EU Credit-Rater Rotation, Continental, JPMorgan: Compliance
The European Union is poised to scrap most parts of a proposal that would force businesses to rotate the credit-ratings company they hire to assess their debt.
The European Parliament’s largest political groups agreed to scale back the proposed rotation requirement so that it would apply only to securitizations and other kinds of so-called structured finance, said Jean-Paul Gauzes, a French member helping to craft the legislation. The stance brings the Parliament’s position largely into line with that of EU national governments, which must also approve the new rules proposed by the bloc’s regulators last year.
Gauzes, who spoke with reporters yesterday in Strasbourg, France, said, “We have a compromise that says we accept rotation for structured products.” The assembly’s economic and monetary affairs committee will vote on the draft law on June 19, according to the assembly’s website.
The European Commission, the 27-nation EU’s regulatory arm, proposed the obligatory rotation rule last year as part of a draft law to toughen regulation of the ratings industry amid concerns that some of their decisions exacerbated the euro-area debt crisis. The commission said rotation would boost competition and solve potential conflicts of interest.
Under the original proposal, companies would have been obliged to change the company that they pay to rate their credit every three years.
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Special Section: JPMorgan Hearings
Dimon Fires Back at ‘Complex’ System in U.S. Senate Hearing
Amid chants from protesters, Dimon arrived shortly before 10 a.m. and began answering questions about the causes of the loss. During more than two hours before the Senate Banking Committee, Dimon described a $2 billion loss in the bank’s chief investment office as a hedge that “morphed into something I can’t justify,” and largely blamed subordinates for a trading strategy gone wrong. The bank is looking at clawing back some of the compensation earned by those responsible, he said.
At the same time, Dimon, one of the most vocal bankers in challenging stricter regulation, said it would be hard for federal agencies to decide on a final version of the so-called Volcker rule, which bans proprietary trading for a bank’s own account.
Dimon also said overconfidence in trusted managers allowed traders to accumulate more than $2 billion in losses through a strategy that “violated common sense.”
Risk-monitoring systems and executives at the largest U.S. bank failed to adequately police threats concentrated in a derivatives portfolio at a London unit of the chief investment office, he said. The division wasn’t subjected to the same scrutiny as other businesses, and managers there deviated from control procedures, even after triggers on risk limits were breached, Dimon told the Senate Banking Committee yesterday.
It was the first of two appearances Dimon will make on Capitol Hill to face lawmakers probing how the largest and most profitable U.S. bank, often praised for its “fortress” balance sheet, could have taken such risks after coming through the 2008 financial crisis largely unscathed.
The hearing didn’t answer some basic questions the Senate has about the details of the New York-based bank’s loss, according to Senator Richard Shelby, the ranking Republican on the committee, said afterward.
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To read Dimon’s prepared testimony, click here.
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Trading Loss a Hit to Dimon’s Reputation, McDonald Says
Duff McDonald, author of “Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase,” discussed the appearance of Dimon yesterday before the Senate Banking Committee to answer questions about a $2 billion trading loss at the bank’s chief investment office.
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Isaac Sees ‘Excessive Reliance’ on Models in Regulation
William Isaac, chairman of Fifth Third Bancorp (FITB) and a former chairman of the Federal Deposit Insurance Corp., talked about JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon’s testimony before the Senate Banking Committee and U.S. financial regulation.
Isaac spoke with Mark Crumpton on Bloomberg Television’s “Bottom Line.”
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Lawmakers Corker, Menendez React to Dimon Testimony
JPMorgan CEO Jamie Dimon’s appearance before the Senate Banking Committee marked the type of discussion lawmakers should have had before the Dodd-Frank Act became law in 2010, Senator Bob Corker, a Republican from Tennessee, told CNBC yesterday. The hearing shows the “tremendous frailties” of the Dodd-Frank regulatory law, the senator said.
The Dodd-Frank Act was politically motivated and won’t “stand the test of time,” Corker said. Lawmakers should work on “real financial reform” that addresses markets, not just institutions, and looks at issues such as “shadow” markets.
Separately, U.S. Senator Robert Menendez, a Democrat from New Jersey, talked to Bloomberg News about Dimon’s testimony on the firm’s $2 billion trading loss.
Menendez spoke with Erik Schatzker in Washington on Bloomberg Television’s “Money Moves.”
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Questions Remain After Dimon Testimony, Mayo Says
Mike Mayo, an analyst at Credit Agricole Securities, talked about yesterday’s testimony by Jamie Dimon, chief executive officer of JPMorgan Chase & Co, before the Senate Banking Committee.
Mayo spoke from New York with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.”
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Ex-Morgan Banker Proposes Steps to Curb Japan Insider Acts
Japan’s ruling party will consider limiting the period for public stock offerings to four days to curtail share declines and discourage insider trading, said lawmaker and former Morgan Stanley (MS) banker Tsutomu Okubo.
Okubo worked at Morgan Stanley for about 10 years until entering parliament in 2004.
A Democratic Party of Japan working group will discuss truncating the period from the announcement of sales to settlement of the deals from the current minimum 15 days, Okubo said in an interview. The panel, which meets for the first time tomorrow, was set up to examine ways to restore confidence in markets rocked by trading and accounting scandals.
Japanese regulators are investigating short selling by investors who used information leaked from underwriters including Nomura Holdings Inc. before stock offerings were announced. The benchmark Topix Index (TPX) has lost 16 percent since the securities watchdog revealed the first case on March 21.
Japanese law requires at least two weeks from the announcement of equity offerings to the conclusion of the transactions, in order to give investors time to decide whether to participate. The period also gives shareholders ample time to sell the stock on concern about dilution, Okubo, 51, said.
Under the proposal, lead underwriters would begin marketing equity offerings before they are announced, on the basis that they and investors adhere to strict rules on confidentiality, with punishments for breaches, said Okubo. That would bring Japanese practice in line with markets including the U.S., he said.
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Nasdaq Exchange Immunity May Limit Losses From Facebook Claims
Nasdaq Stock Market (NDAQ) can rely on legal protections afforded exchange operators to avoid paying damages to firms that lost money on Facebook Inc. (FB), the former chief executive officer of the American Stock Exchange said.
The second-largest equity venue’s status as a self- regulatory organization means it will probably be spared liability for technology breakdowns and bad decisions in the May 18 initial public offering, said Neal Wolkoff, a lawyer who also ran ELX Futures LP. Nasdaq OMX Group Inc., the parent company, proposed setting aside $40 million to compensate firms after delayed orders and confirmations left brokers and fund managers unsure of how many shares they owned in the $16 billion IPO.
At least one investor has sued Nasdaq and brokers Knight Capital Group Inc. (KCG) and UBS AG (UBSN) said they are considering lawsuits. Industry losses tied to delays and malfunctions that slowed the confirmation of trades in the IPO may be close to $200 million, Knight Chief Executive Officer Thomas Joyce said June 7. CNBC said the total for UBS alone may be $350 million.
Robert Madden, a spokesman for Nasdaq OMX, declined to comment, as did Christiaan Brakman, a spokesman for UBS, and Kara Fitzsimmons of Knight.
The owner of the largest social networking website was scheduled to open at 11 a.m. New York time on May 18 when trading was delayed by a design flaw in Nasdaq’s IPO auction mechanism. Fixing it blocked order updates and cancellations sent to the exchange over 19 minutes from being included in the first public trade, or cross, at 11:30 a.m., and prevented confirmations from being immediately distributed to brokers.
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French Prosecutor Seeks to Increase Continental Fine, AFP Says
Continental Airlines Inc. should be convicted for negligence and fined 225,000 euros ($283,050) in connection with the Air France Concorde supersonic jet crash near Paris in 2000, a French prosecutor recommended yesterday, Agence France-Presse reported.
The prosecutor’s recommendation was to a court that is hearing the airline’s appeal against its 2010 conviction, Agence France-Presse said. The fine is heavier than the 200,000 euros imposed by the lower court, though the prosecutor advised the appeals court to clear the two Continental employees charged in the affair, including the mechanic who received a suspended jail sentence in the earlier verdict, AFP said.
Continental Airlines is now part of United Continental Holdings Inc. (UAL)
Deutsche Bahn Faces EU Antitrust Probe Over Rail Power Prices
Deutsche Bahn AG, Germany’s state-owned railway, faces a European Union antitrust probe over the prices a unit charges for power used by trains.
The European Commission will investigate whether Deutsche Bahn’s DB Energie unit, the only supplier of traction current in Germany, offers discounts that “lead to higher prices for competitors of Deutsche Bahn and place them at a competitive disadvantage on the rail freight and passenger market,” the regulator said in an e-mailed statement.
EU regulators raided Deutsche Bahn’s offices last year to check allegations that DB Energie was favoring the group’s rail- freight arm over others.
Deutsche Bahn “will work with the commission to clear up the issue,” according to a spokesman who declined to be named, citing company policy.
Deutsche Bahn last year filed a lawsuit at the EU’s Court of Justice in Luxembourg over the EU raid that it said was an unjustified “fishing expedition” by investigators seeking evidence of antitrust infractions.
EU regulators can fine companies as much as 10 percent of their yearly revenue for abusing a monopoly position.
Kerviel Tells Court He Only Sought to Make Money for SocGen
Jerome Kerviel told a Paris appeals court yesterday that his only goal was to make money for Societe Generale SA (GLE) and reiterated his superiors knew he was taking positions that exceeded his trading limits.
The former trader answered questions from the court as well as lawyers for the bank and himself about the events of January 2008, when Societe Generale unwound his positions and announced the resulting 4.9 billion-euro loss ($6.2 billion). He has said previously that his actions were well-known and he never tried to personally profit from the trades.
Kerviel was convicted in 2010, sentenced and ordered to pay restitution in a verdict that held him solely responsible. He said during hearings last week that the bank allowed him to exceed his limits as a cover for unhedged positions the bank took in the subprime mortgage market, where it foresaw losses.
Philippe Hoube, a broker at Newedge Group, who wrote an unsigned letter included with the documents, will testify today. Hoube said Societe Generale filled Kerviel’s account with losing operations before unwinding it to increase the loss it could attribute to him, Liberation newspaper reported yesterday, quoting the broker.
Luc Francois, one of the Kerviel’s former superiors and an appeal witness, said the theory the bank knew of Kerviel’s outsized trades and used him as a fall guy for subprime losses was “a gigantic lie” and managers were in “complete shock” when they learned of the situation.
Societe Generale said it will address Hoube’s “incorrect analyses and the wrongful allegations” in a note to the court.
Tax Deal That Saved Goldman $31 Million to Get Court Review
A deal between British authorities and Goldman Sachs Group Inc. (GS) that saved the bank as much as 20 million pounds ($31 million) in taxes will be reviewed by a U.K. court, a judge ruled today.
The decision came after anti-austerity group UK Uncut questioned the legality of the decision by British taxing authority Her Majesty’s Revenue & Customs that allowed Goldman to forego paying interest on money owed from a plan to avoid contributions on employee bonuses dating from the 1990s.
The British government has pledged to crack down on what it sees as abusive tax-avoidance schemes, including a Barclays Plc plan that denied the Treasury more than 500 million pounds. Barclays Chief Executive Officer Robert Diamond criticized the government’s handling of the dispute in May, calling it “unwarranted.”
Judicial review is a legal mechanism that examines the decision-making process of public bodies. UK Uncut had also asked for the court review to consider overturning the Goldman settlement, a request that was denied by Judge Peregrine Simon.
Simon said the reexamination will focus on whether the agreement was legal, and not on unraveling the settlement.
No Goldman Sachs representative attended the court hearing. Joanna Carss, a London-based Goldman Sachs spokeswoman, didn’t immediately respond to an e-mail requesting comment on the ruling.
Comings and Goings
U.K. Antitrust Regulator Appoints Maxwell Chief Executive
The Office of Fair Trading appointed Clive Maxwell as its new chief executive officer, the regulator said today in a statement.
Maxwell, who has been on the OFT’s board since September 2010, replaces John Fingleton, who has been in the role for seven years. The U.K. antitrust regulator said Maxwell will be paid 135,500 pounds ($209,000) a year.
The U.K. government announced in March that it planned beginning in April 2014 to bring together the antitrust functions of the OFT and the Competition Commission to create the Competition Markets Authority.
Nigeria’s SEC Head Oteh Sent on Compulsory Leave by Board
Arunma Oteh, director-general of Nigeria’s Securities and Exchange Commission, was sent on “compulsory leave” to enable an independent investigation of allegations of mismanagement, the market regulator said.
The decision followed an audit of spending on celebrations of the 50th anniversary of the capital market, Edosa Kennedy Aigbekaen, the secretary to the commission, said yesterday in an e-mailed statement. It was recommended to the board “that the key actors in the management of the funds should be asked to step aside to allow an unhindered investigation,” he said.
Daisy Ekineh, SEC’s executive commissioner for operations, will temporarily act as director-general, according to the statement. Oteh didn’t immediately respond to an e-mailed request for comment. An official who answered a call to the agency said Oteh had made representations to the appropriate authorities and wasn’t available for comment.
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