U.S Senator Robert Menendez
528 Senate Hart Office Building
Washington, DC 20515
March 22, 2010
Dear Senator Menendez,
The over 200 consumer, employee, investor, community and civil rights groups who are members of Americans for Financial Reform (AFR) write to express our strong support for your amendment to increase the transparency of the U.S. financial system by requiring and making available reports on the off-balance sheet activities of the most systemically important firms.
Your amendment would require these firms to produce a second balance sheet in which they put all off-balance sheet activity on the balance sheet as part of their annual filing with the Securities and Exchange Commission. This will enable investors and regulators to better assess their riskiness and force these institutions themselves to become aware of the overall range of their liabilities and exposures. Moreover, by providing information on the many and various transactions you define, this requirement will help regulators, investors and the public at large develop much needed insights concerning changes in many of the markets and instruments that have been made non-transparent in recent years by off-balance sheet accounting.
Obtaining comprehensive information on the off-balance sheet holdings and commitments of large firms is long overdue. As early as the late 1980s, partial assessments of information and estimates indicated that contingent liabilities rivaled the actual volume of loans on the books of the largest banks. Thus, it should have come as no surprise to regulators that, during the recent crisis, the inability of investors and counterparties to assess the riskiness of the major financial institutions resulted in a loss of confidence within the financial sector itself as well as by its outside investors. As the scramble for funding in markets for repurchase agreements and commercial paper made clear, off-balance sheet positions were not only inadequately capitalized but were like dry tinder in their potential to exacerbate the crisis when the short-term funding that supported those positions dried up.
Equally important, off-balance sheet vehicles and positions allowed firms to hide potential risks and minimize liabilities in ways the misled investors and regulators. For example, the recent report by the bankruptcy examiner revealed that Lehman Brothers treated $50 billion in repurchase agreement transactions as sales instead of financing transactions on their balance sheets. In addition, as noted by experts Frank Partnoy and Lynn Turner, a chief cause of the financial crisis was “abusive off balance sheet accounting.”1 Financial firms did not disclose as liabilities on their balance sheets the amounts owed on swaps or variable-interest-entities (VIEs). For example, Citigroup held over $100 billion in credit derivative payables and $292 billion in VIEs, which do not appear as liabilities on a balance sheet.
Failure to address the problems caused by the unreported off-balance sheet accounts of systemically important financial firms will continue to perpetuate the gaps in information that misled investors and regulators before the current crisis and are likely to contribute to risks that may precipitate another. Providing information to market participants and those charged with ensuring fairness and transparency must be included as a critical prong in the reform process. For these reasons we support your efforts to require reports on all off-balance sheet activities of these firms.
If you have any questions, please do not hesitate to contact Heather McGhee, Washington Office Director, Demos, at email@example.com or (202) 559-1543.
Americans for Financial Reform