Bankers advising the Federal Reserve Board warned in February of potential harm to U.S. financial institutions from rising credit risk even as they endorsed the central bank’s record stimulus.
“The margin pressures that the low-rate environment has put on financial institutions, coupled with dramatically increased compliance and other infrastructure costs, have caused many to seek higher returns by accepting greater interest-rate or credit risk,” the bankers said on Feb. 8, following a Federal Open Market Committee meeting on Jan. 29-30.
“Believing the economy to be improving but still vulnerable, and recognizing the high quality of the Federal Reserve’s information-gathering and analytical resources,” the panel “continues to support the FOMC’s current accommodative monetary policy,” the Federal Advisory Council said.
The minutes of the council’s quarterly meetings, obtained by Bloomberg News in a Freedom of Information Act request, trace how the 12 bankers’ views evolved from opposition to the Fed’s announcement of a third round of bond buying in September to support for central-bank efforts in February to boost an economic expansion beset by a “drag” from fiscal tightening.
Policy makers are debating how long to press on with unprecedented accommodation, including $85 billion in monthly bond buying aimed at spurring economic growth and reducing 7.5 percent unemployment. The purchases have pushed the central bank’s total assets to $3.32 trillion.
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Bitcoin Rules May Be Needed; Ban Not Necessary, Chilton Says
Rules may be needed to regulate the market for online only currency, or so-called bitcoins, Commodity Futures Trading Commissioner Bart Chilton told Bloomberg Television.
The market for bitcoins lends itself to potentially “nefarious” activities and deserves a “thorough” look by U.S. financial regulators, Chilton said.
He described the market as “volatile as all get-out.”
“I haven’t said we should ban it; I’m thinking that maybe there’s a federal interest in regulating it if it isn’t serving the functions that you want a future or a swap or an option to serve,” he said.
While Chilton called bitcoins a “shadow currency” and “cryptocurrency,” he said he was “encouraged” by Treasury’s involvement on issue.
Chilton said he’s not 100 percent certain rules are needed but the possibility of regulations must be considered.
China’s Life Insurers Face Cash Flow Pressure on Surrenders
Cash flows at China’s life insurers will be squeezed this year by customers canceling contracts out of frustration with low returns and an increase in maturing policies, according to BoCom International Holdings Co. and Capital Securities Corp.
In response, the Chinese regulator may take steps to make policy holders more tempted to keep their policies.
China Life Insurance Co. (2628)’s surrenders -- cash repayments policyholders receive when they choose to end the contracts before maturity -- more than doubled to 20.1 billion yuan ($3.3 billion) in the first quarter, the nation’s biggest insurer said last month.
Chinese banks are luring savers who have endured a 20 percent decline in the Shanghai Composite Index (SHCOMP) in the past two years with wealth-management products offering higher returns than deposits. Insurers may accelerate sales through banks of less profitable, short-term policies to keep cash coming in, according to BoCom International.
Insurers need adequate cash inflows to cover normal outlays including policyholders’ benefits, operating expenses and dividends to shareholders, and to protect themselves from liquidity shocks such as early withdrawals by contract holders and defaults by debtors. Insufficient cash holdings may force insurers to liquidate parts of investment portfolios at undesirable prices and incur losses.
Life-insurance premiums rose 4 percent to 996 billion yuan in 2012 after a 9 percent slump in 2011, according to the China Insurance Regulatory Commission. That compares with average growth of 30 percent a year in the previous three decades.
The CIRC, as the regulator is known, may scrap the 2.5 percent maximum rate on fixed-return policies in a trial starting as early as this month to help insurers make their products more attractive, a person with knowledge of the matter said last month. The changes may prompt premature redemptions to increase by less than 50 percent by value from the current level, the person said.
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Finra to Require Factor for Each Transaction in ABS
The Financial Industry Regulatory Authority will begin requiring firms July 22 to report the factor, or funding, for each transaction in an asset-backed security, the agency said in e-mailed statement.
An exception will apply for an ABS delivered at a time to be announced, or TBA, in “limited instances when firms effect such transactions as agent and charge a commission.”
Beginning July 22, the Finra Trace system will reject transactions where the factor is required but not included in the transaction report to Finra. Firms can test modifications to support factor reporting requirements from June 24 through July 19, according to the statement.
SEC Sues Four People Over Bribes for Venezuelan Bond Trades
The U.S. Securities and Exchange Commission sued four people with ties to brokerage Direct Access Partners LLC over claims they paid millions of dollars in bribes to a Venezuelan finance official to secure the bond-trading business of a state- owned bank.
A DAP unit generated more than $66 million for the New York brokerage from 2009 through at least June 2010 in transaction fees on riskless principal trades in Venezuelan sovereign or state-sponsored bonds for Banco de Desarrollo Economico y Social de Venezuela, the SEC said in a complaint filed yesterday in Manhattan federal court. A portion of that revenue was paid to the Venezuelan official, the SEC said.
Tomas Alberto Clarke Bethancourt, an executive vice president at DAP, was responsible for executing the fraudulent trades, according to the SEC. Jose Alejandro Hurtado also participated, the SEC said.
The SEC also sued Iuri Rodolfo Bethancourt over his role in funneling bribes to the Venezuelan official, who wasn’t sued by the SEC, and Haydee Leticia Pabon, who received about $8 million in sham finders’ fees, according to the complaint.
Phone calls to Henry Bell, an attorney for Clarke, and Frank Rubino, a lawyer representing Hurtado, weren’t immediately returned. Bethancourt and Pabon have no known defense counsel, the SEC said.
A press official for the bank, who declined to be identified because of company policy, declined to comment. An e- mail sent to the bank today wasn’t immediately returned.
An official in Venezuela’s finance ministry, who declined to be identified because of ministry policy, also declined to comment.
U.S. prosecutors filed parallel criminal charges yesterday against Clarke, Hurtado and the Venezuelan official.
Apple’s Customer Data-Privacy Rules Struck Down by German Court
Apple Inc. (AAPL), already facing a U.S. privacy lawsuit over its information-sharing practices, was told by a German court to change its rules for handling customer data.
A Berlin court struck down eight of 15 provisions in Apple’s general data-use terms because they deviate too much from German laws, a consumer group said in a statement on its website yesterday. The court said Apple can’t ask for “global consent” to use customer data or use information on the locations of customers.
Technology companies face increased pressure from regulators over data protection and consumer rights. Google Inc. (GOOG) agreed last year to pay $22.5 million to settle U.S. Federal Trade Commission allegations it violated people’s privacy rights by breaching Apple’s Safari Internet browser.
The German press office of Cupertino, California-based Apple declined to comment. The ruling, which only applies to Germany, can be appealed.
Apple had already signed a binding declaration that it wouldn’t use seven of the 15 clauses that consumer group VZBV had objected to before the German suit was filed, the group said. The remaining eight provisions were invalidated by yesterday’s ruling, VZBV said. German law allows recognized consumer groups to sue companies over illegal terms and conditions.
Debt-Settlement Firm Charged in First CFPB Criminal Referral
A debt-settlement company was accused by the U.S. of defrauding more than 1,200 people struggling with credit-card debt, in the first criminal referral from the Consumer Financial Protection Bureau.
Manhattan U.S. Attorney Preet Bharara’s office yesterday announced the unsealing of an indictment against Mission Settlement Agency, its manager, Michael Levitis, and three employees. Prosecutors said the defendants “systematically exploited and defrauded” people across the country.
The case against Mission is the first criminal referral from the CFPB, according to the U.S. attorney’s office. Mission and its employees lied about its fees, taking thousands of dollars from funds that its customers had set aside because they believed the money would be used to pay creditors, according to the indictment. For the majority of customers, Mission did little or no work and failed to reduce debt, prosecutors said.
Levitis spent money from Mission on the expenses of a nightclub he controlled, lease payments for two Mercedes-Benz cars and credit-card bills for his mother, according to the indictment.
Jeffrey Lichtman, a lawyer for Levitis, denied the allegations and said his client would fight the charges. Levitis and three other defendants entered not-guilty pleas through their lawyers. A U.S. magistrate ordered them released on bail.
The case is U.S. v. Mission Settlement Agency, U.S. District Court, Southern District of New York (Manhattan).
12 Banks Sued by Sheet-Metal Union Over Credit-Swap ‘Fix’
Goldman Sachs Group Inc. (GS), Citigroup Inc. (C) and 10 other banks have restrained market competition for credit default swaps in violation of U.S. antitrust law, an Ohio union pension plan contends in a federal complaint filed May 3 in Chicago.
Sheet Metal Workers Local No. 33 Cleveland District Pension Plan, based in Parma, Ohio, seeks damages for what it says are “substantial injuries” it and people and entities on the “buy side” sustained in buying or selling CDS contracts to the “sell side” dealer-defendants between 2008 and 2011.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.
Bloomberg LP, the parent of Bloomberg News, has filed an application at the Commodity Futures Trading Commission to become a swap data repository.
Other banks named as defendants in the case include Bank of America Corp. and Deutsche Bank AG.
The union pension plan seeks a jury trial and class-action, or group, status on behalf of other dissatisfied swaps investors “to recover damages for the substantial injuries” sustained, and prevent restraint of competition in the swaps market by “the proverbial too-big-to-fail banks,” according to court papers.
Spokesmen for New York-based Goldman Sachs and Citigroup, Charlotte, North Carolina-based Bank of America and Frankfurt- based Deutsche Bank declined to comment on the complaint.
Special Section: White on Capitol Hill
White Says SEC Settlements Without Guilt Admissions Under Review
The U.S. Securities and Exchange Commission is reviewing its practice of settling cases without requiring defendants to admit guilt, the agency’s chairman said yesterday in congressional testimony.
SEC Chairman Mary Jo White, a former federal prosecutor, told a House Appropriations subcommittee that the policy has benefited investors while saving SEC resources. The settlements leave no question “about what the conduct was,” White said.
White’s comment provides an early window into whether she’ll change a practice that has been criticized by lawmakers, consumer groups and jurists including U.S. District Judge Jed Rakoff. The SEC has defended “no admit, no deny” settlements for the same reasons that White outlined.
“It is a very good end in many cases,” she told lawmakers. “It saves resources and you do not incur the litigation risk and you get lots of money to investors a lot quicker.”
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Sequestration was also discussed during the hearing. Across-the-board budget cuts have forced the SEC to delay hiring people needed to carry out oversight of security-based swaps market, White told the subcommittee.
The SEC is deferring hiring and suspending “critical IT initiatives that would help our examination and enforcement functions,” she said.
“It is quite an impediment to the agency,” White said, referring to the sequestration measures.
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Alan Blinder Says Leverage Limit Crucial to Financial System
Limiting leverage is “a crucial part” of guarding against future financial meltdowns, said Alan Blinder, former Federal Reserve vice chairman and current Princeton University economics professor.
“One of the things that made this Rube Goldberg contraption so lethal when it collapsed was the incredible amount of leverage,” Blinder said, speaking on Bloomberg Radio with Tom Keene and Michael McKee. “We’re pretty sure there’s a lot less leverage in the system now.”
Blinder’s 2013 book, “After the Music Stopped: The Financial Crisis, the Response and the Work Ahead,” discussed how the U.S. financial system started unraveling in 2007. He criticized the Obama administration for what he depicted as an inadequate job explaining the crisis to U.S. voters, while he said stimulus helped to prop up the American economy.
Having a limit on leverage “is part of the solution,” to prevent future crises, Blinder said yesterday, and he said it’s already being examined as a safeguard.
Financial instruments that were too complex for buyers to understand also contributed to the crisis, he said.
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Comings and Goings
Brazil’s Azevedo Defeats Mexican to Succeed Lamy as Head of WTO
Brazil’s Roberto Azevedo won the final round in the campaign to become the next director-general of the World Trade Organization, putting him in line to be the first Latin American to hold the position.
Azevedo, 55, now Brazil’s ambassador to the Geneva-based WTO, won election over Mexican Herminio Blanco, a former trade minister, according to a statement published on the website of Brazil’s government news agency, Agencia Brasil. The WTO, which has 159 member nations, will announce the appointment today.
Azevedo would succeed Pascal Lamy, the Frenchman who has served as director-general since 2005, on Sept. 1.
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