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

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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