SEC chief vows tighter oversight
Lawmakers look at how banks hid investment risks
WASHINGTON — The chairman of the Securities and Exchange Commission yesterday pledged better oversight of the nation’s largest banks after criticism that the agency failed to spot accounting tricks at investment bank Lehman Brothers before it collapsed.
Chairman Mary Schapiro told a congressional panel that the agency has sent letters to 19 banks seeking information about whether they are using an accounting maneuver that a bankruptcy examiner said masked Lehman’s financial condition. The bank failed in September 2008 in the largest corporate bankruptcy in US history.
Schapiro, who was not with the SEC at the time, said the agency is scrutinizing Lehman’s use of the maneuver, known as Repo 105, which allowed it to mask its weakness.
Her testimony follows widespread criticism that the SEC failed to properly monitor Wall Street ahead of the recent recession, and after the agency filed civil fraud charges Friday against Goldman Sachs.
Yesterday’s hearing into what led to Lehman’s meltdown drew lawmakers into a partisan squabble over the Obama administration’s push for financial regulatory reform. Republicans pointed to the track records of the SEC and other agencies as evidence that more regulation won’t prevent future failures.
The hearing before the House Financial Services Committee was called by its chairman, Representative Barney Frank, a Massachusetts Democrat.
Lehman’s collapse threw global financial markets into crisis. The committee looked at the bankruptcy examiner’s report, which said the firm masked $50 billion in debt.
Schapiro said the SEC is examining “the truthfulness of the disclosure’’ in Lehman’s financial filings. “It’s not clear any action by the SEC could have saved Lehman Brothers, but we are determined to use the lessons of that experience to be more effective,’’ Schapiro said. “More vigorous oversight and a new approach are essential.’’
Richard Fuld, Lehman’s former CEO, said he has “absolutely no recollection whatsoever’’ of any documents related to the Repo 105 maneuver. After reviewing the transactions, he said the firm complied with accounting standards.
Fuld expressed regret about the company’s collapse. “One day we had a firm,’’ he said. “The next day we did not. A lot of people got hurt by that, and I have to live with that.’’
The bankruptcy examiner, Anton Valukas, criticized the company and the SEC.
“Although the public had a right to expect that firms like Lehman were being regulated in a meaningful way, in reality, they were not,’’ Valukas told lawmakers. Regulators, he said, missed opportunities to alter Lehman’s conduct “before its situation had reached the point of no return.’’
In his report last month, Valukas disclosed that Lehman put together complex transactions that allowed the firm to sell securities — mainly those made up of mortgages — at the end of a quarter. That wiped them off its balance sheet, avoiding the scrutiny of regulators and shareholders. Then the bank repurchased them, hence the term “repo.’’
Treasury Secretary Timothy Geithner said at the hearing that Lehman’s collapse highlights why the Obama administration’s proposal to reform the financial system is needed. That legislation includes a mechanism to allow the government to safely wind down ailing financial companies if their collapse could take down the entire financial system and the broader economy.
Representative Scott Garrett, Republican of New Jersey, asserted that regulators’ failure to prevent Lehman’s collapse is proof that the proposed financial reforms won’t work either.
Republicans accused Democrats of trying to continue federal bailouts by injecting more money into Wall Street companies.
But Frank, the committee’s chairman, called that a “blatant mischaracterization,’’ arguing that “no money can be spent in these cases until the institution is out of business.’’