January 16, 2012
The Securities and Exchange Commission last week warned publicly traded banks to be more thorough and consistent in disclosing their exposure to European sovereign debt.
"Our staff has been working with banks to improve their disclosure about sovereign debt exposure for several months," SEC Chairman Mary Schapiro said in a statement. "Even so, I understand this is an area of focus and uncertainty that could really benefit from further transparency and consistency, particularly as we head into annual reporting season."
The banking industry is said to be pushing back on this, citing differences between lending and investment exposure, as well as varying international accounting principles.
Given the steep losses in funds with subprime and Lehman Brothers exposure in 2008, the banking industry doth protest too much.
Take the Schwab YieldPlus $118 million settlement (MME, 1/11/11). The SEC said that rather than adhere to the fund's stated policy of offering only slightly higher risk than a money market fund, YieldPlus invested more than 25% of its assets in private-issuer mortgage-backed securities. As a result, the YieldPlus' assets sank from a peak of $13.5 billion in 2007 to $1.8 billion.
Or, take OppenheimerFunds' $100 million settlement (MME, 8/1/11). Oppenheimer had to pay investors $100 million to settle a class-action lawsuit against Oppenheimer Champion Income and Oppenheimer Core Bond.
OppenheimerFunds denied wrongdoing but, in an unusual move, reached the settlement, prior to dismissal motion rulings.
Shareholders sued the funds in 2009, saying they were led to believe they were holding low-risk, conservative investments. The Champion Income Fund lost 78.5% of its value in 2008, while the Core Bond Fund lost 35.8%.
The plaintiffs' lawyer, in court documents, said Oppenheimer portrayed the funds as "diversified, high-yielding [and] appropriate as part of a retirement plan portfolio," when, in fact, they were "substantially more risky than represented" because they "took huge gambles on mortgage-backed securities and illiquid derivatives."
Whether it's EU or non-prime-it's always a good thing to lay it all on the line. As Justice Brandeis once said, "Sunlight is justly commended as the best disinfectant." MME