Evidence That Primary Dealers Have Collectively Engaged In Repo 105 And Qtr-End Book Cooking Type Schemes For Years

Tyler Durden's picture

The WSJ has compiled some data that gives us hope about the future of the MSM journalistic model (and makes us blush for not having thought of it first). In sorting through PD weekly repo holdings, the WSJ has observed a pattern in which End Of Quarter positions tend to be among the lowest of any reported during the quarter. The WSJ study goes back 5 quarters. Zero Hedge has performed a comparable analysis (incidentally we were looking at Primary Dealer holdings just 3 hours earlier) and we present the preliminary results. They are stunning, and we are scratching our heads how this glaring observation could have been missed, not just by us but by everyone else as well. In a nutshell, in the past 9 quarters, beginning with Q1 2008 or about the time Bear failed and things started going downhill fast, the Primary Dealers (a set of banks that as everyone knows includes Goldman, BofA, JPM, and included Lehman and Bear), in 8 of the these quarters closed out quarters at the lowest level of net asset holdings! Whether this is by Repo 105-type transactions, or via BofA type "roll" trades as discussed in detail in the WSJ, is irrelevant: the simple purpose of this phenomenon was to make balance sheet leverage more palatable and easily presentable: the lower the asset base, the less the equity required to satisfy regulatory leverage ratios. How nobody has observed this scheme previously is simply stunning, and a real testament to the PD's collective ability to keep this crucial data to the distribution list of a select few.

Some facts:

  • The average quartertly High to Low spread in the past 9 quarters was $73.7 billion;
  • The median quartertly High to Low spread in the past 9 quarters was $60.1 billion;
  • In the past nine quarters, Primary Dealers ended their Fiscal Quarter on the lowest net asset holding level 5 times out of 9; Another 3 times, the closing print was a statistically insignificant $6.7 billion away from the low.
  • The only major outlier occurs in Q3 of 2008, or the quarter when Lehman went bankrupt, and PDs closed that quarter at the high of the Lo-High range. To be sure, in that quarter banks had more important things to worry about than cooking their books.
  • The average of all 9 quarters, including the one major outlier, indicates that banks closed just $7.9 billion away from the lows.
  • It would be naive to assume that of the 18 PDs only Lehman, via Repo 105 or however, was presenting to its investors a picture of "health" that was better than reality and than what sensible leverage ratios would permit.
  • We contend that Repo 105 type book-cooking and quarter end balance sheet window dressing was a prevalent phenomenon among all the banks. The fact that over the past two and a half years this resulted in a differential from the peak quarterly assets of over $65 billion is unbelievable, and the fact that this had slipped through the regulators' fingers is inexcusable.

The graphic representation of the Primary Dealer holdings of net assets shown as a Lo-High range during any given quarter, together with the closing net assets (presented by the red dot), is shown on the chart below.

We are confident that armed with this data, the SEC will be able to provide a prompt and logical response why the PDs have such a peculiar pattern in downshifting their assets toward quarter end, and much more relevantly, who the counterparties are that would consistently take the other side of these quarter end window-dressing trades.

And to think we were perplexed earlier why PDs saw a $31 billion drop in their assets in the last week of Q1...

We urge any and all readers to replicate our results at the following FRBNY database.

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GoldmanSux's picture

What about the other side of the equation? All the banks have roughly the same quarter ends. Who took/takes this off their books at quarter end and is duplicitous in accounting fraud, securities fraud, et al? The numbers are so big it can only be the central bank.

xPat's picture

I agree - as you say and Tyler highlighted in the 3rd paragraph from the end, the big question is who was the counterparty.

But let me pose this another way... Assume for sake of argument that FRBNY or another gov't agency was the counteparty. If that were true, is there any possible explanation other than that the government was a party to intentional fraud of the public and that a government-sponsored plot existed to usurp existing reserve ratio laws?

I'm not just asking that rhetorically. I mean really, this seems like the news of the century if it means what I think it means. Either a whole bunch of european banks were taking the other side (making them apparent accomplices to fraud), or our own government was.

I just don't see how this could be happening without FRBNY at least knowing it was going on, if not actually participating.

Who has the authority to petition a court for a criminal indictment against Tim Geithner anyway? Is there a way for the slowly awakening public to create political pressure in favor of such an outcome?


Bear's picture

Who ran the stress test of last year ... Oh, the Treasury, the Fed?

Cognitive Dissonance's picture

This is why we must always distrust any "investigations" or "regulatory reform" initiated and appointed by the system itself. The system will always protect itself from everyone and everything. This is a given.

Seer's picture

Do people demand a really just system? Well, we'll arrange it so that they'll be satisfied with one that's a little less unjust ... They want a revolution, and we'll give them reforms -- lots of reforms; we'll drown them in reforms. Or rather, we'll drown them in promises of reforms, because we'll never give them real ones either!!

- DARIO FO, Accidental Death of an Anarchist

Janice's picture

I say line the CEO Bansters up and shoot then.  Everytime they have an audit, the management is required to sign that the numbers in the financials are provided by the management and are an accurate reflection of ongoing operations. Lies, lies & more lies.

Oh, and if the banks are doing this, who else is?

GillianX's picture

This is not true. Most of the Investment Banks (GS, MS, etc) had quarter ends that were not calendar quarters like the Commercial Banks (JPM, Citi, Barclays, etc). This was specifically done so they could run this sham and offload assets to the commercial banks over their reporting periods. If the Commercial Banks had the same quarterly reporting period as the Investment Banks these trades wouldn't have worked.  

hedgeless_horseman's picture

This is one reason why firms have been allowed to select their own "fiscal year" instead of a common calender year for tax reporting, like the common man must.

The next thing your going to tell me is that investment funds buy "must have" stocks for their portfolios' quarterly reporting.

Truth be told, I try to do some push ups before I get in bed with the Mrs.

Same window dressing, different windows.

Miles Kendig's picture

Either a whole bunch of european banks were taking the other side (making them apparent accomplices to fraud), or our own government was. - XPat

Or both, either in conjunction with their respective central banks or not.  I would add that in other locations governed by different regulations many firms do not report quarterly and have other variances in disclosure requirements and legal precedence... The power of arbitrage.

Cognitive Dissonance's picture


The drum you've been beating regarding judicial exclusion seems to run even deeper than simply the bankster CEO and their henchmen, either animal or mineral. I guess I shouldn't be surprised when the black spot on the apple is just the surface manifestation of a rotten core.

Of course, our problem when looking for criminal behaviour is the near total absence of the criminal mentality and imagination in ourselves. We are hampered by our sense of fair play and a deeper respect for rules and the rule of law. We are outmatched and often outplayed.

I've often thought that in order to beat these bastards, we must think and play like them. But this just leads to a point where you become corrupted and thus your mission is rendered moot. The base insanity that's at the root of this mentality is both seductive and oppressive.

Miles Kendig's picture

We have managed to create an entire profession around the concept of criminal profilers.  One need not be a criminal to understand criminal operations.  The processes that have been repeatedly employed not only in finance, but throughout societies professions are fairly straight forward, if convoluted in construct.  An interesting set of objective circumstances.

Orly's picture

The issue is not personal or individual criminality.  There is a culture of criminality that at once makes the individual criminal virtually invisible and obfuscates their crimes against other cultures that do not see things the same way.

In other words, the broach of decency is broken quite easily in a culture that has a different idea of right and wrong.  They don't think they are doing anything wrong.

In fact, they are doing "God's work" (Blankfein) with "angels" (Skilling).  There is a pervasive cultural disconnect between what these people (mainly Ivy Leaguers, other than "little people"...) and nearly everybody else.

Who would the US government be to question these noble ideals, let alone prosecute for what are clearly philanthropic motives on the part of that culture?  In their blatant adoration of the noblesse oblige, they not only look the other way but, in fact, justify and enable their actions, leaving us wondering why they don't see what we see.

I will call this phenomenon "cultural capture."

Cognitive Dissonance's picture

Thank you Orly.

This is why I talk about denial, the hive mentality and group think etc. Because this goes so beyond simple criminality and exactly why it's nearly impossible to prosecute or even attack when these criminals are essentially supported by the general population, either through ignorance, fear or denial. It's also easy to be corrupted by the system when you are a part of and live within the system. This is why it's nearly immpossible to reform the system from within. 

It's deep capture of and by the hive. One of my next articles will be titled "Hive Mentality and Group Think" and I will discuss the dynamics. It's quite disturbing for the average Joe to face the fact that they are in many ways enabling this behaviour. Thus the important role denial has in the enabling.

Orly's picture

Respectfully, CD, I will disagree with your assessment.

In order for there to be denial, there must be a truth that is there that is either not accepted by the individual or is rationalised and eventualy accepted in bits and pieces.

I submit that there is no denial in play here because there is no "truth" to accept.

It is sort of like having an MRI of your brain.  There is an astrocytoma present in the temporal lobe.  Your neurologist gets the report from the radiologist, which clearly states, "No abnormality noted in the cranial cavity.  Essentially a negative study."

The tumor is still there, whether the physician recognises it or not.  Neurologists rely on radiologists to see the problem.  You come back in two weeks later and bring the images to the neurologist's office.  You've still got a splitting headache and this vicodin just ain't cutting it.  The doctor puts the CD into the computer and lo and behold! an astrocytoma in the temporal lobe!

How could the radiologist have missed that?  Was he lying?  Was he incompetent?  What about what the neurologist told you two weeks ago- that there was no problem, take two aspirin and call me in two weeks?  Was he lying or incompetent?

Either way, there was no "denial" on the part of either the neurologist or the patient, just as there is no denial on the part of Joe Sixpack in America in regards to the financial mess we find ourselves in.

Believe me, if Joe found out he had a brain tumor and was walking aroud for nearly a month with a negative diagnosis, he would be beyond pissed off when he found out the truth.  He will be mad as hell, too, when he finds out the truth about how both the government and the banksters have ruined the lives of his great-grandchildren through their incompetence and lies.

Through sites like this, we can get the truth to Joe so that he can see it for himself.  But the truth must be available for him to be able to deny it.

Cognitive Dissonance's picture

"He will be mad as hell, too, when he finds out the truth about how both the government and the banksters have ruined the lives of his great-grandchildren through their incompetence and lies."

Orly, you basic assumption here is that once people have been shown the truth, they will accept it as the truth and then become energized by the truth to rectify the situation. Or at least will now know the truth and no longer be swayed by the lies. I submit that is a tragic misunderstanding of how denial plays out and the dynamics behind denial. This is not a situation of ignorance but of willful ignorance. And we must be careful how we define ignorance.

Many people will and have accepted that there is corruption and out-right theft by political, corporate and military interests in America. For whatever reason, they have decided they are powerless. Thus in their mind they simply don't wish to know the details and no amount of information will be accepted.

Then there are the people who simply can't get past the notion that the very people who are sworn to protect and serve this nation would not only harm the nation but that others would enable them to do so, again for whatever reasons. So they rationalize away the evidence of this in thousands of ways, one of which is to avoid the details and stick to the big picture world view they have constructed in their minds in order to explain what's going on.

I have been trying to inject some reality into various people, either friends, family, clients or strangers for years and years and the vast majority simply don't want to know what's going on. They don't want to know the details because it's so much harder to ignore the details. Knowing the details will destroy the fragmented worldview that they have piecedtogether (with huge gaps) in their minds. Your premise that they must know something in order to deny it and that once knowing something they will be "pissed" is fundamentally incorrect.

But I still love ya Orly. :>)

WaterWings's picture

What if Joe refuses to believe the doctor? What if Joe decides that happy thoughts and tele-prompter presidents will make it go away. Ask CD how truthtelling has worked out for him with friends and family.

If you aren't happy with the current administration you are a racist tea-bagger. If you say, "Enough!" you are a racist tea-bagger. If you want to print up flyers about Ending the Fed you are a racist tea-bagger. If you want to march to DC to make a stand you are a racist tea-bagger. If you are not at home collecting welfare, watching teevee, you are a racist tea-bagger.

Ridicule. Marginalize. Demonize. Silence.

Lotta people heading to DC with guns in a short while...



Miles Kendig's picture

It goes far beyond this excellent observation.  As an example looking at the recent disclosures regarding activities at Morgan Keegan(1) one could include the field rep at Morgan Keegan who had no clue or concept of the activities elsewhere in the organization and faithfully marketed these grossly deficient products.  Back to judicial exclusion and so corrupting the structure that the law defends and protects plunder and false philanthropy at the expense of the very society whose freedom from these parasitic activities the system of justice is supposed to defend.(2)

(1) http://www.zerohedge.com/article/sec-seeks-pound-flesh-morgan-keegan-bla...

(2) http://bastiat.org/en/the_law.html#SECTION_G712

SWRichmond's picture

Maiden Lane "X".  Off-balance.

Audit the fucking Fed.

Miles Kendig's picture

Once the secrecy is removed, which is just a matter of time, what we'll see is yet another global financial resolution process.  Whatever shape that process takes will have monumental consequences. Just as the last resolution process of extend and pretend has only enhanced the probability and scope of future or ongoing disaster.

knukles's picture

Since time immemorial, investment banks and investment/dealer departments of commercial banks have contracted their balance sheets immediately prior to audit/reporting dates and re-expanded them immediately thereafter. 
This whole process is absolutely Nothing New.

Ever heard of institutional retail being referred to as "inventory"?  Or parking with the "bookie"?  Not everybody closes their books on the same day.

Been there, watched it happen, real time.

Miss Expectations's picture

The same is done with consumer products companies. End of Quarter/End of Year activities include:

1.  Take as many of your future ship orders as you need.

2.   "Release" the orders

3.   Pick and Pack

4.   Load orders on rented trailers

5.   Book the "shipments"

6    Close the books

7    Next day...begin returning products to the warehouse.  Return rental trailers.  Process "returns"

godzila's picture


Absolutely. It's just the scale that might be different

Eally Ucked's picture

Really? Just look carefully at the graph. Do you see something in few first data points?

Ned Zeppelin's picture

I don't think you are suggesting this is OK, only that this is not news.  I agree with the other posters that it is the scale of this thing (quite astounding,  I think, and may constitute a new crack in the dike) that causes one to suspect a larger conspriacy at work. 

Sunshine is the best disinfectant for this kind of bacteria.   

chet's picture

I thought the Lehman story was that they had basically set up an off-sheet vehicle, Enron-style, shifted off the liabilities, then bought them back from this manufactured counterparty paying some sort of fee to make it look legit.

In other words, they are their own counterparties.

Am I remembering the Lehman repo 105 story wrong?

sweet ebony diamond's picture

someone has to force the banks to value their assets using common-law metrics.

would someone in the supreme court of the USA take action please.

erik's picture

we have the power to do it.  we need to close our accounts at the big banks.  i did it yesterday, and already 3 of my friends are going to do it too.  make sure your family and friends do it.  if they pass it along to others, then we have real momentum.

the government is not going to do anything on the taxpayer's behalf, that is obvious now.  we must do it ourselves.

believe me, once you do it, you'll realize how gratifying it is to have your voice finally heard. 

we keep asking ourselves "what can we do?"  removing our money, that is what we can do.  that is what we must do.


system failure's picture

I agree. I did it a while back. My account was interest bearing which was paying practically nothing and was very wasteful of me to leave it there for thier cheap use. I specifically told the bank that they will have to call me or send me a flier in the mail when they would be willing to pay a respectable interest again.

The whole country needs to do this and yank their money from the banks that pay such low interest, which is a slap in the face. Send the message now. Send the message now. Send the massage now.

ArkansasAngie's picture

You can dad gum well vote in November.  Vote against all incumbents. 

In the mean time ... you tell every person you have the opportunity to meet.

If our government refuses to impose moral hazard ... we'll just have to do it ourselves.

And ... it's important to remember that elections are the perferred method of throwing the bums out.

SWRichmond's picture

Vote for who?

Voting in America’s “two-party system” is like using a port-a-potty.  You have to use it because there’s nowhere else to “go”.  You hold your nose, go into the booth, do #1 or #2, and when you come out the stink is in your clothes and you feel like you need to wash your hands.

Cognitive Dissonance's picture


As a man who has invested in securitized port-a-potties, I resemble your comments about stinky cloths and holding your nose.

You will be smelling the presence of my lawyer shortly. :>)

hedgeless_horseman's picture

Is this guy the MSM in your analogy?  Real "insiders" so to speak.



Cognitive Dissonance's picture

Authorities said Gary Moody, 45, of Gardiner, Maine, somehow got inside a toilet in the women's restroom and stayed there undetected as women used the restroom until a young girl detected him. The teen apparently walked into the restroom and looked down into the toilet and saw Moody looking back up at her.

Police were called in to flush him out.

"It's a very filthy environment and before we put anybody in contact with him we wanted to decontaminate him. We treated him exactly like he was hazardous material," Capt. John Hebert of the Carroll City Sheriff's Department said. "I started in this business in 1980 and I have never in my career encountered anybody in this type of a situation."

nedwardkelly's picture

Vote against all incumbents.


Wow you're optimistic. What are you smoking that makes you think the new Boss will be any different to the old Boss?


Ned Zeppelin's picture

No difference. Tweedle Dum and Tweedle Dumber. Demoncrats and Rethuglicans all the same simpering, corrupt scum.

RockyRacoon's picture

Maybe the new guy/gal will realize that he/she will be voted out again with one term under their belt, just like the old incumbent was voted out for being self-serving.  Fear works wonders.  The knowledge that a legislator will make a career out of being re-elected is what causes the problem(s).  I'll vote against EVERY incumbent on the ballot -- regardless of party or platform.  You can't rely on what they say being what they believe anyhow.

GoldmanSux's picture

KPMG, PWC, E&Y... Dude, you couldn't pay me enough to be a partner in one of these firms. This is the ratings agencies x50. Out and out fraud. The liabilities these partners have is astonomical.

sweet ebony diamond's picture

not just those people. you are looking at the whole financial industry.

great "leaders" here.


Miles Kendig's picture

The example set by the actions of those in financial leadership positions communicates it all.

Silver_Bullet's picture

This is more evidence of criminal conspiracy among the enemy oligarchs that usurped the republic in 1895.  Everyone who hasn't should see Max Keiser's article on "Peek-a-Boo" accounting that came out way before Lehman blew.  60 days can be like 60 years to a Red Bull fueled robot trader, so everyone who is anyone on Wall St knew before hand that Lehman was being set up for the kill, because all of them are BK from derivatives.  It was possible before any of this to see it coming.  Max even says Lehman is trying to out Enron Enron.  He picks Lehman by name two months out from Banker-geddon.  This is a controlled demolition of western civilization by the Anglo-Venetion faction of oligarchs, and the purpose is verticle integration and genocide.


See this Puff-Ho article: http://www.huffingtonpost.com/max-keiser/peek-a-boo-accounting-and_b_111...

Bear's picture

The SEC ... what would they do with it ... Tell the Treasury Dept? Does the FBI still work for Treasury?

This makes me ill ... kinda like listening to an Obama speech. What's happening here; everything that is wrong becomes right and enery right becomes wrong. I'm so FED up I'm changing my name to Bull.

hunkofjunk's picture

I'm pretty sure that this practice was common in London across the US investment banks and has been for many years. I suspect most of the big European banks acted as counterparties. Anyone who worked, (not me), on an equity finance desk would be able to add some interesting colour I would have thought.

The Axe's picture

Great reporting, Great effort...But no one gives a shit period...amazing but true. Many years as a Trader/MarketMaker I would have some horrible, illiquid stock on my list for a huge salesman in the firm, something that had a 3 dollar spread and I had to maintain a 30,000 position in. So to prevent getting screwed on a shitty mark on the close of the month, I would park the stock at friends firm, his computers (T+2) wouldn't pick it up for his quarter, break the trade on T+1, and start all over again, never once was I inquired about, these trades and marks don't even need a real counter-party, these banks could easily create false counter-party trades, or transactions and then just back it out again at the start of a new quarter---in fact thats exactly what they did...period...but again the SEC has no guts..

Miles Kendig's picture

Playing Three Card Monte, just as it is designed to be.  Excellent insight.

TooBearish's picture

The practice is wide spread and has be used since the early 90s, the counterparties are hedge funds and even real money accounts because the banks will pay an above market rate to get the securities off the books for a reporting period.

Everyone has a price.

The SEC will do nothing, nor will the rating agencies, as the practice solidly in the gray area in terms of accounting, at worst it is a washed sale, or guaranteed buy- back, which is a contigent liability.  So duh the banks under report their commitments, why is anyone surprised?  The banks have the most powerful lobby in Washington - be outraged but don't expect the status quo to change. 

It is the rating agencies that are once again failing to rate the industry correctly.

Move along nothing to see here....

Miss Expectations's picture

There's plenty to see here.  Reminds me of the scene in Kingdom of the Crystal Skull where the Ukranian woman says, "I vont to know"  Eventually, her head explodes.


(I have an 8 year old)