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Big Banks Should Explain Seesaw Debt Levels

Rather than falling back on technicalities, big banks should be willing to directly address the business logic for lowering their debt levels near quarter's end.



) -- This just doesn't look good.

A report in Friday's

Wall Street Journal

cites data from the Federal Reserve Bank of New York that shows the big banks appear to have been taking active steps to

mask their debt levels for more than a year.

The article says the biggest names on Wall Street --

Bank of America

(BAC) - Get Bank of America Corp Report



(C) - Get Citigroup Inc. Report


Goldman Sachs

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JPMorgan Chase

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Morgan Stanley

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, and

Wells Fargo

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-- appear to have adopted a pattern of temporarily lowering their borrowings at the quarter's end, so that the data disclosed to the public paints a different picture than the reality that exists on their respective balance sheets the majority of the time.

Already maligned by many on Main Street for receiving billions of bailout dollars during the financial crisis, the


found these banks have dropped debt levels related to their securities trading activities at quarters' end by an average of 42% from their peak for the preceding three-month period in each of the past five quarters.

At the very least, taking such steps seems disingenuous, and it reinforces the argument of those who believe the industry needs to be subjected to greater scrutiny and regulation. At worst, the practice conjures up memories of conscious attempts to hide growing problems and risky activities, such as the infamous "Repo 105" shenanigans that played a starring role in

Lehman Brothers'

eventual implosion where Lehman would temporarily shift toxic assets around at quarter's end in complex transactions in order to avoid raising flags about its worsening financial condition.

Shareholder concern about these findings is legitimate. Excessive short-term borrowings were a huge factor in why Bear Stearns went under, as the company got squeezed when persistent whisperings about its insolvency crippled its ability to trade.

The only bank quoted in response to the


article is Bank of America, which says its policies are "consistent with all applicable accounting and legal requirements." The others declined to comment specifically on the data, although some reportedly pointed to boilerplate language in their financial filings in explanation.

But considering the current fragile economic environment, with the aftershocks of the financial crisis only now really subsiding, wouldn't a better response be to give investors some clarity on the business reason that these debt levels fluctuate so much? Assuming there is one, of course.


Written by Michael Baron in New York