In a speech aimed equally at Wall Street and Main Street, President Barack Obama urged the financial industry to drop the “furious effort” to fight his regulation plan, saying a failure to impose tougher rules on the market will put the U.S. economic system at risk.
The U.S. was almost dragged into a second Great Depression by “a failure of responsibility -- from Wall Street all the way to Washington,” Obama said in a speech yesterday at Cooper Union in New York. The audience included Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., other Wall Street executives, local officials, consumer advocates, faculty and students.
“What happens on Wall Street “has real consequences across our country, across our economy,” Obama said.
Obama repeated the arguments he has made for overhauling financial industry regulations during the past two years. His push to get the legislation through Congress got a boost when Democrats and Republicans resumed negotiations after weeks of trading accusations.
The effort has been helped by the administration’s ramped- up lobbying campaign and last week’s announcement by the Securities and Exchange Commission that it is suing Goldman Sachs for alleged fraud linked to derivatives.
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Separately, industry leaders said legislation to regulate the $605 trillion derivatives market is reaching beyond issues that threatened the financial system two years ago and may impede the market.
The Senate Agriculture Committee, chaired by Senator Blanche Lincoln, Democrat of Arkansas, on April 21 approved derivatives legislation that would require U.S. lenders such as JPMorgan Chase & Co. and Bank of America Corp. to spin off their swap-trading operations or lose access to the Federal Reserve’s discount lending window and other government support. Under Senate legislation, the most actively traded swaps would be moved through clearinghouses designed as a safety net for the financial system.
Conrad Voldstad, chief executive officer of the International Swaps & Derivatives Association, said President Barack Obama’s administration has taken a careless approach to financial reform after its victory in passing health care reform, and is now “beating up on the banks.”
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In Europe, dealers in credit-default swaps are doing “a lot of work” to ensure that contracts protecting against government defaults are moved through clearinghouses, said Athanassios Diplas, co-chairman of the credit-steering committee for the ISDA.
Swaps on governments came under fire from European leaders including German Chancellor Angela Merkel and French Finance Minister Christine Lagarde amid accusations that trading in the contracts was fueling speculation that can distort perceptions of government creditworthiness.
Credit Suisse, UBS May Be Split in Swiss Emergencies
Switzerland needs bank insolvency laws to be able to break up Credit Suisse Group AG and UBS AG in an emergency, because the size of the banks is a threat to the rest of the economy, a government panel said.
Laws to create “bridge banks” to run the elements of the lenders most important to Switzerland’s financial system may be published this summer, the group of experts said in an interim report yesterday. The two Zurich-based banks’ combined balance sheets are more than four times the size of the Swiss economy.
UBS spokesman Serge Steiner declined to comment because the experts’ work isn’t final. Credit Suisse spokesman Alex Biscaro wrote in an e-mail that the measures need to be coordinated internationally.
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German Companies May Face Disclosure Rule, Handelsblatt Says
Chancellor Angela Merkel’s government may require German companies to keep lists of data they compile on business partners and disclose the information to them once a year, Handelsblatt reported, citing lawmakers.
The proposal being discussed by the government might include data such as a customer’s credit rating, the newspaper said. Pro-business lawmakers in Merkel’s coalition criticize the plan as costly for companies and bureaucratic, Handelsblatt said.
Ukraine Central Bank Tightens Reserves Rules, Kommersant Says
Ukraine’s central bank, Natsionalnyi Bank Ukrainy, said lenders should keep 100 percent of their reserves in a central bank account to prevent fluctuation of the hryvnia, Kommersant- Ukraine reported, citing an unidentified central bank official.
The new requirement takes effect May 1, according to Kommersant. Banks currently must place 50 percent of their reserves with the central bank, the newspaper reported.
The central bank is also allowing banks to form reserves entirely with state bonds, issued to finance the Euro 2012 soccer tournament, the newspaper reported.
Ireland May Take Stake in Allied Irish Banks as Response to EU
The Irish government would probably take a stake in Allied Irish Banks Plc as part of a payments-in-kind arrangement after the European Commission halted coupon payments by the bank, according to John Corrigan, head of Ireland’s NTMA.
U.S. Said To Weigh AIG Exit Through Two Years of Share Sales
The U.S. government, majority owner of American International Group Inc. after rescuing the insurer in 2008, is considering a two-year plan to dispose of its stake, said a person with knowledge of the discussions.
The proposal involves converting preferred stock into common shares for sale on the open market, said the person, who declined to be identified because talks with AIG are private.
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Moody’s, S&P Were Swayed by Wall Street, Senate Probe Finds
Moody’s Investors Service and Standard & Poor’s were too influenced by Wall Street, had insufficient resources and used outdated models to grade mortgage securities that blew up when the U.S. housing market collapsed in 2007, Senate investigators said in a report.
The Senate Permanent Subcommittee on Investigations concluded after an 18-month probe that the credit-rating firms had conflicts of interest and ignored signs that fraud and lax lending had infected the housing market. The findings may undermine lobbying efforts aimed at defeating legislation that would make it easier for investors to sue the companies.
E-mails released by the committee, which is holding a hearing on the companies today, show Moody’s and S&P deferring to investment banks that were paying them to assign ratings to securities composed of pooled mortgages.
It is a “timely coincidence” that the panel finished its probe just when the Senate prepares to weigh the overhaul bill, according to Carl Levin, the Michigan Democrat who led the panel investigation.
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BHP Says Probe to Have ‘Modest’ Effect, Financial Times Says
BHP Billiton Ltd. said an investigation by U.S. regulators into alleged corrupt practices will have a “modest” effect on the company, the Financial Times reported, citing Chief Executive Officer Marius Kloppers.
At least one person, whom he didn’t identify, is “under scrutiny,” the newspaper said, citing Kloppers, who declined to say where the alleged wrongdoing took place, adding that the claims are a threat to BHP’s corporate governance record.
The U.S. Securities and Exchange Commission is examining a former BHP bauxite exploration project in Cambodia, the newspaper said, citing a person close to the company.
Melbourne-based BHP spokeswoman Amanda Buckley declined to comment.
Mexican Regulators Probe Possible Market Manipulation
Mexican regulators are investigating possible “manipulation” of the government bond market during a 14-month period, said Guillermo Babatz, the president of the National Banking and Securities Commission.
The commission was alerted at the end of 2008 to the actions that are now under investigation. The investigation looks into a period of 14 months, Babatz said in an interview yesterday in Acapulco, where he’s attending a banking conference. He declined to provide more details.
The securities commission has been increasing investigations into possible violations since the global financial crisis began three years ago.
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Goldman Sachs Should Cut Losses in Standoff, Professors Say
Goldman Sachs Group Inc. may be better off cutting its losses instead of fighting what it terms “unfounded” fraud claims, say professors of securities law who have examined the U.S. Securities and Exchange Commission’s lawsuit against the bank.
Goldman Sachs is the first major Wall Street firm accused by regulators of fraud connected to the collapse of the subprime mortgage market. Goldman has said the claims are unfounded.
The most profitable firm in Wall Street history will probably lose what is typically the first hurdle in court, a motion to throw out the April 16 suit because it lacks legal merit, the professors said in interviews this week. After that, Goldman Sachs’s risks will mount and its negotiating position will weaken, the professors said.
Even if top managers are certain they’re right on the merits of the case, Goldman Sachs should probably settle, said senior executives at three of the firm’s rivals. Goldman Sachs may have to change senior management to give the appearance that the firm is changing the way it does business, two of the rival executives said.
Lucas van Praag, a Goldman Sachs spokesman, declined to comment yesterday on the likelihood of getting the case dismissed.
Separately, a Goldman Sachs Group Inc. director tipped off a hedge fund billionaire about a $5 billion investment in the bank by Warren Buffett’s Berkshire Hathaway Inc. before it became public knowledge, the Wall Street Journal reported, citing a person familiar with the matter.
The investment came at the height of the 2008 financial crisis and federal prosecutors say Goldman director Rajat Gupta told Galleon Group founder Raj Rajaratnam about the Berkshire investment; investigators wrote to Gupta, who said last month he was stepping down as a Goldman director, to say they had found out about the tip through an intercepted phone call between Gupta and Rajaratnam, the newspaper said.
Gupta hasn’t been formally accused of any wrongdoing and Goldman wouldn’t comment, the Journal said, adding that his lawyer said he hadn’t violated any law.
Rajaratnam is being sued by the Securities and Exchange Commission for criminal insider-trading, which he denies.
Goldman Executives to Join Tourre at Senate Hearing
Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein and five past and present executives will testify with Fabrice Tourre, the banker at the center of U.S. fraud allegations, at a Senate hearing next week.
David Viniar, Craig Broderick, Daniel Sparks, Michael Swenson and Joshua Birnbaum were listed as witnesses for the Permanent Subcommittee on Investigations hearing on April 27.
Senators will explore investment banks’ role in the financial crisis, the panel said in an e-mail release.
The Securities and Exchange Commission sued Goldman Sachs and Tourre, 31, last week, claiming they misled investors in a collateralized debt obligation. The company has vowed to fight the suit. Tourre and Blankfein agreed to speak publicly to show Goldman Sachs has nothing to hide, people with knowledge of the matter said yesterday.
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FSA Fines Winterflood, Two Traders 4.25 Million Pounds
The Financial Services Authority said it imposed fines of 4.25 million pounds ($6.5 million) on Winterflood Securities and two of its traders after the regulator won a court of appeal ruling in the case.
Deutsche Bank Fined by Hungarian Regulator for Trades
Deutsche Bank AG was fined 90 million forint ($457,922) by Hungary’s financial regulator for a series of trades that caused a “significant” weakening in the forint as the credit crisis engulfed the country two years ago.
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Massachusetts Conducting Probe of Goldman, Boston Globe Says
Massachusetts Secretary of State William Galvin said he is carrying out a separate probe of Goldman, Sachs & Co. for potential conflicts of interest and a policy of favoring certain clients, the Boston Globe reported.
Galvin said in an interview that his office is looking into discussions by the bank’s traders and analysts over investment and market trends and sharing information with hedge funds and other large clients, the newspaper reported.
Ex-Societe Generale Trader Agrawal Is Denied Bail
Former Societe Generale trader Samarth Agrawal must remain in jail following his arrest for stealing the company’s computer code for high-frequency trading, a U.S. judge ruled.
Agrawal, 26, was arrested on April 19 and accused of making copies of part of the code he had been given access to and another part that he hadn’t. U.S. Magistrate Judge Michael Dolinger in New York yesterday denied Agrawal’s request for bail after prosecutors argued he was a risk to flee to his native India.
Agrawal’s lawyer, Steven M. Statsinger, told the judge that eight or nine friends who appeared in court yesterday would have been willing to guarantee his bond, adding that Agrawal has “has lived an exemplary life.”
Agrawal was hired by Societe Generale in New York in March 2007 as a quantitative analyst, according to the criminal complaint.
Comings and Goings
Standard Chartered Ordered to Pay Banker It Fired on First Day
Standard Chartered Plc was ordered by Singapore’s High Court to pay Fermin Aldabe for wrongful dismissal after the lender’s global senior risk manager said he would resign on his first day on the job.
The London-based bank must pay Aldabe at least S$40,333 ($29,384) including one month’s salary of S$27,500 and his wage from Nov. 17 to Nov. 30, 2008, Justice Steven Chong said in his judgment April 21. Aldabe was fired after saying he’d resign when told he wouldn’t be paid for a two-week period before the start date stipulated in his offer letter.
Standard Chartered will also have to reimburse Aldabe his relocation costs to Singapore from Argentina, where he had been based. Chong rejected his claim for S$1.54 million including losses for giving up another job opportunity.
Aldabe, 43, represented himself in the case. He is now a senior research fellow at the National University of Singapore’s Risk Management Institute.
Standard Chartered’s lawyer Herman Jeremiah said the judgment was a “substantial victory” because a significant portion of the claim was dismissed.
The case is Aldabe Fermin v. Standard Chartered Bank 174/2009/B in the Singapore High Court.
Williamson Says U.K. Banks ‘Cautious’ About New Hiring
Benjamin Williamson, an economist at the Centre for Economics & Business Research Ltd., talked about the outlook for employment in London’s financial services industry, and the impact of proposed bank levies and the bonus tax. He spoke with Bloomberg’s Maryam Nemazee.
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FCIC’s Angelides ‘Stunned’ by Ratings on Mortgage Bonds
Phil Angelides, chairman of the Financial Crisis Inquiry Commission, talks with Bloomberg’s Carol Massar and Matt Miller about credit-rating companies’ top rankings for mortgage bonds that later soured.
Angelides also discusses the FCIC’s investigation of the financial crisis and subpoena of Moody’s Corp.
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To contact the reporter on this story: Carla Main in New Jersey at Cmain2@bloomberg.net.