A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.
...I am interested in seeing how disclosure of the repo transactions varied across these firms. Assuming some firms were forthright in the effect that the repo transactions were having on their financial statements, did investors punish firms for being honest? I wonder if industry analysts were aware of the practice, and if so, did they expect most/all firms in the industry to engage in such transactions, regardless of whether or not the transactions were disclosed?
The data highlight the banks' levels of short-term financing in the repurchase, or "repo," market. Financial firms use cash from the loans to buy securities, then use the purchased securities as collateral for other loans, and buy more securities. The loans boost the firms' trading power, or "leverage," allowing them to make big trades without putting up big money. This amplifies gains—and losses, which were disastrous in 2008.