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Senate panel addresses gap in oversight of banks
WASHINGTON (CNN) -- A Senate subcommittee Thursday recommended that the Security Exchange Commission and federal bank regulators take joint action to fill what it said is a gap in federal oversight that allows financial institutions to get away with accounting misconduct. The recommendation came in a report stemming from Permanent Subcommittee on Investigations hearings held last year on four Enron transactions that were, the report said, "funded and facilitated by U.S. financial institutions." The report said the oversight gap exists because the SEC does not generally deal with banks, and bank regulators do not generally deal with accounting practices overseen by the SEC. Evidence from subcommittee hearings in July and December showed that "several of the largest U.S. financial institutions have been designing, participating in, and profiting from complex financial transactions that involved deceptive accounting or tax strategies," according to a news release from the subcommittee. "This report highlights the current gap in federal oversight that is a major problem and needs immediate correction," the release quotes Sen. Carl Levin, D-Michigan, who was chairman of the subcommittee. "Enron's deceptions were shocking, and equally shocking was the extent to which respected U.S. financial institutions like (J.P. Morgan) Chase, Citigroup, and Merrill Lynch helped Enron carry out its deceptions and mislead investors and analysts about the company's finances." Sen. Susan M. Collins, R-Maine, added, "The checks and balances that were supposed to ensure the integrity of financial transactions apparently were compromised by conflicts of interest and the lure of big fees." Marc Shapiro, vice chairman of J.P. Morgan Chase, disagreed with some of the panel's conclusions and said company bankers acted appropriately. Still, he said, in a nod to the new climate, the firm now requires its clients to disclose more financial information. "We understand that the world has changed and we have to change with it," Shapiro told CNNfn's Street Sweep. "We are sorry we got involved with the people at Enron." The report is the second issued by the subcommittee regarding its Enron investigation. The first, issued in July, concluded that the Enron board of directors contributed to the company's collapse. The latest report recommends: • The Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the SEC "should immediately initiate a one-time, joint review of banks and securities firms participating in complex structured finance products with U.S. public companies to identify those ... which facilitate ... use of deceptive accounting." • By June 2003, these agencies should issue a joint guidance on acceptable and unacceptable transactions and practices. • By the end of 2003, they should "each take all necessary steps to ensure the financial institutions they oversee have stopped participating in unacceptable structured finance products, transactions or practices." • The SEC should establish a policy to take action against any financial institution that participates in a deceptive financial transaction with U.S. companies. • The Federal Reserve and the OCC should then "instruct their bank examiners, as part of their routine bank examinations, to evaluate a bank's structured finance activities to determine whether such activity appears to constitute a violation of the SEC policy, and if so, to declare that activity also constitutes an unsafe and unsound banking practice, and take steps to stop it.
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