Risk-Retention Rules, Insider Trading, AT&T: Compliance

U.S. regulators proposed a rule that would require sponsors of asset-backed securities to retain at least 5 percent of the credit risk of the assets underlying the securities.

The rule, required by the 2010 Dodd-Frank legislation, will be proposed by several federal agencies, according to a statement released by the Federal Reserve yesterday.

Regulators “sought to ensure that the amount of credit risk retained is meaningful, while taking into account market practices and reducing the potential for the rule to negatively affect the availability and cost of credit to consumers and businesses,” the Fed said. Treasury Secretary Timothy F. Geithner said the proposed risk-retention rule “will help promote better standards for underwriting and securitizing mortgages.”

The 367-page proposed rule took six agencies eight months to write. It provides exemptions, including for asset-backed securities guaranteed by the U.S. government, and for mortgage-backed securities that are composed exclusively of “qualified residential mortgages,” a term that will be defined in the proposal, the central bank said. Banks and bond issuers who meet high underwriting standards may also be exempt from rules requiring them to keep a stake in loans they securitize, according to a draft proposal.

Companies including JPMorgan Chase & Co. and Ford Motor Co. had told regulators that imposing a single method for retaining risk on different types of bonds would force expensive changes on sectors that already retain risk, such as auto lending. That would make loans scarce and raise borrower costs, they said.

In addition to the Fed, the Federal Deposit Insurance Corp., the Securities and Exchange Commission, the Department of Housing and Urban Development, the Federal Housing Finance Agency, and the Office of the Comptroller of the Currency need to approve the rule before it is formally proposed.

For more on the rules, click here. To watch an interview with Sheila Bair on the rules, click here.

Compliance Policy

FDIC Seeks Comment on ‘Living Wills’ for Financial Firms

The Federal Deposit Insurance Corp. will seek comment on proposed rules for so-called living wills under which systemically important financial firms would outline how they could be unwound in the event of a collapse.

The FDIC voted 5-0 to approve the proposal, part of the agency’s expanded authority under the Dodd-Frank Act, at a meeting in Washington yesterday.

Dodd-Frank “appropriately places the responsibility on financial companies to develop their own resolution plan,” FDIC Chairman Sheila Bair said. “We will require these institutions to make substantial changes to their structure” if necessary.

The proposal, part of a joint rulemaking with the Federal Reserve, will require financial companies to provide information on credit exposures, funding, capital and cash flows. The plans are designed to help firms “rationalize” their business models and mitigate some of the risks that exacerbated the credit crisis after Lehman Brothers Holdings Inc. collapsed in 2008.

Under the proposal, U.S. bank holding companies with at least $50 billion in assets as well as foreign-based lenders of similar size with operations in the U.S., will need such plans, the FDIC said. Of the 124 firms that will have to come up with plans, 26 are U.S. bank holding companies, the agency said.

“My concern with the rule is that the resolution plans it requires are novel, complex, and untested,” said John Walsh, who serves on the FDIC board as acting Comptroller of the Currency. “No company has ever prepared such a plan, much less adapted operations to it, and no such plan has ever been tested in a crisis.”

EU Insurance Rules May Hamper Bond Sales of U.S. Banks

New regulations imposed by the European Union on European insurance companies may impede efforts by large U.S. banks to raise debt capital, according to data compiled by Bloomberg.

Capital requirements for European insurers will be implemented next year, under a program known as Solvency II. Under the rules, the longer the duration of a bond an insurer owns, the higher the capital reserve the insurer will be required to hold. For example, capital reserves held against a five-year bond will be about half the amount held against an equivalent 10-year bond.

Historically, European insurers have been significant buyers of the long-term debt of U.S. banks. Some European insurance companies say they may become reluctant to buy longer-dated bonds because holding so much in reserves will be too costly. For U.S. banks that rely on European insurers, this may pose a problem.

Bloomberg Government examined two outstanding bonds issued by JPMorgan Chase & Co. as a case study in whether these regulations will affect U.S. banks. One of the bonds matures in 2020 and the other, a trust preferred security, matures in 2037.

At the end of 2009, JPMorgan had $110 billion of outstanding debt and trust preferred securities with maturities of longer than five years. This represents 37.3 percent of JPMorgan’s outstanding bonds and hybrid capital.

The top 20 holders of these two bonds owned on average 37.6 percent of the outstanding issues. European insurers represented about 16.5 percent of the top 20.

Howard Opinsky, JPMorgan’s managing director of corporate communications, says that European insurers own significantly less of the bank’s outstanding debt than the 16.5 percent would suggest, though he couldn’t estimate how much they held. He said the bank hadn’t considered the impact of the European rules, adding that the bank had “very diversified funding options.”

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Power Plants Face EPA Cooling-Water Rules to Protect Fish

Utilities such as Entergy Corp. face U.S. rules aimed at preventing fish from being sucked into cooling-water systems and costing industry $384 million a year, the Environmental Protection Agency said.

The Obama administration’s proposal introduced yesterday will affect more than 1,200 facilities and save billions of aquatic organisms, including 615 million fish and shellfish a year, the agency said in an e-mailed statement.

The EPA rule, part of a court settlement with environmental groups, will cover power plants and factories that pull water from rivers or lakes to cool machines. Existing facilities will work with states to determine how to meet the requirements while new units will have to use closed-cycle cooling, a system that draws less water and ensnares fewer fish.

“The EPA’s approach is likely to minimize the industry’s cost of compliance,” Hugh Wynne, an analyst at Sanford Bernstein & Co. in New York, wrote yesterday in a report to clients.

The EPA’s pending proposal under the Clean Water Act had been singled out by energy companies, industry groups and Republican lawmakers as a regulation that may burden electric utilities and cause some coal-fired power plants to shut down.

Representative Fred Upton, a Michigan Republican, in December said the rule might cost utilities as much as $300 million per site for coal-fired plants and as much as $1 billion for nuclear generators, exceeding the EPA’s projections.

Entergy, a New Orleans-based owner of coal-fired and nuclear power plants, has said the rule may force it to spend $1.2 billion building two cooling towers at its Indian Point plant along the Hudson River north of New York City.

Two environmental groups, the Natural Resources Defense Council and Riverkeeper, criticized the EPA for shifting the matter to the states. The proposal won’t stop plants from harming billions of fish that get pinned against screens covering water intake pipes, according to the organizations.

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U.K. Bribery Act Won’t Apply to Sports Events, Client Meals

Britain’s Bribery Act won’t prevent companies from treating clients to tickets for sporting events or fancy dinners as the U.K. clarified the law before it takes effect in July.

Prosecutions under the law must be based on the public interest and it will be up to the Serious Fraud Office and Crown Prosecution Service to use common sense in enforcement actions, U.K. Justice Secretary Kenneth Clarke said today.

The act is considered by some lawyers as one of the strictest anti-corruption laws in the world, along with the U.S. Foreign Corrupt Practices Act. 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 company officials didn’t know.

The act had been delayed several times as business groups lobbied the ministry to publish detailed guidance to make the law more business-friendly and clarify provisions that may be too vague to defend in a prosecution. The proposal was criticized over clauses that would have classified fancy dinners or sports tickets for foreign officials as bribes.

The U.K. SFO and Crown Prosecution Service, which will be responsible for enforcing the law, will also publish guidance today, spokespeople for both agencies said.

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U.K. to Reform No-Win No-Fee to Brake ‘Compensation Culture’

The U.K. will change how lawyers are paid in “no-win no-fee” court cases to stop spiraling legal costs from harming the legal system, Justice Secretary Kenneth Clarke announced yesterday.

“Success fees” will be paid out of damages awarded to claimants -- with a cap of 25 percent -- rather than by defendants who are currently liable for as much as 100 percent of the winning lawyer’s base costs on top of their usual fee, the Ministry of Justice said. The reforms will also see a 10 percent increase in general damages.

The reforms will cut costs for businesses and public agencies, Justice Minister Jonathan Djanogly said, with the National Health Service saving 50 million pounds ($80 million) a year that it currently pays in success fees. A supermarket chain informed the department that 60 percent of the pay-outs it makes on legal claims goes to lawyers with 40 percent going to the injured parties, Djanogly said, without identifying the company.

The department also opened a consultation on reforms to the civil justice system, including encouraging more use of mediation, small claims court and online services to settle cases.

Compliance Action

U.S. Charges FDA Chemist in $3 Million Insider-Trading Scheme

A U.S. Food and Drug Administration chemist and his son were arrested by federal authorities and accused of reaping at least $3 million from trading on nonpublic information related to drug-approval applications.

Cheng Yi Liang, 57, and Andrew Liang, 25, face charges of conspiracy to commit securities and wire fraud, according to a Justice Department statement yesterday. The Securities and Exchange Commission, in a parallel civil suit filed at federal court in Greenbelt, Maryland, said the elder Liang made $3.6 million by trading shares of 19 firms before 27 FDA decisions since 2006.

Federal law bars the FDA from disclosing that a drug application has been filed, whether it is conducting a review and whether it has issued a so-called complete response letter that describes specific deficiencies in the application, according to the lawsuit. The FDA only discloses information when it approves a new drug, the SEC said.

The chemist, who worked for the FDA’s Center for Drug Evaluation and Research, violated his duty as a federal employee not to engage in financial transactions using nonpublic government information and not to use such information for his personal benefit, according to the SEC. The agency is seeking disgorgement of illegal profits and unspecified fines.

“The insider trading laws apply to employees of the federal government just as they do to Wall Street traders, corporate insiders, or hedge fund executives,” said Daniel Hawke, head of the SEC’s market abuse unit.

Liang, identified in the SEC suit as a resident of Gaithersburg, Maryland, didn’t respond to a phone call seeking comment.

“FDA is aware that one of its employees has been charged with insider trading,” Erica V. Jefferson, a spokeswoman for the agency, said in an e-mail statement. “The agency is cooperating fully with the authorities and will review the situation and take any appropriate action.”

The SEC’s case is Securities and Exchange Commission vs. Cheng Yi Liang, 8:11-cv-00819-RWT, District of Maryland (Greenbelt Division). The criminal cases are U.S. v. Chen Yi Liang, 8:11-mj-01236-WGC, and U.S. v. Andrew Liang, 8:11-mj-01237-WGC, District of Maryland.

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AT&T’s T-Mobile Purchase Faces Scrutiny by N.Y. Authorities

AT&T Inc.’s proposed $39 billion purchase of T-Mobile USA will undergo a “thorough review” by New York authorities for possible anti-competitive impact, state Attorney General Eric Schneiderman said yesterday.

AT&T said March 20 that it agreed to buy T-Mobile from Deutsche Telekom AG. The acquisition would combine the second-and fourth-largest U.S. wireless providers. The deal may take a year to win government approval, as U.S. regulators determine whether the transaction will reduce customer choice.

Schneiderman said the potential impact of the merger may be greater in Upstate cities such as Rochester, Albany, Buffalo and Syracuse, where there are fewer wireless options, than in New York City. He said he is also concerned about the impact on consumers who have T-Mobile as a “low-cost option.”

The attorney general’s review will weigh the benefits to New Yorkers against the anti-competitive risks. Schneiderman said he will “closely scrutinize” AT&T’s argument that the merger may be beneficial because of expanded coverage of the company’s next-generation wireless network to underserved rural areas with poor service.

“We look forward to sharing information with the AG’s office and remain excited about the significant consumer and competition benefits that this transaction will provide, including improved customer service and expanded high-speed LTE wireless coverage to additional residents and areas across New York State and the rest of the U.S.,” Mike Buckley, an AT&T spokesman, said by e-mail.

Bank’s Mortgage Shortcuts May Have Dodged $20 Billion in Costs

Bank of America Corp. and Wells Fargo & Co. led U.S. mortgage servicers that may have jointly avoided more than $20 billion in costs since 2007 by cutting corners on collections and foreclosures, confidential estimates by the Consumer Financial Protection Bureau show.

The fledgling bureau provided the analysis in a seven-page Feb. 14 presentation to state attorneys general led by Iowa’s Tom Miller, who are pressing banks to accept billions of dollars in fines and concessions, including principal reductions on home loans, after a probe of foreclosure practices. A $5 billion penalty would be “too low,” and banks can afford more, the agency found.

“Rough estimates suggest that the largest servicers may have saved more than $20 billion through under-investment in proper servicing during the crisis,” the bureau wrote in the document. “A penalty based on servicing costs avoided would have little effect on Tier 1 capital ratios,” a measure of financial strength, it said.

JPMorgan Chase & Co. and Citigroup Inc., both based in New York, are also among banks listed as saving the most money. The estimate, spanning the period from 2007 to Sept. 30 last year, assumes that “effective special servicing” of delinquent mortgages would have boosted firms’ costs 75 basis points annually. A basis point is one-hundredth of a percentage point.

In talks on a mortgage-servicing settlement, regulators and state attorneys general in February floated a possible $20 billion to $25 billion penalty for banks, according to two people briefed on the talks.

Banks are resisting the penalties on grounds that federal agencies haven’t found widespread examples of unjustified home seizures. John Walsh, acting Comptroller of the Currency, told lawmakers last month that his agency’s investigation had found only a “small number” of wrongful foreclosures.

The presentation, with seven slides, was published on the Huffington Post’s website on March 28 after business hours in Washington. Its authenticity was confirmed to Bloomberg News by a person with knowledge of the discussions.

Spokesmen for Citigroup, Bank of America and Ally declined to comment. JPMorgan spokeswoman Kristin Lemkau wasn’t immediately available.

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Dying Banks Kept Alive Show Secrets Fed’s Data Will Reveal

U.S. regulators closed Chicago-based Park National Bank in October 2009 when it owed $345 million to one of the lowest-cost lenders in town: the Federal Reserve’s discount window. Park National had been a constant customer at the window for more than 18 months before it failed, records show.

That glimpse into the loan program, gleaned through the Freedom of Information Act, will be expanded this week with an unprecedented view of the secret lifelines the Fed extended to hundreds of banks. Officials plan to release documents that amount to more than 6,000 pages, according to court records. Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC requested the records under FOIA, then sued after the central bank refused to release them.

Without identifying them as of yet, Fed officials say all the discount window loans made during the worst financial crisis since the 1930s have been repaid with interest. Cases such as Park National’s show how the lending amounted to a secret public subsidy, with few questions asked.

“Solvency is the big issue,” said Arthur Wilmarth, a professor at George Washington University Law School in Washington. “Was the Fed keeping banks alive when they should have died?”

Banks were able to tap the window for loans at rates below the market after subprime mortgage defaults contributed to record losses for them and credit markets began to seize up.

“The Fed really provided an inexpensive source of funding,” Daniel Watts, the former executive vice president at Park National in charge of all business lines, said in a telephone interview. The Federal Deposit Insurance Corp. estimates Park National’s closure cost its insurance fund $656 million. The FDIC typically repays discount window loans in the process of resolving a failed bank.

The Fed is expected to release this week documents related to discount window lending from August 2007 to March 2010, including the peak month of October 2008, when loans hit $111 billion.

The disclosures, the first of their kind for a lending program that dates to 1914, will provide the fullest view yet of which banks needed the most public help during the crisis. From now on, data about the program will be available only after a two-year lag, under provisions in the Dodd-Frank financial regulatory law that Congress adopted last year.

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Bank-Client Compensation in U.K. Rose 11% in 2010 Second Half

Compensation paid by U.K. banks and other financial companies to dissatisfied customers rose by 11 percent in the second-half of 2010, as sales of payment-protection insurance triggered extra complaints.

Banks, insurers and investment firms paid out 454 million pounds ($729.5 million) in compensation between July 1 and Dec. 31, the U.K. Financial Services Authority said today on its website.

Complaints about “advising, selling and arranging” rose 47 percent from the first half of the year, reaching 538,427, the FSA said. This was “mainly caused” by dissatisfaction about PPI.

PPI is used to cover payments on credit cards and mortgages in case of illness or unemployment. The FSA published new rules in August on how consumer complaints about PPI should be handled.

Kaupthing’s Former Luxembourg Offices Raided in U.K. Probe

Law enforcement agencies from three countries raided businesses and homes in Luxembourg, including Kaupthing Bank hf’s former offices, as part of a U.K. investigation into the collapse of the Icelandic bank.

Luxembourg police and investigators from U.K. and Icelandic prosecutors executed search warrants on three businesses and two residences March 28, the U.K. Serious Fraud Office said.

The SFO is investigating “decision-making” at Kaupthing, the last of Iceland’s three biggest banks to collapse in 2008, which allowed some investors to take out large loans before its demise.

Luxembourg police spokesman Vic Reuter said 73 investigators participated in the searches at sites including Kaupthing’s former offices, which are now part of Banque Havilland SA.

Banque Havilland said in a statement that the raids weren’t related to its activities and that it was cooperating with the authorities.

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Rambourg Says FSA Ends Probe, Won’t Take Disciplinary Action

Guillaume Rambourg, the former Gartmore Group Ltd. fund manager who quit amid a Financial Services Authority probe last year, said the U.K. regulator won’t penalize him over allegations of improper stock trading.

The FSA concluded its investigation and informed Rambourg that it doesn’t plan to take any disciplinary action against him, the former fund manager said in a statement yesterday. Rambourg, 40, said in a statement that he plans to manage money again and “can now put the events of the past year behind me.”

Gartmore suspended Rambourg a year ago with the London-based firm’s then chief executive officer, Jeffrey Meyer, saying he may have improperly directed buy and sell orders to favored brokers. Rambourg returned to Gartmore in April as an investment analyst, only to quit two months later after the FSA announced it had opened an investigation into his actions.

FSA spokesman Chris Hamilton confirmed Rambourg’s statement was accurate. Hamilton declined to comment further.

Rambourg will have to apply to the FSA if he wants to manage money again either at a firm or on his own.


AmEx Loses Bid to Dismiss Foreign-Exchange Fee Suit

American Express Co., the world’s biggest credit-card issuer by purchases, must face a class-action lawsuit accusing it of conspiring to fix foreign-currency conversion fees.

U.S. District Judge William Pauley in New York yesterday rejected a bid by AmEx to dismiss the group lawsuit originally filed in 2004. He said AmEx failed to provide documentation to support its defense.

“That Amex cannot pinpoint the precise date of its decision to implement a foreign exchange fee is arresting,” Pauley said in his ruling. “The lack of internal company documentation raises suspicion.”

The plaintiffs, holders of Visa or MasterCard credit cards issued by more than a dozen banks including Citigroup Inc. and Bank of America Corp., allege that AmEx engaged in a price-fixing conspiracy with banks and also conspired to include compulsory arbitration clauses in cardholder agreements.

The plaintiffs said the price-fixing scheme began when AmEx met with representatives of other banks in May 1999, Pauley said in his decision. After the meeting, Amex raised its foreign-exchange conversion fee to 2 percent from 1 percent, and some other banks also raised their fees, according to the ruling.

AmEx argued there was no evidence that the fee increases resulted from a conspiracy involving the New York-based company, according to the ruling. AmEx also said the plaintiffs lacked standing under the arbitration clause to bring a conspiracy claim because they couldn’t demonstrate a “threatened loss.”

While “the plaintiffs are not AmEx cardholders, they nevertheless suffered reduced choice in the marketplace as a result of AmEx’s alleged collusion with the banks,” Pauley said in his ruling.

Joanna Lambert, an AmEx spokeswoman, said in an e-mailed statement, “While we don’t comment on the specifics of pending litigation, we do note that the judge’s decision makes no findings other than the plaintiff may proceed with its case. We intend to continue to vigorously defend the case.”

The case is Ross v. American Express Co., 04-cv-05723, U.S. District Court, Southern District of New York (Manhattan).

Merrill Lynch Wins Dismissal of CDO Derivative Lawsuits

Bank of America Corp.’s Merrill Lynch won dismissal of lawsuits brought by investors who said they experienced losses as a result of aggressive investments in collateralized debt obligations.

U.S. District Judge Jed Rakoff in New York on March 28 dismissed the two so-called double derivative suits brought on behalf of the company in 2007 and 2009. The investors wanted the largest U.S. lender by assets to force its Merrill unit to bring claims against the subsidiary’s officers and directors, he said.

The allegations in the complaints describe “the kind of risky behavior by high-ranking financiers that helped create the economic crisis from which so many Americans continue to suffer,” the judge said in his written ruling.

Rakoff concluded the shareholders failed to show that the Charlotte, North Carolina-based bank’s board was “so involved in the underlying wrongdoing alleged in the derivative complaint that it could not impartially consider a demand to pursue claims against the Merrill officers and directors.”

Shirley Norton, a spokeswoman for Bank of America, which acquired Merrill Lynch in 2009, said she didn’t have an immediate comment.

CDOs are securities backed by corporate loans, mortgages, auto loans, credit cards and other assets that are sliced into layers carrying different levels of risk.

The cases are In Re: Merrill Lynch & Co. Securities Litigation, 07-CV-09633, and N.A. Lambrecht v. O’Neal, 09-cv-08259, U.S. District Court, Southern District of New York (Manhattan).

Ex-Galleon Employee Says Firm Used Insider Tips for ‘Edge’

Adam Smith, a former Galleon Group LLC portfolio manager, testified that the firm used insider tips as an “edge” in a strategy to make money when company revenue figures differed from the Wall Street consensus.

Smith, 39, told jurors in the criminal trial of Raj Rajaratnam yesterday that part of his job was “getting the number” -- learning revenue figures before they became public - - from insiders at publicly traded companies including Intel Corp., the world’s largest semiconductor maker, Intersil Corp. and Synaptics Inc.

“Research is sort of doing your homework ahead of time,” Smith told jurors. “Getting the number is more like cheating on the test.”

Smith has pleaded guilty and is cooperating with prosecutors. Yesterday, he told federal court jurors in Manhattan that he continued trading on inside information after leaving Galleon, and even after the October 2009 arrest of Rajaratnam.

The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

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