Executives at some of the largest U.S. financial institutions and regulators clashed last week over efforts by watchdogs to impose higher capital requirements and other rules.
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon took an unusual step in pressing Federal Reserve Chairman Ben S. Bernanke in a public forum on June 7 on whether regulators have gone too far in reining in the U.S. banking system and are slowing economic growth. Prudential Financial Inc. Vice Chairman Mark Grier said standards for insurers and banks will fail in a crisis. Federal Deposit Insurance Corp. Chairman Sheila Bair warned against forgetting the lessons of the credit crunch.
Regulators are drafting rules as part of the Dodd-Frank Act overhaul of financial-industry oversight, seeking to prevent a recurrence of the 2008 credit freeze that prompted a taxpayer bailout of the banking system. Regulators worldwide are devising new capital requirements.
The Fed supports a proposal at the Basel Committee on Banking Supervision that calls for a maximum surcharge of three percentage points on top of a 7 percent minimum requirement on the largest global systemically important financial institutions, or SIFIs, according to a person familiar with the discussions.
Dimon’s exchange with Bernanke gave other executives cover to criticize proposed international capital standards.
Prudential’s Grier told analysts that Solvency II and Basel III, the insurer and bank standards being readied by regulators, will fail in a crisis. Grier said he refers to SIFIs as “sci-fi,” which is short for science fiction. The biggest U.S. life insurers, including No. 2 Prudential, will be subject to Fed oversight if they are deemed systemically important.
Bob DeFillippo, a Prudential spokesman, said the sci-fi characterization was meant to reflect the change represented by the involvement of federal agencies in insurance oversight. Grier said he hopes federal regulators won’t apply bank rules to insurers and that he expected Prudential to face greater scrutiny, even if it isn’t designated a SIFI.
In Washington, financial companies and their lobbyists have pushed back against restrictions being crafted under Dodd-Frank.
CFTC, SEC Set Forum on Swap Dealer, Participant Definitions
The U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission will hold a joint public forum to discuss proposed definitions of terms such as “swap dealer,” “security-based swap dealer,” “major swap participant” and “major security-based swap participant” as required under the Dodd-Frank Act.
The CFTC, which is writing derivatives rules along with the SEC, announced the June 16 meeting in an e-mail statement June 10.
Telmex Says Rural Rules to Cut Investments, Plans Appeal
Telefonos de Mexico SAB, the nation’s largest land-line phone carrier, said it won’t invest in rural zones of the country if the government doesn’t overturn new rules cutting its fees to connect calls to those areas by 95 percent.
The company will ask the Communications and Transportation Ministry to overturn the Federal Telecommunications Commission rate cut, Regulatory and Legal Affairs Director Javier Mondragon said on a conference call June 9. The reduction is legally unfounded, he said.
Telmex and its parent company, billionaire Carlos Slim’s America Movil SAB, are contending with a series of government decisions to reduce their dominance of Mexico’s phone market. The telecommunications commission in March more than halved the fees America Movil can charge rivals to complete calls to its Mexican wireless unit.
The rate cut reduces the fee Telmex can charge to complete calls in areas where it is the only phone provider to 4 centavos (0.34 cent) from 75 centavos, the telecommunications agency said in a statement June 9.
Telmex is still calculating how the new rules would affect the company financially, said Arturo Elias, Slim’s son-in-law and Telmex’s communications director.
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Grassley Says SEC Response in SAC Trading Inquiry Unacceptable
U.S. Senator Chuck Grassley said the Securities and Exchange Commission provided an unacceptable response to his request for information relating to its stock-trading inquiry into hedge-fund firm SAC Capital Advisors LP.
Grassley’s remark referred to a letter to him from SEC Enforcement Director Robert Khuzami. In the letter, dated June 9, Khuzami declined to provide specific information about any trades or the status of any investigation.
Grassley, the senior Republican on the Judiciary Committee, asked SEC Chairman Mary Schapiro in a May 24 letter to explain how the regulator has handled specific allegations of suspicious trading. Grassley’s office has said he has received about 20 examples from the Financial Industry Regulatory Authority of possible insider trading involving SAC Capital. SAC, led by Steven Cohen, hasn’t been charged with any wrongdoing.
Financial-Industry Groups Urge Delay of U.S. Resolution Rules
Lobby groups representing some of the world’s biggest financial companies want U.S. regulators to delay rules that would govern resolutions of systemically risky firms to allow more time to review and revise the proposal.
The Federal Reserve and the Federal Deposit Insurance Corp. must clarify what constitutes a “credible” plan for unwinding a complex firm before requiring companies to file so-called living wills, six groups including the Securities Industry and Financial Markets Association and the Institute of International Bankers said in a letter to the regulators, according to a copy obtained by Bloomberg News.
The Dodd-Frank Act requires firms deemed systemically important to file plans with the Fed and the FDIC for how they could be unwound in event of their failure.
The groups, representing firms including JPMorgan Chase & Co, BlackRock Inc., Bank of New York Mellon, Royal Bank of Scotland Group Plc and Deutsche Bank AG, urged regulators to push back implementation of the rules from next month to as late as January of next year.
Under the living-wills provision, companies with at least $50 billion in assets will have to provide information on their debt, funding, capital and cash flows. Firms that fail to file workable plans for unwinding their business could be subject to increased capital, leverage or liquidity requirements as well as restrictions on their growth, activities or operations.
Financial-industry criticism of the living-wills measure is part of a broader pushback against Dodd-Frank, the regulatory overhaul law.
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Fed to Expand Annual Capital Exams to 35 Largest U.S. Banks
The Federal Reserve said it will expand a capital-planning program to the 35 largest U.S. banks to ensure they have an adequate buffer in an economic crisis.
Bank holding companies with at least $50 billion in assets will be required to adopt “robust, forward-looking capital planning processes that account for their unique risks,” the Fed said June 10 in a statement in Washington.
Banks would be required to submit plans to raise dividends or repurchase stock as part of the reviews, to begin early next year, the Fed said. Firms whose plans are rejected would have to get approval before distributing capital.
The reviews are part of a broader effort, which includes the Dodd-Frank Act overhauling financial regulation, to tighten supervision of financial firms and reduce the risk of another crisis. In March, the 19 largest banks, such as Wells Fargo & Co. and JPMorgan Chase & Co., completed capital reviews that allowed many of them to boost dividends or buy back shares.
The initiative may force banks to hold additional capital and reduce profitability measured by return on equity, said Bert Ely, an industry consultant based in Alexandria, Virginia.
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Goldman Unlikely to Face Charges From Senate Report, Bove Says
Goldman Sachs Group Inc. is unlikely to face charges from investigations into the firm’s mortgage practices before the financial crisis, according to a June 8 note to investors by Richard X. Bove, an analyst at Rochdale Securities LLC.
Bove suggested less than a month ago that clients sell the firm’s stock because the U.S. Department of Justice was under pressure to bring claims, based on a report from the U.S. Senate’s Permanent Subcommittee on Investigations accusing Goldman Sachs of misleading buyers of mortgage-linked investments.
The firm, which paid $550 million to settle Securities and Exchange Commission charges related to its marketing of mortgage securities, was subpoenaed by the Manhattan District Attorney’s office for information on business practices leading into the credit crisis, two people familiar with the matter said last week.
The Senate subcommittee said that documents uncovered in its two-year investigation of the financial crisis showed the firm took large short positions against the 2007 housing market and aggressively marketed the short position to clients.
Chairman and Chief Executive Officer Lloyd C. Blankfein said at last year’s hearing that Goldman Sachs didn’t have a “massive short” against the housing market, and was acting as a “market maker” in selling collateralized debt obligations and other mortgage-backed investments to clients.
Bove said in his note that evidence is “now mounting” that the company did not have a “net short position” and Blankfein did not misrepresent the matter to the Senate committee.
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Hong Kong Auditor Rejected by U.S. on Inspection Concerns
The Public Company Accounting Oversight Board rejected Hong Kong-based Zhonglei CPA Co.’s application to become a registered U.S. auditor, citing an inability to inspect its work for companies based in China.
This was the first time the PCAOB blocked an auditor since toughening rules in October. The decision follows the U.S. Securities and Exchange Commission’s increased focus on Chinese-based companies that trade on American stock markets. The SEC cautioned investors June 9 about buying stakes in companies that gain listings through so-called reverse mergers, saying they may be prone to “fraud and other abuses.”
Lynn Turner, a former SEC chief accountant who serves on a PCAOB advisory group, said the board is “putting a line in the sand” and telling China its certified public accounting firms must conduct “high-quality audits” and let the board in to inspect.
Zhonglei CPA decided to stop the application process to be registered as an U.S. auditor and focus on its Hong Kong and China businesses, the company said in an e-mailed response to Bloomberg News June 10.
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Barclays, Lloyds, RBS Get Extension on PPI Complaints by FSA
Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc were given more time to handle customer complaints on a kind of loan insurance after a court challenge to the rules created a backlog.
The banks must respond to the complaints on payment-protection insurance as much as 16 weeks, rather than eight weeks, the Financial Services Authority said in a statement today. The British Bankers’ Association, an industry group, lost a court challenge in April of the FSA’s guidelines on how lenders should handle PPI complaints.
Margaret Cole, the FSA’s interim director for business conduct cited “a huge backlog” in explaining the decision.
PPI generates as much as 5.5 billion pounds in annual revenue for U.K. banks, with about 6.5 million policies sold in 2006, the FSA has estimated. The insurance covers payments on credit cards and mortgages in case of illness or unemployment.
Customers who bought PPI rarely compared prices and terms or switched providers. The FSA introduced rules in August aimed at bringing competition into the market for this type of insurance.
U.K. Banks May Beat ‘Merlin’ Business Lending Targets, FT Says
The U.K.’s largest banks may beat actual lending targets set out in the so-called Project Merlin agreement signed between the banks and the government in February, the Financial Times reported, citing figures disclosed last week by Minister for Business and Enterprise Mark Prisk.
The agreement’s targets, labeled “stretch targets,” are about 10 percent lower than the official “capacity targets” published in the Merlin announcement, the FT said. The “stretch target” for total corporate lending in 2011 is 168 billion pounds ($273 billion) compared with a “capacity target” of 190 billion pounds, the newspaper said.
BofA Plans Shutdown of Proprietary Bond-Trading Unit
Bank of America Corp., the largest U.S. bank, is shutting a unit that makes bets on bonds with the firm’s own capital, said three people briefed on the decision.
Julie Hyman reported on Bloomberg Television’s “Bottom Line With Mark Crumpton.”
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Kuwait Bourse Seeks to Slow Government Plan, Favors Nasdaq
Kuwait Stock Exchange is seeking to slow government plans to sell the country’s bourse on concern it remains too weak three years after the credit crisis triggered a $5 billion bailout of financial companies.
The government must sell 50 percent of the exchange by the end of this year under the terms of a law approved in February 2010. The remainder is to be sold to Kuwaitis in an initial public offering, said Hamed al-Saif, the director and head of the exchange.
Kuwait’s benchmark index has lost 9.3 percent this year. Companies are recovering after the global financial crisis forced the government to guarantee all local bank deposits in 2008 and approve a $5 billion economic rescue package to help bolster financial institutions.
Nasdaq OMX Group Inc., the second-biggest operator of U.S. stock exchanges, signed an 18.3 million dinar ($66.7 million) contract with KSE in October 2009 to supply it with a trading system and advisory services.
The exchange has been regulated since March by the Capital Markets Authority, or CMA, the country’s first stock-market regulator.
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Iceland Gets Final Warning on Icesave Depositor Claims
Iceland has three months to compensate the U.K. and Dutch governments for as much as $5.3 billion in depositors’ claims before being taken to the European Free Trade Association’s Court, the bloc’s watchdog announced June 10.
A letter of final warning was sent to the north Atlantic island’s government June 10 by the EFTA Surveillance Authority, the agency said in an e-mailed statement June 10.
Iceland is obliged under European rules to guarantee a minimum compensation of 20,000 euros ($29,000) for Dutch and British account holders in failed lender Landsbanki Islands hf’s high-yielding Icesave accounts, according to the agency. The authority checks that Iceland, Norway and Liechtenstein act in line with European Union rules.
U.K. and Dutch depositors were compensated by their own governments after the failure of Landsbanki. A government-struck agreement on Iceland’s repayment terms of the $5.3 billion used to repay depositors was rejected by Icelandic voters in an April 9 referendum, prompting ESA to continue infringement proceedings.
About 350,000 U.K. and Dutch depositors risked losing their savings when Landsbanki tumbled along with the rest of the north Atlantic island’s debt laden financial industry in October 2008.
Taylor Bean Ex-President Bowman Gets 30-Month Fraud Sentence
Raymond Bowman, former president of Taylor, Bean & Whitaker Mortgage Corp., was sentenced to 2 1/2 years in prison for his part in a $3 billion mortgage fraud.
Desiree Brown, the lender’s former treasurer, received a six-year term. Both were sentenced June 10 in federal court in Alexandria, Virginia, for their roles in a scheme that duped some of the largest U.S. financial institutions, targeted the federal bank bailout and contributed to the failures of Montgomery, Alabama-based Colonial Bank and its parent, Colonial BancGroup Inc.
U.S. District Judge Leonie Brinkema said she wouldn’t ban the two from seeking jobs in the mortgage industry after serving their time. Both will be required to pay restitution to victims, though the amount hasn’t been determined.
Prosecutors said both should receive shorter terms than the maximums because they admitted their crimes and helped the government in its case against Lee Farkas, Taylor Bean’s former chairman. A jury in Alexandria found Farkas guilty April 19 of 14 counts of conspiracy and bank, wire and securities fraud after a two-week trial. He is scheduled to be sentenced on June 27.
The Bowman case is U.S. v. Bowman, 11-cr-00118, the Brown case is USA v. Brown, 11-cr-00084, and the Farkas case is USA v. Farkas, 1:10-cr-00200, U.S. District Court, Eastern District of Virginia (Alexandria).
EFSF’s Regling Sees More Signs of ‘Financing Fatigue’
Klaus Regling, chief executive officer of the European Financial Stability Facility, talked about management of the European sovereign debt crisis.
He spoke at the European Central Bank and Its Watchers conference in Frankfurt. Regling addressed a number of topics including the euro-area budget, rules, and institutional changes.
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Schlosstein Says U.S. Must Be ‘Cautious’ With Bank Rules
Ralph Schlosstein, chief executive officer of Evercore Partners Inc., talked about financial regulation and other factors affecting large U.S. banks.
Schlosstein, who spoke with Betty Liu on Bloomberg Television’s “In the Loop,” also discussed the prospects for Wall Street layoffs.
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Comings and Goings
Barings Fund Chairman Duckworth Joining U.K. SFO as Director
Simon Duckworth, the chairman of the Barings Targeted Return Fund, will join the U.K. agency that prosecutes white-collar crime as a non-executive director.
Duckworth, who is also a non-executive director of Fidelity European Values Plc and chairman of the National Olympics Security Oversight Group, will start in the role on July 1, the U.K. Serious Fraud Office said in a statement. His role will be to link the SFO with both the London police and business, the agency said.