Bank debt harder to hide under SEC proposal

Federal regulators voted Friday to propose new rules that could make it harder for financial firms to disguise their level of debt.

The Securities and Exchange Commission is proposing expanded disclosure requirements for banks' practice of temporarily trimming their debt at the end of quarters to make their financial statements appear stronger. The practice is legal but regulators say it can give investors a distorted picture of a bank's debt and level of risk.

The SEC proposal would require financial firms to report detailed information on their short-term borrowing every quarter. Firms currently are required to disclose that borrowing only once a year.

The SEC commissioners voted 5-0 at a brief meeting to propose the new rules and open them to public comment for 60 days. They could be formally adopted them sometime later, possibly with changes.

Lehman Brothers used so-called repurchase agreements as an accounting trick in the months before its collapse two years ago into the biggest bankruptcy in U.S. history. The demise of the Wall Street titan triggered a panic in financial markets.

Lehman had put together complex transactions that allowed the firm to sell billions in mortgage securities at the end of a quarter — wiping them off its balance sheet when regulators and shareholders were examining it — and then to quickly buy them back. The repurchase agreements, detailed in a report issued in March by a court-appointed examiner, were known as Repo 105.

The term "window dressing" is sometimes used to describe that practice.

"Under these proposals, investors would have better information about a company's financing activities during the course of a (quarter) — not just a period-end snapshot," SEC Chairman Mary Schapiro said before the vote.

Under the proposed rules, banks would be required to report the amount outstanding of their short-term borrowings at the end of each quarter and the average interest rate they paid on the loans. They also would have to report the average amount of borrowings outstanding during the quarter and the average interest rate, as well as the maximum amount outstanding.

Commissioner Luis Aguilar said the expanded disclosure rules are helpful but won't necessarily prevent deception by firms to make their balance sheets appear less risky than they are.

"Rules on the books are not enough; they have to be enforced," he said.