WASHINGTON – Two key financial regulatory agencies told lawmakers Tuesday that they are seeking out for destruction any legal or accounting loopholes that would allow financial institutions to use the same method Lehman Brothers did in making its balance sheet look stronger leading up to its bankruptcy.
Securities and Exchange Commission Chairwoman Mary Schapiro told lawmakers Tuesday that the commission could change disclosure rules connected to repo accounting.
“If there is a loophole, we’ll cut it off,” Schapiro told the House Financial Services Committee.
And in a letter sent to the committee, the Financial Accounting Services Board said it would work with the SEC to make changes on the accounting side.
House committee members simultaneously pushed their beliefs about financial regulatory reform pending in the Senate and grilled former Lehman executives and regulators on what needs to change to prevent, essentially, another Lehman. But it may be the agencies that deal with the repo accounting issue.
Anton Valukas, the court-appointed examiner for Lehman’s bankruptcy, identified Repo 105 and 108 transactions as an “accounting gimmick” by Lehman. Using the tools, Lehman temporarily removed securities inventory from its balance sheet to paint a stronger picture of its financial position than was true. Though such transactions are essentially loans, Lehman accounted for them as sales.
First the SEC is trying to determine whether Lehman simply broke existing rules, said Schapiro. Additionally, the SEC asked the largest financial firms’ CFOs in late March to confess any use of repo transactions like Lehman. Schapiro said the SEC has received responses to the letters it sent.
The responses will be posted no sooner than 45 days after the review of the documents has been completed.
In its letter, FASB said the accounting guidance for repos has been in place since 1997 and “has not been changed significantly over the years.”
“If anything were to change it would have to go through our FASB due process,” FASB spokeswoman Chris Klimek said.