Too-Big-to-Fail Bill, Fund Bonuses, Libor: Compliance

U.S. Representative John Campbell plans to offer legislation aimed at reducing the size of “too-big-to-fail” banks by requiring them to hold more capital including long-term debt.

Campbell, a California Republican, said he plans to introduce his bill today. It comes as a number of lawmakers and regulators from both parties -- including Federal Reserve Governor Daniel Tarullo -- argue that the 2010 Dodd-Frank Act failed to curb the growth of large banks and express support for renewed efforts to limit the kind of systemic risk that fueled the 2008 financial crisis.

Three of the four largest U.S. banks -- JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. -- are bigger today than they were in 2007, heightening the risk of economic damage if one gets into trouble.

Banks typically fund their longer-term assets with short-term debt, making a profit on the interest-rate difference between the two. In a bank failure, stockholders are typically wiped out, and short-term debt can evaporate quickly as creditors refuse to renew commercial paper and short-term notes.

Campbell’s bill would require banks with at least $50 billion in assets to hold an additional layer of capital in the form of subordinated long-term bonds totaling at least 15 percent of consolidated assets. If an institution were to fail, the long-term bondholders would be guaranteed at no more than 80 percent of the face value of the debt. As a result, banks would face pressure to reduce their balance sheets.

The extra layer of capital would be in addition to higher levels required as part of the Basel III international regulatory accords. The goal is to protect taxpayers from bailouts and equalize the competitiveness between large and small institutions, which face higher costs of capital, Campbell said.

Campbell also proposed using credit default swaps to help gauge when regulators should step in and assess a bank’s riskiness.

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Compliance Policy

Fund Managers May Face Longer Wait for Bonuses Under ESMA Rules

Senior hedge-fund and private-equity managers may face longer waits for bonuses under guidelines published by the European Union’s top market regulator.

Bonuses for risk-taking employees should be withheld for a period of time to align managers’ interests with the long-term performance of the fund, the European Securities and Markets Authority said yesterday.

Deferred parts of bonus awards should be paid out at least over a three- to five-year period, ESMA said. Companies “should consider longer” waiting times for “members of the management body,” according to the document.

Payouts for bankers have been under scrutiny since the 2008 collapse of Lehman Brothers Holdings Inc. European finance ministers in 2010 approved a law, known as the Alternative Investment Fund Managers Directive, which gave ESMA power to set rules for hedge funds and private equity firms, regulating their pay and access to EU investors. Member states have until July 2013 to implement the directive.

National regulators will police fund managers’ compliance with the ESMA guidance on pay.

EU Banks May Have to Meet Basel Liquidity Rule Before Rivals

Banks in the European Union may need to comply with an international liquidity rule before competitors in other parts of the globe as part of a deal on how the bloc should implement Basel banking standards.

Nations are weighing calls from the European Parliament for an “accelerated” introduction of the so-called liquidity coverage ratio, according to a document obtained by Bloomberg News.

Ireland, which holds the rotating presidency of the EU, is pressing for an agreement to have the rule take full effect on Jan. 1, 2018, a year ahead of a deadline set last month by global central bank chiefs, according to the document, which was drawn up by the Irish government and is dated Feb. 8.

Basel regulators said last month that phasing in the LCR from 2015 to 2019 would ensure that it could be introduced without disrupting an orderly strengthening of the banking system or the financing of the economy.

Now, lawmakers “want an accelerated introduction of the 100 percent ratio,” according to the Feb. 8 document.

The LCR -- which would force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze -- is part of an overhaul of global financial rules, known as Basel III, intended to prevent a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc.

The EU has struggled to agree on legislation to apply Basel III, as governments and the EU Parliament clashed on a range of issues including curbing banker bonuses, capital rules for systemically important banks and the liquidity requirements.

The international 2019 start date for the liquidity ratio was part of a package of proposed rules decided by central bank chiefs last month meant to water down the standard amid concerns that it could harm interbank lending and stifle a nascent economic recovery. Global regulators had previously planned to implement the requirement fully from 2015.

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Treasury Approves Oregon Test Program to Help Homeowners

The U.S. Treasury Department approved a new program to aid underwater property owners in Oregon’s Multnomah County, Senator Jeff Merkley, a Democrat from Oregon said in a statement.

The program aids borrowers with loans not backed by the government. Underwater homeowners who are current on payments will be allowed to refinance at lower rates under the program, he said.

The pilot program, which borrows features from Merkley’s proposal released last year, may create a model for the nation, according to the senator.

The Oregon Housing and Community Services Department will use funds awarded by the Treasury Department’s “Hardest Hit” program to finance the program.

Oregon is first state to create such a program.

Compliance Action

UBS May Pay $30 Million for Failures Over Sales of AIG Fund

UBS AG may have to pay out as much as 19.5 million pounds ($30.4 million) in fines and compensation for compliance failures on the sale of a fund linked to American International Group Inc.

The bank was fined 9.45 million pounds by the U.K.’s financial watchdog for failing to carry out due diligence on the AIG Enhanced Variable Rate Fund before selling it to customers, the U.K. Financial Services Authority said in an e-mailed statement. It may need to pay out 10 million pounds more in compensation to customers, the agency said.

The fine comes less than two months after the Swiss bank agreed to pay about $1.5 billion to settle with U.S. and U.K. regulators over manipulating interest rates to boost profits and bonuses.

Some customers were prevented from withdrawing money from the AIG fund after Lehman Brothers Holdings Inc. collapsed in 2008 triggering a financial crisis, the FSA said. New York-based AIG repaid the last of its $182.3 billion U.S. government bailout in December.

“We are pleased that we can put this issue that dates back to 2008 behind us, so that we can continue to focus on serving our clients and executing our strategy,” the Zurich-based bank said in an e-mailed statement.

UBS sold the fund to around 2,000 customers with initial investments totaling 3.5 billion pounds between 2003 and 2008, the FSA said.

Trash Talk Haunts Barclays Traders in FERC Manipulation Probe

Boastful chatter among young traders, preserved in digital archives, has come back to haunt Barclays Plc as it defends itself against allegations that it manipulated U.S. energy markets.

Messages containing mild profanity and bragging have surfaced in filings by the U.S. Federal Energy Regulatory Commission against London-based Barclays and four former traders. The agency, which has expanded its oversight of energy markets since the 2001 failure of Enron Corp., and its enforcement unit are seeking a record $488 million in penalties from the bank and its traders, which they are fighting.

The case is the latest example of how instantaneous electronic communications can cause legal headaches years later. In July, Barclays was fined a record 290 million pounds ($455 million), after regulators released e-mails from traders accused of rigging the Libor. Last week, U.S. and British regulators fined Royal Bank of Scotland Group Plc $612 million after electronic messages from bank traders allegedly showed they manipulated rates.

Under post-Enron authority, the FERC can impose fines of as much as $1 million per violation a day for manipulating energy markets. Barclays has vowed to appeal the case to federal court if the commission doesn’t relent.

Instant messages and e-mails sent by Barclays’ traders, along with data, show the company conducted a “manipulative scheme” from 2006 to 2008, costing other market participants at least $139.3 million, according to the FERC’s enforcement office. The regulator says the traders deliberately took losses in physical markets, where electricity is bought and sold, to benefit swap positions in financial markets.

The bank’s lawyers rebut that interpretation and say in a Dec. 14 filing with the regulator that the FERC has cherry-picked from more than 160,000 messages to build a baseless case. Neither Barclays nor its traders did anything wrong, and the electronic messages don’t line up with market data, according to the filing.

The FERC staff rejects such explanations. On Jan. 28, after reviewing responses from the traders and the bank, it upheld $470 million in proposed penalties for Barclays and an additional $18 million for the individuals involved.

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Autonomy Finance Reports Before HP Deal Probed by U.K. Regulator

Autonomy Corp.’s financial reporting before it was acquired by Hewlett-Packard Co. is being investigated by the U.K. accounting regulator.

The Financial Reporting Council is probing the published accounts of Autonomy for January 2009 to June 2011, the agency said in a statement yesterday. Hewlett-Packard, which took an $8.8 billion writedown a year after acquiring Autonomy, on Nov. 20 accused the company of miscategorizing sales and financial misreporting.

Hewlett-Packard said Autonomy booked hardware sales to appear as more profitable software, and used transactions with resellers of its software to accelerate revenue recognition or fabricate sales. Hewlett-Packard has given its evidence to the U.S. Securities and Exchange Commission and the Serious Fraud Office in the U.K.

“Autonomy received unqualified audit reports throughout its life as a public company,” a spokeswoman for Autonomy’s former management said in a statement.

A spokeswoman for Hewlett-Packard declined to immediately comment.

Former Hewlett-Packard Chief Executive Officer Leo Apotheker, who bought Autonomy to diversify away from hardware and expand in software for businesses, left in 2011 after less than a year on the job following repeated strategy shifts and forecast cuts. Meg Whitman, who took over from him, said the misrepresentations caused Hewlett-Packard to value Autonomy incorrectly before the deal, which ultimately cost the Palo Alto, California-based company $11.1 billion.

Porsche Market-Manipulation Probe Extended to Supervisory Board

The role of Porsche SE supervisory board members during a failed bid to take over Volkswagen AG is being investigated as a three-and-a-half-year-old market manipulation probe spreads.

Stuttgart prosecutors, who have already charged former Chief Executive Officer Wendelin Wiedeking and ex-Chief Financial Officer Holger Haerter, are now looking at the supervisory board, Porsche spokesman Albrecht Bamler said in an interview. He didn’t identify any individuals.

Stuttgart prosecutors are investigating whether Porsche misled investors in 2008 when it denied that it was seeking to buy VW. The company also faces lawsuits seeking more than 4 billion euros ($5.36 billion) in a Braunschweig, Germany, court over the issue.

Porsche and its former executives have rejected the allegations.

Jan Dietzel, a spokesman for the prosecutors, said he couldn’t immediately comment. Der Spiegel reported on the expanded probe yesterday.


RBS CEO Calls Libor Scandal Significant Control Failure

Stephen Hester, chief executive officer of Royal Bank of Scotland Group Plc, testified before the U.K. Parliamentary Commission on Banking Standards in London about the Libor scandal.

For the video, click here.

Campbell Wants ‘Painful, But Safe’ Law for Big Banks

U.S. Representative John Campbell, a Republican from California, talked about his proposal to make big banks add a new layer of capital of at least 15 percent of subordinated long-term bonds, a move that could force “too big to fail” banks to contract.

Campbell, speaking with Peter Cook on Bloomberg Television, also talked about the outlook for automatic spending cuts set to begin March 1, if Congress can’t agree on a deficit-reduction plan.

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Turner Says Asset Managers Need Longer-Term Incentives

Adair Turner, chairman of the U.K. Financial Services Authority, talked about proposed changes to fund managers’ performance bonuses.

He spoke with Bloomberg Television’s Elliott Gotkine in London after the publication of a report by the Group of Thirty financial policy group, of which he is a member.

For the video, click here.

Comings and Goings

SEC Nominee White’s Disclosure Report Shows Possible Conflicts

Mary Jo White, President Barack Obama’s nominee to lead the U.S. Securities and Exchange Commission, said she will avoid some matters involving firms including JPMorgan Chase & Co., General Electric Co. and Deloitte & Touche LLP if confirmed by the Senate.

White, a former U.S. prosecutor who is retiring as a partner in the law firm Debevoise & Plimpton LLP, outlined her recusal plans in cases involving former clients in a letter accompanying her financial disclosure report. She reported earning more than $2.4 million from her partnership stake last year.

White may face questions over potential conflicts of interest at her Senate confirmation hearing, which hasn’t been scheduled.

Obama nominated White for SEC chairman on Jan. 24.

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