EU Downgrades, EBA Stress Tests, Dutch Antitrust: Compliance

Standard & Poor’s, rebuked by Warren Buffett in August after downgrading the U.S. over government gridlock, is again injecting itself into the political process, just as European leaders are poised to meet for a summit aimed at ending the region’s sovereign-debt crisis.

The ratings firm put Germany, France and 13 other euro-area nations on review for a downgrade, saying “continuing disagreements among European policy makers on how to tackle” the region’s debt crisis risk damaging their financial stability. The move came four months after S&P cut the U.S. to AA+, saying “extremely difficult” political discussions over how to reduce America’s more than $1 trillion budget deficit tainted the credit quality of the world’s largest economy.

Bondholders questioned the timing of S&P’s move, which occurred Dec. 5, with European Union leaders planning to meet Dec. 8-9 in Brussels to end a crisis that led to bailouts of Greece, Ireland and Portugal, and now threatens to engulf Italy. German Chancellor Angela Merkel and French President Nicolas Sarkozy had presented a plan earlier in the day to rewrite the EU’s governing treaty to allow tighter economic cooperation.

Grades may be lowered by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and as many as two steps for the other governments if the summit results don’t satisfy S&P’s criteria, the firm said. More than $8.1 trillion of government debt would be affected if S&P does downgrade all the nations, according to data compiled by Bloomberg. Germany and France are rated AAA.

Moritz Kraemer, S&P’s head of European sovereign ratings, said yesterday in a conference call with reporters that the Euro-zone crisis has reached a level of “systemic stresses,” and has become “a crisis of euro zone governance.” Kraemer denied that the company was trying to influence politics.

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Compliance Policy

EBA May Issue Stress Test Results Calling for Capital Increase

Less than five months after conducting stress tests that found banks needed to raise 2.5 billion euros ($3.4 billion), the European Banking Authority may tell lenders that they need 40 times that amount to defend against losses on sovereign debt.

The regulator may release updated figures on how much capital lenders should raise to absorb losses from euro-area bonds as early as this week, three people familiar with the matter said. The London-based watchdog’s stress tests in July were criticized for failing to include writedowns on sovereign debt held to maturity.

European leaders are demanding the region’s banks increase capital after financial firms agreed to accept losses on Greek government bonds. The EBA estimated in October that the region’s financial institutions need 106 billion euros to reach a goal of holding 9 percent of so-called core Tier 1 capital by mid-2012, after marking their sovereign debt to market prices.

Seventy banks were tested in October with data broken down by country. Spanish banks needed 26.2 billion euros and Italian banks 14.8 billion euros in core tier 1 capital, taking into account booking sovereign debt at market prices, the EBA said.

A publication date for the bank capital data will be agreed to at a meeting today of the EBA’s board of supervisors, Franca Congiu, a spokeswoman for the authority said in an e-mail. The figures on banks’ capital needs will be signed off at the meeting, she said.

The timing of the release is complicated by holidays in some European nations and the Dec. 8-9 European Union summit in Brussels and could be delayed until next week.

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Euro-Area Rescue Fund to Start Short-Term Debt Sales This Month

The euro area’s rescue fund plans to begin selling short- term debt by the end of the month to meet its expanded role in tackling the region’s debt crisis.

The 440 billion-euro ($589 billion) European Financial Stability Facility announced a funding program that will focus on three-, six- and 12-month bills. The first auction is expected to take place before year-end, the EFSF said in an e- mailed statement today without elaborating.

The Luxembourg-based EFSF gained the authority in October to buy sovereign bonds on the primary and secondary markets, offer credit lines to governments and grant aid to banks as the region’s debt troubles spread. The EFSF’s sole role until then had been to sell bonds to finance rescue loans.

The euro area is beefing up the EFSF in a bid to prevent Spain and Italy from being engulfed by debt troubles that forced Greece to seek an initial rescue in April 2010, pushed Ireland and Portugal into aid programs over the ensuing year and led to a second Greek bailout in late October. The larger EFSF role may also help to relieve the European Central Bank of secondary- market bond purchases undertaken during the past 19 months to counter increases in borrowing costs.

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Insider-Trading Rule Needed to Restore Trust, U.S. Lawmakers Say

New restrictions on insider-trading by U.S. lawmakers are needed to help lift waning public trust in Congress, said Democrats and Republicans on the House Financial Services Committee.

There’s a public perception that lawmakers are benefiting from non-public information whether they are or not, said Representative Tim Walz, a Minnesota Democrat sponsoring legislation to explicitly ban such trading. He added that it comes to a matter of “restoring faith.”

Previous efforts to pass restrictions haven’t advanced in Congress. The issue re-emerged after a report last month by the CBS News program “60 Minutes,” which said members of Congress bought stock in companies during debates on legislation that might affect the businesses.

None of the questioned investments was illegal, the report said. The CBS report sparked interest by lawmakers in legislation first introduced in 2006. The measure, re-introduced this year by Walz, would label as securities fraud any trading on legislative information by lawmakers or their staff members. The bill would require any trade of more than $1,000 to be reported within 90 days.

The Senate’s Homeland Security Committee is examining bipartisan proposals to restrict certain trading by lawmakers and their aides, who often have access to nonpublic information as part of their legislative and oversight duties.

The chairmen of the House and Senate panels said they would move ahead with the measures and bring them to a committee vote.

U.S. Regulators Face Grilling on Volcker Rule, Dodd-Frank

U.S. lawmakers questioned regulators implementing the Dodd- Frank Act yesterday about their progress on rules aimed at preventing a repeat of the 2008 credit crisis, including a ban on proprietary trading by Wall Street firms.

Regulators including Commodity Futures Trading Commission Chairman Gary Gensler, Securities and Exchange Commission Chairman Mary Schapiro, Federal Reserve Governor Daniel Tarullo, Deputy Treasury Secretary Neal Wolin, Martin Gruenberg, acting chairman of the Federal Deposit Insurance Corp., and John Walsh, acting comptroller of the currency, testified before the Senate Banking Committee in Washington about implementation of legislation overhauling U.S. financial regulation.

The Treasury Department, Federal Reserve and other agencies have spent more than a year drafting rules required by the law, from new oversight for the $708 trillion global swaps market to tools for winding down failing financial firms and enhanced supervision of the largest and most complex companies.

Regulators are working on hundreds of rules required by Dodd-Frank, Congress’s response to the credit market collapse that forced lawmakers to approve bailouts for financial firms. Senator Tim Johnson, the South Dakota Democrat who leads the Banking Committee, called for a “timely resolution” to outstanding rulemakings such as the Volcker rule, which would ban proprietary trading by banks that benefit from deposit insurance and Fed borrowing privileges.

Regulators have sought increased resources from Congress, which has been caught between House Republicans working to cut spending and Senate Democrats looking to protect the law.

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Compliance Action

Corzine Subpoena Approved by Senate Committee; House Sets Date

The U.S. Senate Agriculture Committee voted to subpoena Jon S. Corzine, former chairman and chief executive officer of MF Global Holdings Ltd., for a Dec. 13 hearing on the collapse of the New York-based broker.

Senate lawmakers voted to issue the subpoena at a meeting in Washington yesterday. The House Agriculture Committee last week voted to subpoena Corzine for a hearing tomorrow.

Jill E. Sommers, commissioner at the Commodity Futures Trading Commission, James Kobak, lead counsel for the trustee overseeing the brokerage’s liquidation, and Terrence Duffy, executive chairman of CME Group Inc. (CME) are also scheduled to testify at the hearing tomorrow of the House Agriculture Committee.

William Brodsky, chairman and chief executive officer of CBOE Holdings Inc. (CBOE), Dan Roth, president and chief executive officer of the National Futures Association, and Gerry Corcoran, chairman and chief executive officer of R.J. O’Brien and Associates, are also on the schedule.

The sudden collapse of MF Global Holdings Ltd. will require lawmakers and regulators to rebuild farmers’ trust in commodity markets, U.S. Senator Pat Roberts of Kansas said.

Roberts, the top Republican on the Senate Agriculture Committee, said yesterday in a speech at a Washington conference organized by Farm Journal that farmers and ranchers will have to be convinced “that our financial markets are a viable risk- management tool.”

Roberts said MF Global is the “number-one” issue farmers have been asking him about in recent weeks.

MF Global sought bankruptcy protection on Oct. 31 after making wrong-way bets on European sovereign debt. Congress and federal regulators including the CFTC and SEC are investigating as much as $1.2 billion in missing customer funds.

Dutch Antitrust Investigators Visit KPN, T-Mobile, Vodafone

Royal KPN NV (KPN) is among mobile-phone operators in the Netherlands visited yesterday by the NMa competition authority as part of an investigation into possible antitrust violations.

KPN, the largest Dutch phone company, said in a statement that its headquarters were raided yesterday by the NMa as part of a probe into “concerted practice with regard to mobile telecommunications offerings on the Dutch consumer market,” and “division of independent sales channels.” It said five KPN employees are being questioned and the company is cooperating fully.

T-Mobile is also cooperating fully with the investigation, spokesman Michael Vos said via phone, confirming a visit from the NMa this morning. “We are confident in the result,” he said, while declining to elaborate on the probe.

Vodafone (VOD) Group Plc confirmed in a statement that it had been visited by the competition authority.

In October, the regulator lowered fines imposed on KPN, Deutsche Telekom AG (DTE)’s T-Mobile unit and Vodafone in 2002 for colluding on subsidies that they gave retailers on mobile-phone handsets, resulting in more expensive handsets for consumers.

Paul Trienekens, an NMa spokesman, declined to comment on the details of the investigation.

Whirlpool, Panasonic Fined in $216 Million Compressor Cartel

Whirlpool Corp. (WHR) and Panasonic Corp. (6752) are among four companies that agreed to pay European Union antitrust fines totaling 161 million euros ($216 million) for fixing the price of refrigerator compressors.

Whirlpool and a unit were fined a total of 54.5 million euros and Panasonic will pay 7.7 million euros after they settled a European Commission cartel probe into agreements that set prices for compressors used in refrigerators, air conditioners and water fountains.

EU investigators raided producers of refrigerator compressors in 2009. Whirlpool set aside as much as $306 million to cover a possible EU fine, it said in a July regulatory filing.

Nordborg, Denmark-based Danfoss A/S agreed to pay 90 million euros, the largest fine, and Appliance Components Co. SpA of Italy must pay 9 million euros for coordinating prices and market shares from 2004 to 2007.

Whirlpool, Danfoss and ACC declined to immediately comment. Panasonic didn’t immediately respond to calls and e-mails.

Tecumseh Products Co. (TECUA) of Ann Arbor, Michigan, wasn’t fined because it told the EU about the cartel. Panasonic wasn’t involved in all aspects of the cartel and quit it in 2006, regulators said. One of the companies had its fine reduced because of financial difficulties, the EU said, without naming the business.

Courts

Accused Inside Trader ‘Shocked’ Hedge-Fund Friend Misled Him

Accused insider trader Rupinder Sidhu told U.K. authorities he was shocked to discover a friend who worked as a hedge-fund trader had passed him confidential information.

Sidhu, a management consultant from Osterley, West London, thought share tips from AKO Capital LLP trader Anjam Ahmad were based on “research, knowledge and expertise” not inside information, according to a statement he gave to the Financial Services Authority that was read out in court yesterday.

“I was shocked to discover what Ahmad had been doing at his work,” Sidhu wrote. “I have not knowingly been involved in any insider-dealing activity.”

Ahmad told Sidhu when his firm was about to buy or sell a stock so Sidhu could benefit from the effect of those trades on its share price, Michael Brompton, a lawyer for the FSA said last week. Sidhu, 40, made about 500,000 pounds ($780,500) from spread bets on companies including Julius Baer Group Ltd., Swatch Group AG (UHR) and Michael Page International Plc (MPI) between June and August 2009, according to prosecutors.

Sidhu, who pleaded not guilty to 23 counts of insider trading and one money laundering charge in April, is due to be cross-examined today. Insider trading carries a maximum sentence of seven years.

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SEC Freezes Assets of Chinese Traders Over Inside Trading Claims

The U.S. Securities and Exchange Commission won a court order to freeze assets of four Chinese citizens accused of using non-public information to trade ahead of Pearson Plc (PSON)’s announcement of plans to acquire Beijing-based Global Education & Technology Group Ltd. (GEDU)

Sha Chen, Song Li, Lili Wang and Zhi Yao bought American depository shares of Global Education in the two weeks before London-based Pearson, owner of the Financial Times, said on Nov. 21 that it will pay $294 million to acquire all of the Chinese firm’s outstanding stock, the SEC said in a complaint filed at U.S. District Court in Illinois.

Wang may have received a tip about the acquisition from Global Education’s co-founder and chairman, who possibly tipped others, according to the SEC. Wang transferred funds into her brokerage account and bought 28,000 Global Education shares, the SEC said. All Know Holdings Limited and other unknown purchasers were also named in the SEC complaint.

Some of the defendants had already tried to liquidate or transfer their illicit profits, which totaled $2.7 million, the SEC said in a statement yesterday. In some cases, stock purchases equaled or exceeded the stated annual income of the traders, the agency said.

There was no known defense counsel for the defendants, the SEC said. A phone call to Global Education in Beijing outside normal business hours wasn’t answered.

Interviews/Speeches

Kaufman Says Comments on Efforts to Reform the Banking Industry

Henry Kaufman, president of Henry Kaufman & Co. and former chief economist at Salomon Brothers, talked about the Federal Reserve’s balance sheet and flaws in the U.S. banking industry, why the Dodd-Frank law is “verbose,” and conflicts of interest in too-big-to-fail institutions.

Kaufman spoke with Tom Keene on Bloomberg Television’s “Surveillance Midday.”

For the video, click here.

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.

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