SEC looks into books at 19 largest US banks

April 21, 2010 at 12:00a.m.

Associated Press

WASHINGTON

The Securities and Exchange Commission is examining whether any of the 19 largest U.S. banks are using an accounting trick that a bankruptcy examiner has said led to the collapse of Lehman Brothers, SEC Chairman Mary Schapiro said Tuesday.

Schapiro testified at a congressional hearing that the SEC is scrutinizing Lehman’s use of the accounting move, known as Repo 105, that allowed it to mask its weakness before it failed.

She said the agency has sent letters to the 19 banks, seeking information about any such transactions.

The hearing is looking into what led to Lehman’s meltdown in September 2008. But it also drew lawmakers into a partisan squabble over the Obama administration’s push for financial regulatory reform.

Lehman’s collapse was the biggest corporate bankruptcy in U.S. history and threw global financial markets into crisis. The hearing probed the bankruptcy examiner’s report that said the firm masked $50 billion in debt.

Schapiro said the SEC is examining “the truthfulness of the disclosure” in Lehman’s financial filings.

“It’s not clear any action by the SEC could have saved Lehman Brothers, but we are determined to use the lessons of that experience to be more effective,” Schapiro said. “More vigorous oversight and a new approach are essential.”

Richard Fuld, Lehman’s former CEO, said he has “absolutely no recollection whatsoever” of any documents related to the so-called Repo 105 accounting maneuver. After reviewing the transactions, he said the firm complied with accounting standards.

The bankruptcy examiner, Anton Valukas, criticized the company and the SEC.

“Although the public had a right to expect that firms like Lehman were being regulated in a meaningful way, in reality, they were not,” Valukas told lawmakers. Regulators, he said, missed opportunities to alter Lehman’s conduct “before its situation had reached the point of no return.”

In his report last month, Valukas disclosed that Lehman put together complex transactions that allowed the firm to sell securities — mainly those made up of mortgages — at the end of a quarter. That wiped them off its balance sheet, avoiding the scrutiny of regulators and shareholders. Then the bank quickly repurchased them — hence the term “repo.”