With no plan from Congress or the Obama administration to shutter Fannie Mae and Freddie Mac, the companies’ regulator told Congress yesterday it will expand its oversight with a strategic plan to develop new systems and standards for home loans.
The companies, which own or guarantee most of the nation’s mortgages, exist in an extended policy limbo that poses new risks to taxpayers and the housing market, said Edward J. DeMarco, acting director of the Federal Housing Finance Agency. The mandate to protect taxpayers must be balanced with the need to invest in staff and infrastructure, he said.
Conservatorship, an emergency, short-term fix established by the Housing and Economic Recovery Act, has evolved into a long-term government operation. In a strategic plan sent to Congress yesterday, DeMarco said he will begin building a single system for securitizing home loans and set standards for how those loans are managed.
Washington lawmakers began last year with sweeping plans to wind down Fannie Mae and Freddie Mac. Treasury Secretary Timothy F. Geithner offered three options for reducing the government’s footprint and has promised a more detailed plan in the coming months. The House and Senate so far have failed to reach consensus on any legislation.
Fannie Mae and Freddie Mac have survived on taxpayer aid since September 2008, when catastrophic losses from failing home loans forced them into government conservatorship. Since then, the companies have drawn more than $180 billion from a U.S. Treasury Department lifeline.
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EU Ministers Adopt Curbs on Naked CDSs in Short-Selling Law
European Union finance ministers adopted a short-selling law that includes an optional ban on naked credit-default swaps tied to sovereign debt.
The legislation, which would also curb so-called naked short-selling of stocks and government bonds, was approved at a meeting in Brussels today. The decision marks the final stage in the adoption of the law, which was also approved in November by lawmakers in the European Parliament.
Investors buy CDSs as insurance to protect themselves from losses if a bond issuer defaults. A sovereign CDS trade becomes naked when an investor buys the swap without being at risk of suffering such losses.
The short-selling and naked-CDS curbs will come into effect on Nov. 1, according to a copy of the law published on the EU’s website.
Banker Pay on Agenda for Barnier Meetings With U.S. Regulators
Michel Barnier, the European Union’s financial services chief, will discuss banker bonuses with U.S. regulators during a visit to the country this week.
The talks may also cover the implementation of bank capital rules agreed to by the Basel Committee on Banking Supervision, and regulation of financial derivatives, the European Commission said in an e-mailed statement.
The Commission has said that it’s weighing tougher rules on banker pay in response to awards which Barnier has said lack “all reason, common sense and morality.”
High-Frequency Trading No Threat to Stability, Sweden’s FSA Says
High-frequency trading, under scrutiny from securities regulators globally, has had a minimal negative impact on the Swedish market and poses little threat to stability, the nation’s financial services watchdog said.
“The investigation shows that the negative effects related to high frequency and algorithmic trading are limited,” the Swedish Financial Supervisory Authority said yesterday. “It is apparent that trading has undergone a transformation, and to some extent a deterioration, but most parties believe that this is due to multiple factors and not just faster, more computerized trading techniques.”
The role of high-frequency firms in periods of market swings has come under scrutiny since the May 6, 2010, crash that briefly erased $862 billion from the value of U.S. shares. Traders and other professional investors were said to have withdrawn bids as the selloff worsened, according to a September 2010 report from U.S agencies. Regulators and exchanges later installed curbs to limit the disruption to markets.
In Europe, Financial Services Commissioner Michel Barnier last year proposed rules covering high-frequency trading as part of a wider overhaul of European Union market regulations, known as Mifid. A U.K. government study in September concluded that computerized trading isn’t spurring broad increases in market volatility even though it sometimes creates “instability” that may lead to crashes.
Still, the Swedish regulator yesterday said it will remain vigilant because investors said market abuse has become harder to spot and more widespread. Traders and investors “must focus on expanding their systems that monitor trading in real time and improving co-ordination between themselves to identify any market abuse,” Sweden’s FSA said.
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Cordray Announces U.S. Inquiry Into Bank Overdraft Policies
The U.S. Consumer Financial Protection Bureau is starting an inquiry into bank checking account overdraft policies, director Richard Cordray announced today.
Banks and credit unions were set to charge customers about $38 billion from overdraft fees in 2011, according to a Sept. 15 estimate by Moebs Services, a Lake Bluff, Illinois-based economic research firm. Overdrafts occur when consumers spend or withdraw more money than is available in their checking accounts. Banks typically charge a fee when balances go below zero, and treat the amount of the overdraft as an interest-bearing loan.
The bureau will request data from banks, and input from the public on how the ordering of transactions affects how much consumers pay, the agency said in the statement. Banks have sometimes debited customers’ accounts not in the order of the transactions, but with the highest amount first, so as to overdraw the account as quickly as possible and incur fees and interest.
The agency will also examine the quality of information consumers receive on overdraft programs, bank marketing campaigns on overdrafts, and how young and low-income persons are affected by overdrafts, the bureau said. The bureau is seeking feedback on ways to make overdraft fees easier to understand on account statements.
In the past, other regulators including the Federal Reserve and the Federal Deposit Insurance Corporation have imposed rules limiting the application of overdraft programs.
U.K. Insider-Trading Suspects Said to Face FSA Charging Decision
Seven people arrested by Britain’s financial regulator as part of its highest-profile insider-trading investigation may learn next month whether they’ll be charged, two people familiar with the probe said.
The suspects were arrested almost two years ago by Britain’s Financial Services Authority and included employees who worked for Deutsche Bank AG (DBK), Exane BNP Paribas and Moore Capital Management LLC. The suspects must report to police stations in London on March 26 to discover if they’re being prosecuted, said the people, who declined to be identified because they weren’t authorized to discuss the case.
The investigation is codenamed Tabernula, Latin for little tavern, and is probing whether the men engaged in the front-running of block trades. Investigators are seeking to determine if the suspects profited by using knowledge of upcoming securities sales, generally on behalf of a corporate client.
Not all of the suspects will necessarily be charged next month and some final decisions may be delayed, according to one of the people.
The FSA arrested an eighth suspect last year, and last week a ninth -- a trader at insurer Legal & General Group Plc (LGEN)’s investment-management arm.
Ex-Mizuho Credit Executive Rekeda May Face SEC Lawsuit Over CDO
U.S. regulators, as part of a broad probe of how Wall Street firms bundled mortgage-linked financial products as the housing crisis worsened, notified a former Mizuho Financial Group Inc. (8411) executive he may be sued for his role in structuring the securities.
Alexander Rekeda, who was previously head of structured credit in the Americas at Mizuho, received a so-called Wells notice in October informing him that Securities and Exchange Commission staff intends to recommend an enforcement action against him for allegedly making misrepresentations about a collateralized debt obligation, according to his public broker filings.
Rekeda was part of a group of about 10 traders who left Calyon, the investment-banking unit of Credit Agricole SA (ACA), in 2006 to join Mizuho, helping the Japanese lender ramp up its activity in U.S. mortgage-backed securities just as the housing market began its steep decline. As defaults on subprime home loans climbed, Mizuho struggled to find buyers for its CDOs and, as their values plummeted, had to absorb billions of dollars in losses.
Over the past three years, the SEC has targeted a range of firms and individuals for their role in creating and selling products linked to risky mortgages.
An e-mail to Masako Shiono, a spokesman for Mizuho Financial Group Inc., wasn’t immediately answered. Steven Kobre, a lawyer representing Rekeda, declined to comment.
The Wells notice was reported earlier by the Wall Street Journal.
Ex-Credit Agricole Banker Uses Whistle-Blower Rule in Suit
A senior investment banker at Credit Agricole SA (CRARY) sued the French lender for millions of pounds, claiming he missed out on bonuses and was dismissed for reporting colleagues under whistle-blowing rules.
Edward Willems, former deputy head of fixed income markets at Credit Agricole’s corporate and investment banking unit, was “subjected to detriment as a result of making protected disclosure,” his lawyer Tom Croxford told a London employment tribunal yesterday.
Willems’ bonuses in 2010 and 2011 were “inappropriately low” because of the whistle blowing, Croxford said, without describing the conduct he reported. Willems “is seeking millions of pounds,” Credit Agricole’s lawyer Nicholas Randall said at the hearing yesterday.
While most wrongful dismissal damages are capped at about 72,000 pounds ($114,000), employment tribunals can award unlimited amounts in whistle-blower cases. Employees are protected by U.K. law from being fired or punished if they reveal malpractice in the public interest.
Most cases settle before trial, said Samantha Mangwana, an employment lawyer at Russell Jones & Walker who isn’t involved in the case.
Meriel Schindler, one of Willems’ lawyers, didn’t respond to an e-mail requesting comment. An e-mail to Credit Agricole’s press office wasn’t immediately answered.
U.S. Seeks to Drop First Foreign-Bribery Sting Case
The U.S. asked a court to dismiss the biggest prosecution of individuals accused of foreign bribery after two trials in the case ended with acquittals and hung juries.
The U.S. Justice Department yesterday requested that a federal judge in Washington dismiss the indictment, which originally accused 22 security-industry officials of planning to make payments to a federal agent posing as a representative of the West African country of Gabon to secure a stake in a fake $15 million weapons deal.
It was the first time the government used a sting operation involving undercover techniques to charge violations of the Foreign Corrupt Practices Act.
In its filing, the government said it “carefully considered” the outcomes of the first two trials of 10 defendants and the impact of rulings in those cases on future trials of the remaining defendants, as well as the resources needed to continue with “another four or more” trials.
“Continued prosecution of this case is not warranted under the circumstances,” according to the filing.
The government asked that the case be dismissed with prejudice, meaning it couldn’t try to charge the defendants again for the same crimes.
Laura Sweeney, a Justice Department spokeswoman, declined to comment beyond yesterday’s filing.
The case is U.S. v. Goncalves, 09-cr-00335, U.S. District Court, District of Columbia (Washington).
Keydata Founder Seeks Probe Ban on FSA Staff Who Saw E-Mails
Keydata Investment Services Ltd.’s founder told a judge the Financial Services Authority should exclude from its probe of the company anyone who saw protected attorney-client e-mails improperly obtained by the U.K. regulator.
The FSA, which lost a ruling over the e-mails in October, should also hand over communications with other agencies to which it sent the material, including the Serious Fraud Office and the Insolvency Service in Britain and financial watchdogs in Luxembourg and the Cayman Islands, lawyers for Stewart Ford said at a hearing in London yesterday.
Keydata administered 2.8 billion pounds ($4.42 billion) of assets when the FSA asked a court to place it into administration in 2009. The watchdog had started investigating the company two years earlier, examining whether it targeted investors with potentially misleading advertisements, and for tax irregularities.
The e-mails sent by Ford and other directors to legal advisers were covered by the attorney-client privilege and improperly obtained by the FSA, Judge Ian Burnett ruled in October. The so-called judicial review prompted the regulator to suspend its four-year-old investigation into Keydata.
The FSA’s lawyer declined to comment during a break in the hearing. Andrea Kinnear, a spokeswoman for the regulator, didn’t immediately have a comment when reached by phone.
The privileged material included a lawyer’s advice to Ford on how to deal with the FSA and an instruction that the regulator should never see the communications, said Hodge Malek, one of Ford’s lawyers.
McNerney Says Export-Import Bank Reauthorization Vital for U.S.
Boeing Co. (BA) Chief Executive Officer James McNerney urged Congress to reauthorize the U.S. Export-Import Bank and raise the limit for its lending to aid domestic companies.
Loans made by the bank helped create 290,000 direct and indirect jobs at more than 3,600 U.S. companies, McNerney, also Boeing’s chairman, said yesterday during a conference at the State Department in Washington. The bank’s current authorization expires May 31.
Barofsky Says Volcker Rule Good for Financial Stability
William Cohan, author of “Money and Power: How Goldman Sachs Came to Rule the World” and a Bloomberg View columnist, and Neil Barofsky, former special inspector for the U.S. Treasury’s Troubled Asset Relief Program and a Bloomberg Television contributing editor, talked about the proposed Volcker rule.
Former Federal Reserve chairman Paul Volcker met in person with U.S. Securities and Exchange Commission Chairman Mary Schapiro last week to discuss the proposed ban on proprietary trading named for him, according to a person familiar with the meeting. Cohan, speaking with Erik Schatzker on Bloomberg Television’s “InsideTrack,” also discussed the departure of Lucas van Praag as Goldman Sachs Group Inc. (GS)’s chief spokesman.
(Cohan is a Bloomberg View columnist. The opinions expressed are his own.)
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Stumm Says Currency Markets Should Be More Transparent
Michael Stumm, president and chief executive officer of Oanda Corp., discussed currency markets and explained why he thinks more transparency in the Forex market is called for and how to accomplish it.
He talked with Andrea Catherwood on Bloomberg Television’s “Last Word.”
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BOE’s Bean Says Greek Deal Doesn’t Eliminate Crisis Risks
Bank of England Deputy Governor Charlie Bean said agreement on a second bailout for Greece may not be enough to end the debt crisis and countries in the euro-area periphery must reduce debt and improve competitiveness.
While the agreement “between the Greek government and the euro-area authorities is certainly welcome, there still remains a possibility that events could unfold in a disorderly and damaging fashion at some stage in the future,” Bean said in a speech yesterday in Glasgow, Scotland. The euro crisis “represents the biggest downside risk” to the U.K.
The Bank of England expanded its bond-purchase target by 50 billion pounds ($79 billion) to 325 billion pounds this month in response to a recovery weakened by a squeeze on consumers and Europe’s debt turmoil. Bean said that while inflation is easing and some recent business surveys have been encouraging, growth will be “sluggish” in the first half of 2012 and there’s “added incentive” to cement the recovery.
The deputy governor said a “disorderly outcome” in the euro area would hit the U.K.’s export and financial links, reduce confidence and lead companies and consumers to “hunker down and postpone spending.” He also said that Greece isn’t the only country in the currency zone facing challenges.
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