Austria ‘Warehouse’, Credit Suisse, NYC: Compliance

Austria should consider warehousing risky and non-performing assets of its nationalized lenders in a vehicle that isn’t governed by banking laws, according to Klaus Liebscher, the manager in charge of the nation’s bank aid.

Liebscher heads the Finanzmarktbeteiligung AG agency.

Putting toxic assets of rescued banks into a state-backed body without a banking license may have advantages for Austrian taxpayers, Liebscher said in an interview last week. Such a model would mimic Germany’s FMS Wertmanagement, the agency that is winding down 176 billion euros ($221 billion) of assets from nationalized Hypo Real Estate Holding AG.

Austria nationalized two banks in 2008 and 2009 and partially took over another one this year to prevent their collapse. The nation had to inject fresh capital into all three lenders to make sure they meet regulatory requirements after losses on bad debt and on swaps depleted reserves. All major ratings companies have warned the government that its banks are the biggest risk to the Alpine republic’s credit rating.

Hypo Alpe-Adria-Bank International AG, which Austria rescued after former owner Bayerische Landesbank walked away in 2009, may need about 1.5 billion euros in state aid by October to meet regulators’ capital requirements. That’s after taxpayers already injected 1.35 billion euros.

Austrian Finance Minister Maria Fekter has in the past rejected proposals for such a model. She told journalists earlier this week that such plans would have to be approved by the EU, and that Austria wasn’t seeking such approvals currently.

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Compliance Policy

U.K. Softens Vickers’ Bank Plan on Capital, Prompting Criticism

Chancellor of the Exchequer George Osborne softened the recommendations of the Independent Commission on Banking on how much capital lenders must hold, prompting criticism from the report’s author.

In the government’s first detailed response to the proposals made by former Bank of England Chief Economist John Vickers, the Treasury said that banks will only have to hold 3 percent of capital against total assets in line with Basel III requirements rather than the 4.06 percent recommended in the ICB’s September report. That will make it less costly for banks.

Osborne is adopting the overwhelming majority of the Vickers report, which recommended that banks separate consumer and investment banking operations and each have a separate board with at least two thirds of their members sitting on only one board. Banks will also be forced to have their own risk committees.

In a further softening of the ICB’s proposals, Britain will allow the consumer units of banks operating in the U.K. to hedge currencies and some simple derivatives for small and mid-sized companies. More complex derivatives trades won’t be allowed. Vickers last year proposed all those functions remain outside the consumer operations of a bank.

The opposition Labour Party attacked Osborne for not presenting the plans in Parliament.

The Treasury plans to pass all legislation relating to Vickers recommendations by 2015 and fully implement them by 2019, resisting pressure from the industry to slow down their adoption.

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NYC Loses Jobs With Overseas Rule Exemptions, Gensler Says

New York financial firms would move jobs overseas if the U.S. grants the industry’s request to exempt companies’ foreign branches from some Dodd-Frank Act rules, said Gary Gensler, chairman of the Commodity Futures Trading Commission.

Gensler made the remarks yesterday in an interview on Bloomberg Television.

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. are among U.S. firms to argue that applying Dodd-Frank rules to their overseas branches or subsidiaries would threaten their ability to compete with foreign-based rivals. Imposing the law’s margin requirements on non-U.S. swaps would “eviscerate our ability to serve clients overseas and cede the global market,” JPMorgan Associate General Counsel Don Thompson said at a House hearing Feb. 8.

The CFTC is set to propose guidance on June 21 on how the U.S. may govern the international reach of Dodd-Frank rules on derivatives, people familiar with the plan have said.

The CFTC also is planning an order providing overseas-based swap dealers and some affiliates of U.S. banks as much as a year to comply with all of Dodd-Frank regulations, Gensler said in a speech prepared for an Institute of International Bankers’ conference in New York. The delay may affect compliance with capital and some risk management regulations, Gensler said.

Overseas swap dealers would still be required to register with the CFTC and report trades to swap data repositories, Gensler said. The CFTC is seeking to have a system for allowing compliance with overseas regulations substitute for Dodd-Frank rules.

For the video, click here.

Global Bank Pay Rules Aren’t Being Applied Evenly, FSB Says

International efforts to enforce a common set of rules on banker pay may be hampered by diverging national positions on which staff should be covered by the measures, the Financial Stability Board said.

There are “important differences” in how nations have implemented the curbs, which were set by regulators in 2009 to reduce excessive risk taking, the FSB said June 13 in a report on its website. These include a potentially “wide variation” in the range of employees that authorities target.

“Member jurisdictions have made different choices regarding the institutions and employees that are covered,” according to the report, drawn up for a meeting next week of the Group of 20 nations. Divergences exist even within the 27-nation European Union, the FSB said.

Public outrage and shareholder rebellions have forced some banks this year to retreat from their initial pay plans. In a bid to placate investors, Barclays Plc (BARC) Chief Executive Officer Robert Diamond agreed to forgo about 11 percent of his total compensation until the bank increases profits. In a non-binding April vote, Citigroup Inc. (C) shareholders voted to reject that bank’s executive pay plan.

The measures are part of efforts to prevent a repeat of the 2008 financial crisis.

Dark Pool Limits Sought in House Committee by NYSE, Nasdaq

NYSE Euronext and Nasdaq OMX Group Inc., the biggest owners of American stock exchanges, are urging U.S. legislators to support changes to rules that caused a proliferation of broker- run markets that draw orders away from public venues.

Dark pools and brokers should be required to provide better prices than those available on exchanges or offer quotes publicly at the best levels, the companies said in a written presentation to staff of the House Committee on Financial Services that Bloomberg obtained. Lawmakers are holding hearings on the structure of U.S. markets in Washington on June 20. Dark pools, unlike exchanges, are private venues that execute orders without displaying bids and offers in advance.

The Securities and Exchange Commission should explain why Regulation ATS, approved in 1998 to integrate alternative venues that compete with exchanges listing stocks into the broader marketplace, “remains sound policy,” NYSE Euronext (NYX) and Nasdaq OMX said. That rule and another set of changes the SEC approved in 2005 overhauled trading and led to the creation of more than four dozen venues that compete with the New York Stock Exchange and Nasdaq. Executives at both companies have pushed for changes to how dark pools operate over the past three years.

Richard Adamonis, a spokesman for NYSE Euronext, and Joseph Christinat of Nasdaq OMX declined to comment.

Dark pools accounted for 13.6 percent of U.S. equities volume in April, according to data compiled by Rosenblatt Securities Inc.

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Compliance Action

Credit Suisse Urged by SNB to Boost Capital This Year

Credit Suisse Group AG (CSGN) needs a “marked increase” in capital this year to prepare the bank for a possible worsening of Europe’s sovereign-debt crisis, the Swiss central bank said. The shares fell as much as 11 percent.

“For Credit Suisse, given the low starting point and the risks in the environment, it is essential that it already substantially expand its loss-absorbing capital base during the current year,” the Swiss National Bank said in its annual financial stability report yesterday. The central bank said improvements can be achieved by suspending dividend payments or selling new shares in addition to the banks’ plans for cutting assets.

The SNB’s stress scenario assumes that the euro area falls into a “deep recession,” which spreads to other European countries including Switzerland and to the U.S. This could be triggered by a disorderly default of several smaller peripheral countries in the euro area, the central bank said.

Credit Suisse “has been at the forefront” in adapting to regulatory change and attaches “highest priority to an industry-leading capitalization,” the Zurich-based lender said in a statement yesterday. The bank “has also established transparency on its plan for both building up common equity through retaining earnings and further asset reduction,” Credit Suisse said.

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Separately, the Swiss National Bank will review its communications procedures as a newspaper reported the bank’s brief of its annual report may have created the opportunity for insider trading in Credit Suisse derivatives.

The SNB will review how it publishes its annual financial stability report, the central bank said in an e-mailed statement today. The bank has so far presented preliminary information to journalists under embargo before the official publication of the release, “to explain the partly complex content of the report,” it said.

Credit Suisse shares plunged 10 percent to 17.01 Swiss francs yesterday after the central bank said, as part of the annual report, that the lender needs a “marked increase” in capital this year. Turnover in puts that give the right to sell Credit Suisse shares jumped on June 11, the day the SNB briefed journalists, Zurich-based Tages-Anzeiger reported today.

Tobias Lux, a spokesman for the Finma market regulator, wasn’t immediately available to comment. Alain Bichsel, head of media relations at the SIX Swiss Exchange, declined to comment.

Commerzbank to Fix Money-Laundering Controls After Review

Commerzbank AG (CBK), Germany’s second-largest lender, agreed to improve its anti-money laundering program after Federal Reserve examiners determined the bank failed to establish internal controls in its New York branch.

Commerzbank will submit a plan to the Fed within 60 days detailing how it will revise its program for monitoring bulk cash transactions and improve due diligence on customers, according to an enforcement action the regulator released yesterday.

Transactions going back to September 2010 will also be reviewed by a consultant and the bank.

“Commerzbank has committed to take all necessary measures to comply with the additional compliance and reporting requirements agreed with U.S. regulators,” Margarita Thiel, a spokeswoman for the Frankfurt-based bank, said in an e-mailed statement.

NYSE-Nasdaq Feud Misses Congress as Greifeld Drops Hearing

The top executives of Nasdaq OMX Group Inc. (NDAQ) and NYSE Euronext won’t get to face off before lawmakers next week over how brokers affected by Facebook Inc. (FB)’s botched initial public offering should be compensated.

Nasdaq Chief Executive Officer Robert Greifeld declined an invitation to testify June 20 at a House Financial Services capital markets subcommittee hearing, according to two people with knowledge of the plans. The decision means Greifeld won’t have to spend several hours sitting at the same table as NYSE Euronext CEO Duncan Niederauer, who has led the fight against Nasdaq’s compensation plan for customers affected by the glitch.

Representative Scott Garrett, the New Jersey Republican who is chairman of the subcommittee, called the hearing to discuss market-structure issues. The Facebook IPO, however, might have dominated the hearing had Greifeld and Niederauer appeared before the panel together.

Executives from Direct Edge Holdings LLC, Knight Capital Group Inc. (KCG), Invesco Ltd (IVZ) and GETCO LLC have also received invitations to testify, according to one of the people, who wasn’t authorized to speak publicly about the planning.

Joseph Christinat, a Nasdaq spokesman, and Richard Adamonis, a spokesman for NYSE, declined to comment.

Courts

ECB Tells Court Releasing Greek Swap Files Would Inflame Markets

The European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency.

Bloomberg News is suing the ECB to provide the documents under European Union freedom-of-information rules. The papers may help show the role EU authorities played in allowing Greece to mask its deficit for almost a decade before the nation’s troubled finances necessitated a 240 billion-euro ($301 billion) bailout and the biggest debt restructuring in history.

Bloomberg’s lawsuit, filed in December 2010, requested access to two internal papers drafted for the central bank’s six-member Executive Board. They show how Greece used swaps to hide its borrowings, according to a March 3, 2010, note attached to the papers and obtained by Bloomberg News.

These documents “played a role” in shaping policy and “highlighted there were issues” when the ECB undertook a review of its eligibility criteria for collateral in its funding operations, the ECB lawyer told the court.

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Ex-SEC Enforcement Attorney Pleads Not Guilty to Wire Fraud

Daryl Hudson III, a former senior counsel in the U.S. Securities and Exchange Commission’s enforcement division, pleaded not guilty in federal court after being charged with seven counts of wire fraud.

Hudson, who is chairman and chief executive officer of Hampden Kent Group LLC, was arraigned yesterday in U.S. District Court in Albuquerque, New Mexico. He was indicted May 23 and faces as long as 30 years in prison and a $1 million fine on each charge if convicted.

He worked at the SEC from 1982 to 1985, according to the indictment.

Hudson, 59, of the District of Columbia, is accused of engaging in a scheme to defraud Santa Fe-based Bluenergy Solarwind Inc. by falsely representing that he could secure debt funding to help the company grow, according to a statement by New Mexico U.S. Attorney Kenneth J. Gonzales.

“The allegations in the indictment concern one disgruntled client who, over a three-week period, misled my client about its business and in fact could not demonstrate any product or revenues to obtain financing,” David A. Streubel, a lawyer for Hudson, said in an e-mail yesterday.

When the full story is explained in court, he said, “Mr. Hudson will be completely exonerated.”

The case is U.S. v. Hudson, 12-01250, U.S. District Court, District of New Mexico (Albuquerque).

SEC Seeks to Reinstate Claims Against Goldman Sachs’s Tourre

The U.S. Securities and Exchange Commission asked a court to reinstate fraud claims it dismissed against Fabrice Tourre, the Goldman Sachs Group Inc. (GS) trader accused of misleading investors in a collateralized debt obligation.

U.S. District Judge Barbara Jones in Manhattan last June threw out some of the SEC’s claims after Tourre argued that he couldn’t be held liable under U.S. securities law for foreign transactions that occurred outside the country. Jones cited a 2010 U.S. Supreme Court ruling that U.S. securities laws don’t protect foreign investors who buy stocks on overseas exchanges.

The SEC initially sued the London-based trader in April 2010, saying he defrauded investors by not disclosing that hedge fund Paulson & Co. had helped pick the underlying securities for a CDO called Abacus and planned to bet against them. After reaching a $550 million settlement with New York-based Goldman Sachs, the SEC filed a new claim against Tourre, saying he gave the company “substantial assistance” as it misled investors.

Pamela Rogers Chepiga, a lawyer representing Tourre, didn’t immediately return a call seeking comment on the SEC’s filing after regular business hours.

The case is SEC v. Tourre, 10-03229, U.S. District Court, Southern District of New York (Manhattan).

Stanford Gets 110-Year Sentence for $7 Billion Ponzi Scheme

R. Allen Stanford, found guilty of leading a $7 billion international fraud, was sentenced to 110 years in prison after a prosecutor said he treated his victims like “road kill.”

U.S. District Judge David Hittner imposed the sentence yesterday in Houston and ordered Stanford to forfeit $5.9 billion. Jurors in March convicted the Stanford Financial Group principal of 13 charges, including five counts of mail fraud and four of wire fraud.

The jury had found Stanford, 62, lied to those who bought certificates of deposit issued by his Antigua-based Stanford International Bank Ltd. and sold in the U.S. by his Houston- based securities firm. Prosecutors said Stanford wasted investor money on failing businesses, yachts and cricket tournaments and secretly borrowed as much as $2 billion from his bank.

Defense lawyer Ali Fazel said there would be an appeal.

“We’re very disappointed in the outcome,” Fazel said. “It’s a harsh punishment, and it’s tough on him. He is upset because he feels like he didn’t do anything.”

“I never planned to, never did, either corporately or personally, defraud anyone and never set out to do that,” Stanford told the judge.

Prosecutors had asked for a 230-year term, the maximum under federal sentencing guidelines. Fazel requested a 10-year term for his client.

The case is U.S. v. Stanford, 09-cr-342, U.S. District Court, Southern District of Texas (Houston).

Interviews

Frank Sorrentino Says Banks Should Be Allowed to Fail

Frank Sorrentino, chief executive officer of North Jersey Community Bank, discussed the congressional testimony of JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon. Sorrentino talked with Bloomberg’s Pimm Fox and Courtney Donohoe on Bloomberg Radio’s “Taking Stock.”

For the audio, 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.