European Union regulators may push for joint bond sales by euro-area nations to help contain the debt crisis, putting pressure on Germany to drop its opposition.
The European Commission said it may present draft legislation on euro bonds when completing a report on the feasibility of common debt sales. The commission, the EU’s regulatory arm in Brussels, earlier this year opposed such a step because of German-led objections.
“The report will, if appropriate, be accompanied by legislative proposals,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a written response to a European Parliament question. “These euro securities would aim to strengthen fiscal discipline and increase stability in the euro area through markets.” He gave no timetable for either the report or any related draft law.
The idea of jointly sold bonds by the euro area’s 17 nations remains alive because unprecedented bailouts by governments and the European Central Bank have failed to stamp out debt concerns that began in Greece almost two years ago and rattled markets in AAA rated France last week.
“The idea will not fly politically,” Daniel Gros, director of the Centre for European Policy Studies in Brussels, said by telephone. “Why should taxpayers in northern Europe pay for the liabilities of countries in the south? There are also serious economic problems with such a system.”
Supporters of euro bonds include southern nations such as Greece and Italy, federalist-leaning Luxembourg and Belgium and leading members of the 27-nation EU Parliament.
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Merkel Opposes ‘Collectivization’ in Fight Against Euro Bonds
Germany Chancellor Angela Merkel reinforced her opposition to joint euro-area bonds, saying that a “collectivization” of debt would leave the bloc’s members worse off and setting up a conflict with European Union officials.
Merkel, speaking to members of her Christian Democratic Union in the western state of Lower Saxony on Aug. 19, reiterated her view that euro bonds won’t help bring fiscal discipline to profligate euro states and that it’s a political proposal.
“Now comes the answer from the left: euro bonds -- a collectivization of debt, everything in one pot,” Merkel said in the city of Hameln. “We don’t want that.”
European Union officials said on Aug. 19 that regulators may push for joint bond sales by euro-area nations to help contain the debt crisis that started last year in Greece.
Germany, Europe’s largest economy, would face extra costs of 47 billion euros ($67.6 billion) a year through the alignment of interest rates with nations that pay more to borrow, the country’s Ifo institute said on Aug. 17.
“If the debt all goes into the one pot, then you have difficulty figuring out where it all comes from,” Merkel said. Spreading risk through the euro area would place Germany on a “slippery slope” where “in the best case” it would be on par with the European average, or, “we all get worse together.”
Instead, a European framework needs to be developed in which a regulating body must have a “right to intervene” in order to bring fiscal discipline to failing budgets, she said.
NRC Staff Directed to Set Priorities for Japan Safety Proposals
The U.S. Nuclear Regulatory Commission directed its staff to choose which task-force safety proposals should be adopted in the near term in response to the Japan crisis, resolving a dispute over how to proceed.
Chairman Gregory Jaczko had pressed the commission to act within 90 days on each of 12 recommendations the task force offered in a July report. Several commissioners led by William Ostendorff urged more time to review the proposals.
The NRC panel was charged with developing safety steps after an earthquake and tsunami in March crippled Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant, the worst nuclear accident since Chernobyl in 1986.
A majority of the five-member commission balked at Jaczko’s plan and Ostendorff said on July 28 he had “significant reservations” about swift action, echoing the positions of Commissioners William Magwood and Kristine Svinicki.
Under the plan, the NRC staff has until Sept. 9 to outline which recommendations the commission should implement “without unnecessary delay,” according to an Aug. 19 statement.
The task force also recommended requiring plant owners to have at least eight hours of backup power at reactors, provide emergency systems to spray water into pools holding spent fuel and install more reliable venting for reactors similar to those that failed in Japan in March.
U.S. Muni-Finance Advisers Face Pay-to-Play Curb in New Rule
Municipal financial advisers in the U.S. would be barred from making political donations just to win business under a proposal from the Municipal Securities Rulemaking Board.
The new rule would curb advisers from doing business with state or local governmental bodies, including pensions, within two years of giving to officials with the authority to hire them, the board said Aug 19. It has asked the U.S. Securities and Exchange Commission to approve the proposal.
Similar rules on so-called pay-to-play practices already apply to banks that underwrite bonds in the $2.9 trillion municipal securities market. The proposal is among regulations being applied to businesses that advise public officials since passage of the Dodd-Frank financial-services overhaul last year. That law expanded the board’s authority to include advisers.
“Pay-to-play activities have no place in municipal finance, and can distort and undermine fairness in the process by which government business is awarded,” the board’s executive director, Lynnette Kelly Hotchkiss, said in a statement. The proposal “will help reduce the undue influence of political contributions in the selection of municipal advisers.”
An exception lets advisers give as much as $250 in each election cycle to candidates for whom they can vote. A similar rule applies to bankers.
CFTC Trading Data Show Need for Speculation Curbs, Sanders Says
Commodity Futures Trading Commission data showing oil- market speculation by firms including Goldman Sachs Group Inc. (GS) and Morgan Stanley as prices spiked in 2008 demonstrate the need for position limits, U.S. Senator Bernie Sanders said in a statement.
Sanders, a Vermont Independent who has proposed legislation to curb speculation, released the statement Aug. 19, posting data on his website showing bullish and bearish bets by 300 firms including investment banks and hedge funds. A second document lists aggregate positions in futures and over-the- counter swaps markets for non-commercial trading firms that would have exceeded position limits or accountability levels in commodities such as oil, gold and cotton.
“This report clearly shows that in the summer of 2008 when gas prices spiked to more than $4 a gallon, Goldman Sachs, Morgan Stanley (MS), and other speculators on Wall Street dominated the crude oil futures market causing tremendous damage to the entire economy,” Sanders said in the statement.
The Dodd-Frank Act, the financial-regulation overhaul enacted last year, requires the CFTC to implement position limits. The CFTC released a proposal in January, and Chairman Gary Gensler said the agency could schedule a meeting to complete the regulation in September or October.
Moody’s, S&P Mortgage-Bond Ratings Said to Face U.S. Probe
The U.S. Justice Department is probing Moody’s Investors Service and Standard & Poor’s over ratings of mortgage-backed securities, according to three former employees who said they were interviewed by investigators.
Washington-based lawyers from the Justice Department spoke to former employees as recently as last month about whether the companies raised their grades for the complex investments in order to win business, said the former employees, who asked for anonymity because the investigation is ongoing. The inquiry is a civil matter, two of them said.
The probe is the latest of dozens of government investigations and investor lawsuits targeting Moody’s and S&P, a unit of McGraw-Hill Cos., all based in New York, over the top grades they assigned to bonds backed by subprime mortgages. Even as the Financial Crisis Inquiry Commission called them “key enablers of the financial meltdown,” the raters avoided legal liability, according to Benchmark Co.’s Edward Atorino.
The Justice Department has been contacting analysts to discuss mortgage-bond ratings since 2009, the former employees said. In May, Senator Carl Levin, the Michigan Democrat who chairs the Permanent Subcommittee on Investigations, referred the results of a probe into mortgage bonds, credit ratings and the financial crisis to the agency.
S&P, Moody’s and Fitch Ratings engaged in a “race to the bottom” to assign top grades to mortgage-backed securities at the request of the banks that paid them, Levin’s panel said in an April report. The inflated ratings helped fuel the worst financial crisis since the Great Depression, which caused $2.1 trillion in losses and writedowns at the world’s biggest financial institutions, according to data compiled by Bloomberg.
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SEC’s Document Purging Wasn’t Authorized, Archives Agency Says
The U.S. Securities and Exchange Commission didn’t have authority to dispose of investigation documents the agency had been routinely purging since 1993, the National Archives and Records Administration said.
NARA, the Washington-based agency that oversees federal record-keeping, opened an investigation last year after an SEC employee claimed the agency was illegally destroying files pertaining to so-called matters under inquiry, NARA said in an Aug. 18 statement. The SEC, which NARA said has since halted the practice, destroyed the documents without approval, according to the statement.
“While the National Archives is satisfied that the destruction has stopped, NARA remains concerned that the SEC has been slow in creating records schedules for review and approval,” NARA said. The inquiry will continue until archives authorities have approved a plan for treating MUI documents, Paul Wester, chief records officer for the U.S., said in a separate Aug. 1 letter to an SEC official.
The allegations originated with Darcy Flynn, a 13-year SEC veteran, who claimed that the SEC illegally purged more than 9,000 documents from initial probes that never became formal investigations. Senator Charles Grassley, an Iowa Republican, this week asked SEC Chairman Mary Schapiro to respond to Flynn’s claims by the end of this month.
“We maintain records of our inquiries and they are available to investigators across the agency,” John Nester, an SEC spokesman, said in a statement. “As NARA notes, it works with federal agencies on a regular basis to resolve allegations and we are committed to that process.”
Western Digital Gets EU Antitrust Complaint on Hitachi Deal
“The statement of objections sets out the European Commission’s preliminary assessment regarding the combination” and “its potential effects on competition,” Western Digital said in an Aug. 19 regulatory filing. It didn’t give details of the EU’s complaint.
The commission in May opened in-depth probes into Western Digital’s transaction as well as Seagate Technology Plc (STX)’s separate plan to buy Samsung Electronics Co.’s computer hard- disk drive operations. Seagate said Aug. 19 that it doesn’t expect to get a similar warning for its deal, which was formally notified to EU regulators for clearance a day earlier.
The two transactions would reduce the number of large manufacturers of mechanical hard-disk drives for computers to three from five, leaving Western Digital with 50 percent of the market, Seagate with 40 percent and Toshiba Corp. (6502) with around 10 percent, according to researcher IHS Inc.’s iSuppli.
The hard-drive industry “has already experienced significant consolidation and the proposed acquisitions will further reduce competition,” Joaquin Almunia, the EU’s antitrust chief, said when he announced the in-depth probes.
U.S. regulators are also examining both deals. Western Digital has said it and Hitachi received a second information request from the Federal Trade Commission in April that extended the antitrust review of the deal.
Seagate received a second request from the FTC on May 20. The company said in a filing it was “working cooperatively with the FTC as it reviews the proposed transaction.”
Hacking Detective Arrested on Leaks as Probe Nets 14th Suspect
A London police detective was arrested for leaking information about the probe into phone hacking at News Corp. (NWSA)’s News of the World tabloid, while the department also said it detained a 14th suspect in that investigation.
Dan Evans, a former reporter at the News of the World, is the 35-year-old man police said they arrested Aug. 19 on suspicion of intercepting voice mails, according to a person familiar with the situation.
The 51-year-old detective was arrested at work on Aug. 18 for misconduct related to unauthorized disclosure of information about the phone-hacking investigation, known as Operation Weeting, police said in a statement. He was suspended from duty.
“I made it very clear when I took on this investigation the need for operational and information security,” said Sue Aker, the Metropolitan Police Deputy Assistant Commissioner in charge of the police investigation into phone hacking. “It is hugely disappointing that this may not have been adhered to.”
Both men have been released on bail, the police said.
Earlier this year the Met police renewed their probe into claims journalists and investigators at News Corp.’s now defunct News of the World accessed private voice mails to get stories after information from civil lawsuits indicated the practice went beyond a reporter and private investigator jailed in 2007.
FAA Imposes Stricter Rules for Flights in Icing Conditions
Commuter-airline pilots must take additional steps to combat ice buildup on wings under rules released Aug. 19 by the U.S. Federal Aviation Administration.
Prompted by a series of incidents, the FAA will require airlines flying planes weighing less than 60,000 pounds to install sensors that detect ice and warn pilots, or tell their pilots to automatically switch on anti-icing equipment sooner than has been the case.
The FAA said in the rule, which takes effect in 60 days, that there has been a series of cases in which pilots didn’t realize ice was forming on a plane’s wings and didn’t activate anti-icing equipment. Even microscopic layers of ice crystals can destroy wings’ ability to keep a plane aloft.
“This rule is meant to prevent that from happening again by giving flightcrews a clear means of knowing when to activate the airframe ice protection system,” the FAA said.
The rule will cost airlines $12.7 million while saving them $27.2 million by preventing crashes and deaths, the agency said.
Sport Chalet Is Latest U.S. Stock Halted by Circuit Breakers
Sport Chalet Inc. (SPCHB) is the latest U.S. stock halted by circuit breakers implemented in June 2010.
The curbs were created after the 20-minute rout on May 6, 2010, erased $862 billion from the value of U.S. shares before prices rebounded. New rules proposed by exchanges on April 5, 2011, would shift the market to a limit-up/limit-down system that prevents shares from moving more than a certain amount.
Lawyer Tied to Galleon Insider Case Gets Three-Year Sentence
Jason Goldfarb, a New York attorney who pleaded guilty to passing inside information from two other lawyers to ex-Galleon Group LLC trader Zvi Goffer, was sentenced to three years in prison.
U.S. District Judge Richard Sullivan made the ruling at an Aug. 19 hearing in Manhattan federal court. Federal sentencing guidelines, which aren’t binding on judges, called for a term of 37 to 46 months. Prosecutors from the office of U.S. Attorney Preet Bharara said Goldfarb, of Brooklyn, New York, deserved a term at the high end of that range.
“Goldfarb’s crimes were particularly egregious because of his status as an attorney,” the U.S. said in court papers filed Aug. 12. “While working as an attorney obligated to protect client confidences, Goldfarb engaged in a scheme to misappropriate information protected by the attorney-client privilege in order to enrich himself.”
The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).
Ex-Smith Barney Adviser Shah Gets 38 Months for Fraud
Sanjeev Jayant Kumar Shah, a former financial adviser at Smith Barney, was sentenced to 38 months in prison for stealing $3.25 million from one client in a bid cover up a failed trade he made for another.
Shah took the money from Belize Bank to cover heavy margin calls after a calculation error on a set of complicated foreign- exchange trades for Concorde Bank resulted in losses, according to a sentencing memorandum. Shah’s lawyer, Ed Little, said he panicked, seeking to avoid admitting his mistake to Concorde Bank and to Smith Barney. Shah pleaded guilty in November.
U.S. District Judge William Pauley sentenced Shah to less than the 78-to-97 months suggested by federal sentencing guidelines, noting that Shah used $2 million of his own and his family’s funds to meet the margin calls. Pauley also agreed with Shah’s lawyer that he could easily have fled to Kenya where his family lives to avoid prosecution.
“He made a very tragic mistake and then he compounded it, time and time again, through any number of fraudulent acts, to conceal that mistake,” Pauley said.
The case is U.S. v. Shah, 10-cr-1169, U.S. District Court, Southern District of New York (Manhattan).
Mets Owners Say Madoff Trustee Lacks Proof They Knew of Fraud
A $1 billion lawsuit by the trustee liquidating Bernard Madoff’s firm against the owners of the New York Mets should be dismissed, a lawyer for the baseball team’s owners told a federal judge.
Karen Wagner, an attorney for owners Fred Wilpon and Saul Katz, argued to U.S. District Judge Jed Rakoff that the trustee, New York lawyer Irving Picard, has failed to show evidence they ignored red flags that should have alerted them to Madoff’s fraud.
Picard’s case “doesn’t plead anything amounting to willful blindness,” Wagner said in a hearing in Manhattan on Friday.
The trustee, New York lawyer Irving Picard, claims Wilpon and Katz must turn over the $300 million in profits for the benefit of Madoff victims who lost more than they gained in the fraud. Picard claims they can’t keep the $700 million principal because they “turned a blind eye” to concerns Madoff was running a fraudulent scheme.
David Sheehan, a lawyer representing Picard, argued in the hearing that he has to show only that Wilpon and Katz had information that should have prompted them to question Madoff about his operations.
Sheehan said the trustee wants the case heard by a jury if it goes to trial. Rakoff said he will rule on the request by the end of September. He scheduled a two-week trial to begin March 5 if he doesn’t dismiss the suit. Rakoff said he will permit the parties to go forward with the exchange of evidence in the case.
The case is Picard v. Katz, 11-cv-03605, U.S. District Court, Southern District of New York (Manhattan).
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Fed’s Pianalto Says Weak Growth Warrants Near-Zero Rates
Federal Reserve Bank of Cleveland President Sandra Pianalto speaks about the state of the U.S. economy and her support for the central bank’s pledge to hold interest rates near zero until mid-2013.
Pianalto, speaking at an event in Columbus, Ohio, also discusses community banking in the U.S. and the housing and labor markets. To listen to the report, click here.
Comings and Goings
Netherlands Names De Jong to Central Bank’s Supervisory Board
Dutch Finance Minister Jan Kees de Jager named Andre de Jong, a former finance ministry official, to the central bank’s supervisory board. The ministry commented Aug. 19 in an e-mailed statement.
To contact the editor responsible for this report: Andrew Dunn at email@example.com.