“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.