“Not Only Repo 105″: Total Return Swaps Also Used for Window-Dressing

[Joanne98]

“Not Only Repo 105″: Total Return Swaps Also Used for Window-Dressing

A reader wrote to tell me his firm had been shown transactions at the end of 2007 from an investment bank (not Lehman) that he was confident were to tart up its balance sheet. This confirms the hardly shocking idea that window dressing was not limited to Lehman:

Around Dec 2007 bank I work for was approached by XXX to transact a total return swap transaction. The underlying for the TRS would be a large portfolio of ABSes (and CDO tranches – name your toxic stuff, it was there). The deal was offered as “You do TRS with us, we sell you the portfolio and at the end of the deal we buy the portfolio back, no risk, hey?”. It was very clear to me that this was a balance-sheet dressing exercise, as they were very keen to do the transaction before their reporting date.

When I pointed it to our legal dept., they said that since they are doing legal thing, it’s all OK. In the end we turned the transaction down anyway (and, in line with my suspicions about the reason once the reporting date passed they enthusiasm for the transaction evaporated).

Our salesperson could not understand that this was a credit product on XXX, and that just because transaction like this might have priced at 10bp over Libor two years ago, with XXX CDS spreads in their hundreds pricing it at 30bp was NOT a good price.

In general, some credit intermediation trades that some of the large players tried to suck other banks into were unbelievable.

Continued>>>
http://www.nakedcapitalism.com/2010/03/not-only-repo-105-total-return-swaps-also-used-for-window-dressing.html

[unblock]

1. well if you want to get into the flaws of deals that DIDN'T get done....

wall street is nothing if not a giant financial idea factory, a ton of creative deals ideas are either stupid, dangerous, illegal, dodgy, or risky. the deal negotiations/due diligence progresses and the vast majority of the time, deals that make no sense don't get done.

of course, sometimes, deals do get done where one party or the other was stupid, or at least foolish. but the big players are supposed to be sophisticated enough to do their due diligence and take their lumps when they screw up.

the real problem is if the deal makes sense for the parties directly involved, and therefore gets done, but it doesn't make sense for a third-party, like shareholders or creditors. THAT's when the problems happen.


as long as we have end-of-quarter/end-of-year reporting requirements that essentially completely ignore the other days of the year, there are going to be distortions. some of these are large, some are small, some relate to financing, some relate to operations.

accounts receivable collections operations routinely push to get collections in prior to the end of the month/quarter/year for reporting/bonus purposes; accounts payable departments similarly stall, preferring to pay in the following period.

companies (even governments) sometimes switch payroll schedules for similar reasons. if your company pays salary "15th and last", then it can appear to cut expenses quite a bit by shifting to "1st and 15th", i.e., delay the "last" by a single day, pushing it into the next period. that's not a significant savings in real life, but it LOOKS huge. once, anyway.

unless and until accounting standards are changed to reflect something like AVERAGE DAILY metrics instead of END OF MONTH metrics, then you're always going to have some level of gimmickry.