How Bank of America Got Away With a Huge Swindle

If you want to avoid facing a tough prosecution for malfeasance, be a banker, not a biker.

That appears to be the lesson of Saturday’s front page of the Wall Street Journal, where the lead story was about how Bank of America repeatedly hid its massive bad debt holdings from regulators and investors through a creative accounting device called “repurchase agreements,” and the second story, just above the fold, was about how US Food and Drug Administration prosecutors are “Casting a Wider Net” investigating the use of steroids by competitive cyclists.

According to the BofA story, the bank, during a Securities and Exchange Commission investigation into the real financial condition of the nation’s biggest financial institutions, admitted that at the ends of all the quarterly reporting periods from 2007 through 2009, it had used repurchase agreements, or “repos,” to temporarily shed bad debt before drawing up and releasing its required public filings. That is to say, it managed to lie about and hide from view its weakened liquidity position all through the financial crisis.

Astonishingly, the Wall Street Journal article reports that this practice, known euphemistically in financial industry parlance as “window dressing,” is “not illegal in itself,” unless it is done with the intent of misleading investors. The article is quick to note that “Bof A said its incorrect accounting wasn’t intentional.” (The newspaper didn’t go to the SEC or to any independent source such as an academic expert or lawyer for comment on this laughable whopper.)

BofA, every three months, was transferring mortgage-backed securities briefly to a trading partner in return for a simultaneous agreement to repurchase similar securities from the same partner, once the required SEC filing had been shipped out in the mail. As the Wall Street Journal’s reporter Michael Rapoport writes, “The practice amounts to a bank renting out its balance sheet for short periods; the bank gets fees, and the client on the other end of the trade gets short-time cash.”

If this kind of thing is not deliberate fraud I don’t know what is, and yet the bank, in its statement to the Wall Street Journal, claims the “effort to manage its balance sheet” was “appropriate,” and that the intent behind the shell game was not to mislead investors or regulators, but rather was “to reduce the specific business unit’s balance sheet to meet its internal quarter-end limits for balance sheet capacity.”

How’s that for financial mumbo jumbo?

It would be interesting to see how well an ordinary citizen would fare, if he or she used a “repo” type strategy to hide half his or her income from the IRS (the equivalent scam might involve “donating” half of one’s income on December 31 of the tax year to an accommodating charity, and then taking the money back on January 1 of the next year), and then claimed that the fraud was “not intentional.”

But hey, it works for the banks. The article goes on to report that, “Apart from requiring more disclosure about its repo accounting, the SEC hasn’t taken any action against BofA over the matter. The fact that the [BofA] letter [to the SEC] was released suggests the SEC has concluded its review.”

Meanwhile, even as BofA and other financial behemoths get away with accounting murder, and are held harmless after their crooked dealings brought the US and the global economies to their knees, we’re informed that FDA legal bloodhounds are doggedly stepping up their investigation into illegal steroid use by US cyclists involved in the current Tour de France bicycle competition. The FDA is reportedly hoping to get some participants to turn in competitors who are using illegal substances to enhance their physical performance.

In this fishing expedition, the FDA, according to this second Wall Street Journal article by Reed Albergotti and Vanessa O’Connell, is not out to prosecute rank-and-file riders, but rather wants to bring charges against “any team leaders and team directors who may have vacillated or encouraged doping by their riders.”

Clearly, it is viewed by the US government as being critically important that the sport of cycling be kept clean of drugs, so that the Americans who watch the race from the comfort of their sofas and barcaloungers will know that the winners really deserved to win. But it clearly is not very important for Americans to know whether the bank where they put their hard-earned savings, or in whose artificially inflated stock they have invested their IRA or 401)(k) retirement funds, is cooking its books.

It is apparently critically important to know that those who encourage the use of performance enhancing drugs, thus undermining the confidence of America’s sports viewers in the validity of their viewing experience, will be prosecuted to the full extent of the law. It is apparently not that important at all that the people who caused a financial collapse that has pushed real unemployment and underemployment in the US up to close to 20 percent, collapsed the housing market, and put school districts, town and state governments on the brink of bankruptcy, be called to account, made to do jail time, or to perform community service.

The absurdity of this juxtaposition is made all the more clear by the fact that the FDA isn’t even able to come up with a significant charge to bring against the alleged dopers in its intensifying investigation of the cycling sport. As the Journal notes, “Federal investigators are exploring several avenues,” for possible prosecution, including “whether teams defrauded sponsors by failing to race cleanly,” or whether US Tour de France multiple winner Lance Armstrong’s US Postal Service team might have “misused federal funds.”

It’s the old story: steal a loaf of bread for a family and go to jail for years. Deceive national regulatory authorities and steal from a generation of pension investors and get a Troubled Asset Relief Program handout of billions of dollars in taxpayer funds.

DAVE LINDORFF is a Philadelphia-based journalist and columnist. His latest book is “The Case for Impeachment” (St. Martin’s Press, 2006 and now available in paperback). He can be reached at dlindorff@mindspring.com





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Dave Lindorff is a founding member of ThisCantBeHappening!, an online newspaper collective, and is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press).

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