Another Quarter, Another Blatant Window Dressing By The Primary Dealer Banks To Make Their Balance Sheets Seem Strong

When back in 2010, Lehman examiner Anton Valukas exposed the bankrupt bank's Repo 105 practices (which subsequently we learned were also partaken into by most other banks, although the trail ends there and nobody was prosecuted for it, let alone went to jail -after all, everyone was doing it, and everyone knew about it), many were shocked and appalled that such a blatant window dressing practice was allowed to continue quarter after quarter. Which is why we suppose nobody will be surprised to learn that glaringly "in your face" window dressing continues to this very day quarter in and quarter out by the same Primary Dealers who already leech billions in free Fed (i.e., taxpayer) money courtesy of a collusive BWIC/OWIC spread-to-market in the Fed's daily POMOs. The quote-unquote shocking chart below is one we have demonstrated on numerous occasions in the past: it shows total primary dealer assets on a weekly basis as reported publicly by the New York Fed. We have made it clear time and again, that this chart demonstrates nothing short of the end of quarter window dressing, when PDs convert their asset holdings into cash to make their Tier 1 Capital much more robust than it truly is. After all, none other than JPM and Citi were praising just how prepared for Basel III they are with their "sterling" capitalization ratios... which were only sterling courtesy of precisely the highlighted window dressing which occurs each and every quarter. We expect nothing less from Bank of America and Morgan Stanley when they report their own numbers in the coming days. We also expect the regulators to do absolutely nothing to prevent this blatant abuse of fiduciary duty which has no other purpose than to hide the true sad state of America's banking system.

Chart 1: cumulative Primary Dealers assets by week. The red line demonstrates the end of quarter asset holdings, and the arrow shows the Q3 end position. What is of note is that not only the PDs close Q3 with the smallest non-cash asset position in the entire quarter, but that their total asset holdings dropped from $291 billion on August 24 to $202 billion on September 28, a massive window dressing drop of nearly one third. What is also very notable is just how long the window dressing practice has been going on for. Naturally, the first week following the EOQ window dressing has seen the PDs promptly ramp up their asset holdings by a good $24 billion from the Q3 minimum of $202 billion to $226 billion. We expect this number to grow to nearly $300 billion in the coming weeks.

Chart 2: this chart removes any noise (and doubt) and shows just the minimum, maximum and end of quarter position of PD assets. There is absolutely no mistaking what is going on. Beginning in Q1 2008, with just one exception (Q3 2008, when Lehman blew up and killed the whole window dressing practice as PDs then had other more pressing concerns on their hands), every quarter PD asset holdings have closed their quarterly books with disclosed assets at or just near the quarterly minima, with min to max swings as large as $126 billion (Q4 2010). The past quarter saw the PD community liquidate assets into the quarter end to the tune of $93 billion from the intraquarter highs of $295 billion hit on July 27, 2011. If there was any Evidence A to be presented in a court of law, this would be it.

And to those curious just which asset class was used most actively by the PD community to effectuate the end of quarter swing, and the post EOQ rebound so deftly, we have the answer: it is precisely those bonds that the Fed has made risk free: the Bonds that have a maturity of under 3 years. As can be seen on the chart below, a whopping $22.8 billion of sub 3 Year Bonds were sold into the quarter end, only to be repurchased promptly thereafter in the amount of $25 billion.

How did the rest of the curve move in the same time period? Not much as the following 3D chart shows:


As for what the total notional amount of Treasury holdings in the PD community is, the following chart will answer that question too:

There are other nuances, most notably when it comes to holdings of MBS, Agencies and Corporate Bonds by the Dealer community but the findings there are less surprising.

What is, and what took a simple blog 30 minutes of excel analysis and a public database to figure out, is that the recently expanded list of 22 banks which comprise the Primary Dealer community continue to lie about their true financial health. And just like in the case of Lehman, when everyone knew about Repo 105 but nobody dared to say anything as it would expose everybody, accountants, and regulators certainly included, so this time around nobody will do anything to stop the same practice which continues to this day, as the opportunity cost of fixing what is broken is actually confirming just how weak America's banks are, and that years after Lehman, they still engage in precisely the same deceptive practices.

And that, in a society in which nobody takes responsibility for anything, least of all failure, simply is unacceptable.