November 4, 2002
The Honorable David M. Walker Dear Mr. Walker: I am writing with further reference to my request that the General Accounting Office (GAO) update its May 1997 report, "Bank Oversight: Few Cases of Tying Have Been Detected" (GAO/GGD-97-58), that was prepared at my request. In response to GAO’s agreement to undertake this important project, I am transmitting to GAO, and publicly releasing, a copy of the October 16, 2002, joint letter of the Board of Governors of the Federal Reserve System (FRB) and the Office of the Comptroller of the Currency (OCC) which provides their responses to my followup questions on the widespread allegations of illegal tying by banks. The bank regulators contend that they "are concerned about the potential for illegal tying as both a violation of law and an unsafe and unsound banking practice," and promise that they also "are committed to taking any corrective actions that are appropriate" as a result of their joint targeted tying reviews at several large banking organizations. First, the FRB-OCC response insists that available information does not indicate that credits are being mispriced. For your information, I am transmitting a copy of an article, "How America misprices credit," Grant’s Interest Rate Observer, Vol. 20, No. 17 (September 13, 2002), and a July 1, 2002, report by Standard & Poor’s entitled "Leveraged Lending Q2 2002." These materials suggest that such information is available. Second, the FRB-OCC response seems to say that there is no mispricing because, if there were, it would have shown up in the banks’ financial statements. Published financial statements are required to be prepared in accordance with generally accepted accounting principles (GAAP); GAAP’s FAS 107 requires banks to disclose in financial statement footnotes the "fair value" (as measured in accordance with FAS 140) of assets, liabilities, and commitments that are financial instruments; financial reporting and disclosure is subject to review by banks’ independent auditors; and FAS 107 disclosures are provided in audited financial statements submitted to the Securities and Exchange Commission (SEC). The fatal flaw of the bank regulators’ syllogism is the assumption that banks are complying with GAAP. I call to your attention the footnote disclosures of major commercial banks addressing the fair value of financial instruments. These disclosures do not appear to present the true economic value of outstanding commitments, and they call into question whether such disclosures meet the GAAP requirement to disclose, at statement date, the fair value of such financial instruments. I believe that a review of bank accounting and disclosures in this area may be called for, along with an inquiry into whether the banks’ independent auditors and the SEC are carrying out their responsibilities. The Financial Accounting Standards Board intends to issue a proposal in the first quarter of 2003 to provide more guidance on determining fair value and on the display of the disclosures. I would request that GAO monitor that project for its impact on this aspect of tying. Third, there seems to be a great deal of confusion over what activity is and is not illegal. In a recent cover story on bank tying, "The God That Failed," Investment Dealers Digest, September 9, 2002 (enclosure), the president of Banc of America Securities, the investment banking arm of Bank of America, insisted that the bank’s policies are not tying and explains what BofA does as follows:
Several legal experts advise that the activity just described would constitute illegal tying. This may help explain the lack of enforcement in this area. It would be helpful if the GAO report could shed some light on this matter. Fourth, the FRB-OCC response indicates that, as part of the targeted reviews currently under way, FRB and OCC examiners will interview bank officials about their credit extension practices, and inquire into any internal investigations the subject banks may have conducted into allegations of tying. Bank customers will be contacted if reviews of anti-tying policies and procedures appear to warrant investigation of individual transactions. Serious concerns have been raised about the effectiveness and seriousness of these reviews. In that regard, I call GAO’s attention to these comments from an OCC insider as reported in the October 14, 2002, Fortune article, "Banking’s Not-So-Secret Weapon"(enclosed):
GAO’s 1997 report included the views of banking industry officials that increased competition among credit providers makes it more difficult for any particular bank to exert sufficient credit leverage to force a customer into a tying arrangement. But what if all the large money center commercial banks are engaging in tying? In freeing commercial banks from the constraints imposed by Glass-Steagall, has Congress drastically increased the possibility of commercial banks engaging in tying and other anticompetitive behavior? Do the regulators have the right tools and the will to police this behavior and enforce the antitying provisions? I understand that GAO staff will meet with Committee staff soon to begin the design phase of this important work. I thank you for your continued commitment to the public interest and your willingness to address important consumer protection issues. I look forward to working with you. Sincerely, JOHN D. DINGELL Enclosures cc: The Honorable W.J. "Billy" Tauzin, Chairman The Honorable Alan Greenspan, Chairman The Honorable John D. Hawke, Jr., Comptroller
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