In an August 6, 2010 letter to SEC Chairwoman Mary Schapiro, Senator Robert Menendez and six other senators addressed their concern that “wide-spread off-balance sheet accounting arrangements allowed large financial firms to hide trillions of dollars in obligations from investors, creditors, and regulators.” As an example, “Citigroup used their off-balance sheet SIV investments and other subprime backed financing vehicles to reportedly kept $1.1 trillion worth of assets off its books without “adequately disclosure of the risk posed by their off-balance sheet activities to investors.”
In testimony before the FCIC, Citigroup executives testified that losses from these under-regulated opaque subprime-related investments would eventually led to the resignation of Citigroup’s Chairman Charles Price. He stated “I can only say that I am deeply sorry that our management—starting with me— was not more prescient and that we did not foresee what lay before us.” He added that after leaving “Citi incurred even greater losses which led Citigroup to receive over $45 billion in federal TARP funds. Price’s “gold parachute” compensation package included $11.9 million in cash and $24 million in stock, for a total compensation of $79 million.
Title VII of Dodd-Frank, curtails Citigroup type mortgage off-balance sheet investments by eliminating most of exemptions for OTC credit derivatives created by the Commodity Futures Modernization Act of 2000. The Act requires requiring mandatory central counterpart clearing on all mortgage credit derivatives through centralized exchanges and clearinghouses registered with CFTC as a futures commission merchant (FCM). Section 716, prohibits “federal assistance” such as access to any Federal Reserve credit facility or discount window, or FDIC insurance or guarantees to any “swaps entity” engaged in swap activities, among the products included in the definition of “swap” are mortgage credit default swaps. One possible loophole is the fact that the Treasury secretary can exempt foreign-exchange swaps.
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