Mortgage Pipeline, Basel Timing, Money Funds: Compliance

Reopening the U.S. mortgage securitization pipeline is a vital step toward a housing market recovery that will boost the wider economy, Comptroller of the Currency Thomas Curry said yesterday in a Las Vegas speech.

Curry made the remarks at an American Securitization Forum conference, where he pointed out growth in auto-loan securitizations as a “bright spot” that should boost lenders’ confidence in well-designed securitizations. He said that underwriting standards for mortgage loans must “find a new equilibrium of risk and reward for a sustainable mortgage market.”

The so-called Qualified Residential Mortgage rule is being written by the OCC, which regulates banks, and other agencies including the Federal Reserve and Federal Deposit Insurance Corp. Curry said he recognizes the significance of the rule. He said its objectives, which requires lenders to retain a stake in risky mortgages they securitize, include “encouraging the availability of consumer credit on reasonable terms, facilitated by the secondary mortgage market, on the one hand, and sound credit market practices and investor protection on the other.”

A related measure was released Jan. 10 by the Consumer Financial Protection Bureau. That so-called Qualified Mortgage rule offers legal safe harbor for lenders who follow guidelines for “safe mortgages,” which it defines as those made to borrowers whose debt payments are no more than 43 percent of their income, among other things. Some lawmakers and housing industry groups have called for the risk-retention regulation to conform to that rule.

Compliance Policy

EU Said to Weigh Bank Debt Rule Delay in Blow to Basel Timetable

The European Union is weighing a one-year delay to the deadline for lenders to disclose whether they meet a debt ratio, in the latest blow to the global timetable for applying Basel bank rules, according to three people familiar with the discussions.

EU nations may seek to push the start date for mandatory disclosure of this so-called leverage ratio from Jan. 1, 2015, to Jan. 1, 2016, said the people, who couldn’t be named because the talks are private. The revised date was discussed by diplomats at a meeting yesterday, they said.

The ratio is part of the package of international bank rules known as Basel III, which has become beset by delays as regulators across the world ponder how best to implement the measures, which more than triple the core capital lenders must hold and set standards for how lenders should manage risks.

The EU, like the U.S., missed the January deadline to start phasing in parts of Basel III. The Basel Committee on Banking Supervision, the international group that drew up the standards, agreed earlier this month to delay and water down another key part of the package designed to ensure banks have enough easy-to-sell assets in a crisis.

The possible delay to the leverage ratio was triggered by the EU’s failure to meet the January deadline. Officials will hold further talks on the timing for the leverage ratio and other parts of the Basel III rules in the coming weeks, two of the people said.

Governments and European Parliament lawmakers have sparred over swathes of the bloc’s draft Basel implementing law including banker bonus curbs, rules for systemically important banks and the leverage limit.

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Money Funds Retreat as Fidelity to Vanguard Push Limited Rules

Three of the five largest U.S. money-market fund managers, signaling they can’t stop a second attempt by regulators to overhaul rules for the $2.7 trillion industry, are fighting instead to limit the scope of any changes.

Fidelity Investments, Vanguard Group Inc. and Charles Schwab Corp. are urging regulators to exempt retail-oriented funds and focus on those that cater to institutional clients and buy corporate debt, a category that absorbed the bulk of an investor run in 2008. Known as prime institutional funds, they hold $987 billion, or 37 percent of U.S. money-market mutual-fund assets, according to research firm iMoneyNet.

Five months after beating back a regulatory plan by then-Chairman Mary Schapiro of the U.S. Securities and Exchange Commission, fund companies acknowledge they face longer odds in blocking a similar proposal expected to reach SEC commissioners before the end of March. The agency is being pressed to reconsider changes by the Financial Stability Oversight Council, or FSOC, a risk-monitoring panel that includes the heads of the Federal Reserve and Treasury Department.

Fidelity, the largest U.S. money fund manager, wrote in a Jan. 24 letter to the SEC that if it determines reform is necessary, it should be “narrowly tailored” to minimize disruption to short-term markets and lessen adverse impacts on long-term markets. Vanguard made a similar appeal in a letter to the FSOC on Jan. 15. No. 5 Schwab went further in a Jan. 17 letter to the FSOC, saying the idea of forcing prime institutional funds to abandon their fixed $1 share price in favor of a floating value “merits consideration.”

Money managers have asserted that allowing a floating net asset value would destroy the appeal of money funds, which are often used as substitute for holding cash.

Vincent Loporchio, a Fidelity spokesman, John Woerth, a Vanguard spokesman, and Alison Wertheim for Schwab declined to comment beyond the letters.

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Compliance Action

Deutsche Bank Said to Be Among Banks in Bafin Euribor Probe

Deutsche Bank AG is among several banks facing probes by financial regulator Bafin over the possible rigging of Euribor interest rates, two people familiar with the matter said.

WestLB, now called Portigon AG, is also being investigated over the Euribor rates, said the people, who declined to be identified because they aren’t authorized to speak about the matter. Sueddeutsche Zeitung reported yesterday Bafin is looking into four German lenders over Euribor, including Portigon and Deutsche Bank. Both lenders are also being reviewed for their participation in Libor rate setting.

Regulators from Canada to Switzerland are investigating whether more than a dozen banks. The benchmarks are meant to represent the rate at which banks can borrow from other lenders in a specific currency over various periods.

Bafin spokesman Ben Fischer declined to identify any of the banks involved or to say how many are being investigated. Spokesmen for Deutsche Bank and Portigon declined to comment.

The regulator has various forms of reacting to allegations of wrongdoing, said Fischer. The process can be escalated from asking for a dialogue over the issue, ordering to hand in information to opening a special probe, he said.

Grassley Presses CFTC Inspector General on Auditing Standards

Senator Charles Grassley, a Republican from Iowa, has asked the inspector general’s office of the Commodity Futures Trading Commission to ensure that progress has been made in improving its auditing systems after failing a peer review in 2011.

Grassley made the request in a Jan. 25 letter to the Commission’s Office of Inspector General.

While the Office of Inspector General previously said it has “fully implemented” 35 recommendations made in 2011, Grassley says he remains concerned. He asked in the letter for detailed documentation of all steps taken to ensure problems were resolved within six months. He also wants details of how the office plans to maintain standards.

A government-required review completed in March 2011 said the Commission’s internal watchdog had “significant deficiencies” in its auditing systems and received a failing grade.

RBS Drops on Report U.S. Authorities Seeking Libor Guilty Plea

Royal Bank of Scotland Group Plc, Britain’s biggest publicly owned lender, fell the most in four months after the Wall Street Journal reported U.S. authorities are seeking a guilty plea to criminal charges as part of any settlement of allegations of interest-rate rigging.

Executives are resisting such a plea on concern it could increase RBS’s vulnerability to litigation and lead clients to curtail business, the newspaper reported, citing unidentified people with knowledge of the talks. The bank expects to pay about 500 million pounds ($786 million) in fines to U.K. and U.S. regulators in a settlement as soon as next week, two people with knowledge of the matter said earlier this month.

“Discussions with various authorities in relation to Libor-setting are ongoing,” Michael Strachan, a spokesman for RBS, said. “We continue to cooperate fully with their investigations.” He declined to comment further on the talks with the Justice Department.

The fine would be the second-largest, in comparison to that of UBS AG, levied by regulators in their investigation into allegations traders at the world’s biggest lenders manipulated submissions used to set the London interbank offered rate and similar benchmarks.

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Ernst & Young Cleared by Regulator’s Lehman Client-Funds Probe

Ernst & Young LLP won’t face action in the U.K. over its audits of Lehman Brothers Holdings Inc.’s London unit, the U.K.’s accounting regulator said after an investigation lasting more than two years.

The probe focused on whether Ernst & Young had ensured whether the bank complied with client-asset-separation rules, the Financial Reporting Council said in an e-mailed statement.

The regulator also cleared Ernst & Young in a separate probe last year over the way it dealt with the bank’s off-balance-sheet transactions during 2007. The probe focused on its accounting for Lehman’s so-called Repo 105 and Repo 108 transactions.

Wal-Mart Accused of Using Mexican Governor to Negotiate Bribes

Wal-Mart Stores Inc.’s Mexican unit used a current state governor there to facilitate $156,000 in bribes meant to help open stores, an ex-lawyer for the retailer told company officials in 2005, according to documents released by members of the U.S. Congress.

The payments were negotiated by Graco Ramirez Garrido Abreu, who at the time served as a federal lawmaker for the state of Morelos, a Wal-Mart summary of the accusations stated. It was released Jan. 10 by Democratic Representatives Henry Waxman of California and Elijah Cummings of Maryland, whose staff is investigating the lawyer’s allegations.

The accusations by attorney Sergio Cicero Zapata, a 28-year veteran of the company, who alleged Ramirez was “the main contact person” to speed needed permissions from the Urban Development Ministry, came in a summary of an Oct. 13, 2005 meeting with the retailer’s officials. Governor Ramirez denied Cicero’s claims. Cicero couldn’t be immediately reached for comment.

Following a New York Times report based partly on Cicero’s accounts last year, Wal-Mart officials said they had started a corruption investigation of the Mexican unit and expanded the probe to the company’s operations in India, China and Brazil.

Wal-Mart spokesman Randy Hargrove said this information is not new and “has been part of the company’s ongoing investigation of potential violations of the U.S. Foreign Corrupt Practices Act for more than a year and has been the subject of two New York Times articles.”

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Ex-Jefferies Trader Litvak Arrested for Securities Fraud

A former Jefferies & Co. managing director was arrested and accused of defrauding customers of more than $2 million on trades of residential mortgage-backed securities, prosecutors said.

Jesse C. Litvak, 38, of New York, was arrested yesterday at his home and charged with 16 counts including securities fraud, fraud connected with the Troubled Asset Relief Program and making false statements to the federal government, Connecticut U.S. Attorney David Fein said in a statement.

Alleged victims include “numerous” investment funds, among them six established by the U.S. Treasury Department in 2009 as part of its response to the financial crisis, according to the statement. Litvak also defrauded private investment funds, according to the statement.

Litvak is charged with 11 counts of securities fraud and may face as long as 20 years in prison on each count if convicted. He is also charged with one count of TARP fraud.

The SEC yesterday filed a lawsuit against Litvak in federal court in Connecticut, accusing him of defrauding investors in more than 25 trades from 2009 to 2011.

Patrick J. Smith, an attorney with DLA Piper in New York who is representing Litvak, said in a statement that Litvak didn’t “cheat anyone out of a dime,” Smith said. He added that Litvak looks forward to trial so he can clear his name.

Richard Khaleel, a spokesman for New York-based Jefferies, declined to comment on the case.

The civil case is SEC v. Litvak, 13-132, U.S. District Court, District of Connecticut (New Haven).

Caisse D’Epargne Ex-Trader Convicted Over $424 Million Loss

Former Caisse d’Epargne trader Bruno Picano-Nacci was found guilty by a Paris court of charges his unauthorized trading cost the bank 315 million euros ($424 million) in 2008.

The court said he had to repay the money and issued a suspended jail sentence at a hearing yesterday. The 37-year-old former trader breached the trust of the bank, continuing to trade on risky positions after he was ordered otherwise.

The bank announced a 751 million-euro loss less than a year after Societe Generale SA said in January 2008 that unraveling positions taken by Jerome Kerviel cost it 4.9 billion euros. Caisse d’Epargne calculated the damages figure as what was lost through unauthorized trading rather than poor portfolio management.

Picano-Nacci, who joined the bank in 2003, denied he exceeded his authority, arguing he made risk-management mistakes and didn’t hide those errors from superiors or act outside his mandate. Caisse d’Epargne is now part of Groupe BPCE, France’s second-largest bank by branches.

Picano-Nacci’s lawyer, Martin Reynaud, said he didn’t know if the former trader would appeal the two-year suspended sentence and damages award. Under French law, Picano-Nacci faced as much as three years in jail and a 375,000-euro fine.

Caisse d’Epargne lawyer Jean Reinhart said repayment would be “difficult” and the question of any compensation for the bank must be approached with “intelligence and tact.”


Levitt Says White Is ‘Right Choice’ for SEC, Must ’Brand’ Agency

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, said Mary Jo White must “brand” the SEC as the “investors’ commission” if she is to be successful as the new chairman. Levitt talked with Bloomberg’s Tom Keene and Michael McKee on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

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