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Reply #12: Feds Soften Structured-Finance Stance [View All]

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54anickel Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Jan-08-07 11:51 AM
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12. Feds Soften Structured-Finance Stance
For corporate clients of banks, the move represents a relaxation of a regime of scrutiny that regulators had recommended in 2004.

After several years of strong resistance from the banking industry, the Securities and Exchange Commission, the Federal Reserve, and three other federal regulators have issued softened final guidelines on how banks should manage the risks of complicated structured-finance deals.

First proposed in 2004 in the wake of Enron's failure, the guidelines were devised to prevent banks from using complex structured-finance transactions (CSFTs) to help companies hide debt, generate phony revenues, or create the appearance of cash flow from what are essentially borrowed funds.

The regulators' final guidelines, issued Friday, mark a considerable retreat from the original proposal. Banking industry groups argued hard that the guidelines first proposed were too broad, casting suspicion on many legitimate transactions and effectively requiring that banks police the intentions of their corporate customers.

In an unusual move, regulators withdrew their proposal, then issued revised guidelines for comment last May. The final guidelines, which contain only minor modifications to the May revision, take "a risk- and principles-based approach" to managing the perils that CSFTs pose to banks, according to a release issued by the rule-makers. The final version, they say, focuses on those deals presenting high levels of legal or reputational risk to financial institutions.


As in the earlier proposal, the authors of the final guidelines steer clear of precise definitions of CSFTs. However, they do suggest that arrangements like those structured by Citigroup and J.P. Morgan for Enron "appeared to have been designed or used to shield their customers' true financial health from the public" and are in the purview of the statement.


Besides the fed's Board of Governors and the SEC, the other framers of the final statement, which will be published shortly in the Federal Register, were the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. Because the statement focuses on "elevated-risk" CSFTs which tend to be done by "a limited number of large financial institutions" it won't affect most banks but will involve only a scant few small ones, according to the agencies.

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