Google Probe, Funds Register, Rothesay Typo: Compliance

New York and California are in the early stages of an antitrust investigation of Google Inc., along with Texas and Ohio, said a person with knowledge of the matter who didn’t want to be identified because the probe isn’t public.

Officials in Texas and at the European Commission have started investigations into Google’s dominance of the Internet search industry. Ohio Attorney General Mike DeWine said in March his office was “evaluating the facts” to determine whether it wanted to conduct a probe.

Google, operator of the world’s largest search engine, is coming under increasing scrutiny by regulators in the U.S. and Europe for some of its business practices. Mistique Cano, a spokeswoman for Mountain View, California-based Google, declined to comment June 23.

Lynda Gledhill, a spokeswoman for California Attorney General Kamala Harris, and Lauren Passalacqua, a spokeswoman for New York Attorney General Eric Schneiderman, declined to comment.

“The Ohio Attorney General’s Office cannot confirm or deny the status of any possible investigation,” Dan Tierney, a spokesman, said June 23 in an e-mail.

Oklahoma Attorney General E. Scott Pruitt said in May that he may join other states and federal agencies in probing Google’s dominance. Diane Clay, a spokeswoman for Pruitt, said the attorney general’s office was looking at both consumer protection and competition issues.

The investigation by California and New York were reported earlier by the Financial Times.

Separately, Google said June 24 that the U.S. Federal Trade Commission has begun a review of its business practices.

“We respect the FTC’s process and will be working with them (as we have with other agencies) over the coming months to answer questions about Google and our services,” Amit Singhal, a Google fellow, said in a blog. He also said it’s “unclear exactly what the FTC’s concerns are.”

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Compliance Power

Retail Banks’ Behavior to Be Focus of New Regulator, FSA Says

The agency replacing the U.K.’s financial regulator will intervene earlier to prevent the introduction of risky products and use enforcement powers to study banks’ conduct in selling retail investments.

The Financial Conduct Authority, which is due to start work by 2013, will “aim to protect and enhance confidence in the firms and markets it regulates,” the Financial Services Authority said in a report on its website today.

The FSA, the U.K.’s financial regulator, will be abolished by the end of 2012 and replaced by at least two new authorities as part of an overhaul of financial supervision. The Financial Conduct Authority will have new powers to ban risky financial products or intervene in how they are marketed and to publish information about disciplinary investigations earlier.

Separately, under proposals for the Financial Conduct Authority, U.K. regulators may get the power to compel public companies to hire external experts for scrutiny of controls or governance if there are questions about companies’ listings or transactions, the Financial Times reported.

Under proposals in the draft financial reform bill, that power would be vested in the planned authority after the existing Financial Services Authority is split up in 2013, the newspaper said.

European Banks May Have to Raise More Capital After Basel

Regulators meeting in Basel this weekend agreed to make as many as 30 of the world’s largest, or systemically important, banks hold as much as 2.5 percentage points more capital than the 7 percent core Tier 1 capital required.

They also blocked European banks’ requests to use hybrid capital, such as contingent convertible bonds, to meet the target. The biggest banks will use mostly retained earnings and ordinary shares.

Lenders had lobbied against the extra capital requirements, saying they risked stunting the global economic recovery and some had sought to avoid being categorized as systemically important. The decision marks a loss for European banks that are grappling with the region’s debt crisis and had sought to use hybrid capital to meet regulators’ extra requirements.

For a related story on the how the Bank for International Settlements is pushing banks to raise capital before the rules take effect, click here. To read more about the Basel regulators’ decision to rule out contingent convertibles for now, click here.

The decision was part of the Basel Committee’s overhaul of rules on how much capital the world’s largest banks should hold so they don’t collapse during a financial crisis. The proposals will be reviewed by the Financial Stability Board and then be issued for public comment, the Basel group said. The FSB, which brings together finance ministry officials, central bank governors and regulators from the Group of 20 countries, is leading efforts to rein in systemically important banks.

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U.K. Gives Consumer Bodies Power Over Toxic Financial Products

Chancellor of the Exchequer George Osborne will give consumer protection bodies the right to flag ‘toxic’ financial products with regulators to prevent banks selling services to consumers that they don’t need.

Consumer groups such as Which? will be given the power to raise complaints with the financial regulator when they see evidence of products that are improperly sold or harm consumers. The Treasury said it expects the change will make the system more nimble and responsive to the needs of consumers.

The effort comes after HSBC Holdings Plc, Royal Bank of Scotland Group Plc and Barclays Plc in May set aside about $3.4 billion for customers improperly sold personal-loan insurance. The powers are part of the biggest financial regulatory overhaul since 1997.

Consumer groups already have some powers to raise competition complaints with the Office of Fair Trading. The Financial Conduct Authority, whose powers will be formalized once the Financial Regulation Bill is passed next year, will be forced to investigate similar complaints.

Compliance Action

Hedge Funds Ahead of Schedule on SEC Registration Mandate

Hedge funds are a step ahead of the first mandatory registration rule from the U.S. Securities and Exchange Commission as the typically secretive industry has opened its books to regulators since the 2008 financial crisis.

What could have been a difficult adjustment to an unprecedented disclosure system, set to take effect March 30, will come to an industry already accustomed to some SEC oversight as hedge funds and private-equity firms have stepped forward to register with regulators.

Some of the largest hedge-fund firms already are SEC-registered, including Paulson & Co., Renaissance Technologies LLC, Bridgewater Associates LP and AQR Capital Management LLC. The industry leapt into SEC supervision as major investors, spooked by the financial crisis, looked for regulated venues for their money.

In the past three years, institutional clients have become the majority among hedge-fund investors, making up 61 percent of fund assets, according to London-based research firm Preqin Ltd.

Among the top 5 percent of SEC-registered managers, the average number of funds per firm is 79, the agency said in documents discussing the rule. Those who have resisted SEC registration until now will generally be smaller firms because they haven’t been able to run more than 14 funds in order to use the exemption, according to the SEC.

Goldman Unit Misstates $242 Billion of Pension Derivatives

Goldman Sachs Group Inc.’s pensions buyout unit, Rothesay Life, mistakenly told U.K. regulators it had entered into derivatives contracts valued at 151 billion pounds ($242 billion).

The bank overstated the position by a factor of a thousand in its annual return to the Financial Services Authority, signed by the unit’s chief executive officer, Addy Loudiadis, and audited by PricewaterhouseCoopers LLP. The unit has 151 million pounds of inflation and interest-rate swaps outstanding, spokeswoman Fiona Laffan said by e-mail June 24. The firm told the FSA about the typographical error after filing in March and wasn’t required to resubmit it, Laffan said. PwC declined to comment.

Goldman, which set up Rothesay in 2007, manages about 4.3 billion pounds of pensions liabilities for companies including British Airways and RSA Insurance Group Plc. Firms such as Rothesay promise to pay pensions if retirees live beyond a certain age. They typically receive a portion of the pension plan’s assets in return and try to hedge the risk they take on with derivatives.

Rothesay has total capital of 161 million pounds, 350 percent more than the regulatory minimum required by the FSA, according to the filing.

Zimbabwe Plans Diamond Rules to Boost Transparency, News Says

Zimbabwe plans to introduce new diamond mining and trading laws aimed at making the industry more transparent, the Daily News reported, citing Deputy Mines Minister Gift Chimanikire.

The so-called Diamond Act will create a commissioner to oversee the diamond mines, ensure compliance with international standards and specify the role of state security, the Harare-based newspaper said.

While the law will give the state exclusive rights to mine diamonds in Zimbabwe, joint-ventures will be allowed, the newspaper said. In 2008, more than 200 people were killed when security forces took over the Marange diamond fields in Zimbabwe, according to a report by Human Rights Watch.


U.S. Seeks Life Sentence for Ex-Taylor Bean Chairman Farkas

Lee Farkas, the ex-chairman of Taylor, Bean & Whitaker Mortgage Corp., should be sentenced to life in prison for leading a $3 billion fraud involving fake mortgage assets, U.S. prosecutors told a judge in Virginia.

In a filing in Alexandria made public June 24, prosecutors asked U.S. District Judge Leonie Brinkema to order Farkas to prison for 385 years or “a period of years that would ensure that Farkas will remain in prison for life.” Farkas, 58, is to be sentenced June 30.

A federal jury convicted Farkas in April of 14 counts of conspiracy and bank, wire and securities fraud after a two-week trial. Prosecutors said Farkas orchestrated one of the largest and longest-running bank frauds in the U.S., which duped some of the country’s largest financial institutions, targeted the federal bank bailout program and contributed to the failures of Taylor Bean and Montgomery, Alabama-based Colonial Bank. Farkas used the fraud to fuel “his lifestyle of ostentatious wealth,” prosecutors said in the filing.

William Cummings, a lawyer for Farkas, didn’t immediately return a telephone message seeking comment.

The case is U.S. v. Farkas, 10-cr-00200, U.S. District Court, Eastern District of Virginia (Alexandria).


Gurria Says Private Involvement in Greek Aid ‘Critical’

Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said it’s “critical” that private investors are involved in an aid package for Greece .

“Greece needs funding in order to continue to operate normally, to recover its growth in the future,” and “needs refinancing of its maturing debt,” Gurria told Bloomberg Television’s Andrea Catherwood in an interview from Paris June

24. “Substantially all the creditors have to participate.”

European leaders are pushing for private investors to share the burden of financing a second rescue for Greece, which remains shut out of markets a year after its 110 billion-euro ($156 billion) bailout. The European Central Bank is opposed to any solution that could spark a default.

“The creditors will be better off because today a disorderly unraveling of this situation would affect the creditors first and foremost, beyond the people of Greece,” Gurria said. “The creditors will be benefited by contributing to an orderly solution.”

Rating Firms Must Obey EU Rules, Michelbach Tells Handelsblatt

Standard & Poor’s Financial Services LLC, Moody’s Investors Service Inc. and Fitch Ratings Ltd. should be kept out of the European market if they fail to meet European Union requirements in time, a lawmaker from Chancellor Angela Merkel’s political bloc told Handelsblatt.

The rating companies’ methods lack transparency and are arbitrary, the newspaper cited Hans Michelbach, a senior finance committee representative for Merkel’s Christian Democratic Union and its Christian Social Union sister party, as saying.

Repeated sovereign downgrades even after countries have taken measures to restore their finances give reason to doubt the quality of rating decisions, Michelbach told the newspaper. There is no room in Europe for “dubious” rating companies, Handelsblatt cited him as saying.

The European Central Bank’s reliance on ratings by U.S. companies is untenable, Michelbach said, according to the newspaper.

Daniel Says Asian Banking ‘More Entrenched’ in Economies

Emmanuel Daniel, president of The Asian Banker, which provides research to financial services companies, talked about the health of Asia’s banking system and the concept of banks being “too big to fail.”

Daniel spoke with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.”

For the video, click here.

Comings and Goings

Draghi Dodges French Qualms, Wins ECB Job as EU Tackles Debt

Italy’s Mario Draghi dodged last-minute French objections to win the European Central Bank presidency in a dispute that threatened to overshadow efforts to prevent a Greek default.

Draghi’s appointment June 24 at the end of a two-day European Union summit followed a pledge by euro leaders June 23 to do whatever it takes to support Greece as long as Prime Minister George Papandreou pushes through a package of deficit cuts.

National rivalries flared as French President Nicolas Sarkozy held up the confirmation of Draghi, 63, until another Italian on the ECB board, Lorenzo Bini Smaghi, offered to quit to make way for a Frenchman. Leaders rejected questions that they were interfering with the rate setter’s autonomy.

The personality conflicts added to tensions between political leaders and the nominally independent ECB, which has prodded euro governments to do more on Greece and tighten the deficit rules that failed to prevent the crisis.

Making the case that Italy doesn’t deserve two seats at once, Sarkozy persuaded Italian Prime Minister Silvio Berlusconi to call on Bini Smaghi, 54, to step aside.

Draghi, Italy’s top central banker since 2005, won the European Parliament’s non-binding endorsement June 23. Draghi is also chairman of the Financial Stability Board, set up by the Group of 20 to oversee standards to strengthen global regulation.

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Lagarde Vows Neutrality Toward Europe as She Seeks Top IMF Job

French Finance Minister Christine Lagarde, vying for the leadership of the International Monetary Fund, pledged to be impartial toward European nations seeking aid and to give emerging economies greater influence.

“I will not shrink from the necessary candor and toughness in my discussions with the European leaders,” Lagarde said in a statement in Washington delivered in a meeting June 23 with IMF directors. “I am not here to represent the interest of any given region of the world, but rather the entire membership.”

Lagarde, 55, has the backing of European nations that have 31 percent of the voting shares at the IMF and has also gathered support among emerging countries from Egypt to Indonesia. Her sole rival, Mexican central bank Governor Agustin Carstens, claims the backing of 12 Latin American nations while failing to garner endorsements from Argentina or Brazil. The IMF board has said it will meet June 28 to assess the two candidates and repeated it aims to make a choice by June 30.

For more, click here.

BOE’s King to Chair Basel Board; Ingves Replaces Wellink

The Bank of International Settlements appointed Bank of England Governor Mervyn King to chair the Basel committee’s oversight board.

He will succeed European Central Bank President Jean-Claude Trichet and assume the position on Nov. 1, the BIS said in a press release June 25.

The announcement came on the same day the Basel Committee on Banking Supervision said banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis.

The BIS also said Swedish central bank Governor Stefan Ingves will succeed European Central Bank Governing Council member Nout Wellink as the new chairman of the committee on banking supervision. Wellink will step down as the Dutch central bank governor on July 1.

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