The London-based securities affiliates of six major U.S. banks are riddled with management problems and lack safeguards against conflicts of interest in the buying and selling of stocks, congressional auditors said in a report released yesterday.
The foreign affiliates have obtained "less than satisfactory performance ratings" from U.S. bank regulators as a result, according to the report issued by the General Accounting Office, the auditing agency of Congress.
"It is not clear if managerial problems experienced in the securities activities of U.S. banking entities in London are 'teething pains' or if they will persist," senior officials at the Federal Reserve Board, which regulates bank companies, told the GAO auditors.
The review of London securities units was part of a GAO report on problems that might arise if Congress repeals a 55-year-old law that separates commercial banking from securities underwriting in the United States. Banks can compete fully in foreign security markets.
Comptroller General Charles A. Bowsher, who heads the GAO, said U.S. bank deregulation was "inevitable" but should be phased in so regulators can build up their work force, computer capability and expertise to adequately police the new operations and protect the safety and soundness of the banking system.
The report, prepared for Rep. Edward J. Markey (D-Mass.), chairman of the finance subcommittee of the House Energy and Commerce Committee, also raised the possibility of extending a moratorium on new banking activities beyond its March 1 expiration.
Congress imposed the moratorium last summer to give lawmakers time to decide how far they would allow the commercial banking and securities industries to intrude into each other's markets. Ten years before the moratorium, banks and securities firms had used court decisions and state laws to make significant inroads into each other's territory.
Bowsher said that if Congress allows the moratorium to expire in three weeks and fails to take action, "The big risk is that the ad hoc deregulation will continue. Having watched what happened in the savings and loan industry, that worries us a great deal."
He said one reason hundreds of S&Ls have failed since 1980, when deregulation of the industry began, is that they were allowed to enter new fields without adequate supervision by federal regulators, who failed to ensure that the S&Ls had enough capital to expand safely.
U.S. banks also have found the foreign security markets more competitive than they expected, GAO auditors concluded.
The auditors reviewed federal examination reports filed from 1985 through 1987 for eight U.S. banks with large securities operations in London. They would not specify which institutions they studied or which six had significant problems.
Industry sources said, however, that two of the troubled banks that the GAO report referred to were Citicorp and Chase Manhattan Corp.
Citicorp, for example, lost at least $50 million during the Oct. 19 market collapse because its London securities executives broke internal company rules. In 1986, employees at Chase's London unit bought 500,000 shares for themselves in a stock offering Chase was handling -- a practice that is illegal for securities firms in the United States. Banking regulators concluded that the Chase episode was legal under British law but "highly questionable from an ethical standpoint." Chase and most other U.S. banks ban the practice in their securities' affiliates.
Bowsher said Congress could at first allow banks to enter only a few securities activities, but that the GAO would prefer that Congress give them access into all areas but in a limited way, based on a percentage of bank assets.
Markey said it was "very significant" that the GAO has "deep concerns" about the ability of federal regulators to oversee full deregulation. But Rep. Jim Cooper (D-Tenn.) said the GAO report "closely resembles mush."
"You've issued a statement that could be read as a speech to either the Securities Industry Association or the American Bankers Association without making too many enemies on either side," Cooper told Bowsher.