Goldman Market-Shock Test, ECB Change, Lloyds: Compliance

Goldman Sachs Group Inc. said it could survive a global market shock that would send stocks down almost 40 percent and produce $20 billion in trading losses for the firm.

Goldman Sachs would maintain a Tier 1 common ratio of at least 8.9 percent during the shock, above the 5 percent minimum, the New York-based firm said in a disclosure of its company-run stress test. The test included the assumption of a “reputational event” specific to Goldman Sachs that would reduce its revenue over the nine-quarter length of the exam.

The biggest U.S. banks, including JPMorgan Chase & Co. and Bank of America Corp., must conduct so-called mid-cycle stress tests using their own scenarios and disclose a summary of the results.

Goldman Sach’s performance in its own test topped that in the Federal Reserve’s version in March, in which it had a minimum Tier 1 common ratio of 5.8 percent. The Fed’s test had different assumptions and covered a different time period.

The firm projected it would have a $6.2 billion net loss over the nine quarters from April 2013 to June 2015 in a “severely adverse scenario.” It would have $15.5 billion of pre-provision net revenue in the period, overwhelmed by $20 billion in trading and counterparty losses, $1.1 billion in other losses and a $600 million provision for loan losses.

Separately, Citigroup Inc., the third-largest U.S. bank by assets, could incur $21.2 billion of losses over nine quarters through mid-2015 and stay above minimum regulatory capital levels in a severe financial downturn.

The bank’s Tier 1 common capital ratio would fall to as low as 9.1 percent under a severely adverse scenario, above the 5 percent minimum set by U.S. regulators, the New York-based company said yesterday in a presentation on its website.

Citigroup’s figures assume $43.1 billion in pre-provision net revenue and an equal amount of loan losses in the nine quarters from the end of March 2013 through June 2015.

Separately, Bank of America saw Tier 1 capital ratio under its stress test at June 30, 2015, at 10.6 percent, according to a statement posted on its website.

Compliance Policy

Bundesbank Says ECB Bank Oversight May Need Primary-Law Change

European Union lawmakers will probably have to amend the rules governing the European Central Bank as it embarks on the complex task of regulating banks, according to the Bundesbank.

Sabine Lautenschlaeger, vice president of the German central bank, said in Frankfurt yesterday that a “primary law change” may be needed to simplify the governance structure and “separate monetary policy more clearly from banking supervision.”

The ECB is set to oversee banks, starting next year, as part of an effort to create a banking union that would break the link between lenders and states, which spawned the sovereign debt crisis. Critics say the move may create a conflict of interest at the central bank as policy makers are charged with guaranteeing the stability of Europe’s financial sector while fighting inflation.

The Bundesbank vice president said her concerns don’t mean she favors delaying plans for more concerted controls of European lenders.

Kenyan Bourse Authority Completes Draft Rules for Futures Trade

Draft regulations, aimed at creating a fair and efficient futures exchange, are open for public comment until Oct. 17, the Capital Markets Authority, the regulator for Kenya’s Bourse, said in an e-mailed statement.

“The development of the two draft regulations bring to completion the requisite regulatory framework for the establishment of a futures market in Kenya,” the authority said in the statement.

Plans to set-up a futures market in Kenya have been delayed since at least 2009.

Compliance Action

U.K. to Sell $5.3 Billion Lloyds Stake, Five Years After Bailout

The U.K. government plans to sell a 3.3 billion-pound ($5.3 billion) stake in Lloyds Banking Group Plc, its first disposal since bailing out the lender in 2008.

U.K. Financial Investments Ltd., which oversees the government’s holding in the bank, is selling 4.28 billion shares to money managers, the London-based body said in a statement yesterday.

Chancellor of the Exchequer George Osborne, constrained by the biggest austerity program since World War II, could use the proceeds to fund tax cuts or more spending before the next general election, due in 2015. He has said Royal Bank of Scotland Group Plc, which received a 45.5 billion-pound bailout, is still burdened by too many poor assets to be sold.

The transaction will reduce the Treasury’s stake in Lloyds to 32.7 percent from 38.7 percent. JPMorgan Chase & Co., Bank of America Corp. and UBS AG are managing the offering, according to a statement from UKFI. The government still owns 81 percent of Edinburgh-based RBS.

The Lloyds sale is the government’s biggest since the financial crisis.

For more, click here.

HSBC Joins Morgan Stanley in Plan to Screen for Money Laundering

HSBC Holdings Plc and Morgan Stanley are working with outside firms to develop a shared client-screening service amid a crackdown by regulators on money laundering.

Genpact Ltd. and Markit Group Ltd. are creating the service, which will help banks satisfy so-called know-your-client requirements, Hamilton, Bermuda-based Genpact said yesterday in a statement. The service will allow banks to start new trading relationships faster and cut costs by sharing expenses, according to the statement.

The U.S. fined London-based HSBC $1.9 billion last year over claims the lender gave terrorists and drug cartels access to the U.S. financial system. Europe’s biggest bank was accused of failing to monitor more than $670 billion in wire transfers and more than $9.4 billion in purchases of U.S. currency from HSBC Mexico, prosecutors said.

HSBC accepted responsibility at the time and said it’s “a fundamentally different organization from the one that made those mistakes.”

New York-based Morgan Stanley, owner of the world’s largest brokerage, hasn’t faced fines over money laundering since the financial crisis.

Regulators have ordered U.S. banks including Citigroup Inc. and JPMorgan Chase & Co. to tighten their controls.


Ex-JPMorgan Employees Indicted Over $6.2 Billion Derivative Loss

Two former JPMorgan Chase & Co. traders were indicted for engaging in a securities fraud to hide trading losses that eventually surpassed $6.2 billion on wrong-way derivatives bets last year.

Javier Martin-Artajo, who oversaw trading strategy for the synthetic portfolio at the bank’s chief investment office in London, and Julien Grout, a trader who worked for him, were named in a federal indictment, which was unsealed yesterday in federal court in Manhattan. The U.S. announced preliminary charges against the men in August.

Both were charged in yesterday’s indictment with five criminal counts, including securities fraud, conspiracy, filing false books and records, wire fraud and making false filings with the U.S. Securities and Exchange Commission. The pair, along with unnamed co-conspirators, are accused of engaging in a scheme to manipulate and inflate the value of position markings in the synthetic credit portfolio, or SCP.

Martin-Artajo and Grout were named in criminal complaints filed by prosecutors in the office of Manhattan U.S. Attorney Preet Bharara on Aug. 14 that accused them of four separate counts of conspiracy, falsifying books and records, wire fraud, and false filings with the SEC. Yesterday’s indictment, which formalized those counts, added the securities fraud charge, which carries a maximum term of 20 years in prison.

JPMorgan has agreed to pay at least $750 million to resolve U.S. and U.K. regulatory probes of its record trading loss, people with knowledge of the negotiations said. The bank is seeking to settle as many inquiries as possible before the third quarter ends Sept. 30, the people said, asking not to be identified because the talks are private.

Ed Little, a lawyer for Grout, and Meeta Vadher, a spokeswoman for Martin-Artajo’s lawyers, didn’t immediately return e-mails yesterday after regular business hours seeking comment on the indictment. Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on the charges against the two men.

The case is U.S. v. Martin-Artajo, 13-cr-00707, U.S. District Court, Southern District of New York (Manhattan). The SEC case is Securities and Exchange Commission v. Martin-Artajo, 13-cv-05677, U.S. District Court, Southern District of New York (Manhattan).

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Falcone’s SEC Securities Ban Settlement Gets Judge’s Approval

Billionaire hedge-fund manager Philip Falcone’s $18 million settlement with U.S. regulators that includes a five-year ban from the securities industry and an admission of wrongdoing was accepted by a federal judge.

The SEC accused Falcone, who became a billionaire by betting against the U.S. housing market in 2006, of improperly borrowing money from his fund to pay his personal taxes and said he gave preferential treatment to some of his investors in returning their money.

The bar from the securities industry will allow Falcone to liquidate his hedge funds under SEC supervision. He and his firm will pay an $18 million fine.

Eric Goldstein, a lawyer representing Harbinger Capital, didn’t immediately return phone or e-mail messages yesterday after regular business hours seeking comment on the settlement’s approval.

The case is SEC v. Philip A. Falcone, 12-cv-05027, U.S. District Court, Southern District of New York (Manhattan).

Repsol, Cepsa Lose Bid for Reduction in EU Bitumen-Cartel Fines

Repsol SA and Cia. Espanola de Petroleos SA lost European Union court appeals against fines levied for fixing prices of bitumen in Spain, while Nynas AB and Galp Energia SGPS SA had their penalties cut.

The EU General Court yesterday rejected appeals by Repsol and Cepsa of the six-year-old fines. The Luxembourg-based EU court trimmed the fines for Galp and a Spanish unit to 8.3 million euros ($11.1 million) from 8.6 million euros and reduced a penalty for Nynas to 10.4 million euros from 10.6 million euros.

Repsol, which previously was called Repsol YPF SA, was fined 80.5 million euros. Madrid-based Cepsa was fined 83.8 million euros. BP Plc, Europe’s second-largest oil company, got immunity from any fines for being the first to come forward with information about the cartel.

Bitumen is used primarily for surfacing roads and waterproofing. More than 10,000 European companies make or lay asphalt.

“Galp is certain that a complete annulment of the decision is justified,” the Lisbon, Portugal-based company said in a statement on the securities regulator’s website. The company said it will study the ruling before deciding whether to appeal.

Kristian Rix, a spokesman for Repsol, said the company didn’t immediately have any comment, when contacted by phone. No one in the press departments of Nynas or Cepsa was immediately available for comment when contacted by phone.

Antoine Colombani, a spokesman for the commission, said it welcomed the court ruling “as it confirms all the substantial findings” of the authority.

The cases are: T-462/07, T-482/07, T-495/07, T-496/07, T-497/07.

RBS Said to Settle Highland Suits Over $100 Million CDO Losses

Royal Bank of Scotland Group Plc settled lawsuits with Highland Capital Management LP over a failed debt deal that led to accusations of fraud and dishonesty, and losses of as much as $100 million, a person familiar with the cases said.

The settlement ends a four-year legal battle with lawsuits in London and Texas between RBS and Dallas-based Highland. The terms are confidential, according to the person, who asked not to be identified because they weren’t authorized to discuss it.

Highland said it lost as much as $100 million when RBS terminated a planned 500 million-euro ($668 million) collateralized-debt obligation at the height of the 2008 financial crisis and then seized the underlying loans.

The Edinburgh-based lender is being sued by as many as 16,000 investors over a 2008 share offering before its collapse in the 2008 financial crisis, as well as other claims from customers.

Stefan Prelog, a spokesman for Highland in New York, declined to comment on the settlement. A spokeswoman for RBS in London declined to comment.

The U.K. case is The Royal Bank of Scotland Plc v. Highland Financial Partners LP & Ors, U.K. Court of Appeal (Civil Division) A3/2012/1474.

Wabco Wins $272 Million Cut in EU Cartel Fine for Ideal Standard

Wabco Holdings Inc. won a 203.4 million euro ($272 million) windfall after a European Union court cut the antitrust penalty it paid for Ideal Standard’s involvement in a bathroom fittings cartel.

The EU General Court in Luxembourg also trimmed Sanitec Corp.’s fine to 50.6 million euros from 57.7 million euros. Wabco was liable for the original fine as part of an accord linked to its spinoff from American Standard Cos. that predated the EU penalties.

The court said yesterday that EU regulators had wrongly held Ideal Standard guilty of colluding on the Italian market for ceramics for longer than was the case.

Wabco paid all of the 326.1 million-euros fine levied in September 2010 “and will keep the full amount of the reimbursement” awarded by the EU court yesterday, the company said in an e-mailed statement yesterday.

Sanitec, owned by EQT Partners AB, said in a statement it had made a provisional payment of 57.69 million euros in September 2010. It now expects to be reimbursed the difference plus interest.

Antoine Colombani, a spokesman for the commission in Brussels, said the ruling “confirms the substantial findings” of the regulator.

The cases are: T-412/10, T-411/10, T-408/10, T-396/10, T-386/10, T-380/10, T-379/10, T-381/10, T-378/10, T-376/10, T-375/10, T-373/10, T-374/10, T-382/10, T-402/10, T-368/10, T-364/10.

BT Loses Court Fight Over EU Order to Repay U.K. Pension Aid

BT Group Plc, the U.K.’s largest fixed-line phone company, and its pension fund lost a court fight against a European Union order forcing repayment of as much as 16.6 million pounds ($26.5 million) of exemptions from pension rules.

The EU General Court in Luxembourg yesterday rejected the appeals by BT and BT Pension Scheme Trustees against the findings of a European probe that the company benefited from unlawful government aid which had to be recovered.

The European Commission, the 28-nation EU’s antitrust regulator, concluded in 2009 that an exemption for the BT Pension Scheme to contribute to the country’s Pension Protection Fund was unlawful state aid. The EU probe was started after one of BT’s competitors complained to the Brussels-based regulator.

The U.K. Pension Protection Fund was created in 2004 to guarantee pensions when sponsor companies go bankrupt and was financed by their contributions. BT’s exemption was created under a so-called crown guarantee at the time of its privatization in 1984 to protect the staff’s pensions.

“We are disappointed with the decision, which is not in the best interests of BT Pension Scheme members,” Dan Thomas, a spokesman for the company, said in an e-mailed statement. “We shall analyze the judgment in detail and decide upon next steps.”

“The commission’s adverse decision had already been implemented through changes to U.K. pension legislation prior to the General Court’s decision as required by EU law,” Thomas said. “The court’s decision maintains this status quo.”

“The amount to be recovered should be such as to eliminate the economic advantage given to BT which,” the EU decision said, “is the beneficiary of the measure.”

The cases are: T-226/09, British Telecommunications v. Commission, T-230/09, BT Pension Scheme Trustees v. Commission.


Miller Says Another Lehman-Like Crisis ‘Very Possible’

Harvey Miller, a partner at Weil Gotshal & Manges LLP, and David Resnick, president of Third Avenue Management LLC, talked about banking regulation the prospects for another financial crisis.

Miller and Resnick, speaking with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers,” also discuss Lawrence Summers’s withdrawal as a candidate for Federal Reserve chairman.

For the video, click here.

FDIC’s Bair Says Financial Regulations Benefit Families

Sheila Bair, the former chairman of the Federal Deposit Insurance Corp., and author of “Bull by the Horns,” discussed banking regulation and preventing the next financial crisis.

In her book, she does not “hold back,” in describing policy differences that arose during the financial crisis. She also touched on the topic of her forthcoming book.

Bair talked with Bloomberg’s Pimm Fox and Carol Massar on Bloomberg Radio’s “Taking Stock” on September 13th.

For the audio, click here.

Elizabeth Warren Says She’s ‘Big Fan’ of Janet Yellen

U.S. Senator Elizabeth Warren, a Massachusetts Democrat, talked about Lawrence Summers’ withdrawal as a candidate for Federal Reserve chairman and financial regulations.

Warren spoke with Peter Cook on Bloomberg Television’s “In the Loop.”

For the video, click here.

Comings and Goings

Libor Investigator McGonagle Named CFTC Market Oversight Head

Vincent McGonagle, the U.S. Commodity Futures Trading Commission official who opened probes of interest-rate manipulation by banks including UBS AG and Barclays Plc, was named to head the CFTC market oversight unit.

McGonagle, who has been with the agency for nearly 16 years, will take the helm next month of a division responsible for monitoring trading platforms, data repositories and new products to ensure they aren’t susceptible to manipulation, CFTC Chairman Gary Gensler said in a statement yesterday.

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