by Andrew Hoffman, Miles Franklin:
When I was a buy-side analyst at a NYC hedge fund from 1996-98, our portfolio consisted primarily of small-cap, over-the-counter stocks. Many had large bid-asked spreads, tempting the fund’s managers to “paint the tape” by purchasing small lots with “market on close” orders at the end of each quarter. That way the portfolio was “marked up” in time for our quarterly fee assessments – which, naturally, were based on fund’s size. This practice, though not “illegal,” was – and still is – common practice; yet another reason why I eventually left Wall Street, kicking and screaming. Such “tape painting” is not only unethical but manipulative and borderline felonious.
Tape painting, of course, is not just limited to sniveling “hedge bombs,” but corporations, municipalities and sovereign nations as well. For corporations, Lehman Brothers was the poster child of “window dressing” its balance sheet at quarter’s end, engaging in overnight repurchase agreements that temporarily boosted its balance sheet before being unwound the following day. Sadly, this practice is not only alive and well, as “TBTF” banks are, in reality, far more insolvent than in 2008. And thus, the below graph of Federal Reserve initiated repurchase agreements over the past five quarters shouldn’t surprise anyone. To wit, when Lehman Brothers engaged in such deception, it did so via overnight “repos” with other banks; while today, the Fed itself is initiating!
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