On the other hand, in a separate structured-financing settlement, the SEC specifically mentioned Citigroup’s cooperation.
The fact that the SEC noted how cooperative we were in the Enron and Dynegy structured-products settlement is a good thing. I want Citigroup to be viewed by regulators as a company that “gets it.” And I think we do get it. I want regulators to view us as a company that is not dragging its feet on reform, but is leading reform. And if it costs us a little bit more money, I think it’s a good price to pay.
During congressional hearings after the Enron meltdown, one of your officers testified, “We do not dictate our clients’ accounting practices. Once we’re satisfied that our clients’ proposed tax and accounting treatments seem reasonable, the accounting judgments are left to the client and its accounting professionals.” Has that changed?
The standard has changed.
So how do you police that among your customers? For example, under your net-effect rule, how do you police how a customer discloses a structured financing?
I don’t think we can be in the business of policing our customers’ accounting and disclosure. That’s why the SEC exists and why external accountants and law firms exist. That’s their job, not ours. If we believe there’s a structured-finance product that is really financing, we ask the company to commit to us that the product will be disclosed as a financing on its balance sheet. If it’s not going to be disclosed as we think appropriate, then the company will have to go elsewhere because we’re not interested in doing that business.
But again, the environment hasn’t only changed for us, it has changed for our customers. There were a number of them that might have been interested in doing the fancier off-balance-sheet things that were being done in the late 1990s, but they’re not interested anymore. I think our customers are on board with the net-effect rule.
In theory, though, what recourse would you have if they reneged on their commitment to disclose it? Do customers have to sign a document stating how they will disclose it?
They have to commit to us that they’re going to do that. But again, we’re not the SEC, so our job isn’t to enforce accounting rules.
Do they have to make some sort of written commitment to a particular type of disclosure with you?
They just have to commit to us that that’s how they’re going to do it.
Initially, Citigroup’s net-effect rule exceeded GAAP and SEC requirements. Now that off-balance-sheet financing must be disclosed anyway, do any of your requirements exceed what is required by GAAP or regulators?
It’s hard to say. There may be things that, from our perspective, should be disclosed clearly as debt although the accounting rules might permit some flexibility. You’d be fine from a Sarbanes-Oxley [Act] point of view because you’re signing that your statements are based on GAAP, but that might not be consistent with our net-effect rule. In those situations, if a customer is looking for us to do the structuring, it must disclose it appropriately.