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Bank Of America Can Not Deny It Used Repo 105, Response From PricewaterhouseCoopers Pending; The BofA QSPE's

Tyler Durden's picture




 

A day after the Lehman Repo 105 scandal erupted, one, just one bank stepped up and said it had never used Repo 105-type transactions. The bank was Goldman Sachs. Of course, Goldman's claim is completely useless without a context as the proper refusal would be for Goldman's counsel to say that the firm had not used anything "substantially similar" to a Repo 105. The difference between that and the verbatim phrasing is like night from day. But at least the soundbite chasers bought it, and the whole topic of Goldman and Repo 105 promptly died away. We'll let that be... for now. Yet one bank which not only has not provided voluntary disclosure, but which has now gotten itself bogged down in semantics, after recently speculation had emerged that BofA had used "substantially similar" devices to Repo 105. Today, BofA provided a response on the record as to whether it had (ab)used Repo 105s and it appears, that inasmuch the firm is unable to say no, the answer is a resounding yes.

Marian Wang, who apparently caught some green admin over in legal at Bryant Park 2 to spill their guts, shares the following:

I’d put in several calls and emails with Bank of America both
yesterday and today asking for a response to the allegations. The
bank’s rep said he wanted to be thoughtful about the response, and this
afternoon, sent me this carefully crafted statement:

“Efforts
to manage the size of our balance sheet are routine and appropriate,
and we believe our actions are consistent with all applicable
accounting and legal requirements.”

My only thought
is that this is very similar to what Lehman’s auditors, Ernst &
Young, said in response to criticism about their review of Lehman’s
accounting, right after Repo 105 hit the news earlier this month.
Here’s what the auditor’s spokesman, Charles Perkins, said at the time [2]:

“Our
opinion indicated that Lehman’s financial statements for that year were
fairly presented in accordance with Generally Accepted Accounting
Principles, and we remain of that view.”

Sorry BofA, the proper response to Marian's question would have been "Hell no, we did not do Repo 105s." Alas, BofA, which recently lost its CEO, proves yet again that it has so much more to learn from its so much more integrated in the government apparatus, peer Goldman Sachs.

And in order to pursue this topic further, Zero Hedge has sent an email to Bank of America auditors PricewaterhouseCoopers. We are confident that at least PwC will know that the proper response is No... of course, assuming that is true. Which we have a feeling may be not be the case. In that case the E&Y stigmata will soon result in a "Big 3," then "Big 2," then
"Big Last One," until no auditors are left in this country of endless corruption.

A cursory search uncovers the following discussion of SFAS 140 treatment in Bank of America's 2005 10-K, when discussing Qualified Special Purpose Entitites:

Qualified Special Purpose Entities

In addition, to control our capital position, diversify funding
sources and provide customers with commercial paper investments, we
will, from time to time, sell assets to off-balance sheet commercial
paper entities.
The commercial paper entities are Qualified Special Purpose Entities
(QSPEs) that have been isolated beyond our reach or that of our
creditors, even in the event of bankruptcy or other receivership. The
accounting for these entities is governed by
SFAS 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities—a replacement of FASB Statement
No. 125,” (SFAS 140) which provides that QSPEs are not included in the
consolidated
financial statements of the seller. Assets sold to the entities consist
of high-grade corporate or municipal bonds, collateralized debt
obligations and asset-backed securities. These entities issue
collateralized commercial paper or notes with
similar repricing characteristics to third party market participants
and passive derivative instruments to us. Assets sold to the entities
typically have an investment rating ranging from Aaa/AAA to Aa/AA. We
may provide liquidity, SBLCs or similar
loss protection commitments to the entity, or we may enter into
derivatives with the entity in which we assume certain risks. The
liquidity facility and derivatives have the same legal standing with
the commercial paper.

 

The derivatives provide interest rate, currency and a pre-specified
amount of credit protection to the entity in exchange for the
commercial paper rate. These derivatives are provided for in the legal
documents and help to alleviate any cash flow mismatches. In some
cases, if an asset’s rating declines below a certain
investment quality as evidenced by its investment rating or defaults,
we are no longer exposed to the risk of loss. At that time, the
commercial paper holders assume the risk of loss. In other cases, we
agree to assume all of the credit exposure
related to the referenced asset. Legal documents for each entity
specify asset quality levels that require the entity to automatically
dispose of the asset once the asset falls below the specified quality
rating. At the time the asset is disposed,
we are required to reimburse the entity for any credit-related losses
depending on the pre-specified level of protection provided.

In BofA's case it seems more of a pure off balance sheet sweep in SPE. Yet digging into the definition of BofA's QSPEs we uncover the following:

To improve our capital position and diversify funding sources, we also
sell assets, primarily loans, to other off-balance
sheet QSPEs that obtain financing primarily by issuing term notes.
We
may retain a portion of the investment grade notes issued by these
entities, and we may also retain subordinated interests in the entities
which reduce the credit risk of the
senior investors. We may provide liquidity support in the form of
foreign exchange or interest rate swaps. We generally do not provide
other forms of credit support to these entities, which are described
more fully in Note 9
of the Consolidated
Financial Statements. In addition to the above, we had significant
involvement with variable interest entities (VIEs) other than the
commercial paper conduits. These VIEs were not consolidated because we
will not absorb a majority of the expected
losses or expected residual returns and are therefore not the primary
beneficiary of the VIEs.
These entities are described more fully in Note 9 of the Consolidated Financial Statements.

We would love for PwC to confirm that there was no Repo 105 comparable shennanigans associated with BofA's use of SFAS 140 loopholes over the past several years in order to make its balance sheet look more attractive to investors.

 

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Tue, 03/23/2010 - 22:56 | 274027 Flakmeister
Flakmeister's picture

Who'da ever thunk?

How are they going to patch this up? I love it when they always change the rules if the home team isn't winning.

 

 

 

Wed, 03/24/2010 - 08:50 | 274237 Thomas
Thomas's picture

it's like those computer chess games in which you can reverse sides if the computer is kicking your butt.

Tue, 03/23/2010 - 22:57 | 274030 non-anon
non-anon's picture

If the powers that be suspend FASB, Mark to Market, et al.

Nothing will stop this ponzi but the weight of it's own corruption and capitulation.

Good night and ado!

Wed, 03/24/2010 - 07:18 | 274209 Augustus
Augustus's picture

Two German couples bring some justice to one fraudster.

http://news.yahoo.com/s/ap/20100324/ap_on_bi_ge/eu_germany_gang_of_retirees;_ylt=AhCTZNUEl4UfoTZBbcOcUj69IxIF;_ylu=X3oDMTNnczRmdjl2BGFzc2V0A2FwLzIwMTAwMzI0L2V1X2dlcm1hbnlfZ2FuZ19vZl9yZXRpcmVlcwRjY29kZQNtb3N0cG9wdWxhcgRjcG9zAzUEcG9zAzUEc2VjA3luX3RvcF9zdG9yaWVzBHNsawNnZXJtYW5yZXRpcmU-

BERLIN – Three German retirees who lost $1.4 million in the financial crisis and kidnapped their American investment adviser in an attempt to recoup the money were convicted Tuesday, with their 74-year-old ringleader sentenced to six years in prison.

Two couples, aged between 61 and 80, had invested their savings with the financial adviser who worked out of offices in the U.S. and Germany, the Traunstein regional court said. 

Tue, 03/23/2010 - 23:00 | 274032 Jim in MN
Jim in MN's picture

 

Zombielicious!

Braaaaaaiiiiins....investor braaaaaaaiiiiiins....

Eat them up, YUM

Wed, 03/24/2010 - 00:15 | 274093 mikla
mikla's picture

+1

HAHAHAHAHAAAAAA!  LOL!

Tue, 03/23/2010 - 23:07 | 274035 aint no fortuna...
aint no fortunate son's picture

I've gotta do my taxes this weekend... did anybody hear during the hearings today whether Geithner still recommends TurboTax?

Wed, 03/24/2010 - 08:12 | 274223 nedwardkelly
nedwardkelly's picture

Timmy recommends not doing your taxes until after you've been elected to public office

Tue, 03/23/2010 - 23:30 | 274053 Rick64
Rick64's picture

They will play word games until they are caught red handed, then they will go throught the finger pointing stage until they find the lone gunman which will have died already in an accident.

Tue, 03/23/2010 - 23:40 | 274063 LeBalance
LeBalance's picture

yes, an impressive culpability flow diagram leading to our friend the skier.

he was, in fact, the only slightly (very slightly) moldy apple.

everything else is pink, so .... wait for it ....

BUY, BUY, BUY !!!!

(ha)^105

 

Tue, 03/23/2010 - 23:43 | 274065 Bear
Bear's picture

Who will catch them? Anyone who has something to gain from the current status quo will not speak and certainly we cannot rely on the traditional watchdogs; SEC, Media, Congress ... the smoking gun will probably just meltup along with Wall Street.

I speak to my friends about the corruption and collusion of Washington and Wall Street and they just yawn ... they are happy so long as their IRA's and 401K's don't go down.

Could Ben be right?

Tue, 03/23/2010 - 23:56 | 274080 Rick64
Rick64's picture

We need somebody on the inside like a Daniel Elsberg to copy documents and hand them to Zerohedge because you can't trust the media. A patriot, a rare breed these days.

Wed, 03/24/2010 - 04:33 | 274160 Bear
Bear's picture

Unfortunately Woodword and Berstein are now on the government's side, so Danny boy has got no one to go to

Tue, 03/23/2010 - 23:31 | 274056 Gubbmint Cheese
Gubbmint Cheese's picture

How about you Wells.. Citi?

 

Tue, 03/23/2010 - 23:44 | 274067 Silver Bullet
Silver Bullet's picture

Im tired of this shit. Damnit

Tue, 03/23/2010 - 23:55 | 274079 chindit13
chindit13's picture

There is scant difference between Repo 105's and the marked-to-myth accounting that is now sanctioned by FASB (after the appropriate pressure was applied).  Accounting has morphed from a supposedly accurate representation of an ongoing concern's financial standing to a wish list that represents where the firm would be at if only they were competent and honest.

No doubt the shenanigans (an old Irish term for generally accepted accounting principles) involved in Repo 105's will just be made perfectly acceptable by law (if they are not already) and grandfathered back to whatever date is required by the "innocent and misunderstood" parties.

If the equity market is willing to suspend reality and accept M2Myth, it is hardly much of a step to likewise applaud Repo 105's.  Accounting gimickry is now awarded "style points" by the market.

Wed, 03/24/2010 - 11:23 | 274414 viahj
viahj's picture

Accounting gimickry is now awarded "style points" by the market.

how iconic

 

Wed, 03/24/2010 - 00:09 | 274087 Tripps
Tripps's picture

this is just unbelieveable. this confirms are banks are ponzi schemes

Wed, 03/24/2010 - 00:40 | 274088 BlackBeard
BlackBeard's picture

nevermind.  It's late and I'm seeing things.

Wed, 03/24/2010 - 00:20 | 274098 DaveyJones
DaveyJones's picture

Your honor my client has never sold drugs from the back of a vehicle of that color

Wed, 03/24/2010 - 09:02 | 274248 Cognitive Dissonance
Cognitive Dissonance's picture

The classic non-denial denial. I never did that while the moon was blue, the winds were higher than 50 MPH and American Idol was blacked out, all at the same time.

Slim to none chance in other words. He's guilty, just not of that specific event at that specific time.

Wed, 03/24/2010 - 03:04 | 274146 Arm
Arm's picture

So how much does a firm rise on accounting fraud these days?  I guess we will find out tomorrow.  I bet at least 2%

Bloomberg headline for tomorrow "Stocks rise as Bank of America fraud less than expected"

 

Sadly, I would not be surprised if this exact quote raced through my screen tomorrow afternoon.

 

Wed, 03/24/2010 - 04:51 | 274169 bingaling
bingaling's picture

They wont nail BOFA on this . If they nail anyone to a cross it will be a big regional not to big to fail bank . Just big enough to be front page news for a week. That is the the way this has always worked .

Wed, 03/24/2010 - 05:27 | 274179 bingocat
bingocat's picture

I am 99% certain a number of the VIEs and similar entities - especially those with credit protection or securities buyback offered by BoA, will come back on balance sheet this quarter because of the move to FAS167.

However, if BoA's only involvement and risk is the provision of interest rate or forex swap portion, and there is no pass-through requiring a decision to call or dispose of the asset on a discretionary basis on the part of BoA, they will stay off balance sheet I expect.

If you are the real estate agent, the house you sold doesn't go on your balance sheet, even though you take a fee out of the middle).

Wed, 03/24/2010 - 05:35 | 274181 foo-twa
foo-twa's picture

where the phuck are the whistleblowers? I mean, the lowely clerk making 30k/year. They must have some info.

I would ask that zerohedge more actively solicit whistleblowers. A safe haven where anyone working for a company that is actively engaged in fraud. Perhaps readers of Zerohedge would even donate to a whistleblower fund, which purpose would be to help the whistleblower get counsel, seek a new job, etc...

Wed, 03/24/2010 - 05:43 | 274182 Miss Expectations
Miss Expectations's picture

BoA Meets Expectations

Wed, 03/24/2010 - 08:15 | 274224 nedwardkelly
nedwardkelly's picture

Right, this will be the headline tomorrow.

"BofA shares up significantly after the bank meets expectations" - where expectations are that they're full of as much BS as the rest of them.

Wed, 03/24/2010 - 06:33 | 274193 williambanzai7
williambanzai7's picture

RIPPIN 105:

http://williambanzai7.blogspot.com/2010/03/get-ready-for-next-wave.html

What kind of Repo Rippin was Johnny Thain's gang doin?

 

Wed, 03/24/2010 - 06:20 | 274194 Dark Space
Dark Space's picture

I don't see the connection at all. The supposed response from their legal department is accurate and appropriately disclaimed. The paragraphs you highlighted from their 2005 (really?) statement describe two things 1) the exact type of asset that FAS140 (and subsequently, 166 & 167) is designed to bring on the balance sheet and 2) something very similar to the covered bond 'solution' Washington believes will solve all the securitization problems - keep 5% (the latest number in the Senate bill) of the risk on balance sheet.

 

I'm not really a fan of Bankofamerillwide and wouldn't be surprised at all if they used some sort of Repo 105 transaction during KDL's tenure, but you're not providing even a modicum of proof to that end in the article above. You might as well of received confirmation from the hot dog vendor at 1 Bryant Park.

Wed, 03/24/2010 - 06:25 | 274195 Augustus
Augustus's picture

Who was taking the other side of these Repo 105 deals.  When the stuff was moved off of the BAC or LEH balance sheet, whose balance sheet swallowed the assets?  Since all of the banks were trying to hide the same overlevraged problems, where did the they find a counterparty for funding that was NOT overleveraged.  Numbers not available for BAC, but the LEH balance of $50 Bln is more than granny keeps in the purse for weekend spending.

Wed, 03/24/2010 - 10:10 | 274301 retheauditors
retheauditors's picture

What B of A is talking about is real off-balance sheet stuff versus what Lehman was doing with Repo 105 which was plain vanilla round-tripping with a counterparty.  You will get no response for PwC due to "client confidentiality."  But given that JPM Chase, PwC's other biglong term banking client said they did use Repo 105 per FTAlphaville until 2005, I would bet there's some hidden in $BAC too.  Hell, they were probably counterparties to each other so PwC could keep track of it all . Someone had to.

Wed, 04/14/2010 - 07:04 | 299613 mark456
mark456's picture

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