Majors Banks Masked Risk Levels: Report

Major banks masked their risk levels over the past five quarters by temporarily lowering their debt just before reporting it to the public, a report says.

Author:: Joseph Woelfel
Publish date:: Apr 9, 2010 4:41 AM EDT

NEW YORK (

TheStreet

) -- Major banks masked their risk levels over the past five quarters by temporarily lowering their debt just before reporting it to the public, the

Wall Street Journal

reports, citing data from the

Federal Reserve

Bank of New York.

A group of 18 banks -- including

Goldman Sachs

(GS) - Get Report

Morgan Stanley

(MS) - Get Report

JPMorgan Chase

(JPM) - Get Report

Bank of America

(BAC) - Get Report

and

Citigroup

-- understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the

Journal

reports, citing the data. The banks then boosted the debt levels in the middle of successive quarters.

Excessive borrowing by banks was one of the major causes of the financial crisis in 2008. Since then, banks have become more sensitive about showing high levels of debt and risk, worried their stocks and credit ratings could be punished, the

Journal

says.

The practice by the banks, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time, the

Journal

notes.

Representatives at Goldman, Morgan Stanley, JPMorgan and Citigroup declined to comment specifically on the New York Fed data. Some noted their financial filings include language saying borrowing levels can fluctuate during the quarter.

"The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman told the

Journal

-- Written by Joseph Woelfel in New York.

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