This year brought a tangle of regulatory and legal troubles to the nation's large banking companies, and no one predicts an easier 2005.
But maybe banks will be better prepared. Across the in-dustry in 2004, banking companies hired new compliance and risk management executives, brought in consultants to review governance practices, and installed new systems aimed at detecting trouble and complying with new reporting requirements.
Nancy Bush, who runs NAB Research LLC, in Annandale, N.J., sees the moves as part of a long-term trend. Regulatory burdens have been growing for a couple of decades, she said.
Nonetheless, she said, it was a "particularly active year" on regulatory issues, in part because of crackdowns by New York Attorney General Eliot Spitzer. Indeed, some of the biggest headlines involved costly settlements stemming from his investigation of trading practices in the mutual fund industry.
Bank mutual fund operations were under the microscope this year, targeted by state and federal regulators who said they had let hedge funds and others conduct questionable and sometimes improper trades in fund accounts, to the detriment of individual investors.
Loans and other corporate finance work for big companies involved in financial meltdowns over the past few years also continued to haunt banking companies, mainly in the form of potentially costly litigation. Some used 2004 to set aside eye-popping reserves to cover potential liabilities.
Federal anti-money-laundering rules landed several banking companies in hot water and spurred others to step up diligence. Meanwhile they are scrambling to comply with regulations that take effect at yearend to implement parts of the Sarbanes-Oxley Act of 2002.
"Clearly, it was a terrible year for banks, from a corporate governance standpoint," said Richard X. Bove, an analyst with Punk, Ziegel & Co. "Not only were banks fined and sued, but the net result of the fines and suits was a change in operating practices."
Nowhere was the trend more evident than at Citigroup Inc., which set aside $2.95 billion to settle with shareholders over the WorldCom Inc. bankruptcy and had to contend with embarrassments that tarnished its reputation.
The largest U.S. banking company is still under investigation by European regulators for a euro zone bond trade conducted by members of its London trading desk in August that roiled European government bond markets. Its private bank got kicked out of Japan in September after controls were found to be lax.
Chief executive Charles Prince fired three senior executives as a result, including Deryck Maughan, who was the head of Citi International; Thomas Jones, the head of Citi Asset Management; and Peter Scaturro, the head of the private bank. He vowed to clean up Citi's act. Mr. Prince was photographed bowing before Japanese regulators in a show of contrition.
In March, Bank of America Corp., which was named in Mr. Spitzer's 2003 complaint against the New Jersey hedge fund Canary Capital LLP, and FleetBoston Financial Corp., agreed to a combined $675 million in penalties and restitution to settle claims that their mutual fund businesses allowed improper mutual fund trades. The settlements with state and federal officials came two weeks before B of A bought Fleet for $47 billion.
Bank One Corp.'s mutual fund unit, also mentioned in the Canary complaint, agreed to a $90 million settlement in June. (J.P. Morgan Chase & Co. bought Bank One the next month.)
In February the Securities and Exchange Commission and the National Association of Securities Dealers announced disciplinary actions and settlements totaling $21.5 million with 15 firms for overcharging mutual fund customers who were eligible for discounts. Wachovia Securities, the brokerage division of Wachovia Corp. of Charlotte, drew the biggest penalty: $4.8 million.
This fall Mr. Spitzer announced a series of investigations of large insurance brokers and insurers and actions against them over alleged bid rigging. The controversy widened as other states followed suit. Bank-owned insurance divisions have begun getting inquiries from regulators, but so far there are no charges or settlements.
Ms. Bush said banking companies could feel more regulatory pressure in 2005 over their sales of nonbank products in general. "The whole area of sales practices, whether it be mutual fund sales practices or insurance product sales practices, is going to get a second look" from regulators, she said. "I don't see how that doesn't somehow shake out to the banking industry."
Accounting scandals at WorldCom and Enron Corp. were still dogging large banking companies in 2004. As complex lawsuits against them made their way through the courts, they set aside money to cover projected costs.
Citigroup announced in May that it would reserve nearly $5 billion to cover possible legal expenses and settlements related to its work for WorldCom and Enron. JPMorgan Chase has set aside roughly $4.7 billion for various kinds of litigation.
New accounting scandals also emerged. Citigroup and Bank of America were sued for $10 billion each by Italian food giant Parmalat Finanziaria SpA, which accused them of having played roles in the financial fraud that led to its bankruptcy in late 2003. Citi and B of A are among Parmalat's largest creditors.
Money laundering and the Bank Secrecy Act emerged as enforcement priorities. In an important turn of events, the crackdown involved not only bank regulators but federal and state law enforcement officials.
AmSouth Bancorp of Birmingham, Ala., announced in mid-October that it would pay $50 million in penalties for allegedly failing to report suspicious activity. The settlement involved a collection of regulators, including the U.S. attorney for the Southern District of Mississippi, the Federal Reserve, the Alabama Department of Banking, and the Treasury Department's Financial Crimes Enforcement Network.
Riggs National Bank of Washington was fined $25 million in May by the Office of the Comptroller of the Currency and Fincen for shortcomings in its compliance with anti-money-laundering rules. The regulatory heat seemed too much for Riggs, which found a buyer in PNC Financial Services Group in July, though the deal has yet to close.
"Clearly there has been a major intensification of anti-money-laundering and Bank Secrecy Act compliance," said banking lawyer H. Rodgin Cohen, the chairman of the New York firm Sullivan & Cromwell. "I think anyone would be Pollyanna-ish in the extreme if they thought this was over."
Mr. Cohen called the crackdown on money-laundering crimes and the involvement of nonbank regulators one of the "biggest issues" for banking companies now.
"A whole set of additional regulators, which consist of not only federal criminal enforcement authorities but also state criminal enforcement authorities," has added to the seriousness of the challenge, he said.
CEOs at most large banking companies have been grappling with new Sarbanes-Oxley requirements that will take effect Dec. 31. SunTrust Banks Inc. of Atlanta, for example, warned in November that errors in calculating loan-loss reserves for its indirect auto loan portfolio might make it difficult to comply with Section 404 of the act, which requires companies and their auditors to certify the effectiveness of internal controls.
It is unclear what the consequences might be for failing to comply.
The deadline is a critical milestone for all banks, and trying to prepare for it has cost SunTrust millions of dollars, said chairman, CEO, and president L. Phillip Humann on Dec. 7 at a Goldman Sachs & Co. conference.
What would happen if it missed the deadline? "I really don't have any idea," he said. "We don't have any experience to look toward."
