VideoRegulators dismiss any suggestion that Citigroup and Chase were given special treatment. Last February, at a conference held by The Bond Market Association (TBMA) in New York, SEC official Annette Nazareth waved off suggestions by CFO that the regulators' differing objectives might cause them to work at cross-purposes when it came to questionable structured-finance deals. Indeed, Nazareth, the SEC's director of the division of market regulation, and her counterparts at the Fed and the Office of the Comptroller of the Currency (OCC) insisted at the December 2002 Senate hearings that they had more than sufficient means of preventing banks from aiding and abetting corporate fraud. And that testimony was reiterated in a letter to the Senate investigations subcommittee from the officials several weeks later.
"The SEC and the federal banking regulators have a long history of cooperation on enforcement matters including referrals by the banking regulators of securities laws violations and, when appropriate, coordinated investigations," read the letter. It went on to say that "We intend that this cooperative relationship will develop and continue."
But the hearings themselves produced no evidence that bank supervisors played a critical role in helping the Bush administration's corporate task force uncover exactly what the banks did to help Enron mislead investors. In her testimony, Nazareth cited the bank regulators' help in the SEC's recent prosecution of PNC Financial Services Group for overstating its earnings because it failed to consolidate three SPEs that it effectively controlled. However, nothing in that testimony indicated the investigation was initiated by the SEC in response to evidence turned over by the bank regulators.
Advise and Reject
In January 2003, the Senate subcommittee issued a report with three recommendations for plugging the regulatory gap between the Fed and the SEC. One was that the agencies, along with the OCC, jointly develop guidelines for acceptable and unacceptable structured-finance transactions, products, and practices. Another was that the SEC issue a regulation or guidance that it promised to take "enforcement action" against a financial institution that participated in a deceptive transaction with a publicly traded company. The third was that the Fed's and the OCC's bank examiners would routinely examine a bank's structured-finance activities for evidence of impropriety.
Nazareth and her fellow regulators, however, rejected key parts of the subcommittee's recommendations. It's not that they deny that there is a problem. In fact, they've responded to the criticism by conducting a review of structured-finance operations at financial institutions and working on guidance for best practice in this area. At press time, a top aide to Levin allowed that the senator was "pleased" by the time and effort the regulators have devoted to the review, but added that Levin has yet to see a written product of their work.
But the regulators contend that it's difficult to come up with clear-cut rules because of the increasing complexity of financial products. That was evident in their rejection of the subcommittee's request to create a list of permissible and prohibited transactions. "Our work has confirmed that the permutations of structured transactions can be virtually endless," they said in their letter. "The appropriateness of any particular product can depend very much on the specific factual context in which the product is provided, which can vary greatly from transaction to transaction and can be highly complex."
However, the Enron deals had one basic objective in common: to lay off private debt on the public by disguising its true nature. And the Fed regularly publishes lists of permitted and prohibited transactions for banks it oversees. As a result, says Tom Schlesinger, founder and executive director of the Financial Markets Center, a nonprofit research institute, "it's difficult to understand the logic" of the assertion that the wide variety of uses for structured finance militates against issuing a list of what's permissible and what's not.
Regardless, the agencies contend that compiling a prohibited-transactions list "is not the most effective approach," as Nazareth and her fellow regulators said in their letter to the Senate subcommittee. Instead, they wrote, "as we...plan to reiterate in supervisory guidance, it is the responsibility of banks, broker-dealers, and other financial-services companies to develop and maintain policies and procedures to assure that they are in compliance with all applicable laws and regulations."
In other words, the regulators' solution is to remind the bankers that they have to obey the law, and to ask the public to take it on faith that regulators will turn over evidence of wrongdoing to prosecutors.
Just Say No?
The regulators' stance reflects the fact that the Gramm-Leach-Bliley Act embraced financial deregulation. Indeed, bank regulators contend that legal and reputational risk encourages considerable self-restraint on the institutions they oversee. Granted, private litigation against the banks could yield bigger penalties than those imposed by the regulators. But the decision by Judge Melinda Harmon in December 2002 to dismiss investor claims against banks involved in the Enron case would seem to close the door to future such actions.
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