Friday Nov 4, 2011

A Primary Dealer PD is one who is designated as an official dealer to re sell government debt in primary offerings. As such the PD can carry much more debt than a typical bank, this allows the inventory of government bonds. Zero Hedge makes the point that PDs are artificially lowering their actual debt at the end of each quarter. This makes it look like they are more conservatively run than they actually are. GM was doing the same thing with its cash before the quarter end. 

We study ratios in accounting. But understand the ratio can change dramatically over the quarter. IF I drop my borrowings for a couple of days, get someone to lend me their assets for a couple of days, gee the debt equity ratio can drop dramatically on the quarter end date when I am examined. But after that date passes I can go back to doing just what I was doing, borrowing more than I should. 

Zero Hedge on 11/4 explains as follows. 

Was it just two weeks ago when we penned "Another Quarter, Another Blatant Window Dressing By The Primary Dealer Banks To Make Their Balance Sheets Seem Strong", the same post in which we said, "We have made it clear time and again, that this chart demonstrates nothing short of the end of quarter window dressing, when PDs convert their asset holdings into cash to make their Tier 1 Capital much more robust than it truly is. After all, none other than JPM and Citi were praising just how prepared for Basel III they are with their "sterling" capitalization ratios… which were only sterling courtesy of precisely the highlighted window dressing which occurs each and every quarter. We expect nothing less from Bank of America and Morgan Stanley when they report their own numbers in the coming days. We also expect the regulators to do absolutely nothing to prevent this blatant abuse of fiduciary duty which has no other purpose than to hide the true sad state of America's banking system." Ironically, we have just found out that had regulators not only listened to us over the two years we have been pointing this out, but also done something on it, MF Global would likely not have filed for bankruptcy. Here is the WSJ, confirming all our worst fears: "For the past two years, MF Global Holdings Ltd. may have disguised its debt levels to investors by temporarily slashing the debt it was carrying before publicly reporting its finances each quarter, according to an analysis by The Wall Street Journal. The activity, referred to in the financial industry as "window dressing," suggests that the troubled financial firm was shouldering more risk and using more borrowed funds to facilitate its trading than investors could easily detect from the firm's regulatory filings. And scene: but wait, there's more. As we have shown over and over and over, this has continued for 8 quarters in a row since Lehman first exposed this criminal activity. Sure enough, another company just went bankrupt because of the SEC's gross and criminal negligence, incompetence, and overall corruption.