Bye, Bye Enron, Regulators Say

New guidance on structured finance recalls how long ago and far away the Houston debacle seems.

If their latest words on how banks should handle the risks of complex structured-finance deals are any indication, banking and securities regulators think it’s high time to put the ghost of Enron behind them.

In a final guidance on high-risk structured finance released on January 5 by the Securities and Exchange Commission, the Federal Reserve Board, and three other federal regulatory agencies, for example, the rulemakers plunked mention of the energy giant’s catastrophic failure down into two footnotes.

The document purports to help banks curb the legal and reputational risks of engaging in “elevated risk” complex structured finance transactions (CSFTs). In footnote 2, the regulators cite the Enron case as evidence of the “strong and coordinated civil and administrative enforcement actions” against certain banks involved in CSFTs that seemed to have been used to shield “their customers’ true financial health from the public.” In footnote 3, they mention a Senate subcommittee probe into those banking arrangements.

Only in the sparsely worded citations to the footnotes does the name “Enron” appear, along with the names of JP Morgan Chase and Citigroup. While those banks didn’t admit or deny any wrongdoing, they struck hefty settlements ($135 million by JP Morgan and $120 million by Citigroup) in July 2003 with the SEC on charges that they had used structured finance to help Enron fiddle with its financials.

The terseness was a marked comedown from the play the regulators gave Enron and the banks in the agencies’ first version of the statement. Issued in May 2004, that first proposal placed a meaty two-paragraph discussion in the body of the statement, up near the front. (The authors of the statement also include the Office of the Comptroller of the Currency; the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation.)

More importantly, in the earlier version, the regulators linked the debacle in Houston clearly to the need to set up guidelines for managing perilous structured finance risks: “The events associated with Enron Corp. demonstrate the potential for the abusive use of complex structured finance transactions as well as the substantial legal and reputational risks that financial institutions face when they participate in complex structured finance transactions that are designed or used for improper purposes,” they said then.

But times have clearly changed, and “Enron” seems no longer to be the rallying cry for regulators that it was more than two years ago. Recent moves by the Securities and Exchange Commission and the Public Company Accounting Oversight Board aimed at making it easier for smaller companies and their auditors to comply with the internal-controls rules under Sarbanes-Oxley provide further evidence of that.

Thus, in crafting their final advice to the banks, the regulatory agencies seem to have felt the need to put the past behind them and place new emphasis on the positive. They declare, for instance, that market-risk and credit-risk derivatives, asset-back derivatives with customized cash flow, and other familiar examples of structured finance “serve important purposes, such as diversifying risks, allocating cash flows, and reducing cost of capital.”


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