MF Global may have disguised its debt levels to investors by temporarily reducing the amount of debt shown on its books at the end of the quarter before publically reporting its finances (source: WSJ). Every quarter, for seven consecutive quarters in a row, the debt was always lower at the end of the quarter. The debt levels at the end of the quarter were lower than the peak for each quarter by an average of 24%. Yet another shell game courtesy of Wall Street!
Although window dressing is legal, it is immoral, because it misleads investors who—based on publically reported information—believe that a firm is taking on less risk than what is really the case. Given MF Global’s bankruptcy earlier this week, investors must feel that they there were deceived.
I know the feeling. I bought some Lehman Bros. convertibles in 2008, based on published financial information. During that period of time, the company’s management team loaded up on a $85 billion portfolio of risky mortgage-backed securities. At the end of the quarter, the management team moved these securities off Lehman’s books, a practice that the New York Times described as a “shell game.”
It has been over three years since the Lehman Bros. bankruptcy, the largest in U.S. history. The SEC is considering a rule that would require financial companies to disclose more information about their borrowings, but has not taken action.
George Santayana, a famous philosopher, once remarked: “Those who do not remember the past are condemned to repeat it.”
Is it not time that we pass regulations that eliminate the unethical practice of window dressing that destroys the credibility of our financial system?