US SEC admits inandequate oversight of Lehman Brothers
U.S. Securities and Exchange Commission Chairman Mary Schapiro on Wednesday acknowledged that the agency’s oversight of Lehman Brothers Holdings may have been inadequate during a critical period when the company may have masked its losses.
The SEC wasn’t aware of an accounting method, dubbed Repo 105, that allegedly allowed Lehman to hide some of the risks it took before collapsing in 2008, Ms. Schapiro told the House Appropriations Subcommittee on Financial Services.
The House Financial Services Committee, meanwhile, announced Wednesday that it will hold a hearing on the recent report from a bankruptcy court accusing Lehman of routinely hiding $50 billion in debt from the public.
The SEC was the consolidated supervisor of Lehman during 2007 and 2008 as a result of Lehman’s participation in a voluntary oversight program that existed under former SEC Chairman Christopher Cox. That program was dismantled about a year and a half ago, Ms. Schapiro said.
Ms. Schapiro took the helm of the SEC just over a year ago.
“It was inadequately staffed almost from the very beginning. It was a bit insular and stove-piped,” she said.
“This program really required more of the banking regulators’ sort of approach,” Ms. Schapiro said, adding that the SEC was “ill-suited, because of our disclosure and enforcement mentality, to really convert to being a prudential regulator.”
After the hearing, Ms. Schapiro wouldn’t comment on whether the SEC is investigating Lehman or its auditor, Ernst & Young. “Our review of activity during this period is taking us down a broad path, and we’re looking broadly,” she said.
Ms. Schapiro said SEC staff who were on site at Lehman during some of the times in question were looking at the company’s capital and liquidity-related issues rather than asking questions about public transparency. But the SEC’s relationship with Lehman at the time wouldn’t have prevented the SEC’s enforcement division from starting an investigation if it suspected irregularities, she said.
Ms. Schapiro told lawmakers that the SEC is addressing some of the shortcomings throughout the agency, in part by trying to eliminate the lack of communication among its bureaus.
Subcommittee Chairman José Serrano (D., N.Y.) said the recent news of the Lehman fiasco hurt efforts by some in Congress to defend the SEC in the wake of Bernard Madoff’s Ponzi scheme and other difficulties. “You’re saying things have changed. We’re saying we want them changed. If we press you, it’s because this can’t happen again,” he said.
The Financial Services Committee hearing on Lehman was requested separately by Rep. Mary Jo Kilroy (D., Ohio) and Committee Ranking Republican Spencer Bachus of Alabama. “How did the regulators charged with policing Lehman for the benefit of the American public allow this to happen?” Ms. Kilroy asked.
Mr. Bachus said the hearing should “specifically examine the adequacy of the New York Fed’s and the SEC’s monitoring of Lehman Brothers after the collapse of Bear Stearns.”
Ms. Schapiro also told lawmakers Wednesday that her agency is focusing on the integrity of its own staff as part of a top-to-bottom review of its operations.
“The public appropriately holds the SEC to a very high standard for integrity and professionalism, and we must hold ourselves to that very high standard as well,” she said in prepared remarks. “In the past year, we took major steps to implement a compliance program to guard against inappropriate securities trading by SEC staff.”
The agency has embarked on an aggressive rule-making agenda designed to protect investors, she said, including new guidelines in the wake of the Madoff fraud that will provide greater protections to investors who entrust their assets to investment advisers.
The White House has requested $1.26 billion for the agency in fiscal 2011, a 12% increase over the fiscal 2010 funding level.
The boost, if granted by Congress, would allow the agency to increase staff in its enforcement and investigative divisions, Ms. Schapiro said.
Separately, a leading federal bank regulator offered a gloomy view of the U.S. banking industry’s health and said regulators won’t hesitate to crack down on troubled lenders.
In remarks to the American Bankers Association in Washington on Wednesday, Comptroller of the Currency John Dugan acknowledged these are tough times for U.S. banks, with 702 banks—nearly 9% of the industry—defined as troubled. He told bankers that regulators “simply cannot turn a blind eye” to problems and have learned the lesson that looking the other way will only compound losses.
Nearly 200 U.S. banks have failed in the past two years, at a cost of nearly $58 billion, “and we may not be even halfway through,” Mr. Dugan said.
He promised that regulators will promptly shutter troubled lenders, saying the forbearance offered to shaky savings and loans during the 1980s only delayed the inevitable and proved “disastrous.”
Mr. Dugan said his agency was one of the first to raise concerns about banks making too many loans to commercial-real-estate developers, a stance he said is drawing less criticism now that some commercial-real-estate loans are souring.
Bankers have complained that regulators are being far too tough now, and Mr. Dugan said “we hear that message loud and clear” and need to balance it against complaints that regulators aren’t moving fast enough to close troubled banks.
Source: WSJ