Even before PNC Financial Services Group Inc. said it would have to restate last years financials because of a Federal Reserve Board inquiry, a few banking companies such as Bank of America Corp. and Zions Bancorp had begun to describe their off-balance sheet activities in more detail than in the past.
Now, after PNCs restatement, those disclosures are coming in waves, and many officials of the countrys largest banking companies, who are in New York this week for an investor conference, on Wednesday appeared to usher in a new season of openness on off-balance sheet activities.
Already, a consensus is building that the vast majority of banks will not have the same problems.
Much of what I know is anecdotal [that said] the PNC situation is likely to be pretty much the entire iceberg, said H. Rodgin Cohen, chairman and head of the financial institutions practice at law firm Sullivan & Cromwell.
I am not aware of any major banking institution that used this or a similar structure. Many other banking institutions were showed this structure, and for whatever reason, did not execute them, Mr. Cohen said. As you can imagine, banking regulators have been making inquiries at a number of institutions to my knowledge, all the responses at other institutions have been negative.
Likewise, Goldman Sachs analyst Lori Appelbaum who hosted a conference call at which Mr. Cohen made his comments wrote in a report to clients that a survey of 12 major banks by Goldman showed that none had a PNC-like structure to disclose.
That was echoed, often in extremely clear language, by executives who spoke on the topic on Wednesday.
Let me point out right here as it relates to the industry news about nonperforming loans that were reported yesterday, Jerry A. Grundhofer, the president and chief executive officer of U.S. Bancorp, said Wednesday morning at the Salomon Smith Barney financial services conference. We have created no zero structures that reduce our nonperformers.
We do have one, O-N-E, one off-balance sheet entity formed several years ago, said L. Phillip Humann, the chairman and CEO of SunTrust Banks Inc.
A day after PNCs announcement, it was far from clear that the investigation by the Fed and the Securities and Exchange Commission into the accounting used by PNC for a structure that held distressed assets would involve other banking companies. Certainly, there were expectations that the examinations would extend beyond just one company.
One former Fed official said he would not be surprised to see other companies forced to make similar restatements in the future. I think there is a toughening stance emerging out of the Fed. I think that going forward, the Fed will have a different view on disclosure, accounting standards, and the Enron-like off-balance sheet structures that many institutions use.
It is our understanding that this is a broad inquiry by all of the banking regulators, not just the Federal Reserve Board, and that it is spurred largely by Enron, said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington. I think all of the regulators, especially those that make up the Presidents Working Group on Financial Markets, are circling the wagons and taking a closer look at disclosure regardless of the institutions charter.
In recent years its become increasingly clear to us that we cant rely on the work of public accountants, said Robert M. Garsson, a spokesman for the Office of the Comptroller of the Currency.
If disclosure is what regulators are after, they have already made progress.
Zions made a special point of detailing its off-balance sheet activities in its quarterly call last week, to make sure all of us fully understand the context of our loan sales, Doyle Arnold, its chief financial officer, said in an interview.
The company has $2.6 billion of loan securitizations that must be kept off the balance sheet to comply with Financial Accounting Standard 140 on qualified special purpose entities, Mr. Arnold said. All are backed by either government guarantees or insurance, so if they ever moved back on to the balance sheet, the company should be safe from a loss, he said.
Zions has one special purpose vehicle, which it uses to hedge the gain on sale of a marketable equity security, but the point executives have stressed to investors, and Mr. Arnold emphasized yesterday, is that Zions never used any special purpose vehicles to securitize any of its loans.
Mr. Arnold, who joined Zions in December after nearly a decade at Bank of America, said it is common for investment bankers to present a banking company with ideas for using a special purpose vehicle to move loans off its sheet, but there are reasons why these more complicated structures are not attractive.
One problem with using special purpose vehicles is that theres virtually no accounting guidance about equity and other treatment, so its difficult for the market to determine how much risk really has been shifted permanently off your balance sheet, he said.
Also, the markets concern is that you have understated the amount of risk that youre still exposed to, he said.
James Hance, Bank of Americas chief financial officer, told investors last week: No question were all more sensitized to off-balance sheet transactions, be they GAAP or non-GAAP related, in the current environment.
Most of the Charlotte companys off-balance sheet holdings are in the form of loan commitments, credit card lines, and letters of credit, he said. Conduits for those commitments total about $39 billion. In addition, the company has about $13 billion of securitizations, which are going to come back on the balance sheet, he said.
Yesterday Mr. Hance reiterated his earlier statements. Clearly, the biggest off-balance sheet activity any of us have is our loan commitments.
For SunTrust, part of the answer came from a pledge to continually update investors. That pledge was coupled with not quite a confession, but at least a reminder of some of the companys past alleged accounting sins.
I would like to remind you that SunTrust is the one bank in the country who has been accused by the SEC of overly conservative accounting practices, Mr. Humann said. So I think if there is a bias in our company, which honestly we try for there to be no bias, but if there is, its in the obvious direction.
David Boraks and Lee Ann Gjertsen contributed to this article.
