Banks hiding debt and risk is widespread – that’s the statement planted in the WSJ sourced from the Federal Reserve on the eve of the US Senate discussing Financial Reform. The Federal Reserve, which refuses to disclose who it lends money to and why, now “leaks” data to the WSJ.
I don’t doubt for a second that the information is true. This is what they figured out Lehman was doing – using “repo” agreements to shuffle all the crap on their books as a “loan” to another entity with the promise to take it back in a few days after the balance sheet was published.
I don’t doubt mutual funds do the same thing – the term you hear on the TV networks is “period end window dressing”. On the final day of trading, you trade away all the loser crap in your portfolio and fill it in with rock solid (but low yielding) conservative stocks – then the next day take back all the high risk crap.
This is a very fundamental problem with accounting. Balance sheets are normally only produced at the end of each accounting period. With computers, it’s probably possible to create something like an “average balance sheet” or a “highest and lowest” balance during the period. The current system is totally broken, and that didn’t happen in the last 5 years.
