U.S. financial regulators are looking at specific non-bank financial companies to possibly designate them as systemically important and subject to more rigorous supervision, said Michael Gibson, director of the Division of Banking Supervision and Regulation at the Federal Reserve Board.
The Financial Stability Oversight Council issued a rule April 3 explaining the criteria it will use to designate non-bank financial firms as systemically important. Federal Reserve Chairman Ben S. Bernanke is a member of the council and U.S. Treasury Secretary Timothy Geithner chairs the panel.
Under the rule approved in April, regulators will evaluate non-bank financial companies with more than $50 billion in assets if they meet any one or more of the following thresholds: A 15-to-1 leverage ratio; $3.5 billion in liabilities on derivatives contracts; $20 billion of outstanding loans borrowed and bonds issued; $30 billion in gross notional credit-default swaps outstanding; or a 10 percent ratio of short-term debt to assets.
“The Council and its member agencies’ staffs currently are using these criteria to analyze the potential systemic importance of individual non-bank financial companies in different industries,” Gibson said in prepared testimony to a House Financial Services subcommittee yesterday.
Fed officials have stepped up their oversight of financial system risk following the 2008-2009 financial crisis. Once the panel, known as FSOC, designates a financial company as systemically important, the Dodd-Frank Act entrusts the Fed with supervision of the institution.
Mortgage Forgiveness Said to Be Part of New U.S.-Backed Program
The conservator of Fannie Mae and Freddie Mac may let servicers forgive debt on a limited number of mortgages owned or guaranteed by the taxpayer-owned companies, according to a person with direct knowledge of the discussions.
The model could be a new California effort that will pay for writedowns using federal dollars set aside for regions that have seen the worst housing-market declines, the person said. Because the government will bear the full costs of the California program, mortgages backed by the two government-sponsored enterprises will be eligible for the first time.
The Federal Housing Finance Agency currently bars principal reductions on all other troubled loans backed by Fannie Mae and Freddie Mac on the grounds that it would hurt the companies’ finances. So far, FHFA officials have resisted political pressure from congressional Democrats and financial incentives offered by the U.S. Treasury to change the policy.
FHFA Acting Director Edward J. DeMarco and other FHFA officials want to move beyond the principal-reduction debate and focus on winding down the two companies and bringing private capital back into the housing finance system, according to people familiar with their thinking. After delaying an announcement on loan forgiveness expected at the end of April, officials hope to release the new policy soon.
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Finnish Watchdog Sets Loan to Value Rules, Mining Rules Expected
Finland’s Financial Supervisory Authority set common rules for banks on calculating loan-to-value ratios in mortgage lending.
The watchdog kept its recommendation of a maximum 90 percent loan to value, saying the rule helps reduce the number of insolvencies by as much as 80 percent. The Helsinki-based regulator commented in an e-mailed statement yesterday.
Separately, Finland’s mining companies stand to face tougher rules as environmental damage prompts regulators to check the Nordic nation’s mining boom.
Finland’s natural resources, including gold, copper and nickel, have become lucrative as global demand for metals drives up prices. More than 500 mining claims and 60 mining permits were being processed by Finnish authorities in September, according to a government report.
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Portuguese Banks Receiving State Aid to Cut Pay of Board Members
Portuguese banks that receive state aid must cut the remuneration of board members by half, according to a government decree.
Total pay must be limited to 50 percent of the salary and bonuses earned in the previous two years, according to rules published today.
Portugal’s 78 billion-euro ($99 billion) bailout plan earmarks as much as 12 billion euros to recapitalize its banks. Under the bailout’s terms, Portuguese banks were required to have a 9 percent Core Tier 1 ratio at the end of last year and maintain that level through June after government bond holdings are written down to market prices. They must boost the ratio to 10 percent by the end of 2012.
Under the decree, the banks will also have to outline a plan to support the economy.
JPMorgan’s Specific Trades Weren’t Monitored, Regulator Says
JPMorgan Chase & Co.’s individual trades that led to a $2 billion loss weren’t monitored by the Office of the Comptroller of the Currency, which said it didn’t expect to be notified about the positions.
The OCC’s job is to oversee wider risk-management policies and limits at national banks and to alert company management when it sees activities that range far from expectations, said Bryan Hubbard, an OCC spokesman.
While there is no requirement to notify regulators of specific trades and positions and the performance of those trades and positions, “we do expect to be apprised of significant developments affecting the bank,” Hubbard said May 15. He added that it is possible that losses may be incurred “even when all controls function properly.”
JPMorgan Chief Executive Officer Jamie Dimon said on May 10 the bank made “egregious” mistakes and had so far lost about $2 billion tied to synthetic credit securities. Federal regulators are examining what happened, according to people familiar with the probes.
OCC examiners don’t approve loans, models or investments, focusing instead on risk controls, Hubbard said, adding that they don’t typically track a firm’s activities on a live basis.
The OCC has about 70 people devoted full-time to monitoring JPMorgan’s banking activities, including the activity of its chief investment office where most of the losing trades happened in a London unit.
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Lloyds Banking Said to Suspend Two Traders Amid Libor Probe
Lloyds Banking Group Plc, the U.K.’s second-biggest government-backed lender, suspended at least two derivatives traders in a probe of potential interest-rate manipulation, two people briefed on the matter said.
Foreign-exchange derivatives trader Alexandre Dube and interest-rate derivatives trader John Argent, both based in London, were sent home about two months ago, said the people, who declined to be identified because they weren’t authorized to discuss the matter.
Both are listed as active on the U.K. Financial Services Authority’s register of people approved to work in the industry. Attempts to reach them through the Internet, work phone numbers and directory assistance were unsuccessful. Dube didn’t respond to calls to his mobile phone, which was switched off.
Lloyds joins Royal Bank of Scotland Group Plc, Citigroup Inc., UBS AG, Deutsche Bank AG and ICAP Plc in suspending, dismissing or putting on leave traders as part of the investigations into interest-rate manipulation.
A spokesman for Lloyds said the bank doesn’t comment on individual employees.
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Green Non-Life Ordered to Improve Finances, Korea Regulator Says
South Korea’s Financial Services Commission ordered Green Non-Life Insurance Co. to boost capital by June because the company’s debt exceeded capital, according to an e-mailed statement from the regulator. The insurance company’s operations will continue normally, according to the statement.
The regulator may force the sale of the insurer if it fails to meet the order, the regulator said in the statement.
ECB Takes Steps to Remain Operational During Frankfurt Protests
The European Central Bank said it has taken the “necessary steps” to ensure it remains operational and fulfills its mission during planned anti-capitalist protests in Frankfurt over the coming days.
“The ECB has also implemented measures to ensure the safety of its staff and visitors, taking into account the protection granted to the ECB’s premises and operations by the Headquarters Agreement between the ECB and the Federal Republic of Germany,” the central bank said in a statement published yesterday.
Greece’s T Bank Wins Temporary EU Approval on Resolution Aid
Greece’s T Bank SA received temporary approval from the European Union for about 680 million euros ($866 million) in government funding to aid the bank’s takeover by the state-owned TT Hellenic Postbank SA.
The European Commission said it would prolong its approval for the subsidy if Greek authorities submit an updated restructuring plan for Hellenic Postbank within six months that takes account of the new aid for T Bank.
The Bank of Greece put T Bank’s deposits, personnel, and banking activities under Hellenic Postbank’s control in December because T Bank wasn’t able to raise enough capital to keep operating. About 2.16 billion euros of T Bank’s liabilities and around 1.48 billion of its assets were transferred to Hellenic Postbank. The shortfall of 680 million euros was covered by resolution funds from Greece’s deposit and guarantee fund.
T-Bank and Bank of Greece referred requests for comment to Hellenic Postbank, which declined to speak about the EU decision.
Finra Adds Tools for Checking Broker Backgrounds, Reuters Says
The Financial Industry Regulatory Authority has made changes to its BrokerCheck program that make it easier to use, Reuters reported, citing a statement made by the agency.
Finra made the changes to implement SEC recommendations, according to the Reuters report. The upgrades include a tool to help people find advisers based on proximity.
BrokerCheck lists background information on approximately 1.3 million current and former brokers, and 17,400 firms, Reuters said.
Goldman, Merrill E-Mails Show Naked Shorting, Overstock Alleges
Goldman Sachs Group Inc. and Merrill Lynch & Co. employees discussed helping naked short-sales by market-maker clients in e-mails the banks sought to keep secret, including one in which a Merrill official told another to ignore compliance rules, Overstock.com Inc. said in a court filing.
The online retailer accused Merrill, now part of Bank of America Corp., and Goldman Sachs of manipulating its stock from 2005 to 2007, causing its shares to fall. Clearing operations at the banks intentionally failed to locate and deliver borrowed shares for clients shorting stocks, including two traders who were fined and suspended from the industry, Overstock’s attorneys said in court filings earlier this year.
Lawyers for Overstock, whose California state court lawsuit in San Francisco was dismissed in January, asked a judge to make public e-mails sent in 2005 and 2006 that it said “reflect business decisions to put profits and corporate ambition over compliance” at Goldman Sachs and Merrill. The banks’ decisions to intentionally fail to deliver Overstock shares caused large-scale naked short selling of the company’s stock, according to the filing.
Four media organizations, including Bloomberg LP, the New York Times, Wenner Media and The Economist, intervened in the Overstock case and joined the company’s request to unseal court files. Bloomberg News obtained a copy of the filing describing the e-mails that had earlier been part of a larger court filing.
The e-mails demonstrate Bank of America’s efforts to ensure proper handling of short sale transactions, said William Halldin, a spokesman for Charlotte, North Carolina-based Bank of America.
Michael DuVally, a spokesman for New York-based Goldman Sachs, didn’t immediately comment on the document.
Both banks have denied any wrongdoing.
The case is Overstock.com v. Morgan Stanley, CGC-07-460147, Superior Court of the State of California (San Francisco).
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Gulf Keystone Sues Blogger for Internet Posts About Share Sale
Gulf Keystone Petroleum Ltd., which is exploring for oil and natural gas in Kurdistan, sued a man over comments on Internet message boards and Twitter that the company planned to sell shares.
Gulf Keystone filed the lawsuit in London against Spencer Freeman on May 11, according to court records. Freeman is being sued for defamation and malicious falsehood, Gulf Keystone lawyer Jane Marsden said.
The company, which has wells in northern Iraq, said in a May 10 statement it would take legal action to prevent “unfounded speculation” on websites and social-media sites about the possibility it would raise money by selling equity at 160 pence a share. Gulf Keystone began London trading on May 1 at 242 pence and traded as high as 450 pence in February.
An account on Twitter Inc.’s micro blogging service in the name of Spencer Freeman has been deactivated. That user wrote about a potential placement of new Gulf Keystone shares, and an unannounced takeover bid by Exxon Mobil Corp., according a history of the posts on social-media research site operated by Topsy Labs Inc. A “Spencer PR Freeman” also commented about the company on investor message boards.
Gulf Keystone wouldn’t provide contact details for Freeman or confirm his real name.
Christopher Hamilton, a spokesman for the U.K. Financial Services Authority, said the regulator was aware of Spencer Freeman’s comments. He declined to comment further.
Gulf Keystone declined to comment beyond its statement from last week, the company’s lawyers said in an e-mail. Alan Jeffers, an Exxon spokesman, declined to comment. A hearing in the case is scheduled for today in London.
The case is: Gulf Keystone Petroleum Limited v. Spencer Freeman, High Court of Justice, Queen’s Bench Division, HQ12D01817.
AstraZeneca Antitrust Fine Should Stand, EU Court Aide Says
AstraZeneca Plc, the U.K.’s second-biggest drugmaker, shouldn’t get a further reduction in an antitrust fine of 52.5 million euros ($67.5 million), an adviser to the European Union’s highest court said.
Jan Mazak, the advocate general to the EU’s Court of Justice, said the tribunal shouldn’t re-examine a reduction of the penalty, according at a non-binding opinion.
A 2010 lower court ruling cut AstraZeneca’s fine from the 60 million euros initially levied by EU regulators. The company misled patent officials and flouted antitrust rules to block a generic version of its Prilosec heartburn medicine, according to the 2005 antitrust decision. Prilosec was the world’s best-selling drug in the late 1990s.
The European Commission, the region’s antitrust regulator, has said AstraZeneca blocked cheaper versions from 1993 to 2000 to keep prices high.
AstraZeneca is “disappointed” with the legal adviser’s opinion that its appeal should be dismissed, said Sarah Lindgreen, a spokeswoman for the company. AstraZeneca takes “compliance with all laws seriously” and has “a fundamental commitment to doing business in an ethical and proper manner,” she said in an e-mail.
While the court aide’s opinion isn’t binding, it is followed by the court in the majority of cases.
The case is C-457/10 P AstraZeneca v Commission.
Banks Must Take Risks to Grow Economy, Kaplan Says
Robert Kaplan, a professor of management practice at Harvard Business School and a former vice chairman at Goldman Sachs Group Inc., talked about JPMorgan Chase & Co.’s $2 billion trading loss and the ability of Chief Executive Officer Jamie Dimon to manage the firm.
Kaplan spoke with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “InsideTrack.”
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