Last weekend, John Hempton demonstrated how Bank of America (BAC) had engaged in the same sort of balance-sheet manipulation that Lehman Brothers did: temporarily shedding assets at the end of the quarter to make it appear that it was taking less risk than it actually was.We blasted Bank of America for this. While the behaviour may not have been illegal, we said, it certainly wasn’t transparent.
Bank of America executive Jerry Dubrowski has since reached out and asked us to clarify our remarks and provided a response. We asked a few more questions, to which Bank of America provided an additional response. The exchange is below.
(As a side note, we would like to commend Bank of America on its civility, considering the hell-fire we have rained down on the firm over the past 18 months. Though, it’s true, Ken Lewis bore the brunt of that.)
Your posting on Bank of America contains a line that we would like you to explain.
You write the following:
As John Hempton pointed out last week, Lehman wasn’t the only bank that engaged in bogus end-of-quarter balance sheet manipulation to trick investors into thinking it was less leveraged than it was.
Turns out, Bank of America (BAC) did it, too.
We are not sure what you mean when you say “Bank of America did it too.”
It appears that this line is based on Mr. Hempton’s “analysis” and if so we would appreciate the opportunity to respond directly. Unfortunately we did not get a phone call or email from you or your organisation seeking our response.
For the record, this is our response:
“Efforts to manage the size of our balance sheet are routine and appropriate, and we believe our actions are consistent with all applicable accounting and legal requirements. It has been a long-standing practice not to engage in so-called Repo 105 transactions and we are not aware that Bank of America has entered into any such transactions.”
Thanks very much for the note.
I’ll be happy to add your comment to the post.
The point I was making, which is the same one Hempton was making, was that BAC’s assets shrank repeatedly at the end of the quarter relative to the average assets for the quarter. This makes it appear that BAC was carrying higher leverage ratios through the quarters than it was reporting at the end of the quarters.
Hempton didn’t reference any Repo 105 transactions, but it seems pretty clear from the average-versus-ending levels that the goal was to manage the ratios down at the end of the quarter. (If this isn’t true, I’m happy to note that). So the questions I’d have are:
1) What techniques did BAC use to shrink end-of-quarter assets relative to average assets (and how were these disclosed)
2) Does BAC think this end of quarter balance sheet management provided a transparent picture to investors of the leverage the company typically used, and
3) Do most Wall Street firms exhibit the same pattern of average-versus-end of quarter assets (in which case BAC’s balance-sheet management might be directly in keeping with standard industry practices).
Thanks for getting back so quickly.
With regard to how we manage the balance sheet, I cannot provide specific information on our activities other than what we provide in the 10-K. (Page 124 – “In addition, we utilise certain financing arrangements to meet our balance sheet management, funding and liquidity needs.”) Keep in mind that this section details more than just balance sheet management. It also deals with liquidity and funding needs
With regard to the question on transparency, I would also point you to our 10-K where we report both average assets and period end assets. We clearly disclose this information for investors to review in our public filings.
Finally, I cannot speak for other companies and their disclosure polices.
Thanks for the opportunity to respond.