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Why Alan Greenspan's Fed lets banks off easy on corporate fraud.

But the market did nothing to prevent Enron—or Parmalat, another scandal involving SPEs. And unless the regulatory gap is closed, they are unlikely to be the last bank-engineered financial meltdowns to roil the markets and shake investor confidence.

Indeed, some academics contend that structured finance and other types of securitization only encourage Enron-like behavior, because the public markets are inherently less transparent than private sources of financing. Greg Hannsgen, a research associate at Bard’s Levy Economics Institute, said in a recently published working paper, Hannsgen writes that unlike commercial lenders that impose covenants on corporate borrowers and have a personal acquaintance with their management, “securities owners may be too far removed from the activities of a corporation to prevent insiders from engaging in fraud or managing improperly.”

If there are a few financially engineered meltdowns still to come, it will be hard to argue that more-dramatic regulatory action—consistently severe punishments of the banks, prohibitive rules, or even structural change—isn’t necessary. When it comes to structured finance, a double standard may be better than no standard at all—but not by much.

Ronald Fink is a deputy editor of CFO.

Unequal Treatment

If the Federal Reserve Board and the Securities and Exchange Commission pursue the same agenda, why were Merrill Lynch & Co. and the Canadian Imperial Bank of Commerce (CIBC) treated so differently by the Corporate Fraud Task Force—a team with representatives from the SEC, the FBI, and the Department of Justice (DoJ) set up to prosecute perpetrators of Enron’s fraud—than were Citigroup and J.P. Morgan Chase & Co.? After all, all four banks did much the same thing.

Under settlements signed with the SEC last July, Citigroup and Chase were fined a mere $101 million (including $19 million for its actions relating to a similar fraud involving Dynegy) and $135 million, respectively, which amounts to no more than a week of either’s most recent annual earnings. And they agreed, in effect, to cease and desist from doing other structured-finance deals that mislead investors. That contrasts sharply with the punishment meted out by the DoJ to Merrill and CIBC, each of which not only paid $80 million in fines, but also agreed to have their activities monitored by a supervising committee that reports to the DoJ. Even more striking, CIBC agreed to exit not only the structured-finance business but also the plain-vanilla commercial-paper conduit trade for three years. No regulatory agency involved in the settlements would comment on the cases, though the SEC’s settlement with Citigroup took note of the bank’s cooperation in the investigation.

But Brad S. Karp, an attorney with the New York firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, suggested recently that the terms of the SEC settlement with its client, Citigroup, reflected a lack of knowledge or intent on the bank’s part. As Karp noted more than once at a February conference on legal issues and compliance facing bond-market participants, the SEC’s settlement with Citigroup was ex scienter, a Latin legal phrase meaning “without knowledge.”

However, the SEC’s administrative order to Citigroup cited at least 13 instances where the bank was anything but in the dark about its involvement in Enron’s fraud.

As Richard H. Walker, former director of the SEC’s enforcement division and now general counsel of Deutsche Bank’s Corporate and Investment Bank, puts it, all the banks involved in Enron’s fraud “had knowledge” of it. Yet Walker isn’t surprised by their disparate treatment at the hands of regulators. “The SEC does things its way,” he says, “and the Fed does them another.” —R.F.

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