The Federal Deposit Insurance Corp., assigned the task of determining how to unwind systemically important, failing firms while avoiding the market turmoil that followed the collapse of Lehman Brothers Holdings Inc., discussed plans for the new resolution authority at a meeting in Washington yesterday.
The Dodd-Frank law lets the FDIC determine which parts of a failing firm should be kept on life support to stabilize the system and maintain the value of the business line for future sale. It also requires the agency to dismantle and sell firms that it takes over -- a measure designed to eliminate the uncertainty and ad hoc bailouts that came to define the 2008 crisis.
Lehman, facing a liquidity crisis amid losses tied to subprime mortgage securities, filed for bankruptcy on Sept. 15, 2008, after regulators tried to broker an industry-funded solution.
If the new powers had been in place in 2008, the FDIC could have moved the Lehman business lines that were still valuable, such as the broker-dealer unit purchased by Barclays Plc, into a separate entity that would have served as a bridge until a buyer was found.
“The inability to close the largest financial companies without creating systemic havoc using the existing tools was underscored over and over in 2008,” Michael Krimminger, an FDIC special adviser for policy, said in a phone interview.
Krimminger, who is leading the FDIC’s implementation effort, said it’s only a matter of time before banks grasp the government’s intent.
“Through our actions, the rulemakings and the law itself, at some point they are going to realize there really isn’t any other option but to close and liquidate any failed financial company,” Krimminger said.
The FDIC’s authority to choose which creditors would become part of a bridge entity has raised concern among banking officials including Hamid Biglari, a vice chairman of Citigroup Inc.’s Citicorp unit, who said the lack of certainty would lead to higher costs of funding for U.S. financial institutions.
FDIC Chairman Sheila Bair, 56, said the agency has established a clearly defined creditor priority system through its resolutions of depository institutions. The agency will soon propose a rule that would preclude bondholders and subordinated debt holders from being brought into bridge entities, according to an FDIC official who spoke on condition of anonymity because the new rule isn’t public.
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FSB Chairman Draghi May Seek Tougher Capital Rules for Banks
Financial Stability Board Chairman Mario Draghi renewed calls for capital rules for the largest lenders that go beyond the Basel III proposals earlier this month from global regulators.
Draghi said in Paris yesterday that systemically important financial institutions should have the ability to absorb more losses than smaller banks. Draghi, who is also governor of the Bank of Italy, made similar comments in newspapers in the U.K. and his home country earlier this month.
Regulators of the 27-nation Basel Committee on Banking Supervision reached an agreement on Sept. 12 on new rules that more than double capital requirements for banks, while giving them as long as eight years to comply in full.
“We want a strong financial system with higher capital standards,” Draghi said. “We have a proper transition period so that we don’t risk hampering the economy.”
The FSB will make additional proposals to the Group of 20 Nations at a November meeting in the South Korean capital. The FSB was established by G20 leaders in April 2009 to coordinate the work of national regulators and international standard setting agencies.
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FSA Proposes Rules for Accounting Firms on Asset Reports
Britain’s financial regulator proposed changes to the way accounting firms sign-off on client-asset reports in a bid to correct “serious failings” identified in a study of the industry.
The measures are part of an initiative to improve financial firms’ segregation of client assets, the Financial Services Authority said in a statement yesterday. Failings identified in the accounting industry show a “general deficiency” in applying FSA requirements on client assets, the agency said.
“It is ultimately a firm’s responsibility to ensure that they have adequate systems in place, but they, as we, rely on their auditors to provide the necessary assurance,” Richard Sutcliffe, a sector leader at the FSA, said in the statement.
The FSA has been under pressure to clarify rules on client assets since they were deemed to be flawed by a London judge overseeing a case involving Lehman Brothers Holdings Inc. The regulator has been examining whether investment firms properly separate client money following Lehman’s 2008 bankruptcy.
Spill-Response Law Creates Potential Conflicts, Allen Says
Putting the company responsible for an oil spill in charge of the cleanup creates a potential conflict of interest, the U.S. official who led the response to the BP Plc spill told an investigating panel.
Policy makers should consider giving an independent expert control of spill-response resources, National Incident Commander Thad Allen said yesterday at a Washington hearing.
“We need to really think about what we mean by the concept of responsible party and how we want that to work in the future,” Allen told the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling. “Something we might want to consider is the creation of a qualified individual that would represent the industry, oversee the response, have access to the resources.”
BP had responsibility under U.S. law to lead cleanup efforts after its Macondo well, about 40 miles (64 kilometers) off the Louisiana coast, blew out April 20. The explosion killed 11 workers and set off an uncontrolled leak that spewed 4.9 million gallons until BP plugged the well in mid July.
There is no indication BP was slow to deploy resources because of concern about costs, Allen said. Any delays were more likely the result of “the enormity” of the response, he said.
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Treasury Said to Prepare AIG for Independence, Recoup Bailout
The U.S. Treasury Department may announce plans as early as this week to return American International Group Inc. to independence and recoup taxpayer money from the insurer’s bailout, according to three people with knowledge of the talks.
The biggest part of that strategy is for Treasury to begin converting its $49 billion preferred stake into common stock for sales by the first half of next year, said the people, who declined to be identified because the negotiations are private.
The government is seeking to dispose of its AIG stake as Chief Executive Officer Robert Benmosche, 66, prepares divestitures of two non-U.S. divisions that he said would largely repay the firm’s Federal Reserve credit line. MetLife Inc. said this month its purchase of American Life Insurance Co., for about $15.5 billion, is “on track” to be completed on Nov. 1. AIG may hold an initial public offering of another business, AIA Group Ltd., in October.
The insurer’s objective is to “repay the taxpayers and position AIG, over time, as a strong, independent company worthy of investor confidence,” said Mark Herr, a spokesman for the firm. “We have been in discussions with the U.S. Treasury, the Federal Reserve Bank of New York and trustees of the AIG Trust over the terms of the government’s exit from AIG.”
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JPMorgan Based Foreclosures on Faulty Documents, Lawyers Claim
JPMorgan Chase & Co. faces a legal challenge next month that could cast doubt on thousands of foreclosures after a mortgage executive at the bank said she didn’t verify documents used to justify home seizures.
Lawyers for a Palm Beach County, Florida, homeowner asked a judge to throw out a foreclosure as a penalty for misleading the court, according to attorney Tom Ice of Ice Legal PA. They’re citing a May 17 deposition in which the JPMorgan executive said she signed thousands of affidavits and documents supporting the New York-based bank’s claims without personally checking loan records. The court is scheduled to hear arguments Oct. 19.
The Chase Home Finance operation supervisor, Beth Ann Cottrell, said in May she was among eight managers who together sign about 18,000 documents a month, according to a transcript of her sworn deposition provided by Ice. Asked how they were prepared, she said she relied on other people at the firm.
Inaccurate statements by banks in foreclosure documents may give borrowers who have lost their homes a legal basis to challenge the seizures, derailing resales and casting doubts on property titles.
JPMorgan spokesman Tom Kelly declined requests for comment. Cottrell didn’t return phone calls to her office seeking comment. A lawyer representing her at the deposition, Joseph Mancilla of the Florida Default Law Group PL, didn’t return calls. Cottrell isn’t named as a defendant.
GMAC/Ally Foreclosure Bar Sought by Connecticut’s Blumenthal
Connecticut Attorney General Richard Blumenthal said his office is investigating defective foreclosure documents filed by GMAC/Ally Finance Inc. and demanding that the company freeze foreclosures in the state.
“The GMAC/Ally foreclosure steamroller should be stopped so the company can be held accountable,” Blumenthal said in a statement yesterday. “My office has already confirmed that some defective documents were filed in Connecticut.”
Blumenthal’s action follows news of investigations by Texas, Iowa and Illinois into mortgage practices at Ally. California ordered the company to stop foreclosures until it can prove it is complying with state law.
Ally, the Detroit-based auto and home lender, faces claims that its GMAC unit evicted people from their homes without first ensuring the borrowers were in default or the firm had legal standing to take possession of the homes.
GMAC Mortgage on Sept. 17 notified agents and brokers that it was suspending evictions in 23 states.
Progress Energy Stock Trading Halted by U.S. Volatility Curb
Progress Energy Inc. stock trading was halted for five minutes following a 90 percent decline that triggered a circuit breaker implemented after the U.S. equity market crash in May.
Progress Energy exceeded $44.50 at 12:57:52 p.m. yesterday before more than 100 transactions during the same second drove the stock as low as $4.57, according to data compiled by Bloomberg. Fifty-three trades that second, before the halt, were canceled on the Nasdaq Stock Market, Bloomberg data show. It changed hands for $43.90 in the first transaction following the pause.
Progress Energy, a Raleigh, North Carolina-based electric utility, became the 10th security paused by the volatility circuit breaker, following Seagate Technology Plc on Sept. 21, Nucor Corp. on Sept. 14, Intel Corp. on Aug. 27, Micron Technology Inc. on Aug. 5, Cisco Systems Inc. on July 29, Genzyme Corp. on July 23, Anadarko Petroleum Corp. on July 6, Citigroup Inc. on June 29 and Washington Post Co. on June 16.
SEC Aims to Release Plunge Report This Month, Schapiro Says
U.S. Securities and Exchange Commission Chairman Mary Schapiro said the agency still aims to release a report on the causes of the May 6 market plunge this month.
“We said quite some time ago that it was our goal to get the report done by the end of September,” she told reporters after a speech in New York yesterday. “It could slip by couple of days, but the expectation, the hope, is we’ll be able to do it this week.”
The SEC and the Commodity Futures Trading Commission have been investigating the cause of the drop, which temporarily erased $862 billion from the value of U.S. equities. The study will help people “understand quite clearly what happened in the markets that day,” Schapiro said.
Debt-Management Firms Must Correct Ads, Improve ‘Competence’
More than 100 U.K. companies that sell services to consumers with too much debt may lose their licenses unless they correct misleading advertising and improve employee training and “competence.”
The 129 companies, which are known as debt-management firms, use ads and websites that fail to reveal fees and suggest their services are free, the Office of Fair Trading in London said today.
“The level of non-compliance we found across the industry is unacceptable,” OFT Director Ray Watson said in a statement. “People who are heavily indebted, desperate and vulnerable need advice which makes their problem better -- not worse.”
The antitrust regulator said it would take action against the companies, which it didn’t identify, if they fail to give independently audited evidence within three months that they are complying with stricter industry guidelines.
The companies compete with free, government-funded and charitable services, according to the OFT. Their services include setting up debt-management plans and negotiating settlements with creditors.
“Advisers working for debt management companies are lacking in competence and are providing poor advice based on inadequate information,” the OFT said in the statement.
JPMorgan Starts Moving Proprietary Traders to Asset Management
JPMorgan Chase & Co. began moving proprietary traders to its asset-management unit from the firm’s investment bank to comply with laws that restrict a bank’s ability to trade for its own account.
Proprietary traders in the equity, emerging markets and structured credit divisions will report to Mary Erdoes, asset management’s chief executive officer, in a new alternative investment management group for clients, according to a memo sent to employees yesterday by Erdoes and investment bank CEO Jes Staley.
“Colleagues who will transition have delivered strong risk-adjusted returns for the firm, and we are confident that clients will benefit from their investment experience and insight,” Erdoes and Staley wrote in the memo, the contents of which were confirmed by Jennifer Zuccarelli, a JPMorgan spokeswoman.
JPMorgan ranked 12th among U.S.-based stock and bond mutual fund managers as of June 30, according to Morningstar Inc. data. The bank had $103 billion of assets under management, excluding money market funds. The asset-management unit oversees $1.6 trillion in investments, which includes $1.2 trillion it directly manages.
Ex-TFS Broker Fined, Banned in U.K. for AKO Kickbacks
A former TFS Derivatives Ltd. broker was banned from working in the U.K. finance industry for paying kickbacks to a former trader at hedge fund AKO Capital LLP who pleaded guilty in June to insider-trading charges.
In addition to the ban, Fabio Massimo De Biase, the broker, was also fined 252,239 pounds ($400,750) by the U.K. Financial Services Authority for paying 131,000 pounds to Anjam Ahmad at AKO in exchange for brokerage business between January 2008 and September 2009, the regulator said today in a statement. The men overcharged the hedge fund by $739,000 on commissions to increase the amount of money they split, the FSA said.
“De Biase exploited the trust of his employer and his client,” FSA head of enforcement Margaret Cole said. “This substantial fine and the ban from working in the financial services industry are significant penalties and should serve as a reminder that such behavior is woefully short of that expected of approved persons and will not be tolerated.”
Mark Duffell, a spokesman for De Biase’s lawyers at Irwin Mitchell, wasn’t immediately available to comment. De Biase received a reduction to his fine for agreeing to settle the case.
Justice Department Urges Stem-Cell Funding Stay by Court
The U.S. Justice Department urged a federal appeals court to maintain its stay on a lower-court order cutting off funds for embryonic stem cell research while it seeks to overturn the trial judge’s ruling.
A three-judge panel of the U.S. Court of Appeals for the District of Columbia, after an hour-long hearing yesterday, didn’t say when it would decide whether to make the emergency hold extend through the appeal. The Obama administration attorneys argued that even a temporary cutoff would cause irreparable harm to researchers, taxpayers and scientific progress.
The appeals court ruled on Sept. 9 that the government can keep funds flowing for the research at least during the initial stages of the administration’s challenge to the order banning taxpayer support for any activity using cells taken from human embryos.
U.S. Judge Royce Lamberth last month cited the still-in- force 1996 Dickey-Wicker Amendment in his ruling, saying Congress prohibited funding any research in which a human embryo was destroyed.
The case is Sherley v. Sebelius, 10-5287, U.S. Court of Appeals for the District of Columbia (Washington).
Reilly Says Deep-Water Drill Ban Likely to End Before Nov. 30
William Reilly, co-chairman of President Barack Obama’s commission investigating the BP Plc oil spill in the Gulf of Mexico, spoke with Bloomberg’s Lizzie O’Leary about BP’s role in cleanup efforts and the Obama administration’s moratorium on deep-water drilling.
The administration halted drilling in waters deeper than 500 feet after BP’s Macondo well, about 40 miles (64 kilometers) off the Louisiana coast, blew out April 20. The explosion killed 11 workers and set off the biggest U.S. oil spill.
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To contact the editor responsible for this report: David E. Rovella at email@example.com.