Sunday, April 11, 2010

Banks Lowering Debt to Present Prettier Balance Sheets – Is This Dishonest?

How could banks and financial firms be accused of being dishonest when they lower debt at the end of the quarter?





Well… the answer is quite simple they lower the debt strategically at the end of the quarter and then raise the debt to its peak by the quarter’s half way point.



This maneuver gives the banks a better looking balance sheet for quarterly reports which share holders are presented with. Thus the quarterl7y reports shed a different light on the debt levels held by the bank.



Just How Much Debt is Hidden?



Approximately 40 or so percent is the average practice. This figure is the difference between the mid quarterly peaks compared to the quarter’s end where levels sink.



In my opinion this practice is in deed deceiving to the average investor but I understand why it is done. Its legal. It is a natural operational strategy for a company that is so influenced by share price as a typical publicly held company is. I am sort of surprised that most companies do practice this habit.



Weird little practices like this are due to regulation of the financial markets.

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