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Bank Levy, Sovereign Debt, Stress Tests: Compliance

U.S. House Democrats are looking to JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp. to pick up the tab for housing programs targeted by Republican budget cuts.

Representative Barney Frank of Massachusetts, the top Democrat on the Financial Services Committee, introduced a measure yesterday that would impose a $2.5 billion levy on financial firms with more than $50 billion in assets and hedge fund managers with more than $10 billion in assets. The money would be collected through risk-based assessments.

Republicans have targeted four housing programs as they attempt to cut back on federal spending, voting March 16 to eliminate the Neighborhood Stabilization Program. They are also scheduled to vote on eliminating the Obama administration’s signature foreclosure-prevention effort, the Home Affordable Modification Program.

Frank, as a member of the minority party, would need Republicans to support the measure for it to move forward.

He proposed a similar levy last year to cover the cost of the Dodd-Frank financial regulation law, which didn’t succeed.

Compliance Policy

Banks Should Assess EU Debt-Restructure Risk, U.K. FSA Says

U.K. banks need to assess their preparedness for a sovereign-debt restructuring by a European country with internal stress tests, the Financial Services Authority said.

Lenders should look at how their balance sheets would withstand “a prolonged period of austerity and possible restructuring of bank and sovereign debt” by countries such as Greece, Ireland, Portugal and Spain, the FSA said yesterday in a report on risks to the British financial industry.

U.K. banks may face “indirect credit risks” from the EU sovereign-debt crisis because their “exposures to German and French banks totaled nearly 150 billion pounds” ($241 billion) in 2010, according to the report.

Adam Farkas, the nominee to be the executive director of the European Banking Authority, said regulators should strengthen EU-wide stress tests to better examine lenders’ sovereign debt holdings.

The EBA, which is preparing the exams, could review whether the tests should include the possibility of a sovereign default, Farkas told the European Parliament in Brussels. That wasn’t among draft test scenarios circulated earlier this month and seen by Bloomberg News.

Stress Tests May Undermine Confidence, German Bank Group Says

The publication of bank stress tests planned by European Union regulators may undermine confidence rather than boost stability because the results can be misread, the Association of German Banks said.

While the German banking association supports examining the stability of the European financial system and “significantly tougher” criteria, it says the results for individual banks shouldn’t be published. In addition, the test shouldn’t include minimum capital hurdles and tougher definitions for reserves, Dirk Jaeger, managing director at the BdB lobby group, said in Frankfurt yesterday.

EU regulators are considering lifting the minimum amount of capital needed to pass the test and introducing a stricter definition of what constitutes such reserves after criticism of last year’s tests. A decision on the final hurdles hasn’t been made, Jaeger said. The stress tests will cover 88 banks in Europe, or about 65 percent of EU banking assets, according to documents obtained by Bloomberg News earlier this month.

European Union regulators have yet to agree on which banks to test as part of annual exams on capital, or what the passing grade will be, a month before an April deadline for disclosure of stress test methodology.

The stress tests will apply to a “wide sample of European banks covering over 60 percent of total EU banking assets,” the European Banking Authority, the agency carrying out the tests, said in a statement yesterday that didn’t identify the banks to be examined.

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Compliance Action

Barclays, Citigroup Said to Be Subpoenaed in Libor Probe

Barclays Plc and Citigroup Inc. are among banks subpoenaed by U.S. regulators investigating whether some firms manipulated the setting of the London interbank offered rate, two people with knowledge of the probes said.

Germany’s WestLB AG and London-based Lloyds Banking Group Plc are among the 16 banks on the panel that set Libor that have been contacted by regulators requesting information, said two people who declined to be identified because they aren’t authorized to speak on the matter. Bank of America Corp., the biggest U.S. bank by assets, also received subpoenas from the Securities and Exchange Commission and the Justice Department, the Financial Times reported March 16.

Libor rates are set daily by the British Bankers’ Association, based on data it gets from a panel of banks on what it would cost them to borrow funds for various periods and in different currencies. The validity of Libor, a benchmark for more than $350 trillion of derivatives and corporate bonds, was questioned during the credit crisis as banks became wary of lending to one another because of mounting losses.

The SEC may examine whether banks misled their own investors by making misstatements regarding the benchmark, said Arthur Wilmarth, a professor at George Washington University Law School. During the financial crisis, investors tracked firms’ ability to borrow money and remain liquid.

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Comparing CEO to Worker Pay Too Costly, Firms Tell SEC

As part of the Dodd-Frank regulatory overhaul, public companies including those with global operations like United Parcel Service Inc. and McDonald’s Corp. eventually will have to work out what they pay each employee, across an international variety of payroll systems, currencies and benefits, and find the median compensation.

Some of the firms and trade groups have sent letters to the Securities and Exchange Commission, urging the regulator to revoke the rule and claiming that it costs too much money to compile the data. Bloomberg’s Lizzie O’Leary reported on the topic yesterday.

For the video, click here.

South Korean Regulator to Tighten Rules on Bond Sale

South Korea’s Financial Services Commission will tighten rules on subordinated bonds sold by savings banks, the regulator said in an e-mailed statement yesterday.

The regulator also will apply stricter criteria on calculating those savings banks’ capital adequacy ratio.

South Korea suspended eight savings banks this year because of their poor finances.

RBS Reduced Taxpayer, Central Bank Funding Aid by 21% in 2010

Royal Bank of Scotland Group Plc, the biggest U.K. government-owned bank, said it reduced taxpayer-assisted funding by 21 percent to 57.6 billion pounds ($93 billion) last year.

The Edinburgh-based lender had 41.5 billion pounds of loans and guarantees from the government’s Credit Guarantee Scheme and 16.1 billion pounds from the Bank of England’s Special Liquidity Scheme. That is 15.3 billion pounds less than the total in 2009.

The government has injected 45.5 billion pounds into RBS to bolster its capital and insures about 195 billion pounds of its risky assets.

The U.K. financial authorities introduced the SLS at the peak of the credit crisis to allow banks to swap hard-to-trade mortgage-backed securities for government bonds.

Kraft, Unilever, Dr. Oetker Get German Antitrust Fines

German units of Kraft Foods Inc. and Unilever NV, and Dr. August Oetker Nahrungsmittel KG, were fined a total of 38 million euros ($53 million) for anticompetitive behavior.

The companies took part in meetings where they shared data about food, as well as information about negotiations and price policies with retailers, the Federal Cartel Office, Germany’s antitrust regulator, said in an e-mailed statement.

The companies agreed to the fines as part of a settlement, the cartel office said yesterday.

Regarding Rotterdam-based Unilever, the investigation focused on information exchanged in 2006, and doesn’t concern ongoing operations, company spokesman Konstantin Bark said in an e-mailed statement. The settlement is considered to be in the best interests of Unilever, he said.

Silke Troesch, a German spokeswoman for Northfield, Illinois-based Kraft, confirmed the settlement. Dr. Oetker spokesman Joerg Schillinger said he couldn’t comment beyond the regulator’s statement.


FDIC Sues Ex-Washington Mutual CEO Killinger for Bank Losses

Former Washington Mutual Inc. Chief Executive Officer Kerry Killinger and Chief Operating Officer Stephen Rotella took extreme risks with the bank’s home-loans portfolio, causing billions of dollars in losses, the Federal Deposit Insurance Corp. said in a complaint.

Rotella, Killinger and David Schneider, Washington Mutual’s home loans president, showed reckless disregard for the bank’s long-term safety and instead focused on short-term gains to increase their compensation and “should be held accountable,” the FDIC said in the complaint filed March 16 in federal court in Seattle. The agency seeks unspecified damages and an order freezing the assets of Killinger and Rotella and their wives.

Federal regulators seized Washington Mutual, once the nation’s biggest savings and loan, in September 2008 and sold it to New York-based JPMorgan Chase & Co. for $1.9 billion.

Bank executives blamed Killinger, who was CEO for 18 years, during hearings before the U.S. Senate last year for ineffective management controls and lax lending standards.

“This action runs counter to the facts about my relatively short time at the company,” Rotella wrote in a letter e-mailed to Bloomberg by his spokesman, Daniel Hilley. “As you might imagine, I am angered by this abuse of power by the FDIC.”

JPMorgan spokesman Joseph Evangelisti declined to comment. No phone number is listed for Kerry Killinger in Washington State and Schneider couldn’t immediately be reached for comment.

The case is FDIC v. Killinger, 11-00459, U.S. District Court, Western District of Washington (Seattle).

Kentucky Bank Takes on FDIC in Last Stand for Tax Refund Loans

A Kentucky bank’s legal challenge to regulatory efforts to banish “refund-anticipation loans” for taxpayers may be the last stand for a product that has generated millions of dollars for tax preparation firms including Jackson Hewitt Tax Service Inc., analysts said.

Republic Bancorp Inc., based in Louisville, sued the Federal Deposit Insurance Corp. last month after the agency subpoenaed tax preparers for “immediate access to and copies” of files, customer disclosures and communications as part of a probe of “unsafe or unsound banking practices” by the bank.

The requests, outlined in a confidential subpoena obtained by Bloomberg News, followed efforts by the Internal Revenue Service and the Office of the Comptroller of the Currency to curb use of the tax-refund loans known as RALs.

A unit of the bank, Tax Refund Solutions, provides the loans through Jackson Hewitt and Liberty Tax Service offices.

Andrew Gray, an FDIC spokesman, said the agency is scrutinizing whether RALs are “a safe and sound product and comply with consumer protection laws.” He declined to comment on the Republic case, citing an FDIC prohibition on discussing active litigation or confidential supervisory information.

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Massad Says Treasury Opposes Ending of U.S. Housing Aid

Tim Massad, acting assistant secretary for financial stability at the U.S. Treasury; Neil Barofsky, special inspector general for the Troubled Asset Relief Program; Ted Kaufman, former U.S. Senator from Delaware; and Thomas McCool, director of the Government Accountability Office’s Center for Economics, Applied Research and Methods, testified before the Senate Banking Committee about TARP.

They spoke at a hearing of the Senate Banking Committee in Washington yesterday. Their testimony included comments about costs of the TARP program, TARP oversight, regulation, and use of taxpayer funds.

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Burns Says Rajaratnam Defense Arguing Tips Were Public

Douglas Burns, a former federal prosecutor, talked about the insider-trading trial of Galleon Group co-founder Raj Rajaratnam and the strategy of his defense team.

Burns discussed possible defense strategies with Erik Schatzker and Lisa Murphy on Bloomberg Television’s “InsideTrack.” He also talked about the administrative proceeding against Rajat K. Gupta.

For the video, click here.

Deficit Fight Doesn’t Justify Shortchanging CFTC, Gensler Says

Congressional efforts to reduce the federal deficit shouldn’t restrict funding for the Commodity Futures Trading Commission, which needs more money to avert a repeat of the credit crisis, CFTC Chairman Gary Gensler said.

“We recognize that the budget deficit presents significant challenges to Congress and the American public,” Gensler said yesterday in remarks prepared for a House Appropriations Committee hearing in Washington. “But we cannot forget that the 2008 financial crisis was very real.”

The CFTC budget has been frozen at its fiscal 2010 level -- along with those of other federal agencies -- by a stalemate between Republicans aiming to cut spending and Democrats looking to fund implementation of the Dodd-Frank Act. The CFTC and the Securities and Exchange Commission are responsible for expanding oversight of derivatives under the regulatory overhaul.

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Comings and Goings

Goldman Sachs Hires U.K. Lawyers to Prepare for Bribery Act

Goldman Sachs Group Inc. and U.S. law firms are luring lawyers away from the U.K. fraud prosecutor as companies prepare to comply with the world’s “most draconian” anti-bribery law.

The U.K. Ministry of Justice has said it will introduce new proposals as soon as next week. Under the law, U.K. companies without adequate controls to prevent corruption may be prosecuted if a bribe is paid by third parties on their behalf anywhere in the world, even if officials didn’t know.

The Ministry of Justice may weaken some parts of the law initially put forward by former Prime Minister Gordon Brown’s Labour government last year, SFO officials said. The proposal was criticized over clauses that would have classified fancy dinners or sports tickets for foreign officials as bribes.

Chris Walker, the SFO policy chief, told a defense industry conference in January that the revised law may allow a company to fund a factory visit and hospitality for a public official. A month’s stay on a private yacht after the trip would “raise red flags,” he said.

British business groups pressed the ministry to make the law more business-friendly and clarify provisions that may be too vague to defend in a prosecution.

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Goldman Sachs Board Member Scott to Leave After Review

Goldman Sachs Group Inc. said board member H. Lee Scott, who helped review the bank’s business practices when the firm was sued by U.S. regulators, will quit after one year because of other commitments.

Scott, 62, a former Wal-Mart Stores Inc. chief executive officer, was elected to the board at the annual shareholder meeting in May. He won’t seek re-election at this year’s meeting, the firm said yesterday in a statement. Goldman Sachs, the fifth-biggest U.S. bank by assets, is seeking a replacement, a person familiar with the matter said.

Scott was nominated to the board on March 19 last year, the same day the firm said Rajat K. Gupta, who joined the board in 2006, wouldn’t stand for re-election. Gupta was later sued by Securities and Exchange Commission. Gary Naftalis, an attorney for Gupta, has called the SEC’s allegations “totally baseless.”

Draghi Backed by Hedge Fund Managers to Become ECB Chief

Italy’s Mario Draghi should succeed Jean-Claude Trichet as president of the European Central Bank when the incumbent’s term ends in October, a panel of hedge fund managers said.

Draghi’s experience as head of the Financial Stability Board, where he helped to rewrite global financial rules, makes him the most qualified candidate to succeed Trichet, investors from RAB Capital Plc, Sturgeon Capital LLP and Signet Group said at the Bloomberg Link Hedge Funds conference in London yesterday.

European leaders are looking for a Trichet successor just as they try to persuade voters to offer more financial support to debt-strapped nations across the euro region’s periphery.

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