Legal Briefing: SEC Wants to End Balance Sheet Manipulation
SEC Targets Balance Sheet Manipulation, er, "Window Dressing"
Learning about how Wall Street firms used a variety of accounting techniques to hide the debt they carried at each quarter's end, conveniently dressing up their balance sheets for public reporting, I thought: 'there ought to be a rule against that'. Turns out, there was, but it was scrapped in 1994 as part of the deregulation tsunami. If the rule had remained in place, Lehman Brothers--the worst of the balance sheet manipulators by far--could not have disguised its massive debt, er, leverage, so easily and arguably could have been stopped from the massive risk taking that brought Lehman down.
Well, now the Securities and Exchange Commission has proposed rules requiring companies to disclose metrics that try to prevent the "window dressing". Firms would have to report not only their short term borrowings at the end of the quarter, plus the weighted average interest rate across those borrowings, but also the average amount of short term borrowings across the quarter and the weighted average interest rate across the reporting period. Financial companies would also have to disclose their maximum daily borrowing. With the quarterly average and maximum daily balance to contextualize the quarter-end numbers, any window dressing would be immediately obvious.
Unfortunately, as the New York Times's Dealbook blog notes, firms could comply with the letter but not the spirit of the law by doing window dressing "24/7", and a firm as determined as Lehman was to hide its debt problem would find some way to do it. Moreover, investors won't get the information immediately; the comment period for the proposed rules runs for the next 60 days, after which the rules get finalized, and then an effective date will be announced.
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And in the Business of Law
Lehman Brothers Holdings Inc. remains very profitable--for lawyers, reports Bloomberg. Weil, Gotschal & Manges LLP picked up another $8.6 million in August for its bankruptcy advice, bringing its haul to date to $221 million. Lehman's creditors are represented by Milbank, Tweed, Hadley & McCloy LLP, who have billed $69.3 million through the end of August.