Bank of America has fessed up to having shifted billions of dollars in debt off its balance sheet at opportune times in its fiscal calendar over the past three years, showing that the kinds of repurchase transactions that helped sink Lehman Brothers were not altogether uncommon.
In a recently unveiled letter to the Securities and Exchange Commission, the banking behemoth admitted to temporarily maneuvering debts such as mortgage-backed securities off its balance sheet via deals to repurchase them later. The bank referred to the repurchase transactions and securities lending transactions as dollar rolls and said they happened at least four times at the end of a quarter during the past three years. The amounts included $573 million for the quarterly period ended March 31, 2009, a whopping $10.7 billion for Sept. 30, 2008; $1.8 billion for Dec. 31, 2007, and $4.5 billion for March 31, 2007.
The bank also admitted that the transactions were improperly classified as sales rather than as secured borrowings. However, the bank said the impact of the errors was not material to its previously issued consolidated financial statements. For most companies, a $10.7 billion error would be highly material. But given the size of Bank of America, perhaps $10.7 billion is a drop in the bucket, except when it needed a taxpayer bailout or extra help in buying up other banks like Merrill Lynch.
The bank admitted that the dollar rolls were entered into by the business with the intent to reduce the specific business units balance sheet to meet its internal quarter-end limits for balance sheet utilization capacity.
Thats a polite way of saying the bank manipulated its balance sheet. Banks like BOFA are currently engaged in fending off proposed standards from the Financial Accounting Standards Board that would force them to use fair value measurement to assess the value of the loans they carry on their books.
The banks are encouraging their investors to file comment letters with FASB vociferously objecting to the proposals, as if investors dont really want to know what the assets are worth that they're helping subsidize.
But why bother with accounting standards anyway when banks can just make their bad debts go away right before they have to announce their financial results to the public.
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