June 10 (Bloomberg) -- Regulators and banks agreed to changes aimed at easing the risk of a collapse in the $62 trillion market for credit-default swaps.

Morgan Stanley, Deutsche Bank AG and Goldman, Sachs Group Inc. are among the 17 banks creating a system to move trades through a clearinghouse that would absorb a failure by one of the market-makers, the Federal Reserve Bank of New York said yesterday in a statement following a meeting with the firms. A guarantee may encourage more trading of default swaps, said NanaOtsuki of UBS AG, one of the banks involved in the agreement.

``Increasing liquidity as a result of the settlement house would be the key,'' said Otsuki, head of debt and equity research for Japanese financial institutions at UBS in Tokyo. ``Larger trading volume means higher efficiency.''

The central counterparty, more automated trading and settlement and other fixes ``will help improve the system's ability to manage the consequence of failure by a major institution, and we expect to make meaningful progress over the next six months,'' New York Fed President Timothy Geithner said in a speech to the Economic Club of New York yesterday.

Concerns that the market could fail erupted in March when Bear Stearns Cos., then the fifth-biggest U.S. securities firm, faced a cash squeeze. The central bank agreed to back an emergency sale of Bear to JPMorgan Chase & Co. in part because of the systemic losses that would have resulted if the firm had filed for bankruptcy, Geithner said.

The Fed has conferred with banks since September 2005 to improve processing and settlement in the market. Ten of the 17 banks at the meeting yesterday were owners of Chicago-based Clearing Corp., which has said it will start guaranteeing credit- default swap trades by September.

Investment firms AllianceBernstein LP, Citadel Investment Group LLC and BlueMountain Capital Management LLC joined the meetings yesterday for the first time.

In addition to a central clearing mechanism, the group agreed to include in standard trading documents a mechanism for settling trades with cash instead of having to physically deliver the underlying securities.

The group will reduce the volume of outstanding contracts through multilateral trade terminations. They also agreed to extend the changes in credit-default swaps to other derivatives contracts backed by equities, interest rates, currencies and commodities.

The group will provide details on its next steps by July 31, the Fed said in its statement.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value should the company fail to adhere to its debt agreements.

SEC Adding `Scarlet Letter' to Subprime Risk Measuring Gauges

Regulators' plan to add a letter to credit ratings of asset- backed debt may constrict the $4.6 trillion market and choke off consumer credit at a time when Federal Reserve Chairman Ben Bernanke wants more lending to bolster the economy.

The U.S. Securities and Exchange Commission may recommend this week that Moody's Investors Service, Standard & Poor's and Fitch Ratings include a new designation to the scale created by John Moody in 1909, according to people familiar with the plans. The changes may force investors to reassess the way they gauge the risk of securities backed by mortgages, student and auto loans and credit cards, said the person, who declined to be named before the announcement. The action could force banks to add capital to guard against losses or curb lending.

The banking industry is ``very significantly concerned,'' said George Miller, executive director of the American Securitization Forum, a New York-based group representing 370 financial companies that package assets into bonds. ``If the rating itself is substantively changed, or the symbology is changed, it's not just investment guidelines that have to be examined.''

Ratings companies' grades of AAA through C underpin global financial accords dictating the capital lenders and insurers must set aside to protect against losses. Changes may lead to revisions of rules including the Basel banking accords and investment guidelines for mutual and pension funds.

The SEC plans to vote tomorrow on whether to submit proposed rules for credit-rating companies for public comment, which usually lasts 30 to 90 days. The SEC will incorporate changes from the submissions and hold a second public meeting to vote and make the regulations binding.

Credit-rating companies came under fire from investors and Congress after the collapse of the subprime market 10 months ago proved that their AAA rankings for thousands of asset-backed bonds were flawed. Banks have taken almost $400 billion in losses and writedowns, forcing them to raise almost $280 billion in capital.

The SEC staff is recommending giving ratings companies two choices, the people familiar with the agency's plans said. One option is to publish a report on how they came up with each ranking and how it could go wrong. The other would add a designation distinguishing the assessment of asset-backed debt from a corporate bond.

``If, all of a sudden, the security has a scarlet letter on it, maybe regulators won't judge that so well,'' said James Grady, a managing director in New York at Deutsche Asset Management, which oversees $240 billion in fixed-income securities. ``What will it do to liquidity, valuation and capital requirements?''

Global credit markets seized up in the subprime debacle, driving the Fed to cut its target interest rate for overnight loans between banks to 2 percent from 5.25 percent in September.

In ``The Scarlet Letter,'' a novel by 19th century American author Nathaniel Hawthorne, protagonist Hester Prynne is forced to wear a red cloth ``A'' as punishment by her Puritan community for an adulterous affair.

Regulators have given asset-backed debt rated AAA or AA preferential treatment for 20 years, regarding the securities as less likely to default than similarly rated corporate debt backed by companies' promises to repay.

The number of collateralized debt obligations failing since October has reached 186, with $202 billion of assets, data compiled by S&P and Bloomberg show. That's 40 times the total for the previous four years, according to the rating company.

If asset-backed debt were to be treated the same as corporate notes, the institution would need to add more capital to support a similar volume of lending, according to bank treaties. Rules that apply to most European banks would require lenders to raise even more.

``I suspect they do want investors to rip up their manuals and rewrite their policies for structured finance and not treat structured finance the same way treat corporates and municipals,'' said Frank Partnoy, a University of San Diego law professor and former Morgan Stanley banker who's been writing about credit-ratings companies since 1997.

Investors may steer clear of structured-finance in the future, said Richard Metcalf, director of the corporate affairs department of the Laborers' International Union of North America,

``If there are going to be certain financial products which are flagged as having increased volatility or risk, then we may have to look at whether such products fit into our portfolios and, if so, where,'' Metcalf said.

For the full story, click here.

UBS Faces Further Writedowns, New Allegations About Bond Risk

UBS AG, the European bank hardest hit by the U.S. subprime contagion, declined in Swiss trading amid speculation the company will face further writedowns.

Switzerland's largest bank fell 3.3 percent yesterday after slumping as much as 9 percent following errors in the trading of subscription rights linked to a 16 billion-franc ($15.8 billion) stock sale. Swiss newspaper Sonntag, citing unidentified ``insiders,'' said the Zurich-based bank may post losses of 2 billion francs to 4 billion francs in the second quarter.

Separately, the bank's UBS Financial Services Inc. was aware of the risk to investors who bought auction-rate securities as early as December and warned only some of its clients, the Boston Globe reported, citing documents.

In December, UBS, which had been the investment banker for the New Hampshire Higher Education Loan Corp. since 1997, advised the group to offer a 17 percent or 18 percent rate on its bonds if they ever stopped trading, the newspaper said, citing a letter to investors. The borrower had paid about 5.2 percent on its bonds on average, the newspaper said.

The agreement with the New Hampshire group and Lehman was never disclosed to other investors, nor did UBS ever warn of the potential for failed auctions, the newspaper said. Some holders of the New Hampshire student-loan bonds were told in February that they were unable to sell the debt, the newspaper said.

UBS spokeswoman Karina Byrne told the Globe the company is helping clients who are concerned about their auction-rate investments.

UBS said in regulatory statements published yesterday by newsbox wire that the bank's Chief Risk Officer Joseph Scoby bought shares in the bank for 3.44 million Swiss francs ($3.36 million) as part of the Swiss bank's capital increase.

Scoby bought the shares in two transactions by exercising 164,003 subscription rights, according to the regulatory statements.

Lehman Raises $6 Billion After $2.8 Billion Quarterly Loss

Lehman Brothers Holdings Inc. raised $6 billion to help survive the collapse of the mortgage market after reporting a $2.8 billion second-quarter loss, the first since the company went public in 1994.

The fourth-largest U.S. securities firm fell as much as 12 percent in New York trading after selling common and preferred shares at a price 13 percent below the close on June 6. The New York-based company sold about $130 billion of assets in the quarter and cut mortgage-related holdings and leveraged loans by as much as 35 percent.

Chief Executive Officer Richard Fuld, who said he was ``very disappointed'' with the results, is adding to the $8 billion he raised since February to quell concern that the global credit- market contraction would bring his firm down. Lehman's loss was three times bigger than the most pessimistic analyst surveyed by Bloomberg, though it was still just one fifth the losses reported by rival Merrill Lynch & Co.

``It's kind of sobering for people who have been listening to the company these last six to nine months that they had everything under control,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``They've got to start thinking about selling a strategic stake or selling the firm because there's just not enough business to go around.''

Lehman is the worst performer this year in the 11-company Amex Securities Broker/Dealer Index.

The share sale included $4 billion of common stock priced at $28 apiece and $2 billion of preferred stock that converts to common shares in three years. The sale was oversubscribed in New York, people close to the firm said.

For the full story, click here.

UBS, Citi, Merrill May Face $10 Billion in Monoline Losses

Citigroup Inc., Merrill Lynch & Co. and UBS AG may post losses of $10 billion on bond insurance after MBIA Inc. and Ambac Financial Group Inc. lost their top credit ratings, Oppenheimer & Co. analyst Meredith Whitney said.

MBIA and Ambac, the world's largest bond insurers, had their AAA ratings cut two levels by Standard & Poor's June 5, which trimmed ratings on more than $1 trillion of securities they guaranteed. The downgrades may limit the so-called monoline insurers' ability to write new policies, putting further pressure on earnings, she wrote yesterday in a note to investors.

``The limited earnings potential of monolines poses a risk to the value of the insurance and hedges on the subprime-related securities provided to the banks and brokers,'' Whitney wrote. ``The collateral damage could be in excess of an additional $10 billion.''

Whitney, one of the first bank analysts last year to gauge the depth of the U.S. credit crisis, said in January that losses tied to the bond insurers for all banks might top $40 billion. She didn't update her estimate. Citigroup, Merrill and UBS have taken more than $10 billion of writedowns related to the insurers, she wrote.

UBS had $6.3 billion of ``exposure'' to bond insurers at the end of March, Whitney said. Citigroup had $4.8 billion and Merrill had about $3 billion, she wrote.

For the full story, click here.

Analysts Lose 17% for Investors in Brokerage Industry Picks

Investors who followed the advice of analysts who say when to buy and sell shares of brokerage firms and banks lost 17 percent in the past year, twice the decline of the Standard & Poor's 500 Index.

Buying shares on the advice of Merrill Lynch & Co.'s Guy Moszkowski, the top-ranked brokerage analyst in Institutional Investor's annual survey, cost investors 17 percent, according to data compiled by Bloomberg. Deutsche Bank AG analyst Michael Mayo's counsel to purchase New York-based Lehman Brothers Holdings Inc. lost 59 percent. Citigroup Inc.'s Prashant Bhatia still rates Merrill ``buy'' after its 56 percent retreat from a January 2007 record.

Of the 39 analysts tracked by Bloomberg who follow stocks in the Amex Securities Broker/Dealer Index, 32 produced losses for investors. Investors who bought brokerages on ``buy'' recommendations, sold when they switched to ``hold'' and speculated prices would decline when analysts said ``sell,'' lost 17 percent in the last year through June 3, compared with the S&P 500's 8.5 percent drop.

``One would expect that if there was any industry Wall Street estimates would be more precise on, it would be their own,'' said Richard Weiss, who oversees $60 billion as chief investment officer at City National Bank in Beverly Hills, California. ``But this particular debacle was so global in nature and pervasive, you can't blame them for missing this one.''

Meredith Whitney, who correctly predicted Citigroup Inc. would reduce its dividend to preserve capital, lost 16 percent collectively at Oppenheimer & Co., her current employer, and CIBC World Markets, where she worked until mid-January. Whitney's advice included buying Lehman shares up until March 24 as the stock lost 35 percent.

Whitney made investors 1.8 percent over the past three months, the eighth-best performance.

Judging analysts solely by the return their picks generate isn't fair because their goal is to beat indexes of stocks in the industry they cover, said Christopher Malloy, a professor at Harvard Business School in Boston.

``Whether they make money in down markets, I don't think analysts think that way,'' said Malloy, who studies the performance of stock pickers. ``Investors shouldn't hold them to that. There is a good deal of evidence that analysts bring some value to the market. They beat benchmarks.''

The analysts who made investors the most money were Charles Peabody of New York-based Portales Partners LLC and Richard Bove of Ladenburg Thalmann & Co. in Miami, Florida, whose ``sell'' ratings on Merrill, Morgan Stanley, Lehman and Goldman Sachs Group Inc. produced profits of 47 percent and 18 percent, respectively, according to data compiled by Bloomberg. Citigroup's Colin Devine made 4.8 percent by rating Ameriprise Financial Inc., the only brokerage stock he covers, ``sell'' before moving to ``hold'' in July.

``Ten years ago, the expectation was that analysts would simply avoid the worst excesses,'' Bove said in an interview. ``The idea was just to beat the benchmark. Today, analysts have got to make you money in both up and down markets. You don't have any excuse.''

For the full story and table listing analyst based on accuracy of their estimates, click here.

Subprime-Mortgage Losses May Be Overstated by Indexes, BIS Says

Researchers and investors may overstate the gross market- value losses on subprime-mortgage securities if they simply use benchmark credit-default swap indexes, the Bank for International Settlements said.

The BIS estimates losses as of May 30 reached $205 billion, a figure that's 18 percent less than the $250 billion assumed using Markit ABX.HE indexes in a less sophisticated way, researchers Ingo Fender and Peter Hordahl wrote in a quarterly report yesterday. The Basel, Switzerland-based group acts as a central bank for the world's monetary authorities.

Plunging values for securities backed by home loans to borrowers with poor credit have sapped financial companies of capital and roiled worldwide credit markets. The world's largest banks and securities firms have reported more than $393 billion of asset writedowns and credit losses since the start of 2007.

``Repeated large-scale writedowns of exposures to the U.S. mortgage market and continuing deterioration of the U.S. housing sector have given rise to strong public and private sector interest in estimates of overall subprime-related losses,'' the BIS said. The task carries ``pitfalls,'' the researchers wrote.

For the full story, click here.

Fed Needs More Oversight to Mitigate Against Moral Hazard Risk

Federal Reserve Bank of New York President Timothy Geithner called for greater central bank authority over banks so the financial system can better withstand shocks and recover from the credit crisis.

In addition, the Fed's lending programs to commercial and investment banks will remain ``until conditions in money and credit markets have improved substantially,'' Geithner wrote in an op-ed article for the Financial Times. His remarks were excerpted and adapted from a speech he delivered yesterday in New York.

Officials are searching for ways to prevent a repeat of the decline in credit, sparked by the subprime-mortgage bust, that's cost banks $389 billion in writedowns worldwide and led the Fed to rescue Bear Stearns Cos. from bankruptcy in March. Geithner's comments build on congressional testimony he gave in April.

``It is important that we move quickly to adapt the regulatory system to address the vulnerabilities exposed by this financial crisis,'' Geithner said. Officials must be careful not to write rules that ``make things worse'' and distort incentives in ways that may make the system less safe, he said.

``We are examining what framework of facilities will be appropriate in the future, with what conditions for access and what oversight requirements to mitigate moral hazard risk,'' Geithner said. ``Some of these could become a permanent part of our instruments. Some might be best reserved for the type of acute market illiquidity experienced in this crisis.''

For the full story, click here.

For news on risk and compliance, click here, here, here, here, here and here.

Courts

AIG Directors Accused in Suit of Breaching Duty to Shareholders

American International Group Inc. officers and directors were accused in a lawsuit of breaching their duty to shareholders by making flawed investments and concealing the massive risk that the insurer faced.

The suit, which was filed yesterday in Manhattan federal court, names Chief Executive Officer Martin Sullivan, outgoing Chief Financial Officer Steve Bensinger, and other senior executives. The suit seeks unspecified damages on behalf of shareholders of AIG, the world's largest insurer, and undefined changes to the company's governance.

The U.S. Securities and Exchange Commission and the Justice Department are probing the way AIG valued credit-default swaps that wiped out profit for two quarters, the New York-based insurer said on June 6. The insurer has reported net losses of $5.29 billion for the fourth quarter of 2007 and $7.81 billion for the first quarter because of writedowns.

``Defendants breached their fiduciary obligations to exercise a high degree of due care, loyalty and diligence in the management and administration of the affairs of the company,'' according to the complaint.

The suit was filed by the Westchester Putnam Counties Heavy and Highway Laborers Benefit Funds on behalf of AIG shareholders.

Other defendants include Frank Zarb, a director and the board's former chairman; Robert Lewis, the chief risk officer; and directors including Stephen Bollenbach and Martin Feldstein.

Franklin Bank Sued by Investor Over Accounting Errors

Franklin Bank Corp., the Texas bank led by mortgage bond pioneer Lewis Ranieri, was sued over claims it misled investors about accounting errors that led to a federal inquiry and the removal of its chief executive officer.

Franklin issued materially false and misleading information with reckless disregard for investors, the Harold Roucher Trust said in a complaint filed June 6 in federal court in Houston, where the bank is based. The trust seeks unspecified damages on behalf of investors who purchased the stock between Oct. 29, 2007, and May 1 of this year.

``The accounting frauds committed by the bank and other defendants have ravaged Franklin's share price,'' lawyers for the Roucher Trust said in the complaint. ``Plaintiff and other Franklin investors have collectively lost tens of millions of dollars due to defendants' misconduct.''

Franklin shares have plunged 93 percent from a year ago. The bank announced in May that a 10-week internal probe found accounting errors tied to real-estate loans and the U.S. Securities and Exchange Commission was investigating. Franklin ousted CEO Anthony Nocella and the company's banking unit amended its past three quarterly reports.

Sentinel Judge Okays $10.7 Million Settlement of Fraud Claim

Sentinel Management Group Inc.'s trustee gained court approval of a $10.7 million settlement with the bankrupt company's founder and chief executive officer that resolves what was a $350 million fraud claim.

U.S. Bankruptcy Judge John H. Squires in Chicago approved yesterday Frederick Grede's settlement with the cash-management company's founder Philip Bloom and its CEO, Eric Bloom. Grede sued the Blooms in October, accusing them of commingling client assets with those belonging to the firm and using them as collateral for a Bank of New York Mellon Corp. credit line.

A lawsuit could demand ``the sun, the moon and the stars,'' Squires said after hearing Grede testify that the settlement amount represents almost all of the Blooms' assets that creditors can claim. ``That doesn't mean you'll collect it.''

Bank of New York, which has filed a $312 million claim against Sentinel and faces a $550 million lawsuit brought by Grede accusing it of helping the Blooms defraud Sentinel clients, had objected to the settlement.

Sentinel, based in Northbrook, Illinois, filed for Chapter 11 bankruptcy protection on Aug. 17, four days after telling customers it had to freeze their funds because of credit market instability.

For more courts news, click here, here and here. For news on SEC settlements, click here.

SEC Filings, Interviews, Company News

AIG's Sullivan on `Short Leash' as Investors Complain

American International Group Inc. Chief Executive Officer Martin Sullivan's tenure as head of the world's largest insurer may be in doubt as his predecessor Maurice ``Hank'' Greenberg calls for his removal.

``He's on a fairly short leash,'' Marshall Front, who oversees $700 million including AIG shares as CEO of Front Barnett Associates in Chicago, said yesterday in a telephone interview. ``The odds are we'll see a change in management like at Citigroup, Merrill Lynch and other companies where results have been disappointing.''

Greenberg, 83, said today on CNBC that New York-based AIG is ``falling apart'' and called for management and directors to be changed. Investors are ``fed up'' as AIG shares have lost half their value in the past year, Greenberg said. He controls the biggest stake of AIG stock through two investment firms and personal holdings.

Sullivan, 53, may be running out of time to improve results after posting two record quarterly losses totaling more than $13 billion. Bill Miller of Legg Mason Inc. joined other investors in signing a letter demanding progress at AIG, the Wall Street Journal reported yesterday. Last week, AIG said U.S. regulators are probing accounting tied to $20 billion in writedowns.

Bove Says JPMorgan's Purchase Bad for Holders, Reuters Reports

Banking analyst Richard Bove said JPMorgan Chase & Co. shareholders would absorb most of the cost of its purchase of Bear Stearns Cos. because no businesses would add to profit, Reuters reported.

Bove of Ladenburg Thalmann & Co. said JPMorgan's Chief Executive Officer Jamie Dimon is ``a patriot'' for buying Bear Stearns for $10 a share in March, a price that was increased from $2, Reuters said, citing Bove's comments yesterday at a conference sponsored by the news service.

``He's not getting anything that will add to JPMorgan's profits,'' said Bove, who rates JP Morgan shares ``neutral,'' Reuters reported. ``Bear Stearns should have gone bankrupt because there's nothing there (but) a great building in New York -- big deal.''

The New York-based bank estimated last month that merger- related costs might be $9 billion, or 50 percent more than expected at the time the transaction was announced, Reuters said.

Calpers Joint Venture LandSource Files for Bankruptcy

LandSource Communities Development LLC, a joint venture majority-owned by California Public Employees Retirement System, filed for bankruptcy protection after failing to reach an agreement with lenders to restructure its debt.

LandSource said it has received a revolving credit line of $135 million from a group of lenders led by Barclays Bank PLC. Bankruptcy will help the partnership best preserve the value of its business, Los Angeles-based LandSource said yesterday in a statement distributed by Business Wire.

LandSource, a venture part-owned by Lennar Corp. and LNR Corp. in which Calpers invested in 2007, received a default notice on its loans after a forbearance agreement expired April 16, according to Standard & Poor's LCD. The 15,000-acre development, known as Newhall Ranch, is located in the Santa Clara River Valley, 30 miles north of Los Angeles. California is among the states hardest hit by the worst housing recession in 26 years.

Greenlight's David Einhorn Sees Additional Losses at Lehman

David Einhorn, president of hedge fund Greenlight Capital LLC, comments on Lehman Brothers Holdings Inc.'s $6 billion capital raise and $2.8 billion second-quarter loss.

Einhorn, who's betting Lehman shares will fall, spoke in an interview yesterday after the firm held a conference call with investors. Einhorn is the author of ``Fooling Some of the People All of the Time,'' a book he's promoting about his experience betting against Allied Capital Corp. On additional losses:

``The call did nothing to allay my suspicions that there are additional losses that Lehman has not yet recognized.''

``There are signs already from the press release that the company has more to go, particularly in the commercial mortgage backed securities areas, where they only wrote down $700 million gross. It's unclear to me why the writedown would be so small.''

``The burden is on them to be much more forthcoming and transparent in their disclosures and discussion and analysis of their high-risk assets.'' On the $6 billion capital raise:

``This is the third capital raise. The first two they said they didn't need to do. This one is not to install confidence. It's not to go after short sellers. It is to replace losses. They are raising $6 billion of capital that they said they didn't need in order to replace losses that they said they did not have.'' On management's credibility:

``This raises management credibility issues. These results combined with their previous statements raise further management credibility issues.''

This ``confirms a lot of things we've been saying. The credit market did not really deteriorate between February and May. Most of these losses are losses that were probably evident quarters ago.'' On bankruptcy risk:

``I do not believe the Fed will allow an uncontrolled bankruptcy of Lehman just as it did not allow an uncontrolled bankruptcy of Bear Stearns. That said, I don't think there's any public interest in preserving the equity holders of Lehman Brothers.''

For news on SEC filings, click here.

Comings and Goings

Blackstone Taps Merrill's Tosi to Replace Finance Chief Puglisi

Blackstone Group LP hired Laurence Tosi as chief financial officer, adding a senior executive from U.S. securities brokerage Merrill Lynch & Co. as the New York-based buyout firm expands beyond private equity.

Tosi, chief operating officer of Merrill's trading and investment-banking division, replaces Michael Puglisi, Blackstone said yesterday in a statement. Puglisi, a 14-year Blackstone veteran who helped steer the world's largest buyout firm through its June 2007 initial public offering, will stay at the company as a senior managing director and adviser to Chief Executive Officer Stephen Schwarzman.

Blackstone, co-founded 23 years ago by Schwarzman after he worked at U.S. brokerage Lehman Brothers Holdings Inc., has pushed into hedge funds, distressed-debt investing and real estate to help counter a slump in private-equity deals. The firm's shares have dropped more than 40 percent since the IPO.

``Blackstone's businesses continue to expand in new markets and with new products,'' Schwarzman, 61, said in the statement. ``Laurence's deep knowledge of financial services and finance will be a tremendous resource.''

Tosi joined Merrill Lynch in 1999 and held jobs in finance and business development before becoming divisional chief operating officer in May 2007. As finance director for three years starting in 2004, he oversaw worldwide accounting, regulatory reporting, budgeting and corporate development, and he helped coordinate Merrill's own investments in hedge funds.

Before joining Merrill, he worked at General Electric Co.'s NBC broadcast network. He has bachelor's, master's and law degrees from Georgetown University in Washington.

He starts after August, Blackstone said in the statement.

Tosi's departure extends an exodus of at least 30 senior executives, traders and bankers who have quit New York-based Merrill or have been forced out since the firm hired John Thain as its CEO last December. Thain, a former president of Goldman Sachs Group Inc., the largest U.S. securities firm, has recruited colleagues from his former firm to occupy top posts at Merrill.

In a memo yesterday to employees, Merrill President Greg Fleming said Tosi ``will join the senior management of a very valued client.''

Puglisi, 57, joined Blackstone in 1994 after working for Fosterlane Holdings Corp., an investment company affiliated with the Kuwaiti government.

GSC Group's Castro to Become Huxley Capital's Top Risk Officer

Dan Castro, chief credit officer of structured finance at GSC Group, said he is leaving to join Huxley Capital Management as chief risk officer.

Castro, 49, joined New York-based GSC in April 2005. Previously, he was head of asset-backed research at Merrill Lynch & Co.

Huxley, based in New York, intends to buy distressed structured and corporate debt assets following the collapse of the subprime mortgage market. Banks and financial firms worldwide have recorded writedowns and credit losses of $386.2 billion on securities tied to subprime home loans.

Investment companies have raised at least $20 billion to take advantage of the housing recession. Pacific Investment Management Co., manager of the world's biggest bond fund, has raised $3 billion. Goldman Sachs Group Inc. created two distressed-debt pools with a combined $4.5 billion in assets.

UBS, Credit Suisse Lose Employees to Private Banks

UBS AG and Credit Suisse Group AG are losing employees to companies such as Clariden Leu, NZZ am Sonntag reported, citing banks.

UBS lost an entire private banking team to Clariden Leu and two Credit Suisse teams have gone to either Julius Baer Holding AG or Bank Sarasin & Cie AG, the newspaper said.

UBS spokesman Axel Langer confirmed that seven customer consultants and four assistants went to Clariden, the newspaper said. Langer said UBS has been hiring private bankers.

Credit Suisse spokeswoman Regula Arrigoni said the bank doesn't comment on staff departures. The company plans to hire 1,000 private bankers in the next three years and the bank ``overachieved'' its hiring target in the first quarter of the year, Arrigoni said in a telephone interview yesterday.

International Compliance

European Regulators Don't Need Separate Credit Ratings Rules

New rules forcing Standard & Poor's and Moody's Investors Service to change how they rate asset-backed debt would be ``counterproductive,'' a European Union advisory group said.

EU policy makers should avoid ``duplication of regulatory effort'' by the U.S. in response to credit-market turmoil, the European Securities Markets Expert Group said in a report posted on its Web site in Brussels June 6.

``We have doubts as to whether the development of a separate EU law would produce any particular benefits,'' the group said.

The report, which follows similar advice from EU securities regulators, is contrary to EU Internal Markets Commissioner Charlie McCreevy's calls to force credit ratings companies to change their business practices. The firms face criticism after mortgage-backed bonds contributed to $383 billion of losses and writedowns at the world's biggest financial companies.

``Full formal regulation may be counterproductive,'' the advisory group said in the report posted June 6. ``It might be seen by users in the market place to imply a level of official endorsement of ratings which is neither justified nor feasible.''

For the full story, click here.

Goodwill Sells Shares to Joint Morgan Stanley-Cerberus Fund

Goodwill Group Inc., a Japanese staffing company whose operations were temporarily suspended by the government, rose after shareholders backed a preferred stock sale to a fund set up by Morgan Stanley and Cerberus Partners LP.

The shares rose 10 percent yesterday on the Tokyo Stock Exchange, the largest increase since Apr. 17.

The Tokyo-based company's shareholders voted on June 7 to approve a reorganization plan that includes the sale of 15.5 billion yen ($146 million) of preferred shares.

The funds will be used to eliminate debt and improve finances, the company said in a March 11 statement.

BP Russia Venture Faces Labor Investigation Amid Owner Dispute

BP Plc's Russian venture TNK-BP is being investigated to determine whether it broke labor laws amid a shareholder dispute over staffing and expansion plans at the country's third-biggest oil producer.

A company official representing Chief Executive Officer Robert Dudley and a lawyer yesterday delivered boxes of documents to Moscow prosecutors and will provide additional information, spokesman Peter Henshaw said yesterday in a telephone interview.

BP and the billionaire shareholders in TNK-BP -- Mikhail Fridman, Viktor Vekselberg, German Khan and Len Blavatnik -- are locked in a dispute that led to the Russian shareholders calling for Dudley's resignation last month for favoring BP's interests. BP CEO Tony Hayward refused, the shareholders said.

For news on compliance, click here, here, here, here, here and here.

To contact the reporter on this story: Lisa Brennan in New York at lbrennan1@bloomberg.net.

Last Updated: June 10, 2008 08:16 EDT