EU Debt Pools, IMF Image, Heinz, Bank Capital: Compliance
European Parliament negotiators abandoned a demand for a fast-track move toward debt pooling by euro governments at the insistence of a German-led group of nations opposed to such an anti-crisis step.
As part of an accord with European Union governments on stricter budget-oversight rules, representatives of the EU Parliament discarded its appeal for a fund to pool and help repay the debts of nations using the euro. Last June, the assembly voted to create a “European redemption fund” in a bid to link a policy opposed by German Chancellor Angela Merkel to draft deficit-control legislation she has championed.
The climbdown clears the way for the EU to gain the power to screen the budgets of nations earlier and monitor more closely countries where rising borrowing costs threaten financial stability. The EU will also tighten fiscal surveillance of nations such as Greece, Ireland and Portugal after they exit rescue programs.
The two pieces of draft legislation complement 2011 laws that granted the EU stronger powers to sanction spendthrift euro-area countries. The latest rules, dubbed the two-pack, also follow a new European treaty aimed at limiting budget deficits.
The EU Parliament said Europe must go further through euro- area debt pooling, which Germany, other nations and the European Commission say is premature and requires a European treaty change.
In a concession yesterday to the EU Parliament, European Economic and Monetary Affairs Commissioner Olli Rehn agreed to create an “expert group” to assess the feasibility of debt pooling in the euro area and produce a report by March 2014. The commission, the EU’s regulatory arm, in 2011 published a paper outlining options for joint bond sales by euro governments, held consultations on the matter and hasn’t taken further action.
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IMF Must Build On Image That’s Improved in Crisis, Audit Says
The International Monetary Fund has improved its image since the global financial crisis and should address member countries’ long-standing criticism to build on the regained trust, according to an internal audit.
With a call for temporary fiscal stimulus to avoid a collapse of the world economy in 2008-2009, the Washington-based IMF was seen as breaking away from a tradition of austerity, according to the report by the Independent Evaluation Office.
“The global crisis was a watershed event for the fund,” which is now perceived “as more flexible and responsive,” according to the report dated Jan. 17 and released yesterday. “The true test for the fund will be in periods of calm, when a trusted adviser role is even more critical for traction.”
With loans in 47 countries including Greece and resources that were increased twice in the past four years, the IMF regained the global relevance it had lost in the years leading to the crisis. Still, the auditor urged the fund to respond to distrust that lingers in Asia and Latin America.
The internal auditor two years ago lambasted the IMF for failing to see the signs of the global financial crisis, saying the Washington-based fund was sometimes “in awe of” government officials’ reputation and expertise in nations such as the U.S. and the U.K.
Yesterday’s report described a perception in some countries that the fund is still dominated by its largest shareholders with conditions attached to recent loans in Europe being seen as “soft” compared with bailouts in the past.
The report made several recommendations, which include sharing with country officials some information on policy advice before visiting to assess their economies, crafting medium-term policy strategic plans for each country and incorporating the views of all countries when preparing major policy decisions.
Cost of Higher Bank Capital Requirements Is ‘Significant’
A “dangerous misconception” is taking hold that banks can be safer, at no economic cost, by requiring shareholders to provide more funding with less money flowing from depositors and debt holders, Douglas Elliott, the Brookings Institution fellow who was managing at JPMorgan from 2006-09, wrote in a report.
“There would be significant economic costs, so there needs to be a debate centered on an examination of the trade-offs; personally, I agree with the majority of analysts and policy makers that the costs would outweigh the benefits, but my key point here is that we need a debate on the trade-offs,” Elliott wrote in the report.
“The recent severe recession is a reminder of how much damage a credit crunch can do, so we ought not to inflict one on ourselves voluntarily,” he said in the report.
Currently, shareholders supply about five percent of the funding for most banks, while some proposals call for increasing this as much as 30 percent, according to Elliott.
Amazon’s European Base Luxembourg Sued by EU on Low E-Books Tax
Amazon.com Inc. (AMZN)’s European base of Luxembourg as well as France face European Union lawsuits over their low value-added tax rates for e-books, which the EU claims hit sales elsewhere in the 27-nation bloc.
The European Commission is suing both countries in the European Court of Justice for breaching EU rules that ban reduced VAT rates for e-books, the regulator said in a statement today. Luxembourg charges 3 percent VAT on e-books and France levies 7 percent. The commission said they should charge the standard rate of VAT, which is 15 percent in Luxembourg and 19.6 percent in France.
The low rates are hurting sales of e-books in other EU countries and creating “serious distortions of competition,” the Brussels-based authority said.
Amazon has its European headquarters in Luxembourg, allowing the world’s largest retailer to charge 3 percent on e- book sales. VAT rates on sales of other items are charged in line with tax rates in customers’ home countries.
Chesapeake Absolves CEO in Internal Probe of Gas-Well Loans
Chesapeake Energy Corp. (CHK) exonerated co-founder and outgoing Chief Executive Officer Aubrey McClendon for privately borrowing hundreds of millions of dollars from some of the company’s biggest financiers.
The review found no intentional misconduct on the part of McClendon, the Oklahoma City-based oil and natural gas explorer said in a statement yesterday. The findings, announced three weeks after McClendon agreed to resign from the company he led for almost a quarter century, was the culmination of a 10-month probe by the board into the CEO’s use of minority stakes in Chesapeake-owned wells as collateral for private loans.
The investigation by the board’s audit committee and the Locke Lord Bissell & Liddell LLP law firm involved more than 50 interviews with executives from Chesapeake and other companies, according to the statement. The transactions reviewed included McClendon’s borrowings from EIG Global Energy Partners LLC, a private-equity firm that bought preferred shares in two Chesapeake subsidiaries in 2011 and 2012.
“The review of the financing arrangements did not reveal any improper benefit to Mr. McClendon or increased cost to the company as a result of the overlap in the financial relationships,” the company said.
Separate probes are in progress at the Internal Revenue Service and the U.S. Securities and Exchange Commission.
The internal investigation also found no evidence of antitrust violations during Chesapeake’s 2010 acquisitions of drilling rights in a Michigan shale formation, the company said. Chesapeake said it has been cooperating with federal and state investigations of those transactions.
The U.S. Justice Department and Michigan’s attorney general began inquiries last year into e-mailed communications between Chesapeake and Encana Corp. (ECA) in the run-up to a 2010 auction of state-owned leases. The e-mails included discussions of divvying up Michigan counties for bidding by each company.
McClendon, 53, agreed on Jan. 29 to resign effective April 1, citing “philosophical differences” with the board that he didn’t detail. His grip on power at what was once the pre- eminent U.S. gas producer began to slip last year when the board inquiry commenced in April and he was deposed as chairman in June.
Heinz Deal Trading Anomalies Subject of FBI’s Criminal Probe
The Federal Bureau of Investigation is working with the Securities and Exchange Commission in a criminal probe of trading “anomalies” prior to the announcement of a deal to buy H.J. Heinz Co. (HNZ), said Peter Donald, a spokesman for the FBI’s New York office.
The SEC sued “unknown” traders over “suspicious trading” of Heinz shares through what the regulator said was an account at Goldman Sachs Group Inc. The trades came one day before Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) and 3G Capital Inc. announced their $23 billion takeover, the SEC said.
The SEC alleged in a complaint filed Feb. 15 in Manhattan federal court that the traders earned $1.7 million by purchasing the ketchup maker’s stock just before the announcement. The trading in the deal, which Heinz and 3G said is the largest ever in the food industry, was carried out through a Zurich, Switzerland-based account and involved call-option contracts, the SEC said.
The SEC said it obtained an emergency court order to freeze assets in the Zurich-based account.
Tiffany Galvin, a spokeswoman for Goldman Sachs Group Inc., (GS) has said the bank is “cooperating with the SEC’s investigation.”
The SEC alleged the defendants invested almost $90,000 in option positions the day before the deal was announced. As a result, their position increased to more than $1.8 million, a rise of almost 2,000 percent in one day.
The case is U.S. Securities and Exchange Commission v. Certain Unknown Traders in Securities of H.J. Heinz Co., 13- cv-1080, U.S. District Court, Southern District of New York (Manhattan).
EU Cartel-Fine Practice to Be Reviewed by Germany’s Top Court
Germany’s top constitutional court is reviewing a complaint about the European Union’s cartel prosecution practice, according to a list of pending cases released yesterday.
A company fined by the European Commission for antitrust violations asked the court to review the decision to punish it as well as rulings by the European Court of Justice on the issue. The company’s name wasn’t disclosed.
German companies fined by the EU’s antitrust regulator have long argued the punishments are excessive and the appeal process before the European courts lacks the fairness and defense rights afforded by national courts.
The case may reopen a dispute between Germany’s Federal Constitutional Court and the ECJ over who has the last word in such matters. As a rule, the German court can’t review EU authorities’ actions. Agreeing to hear the cartel fine case indicates the German court will take another look at the issue.
The German constitutional court complaint was filed in 2011.
The German case is BVerfG, 2 BvR 2752/11.
JPMorgan Asks Judge to Toss Credit Union Regulator’s Lawsuit
JPMorgan Chase & Co. (JPM)’s Bear Stearns unit asked a federal judge to throw out a regulator’s lawsuit that claims it used misleading documents to sell $3.6 billion in mortgage-backed securities to credit unions that later failed.
Bear Stearns, in papers filed Feb. 19 with the U.S. court in Kansas City, Kansas, contends that the National Credit Union Administration board is unfairly blaming the bank because the credit unions took widely known risks that eventually “backfired.”
NCUA, an Alexandria, Virginia-based independent federal agency, is responsible for recovering losses to minimize the costs to its industry-paid stabilization fund. The agency sued the JPMorgan Chase unit in December, acting on behalf of credit unions that went into liquidation.
Bear Stearns’s offering documents said originators of the underlying mortgages had adhered to underwriting guidelines that had, in reality, been “systematically abandoned,” making the investments riskier than represented, NCUA said in its complaint.
John Fairbanks, an NCUA spokesman, declined to comment on the Bear Stearns filing, saying the agency doesn’t comment on pending litigation.
JPMorgan Chase & Co. acquired Bear Stearns in 2008.
The regulator separately sued the New York-based bank as successor in interest to Washington Mutual Bank and has eight other cases pending against defendants including Goldman Sachs Group Inc., and investment banking units of Barclays Plc (BARC) and Royal Bank of Scotland Group Plc. (RBS)
The case is National Credit Union Administration Board v. Bear Stearns & Co., 12-cv-2781, U.S. District Court, District of Kansas (Kansas City).
FSA Deserves Blame on Libor Scandal, Lawmaker Tyrie Says
The U.K.’s financial regulator is partly to blame for not detecting efforts by banks it supervised to rig benchmark interest rates for several years, lawmaker Andrew Tyrie said.
The Financial Services Authority didn’t identify or deal with weak compliance at Barclays Plc before it and U.S. authorities fined the bank 290 million pounds ($441 million) for rigging the London interbank offered rate and similar benchmarks, the Treasury Select Committee led by Tyrie said in a report released today.
“The systemic rigging of important rates appears to have been pervasive in the banking industry over a long period of time,” Tyrie said in a statement on the findings. “Serious regulatory shortcomings also came to light. It is only right that the FSA has had to shoulder its share of the blame for this scandal.”
The FSA, which along with U.S. regulators fined Barclays, UBS AG and the Royal Bank of Scotland Group Plc more than $2.5 billion, has “increased the intensity of our supervision, including our focus on firms’ control functions and board oversight,” it said in response to the committee report.
Miller Says Eventual Looser Credit Raises Bank Concerns
Paul Miller, an analyst at FBR Capital Markets, talked about a proposal by Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., to apply stricter accounting standards for derivatives and off-balance-sheet assets at the four largest U.S. banks.
Miller spoke with Deirdre Bolton on Bloomberg Television’s “In the Loop.”
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Comings and Goings
Corzine May Get Lifetime Ban From U.S. Watchdog, N.Y. Post Says
Jon Corzine, the former head of commodity futures brokerage MF Global, may be handed a lifetime ban from the futures trading industry, the New York Post reported.
The National Futures Association directors is expected to discuss today a motion to initiate the ban, the newspaper said, citing John Roe, a director of the association.
An NFA spokesman whose name was not provided, and Christopher Hehmeyer, chairman of association’s board, declined to comment on the ban, as did Corzine, the Post reported.
MF Global filed for bankruptcy on Oct. 31, 2011, hours after informing regulators that it could not account for millions of dollars in customer deposits.
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