The London interbank offered rate, the benchmark for $360 trillion of securities, may not survive allegations of being corrupted unless it’s based on transactions among banks rather than guesswork about the cost of money.
The British Bankers’ Association, the lobby group that has overseen Libor for 26 years, is under pressure to find an alternative way to calculate the benchmark, or cede control of it. Regulators from Canada to Japan are probing whether banks lied to hide their true cost of borrowing and traders colluded to rig the benchmark, the basis for interest rates on securities from mortgages to derivatives.
Libor, a gauge of how much it costs banks to borrow from one another, is so deeply embedded in the financial system it can’t be replaced without potentially voiding existing contracts, academics said. The BBA may instead overhaul Libor by making banks base their submissions on actual trades, open submissions to independent verification and increase the number of firms that set the rate, investors said.
The BBA is reviewing potential changes to the benchmark and met regulators and bank executives last week. The rate is set through a daily survey of firms conducted on behalf of the BBA by Thomson Reuters Corp. (TRI) in which banks are asked how much it would cost them to borrow from one another for 15 different periods, from overnight to one year.
Because banks have to submit a rate when no market exists, and their estimates aren’t subject to outside verification, the benchmark is vulnerable to manipulation, investors said. Some firms are already turning away from Libor and using alternative rates to price trades.
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Separately, the European Banking Federation, which represents lenders in the region, will start calculating a dollar interest rate for the first time next month as the accuracy of Libor is questioned.
The rate will initially be set through a daily survey of 20 banks, increasing to 30 firms by the end of the year, said Cedric Quemener, a manager at Euribor-EBF, the division that will be responsible for the new lending rate. The Brussels-based group already oversees the Euro interbank offered rate, or Euribor, the level at which European banks say a “prime bank” could borrow for different periods in euros.
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Job-Creation Bill Seen Eviscerating U.S. Shareholder Protections
U.S. legislation that would roll back securities disclosure and governance rules in the name of job creation is being attacked by consumer advocates and former regulators as an evisceration of investor protections in place since the 1930s.
The package of bills awaiting Senate action after receiving broad bipartisan support in a House vote last week would destroy safeguards dating as far back as the laws that created the Securities and Exchange Commission, according to Lynn E. Turner, a former SEC chief accountant.
The Republican-led House, in a show of election-year comity, voted 390-23 to approve the measures. Among other things, the measures would undo a ban on closely held firms soliciting investments, increase the number of investors such firms can have and exempt newly public companies with less than $1 billion in revenue from some reporting requirements of the Dodd-Frank and Sarbanes-Oxley laws. President Barack Obama has backed the legislation as a way to help spur job creation, and Senate Democrats have said they will move quickly on their own version.
Supporters including the U.S. Chamber of Commerce, and New York-based exchange operators Nasdaq OMX Group Inc. (NDAQ) and NYSE Euronext (NYX) say the bill targets rules that have impeded economic growth by making it harder for companies to raise capital or conduct initial public offerings. That view has won support from Democrats including Senator Charles Schumer of New York.
Opponents, including former SEC Chairman Arthur Levitt and Barbara Roper, director of investor protection for the Consumer Federation of America, say the approach is wrong-headed because it will hurt investors without achieving the stated goal.
SEC Chairman Mary Schapiro “believes that portions of the legislation either unnecessarily eliminate important investor protections or are not balanced with sufficient safeguards,” John Nester, an agency spokesman, said in a statement.
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EU Ministers Seek More Study of Financial-Transaction Tax
European Union finance ministers remain divided on a financial-transaction tax, with France, one of the main backers of the levy, saying it will allow more time to reach an accord.
The ministers reached no decisions during debate in Brussels yesterday. They called for more study of how much tax banks pay and pledged to reconsider the issue later this year along with possible alternatives to the EU’s existing proposal.
Danish Economy Minister Margrethe Vestager said in an interview after the meeting that the plan was to explore the EU proposal, see what countries already have in place and investigate other options like a financial-activity tax.
The European Commission, the EU’s regulatory arm, has proposed a wide-ranging tax on trading of stocks, bonds, derivatives and other financial contracts. The commission says the tax could raise 57 billion euros ($75 billion) annually if implemented throughout the region, while also discouraging transactions like high-frequency trading that it considers more risky for the financial system.
The Brussels-based commission and Denmark, current holder of the EU’s rotating presidency, have urged more technical work to find a widely accepted compromise.
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EU Clears U.K. Financial Support Programs for Small Companies
The European Union approved two U.K. financial support programs for small businesses, saying they are compatible with the region’s rules on state aid.
The measures, the so-called National Loan Guarantee Scheme, and the Business Finance Partnership, won’t give unfair advantages to participating companies or banks, the European Commission said in an e-mailed statement.
EU Approves Second Greek Bailout, Freeing 39.4 Billion Euros
Euro-area member states gave formal approval to a second Greek bailout program, freeing a first installment of 39.4 billion euros ($51.5 billion) of aid.
The European Financial Stability Facility, the euro region’s temporary rescue fund, has been authorized to disburse the first payment in several tranches, Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of 17 euro-area finance ministers, said in a statement today.
The 130 billion-euro package received political approval earlier this week from the euro ministers at a meeting in Brussels. The International Monetary Fund’s board is set to vote on its participation tomorrow in Washington. IMF Managing Director Christine Lagarde has proposed a 28 billion-euro contribution, the IMF said on March 12.
The agreement caps months of negotiations between Greece, the IMF and euro-area authorities over the successor to an initial 2010 bailout that failed to halt the debt crisis. To win the new aid package, Greece had to sign on to deep budget cuts and complete the world’s largest-ever sovereign-debt restructuring.
Greece is now in line to receive more than 100 billion euros in the next three years, starting with payments of 5.9 billion euros in March, 3.3 billion euros in April and 5.3 billion euros in May, according to EFSF Chief Executive Officer Klaus Regling.
The EFSF expects to disburse 48 billion euros on a non-cash basis for Greece’s bank-recapitalization efforts.
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Stress Tests Show How Fed Pushed Banks to Bolster Balance Sheets
The resilience of the largest U.S. financial firms when tested against a recession more severe than the last one shows regulators have succeeded in pushing banks to build fortress- like balance sheets.
The Fed yesterday said 15 of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock. Those results were due to scrutiny by the Fed on capital payouts during the past three years, the central bank said.
Regulators, empowered by the Dodd-Frank Act and goaded by criticism for failing to spot the subprime mortgage debacle, have redesigned their approach to bank supervision. They now place greater emphasis on systemic risk as they seek to avoid a repeat of the crisis that resulted in a $245 billion taxpayer bailout of banks through the Troubled Asset Relief Program.
JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) joined banks raising dividends and authorizing share repurchases after passing the stress tests. Citigroup Inc. (C), the lender that took the most government aid during the financial crisis, said it will resubmit its capital plan to regulators after failing to meet some minimum standards in the tests. Citigroup has repaid $45 billion in TARP money.
SunTrust Banks Inc., (STI) Ally Financial Inc. (ALLY) and MetLife Inc. (MET) fell short by at least one measure under the central bank’s worst-case scenario. Ally intends to resubmit its plan, the company said in a statement.
The Fed tested the banks to ensure that they have adequate capital to continue lending in a downturn.
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Japan’s FSA Received Status Reports From All 265 Asset Managers
Japan’s Financial Services Agency received reports from all 265 of the asset-management firms that were asked to provide information on their business by today following the suspension of AIJ Investment Advisors Co., an agency official said.
The FSA will analyze the responses and swiftly consider any further investigation, the official told reporters on condition of anonymity in accordance with the FSA’s policy.
The reports due today must contain details of a firm’s operations, contracts and amounts, and any past complaints from customers. The reports will be used to create a shortlist for further investigation, a senior FSA official told reporters last week on condition of anonymity.
Goldman Sachs to Pay $7 Million Over CFTC Trading-Account Claims
Goldman Sachs Group Inc. (GS) agreed to pay $7 million to resolve regulatory claims it failed to properly supervise commodities trading accounts, the U.S. Commodity Futures Trading Commission said.
The regulator accused the New York-based firm’s Goldman Sachs Execution & Clearing LP unit of failing to supervise subaccounts managed from 2007 to 2009 by a broker-dealer that had engaged in “questionable conduct,” the CFTC said in a statement yesterday. Goldman Sachs agreed to disgorge $1.5 million in fees and commissions it had collected from the broker and pay a $5.5 million civil penalty, the agency said.
In its first-quarter financial disclosures last year, Goldman Sachs disclosed its cooperation with an ongoing CFTC investigation into supervision of a client broker-dealer.
Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment on the settlement. The company resolved the claims without admitting or denying wrongdoing, the CFTC said.
Siemens, Areva Offer Antitrust Remedies in Bid to End Probe
Areva SA (CEI) and Siemens AG (SIE) have offered antitrust remedies to the European Commission in a bid to end a competition probe into contractual clauses they concluded in a nuclear-reactor joint venture.
The companies proposed changes to “non-compete and confidentiality obligations” to curb Siemens’s exploitation of Areva technology, according to a statement published on the commission’s website. The commission said today it would seek views on the measures in a so-called market test to see if they would solve competition concerns.
The commission opened an investigation in 2010 into whether contractual clauses between Areva and Siemens may impede competition for certain products in the civil nuclear technology industry.
The remedies that have been offered won’t result in any payments by Siemens or financial obligations, said Alfons Benzinger, a spokesman for Europe’s biggest engineering company.
Siemens decided to end its involvement in nuclear technology after the Fukushima disaster in Japan last year, Benzinger said, meaning concessions offered to the commission in this field wouldn’t have an effect on the company’s business.
Areva, based in Paris, declined to immediately comment.
Credit Suisse Banker Fined Over Bond Offering ‘Charades’
A Credit Suisse Group AG (CSGN) banker in London, Nicholas Kyprios, was fined 210,000 pounds ($330,000) for disclosing confidential client information to a fund manager in what regulators called a “guessing game.”
Kyprios, head of European credit sales at the bank, indicated to the manager that the bank’s client Liberty Global Inc. (LBTYA) was close to issuing bonds to finance its acquisition of German cable company UnityMedia GmbH, after the manager told Kyprios he didn’t want information he couldn’t act on, the Financial Services Authority said in a statement yesterday.
Credit Suisse was working for Liberty on the takeover and also served as lead book runner for the 2.5 billion-euro ($3.3 billion) bond issue to partly finance the deal. In response to questions during a November 2009 call about who was issuing the bonds, Kyprios told the manager they could “play this game” and “you’re going to be my charades partner.” Kyprios ruled out possible issuers and signaled confirmation when the manager, who the FSA didn’t identify, guessed UnityMedia.
The case is the second time this year the FSA levied a fine for disclosing inside information to a person who said they didn’t want to be wall-crossed, or provided information with the understanding they wouldn’t act on it.
Credit Suisse “deeply regrets” that one of its employees has been sanctioned by the FSA, the Zurich-based bank said in a statement. It “fully supports the FSA’s actions to ensure information is properly controlled and has reinforced the FSA’s decision by imposing its own financial penalty” on Kyprios.
When questioned by the regulator, Kyprios told them the conversations were “banter” that didn’t disclose any actionable information. He was fined for improper market conduct and received the FSA’s standard 30 percent discount on the fine for settling early.
Kyprios, who still works at the bank, didn’t immediately respond to an e-mail request for comment.
Flour Millers Fined $317 Million by French Antitrust Authority
France’s competition regulator fined French and German flour millers about 242 million euros ($317 million) for anticompetitive practices in the retail market.
A 14-member Franco-German cartel was fined 95.5 million euros for conspiring between 2002 and 2008 to limit flour exports between the two countries. A German miller contacted the Paris-based regulator about the cartel and the agency opened the investigation in 2008. The informing company, Wilh. Werhahn KG, avoided a 16.7 million-euro fine.
The Autorite de la Concurrence also fined seven French flour companies, including three that were involved in the Franco-German cartel, a total of 147 million euros for price fixing.
Iran’s Bank Melli Loses EU Court Challenge to Unfreeze Funds
Iran’s Bank Melli, the state-run lender that is subject to European Union sanctions, lost an EU court bid to unfreeze its funds.
The EU’s highest court rejected the Tehran-based bank’s challenge to a 2008 decision by EU governments that froze assets belonging to Bank Melli and its units because the lender helped Iran buy “sensitive materials” for its nuclear and missile programs.
The freezing of the funds of a bank owned or controlled by a company “engaged in nuclear proliferation is necessary and appropriate,” the EU court said in an e-mailed statement.
Yesterday’s ruling from the EU’s Court of Justice is binding. Bank Melli, Iran’s largest government-owned lender, lost earlier bids to overturn the sanctions.
The bank didn’t immediately respond to e-mails seeking comment.
The case is C-380/09 P Melli Bank v Council.
Alcoholics Anonymous Tie Cited by SEC in Insider-Trading Claims
A Philadelphia investment adviser is facing U.S. Securities and Exchange Commission claims that he led a group that used nonpublic information divulged by an Alcoholics Anonymous confidant to profit from a 2008 merger.
Timothy J. McGee and eight others made about $1.8 million trading ahead of Philadelphia Consolidated Holding Corp. (PHLY)’s announcement that it would be acquired by Tokio Marine Holding Inc. (8766), the SEC said yesterday in a complaint filed at U.S. District Court in Pennsylvania.
In early July 2008, immediately after an AA meeting, an executive with the Philadelphia firm, who wasn’t named in the SEC complaint, told McGee that he was under pressure related to ongoing merger negotiations, the SEC said. McGee, an Ameriprise Financial Inc. (AMP) broker, then bought shares in the insurer and tipped a co-worker, who in turn tipped relatives, according to the complaint.
Phone calls to John Grugan, McGee’s attorney weren’t immediately returned.
Ex-Thornburg Executives Sued by SEC for Hiding Cash Crisis
The U.S. Securities and Exchange Commission sued three former executives at defunct Thornburg Mortgage Inc., claiming they schemed to overstate the company’s 2007 income and hide its inability to pay lenders.
Larry Goldstone, Thornburg’s chief executive officer, finance chief Clarence Simmons and Jane Starrett, who was in charge of accounting, overstated income by more than $400 million and failed to tell investors and auditors that the firm couldn’t make payments to its lenders, the SEC said in a lawsuit filed yesterday in U.S. District Court in New Mexico. Goldstone and Simmons, in an e-mailed statement, said they will “vigorously defend themselves in court.”
The SEC’s lawsuit “is based on unfounded claims, e-mails taken out of context and inaccurate interpretations of management’s actions surrounding the company’s financial filings at the height of the financial crisis,” Goldstone and Simmons said in their statement.
A phone call to Jerry Marks, an attorney for Starrett, wasn’t immediately returned.
Johnson Calls MF Global Bonus Proposal ‘Outrageous’
U.S. Representative Timothy Johnson, an Illinois Republican, talked about a bonus proposal for officers of MF Global Holdings Ltd.
The MF Global executives who oversaw the company before it failed last year should get bonuses this year if a bankruptcy court approves, said Frank Piantidosi, an adviser working with the trustee, Louis Freeh. Johnson spoke on Bloomberg Television’s “InBusiness with Margaret Brennan.”
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