Review of investment banks urged

Senate panel says firms using deceptive practices should face punishment

January 03, 2003|By BLOOMBERG NEWS

WASHINGTON - U.S. regulators should put Citigroup Inc. and other investment banks on notice that they will be subject to punishment for joining in deceptive financial practices like those used by Enron Corp. to keep debt off its balance sheet, a Senate investigative report said yesterday.

The report by a Senate subcommittee also urged banking and securities regulators to conduct a one-time review of firms that offer complex structured finance products. Citigroup, J.P. Morgan Chase & Co. Inc. and Merrill Lynch & Co. aided Enron by structuring transactions that allowed the energy trader to hide debts on its financial statements, the panel said.

"These financial institutions weren't victims of Enron," said Sen. Carl Levin, a Michigan Democrat and chairman of the Senate subcommittee that issued the report. "They helped plan and carry out Enron's deceptions in exchange for large fees or favorable consideration in business deals."

The report was issued by the Senate Governmental Affairs Permanent Subcommittee on Investigations, which held three hearings last year into the role of investment banks in the collapse of Enron. In its investigation of Enron, the Securities and Exchange Commission is looking at some transactions set up by investment banks.

"We respectfully disagree with the Senate subcommittee," said Merrill spokesman Mark Herr, declining to comment further. Representatives for J.P. Morgan and Citigroup did not return calls seeking comment.

At a hearing last month, representatives from Citigroup and J.P. Morgan told the committee that they broke no laws in their dealings with Enron. Both banks also said they had revised their internal policies and would not create such products, known as structured finance transactions, today.

Federal banking and securities regulators need to "strengthen federal oversight of financial institutions," the report said. The banks' transactions highlighted an oversight "gap" between the SEC and bank regulators, the report said.

The SEC does not generally regulate banks, and the banking agencies - the Federal Reserve and the Office of the Comptroller of the Currency - do not regulate accounting, the report said.

The committee called on the three regulators to issue guidance by June on which structured finance products are acceptable and which are not.

The report said the SEC should issue a regulation declaring it will take enforcement action against any bank that offers deceptive financial products. SEC spokesman John Nester declined to comment on the Senate report.

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