“First, we have endorsed the creation of a single financial markets stability supervisor…Second, the industry strongly supports the administration’s proposal for a public-private partnership to absorb troubled assets…Third, it is clear the complexity of some financial instruments went too …Markets themselves have also imposed some much-needed discipline, declaring the end of complex and confusing products such as collateralised debt obligations squared….Finally, we firmly believe that there have been excesses on the compensation front….compensation should not encourage excessive risk-taking, but should promote business sustainability and be aligned with the best interests of shareholders, the financial system and the economy.”

Timothy Ryan, President and Chief Executive Officer. The Securities Industry and Financial Markets Association (Sifma). June 8, 2009

Alliance For Economic Stability

Home U.S. SEC Initiative SEC Ethics and Conflicts Reports Schapiro’s Testimony on Lehman Accounting Trick Omits Mention of FINRA's Central Role

Schapiro’s Testimony on Lehman Accounting Trick Omits Mention of FINRA's Central Role

In Congressional testimony on March 17, 2010 and again on April 20, 2010, Securities and Exchange Commission Chairman Mary Schapiro commented on the SEC's failure to uncover Lehman Brothers’ use of irregular accounting with its “Repo 105” program. While Schapiro derided the SEC’s oversight of Lehman, she did not mention the lapse in oversight of Lehman’s accounting by FINRA, the quasi-governmental financial regulator where Schapiro was CEO during 2007 and 2008, when Lehman was implementing Repo 105.The Report of the Examiner on the Lehman case before the U.S. Bankruptcy Court (“Examiner Report”) states that Lehman used Repo 105 “to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008” by hiding its debt. The Examiner’s Report also states, “[A]lthough Lehman had in effect borrowed tens of billions of dollars in these [Repo 105] transactions, Lehman did not disclose the known obligation to repay the debt.” Schapiro stated that the SEC had failed to uncover that Lehman was understating its debts, blaming one SEC oversight program for being "inadequately staffed," and stating that its personnel were "ill-suited," according to Schapiro’s testimony before the House Appropriations Committee’s Subcommittee on Financial Services while not mentioning FINRA.

Though Schapiro was not at the SEC when Lehman executed its Repo 105 trades or when Lehman failed, Schapiro was running FINRA throughout that time. Schapiro left FINRA in 2009 upon her appointment to the SEC. It was FINRA rather than the SEC that had the most direct responsibility and authority for overseeing Lehman. FINRA is responsible for verifying the compliance of all brokerage firms with regulatory capital requirements on a monthly basis. FINRA has the power to request financial information for any subsidiary or parent-company of a broker-dealer. The Examiner Report refers to an email from a Lehman employee named Mark Neller confirming that the Repo 105 trades were done out of Lehman’s U.S.-based broker-dealer, over which FINRA had direct jurisdiction and responsibility. FINRA licensed the Lehman personnel responsible for its capital regulatory reports and was responsible for reviewing the calculations Lehman used in determining its capital position and whether or not its capital was adequate. The Examiner Report quotes Treasury Secretary Timothy Geithner, who served as President of the Federal Reserve Bank of New York at the time that Lehman executed its Repo 105 transactions that he “did not recall being aware of” Lehman’s Repo 105 program and that “if this had been a bank we were supervising, that [Lehman’s Repo 105 program] would have been a huge issue for the New York Fed.” Schapiro did not comment on FINRA’s failures to supervise Lehman in her testimony, nor has she done so in any other public statements. In her testimony as in other public statements, Schapiro has failed to acknowledge the direct conflict-of-interest posed by her now being in charge of the government agency that oversees FINRA, which is a private business, though it has government authority conferred by the SEC. Schapiro’s personal interest in FINRA was also evident in the SEC’s treatment of FINRA’s failure to uncover the Madoff and Stanford schemes. Not only has the SEC not opened an investigation into FINRA’s failure, but the SEC has allowed FINRA to lobby Congress using a self-generated report stating that FINRA did not have responsibility, though both Madoff and Stanford operated FINRA-regulated broker-dealers as part of their schemes. FINRA announced that it had provided copies of its report to the SEC before it began using it to lobby Congress. A March 8, 2010 Barron's article, titled "FINRA, First Heal Thyself,” notes the apparently common criticism that FINRA is not “accountable to anyone,” stating that FINRA has “no regular oversight hearings by the Congress.” Barron’s also notes that FINRA “pays its executive staff high-on-the-hog salaries, despite abysmal performances.” FINRA wrote a response to Barron’s, and addressed the criticism of being accountable to no one by saying that FINRA “is overseen by the Securities and Exchange Commission,” which “has the authority to sanction FINRA.” Despite FINRA’s statement, a review of SEC records shows that the SEC rarely sanctions its own SROs and has never sanctioned FINRA. Given the current leadership of the SEC, there can be little expectation that FINRA would actually be sanctioned for its failings by the SEC, regardless of further revelations of wrongdoings.

 

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