SEC chairman says agency examining companies’ pre-meltdown conduct, offers no names

SEC boss: Agency examining companies

WASHINGTON — The head of the Securities and Exchange Commission confirmed Wednesday that the agency is investigating several companies’ actions in the run-up to the financial crisis of 2008.

SEC Chairman Mary Schapiro said “it would be safe to assume” that the agency is looking very closely at the conduct of a number of firms during that time. She didn’t name the companies. A new report by a bankruptcy examiner digging into the collapse of big investment firm Lehman Brothers in September 2008 raised “some very interesting points” and will be helpful to the SEC in its investigation, Schapiro said.

Schapiro spoke in testimony to a House Appropriations subcommittee weighing the agency’s request for about $1.3 billion for the budget year starting Oct. 1, a 12 percent increase from the current year.

Lawmakers want to know if the sort of accounting gimmick recently uncovered that was used by Lehman Brothers to mask billions in debt was widely deployed on Wall Street.

The SEC’s review of the Lehman Brothers disaster “has taken us down a path where we’re looking broadly,” Schapiro told reporters following her testimony.

The implosion of Lehman Brothers Holdings Inc. into the biggest bankruptcy in U.S. history precipitated the financial meltdown that plunged the economy into the most severe recession since the 1930s.

After saddling itself with tens of billions in troubled assets that couldn’t easily be sold, Lehman masked $50 billion in debt and its perilous financial condition by using the so-called Repo 105 accounting gimmick, the examiner appointed by the bankruptcy court found in an extensive report issued last week.

“This cannot be tolerated again,” said Rep. Jose Serrano, D-N.Y., chairman of the appropriations panel.

The Lehman collapse “could be an even greater tragedy” than the multibillion-dollar swindle by money manager Bernard Madoff, Serrano suggested, because it ignited a chain of events that threw millions of Americans out of work and brought hardship.

Questions are being raised about the supervision of Lehman by the SEC and the Federal Reserve in the months before its collapse.

“The culture of the agency is changing. It doesn’t happen overnight,” Schapiro told the lawmakers. “We’re working very hard at the SEC … to rebuild the agency’s credibility.”

She acknowledged that the SEC was “ill-suited” to supervise Lehman and the four other big investment banks — Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch and Bear Stearns — in a voluntary program because the agency had to that point overseen brokerage firms but not their investment bank parents. Schapiro’s predecessor as SEC chairman, Christopher Cox, terminated the program in September 2008 when the firms converted to bank holding companies at the height of the crisis and fell under the Fed’s supervision.

In March 2008, examiners from the SEC and the Federal Reserve Bank of New York began working in Lehman’s New York headquarters building, poring through the firm’s books. The examiners were dispatched by Cox and Timothy Geithner, the Treasury secretary who then was chairman of the New York Fed.

The monitors from the two agencies “stood idle while (Lehman) engaged in the balance sheet manipulation,” Rep. Spencer Bachus of Alabama, the Financial Service Committee’s senior Republican, charged at a hearing held by that panel to hear testimony by Fed Chairman Ben Bernanke.

Bernanke, who was Fed chief at the time, told the committee that he was not aware of the accounting irregularities at Lehman.

In the meltdown’s wake, the SEC and the Justice Department launched wide-ranging investigations of companies across the financial services industry, believed to include insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac as well as Lehman. A year and a half after the financial crisis struck, charges haven’t yet come in most of the probes.

The autopsy of Lehman issued last week by bankruptcy examiner Anton Valukas could serve as a valuable road map for the two agencies in their investigations, experts say.

Schapiro also renewed her call for Congress to bring credit default swaps and other derivatives under new regulation, saying “it’s absolutely imperative” to bring transparency to the multitrillion-dollar global market for the risky instruments.

Credit default swaps, a form of insurance against loan defaults, have come under heightened scrutiny in the U.S. and Europe following the deepening of Greece’s debt crisis. The leaders of France, Germany and Greece have called for a clampdown on trading in the swaps, which they blame for Greece’s financial travails and weakness in the European currency.

Asked for her view on a European Commission proposal to ban speculative trading of the swaps by investors who don’t actually own a country’s underlying debt, known as “naked” trades, Schapiro said: “Whether banning is the right thing to do or not, I’m not sure is at all clear.” That’s because there isn’t enough information to make a judgment, she said.