Federal Deposit Insurance Corp. Chairman Sheila Bair called money-market mutual funds “destabilizing” to the financial system and said investors would be served just as well if share prices floated.
“Money-market funds are maintaining a fiction of a stable” net-asset value, as shown by the September 2008 failure of the $62.5 billion Reserve Primary Fund, Bair said May 10 at a round-table meeting of fund-company executives and regulators arranged by the U.S. Securities and Exchange Commission in Washington. “That is skewing investment dollars into a structure that is highly unstable in a crisis.”
Former Federal Reserve Chairman Paul A. Volcker called a floating share price the “simplest” solution to the risk posed by money funds, which trade at a constant $1 a share.
Their remarks lent support to proposals fund executives have said may ruin the product’s appeal to investors, and its role as the biggest collective provider of short-term financing for U.S. corporations through the commercial-paper market. Calls to make funds safer began after Reserve Primary’s collapse helped freeze global credit markets. The SEC, after passing rules last year that made funds more liquid and more transparent, is considering whether further changes are needed.
Representatives of Fidelity Investments, JPMorgan Chase & Co. and Federated Investors Inc. (FII), the three biggest money-fund providers, defended the business as popular among investors and crucial to the financing of U.S. companies and municipalities.
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Bernanke Says Fed Will Propose Financial Rules in Coming Months
Federal Reserve Chairman Ben S. Bernanke said the central bank plans to propose regulations within the next few months for financial firms whose failure may endanger the financial system.
“We anticipate putting out a package of proposed rules for comment this summer” covering areas including “enhanced” capital requirements and annual Fed stress tests, pursuant to the Dodd-Frank Act of 2010, Bernanke said in testimony prepared for a Senate Banking Committee hearing today. The Fed posted the testimony on its website yesterday.
Hungary May Use Tax Break for Banks to Boost Loans, Help Debtors
Hungary, which last year imposed a special tax on banks to plug budget holes, may give a tax discount to lenders to spur lending and protect mortgage holders, a study posted on the Economy Ministry website shows.
The government, which banned evictions until July 1, may also offer subsidized housing loans to help the construction industry, according to the ministry’s strategic working paper, published yesterday.
The government wants to protect foreign-currency borrowers who are unable to make payments while encouraging lending to support the country’s economic recovery. Hungary, facing the risk of its credit rating being cut to junk, is also seeking to avoid added budget spending.
Apart from OTP Bank Nyrt., the country’s largest lender, Hungary’s financial industry is dominated by foreign-owned banks including the units of KBC Groep NV (KBC), Bayerische Landesbank, Erste Group Bank AG (EBS), Intesa Sanpaolo SpA (ISP), Raiffeisen Bank International AG (RBI) and UniCredit SpA. (UCG)
Another proposal is to set up a National Asset Manager to pool real estate of borrowers who can’t make their payments because of reasons “outside of their control.” Banks would be able to transfer the loans and the collateral to the asset manager in exchange for “long-maturity special” government bonds.
U.K. FSA Insider-Trading Probes to Target London’s ‘Bigger Fry’
The U.K.’s Financial Services Authority will focus its insider-trading investigations on senior London financial workers as part of its deterrence strategy, the finance watchdog’s acting enforcement chief said.
The FSA, which was set up in 1997 and prosecuted its first criminal case of insider trading in 2008, is “determined to take insider dealing enforcement right into the heart of the city,” Tracey McDermott, acting head of enforcement at the FSA, said in an interview in London hours before Galleon Group LLC co-founder Raj Rajaratnam was convicted in New York of insider trading yesterday.
“We recognize the need to go after bigger fry, not because they’re wealthy or high profile -- we want to go after the people we actually think are causing the most damage to the market,” said McDermott, who took over earlier this year from Margaret Cole, who has gone on to lead a another agency unit.
The FSA is imposing stricter supervision after being criticized for failing to prevent the U.K.’s worst financial crisis since the Second World War. The regulator in February secured the longest-ever U.K. sentence for insider trading when former Dresdner Kleinwort banker Christian Littlewood was imprisoned for 40 months after admitting illegally trading over a 10-year period, along with his wife and an accomplice.
National regulators in the 27-member European Union may get powers to take action against traders who attempt to manipulate the market under proposals from the European Commission to review market abuse laws, due to be published as soon as July.
Special Section: Rajaratnam Verdict
Rajaratnam Guilty on All Counts in U.S. Insider-Trading Case
Raj Rajaratnam, the hedge-fund tycoon and Galleon Group LLC co-founder at the center of a U.S. insider-trading crackdown, was found guilty of all 14 counts against him in the largest illegal stock-tipping case in a generation.
A jury of eight women and four men in Manhattan returned its verdict yesterday after hearing evidence that Rajaratnam, 53, engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies including Goldman Sachs Group Inc. (GS) He gained $63.8 million, prosecutors said.
John Dowd, an attorney for Rajaratnam, said he will appeal the verdict.
The trial came as Manhattan U.S. Attorney Preet Bharara promised to crack down on “rampant” illegal trading on Wall Street. Rajaratnam was convicted on five counts of conspiracy and nine counts of securities fraud. Conspiracy carries a maximum sentence of five years; securities fraud can bring 20 years in prison. Prosecutors yesterday said he faces between 15 1/2 and 19 1/2 years in prison at his July 29 sentencing.
Galleon was among the 10 largest hedge funds in the world in the early years of the last decade. It managed $7 billion at its peak in 2008. Rajaratnam’s net worth of $1.3 billion made him the 559th richest person in the world, Forbes Magazine said in 2009.
The case was the first one focused exclusively on insider trading in which prosecutors wiretapped their targets’ telephone conversations, a tactic used in organized crime investigations. Jurors heard more than 40 recordings of Rajaratnam, in some of which he can be heard gathering secrets from his sources.
Rajaratnam used inside information to trade ahead of public announcements about earnings, forecasts, mergers and spinoffs involving more than a dozen companies, according to the evidence at the trial.
His case was the most prominent amid a widespread U.S. crackdown on insider trading. In New York, the Galleon probe and related cases have led to more than 40 arrests since 2009 and guilty pleas from about 30 of the accused. A related case against former Galleon trader Zvi Goffer is scheduled for trial this month.
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
For more about the trial, click here.
For video of defense attorney John Dowd after the verdict, click here.
For more about other insider-trading cases, click here.
For a video report on the verdict, click here.
For commentary by Harvey Pitt on why the verdict is a “wake-up call,” click here.
For commentary by Robert Thompson, who called the appeal an “uphill battle,” click here.
For commentary by Don Steinbrugge, who said the jury made “the right decision,” click here.
For commentary by Andrew Stoltmann on likely sentencing, click here.
For commentary by Mark Rifkin on likely sentencing, click here.
For commentary by Bruce Baird on the role of audio tapes in the trial, click here.
For commentary by Ron Geffner on why evidence of guilt “was overwhelming,” click here.
For commentary by Alan Dershowitz on appellate strategy and likelihood of bail pending appeal in the case, click here.
JPMorgan Wins Bid to Have $112 Million CDO Case Heard in U.K.
JPMorgan Chase & Co. (JPM), the second-largest U.S. bank by assets, won a challenge at the European Union’s highest court to have a collateralized-debt obligation dispute over $112 million dealt with by the U.K. courts.
Disputes of a contractual nature are mainly about questions on a contract’s validity and this doesn’t justify having such disputes heard in the country where one of the parties challenging the validity of the contract is based, the EU Court of Justice in Luxembourg ruled today.
The ruling relates to two cases at the Luxembourg-based EU court over whether disputes between JPMorgan and the city of Berlin’s transportation provider BVG about a 2007 derivatives transaction should be heard in the U.K. or Germany. JPMorgan in 2008 sued BVG in the U.K., arguing the contract said any dispute would be handled in British courts. BVG sued JPMorgan in Berlin in 2009 seeking to annul what it called an invalid deal.
The decision may influence dozens of lawsuits over losses on swap agreements between local governments and community-owned utilities in the U.K., Germany and Italy on one hand, and banks including UBS AG (UBSN), Bank of America Corp. (BAC) and Depfa Bank Plc on the other. While municipalities are increasingly filing suits at home claiming they weren’t properly advised of risks or that swaps were unlawfully settled, the banks are turning to U.K. courts where they expect to get swifter rulings.
The case is C-144/10, Berliner Verkehrsbetriebe (BVG), Anstalt des oeffentlichen Rechts v JPMorgan Chase Bank N.A., Frankfurt Branch.
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All German Landesbanken to Pass EU Stress Test, VOeB Says
Germany’s Landesbanken will probably pass the European Union’s stress tests, even as this year’s examinations exclude some forms of capital, said Christian Brand, the head of the Association of German Public Sector Banks, or VOeB.
He made the remarks at a press conference in Frankfurt yesterday.
The European Banking Authority is applying a tougher capital measure to 90 lenders across the region in this year’s assessment. Silent participations, a non-voting type of capital used in Germany, will only be recognized if it was provided as aid during the financial crisis, sparking concern over the test performance of Landesbank Hessen-Thueringen and Norddeutsche Landesbank Girozentrale, which didn’t need a bailout.
“I still think it’s wrong not to recognize parts of core capital that’s accepted under current banking supervision and by Basel III until 2018,” Brand said, reiterating comments made in April.
The publication of the stress-test results is scheduled for June.
Mergers among Germany’s state-owned lenders only make sense if business models complement each other, and the creation of a “super-Landesbank” may pose a systemic risk, Brand said. Berlin-based VOeB represents 62 institutions, including the country’s Landesbanken.
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Gonzalez-Paramo Says Debt Default Would Irreversibly Harm Greece
European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said a debt default would have an extremely adverse impact on the Greek economy and the nation must implement its fiscal consolidation program.
“Far from being a convenient means of minimizing economic losses and dissipating uncertainty, a default would have extreme adverse consequences, many of an irreversible nature, for the Greek economy -- particularly for its banking sector and for the welfare of its citizens,” Gonzalez-Paramo said in a speech in Madrid today. “The thorough implementation of the comprehensive program of structural reforms and fiscal consolidation negotiated with the international authorities is the only way forward which is fully consistent with the long-term interests of the people of Greece.”
Gonzalez-Paramo said he’s surprised to hear calls for Greece to default or restructure its debt.
“I am rather surprised to see the flippancy with which some commentators recommend that the government of an advanced economy should infringe its legal and contractual obligations, as though breaching the trust of investors and citizens were the simplest and least costly solution to the deeply rooted structural problems in Greece.”
Comings and Goings
Ex-Credit Agricole Banker Has Race-Discrimination Award Reduced
Credit Agricole SA (ACA), France’s third-biggest lender, won a U.K. court bid to cut the 375,000 pounds ($617,250) in compensation awarded to a London banker who was refused promotion because of his British nationality.
An employment tribunal overestimated the financial loss suffered by Michael Wardle, who worked at the bank’s Calyon unit before taking a job at the U.K.’s Financial Services Authority that paid less than the one he was denied, three judges at the Court of Appeal ruled yesterday.
The former Global Head of Exotic Interest Rate Derivatives Risk Management was awarded the compensation in 2010 after he was fired for complaining that a French national was promoted over him. Wardle, then on a salary of 104,000 pounds, was turned down for a promotion that was set to start in January 2008, according to the ruling. He was dismissed in July 2008 after he alleged racial discrimination. The Employment Tribunal in London found in his favor.
Patrick Elias, one of the judges, said in his part of the ruling that it was “reasonable” to conclude that Wardle would obtain an equivalent job.
Elias didn’t specify how much Wardle should be awarded. He asked for written arguments from counsel to fix the sum.
Wardle’s law firm, Pritchard Englefield, and Credit Agricole didn’t respond to messages seeking comment.
Juncker Seeks Eurogroup Backing for Draghi at May 16 Meeting
Jean-Claude Juncker, who leads the group of euro-area finance ministers, said he will seek the so-called eurogroup’s backing next week for Mario Draghi to be the next president of the European Central Bank.
An endorsement at the May 16 meeting of the euro-area ministers would be “desirable,” Juncker said today in Mainz, Germany. “In any case, I have put it on the agenda of the eurogroup meeting.” The gathering starts at 5 p.m. in Brussels.
Italian Finance Minister Giulio Tremonti said yesterday that he officially backed the candidacy of Draghi, the head of the Bank of Italy, to succeed ECB President Jean-Claude Trichet when his term ends in October.
To contact the editor responsible for this report: Michael Hytha at firstname.lastname@example.org.