SEC Eyes New Rules on Banks' Debt-Level Disclosure

September 17, 2010 - 6:00 AM

Mary Schapiro, SEC

Securities and Exchange Commission Chair Mary Schapiro testifies before the House Financial Services Committee on Capitol Hill on Thursday, Sept. 16, 2010. (AP Photo/Evan Vucci)

Washington (AP) - Federal regulators are set to propose new rules that could make it harder for financial firms to disguise their level of debt.

The expanded disclosure requirements would apply to banks' practice of temporarily trimming their debt at the end of quarters to make their financial statements appear stronger. The practice is legal but regulators say it can give investors a distorted picture of a bank's debt and level of risk.

Lehman Brothers used so-called repurchase agreements as an accounting trick in the months before its collapse into the biggest bankruptcy in U.S. history two years ago. The demise of the Wall Street titan triggered a panic in financial markets.

Lehman had put together complex transactions that allowed the firm to sell billions in mortgage securities at the end of a quarter -- wiping them off its balance sheet when regulators and shareholders were examining it -- and then to quickly buy them back. The repurchase agreements, detailed in a report issued in March by a court-appointed examiner, were known as Repo 105.

The Securities and Exchange Commission is expected to propose the new rules and open them to public comment at a meeting on Friday. They could be formally adopted sometime later, possibly with changes.

The term "window dressing" to sometimes used to describe the practice of big banks and financial firms sweeping away debt at quarter's end, then buying back the assets and building up debt again in a new quarter.

Banks are required to disclose their short-term borrowing only once a year. The SEC could, for example, propose increasing the required frequency of reporting.

The SEC last spring sent letters to 19 big financial firms asking about their use of repurchase agreements.

The agency found from its canvass that "people were using repos quite extensively," with a marked spike in volume just before quarters' end, Wayne Carnall, chief accountant of the SEC's corporation finance division said Wednesday.

However, the agency "did not find any significant noncompliance with the accounting standards" with banks' use of repos, Carnall told a gathering of the American Institute of Certified Public Accountants. In a few instances, he said, banks acknowledged they had made errors but said they weren't significant.