Posted by: Dirk | March 24, 2010

Financial innovation at BofA: Repo 105

Propublica reports:

Yesterday we wrote about allegations that Bank of America had engaged in manipulation of its balance sheet using tactics akin to Lehman Brothers’ “Repo 105.” (Repo 105, as the Wall Street Journal puts it, is a “more-than-questionable interpretation of accounting rules [1]” that enabled the bank to hide its risks before its eventual bankruptcy.)

This video explains how a Repo 105 works.

According to Problica, BofA has come as close to admitting it is using Repo 105 as it can. The New Yorker recently published an article almost praising Geithner for ending the financial crisis:

Economists are still debating what it was that ended the financial crisis and turned the economy around. It is inarguable, though, that Geithner’s stabilization plan has proved more effective than many observers expected, this one included. “The policy worked,” Brad Hintz, a top-rated financial analyst at the research firm Sanford C. Bernstein, said. “Now, did it raise the mob to come after the bankers and politicians and try and drag them off to the guillotine? Certainly it did. That’s part of the political price that is being paid for the policy having worked.”

The financial problems have been hidden by clever accounting tricks by the Fed and the financial system. This can be good, since it has bought time, which was running out after the collapse of Lehman Brothers. However, the ongoing ‘auditing fraud’ in collaboration with the Fed is only acceptable if reforms are forthcoming to put us back on a sustainable growth path. This includes thinking about unwinding current economic imbalances and fixing financial market regulation so that:

  • A. money is channeled to those that can repay their debts and
  • B. money is used to invest in the production of real goods and services.

UPDATE 24/03/2010: Put differently, only when excess reserves fall back to near zero and the Fed has cleaned its balance sheet the crisis in the US is over. Only then you can be sure that what you see is what you get. As it stands, we are still a long way from normal:

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