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THE MADNESS
vestigations called on the Fed, OCC, and SEC “to 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 structured finance products,
transactions, or practices which facilitate a U.S. company’s use of deceptive account-
ing in its financial statements or reports.” The subcommittee recommended the agen-
cies issue joint guidance on “acceptable and unacceptable structured finance
products, transactions and practices” by June . Four years later, the banking
agencies and the SEC issued their “Interagency Statement on Sound Practices Con-
cerning Elevated Risk Complex Structured Finance Activities,” a document that was
all of nine pages long.
In the intervening years, from to , the banking agencies and SEC issued
two draft statements for public comment. The draft, issued the year after the
OCC, Fed, and SEC had brought enforcement actions against Citigroup and JP Mor-
gan for helping Enron to manipulate its financial statements, focused on the policies
and procedures that financial institutions should have for managing the structured fi-
nance business. The aim was to avoid another Enron—and for that reason, the
statement encouraged financial institutions to look out for customers that, like En-
ron, were trying to use structured transactions to circumvent regulatory or financial
reporting requirements, evade tax liabilities, or engage in other illegal or improper
behavior.
Industry groups criticized the draft guidance as too broad, prescriptive, and bur-
densome. Several said it would cover many structured finance products that did not
pose significant legal or reputational risks. Another said that it “would disrupt the
market for legitimate structured finance products and place U.S. financial institutions
at a competitive disadvantage in the market for [complex structured finance transac-
tions] in the United States and abroad.”
Two years later, in May , the agencies issued an abbreviated draft that re-
flected a more “principles-based” approach, and again requested comments. Most of
the requirements were very similar to those that the OCC and Fed had imposed on
Citigroup and JP Morgan in the enforcement actions.
When the regulators issued the final guidance in January , the industry was
more supportive. One reason was that mortgage-backed securities and CDOs were
specifically excluded: “Most structured finance transactions, such as standard public
mortgage-backed securities and hedging-type transactions involving ‘plain vanilla’
derivatives or collateralized debt obligations, are familiar to participants in the finan-
cial markets, have well-established track records, and typically would not be consid-
ered [complex structured finance transactions] for purposes of the Final
Statement.” Those exclusions had been added after the regulators received com-
ments on the draft.
Regulators did take note of the potential risks of CDOs and credit default swaps.
In , the Basel Committee on Banking Supervision’s Joint Forum, which includes
banking, securities, and insurance regulators from around the world, issued a com-
prehensive report on these products. The report focused on whether banks and other
firms involved in the CDO and credit default swap business understood the credit
