SEC to look at banks' 'window dressing'

The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, D.C.

TEXT OF STORY

BILL RADKE: Today, the Securities and Exchange Commission will tackle a loophole in bank regulations -- one that came to light during the financial crisis.

This loophole allows a practice known as "window dressing." Marketplace's John Dimsdale explains.


JOHN DIMSDALE: Sifting through the Lehman Brothers collapse, SEC investigators found the bank's accountants were hiding its debts. Just before a quarterly finance report was due, Lehman would pay down a lot of its debt, report that snap shot to the SEC, and then re-borrow the money.

DAVID RUDER: I was not aware that this practice was going on.

David Ruder was chairman of the SEC in the late 1980s.

RUDER: In fact, I was somewhat surprised when I learned that Lehman Brothers had been involved in that practice.

But it wasn't just Lehman. Columbia Law School's John Coffee says other big banks were doing the same thing.

JOHN COFFEE: This is a game of cosmetically changing your numbers in order to have a healthier looking ratio as of the last day of the quarter, even though that particular state of affairs will last only a matter of hours.

The result: Banks looked more solvent and safer than they really were. The SEC is considering requiring banks to report an average of their borrowings throughout the quarter.

In Washington I'm John Dimsdale for Marketplace.

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