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JOHN D. DINGELL, Michigan, Chairman JAMES H. SCHEUER, New York

JAMES T. BROYHILL, North Carolina HENRY A. WAXMAN, California

NORMAN F. LENT, New York TIMOTHY E. WIRTH, Colorado

EDWARD R. MADIGAN, Illinois PHILIP R. SHARP, Indiana

CARLOS J. MOORHEAD, California JAMES J. FLORIO, New Jersey

MATTHEW J. RINALDO, New Jersey EDWARD J. MARKEY, Massachusetts WILLIAM E. DANNEMEYER, California THOMAS A. LUKEN, Ohio

BOB WHITTAKER, Kansas DOUG WALGREN, Pennsylvania

THOMAS J. TAUKE, Iowa BARBARA A. MIKULSKI, Maryland

DON RITTER, Pennsylvania AL SWIFT, Washington

DAN COATS, Indiana MICKEY LELAND, Texas

THOMAS J. BLILEY, JR., Virginia RICHARD C. SHELBY, Alabama

JACK FIELDS, Texas CARDISS COLLINS, Illinois

MICHAEL G. OXLEY, Ohio MIKE SYNAR, Oklahoma

HOWARD C. NIELSON, Utah W.J. "BILLY” TAUZIN, Louisiana

MICHAEL BILIRAKIS, Florida RON WYDEN, Oregon

DAN SCHAEFER, Colorado
RALPH M. HALL, Texas

FRED J. ECKERT, New York
DENNIS E. ECKART, Ohio
WAYNE DOWDY, Mississippi
BILL RICHARDSON, New Mexico
JIM SLATTERY, Kansas
GERRY SIKORSKI, Minnesota
JOHN BRYANT, Texas
JIM BATES, California

WM. MICHAEL KITZMILLER, Staff Director

THOMAS M. RYAN, Chief Counsel
ARNOLD I. HAVENS, Minority Counsel

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JOHN D. DINGELL, Michigan, Chairman RON WYDEN, Oregon

JAMES T. BROYHILL, North Carolina DENNIS E. ECKART, Ohio

BOB WHITTAKER, Kansas JIM SLATTERY, Kansas

THOMAS J. BLILEY, JR., Virginia GERRY SIKORSKI, Minnesota

MICHAEL G. OXLEY, Ohio JAMES H. SCHEUER, New York

MICHAEL BILIRAKIS, Florida JAMES J. FLORIO, New Jersey

DAN SCHAEFER, Colorado
THOMAS A. LUKEN, Ohio

FRED J. ECKERT, New York
JOHN BRYANT, Texas
HENRY A. WAXMAN, California
RICHARD C. SHELBY, Alabama

MICHAEL F. BARRETT, Jr., Chief Counsel/Staff Director

John B. CHESSON, Counsel

ROBERT C. NORWOOD, Counsel
DENNIS B. WILSON, Associate Minority Counsel

(IT)

85-603038

CONTENTS

47

208

(III)

SEC AND CORPORATE AUDITS

THURSDAY, APRIL 10, 1986

HOUSE OF REPRESENTATIVES,
COMMITTEE ON ENERGY AND COMMERCE,
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC. The subcommittee met, pursuant to notice, at 10:15 a.m.,

in room 2123 Rayburn House Office Building, Hon. Richard C. Shelby presiding (Hon. John D. Dingell, chairman).

Mr. SHELBY. The subcommittee will come to order. If all of you who are standing will come in and have a seat, we will get moving as fast as we can. I will proceed to present Chairman Dingell's opening statement.

Today the Subcommittee on Oversight and Investigations begins a series of three hearings which will explore the relationship between the Federal securities laws and the actions of the various Federal banking agencies.

More than 50 years ago, Congress approved a system which depends upon the vigilance of Federal agencies and private independent audit firms to implement the provisions of the securities laws.

The Committee on Energy and Commerce is responsible for assuring that the securities laws—which are based on the concept of open and fair disclosure of important information to the publicare faithfully administered and enforced.

Last year this subcommittee held several hearings regarding the administration and enforcement of the securities laws by the Federal Home Loan Bank Board for the savings and loan institutions that it regulates. We found many instances of severe problems with the efforts of the Bank Board and independent audit firms in this area. These problems ranged from misleading accounting gimmicks to actual participation by the Bank Board itself in permitting the stock of a major institution listed on the New York Stock Exchange to be manipulated.

The subcommittee is particularly concerned about two fundamental problems we found during the course of our hearings. The first is that the Federal Home Loan Bank Board has an institutional bias toward secrecy in promoting the institutions it regulates and protecting the reserves of the Federal Savings and Loan Insurance Corporation. The Agency's preference for secrecy directly conflicts with its statutory responsibilities to see that problems at thrift institutions are openly and fairly disclosed as required by the Federal securities laws.

The second problem concerns the Bank Board's willingness to use and endorse financial reporting rules which deviate significant

(1)

ly from the generally accepted accounting principles used in other industries. The purpose of these unorthodox rules-called regulatory accounting principles-has been to inflate the reported net worth of savings and loan institutions so that the industry would appear healthier than it really is. This charade may make the regulators at the Bank Board feel more comfortable, but it has not aided the process of recognizing the real extent of problems in order to deal with them effectively.

We will examine some of the regulatory accounting principles used to inflate the net worth of thrift institutions, as well as the impact of those rules on the Federal deposit insurance system. The subcommittee's inquiry is timely because we are now seeing strong attempts to have some of the rules used by the Bank Board to fool itself accepted as part of the generally accepted accounting principles used to report financial information to the public.

Furthermore, we are seeing new efforts by the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the Federal Reserve Board to use accounting rules as part of their efforts to address the problems of banks with significant loan exposure in the agricultural and energy industries. These Federal agencies also have a statutory responsibility to assure complete and accurate disclosure of bank problems under the securities laws. We do not want these agencies to follow the same path of misleading accounting principles which have caused so many problems in the savings and loan industry.

Finally, I want to make the record clear that the Committee on Energy and Commerce is serious about preserving and improving the integrity of the system used to report financial information to the public. The word should go out that this committee will not tolerate attempts by any Government Agency, private accounting firm, rule-setting body, corporate management, or other person to subvert the integrity of the system. We will continue to develop our factual record of current and potential problems in the system, but let everyone understand that the committee will vigorously exercise all powers which are necessary or appropriate to meet its goals in this regard.

This concludes Mr. Dingell's prepared statement.

We have Mr. Wolf on the first panel. And then we will have Mr. Stearns and Mr. Isaac, who are not here yet.

It is the custom of the subcommittee to receive all testimony under oath. Do you have any objections to being sworn?

Mr. WOLF. No, sir.

Mr. SHELBY. You also have the right to counsel, to have counsel present with you, as you probably know. Do you desire counsel to be present?

Mr. WOLF. No, sir.

Mr. SHELBY. Let the record show that the rules of the committee and the rules of the House are available at the witness table before you for your reference. If you have no objection, if you would please stand, I will swear you.

[Witness sworn.]

Mr. SHELBY. Identify yourself and anyone seated at the witness table.

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