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?
I think that this kind of financial deception/manipulation is part of what has fueled the “99%” movement, or at least the sentiments behind it. For many Americans, it feels like there is an elite club of powerful financial actors who benefit richly from the stock market that they control. For the rest of us, even if we follow the markets closely and do our due diligence to stay informed, we lose out big time because we were never given the whole truth about the financial states of the companies we have chosen to invest in. How many pension funds and school districts, for example, lost almost everything in 2008 because they were advised to put their money into mortgage-backed securities? More transparency is a necessary start, and the financial companies are unlikely to provide that themselves. You’d think we would have learned after Enron…
Thank you for your insightful comments. You make an excellent point in correlating the misdeeds of Wall Street executives with the “99%” movement. The protestors seem to be expressing the feeling: “I can’t take it any more.”
Wall Street firms always have an advantage in terms of more information than the average investor. That is to be expected, and it is part of the game. But window dressing is different. It amounts to rigging the game, and putting the investor at an unfair advantage. As such, it is an unethical practice.