Former Bank of America CEO Ken Lewis tries to smile. Lewis ran the show when the fraudulent transactions took place. He will not be punished.
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As I've written repeatedly, Lehman was not alone in hiding the truth from investors and regulators. As we will likely soon hear in a report from the SEC, offloading troublesome debt for a few days at quarter's end (ostensibly to hide true leverage ratios) was widespread among the mega banks.
The most entertaining part of the BofA story, is their claim that it wasn't done intentionally. That's a priceless excuse, and it appears it may have worked, at least as far as SEC punishment is concerned.
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BofA Says $10.7 Billion of Trades Wrongly Classified (Bloomberg)
Bank of America Corp., the largest U.S. bank by assets, said it wrongly classified as much as $10.7 billion of short-term repurchase and lending transactions as sales from 2007 to 2009 to reduce its end-of-quarter assets.
Bank of America said the inaccuracies aren’t material and “don’t stem from any intentional misstatement of the Corporation’s financial statements and was not related to any fraud or deliberate error,” according to a May 13 letter released yesterday from the U.S. Securities and Exchange Commission.
- “A $10.7 billion accounting error would be a material event for about 99.9 percent” of U.S. banks, said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University School of Law. “It’s hard to see how the SEC can accept BofA’s rejoinder as being sufficient.”
SEC spokesman John Nester declined to comment.
The SEC sent letters to finance chiefs at about two dozen firms in March asking whether they employed accounting strategies like those at Lehman Brothers Holdings Inc. The bankrupt securities firm was accused of using repurchase agreements called Repo 105s to move assets off its balance sheet to hide leverage, thereby improving its capital ratios.
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Bank of America Corp. admitted to making six transactions that incorrectly hid from view billions of dollars of debt, following a bid to cut the size of a unit's balance sheet and meet internal financial targets.
The disclosure, made in a letter to the Securities and Exchange Commission, comes as the agency prepares to unveil the results of an inquiry into banks' accounting for borrowing deals known as repurchase agreements, or "repos."
BofA's letter was sent in April in response to the inquiry, but this is the first time the details of the six trades in question have been disclosed. The bank had acknowledged in its last quarterly report that its accounting for the transactions, made at the ends of quarters from 2007 to 2009, was incorrect.
The bank's disclosure also suggests the trades may be an example of end-of-quarter "window dressing" on Wall Street, in which banks temporarily shed debt just before reporting their finances to the public. The practice, which The Wall Street Journal has uncovered in a series of articles, suggests the banks are carrying more risk most of the time than their investors or customers can easily see, and then juggling it during quarter-end reporting of financials.
Window dressing isn't illegal in itself. But intentionally masking debt to deceive investors violates regulatory guidelines. BofA said its incorrect accounting wasn't intentional.
Apart from requiring more disclosure about the bank's repo accounting, the SEC hasn't taken any action against BofA over the matter. The fact that the letter was released suggests the SEC has concluded its review.
Though much smaller in scope, Bank of America's accounting of the six trades is similar to what a bankruptcy-court examiner said Lehman Brothers Holdings Inc. did to make its balance sheet look better before it filed for bankruptcy in 2008. Lehman used a strategy dubbed "Repo 105" that helped the Wall Street firm move $50 billion in assets off its balance sheet, the examiner said in March.
Following the Lehman examiner's report and the Journal disclosures, the SEC said it is considering stricter disclosure and a clearer rationale from firms about quarter-end borrowing activities.
The SEC review on repo activity could be released as early as this coming week. A spokesman said Friday that the SEC will release the banks' responses after the agency completes its review.
In its letter to the SEC, which has been posted as a regulatory filing, BofA disclosed details of how it erroneously classified some short-term repos as sales when they should have been classified as borrowings over the past few years. Repos are short-term financing arrangements that allow banks to take bigger risks on securities trades. Classifying the transactions as sales instead of borrowings—as in the Repo 105 strategy—allows a bank to take assets off its balance sheet and thus reduce its reported leverage.
In the letter, the bank said its incorrect accounting for the six trades wasn't intentional. "We do not deliberately structure transactions that are economically disadvantageous simply for the purpose of recording a sale or reducing recorded liabilities."