Window dressing can be defined as the deceptive practice of mutual funds and banks to mask their real holdings. In the case of mutual funds, they will be selling their biggest losers and purchasing the high-flying stocks at the end of the quarter to boost up the fund’s performance. In the case of banks, they will be reducing their debt levels in the short run before their earnings report.
To those believers of market efficiency we can tell you this: Wall Street will always try to deceive you and you will never get the true picture of a company just by looking at earning reports. The information is not clear and it is not always available. We can always try to gleam true company performance by trending the free cash flow of a company.
Now, after eons and eons of trading our friends the regulators are going to start targeting the practice.
Federal regulators are poised to propose new disclosure rules targeting “window dressing,” a practice undertaken by some large banks to temporarily lower their debt levels before reporting finances to the public.
The Securities and Exchange Commission is scheduled to take up the matter at a meeting Friday and is expected to issue proposals for public comment. The action follows a Wall Street Journal investigation into the practice, which isn’t illegal but masks banks’ true levels of borrowing and risk-taking.
A Journal analysis of financial data from 18 large banks known as primary dealers showed that as a group, they have consistently lowered debt at the end of the past six quarters, reducing it on average by 42% from quarterly peaks.
The practice suggests the banks are carrying more risk than is apparent to their investors or customers, who only see the levels recorded on the companies’ quarterly balance sheets.
The SEC focus comes two years after the peak of the financial panic, which was exacerbated by high levels of borrowing by the nation’s banks.
Since then, heightened scrutiny from regulators and investors has prompted banks to be more sensitive about showing high debt levels.
The SEC is expected to propose rules requiring greater disclosure from banks and other companies about their short-term borrowings.
Believe us when we say that this “window dressing” practice has taken place longer than two years. This regulation is the right step in the right direction. Next, in their target list should be high frequency trading. We take solace that the limit of trading speed is basically the speed of light. Let the computers cannibalize themselves into oblivion.
A pig will always be a pig…
Fin
Source: http://finance.yahoo.com/banking-budgeting/article/110688/regulators-to-target-window-dressing?mod=bb-budgeting
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