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German Bailout, Regulating Libor, Matsushita: Compliance

Two German plaintiffs trying to stop the euro region’s future permanent bailout fund said they expect the nation’s highest court to set limits on Germany’s liabilities and tie its approval to popular consent.

Former German Justice Minister Herta Daeubler-Gmelin, another plaintiff, said she hopes that shifting rights away from Germany’s lower house of parliament will only be allowed after the country’s voters have approved it or the European Parliament has been given more competencies.

The Federal Constitutional Court in Karlsruhe, Germany, is due to rule tomorrow on the plaintiffs’ challenge to the European Stability Mechanism. The 500 billion-euro ($639 billion) ESM, designed to bail out indebted euro-area member states, is a cornerstone of efforts to save the currency.

German lawmaker Peter Gauweiler’s emergency bid to postpone the top civil court’s ruling on part of the European Union’s bailout of indebted euro-area countries is unlikely to succeed, law professors said.

Gauweiler’s challenge, which argues the court must block the European Stabilization Mechanism after the European Central Bank pledged unlimited funds to buy government bonds, was under review by the court yesterday. While the judges may say today how they will proceed, they probably won’t delay a ruling on the ESM scheduled for tomorrow, said law professors Franz Mayer and Christoph Ohler.

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Compliance Policy

Basel Group Faces ‘Now or Never’ Chance on Bank-Liquidity Rule

Global financial regulators begin three days of talks today that may pave the way for a deal on liquidity rules that lenders and the European Central Bank warn could stifle the economic recovery.

The Basel Committee on Banking Supervision will attempt to overcome divisions within its ranks as it races to meet a self-imposed January deadline for reviewing the liquidity coverage ratio, or LCR, three people familiar with the discussions have said. ECB President Mario Draghi has warned the measure risks choking off bank lending, while some other regulators, including in the U.S., say that diluting the LCR risks rendering the standard meaningless, according to the people.

“It’s now or never for the LCR,” Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., said in an e-mail. “If Basel can’t cobble together an agreement on it that is more than papered-over differences, the U.S. and U.K. will implement their own rules, the EU will stand down and the global liquidity framework may well dissolve.”

The 212 largest global banks would have had a collective shortfall of 1.76 trillion euros ($2.2 trillion) as of June 2011 in the assets needed to meet the LCR, according to figures published by the Basel group based on a draft version of the standard. Lenders have warned that full compliance with the LCR would force them to cut loans to businesses and households.

The LCR, which would force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze, was drawn up by the Basel committee as part of a package of measures in response to the 2008 financial crisis. It is scheduled to become binding as of Jan. 1, 2015.

Jamie Dimon, chief executive officer of JPMorgan Chase & Co., has said that the U.S. should consider withdrawing from the Basel committee and that the rules it sets are “anti-American.”

The LCR is one of the main items on the agenda of the Basel meeting, which begins today in Istanbul, according to the people. The Basel group declined to comment on the talks.

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Finance Lobbyists Press for Libor Regulation, Resist Replacement

Lobbyists for the banking and asset-management industries are pushing for greater regulation of Libor and are resisting pressure to replace the benchmark in the wake of the rate-rigging scandal.

Firms and employees who contribute to interest rates should be regulated, the Investment Management Association, the Global Financial Markets Association and the International Capital Market Association said in separate submissions to the Financial Services Authority’s review of the rate. Replacing Libor with an alternative rate or significantly changing how it’s calculated would be too disruptive and should be avoided, they wrote.

FSA managing Director Martin Wheatley is reviewing how the London interbank offered rate is set. The London interbank offered rate, overseen by the London-based British Bankers’ Association, is the basis for more than $300 trillion of securities worldwide.

Wheatley, who started consulting with banks and users of Libor last month, is scheduled to present his findings to the Treasury by the end of September. Separately, Bank of England Governor Mervyn King yesterday said global central bankers will set up their own separate inquiry into Libor.

The benchmark is determined by a daily poll carried out on behalf of the BBA by Thomson Reuters Corp. that asks banks to estimate how much it would cost to borrow from each other for different periods and in different currencies. At least a dozen firms are being probed worldwide over allegations they manipulated the rate to profit.

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Hungary Probably Has to Drop Central Bank Tax, Matolcsy Says

Hungary probably can’t include the central bank in a new financial-transaction tax, Economy Minister Gyorgy Matolcsy said yesterday after the government last week confronted international lenders on conditions for aid.

The government can probably include the State Treasury and interbank transfers in the scope of the transaction levy, which will still finance payroll-tax cuts even if the Magyar Nemzeti Bank needs to be exempted, Matolcsy told a parliamentary hearing in Budapest yesterday. The country needs a credit line from lenders even though it opposes some of the criteria demanded for the aid, Prime Minister Viktor Orban added afterward.

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Brazil Publishes Changes to Income Tax on Investment Funds

Brazil has published changes to its law relating to income tax on investment funds, according to the official gazette yesterday.

Earlier, Brazilian President Dilma Rousseff said she’ll seek new tax cuts while maintaining fiscal discipline in a bid to fuel faster growth in Latin America’s biggest economy.

Brazil will push banks to lower lending rates and cut electricity rates for producers and households, Rousseff said Sept. 6 in a national address.

CFTC Cancels Sept. 12 Meeting on Customer Fund Protection Rule

The U.S. Commodity Futures Trading Commission canceled a meeting to consider rules for protecting customer funds held by futures commission merchants after agency Chairman Gary Gensler injured himself over the weekend.

Gensler “fell at his home in suburban Washington yesterday and suffered a few cracked ribs,” Steven Adamske, the agency’s spokesman, said in an e-mail yesterday. “The meeting scheduled for Wednesday has been canceled, and the subject matters will be handled” in a non-public vote, Adamske said.

Compliance Action

BlackRock Fined $15.2 Million by U.K. FSA Over Client Money

A U.K. unit of BlackRock Inc. was fined 9.5 million pounds ($15.2 million) for failing to properly protect client money over a three-and-a-half-year period.

BlackRock Investment Management (UK) Ltd. didn’t take reasonable care to identify and protect client money and didn’t have trust letters for some of its money-market deposits with third-party banks, the U.K. Financial Services Authority said in a statement today. The average daily balance affected was more than 1.36 billion pounds, according to the regulator.

The errors in setting up trust letters were a result of New York-based BlackRock’s acquisition of the unit, which was previously Merrill Lynch Investment Managers Ltd., according to the FSA. BlackRock reported the failings to the regulator and received the FSA’s standard 30 percent discount for cooperating.

“The situation that led to this settlement was not deliberate and no clients suffered any losses as a result of the error,” Jonathan Mullen, a spokesman for BlackRock, said in an e-mailed statement. “Still, we regret this instance where our U.K. procedures regarding money-market deposits for a number of our clients were not consistent with applicable standards.”

The regulator said last week it is planning to require banks, brokerages and other companies to better protect clients’ funds, particularly when their investment firm fails. The plans include overhauling rules on the treatment of margin assets posted by failed companies for their derivatives trades and amount to “the most radical change in the client-assets regime in over 20 years,” the FSA said.

The FSA plans include that an investment company could divide up its clients’ money into various ring-fenced “sub-pools,” so not all its clients would face the same losses in the event of insolvency, the regulator said.

The agency stepped up enforcement of client-money rules after the bankruptcy of Lehman Brothers Holdings Inc. in 2008.

The New York-based bank’s former U.K. unit failed to segregate billions of dollars of client funds from its own accounts, leaving creditors with competing claims that resulted in years of litigation. The issue has resurfaced in the administration of MF Global Holding Ltd.’s U.K. unit.

AIG to Buy $5 Billion of Stock in $18 Billion Treasury Offering

The U.S. Treasury said it’s offering to sell $18 billion in American International Group Inc. shares, and that the bailed-out insurer plans to buy back as much as $5 billion.

The U.S. also will give underwriters a 30-day option to purchase as much as an additional $2.7 billion in common stock from the department to cover over-allotments, if any, Treasury said yesterday in a statement.

AIG may be free of its U.S. government stake by end of 2013 as the insurer accelerates asset sales and improves earnings, Chief Executive Officer Robert Benmosche said in an interview with Barron’s last month.

The U.S. government obtained an ownership interest in AIG through the Troubled Asset Relief Program.

SEC May Rule on Facebook Plan in Fourth Quarter, Nasdaq CFO Says

Nasdaq OMX Group Inc. said the U.S. Securities and Exchange Commission may rule next quarter on its proposal to compensate companies that suffered losses in Facebook Inc.’s public debut.

Nasdaq OMX’s $62 million plan would pay companies that lost money after the May 18 Facebook initial public offering, which led to order cancellations after the IPO cross took longer than planned. Member brokers who accommodated customers for losses will get paid first, Nasdaq said in July.


CFTC Seeks to Delay Peregrine’s $123 Million Distribution

The Peregrine Financial Group Inc. trustee should delay distribution of $123 million to customers of the defunct futures brokerage until after testing customer accounts, the U.S. Commodity Futures Trading Commission said.

The tests are essential because Peregrine collapsed amid a fraud and theft of money by its founder, Russell Wasendorf Sr., the CFTC said Sept. 9 in a filing in U.S. Bankruptcy Court in Chicago. The regulator asked the judge not to approve the payout until all the accounts of intended recipients are validated.

Peregrine filed for Chapter 7 liquidation on July 10, hours after the CFTC sued accusing the firm and Wasendorf of misappropriating more than $200 million in customer funds.

The CFTC said it had consulted with the trustee, Ira Bodenstein, about ways to perform validity tests of commodity customer accounts to ensure money didn’t go to any claimant who may have been involved in the theft of customer money.

The commission wants the trustee to complete the validity testing and “work on the implementation of the mechanics of the distribution” before the court authorizes the distribution,’’ it told the judge handling the liquidation.

The bankruptcy case is Peregrine Financial Group Inc., 12-27488, U.S. Bankruptcy Court, Northern District of Illinois (Chicago). The regulatory case is U.S. Commodity Futures Trading Commission v. Peregrine Financial Group Inc., 12-cv-05383, U.S. District Court, Northern District of Illinois (Chicago).

SEC Ordered to Defend Negligence Case Over Stanford Ponzi Scheme

The U.S. Securities and Exchange Commission must defend a negligence lawsuit alleging that the agency failed to act appropriately after concluding that R. Allen Stanford was operating a Ponzi scheme, a judge ruled.

Investors Carlos Zelaya and George Glantz may proceed with a claim that agency examiners determined four times before 2009 that Stanford was running a Ponzi scheme, U.S. District Judge Robert Scola Jr. ruled in federal court in Miami. Stanford is serving 110 years in prison for his $7 billion fraud.

The lawsuit claims the SEC had a “nondiscretionary duty” to report Stanford to the Securities Investor Protection Corp., which compensates victims, after examinations in 1997, 1998, 2003 and 2004. The SEC sued Stanford in February 2009, alleging a “massive fraud” at Antigua-based Stanford International Bank.

The judge ruled that the next stage of the litigation may be more appropriate for the SEC to raise the agency’s argument that it hadn’t concluded before 2009 that Stanford was running a Ponzi scheme. Investors still face several legal hurdles.

SEC spokesman John Nester declined to comment.

The case is Zelaya v. United States, 11-cv-62644, U.S. District Court, Southern District of Florida (Miami).


Gramm Says No Institution Should Be Too Big to Fail

Former U.S. Senator Phil Gramm, a Texas Republican who helped write the 1999 law that enabled the creation of financial institutions such as Citigroup Inc. and Bank of America Corp., talked about the outlook for the 2012 presidential election and the banking industry.

He spoke with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers.”

For the video, click here.

Notable Passing

Japanese Banking Minister Matsushita Is Found Dead at His Home

Japanese Financial Services Minister Tadahiro Matsushita has died, an aide at his regional office said. He was 73. Police are investigating the possibility of suicide, a police spokesman said.

Matsushita was found dead at his residence in Tokyo yesterday, Etsuko Horita, a staff member at his regional office in Kagoshima prefecture on the southwestern island of Kyushu, said by phone. Tokyo Metropolitan Police received an emergency call at 4:59 p.m. yesterday, the spokesman said. Matsushita may have left a note, Kyodo News reported, citing the police.

Matsushita, a lawmaker from the junior government coalition partner the People’s New Party, was appointed to the post by Prime Minister Yoshihiko Noda in June. After taking the role, he vowed to deepen the Financial Services Agency’s probe into an insider trading scandal that embroiled Nomura Holdings Inc., Japan’s biggest brokerage.

Nomura’s top two executives, Chief Executive Officer Kenichi Watanabe and Chief Operating Officer Takumi Shibata, resigned in July after the FSA found that employees leaked information on share sales managed by the firm. In August, the agency ordered Nomura to improve its compliance.

A month into the role, Matsushita asked an advisory panel at his agency to examine stiffer penalties for insider trading, including bigger fines for traders and disciplinary action against leakers of non-public information. He was also overseeing an application by state-backed Japan Post Bank Co. to begin retail and commercial lending next April, a move that Moody’s Investors Service said would be to the detriment of regional banks.

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