Volcker Profit Shave, ABS-Basel Rules, Finra: Compliance

The Volcker rule could cut profit at the biggest U.S. banks twice as much as earlier estimates if regulators take a strict stance on limiting proprietary trading, Standard & Poor’s said.

S&P said yesterday in a statement announcing a new report on the topic that it currently estimates the impact of the Volcker rule could reduce combined pretax earnings “for the eight largest U.S. banks by up to $10 billion annually, up from our initial $4 billion estimate two years ago.”

Goldman Sachs Group Inc. and Morgan Stanley, which were the two biggest U.S. securities firms before converting to banks in 2008, stand to lose the most because they get a larger percentage of their revenue from trading than the other lenders, S&P said in the report. Regulators are unlikely to draft a final version of the rule until the end of 2012, S&P said.

Less strict rules would have “a limited impact on banks’ earnings and business positions” would therefore it’s unlikely S&P would take ratings actions as a result, the company said in the statement. Stricter rules could lead the ratings company “to take negative ratings actions on certain banks.”

In addition to Goldman Sachs and Morgan Stanley, S&P included Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., PNC Financial Services Group Inc., U.S. Bancorp, and Wells Fargo & Co. in its analysis.

While the Volcker rule will also affect the U.S. operations of non-U.S. companies such as Deutsche Bank AG and Zurich-based UBS AG, S&P said those lenders’ profits weren’t included in the analysis.

Compliance Policy

Asset-Backed Securities May Face Tougher Basel Bank Rules

Banks trading asset-backed securities may face tougher capital requirements and stricter oversight from global supervisors amid concerns that regulation is failing to curb excessive risk-taking.

The Basel Committee on Banking Supervision is about to embark on a “fundamental” review of how securitization is regulated, Wayne Byres, the group’s secretary general, said in an interview last week.

The boom in the U.S. and European markets for securitized debt in the years leading up to 2008 has been identified by regulators as one of the main reasons for the collapse of Lehman Brothers Holdings Inc. and the ensuing financial crisis, as lenders struggled with a plunge in the debt’s market value.

Securitization has also been the subject of lawsuits, amid accusations that some instruments were flawed or even designed to incur losses.

Some steps taken by regulators on securitized debt don’t take into account recent credit quality and price performance “of European asset-backed securities since the onset of the financial crisis,” Richard Hopkin, a managing director at the Association for Financial Markets in Europe, said in an e-mail.

AFME represents lenders and brokers including Goldman Sachs Group Inc., Bank of America Corp., Deutsche Bank AG and UBS AG.

The push on securitization adds to the Basel group’s list of priorities as it seeks to set liquidity rules for lenders. The committee plans to complete a review of the so-called liquidity coverage ratio, or LCR, at its next meeting in December, Byres said.

For more, click here.

Compliance Action

David Lerner Banned by Finra for Misleading on Apple REITs

David Lerner was banned from the securities industry for a year and his firm ordered to pay $12 million for misleading investors into buying real estate investment trusts, regulators said.

Lerner, whose David Lerner Associates Inc. has underwritten about $7 billion of its Apple REITs, was also fined $250,000, the Financial Industry Regulatory Authority said yesterday in a statement. The Syosset, New York-based brokerage, known for its founder’s “Take a tip from Poppy” advertising slogan, persuaded elderly customers to invest by exaggerating the performance of older Apple REITs, Wall Street’s self-funded regulator said.

Lerner personally misled over 1,000 customers at four or more seminars, calling the Apple REITs “a fabulous cash cow” and a “gold mine,” Finra said. He cited the success of previous investment pools without telling prospective investors that those REITs were partially funding their payouts by borrowing money, the regulator said.

Lerner agreed to repay the $12 million to investors without admitting or denying Finra’s claims. The firm “decided it is time to move the company past these distractions and settle with the regulators,” said Joseph Pickard, its general counsel. His statement was e-mailed by David Chauvin, an outside spokesman at Zimmerman/Edselson Inc.

Finra also fined David Lerner Associates $2.3 million for overcharging on municipal bonds and mortgage investments.

For more, click here.

AIG to Pay at Least $25 Million to Settle California Review

American International Group Inc., the insurer that counts the U.S. as its largest shareholder, agreed to pay $25 million to $30 million to settle a California review into whether the company held funds that should go to beneficiaries.

The deal requires the New York-based insurer to check the Social Security Administration’s Death Master File to determine if policyholders have died, according to a statement yesterday from California Controller John Chiang and Insurance Commissioner Dave Jones.

California City Facing SEC Probe Drained Sewer and Road Funds

San Bernardino, the bankrupt California city facing an inquiry by the U.S. Securities and Exchange Commission, masked its growing deficits by using funds meant for sewers, roads and construction to cover current expenses, according to city records.

In the year ended June 30, San Bernardino added $33 million to its $177.7 million general fund from a payroll trust fund and accounts designated for sewer-line maintenance, storm-drain constriction and other purposes, exhausting most of the special funds, according to a city budget document.

Now, as the city of 209,000 about 60 miles (100 kilometers) east of Los Angeles faces the scrutiny of a bankruptcy judge and the SEC, it’s $1 million in default on pension bonds issued in 2005 and late on $5.3 million owed to the California Public Employees’ Retirement System, of which $1.2 million is delinquent. The city’s broke because its leaders resorted to accounting tricks, rather than reduce spending as the recession drove down property taxes and sales levies, City Treasurer David Kennedy said.

The SEC’s “informal inquiry” was revealed in an Oct. 11 letter from Robert H. Conrrad, a senior enforcement lawyer in Los Angeles, to City Attorney James Penman. The letter asked the city to preserve documents and data on bonds, underwriters, audits and financial information presented to elected officials.

Conrrad didn’t respond to a voice-mail message requesting details of the investigation. Judith Burns, a commission spokeswoman in Washington, said policy prevented her from confirming the existence of a probe.

For more, click here.

Carbon Plan Hurts EU Credibility as Regulator, Traders Say

A plan by the European Commission to prevent emitters from using some Emission Reduction Units issued after the end of this year damages the regulator’s credibility, said a lobby group representing traders.

The proposal does not follow due process and the commission should have proposed a change to the emissions trading system law instead of the carbon registry regulation, Jeff Swartz, Geneva-based international policy director at the International Emissions Trading Association, said yesterday.

The commission, the EU’s regulatory arm, proposed draft rules for the use of United Nations-sponsored ERU offsets as of 2013 in a modified draft amendment to the bloc’s carbon registry regulation at a meeting of officials from national governments on Oct. 17, according to two people with knowledge of the matter, who declined to be identified because the gathering was private. The EU doesn’t comment on draft regulations.

ERUs are generated under the rules of the Joint Implementation mechanism of the Kyoto Protocol, known as JI.

Traders were assuming they could use ERUs for EU compliance at least for the 2012 year, which has a compliance window through April 2013, Swartz said. Investors have entered into contracts that extend many months into the future.

IETA, whose members include RWE AG, Royal Dutch Shell Plc and Goldman Sachs Group Inc., says any policy changes should include a “predictable time line,” he said.

Consumer Bureau Taking Complaints on Credit-Reporting Agencies

The Consumer Financial Protection Bureau, the new federal agency charged with protecting consumers, is taking complaints on credit-reporting agencies, according to a statement on its website.

Consumers must first file the dispute with their respective consumer-reporting agencies before seeking help, the Bureau said in the statement.

The reporting agencies are expected to respond to bureau inquiries about the complaints within 15 days.

UKFI Suggested Possible Sale of RBS’s Citizens Unit in U.S.

U.K. Financial Investments Ltd., which manages the government’s 81 percent stake in Royal Bank of Scotland Group Plc, suggested a possible sale of the lender’s U.S. operations to increase shareholder returns.

The firm wrote to RBS to raise the prospect of a sale of Citizens Financial Group Inc., the consumer and commercial lender acquired in 1988, UKFI Chief Executive Officer Jim O’Neil told a panel of lawmakers today. The letter also detailed the benefits of scaling back the Edinburgh-based lender’s investment banking operations.

RBS said in January it would cut about 3,500 jobs at the investment-banking division.

U.K. Insurers Seen Taking Risks in Face of Low Rates, FT Reports

Low U.K. interest rates make it difficult for insurers to obtain investment returns high enough to meet commitments to policyholders in the nation, according to Julian Adams, the Financial Services Authority executive in charge of supervising the insurance business, the Financial Times reports.

Adams says insurers, which typically hold two thirds of assets in fixed-income securities, may turn to alternative investments in face of weak returns, and that carries risks

Insurers plan to increase holdings of such asset classes as private equity, property and emerging-market debt, according to a study by Goldman Sachs Asset Management this year.

Andrew Bailey, head of FSA’s prudential business unit, says many “with-profits” contracts, with nominal return commitments of 7 percent or 8 percent, were written in 1980s, which spells danger in an environment of very low interest rates over a long period.


Swaps Exchanges Couldn’t Rival NYSE-Deutsche Boerse, EU Ruled

Derivatives exchanges would have been unable to quell the combined market power of Deutsche Boerse AG and NYSE Euronext, European Union regulators said in disclosing their reasons for blocking the duo’s plans to join forces to create a global leader.

Regulators rejected the companies’ arguments that derivatives traded over the counter competed with those traded on exchanges, according to the 447-page filing made public last week. The two products are separate “rather than substitutable” for exchange customers, according to the document, which may set the tone for how the EU’s antitrust agency will view future exchange deals.

Since the deal was blocked in February, at least five new entrants have announced plans to enter the European derivatives market. Both CME Group Inc., owner of the world’s biggest futures exchange, and Nasdaq OMX plan derivatives markets in London, setting up in competition with Eurex and Liffe, the largest venues. EU lawmakers have also agreed on regulations that will stir competition in derivatives and clearing.

The appeal by Frankfurt-based Deutsche Boerse attacks regulators’ analysis of competition among trading platforms, saying it was “not based on cogent and consistent evidence” and that they failed to properly analyze the role of exchange customers in over-the-counter trading, according to court documents published in June. NYSE isn’t a party to the appeal and said in March that it was focused on its strategy as a standalone company.

Caroline Nico, a spokeswoman for NYSE Euronext, declined to comment on last week’s EU disclosure.

SEC Sued Over ‘Conflict Minerals’ Rule by Business Groups

The U.S. Chamber of Commerce and National Association of Manufacturers asked a federal court to modify or scrap U.S. Securities and Exchange Commission rules governing so-called conflict minerals because compliance would be burdensome and ineffective.

The SEC adopted a regulation in August that requires companies using gold, tin, tungsten and tantalum in their products to make “reasonable” efforts to determine if those materials came from the Democratic Republic of Congo or an adjoining country. Trade in those minerals -- used in electronic devices -- is helping to finance conflict and contributing to a humanitarian crisis in the central African nation, according to the SEC.

The advocacy groups ask that the rules be modified or set aside, according to a joint filing with the U.S. Court of Appeals in Washington on Oct. 19. The first disclosure reports are due by May 31, 2014, the agency said.

The case is National Association of Manufacturers v. U.S. Securities and Exchange Commission, 12-1422, U.S. Court of Appeals for the District of Columbia Circuit (Washington).


Buchan Says PAAMCO Doesn’t Want ‘Hedge Fund Hipsters’

Jane Buchan, co-founder and chief executive officer of Pacific Alternative Asset Management Co., talked about investment in hedge funds, financial regulation and the potential impact of the U.S. presidential election on the stock market.

She spoke with Scarlet Fu and Stephanie Ruhle on Bloomberg Television’s “Market Makers.”

For the video, click here.

Comings and Goings

EU Parliament Panel Opposes Mersch Move to ECB Executive Board

A European Parliament committee opposed the appointment of Luxembourg’s Yves Mersch to the European Central Bank’s Executive Board because of unhappiness about a lack of female candidates for the job.

The non-binding opinion by the European Union assembly’s economic and monetary affairs committee yesterday in Strasbourg, France, is a political appeal to euro-area government leaders to put forward women for top ECB posts. The recommendation on Mersch, Luxembourg’s central bank governor, now goes to the full EU Parliament for a vote on Oct. 25.

Two women, Sirkka Haemaelaeinen of Finland and Gertrude Tumpel-Gugerell of Austria, previously sat on the ECB’s six-member Executive Board. If the five men currently there serve their full terms, another position won’t become available until June 2018 when Vice President Vitor Constancio retires.

The ECB seat has been vacant since Jose Manuel Gonzalez-Paramo of Spain ended his eight-year term on May 31. A controversy has arisen over demands to have a woman fill the position.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE