But for sheer contrition he was surpassed by James Rohr, chairman, CEO and president of Pittsburgh-based PNC Bank. “I’m disappointed by these events,” said Rohr, in a July 18 conference call to discuss second-quarter earnings. “This falls on my watch, and I regret the impact it’s had on our employees and investors. This is an issue I sincerely do apologize for, and we’re going to make sure this doesn’t happen again.”
He wasn’t talking about results – they were solid. He was referring to the fallout from PNC being forced by the Securities&Exchange Commission to unwind three special purpose vehicles set up in 2001 to take some of the bank’s troubled assets off its balance sheet. Of these $500 million was loans and $160 million private equity investments, with another $500 million in cash and zero-coupon treasury bills. The regulator acted in January, just after PNC had released its earnings figures for 2001.
CreditSights’ banks analyst David Hendler said at the time that “through its preferred stock interest [in the SPVs], which we estimate comprised 75% of the subsidiary’s capitalization, PNC was buying back its own loans from PNC and, it seems, at artificially high prices.” The bank had to take the loans back on balance sheet and restate earnings.
The Federal Reserve and the Office of the Comptroller of the Currency (OCC) then came in for a review of the bank’s procedures, finding them wanting in accounting and risk management. The investigations’ results were made public on July 18. Rohr revealed that PNC had entered into a “cease and desist” commission order with the SEC. Its ability to enter new activities has also been curtailed under the 1999 Gramm-Leach-Billy Act.
PNC executives cannot appoint any new senior managers or implement any share repurchases without regulators’ approval. What’s more, the Fed has called for a management review to be conducted by independent consultants, and the OCC has called for the bank to ensure that it is “well managed”.
The company did say that, subject to the regulators approving it, John Wixted would join the firm as chief regulatory officer. Wixted was head of supervision at the Federal Reserve Bank of Chicago, and before that at the Federal Reserve Bank of Cleveland, which supervises PNC.
Investors may panic
There is no material impact on earnings, and the regulators have imposed no financial penalties. But, says Hendler: “The fact remains that when investors hear the words ‘regulatory interference’ they head for the hills. Although these activities alone probably won’t significantly impact earnings, we believe that the ensuing reputational impact will stick with the current management.”
The regulators’ action is not a one-off. Earlier that week credit-card company Capital One revealed that it had signed a memorandum of understanding with bank regulators concerned about the rapid growth of loans from its banking subsidiary – sub-prime loans, the company said, are over 33% of its total assets. Credit-card company Metris signed a similar memo earlier in the year, and problems at Providian and Superior Bank have also been dealt with promptly.
All this activity could indicate that the various regulators are starting to act more as a team after years of bank executives leading them around by the nose. So given their firms’ intricate dealings with Enron, WorldCom and others, executives at Citigroup, JPMorgan and elsewhere might find themselves saying sorry more often.
