Bank Shenanigans

How many times will we see the headlines say that an aid package for Greece is ready to go into effect? Talk about dysfunction, the way the EU and Greece has handled this situation, it’s no wonder that investors are demanding extremely high premiums to handle Greek debt.   


It’s pretty clear that Greece needs a lump sum loan from either the EU or the IMF. I don’t care which. But please, just get it done so we can stop all the drama.   


The Wall Street Journal is reporting that banks have been pulling a fast one on investors for the last year.   


Apparently, banks like Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM) and 14 other banks have been understating the amount of debt they use to pay for securities trades.   


Toward the end of a quarter, banks simply cut that number by up to 42% to make their balance sheets look less risky.   


It sounds as if this debt that’s being cut is essentially margin debt. As any investor should know, buying stocks on margin has inherent risks. If you buy a stock by borrowing against the current market value of stock you already own, you can get in a tight spot if the value of that stock you borrowed against starts falling.   


So for the banks, if they have bought securities on margin, it adds debt to their balance sheet. If they can magically write the margin debt down 42% then – voila! – their balance sheets look better.   


The Journal says this accounting loophole has been used periodically since 2001. But it’s been consistently used for the last 5 quarters.  


I’ve got an idea. Instead of struggling to define “proprietary trading” and creating umpteen regulatory bodies to oversee banking activities, why doesn’t Congress just fix accounting rules. No more off balance sheet transactions, no more Repo 105s, no more BS. Companies should simply report what they have, what they bring in and what they owe. Period.   


It doesn’t seem so hard to me. But I suspect if banks had to use real-world accounting to show us exactly what’s going on, we’d be in for a rude awakening. “Pay no attention to that off balance sheet transaction behind the curtain.”   


The funny thing is, we all know this is going on. I imagine you’d be hard-pressed to find an investor that believes bank earnings and balance sheets are on the up and up.  


And I also think you’d be hard-pressed to find someone who thinks the Bureau of Labor’s unemployment rate is an accurate measure of how many people in the U.S don’t have jobs. Or that the Consumer Price Index (CPI) is an accurate measure of inflation.   


No, earnings reports, balance sheets and government reports are all just glimpses of the real picture.   


But so long as stocks are going up, we have little choice but to participate. And speaking of stocks going up, I haven’t included any analysis from TradeMaster’s Jason Cimpl in a while…  


Today, Jason writes:   


Over the past few days the futures indicated the market would trade in the red. In fact, on many of those instances when futures were negative the market did open with a gap down. Much like yesterday, that pull back was hastily bought by the bulls and the market reversed its losses to end the day in the green. 


Price reversals are one of the ways to assess the strength of a trend – and this bull has some big horns. The bullish traders did have help mid-session from the retail group… March retail sales indicate the consumer is back spending again, which is a trend that bodes well for the economic recovery hopes.   


One of Jason’s recent trade recommendations for his readers is up 90% in about a month. And he’s got several stocks in his most recent Special Opportunity Report that could do even better. Click HERE

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