BofA, Citi Made 'Repo' Errors

Disclosures Cite Accidental Misclassification of Borrowings; No Material Impact

By MICHAEL RAPOPORT

Bank of America Corp. and Citigroup Inc. incorrectly hid from investors billions of dollars of their debt, similar to what Lehman Brothers Holdings Inc. did to obscure its level of risk, company documents show.
In recent filings with regulators, the two big banks disclosed that over the past three years, they at times erroneously classified some short-term repurchase agreements, or "repos," as sales when they should have been classified as borrowings. Though the classifications involved billions of dollars, they represented relatively small amounts for the banks.

A bankruptcy-court examiner said Lehman had been doing the same thing to make its balance sheet look better before it filed for bankruptcy in September 2008, using a strategy dubbed "Repo 105" that helped the Wall Street firm move $50 billion in assets off its balance sheet.

 

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Bank of America and Citigroup say their misclassifications were due to errors—not an attempt to make themselves look less risky, which examiner Anton Valukas said was Lehman's motivation. The disclosures, made after federal securities regulators began asking financial firms about their repo accounting, were included in quarterly filings earlier this month but not highlighted.

The disclosures come amid a series of revelations about how banks obscure their risk-taking before reporting their finances to the public, a practice known in the financial world as "window dressing."

Bank of America and Citigroup were among the banks cited in a page-one Wall Street Journal article on Wednesday detailing how financial firms temporarily shed repo debt at the ends of quarters, when they report their finances to investors. Since the financial crisis began, both banks often have reduced their quarter-end repo debt from their average borrowings for the same quarter. That activity didn't involve misclassifying repo loans as sales.

Borrowing Gap

A look at the overall net short-term borrowing of large banks in the repo market as well as the net short-term borrowings of the three banks.

Repos are short-term loans that allow banks to take bigger risks on securities trades; classifying the transactions as sales instead of borrowings allows a firm to take assets off its balance sheet and thus reduces its reported leverage, or assets as a multiple of equity capital.

Federal securities rules bar financial firms from intentionally masking debt to deceive investors. There is no indication that Bank of America or Citigroup misclassified their repos intentionally or that the Securities and Exchange Commission will take any action against them. An SEC spokesman declined to comment.

The amounts Bank of America and Citigroup cite are relatively small. The misclassifications had tiny impacts on the banks' reported leverage, and none at all on their earnings or shareholder equity. The banks didn't restate any financial statements.

Bank of America said the misclassified transactions in certain quarters over the past three years—ranging from $573 million to as much as $10.7 billion—"represented substantially less than 1% of our total assets" and had no material impact on its balance sheet, earnings or borrowing ratios.

Citigroup said the misclassified transactions—of $5.7 billion as of the end of 2009, and as much as $9.2 billion over the past three years—involved "a very limited number of our business units" that "used this type of transaction in very small amounts." It also said its errors were immaterial to its financial statements. "At no point in time was the impact of these sales transactions large enough to have a noticeable impact on our published leverage ratios."

By comparison, both banks have more than $2 trillion in assets.

The SEC had asked big banks in March for more information about their repo accounting in the wake of the Lehman bankruptcy report. That inquiry hasn't found any widespread inappropriate practices, SEC chief accountant James Kroeker told a congressional subcommittee last week.

But Mr. Kroeker said the SEC has asked several companies to provide more disclosure about their repo accounting in their securities filings. Bank of America and Citigroup indicated they had found their errors on their own initiative.

More broadly, the SEC is now considering stricter disclosure and a clearer rationale from firms about quarter-end borrowing activities. The agency may extend these rules to all companies, not just banks. The potential new rules, disclosed by SEC Chairman Mary Schapiro at a congressional hearing last month, came two weeks after the Journal's initial article about banks' debt-masking activity.

Separately, Bank of New York Mellon Corp. said in a securities filing that it had found some small errors in its repo accounting over the past three years. The bank said it didn't use Repo 105 transactions.

The errors have been corrected, and none of them were material to the bank's financial statements, the bank said in the filing. A Bank of New York Mellon spokesman declined to comment further.
Write to Michael Rapoport at Michael.Rapoport@dowjones.com