Securities and accounting regulators refused to retreat Wednesday from a recent series of unilateral moves on bank loan-loss reserves.
Though they took a pummeling from lawmakers at a hearing sponsored by House Banking's financial institutions subcommittee, witnesses from the Securities and Exchange Commission and the Financial Accounting Standards Board were undaunted.
SEC General Counsel Harvey J. Goldschmid rebuffed a request from subcommittee Chairwoman Marge Roukema, R-N.J., to postpone the June 30 deadline for banks to adjust to new loan-loss guidelines. Banks have had plenty of time, he said.
"If a bank for some reason is having trouble and there are serious reasons why it needs an extra quarter," he said, "they should call the (SEC's) chief accountant. He'd certainly be open to discussion."
In a testy exchange with Rep. Richard H. Baker, R-La., Mr. Goldschmid said banks that want extra protection against an economic downturn should build capital-not reserves.
"If you want to put extra (protection) in, don't put it where it is disguised, where no one will understand it, and (where) management will be able to hide downturns," he said. "Put it in capital where it belongs."
Mr. Goldschmid remained steadfast on a variety of other issues.
He challenged the notion that typical investors can spot "earnings management." He said loan-loss guidelines issued April 12 by the FASB were exposed to more than enough comment from banks and bank regulators. He denied that the SEC is targeting banks for loan-loss reserve irregularities.
"There are no hit lists, there are no suspicions," he said.
Mr. Goldschmid said it would be "terribly wasteful" for the SEC to consult with bank regulators every time it wanted to query a bank about its reserves.
The hearing was meant to "clear the air" on the controversial issue, Rep. Roukema said. Instead, Democrats and Republicans attacked Mr. Goldschmid and Timothy S. Lucas, the FASB's director of research.
Bank and securities regulators began tussling over the reserves issue last fall, when the SEC held up SunTrust Banks Inc.'s acquisition of Crestar Financial Corp. until SunTrust agreed to restate its earnings and cut reserves.
Interagency agreements reached in November and March seemed to promise an end to the bickering. But when the FASB issued an article on loan-loss reserves in April, the alliance began to unravel.
It disintegrated further in May when the SEC instructed banks to comply with the article and, if necessary, make one-time adjustments in loan-loss allowances. Bank and thrift regulators accused the FASB and the SEC of sowing confusion and sending a signal, inadvertently or not, that banks should lower their reserves or face SEC scrutiny.
As late as Tuesday night, the SEC and bank and thrift regulators were trying to draft a new agreement, in part to avoid the wrath of lawmakers Wednesday. Those negotiations failed to produce an accord, but the regulators vowed to keep talking.
"We have agreed to meet and start working on some detail," said Richard M. Riccobono, deputy director at the Office of Thrift Supervision.
Wednesday's hearing was a lopsided victory for bank regulators. Mr. Lucas and Mr. Goldschmid were grilled for more than an hour, but witnesses from the four bank and thrift agencies fielded a few softball questions and were sent home.
Mr. Goldschmid said the SEC's mandate is to protect the investor, but he received little support from R. Harold Schroeder, a senior equity analyst at Keefe, Bruyette & Woods Inc. and a former auditor at Ernst & Young.
Mr. Schroeder said investors can easily detect earnings management. Besides, safety-and-soundness concerns override investor protection, he said, so the SEC should involve bank regulators whenever it targets a bank's loss reserves.
Moreover, he accused the SEC of intimidating banks. Given the status of the credit and business cycles, he said, "the timing couldn't be worse."
"I've already heard from a few banks that are today citing the SEC's position as a reason for not fully replenishing reserves," the analyst said in written testimony. "I see tremendous risks in what the SEC is doing, and little or no payback."
Allen Sanborn, the president and chief executive officer of Robert Morris Associates, agreed. "We are in what I would characterize as the ninth year of a seven-year economic cycle," his written testimony said. "For the SEC to begin questioning reserves ... at this point in the business cycle is very bad public policy."