The SEC: Defending the Indefensible
By Jeremy Weltmer • Tuesday, June 1, 2010 5:13 pm
In the past several weeks, the SEC has attempted to single out certain key firms on Wall Street like Lehman Brothers, Bear Stearns, and others that took recovery funds as having engaged in deceitful accounting with a practice known as a “Repo 105 transaction.” When testifying before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, SEC Chief Accountant James Kroeker testified that, “based on the requests [made to 19 key banks about repo transactions], no information has come to our attention that would lead the staff to conclude that inappropriate practices were widespread.”
But, the Wall Street Journal reported that the vilified practice was really just standard form on the Street.
“Three big banks – Bank of America Corp., Deutsche Bank AG and Citigroup Inc. – are among the most active at temporarily shedding debt just before reporting their finances to the public, a Wall Street Journal analysis shows. The practice, known as end-of-quarter ‘window dressing’ on Wall Street, suggests that the banks are carrying more risk most of the time than their investors or customers can easily see. This activity has accelerated since 2008, when the financial crisis brought actions like these under greater scrutiny, according to the analysis. The Journal reported last month that 18 large banks, as a group, had routinely reduced their short-term borrowings in this way.”
As pernicious as this may sound, the very fact that it has a common name, “window dressing,” implies that it is a practice well known to executives and sophisticated investors, specifically the type of investors most likely to react to quarterly reports. The risk that does not appear on the statement is already known to large investors
The fact that the SEC is trying to portray what had become standard acceptable accounting procedures as toxic in one or two isolated cases rather than admit that most heavily financialized firms engage in the practice betrays a latent desire to intervene in markets in ways that cannot be defended candidly. The situation remains clear as something that sophisticated investors knew already, and it has become a way for the SEC to get involved more intrusively in corporate accounting and justify economic intervention for the sake of regulation and to the detriment of shareholders, who will bear the brunt of the additional expenses as the lost profits pass to investors.
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