U.K. Fraud, FCIC Results, La Caixa, Davos: Compliance

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The U.K. is losing about 38 billion pounds ($61 billion) a year to fraud, with the finance industry bearing the largest loss in the private sector of 3.6 billion pounds, the government said.

The financial-services industry in the U.K., which saw a 14 percent increase in online-banking fraud, is losing 1 billion pounds a year to mortgage fraud and 2.1 billion to insurance scams, the National Fraud Authority, a unit of the U.K. Attorney General’s office, said in a statement yesterday.

The public sector is losing 21 billion pounds to fraud, and the private sector loses an estimated 12 billion pounds, according to the NFA. Fraud costs individuals another 4 billion pounds a year and charities 1.3 billion pounds, it said.

The estimate “shows that 55 percent of fraud -- a massive 21 billion pounds -- is committed against the public sector,” Francis Maude, a minister for the Cabinet Office, said in the statement. “Ripping off the taxpayer will not be tolerated.”

The Serious Fraud Office, which prosecutes complex fraud and white-collar crime in the U.K., said in a separate statement yesterday that it has achieved an 80 percent conviction rate in its cases since April last year, and has 103 open cases.

Compliance Policy

FCIC Publishes Report; Goldman Got $2.9 Billion on AIG Bets

The Financial Crisis Inquiry Commission, tasked with determining the causes of the financial crisis, released its report yesterday in Washington, simultaneously publishing a 545-page book.

Among its findings, the report said Goldman Sachs Group Inc. received $2.9 billion for its own account as a taxpayer bailout enabled American International Group Inc. to make good on credit-default swaps linked to mortgages.

The money was included in about $3.4 billion in swap-related payments, most of which AIG made following the government’s bailout, the FCIC said. That was in addition to about $14 billion that Goldman Sachs collected from AIG and passed to other counterparties, according to the report.

Goldman Sachs, the most profitable firm in Wall Street history, acted as a “market intermediary” and bought protection from AIG to hedge transactions with clients, Chief Financial Officer David Viniar told reporters on a conference call in 2009. The trades at issue in the FCIC’s report were hedged, and most of the payments were used to cover offsetting bets, a person with direct knowledge of them said, declining to be identified because the transactions weren’t public.

Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment on the panel’s findings.

Mark Herr, an AIG spokesman, declined to comment.

For more of this story, click here, click here, and see Interviews section, below.

For streaming video of the FCIC news conference, click here.

For a Bloomberg Television report by Peter Cook on the FCIC findings, click here.

Europe’s Securities Law Proposals Must Go Further, Banks Say

Pan-European rules to bolster legal protection for investors who hold securities through banks or brokers should be “more ambitious,” according to a group of lenders, including UBS AG and Deutsche Bank AG.

Proposals from the European Commission, the EU’s executive arm, should be tightened to prevent differences in the way national authorities implement the rules, said Werner Frey, a managing director at the Association for Financial Markets in Europe.

The Securities Law Directive, while a good step, “doesn’t go far enough,” Frey said in an interview. The measures should be a regulation that can’t be changed at national level after it has been approved by EU governments and members of the European Parliament, he said.

The Brussels-based commission sought views in November on plans to eradicate some of the difficulties faced by investors when they hold securities bought in another EU state. London-based AFME responded to regulators’ call for comment.

Position Limits Needed in Commodities Markets, EU’s Barnier Says

Commodities traders should be subject to position limits to curb food price volatility, Michel Barnier, the European Union’s financial services chief, told reporters yesterday in Brussels.

World food costs rose to a record in December on higher costs for sugar, grain and oilseeds, the UN reported Jan. 4, contributing to the uprising that ousted Tunisia’s Zine El Abidine Ben Ali on Jan. 14. Protests have spread to Egypt, Algeria, Morocco and Yemen.

Higher commodity prices are “leading to riots, demonstrations and political instability,” Nouriel Roubini, the New York University economics professor who predicted the financial crisis, said yesterday in an interview with Tom Keene on Bloomberg Television’s “The Pulse.”

U.S. Regulators Target Loan Servicers to Fix Foreclosures

U.S. mortgage servicers face a new era of tighter oversight as regulators seek to cut the number of botched foreclosures and increase loan modifications for struggling borrowers.

The industry, which oversees $10.6 trillion in loans, has been overwhelmed by more than 3 million foreclosures since 2006. The housing-market collapse exposed failures -- in the way servicers are paid, track loans and process property seizures -- that threaten to stall a fledgling rebound in prices and sales.

The topic was raised by Sheila Bair, chairman of the Federal Deposit Insurance Corp., in a Jan. 19 speech to mortgage-industry executives in Washington, who described the problem as “urgent.”

Changes being studied include a new fee structure for servicers, independent reviews of rejected requests to ease loan terms and a fund to compensate victims of improper foreclosures, according to Bair and other federal and state regulators.

The Mortgage Bankers Association, the industry’s Washington-based trade group, is seeking a role in developing new rules, Chief Executive Officer John A. Courson said.

For more, click here.

Country-Level Banks Too Big to Fail Face FSB Rules, Wellink Says

Banks whose failure may cause a national economy to collapse will be targeted by global regulators for possible extra rules, said Nout Wellink, chairman of the Basel Committee on Banking Supervision.

The Financial Stability Board will “take on the issue of how best to treat” banks that pose risks at country-level, said Wellink, in the text of a speech in Cape Town yesterday. Local regulators should also consider “appropriate measures.”

The FSB focus on preventing national-level crises will follow efforts to regulate banks deemed to be systemically important to the world’s economy, said Wellink, who also heads the Dutch central bank.

The FSB plans to finish by mid-2011 a first list of lenders that are systemically important on a global scale.

Wall Street Rocket Scientists Revive CDOs in Derivatives Battle

Three years after collateralized debt obligations helped trigger the worst financial crisis in 70 years, Wall Street’s math wizards are exploring how to use them to deflect rules intended to prevent the next crisis.

Credit Suisse Group AG traders are testing a risk model that may help them reduce capital charges imposed by the Basel Committee on Banking Supervision on derivative products. Claudio Albanese, a quantitative economist who is advising the lender on the plan, says it could also help banks to limit one of their biggest risks by allowing them to offload through a CDO the risk that one of their trading partners, or counterparties, defaults. Critics say such CDOs could trigger a new crisis.

Albanese’s plan shows how banks are likely to try and mitigate rules that impose higher capital requirements on their operations and threaten profit, according to Charles Freeland, a former deputy secretary general of the Basel Committee. The Basel rules may cut the return on equity by more than half for some derivatives, forcing some banks to stop arranging those types of transactions, according to Kian Abouhossein, a banking analyst at JPMorgan Chase & Co. in London.

Regulators said they will carefully scrutinize banks’ attempts to remove risk from their balance sheets.

For more, click here.

EU Plans to Publish Draft Commodity Proposals on Feb. 2

The European Commission plans to publish possible measures for commodity markets and raw materials on Feb. 2, according to its website.

The commission will “present an overview of what has already been achieved at the EU level on the commodities markets and raw materials areas and on the steps which are planned to take the work forward,” it said.

Recent “commodities price swings” have had “negative effects on both producers and consumers,” the commission said.

China Said to Plan Raising Ratio If Credit Excessive

China may order its biggest lenders, including Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., to raise capital ratios to as high as 14 percent when credit growth is judged excessive, said a person familiar with the matter.

Newly proposed rules would require increasing capital adequacy buffers by as much as 2.5 percentage points when the banking regulator determines loan growth to be too fast, said the person, declining to be identified as the plan isn’t public. In normal conditions, lenders deemed systemically important will need to have a minimum 11.5 percent ratio, unchanged from the current requirement for China’s biggest banks, the person said.

China is tightening oversight of banks, limiting mortgages and raising interest rates to prevent a record $2.7 trillion of credit extended in the past two years from inflating asset bubbles that may saddle lenders with bad loans. Some banks may need to raise additional capital to meet the new requirements, the person said.

An official with the regulator’s news department, who declined to be identified because of the agency’s rules, said a decision hasn’t yet been made on the ratios and that the process is still ongoing.

For more, click here.

Compliance Action

NYSE Will Require Three Trades for Circuit Breakers

NYSE Euronext relaxed rules meant to curb volatility in the U.S. stock market, requiring three trades instead of one to execute outside price limits before a company is halted.

The circuit breakers last five minutes for Standard & Poor’s 500 Index and Russell 1000 Index companies as well as more than 300 exchange-traded funds when they rise or fall at least 10 percent within five minutes. The pauses were established after the May 6 crash erased $862 billion of value in 20 minutes.

Starting today, one or two transactions outside the 10 percent threshold on the New York Stock Exchange or NYSE Amex won’t trigger the pause, according to an e-mail sent to customers yesterday. Three trades are already required at NYSE Arca, another venue owned by the New York-based company.

Spain’s Caixa to Turn Criteria Into Bank to Meet Capital Rules

La Caixa, Spain’s second-biggest savings bank, will turn its publicly traded holding company Criteria CaixaCorp SA into a bank, as it seeks to comply with new banking rules.

Criteria will become CaixaBank, and the lender will sell 1.5 billion euros ($2.1 billion) of convertible bonds through its branch network to boost its core capital ratio to more than 8 percent under Basel III rules by the end of 2012, the Barcelona-based company said in a regulatory filing yesterday.

For more, click here.

Special Section: Davos

Bank CEOs Convene in Davos to Review Debt Risk, Rules

The chief executive officers of banks including Bank of America Corp., Barclays Plc, Credit Suisse Group AG, JPMorgan Chase & Co. and UBS AG met behind closed doors in Davos, Switzerland, yesterday to discuss regulation, the sovereign crisis and political intervention in the markets.

Barclays CEO Robert Diamond and Tidjane Thiam, CEO of insurer Prudential Plc, co-chaired the gathering, an annual event on the sidelines of the World Economic Forum. U.S. Treasury Secretary Timothy Geithner arrived to speak to the group after Diamond presented an “industry issue matrix” for discussion among the participants, who also included top executives from Standard Chartered Plc and Perella Weinberg Partners LP. The list of issues was visible through a window into the meeting room.

The matrix contained five items for discussion: Interplay and unintended consequences of proposals to regulate institutions; threats of sovereign debt default, fiscal weaknesses and contagion in the euro zone; reactions to policymakers’ increasing propensity to intervene in markets; financial innovation and appropriate institutional structures; and successful business in a low-yield environment.

Thiam, during a break in the discussion, said executives planned to ask Geithner for “more certainty” about financial regulation.

For more, click here.

Regulators Still Can’t Wind Down Biggest Banks, Hildebrand Says

Regulators are “years away” from establishing a process to wind down the biggest multinational banks if they fail, said Swiss central bank President Philipp Hildebrand.

While there are some good national resolution regimes, “we’re years away from a proper global resolution regime,” Hildebrand said yesterday at a lunch sponsored by Credit Suisse Group AG, Switzerland’s second-largest bank.

After the 2008 financial crisis led to unprecedented taxpayer support for the banking system, regulators have called for banks to hold more capital and reduce some forms of risk-taking. Still, the regulations haven’t addressed all potential risks, said Hildebrand and former U.S. Treasury Secretary Lawrence Summers.

Summers, 56, who left his job as a White House economic adviser last year and is now a professor at Harvard University, said regulators are “a long way away” from being able to wind down the biggest banks because of their multinational operations. He also said most large banks fail in the middle of a larger crisis of the financial system, which complicates the risk factors.

For more, click here.

For an interview of the Indonesian President Susilo Bambang Yudhoyono on Asian emerging economies, click here.

For an interview of Canadian Finance Minister Jim Flaherty on Canada’s banking regulation and the European stability fund, click here.


OMV’s Ruttenstorfer Acquitted in Insider-Trading Trial

OMV AG Chief Executive Officer Wolfgang Ruttenstorfer, 60, was acquitted by a Vienna court of charges he used inside information to buy shares of Vienna-based OMV a week before a major divestment.

“It clearly confirms that we always acted correctly,” Ruttenstorfer said to journalists, referring to the verdict.

Vienna state prosecutor Michael Schoen said he plans to appeal the verdict.

Ruttenstorfer still holds the shares he bought in March 2009. Austria’s financial regulator fined Ruttenstorfer 20,000 euros for market manipulation related to the case. Vienna’s administrative court rejected Ruttenstorfer’s appeal of the fine last week. He has said he plans a further appeal.


Thomas, Hennessey, Holtz-Eakin Explain Dissent to FCIC

Bill Thomas, vice chairman of the Financial Crisis Inquiry Commission and Republican commissioners Keith Hennessey and Douglas Holtz-Eakin spoke on a teleconference about their dissent to the commission’s assessment of the 2008 market meltdown.

The dissent detailed 10 causes of the financial crisis. Topping their list was the credit bubble, which the three commissioners said was inflated by increased investment in high-risk mortgages.

For the audio, click here.

Holtz-Eakin also spoke on camera with Bloomberg’s Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.”

For the video, click here.

FCIC’s Angelides Says Crisis Avoidable, U.S. Unprepared: Video

Phil Angelides, Democratic co-chairman of the Financial Crisis Inquiry Commission, speaks at a news conference in Washington about the panel’s report on the 2008 market meltdown. FCIC Commissioners John Thompson, Brooksley Born, Byron Georgiou, Bob Graham and Heather Murren also spoke.

For the video, click here.

McLean Says Financial Crisis ‘Involved Many Actors’

Bethany McLean, Bloomberg Television contributing editor and author, discusses the Financial Crisis Inquiry Commission’s final report released yesterday.

McLean, who spoke with Margaret Brennan on Bloomberg Television’s “InBusiness,” also talked about her book on the financial crisis, “All the Devils Are Here.”

For the McLean video, click here.

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