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Hank’s TARP, Madoff Feeder-Fund Fees: Compliance

Henry Paulson may be the most powerful manager of money in the world and he still couldn’t do for taxpayers with the $700 billion bailout of American banks what Warren Buffett did for his shareholders in investing in Goldman Sachs Group Inc. (GS), Mark Pittman of Bloomberg News reported today.

The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.

Paulson’s warrant deals may give U.S. taxpayers, who are funding the bailouts, less profit from any recovery in financial stocks than shareholders such as Goldman Sachs Chief Executive Officer Lloyd Blankfein and Saudi Arabian Prince Alwaleed bin Talal, owner of 4 percent of Citigroup Inc. (C), said Simon Johnson, former chief economist for the International Monetary Fund.

The transactions are “just egregious,” said Johnson, a fellow at the Peterson Institute for International Economics in Washington. “You want to do it the way Warren does it.”

Paulson’s decisions mark the first time in the nation’s 236-year history that the U.S. government has had to prop up the financial system by purchasing shares in institutions from Goldman Sachs, the most profitable Wall Street firm last year, to Saigon National Bank (SAGN), a Westminster, California, lender with a market value of $3.8 million.

“Paulson said he had to make it attractive to banks, which is code for ‘I’m going to give money away,’” said Joseph Stiglitz, who won a Nobel Prize in 2001 for his work on the economic value of information.

“The worst aspect of this is that they were designed not to do what they were supposed to do,” he said in a telephone interview from Paris Jan. 7. “In many ways, it’s not only a giveaway, but a giveaway that was designed not to work.”

For more, click here.

For a table illustrating warrant dilution under Paulson’s rescue, click here.

For a table showing bank bailout warrant values, click here.

Warren’s TARP Oversight Panel Blasts Paulson for TARP Shift

The panel set up by Congress to oversee the U.S. Treasury’s $700 billion financial markets rescue criticized the Bush administration for failing to stem mortgage foreclosures while bailing out banks.

The Congressional Oversight Panel, headed by Harvard Law Professor Elizabeth Warren, also said a lack of transparency about the fund “erodes the very confidence” the program is supposed to restore. The group reiterated criticisms of Treasury Secretary Henry Paulson’s shifting strategy for the Troubled Asset Relief Program.

“It is not enough to say that the goal is the stabilization of the financial markets and the broader economy,” the panel wrote in a monthly report published yesterday. “The question is how the infusion of billions of dollars to an insurance conglomerate or a credit card company advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs and families unable to pay their credit cards.”

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Advocates Hoping for a Consumer-Friendly Regulatory Shift

The Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration unveiled rules last month limiting lenders’ ability to raise interest rates on existing credit-card balances and giving consumers more time to pay credit-card bills. The rules represent a “major sea change,” Montrice Yakimov, the Office of Thrift Supervision’s managing director of compliance and consumer protection, told Bloomberg Television.

Banks said the new rules will require them to overhaul their business models and may restrict customers’ access to credit.

President-elect Barack Obama said on CNBC Jan. 8 that he would propose an overhaul of the U.S. financial regulatory system by April.

A new agency modeled on the consumer product commission but focused on financial products has been promoted by Elizabeth Warren, a Harvard law school professor and member of the panel overseeing Congress’s $700 billion bailout of the financial industry. Senator Richard Durbin, an Illinois Democrat, introduced legislation to do so last September.

A new, broadly focused agency would create a more lasting legacy for the consumer groups, Warren told a Consumer Federation gathering, much more than a mere list of 10 or 100 favorite reforms. This was, she said, a rare “regulatory moment,” akin to the fall of Enron Corp. when industry lobbyists were in retreat.

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UBS Continues to Close Offshore Accounts of American Clients

UBS AG (UBSN), the world’s largest wealth manager, is continuing to close the offshore accounts of U.S. clients and to transfer assets to entities regulated by the Securities and Exchange Commission.

“We are proceeding with the closings in an orderly fashion,” UBS spokesman Serge Steiner said today in a phone interview from Zurich. “A U.S. client can only do business through a U.S.-regulated entity” and otherwise “has to change,” he added.

UBS, Switzerland’s largest bank, said last July it would stop offering offshore-banking services to U.S. clients through non-U.S. branches. The bank is cooperating with probes by U.S. prosecutors and regulators, who say tax evasion through offshore accounts robs the U.S. Treasury of $100 billion annually.

UBS will close about 19,000 offshore accounts that prosecutors suspect have gone unreported to the Internal Revenue Service, the New York Times reported earlier today. Steiner declined to comment on the number of accounts being closed.

SEC Approves Rule Limiting Motions to Dismiss Arbitrations

The U.S. Securities and Exchange Commission approved rules that will make it harder for securities firms to file motions to dismiss arbitration cases, a brokerage industry regulator said.

The new regulations respond to investor concerns that securities firms have been filing motions to dismiss arbitration claims “routinely and repetitively,” before the cases are heard, increasing costs for retail investors, the Washington-based Financial Industry Regulatory Authority said in a statement.

“In recent years, there has been an increase in motions to dismiss by respondents, even before individual claimants presented their cases,” said Linda Fienberg, president of Finra Dispute Resolution. “It is costly and time consuming for parties to defend.”

The reasons for allowing dismissal motions will be sharply limited, and there will be penalties for those who abuse the process, Finra said in the statement.

Motions from securities firms have been tying up arbitrators, who sometimes aren’t lawyers, with intricate legal challenges, according to Brian Smiley, president of the Public Investors Arbitration Bar Association. The process bogged down what was supposed to be a forum for the quick, common-sense resolution of disputes, he said.

“We’ve been ardently pushing for this for years,” Smiley said. “We’re delighted.”

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SEC Allows Auditing Registration Exemption to Lapse, NYT Says

The U.S. Securities and Exchange commission hasn’t renewed a waiver that allowed privately-held brokerage firms to be exempted from using registered accounting firms for their audits, the New York Times reported.

The waiver on requiring auditors of such brokers to register with the Public Accounting Oversight Board was last extended in December 2006 and expired at the end of last year, the newspaper said.

The waiver was one of the reasons Bernard Madoff Investment Securities was able to carry out an alleged $50 billion fraud and escape scrutiny by using Friehling & Horowitz, an accounting firm with only three employees, the newspaper said.

The oversight board said in a statement yesterday that the registration requirement won’t lead to inspections of nonpublic broker-dealers which, “like other private company audits, are not, under current law, subject to board inspection and cannot be the basis for board disciplinary action.”

Madoff Investigators Said to Be Struggling Over Scheme’s Scope

Almost a month after Bernard Madoff was arrested for securities fraud, investigators are still struggling to learn how the investment adviser directed an alleged $50 billion Ponzi scheme and how widespread it may have been, a person familiar with the probe said.

Personnel from the Federal Bureau of Investigation, U.S. Securities and Exchange Commission and the U.S. Attorney’s Office in Manhattan are examining a steadily growing mass of data in an effort to unwind the alleged fraud, said the person, who declined to be identified for lack of authorization to speak publicly on the case. Documents include transaction records and investors’ monthly statements, the person said.

“This is like an explosion that’s ripped a hole which the investigators are pouring through, and it probably just doesn’t relate to Madoff alone,” said Daniel Richman, a Columbia Law School professor and former federal prosecutor. It may take months for investigators to finish the work, Richman said.

“These kinds of investigations are incredibly resource-intensive because of the paper trail involved and the level of sophistication needed to go through the paperwork,” he said.

The professor said the probe faces an urgent need to “catch whatever funds they can in a very fast-moving system and get seizure orders on those funds in place.”

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Madoff Losses ‘Humiliating,’ DreamWorks Chief Katzenberg Says

DreamWorks Animation SKG Inc. (DWA) Chief Executive Officer Jeffrey Katzenberg said losses tied to Bernard Madoff are “painful and humiliating,” and caused “extraordinary damage” to the executive’s charitable giving.

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Madoff Investigators Claim to Find 100 Checks in Desk

For story on investigator’s discovery of 100 checks, click here.

To read about U.K. Madoff probe, click here.

For story on investor suit against Fairfield Sentry, click here.

Madoff Investors Paid Fees to Funds for Profits That Vanished

Investors wondering what happened to the $50 billion that disappeared in Bernard Madoff’s alleged Ponzi scheme need look no further than the fees charged by the hedge funds that marketed his money-making prowess.

Many investors left their savings in the Madoff-run funds, content in the belief that their nest eggs were doubling every seven years. Firms that sold the feeder funds, including Fairfield Greenwich Group, Tremont Group Holdings Inc. and Bank Medici AG, were paid fees every year.

“The people who put money into those feeder funds generally let their investments ride,” said Ross Intelisano, a lawyer at New York-based Rich & Intelisano LLP retained by clients who had more than $100 million with Madoff.

The eight largest Madoff-only vehicles had a combined $27 billion in assets. That’s more than half of what the 70-year-old financier, who was arrested on Dec. 11 in New York, said was lost in the scheme. Their role in the scandal has damaged the reputation of funds of funds, which tout their ability to select superior investment managers, and exposed them to client lawsuits.

Investors with Fairfield Sentry and Tremont Group Holdings and Ezra Merkin’s Ascot Partners LP have gone to court to recover their money. The U.S. Securities and Exchange Commission is looking into whether hedge funds failed to conduct adequate due diligence on Madoff.

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FASB Measure May Help Banks Record Fewer Investment Writedowns

The Financial Accounting Standards Board voted 3-2 on Jan. 7 in favor of a staff position on “impaired” investments, board spokesman Neal McGarity said in an interview.

The measure is related to the so-called fair-value rule that requires companies to record the value of assets every quarter to reflect a market price and may help companies record fewer asset writedowns after U.S. banks blamed accounting rules for eroding their capital.

Companies can “exercise judgment when assessing whether declines in fair-value are indicative of a decline in the cash flows expected from the issuer of the security,” FASB said in a statement.

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Citigroup Supports Letting Bankruptcy Courts Reset Mortgages

Citigroup Inc., which serviced about 7 percent of all U.S. mortgages last year, agreed to support federal legislation that will let bankruptcy courts reset mortgage rates for borrowers at risk of losing their homes.

Senate Banking Committee Chairman Christopher Dodd of Connecticut, Chuck Schumer of New York and Richard Durbin of Illinois praised New York-based Citigroup for the agreement to revise legislation that failed last year. Citigroup supported the legislation that will apply only to existing mortgages.

Special Section: Lehman, Risk

Lehman Said to Weigh Sale of Merchant-Banking Fund to Managers

Lehman Brothers Holdings Inc., the bankrupt U.S. securities firm, is in advanced talks to sell a $3.3 billion merchant-banking fund to the managers overseeing the unit, two people with knowledge of the talks said.

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Hong Kong Reviews Regulation After Lehman Note Probes

Hong Kong’s government said it was ordering “an immediate review” of its financial regulation after probes into the sale of so-called minibonds linked to the failed Lehman Brothers Holdings Inc.

For more, click here.

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

Courts

Fairfield Greenwich Fund Sued by Investors Over Madoff Losses

Walter Noel’s Fairfield Greenwich Group, the hedge-fund firm that had $7.5 billion invested with alleged fraudster Bernard Madoff, was again sued by investors over claims it failed to protect their assets.

Pacific West Health Medical Center Inc. Employees Retirement Trust claims that Fairfield Greenwich failed to act on warnings found in news reports and in meetings with Madoff, who was arrested on Dec. 11 after allegedly admitting he ran a $50 billion Ponzi scheme.

For more, click here.

Philadelphia Firm Accused of $50 Million Ponzi Scam

U.S. regulators sued a Philadelphia-area investment-fund manager and his firm, claiming he has been running a $50 million Ponzi scheme since at least 1995 that bilked charities and schools.

Joseph Forte raised funds from as many as 80 clients and withdrew millions of dollars in fees while falsely claiming to deliver “outrageous returns,” the Securities and Exchange Commission said in a statement. Instead, his “limited” trades in the past 10 years generated one annual profit, which was less than $22,000, according to the agency’s lawsuit filed in federal court in Philadelphia.

For more, click here.

New York State Ponzi Scheme Hit Catholics, Clergy, U.S. Says

U.S. prosecutors and market regulators accused a Buffalo, New York-area investment adviser with operating a Ponzi scheme that targeted Catholics, including clergy.

Richard Piccoli, 82, was criminally charged with mail fraud at federal court in Buffalo, U.S. Attorney Terrance Flynn said in a statement. Piccoli placed advertisements in Catholic newspapers across the country while raising at least $17 million since 2004, according to the statement.

For more, click here.

National Century Executive Featured on ‘America’s Most Wanted’

Rebecca Parrett, a convicted fugitive in a $2 billion fraud involving National Century Financial Enterprises Inc. who vanished from her home last year in Carefree, Arizona, is featured on the Web site for “America’s Most Wanted,” the U.S. Marshals Service said.

Parrett and four other former executives at National Century Financial were convicted last year of fraud in federal court in Columbus, Ohio, stemming from the collapse of the Dublin, Ohio-based health-care financing company.

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

SEC Filings, Interviews, Company News

GM Employees Banned From Striking Under Bailout Terms, WSJ Says

The United Auto Workers labor union is banned from taking strike action under the terms of the financial rescue agreement between the U.S. Treasury Department and General Motors Corp., the Wall Street Journal reported.

Hedge Funds Lost Record 18% as Managers Misjudged 2008 Market

Hedge funds lost 18.3 percent in 2008, their worst year on record, as managers misjudged the severity of the biggest financial crisis since the Great Depression.

For more, click here.

MF Global Rises Most in Two Months on Possible ICAP Takeover

MF Global Ltd., the derivatives broker that lost 94 percent of its market value last year, rose the most in two months on speculation it would be acquired by ICAP Plc.

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Catsimatidis ‘Chilling” SemGroup Bids, Lawyers Say

Billionaire John A. Catsimatidis, who said he will reorganize bankrupt oil trader SemGroup LP, is “chilling bidding” for the company’s assets, a lawyer for SemGroup’s lenders told a judge.

For more, click here.

For news on SEC filings, click here.

Comings and Goings

Merrill Brokers Rebel Against New Bank of America Bosses

When Kenneth Lewis, chief executive officer of Bank of America Corp., unveiled the acquisition of Merrill Lynch & Co. on Sept. 15, he called its 16,000-strong brokerage group the firm’s “crown jewel.” Only a month later, the brokers were rebelling against their new parent.

For more, click here.

Merkin Intimidated Co-Op Board While Building Funds Madoff Lost

Over four weeks, J. Ezra Merkin lost more than $2 billion with Bernard Madoff, board positions with at least three institutions and his flagship fund, which is liquidating. He also lost his anonymity.

For more, click here.

National Century Executive Featured on ‘America’s Most Wanted’

Rebecca Parrett, a convicted fugitive in a $2 billion fraud involving National Century Financial Enterprises Inc. who vanished from her home last year in Carefree, Arizona, is featured on the Web site for “America’s Most Wanted,” the U.S. Marshals Service said.

“Finding Rebecca Parrett will be a priority to the United States Marshals Service until the day she is captured and forced to face what she did,” Deputy U.S. Marshal Andrew Shadwick said in a statement.

For more, click here.

Merrill’s Greg Fleming Said to Resign to Teach at Yale

Merrill Lynch & Co. President Greg Fleming is resigning from the company and will take a teaching position at Yale University, according to a person briefed on his plans.

Warsh’s Skills Push Him Toward New York Fed Position

The Federal Reserve is nearing a decision on the next president of the New York Fed, with Kevin Warsh’s Wall Street background and role in the government’s response to the financial crisis making him a leading contender.

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International Compliance

Madoff’s Three-Bedroom Riviera Retreat Belied Ponzi Scheme Role

Bernard Madoff’s three-bedroom apartment in the French Riviera’s Cap d’Antibes has a partially obstructed sea view and overlooks the tennis courts and swimming pools of larger homes closer to the water.

The 120-square-meter (1,300-square-foot) apartment, one of 23 in the Chateau des Pins development, is surprisingly modest for a man who allegedly swindled people out of $50 billion, says Bernard Collini-Lopes, an interior designer who has worked on several of the properties. He met Madoff in the shade of maritime pine trees along the walking paths between buildings.

For more, click here.

Satyam’s False Accounting Needs Quick Probe, Damodaran Says

The $1 billion accounting fraud that has edged Satyam Computer Services Ltd. to the brink of collapse needs to be quickly investigated to ensure that no other Indian company can mislead investors, a former regulator said.

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Commerzbank to Get EU10 Billion in Extra Capital

Commerzbank AG, Germany’s second-biggest lender, will receive 10 billion euros ($13.7 billion) of additional capital from the German government, which will receive a stake of 25 percent plus one share in the bank.

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

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

To contact the editor responsible for this report: David Rovella at drovella@bloomberg.net.

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