How Banks Hide Their True Financial Condition
Banks hide their true financial condition. They do this a number of ways. Here are two.
One way is they simply refuse to acknowledge losses. For example, take some of the so-called "toxic" assets or bad mortgages they hold. Under current acceptable accounting practices (for banks), they don't have to reveal the true value of this garbage when they file quarterly reports. Why wouldn't they reveal the true value of these assets? You have to assume they've got so much of this stuff, they're afraid that if we knew the extent of it, we wouldn't buy their stock or, worse, pull our money out of the bank.
This past quarter big banks showed strong profits. A good portion of those profits were based on the banks not declaring losses that they will have to declare at some point. They just decided not to do it now. So their profits looked good, their stocks continue to rise. There really aren't "real" profits there, at least to the extent reported.
A second way banks hide their true financial condition is to utilize financial instruments that literally mask their debt. It's just like they threw a blanket over the bad stuff so no one could see it.
One of these financial is called a "repo." Basically, the bank borrows cash from another party by using the toxic garbage as collateral for the loan. They do this for a very short period of time, after which the lending party wants its cash back and the bank takes back the garbage.
When do they do this? They do it right before they have to provide a quarterly report on their financial condition. So the report shows a big chunk of cash (or other valuable assets) where the garbage used to be. As soon as they report, back comes the garbage - only no one got to see it in the report.
I'm not making this up. That's what they've do. And it's all legal.
Imagine if you could do this. Let's say you wanted to refinance your mortgage (rates are pretty low right now). Only problem is, you've got too much overall debt to qualify. So instead of applying and showing the mortgage company all your current debts and obligations (your credit card debt, home equity line, etc.), you temporarily exchange them with me. I take the loans from you and give you cash right before you apply. Of course, this is absurd. You couldn't do it. (And I certainly wouldn't make the exchange with you!)
Now, the banks are supposed to declare somewhere in the quarterly report that they did this. I assume they do. If they do, you could say that if they declare what they did, then that's OK. People should read the report carefully. If they don't, then it's their fault.
On the other hand, you could say that the practice of swapping out the garbage every quarter is intended to mislead. That's, in fact, what I would say.
In the April 20th Wall Street Journal, Gerald O'Driscoll, a former vice president at the Federal Reserve Bank of Dallas talked about this and other deceptive practices by banks and businesses in an article titled "An Economy of Liars." You shouldn't call someone a liar unless you know they not only said something false but also that they meant to mislead. I would say that the use of the term "liar" is appropriate. Banks mislead people by these practices.
So you see how banks hide their true financial condition. Of course, these are only two ways. And banks aren't the only institutions to present false and misleading information in their filings and reports.
Then again, it seems to me that, in the case of banks, it's an especially bad problem. Banks are an important part of our economy. Companies borrow money to grow their businesses Many people keep their savings in banks. It's really outrageous that banks hide the truth from their customers and investors. It's especially outrageous now at a time when the taxpayer had to fork over money to save many of these banks.
With all the talk of regulatory reform out there now, I would hope that a reform of accounting practices that allow this sort of lying would be at or near the top of the list of things to be reformed.
One way is they simply refuse to acknowledge losses. For example, take some of the so-called "toxic" assets or bad mortgages they hold. Under current acceptable accounting practices (for banks), they don't have to reveal the true value of this garbage when they file quarterly reports. Why wouldn't they reveal the true value of these assets? You have to assume they've got so much of this stuff, they're afraid that if we knew the extent of it, we wouldn't buy their stock or, worse, pull our money out of the bank.
This past quarter big banks showed strong profits. A good portion of those profits were based on the banks not declaring losses that they will have to declare at some point. They just decided not to do it now. So their profits looked good, their stocks continue to rise. There really aren't "real" profits there, at least to the extent reported.
A second way banks hide their true financial condition is to utilize financial instruments that literally mask their debt. It's just like they threw a blanket over the bad stuff so no one could see it.
One of these financial is called a "repo." Basically, the bank borrows cash from another party by using the toxic garbage as collateral for the loan. They do this for a very short period of time, after which the lending party wants its cash back and the bank takes back the garbage.
When do they do this? They do it right before they have to provide a quarterly report on their financial condition. So the report shows a big chunk of cash (or other valuable assets) where the garbage used to be. As soon as they report, back comes the garbage - only no one got to see it in the report.
I'm not making this up. That's what they've do. And it's all legal.
Imagine if you could do this. Let's say you wanted to refinance your mortgage (rates are pretty low right now). Only problem is, you've got too much overall debt to qualify. So instead of applying and showing the mortgage company all your current debts and obligations (your credit card debt, home equity line, etc.), you temporarily exchange them with me. I take the loans from you and give you cash right before you apply. Of course, this is absurd. You couldn't do it. (And I certainly wouldn't make the exchange with you!)
Now, the banks are supposed to declare somewhere in the quarterly report that they did this. I assume they do. If they do, you could say that if they declare what they did, then that's OK. People should read the report carefully. If they don't, then it's their fault.
On the other hand, you could say that the practice of swapping out the garbage every quarter is intended to mislead. That's, in fact, what I would say.
In the April 20th Wall Street Journal, Gerald O'Driscoll, a former vice president at the Federal Reserve Bank of Dallas talked about this and other deceptive practices by banks and businesses in an article titled "An Economy of Liars." You shouldn't call someone a liar unless you know they not only said something false but also that they meant to mislead. I would say that the use of the term "liar" is appropriate. Banks mislead people by these practices.
So you see how banks hide their true financial condition. Of course, these are only two ways. And banks aren't the only institutions to present false and misleading information in their filings and reports.
Then again, it seems to me that, in the case of banks, it's an especially bad problem. Banks are an important part of our economy. Companies borrow money to grow their businesses Many people keep their savings in banks. It's really outrageous that banks hide the truth from their customers and investors. It's especially outrageous now at a time when the taxpayer had to fork over money to save many of these banks.
With all the talk of regulatory reform out there now, I would hope that a reform of accounting practices that allow this sort of lying would be at or near the top of the list of things to be reformed.
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