As expected, the Securities and Exchange Commission has decided that it’d probably be better if financial institutions weren’t regularly misleading investors about the amount of debt they carry on their balance sheets, and so today the agency decided to draft new rules that force companies to say more about their short-term borrowing.
Companies’ tendency to temporarily pay off debt ahead of quarterly balance-sheet disclosures has lately come under scrutiny by the SEC following a Wall Street Journal investigation into the matter. Bank of America, Citigroup and AIG have said that they have classified certain assets as sales by briefly exchanging them for cash on the repossession market. The technique, known as “Window Dressing,” isn’t illegal but it can be misleading to investors. The Journal investigation found that a group of 18 large banks had reduced their debt by an average of about 42 percent for each of the past six quarters.
Perhaps the most famous form of window dressing is the “Repo 105” trick used by Lehman Brothers before its bankruptcy.
The new rules propose to curtail the accounting shenanegans by making firms disclose the average rate of their borrowing over a quarter as opposed to a one-day picture of their balance sheets. They would also have to report the maximum amount outstanding during the quarter and the average interest rate on their debt.