Washington, D.C. - A group of Democratic senators has written to the chair of the Securities and Exchange Commission urging the SEC to require more complete and accurate corporate accounting disclosures, especially of off-balance-sheet transactions.
The group of six senators, led by Banking Committee member Robert Menendez, D-N.J., wrote to SEC chair Mary Schapiro, noting a series of incidents in which corporations concealed their debts and financial weaknesses. They pointed to Lehman Brothers' use of "Repo 105" repurchase transactions to hide its debts. They requested that the SEC use its existing rule-making authority from the Sarbanes-Oxley Act to require full disclosure of off-balance-sheet activity.
"While the SEC did issue rules on off-balance-sheet activity pursuant to Sarbanes-Oxley, we are troubled that despite these rules, widespread off-balance-sheet accounting arrangements allowed large financial firms to hide trillions of dollars in obligations from investors, creditors and regulators," they wrote.Besides Menendez, the group of letter signers also included Senators Edward Kaufman, D-Del.; Carl Levin, D-Mich.; Diane Feinstein, D-Calif.; Barbara Boxer, D-Calif.; and Sherrod Brown, D-Ohio.
In addition to Lehman's use of Repo 105, the senators cited Citigroup, which reportedly kept $1.1 trillion worth of assets off its books in various financing vehicles and trusts that were used to handle mortgage-backed securities and issue short-term debt. State Street shareholders, they noted, saw their investment value drop by 60 percent in a single day when hidden off-balance-sheet conduits sustained heavy losses under credit turmoil in January 2009.
They want the SEC to require that companies write detailed descriptions of all their off-balance-sheet activities in their annual 10K reports, not just those that are "reasonably likely" to affect the firm's financial condition, as the regulations currently state.
"Additionally, we also urge the SEC to encourage the Financial Accounting Standards Board to improve financial reporting rules for all types of off-balance-sheet activities and to monitor FASB's efforts to prohibit off-balance-sheet financing," the senators wrote.
They are also urging the SEC to pay particular attention to the large market for repurchase agreements, citing not only Lehman's use of Repo 105 transactions, but a recent Wall Street Journal article that identified 18 banks, including Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, Bank of America and Citigroup, that understated the debt levels used to fund securities trades by lowering them an average of 42 percent at the end of each of the past five quarterly periods.
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