market is, to simplify, a market banks and other big financial institutions use to exchange equity for cash for short periods of time and the market on which there was a kind of bank runduring the crisis. (More on that later.)
The Wall Street Journal* *says the firms were reducing their debt levels more than 40 percent beyond their quarterly averages. What’s worse? “The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.”
The Securities and Exchange Commission — in the wake of the revelationlast month that Lehman Brothers used such transactions to park billions of debt off its balance sheet shortly before its collapse — is investigatingbanks’ use of the tactic. In my mind, there is one dead simple way to preclude banks from skewing their debt and leverage levels using repo transactions (which are, I should note, common, important and perfectly legal): Require banks to report not just their debt levels at the time the reports come out, but their quarterly averagedebt levels, thus removing the incentive to alter them.