Trader IMs Probed, Geithner-AIG, China IPOs: Compliance

An instant-message group involving senior traders at banks including Barclays Plc, Citigroup Inc. and Royal Bank of Scotland Group Plc is being scrutinized by regulators investigating potential manipulation of the foreign-exchange market, four people with knowledge of the probe said.

Over at least three years, the dealers exchanged messages through Bloomberg terminals outlining details of their positions and client orders, and made trades before key benchmarks were set, said two of the people, who asked not to be identified because the inquiries are continuing.

The roster of firms changed over time and included other banks such as Zurich-based UBS AG as the men switched employers, one of the people said. Two traders who weren’t involved in the conversations and who asked not to be identified because they do business with the people involved said that they and others in the market referred to the message group as “The Cartel.”

Regulators are weighing whether those messages amounted to attempts to manipulate the market, two people said. The four banks account for more than 40 percent of trading in the $5.3 trillion-a-day foreign-exchange market, according to a survey by Euromoney Institutional Investor Plc. The U.K.’s Financial Conduct Authority this week opened a formal probe into currency trading, joining a global investigation.

RBS, based in Edinburgh, handed over transcripts of the group’s conversations to the British regulator after concluding that a former senior dealer in London, Richard Usher, disclosed too much information to competitors, one of the people said. Usher didn’t respond to an e-mail request for comment.

Officials at London-based Barclays, RBS, New York-based Citigroup, UBS and the FCA declined to comment on the discussions among dealers. RBS said in an Oct. 16 statement it was “cooperating fully” with the FCA inquiry.

One trader who participated in the group said the messages sought only to match buyers and sellers for large orders and there was no wrongdoing, according to a person briefed on the exchanges between the traders.

Firms across the industry have been reviewing records of instant messages, e-mails, phone calls and trading data, according to people with knowledge of the probe.

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Compliance Policy

SAP’s Plattner Calls for Privacy Rules as Big Data Take Off

SAP AG Chairman Hasso Plattner said governments need to design new rules that balance privacy with the need to collect and analyze increasing amounts of data in areas including health care.

The integrity of consumer records has come under scrutiny since former U.S. National Security Agency contractor Edward Snowden revealed in June that the government secretly collected telephone records of millions of U.S. customers of Verizon Communications Inc. under a classified court order. Prism, another program, collects Internet data from Apple Inc., Google Inc. and other companies.

SAP’s data-crunching Hana software, developed under Plattner’s tutelage, rapidly processes gigabytes of data ranging from business data to genome sequences found in cancer patients’ blood. The vast quantity of information amassed by businesses, governments and universities that requires powerful computers for storage and analysis is often referred to as big data.

Billionaire Plattner, 69, said governments shouldn’t elevate concerns about privacy over the benefit that big-data technology offers when devising new rules.

In the health-care industry, rules in Germany require that medical records be anonymous, and customers’ health details are kept from insurance companies, he said. Hospitals have to store patient data on their premises, improving their protection while at great expense, he said.

SAP, based in Walldorf, Germany, has said its corporate customers can decide in which region of the globe their files are stored and thereby help evade requests to provide data to governments in other countries.

Plattner, who co-founded SAP in 1972, declined to say whether U.S. government agencies are using the Hana software to analyze data.

SAP is scheduled to report third-quarter earnings on Oct. 21.

Banks Face Risk-Model Clampdown in Basel Trading-Book Review

Banks face an overhaul of how they calculate possible losses on securities they hold in their trading books as global regulators target discrepancies in how lenders measure the riskiness of their investments.

In a bid to address weaknesses uncovered by the financial crisis, the Basel Committee on Banking Supervision may publish draft proposals as soon as this month on capital rules for assets that banks intend to trade, according to members of the group.

Banks’ ability to reduce their capital requirements by changing how they measure the risk of losses on their assets has prompted regulatory reviews and calls from some supervisors for more reliance on non-risk-sensitive capital rules. Bankers including Jamie Dimon, chief executive officer of JPMorgan Chase & Co., have said that flexible implementation of previous rounds of Basel rules in the European Union has allowed European lenders to hold less capital against some assets compared to their U.S. counterparts.

A study of large banks found “substantial” differences in how much capital lenders thought was needed to guard against possible losses on assets, the Basel committee said earlier this year. Differences in the risk-models used by banks was an “important source” of the variation, the group said.

The Basel proposals will address variations in different banks’ risk measurement and will go beyond toughening rules on how much information banks have to disclose about their models, Wayne Byres, the Basel committee’s secretary general, said in an e-mail.

International standards set by the Basel committee require banks to meet minimum capital requirements, calculated as a percentage of their assets. The amount of capital that must be held is linked to the riskiness of the banks’ investments.

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Compliance Action

China CSRC Lists 180 Shanghai IPO Applications as of Oct. 17

The China Securities Regulatory Commission said 10 applications were approved out of 180 companies that submitted applications for initial public offerings on the Shanghai exchange as of Oct. 17.

Thirty applications were approved so far this year of 311 companies applying for IPOs on Shenzhen’s main and medium-small company board’s initial public offerings. Forty-three applications of 263 companies that submitted applications for initial public offerings on Shenzhen’s Chinext board were approved as of Oct. 17.

Separately, the commission approved futures trading of japonica paddy and late indica rice at Zhengzhou Commodity Exchange, according to a statement posted on the Commission’s micro blog.


JPMorgan’s $13 Billion Accord Wouldn’t Deter Some Investors

JPMorgan Chase & Co.’s tentative agreement to pay a record $13 billion to end civil claims over its sales of mortgage bonds, a deal that won’t absolve the bank of potential criminal liability, hasn’t shaken some investors’ faith in Chairman and Chief Executive Officer Jamie Dimon.

Billionaire Home Depot Inc. founder Ken Langone said he sees the accord as a buying opportunity. The pact with the U.S. Justice Department would resolve claims that the bank, Bear Stearns Cos. and Washington Mutual Inc. misleadingly packaged and sold mortgage-backed securities. JPMorgan acquired both lenders at the government’s urging in 2008.

“The brunt of this misbehavior occurred before Jamie or JPMorgan had anything to do with these two companies,” Langone, 78, said yesterday in a telephone interview. “I’m very, very comfortable as an investor in JPMorgan.”

Dimon, 57, personally negotiated the terms in a call with U.S. Attorney General Eric Holder after markets closed Oct. 18. The government’s mounting demand for payments tied to Bear Stearns and WaMu had frustrated the CEO’s push to end probes this year, driving legal reserves to $23 billion and causing the New York-based bank’s first quarterly loss under his watch.

“There’s no question that Jamie Dimon and JPMorgan underestimated the legal risk related to their acquisitions,” Mike Mayo, an analyst with CLSA Ltd. in New York, said in an interview. “Dimon messed up with the Bear Stearns acquisition.”

That doesn’t mean shareholders will withdraw their support, Mayo said. JPMorgan weathered the financial crisis without a loss and produced three straight years of record profits, reaching $21.3 billion in 2012. Its shares have climbed 72 percent since the end of 2008, outpacing a 48 percent gain in the KBW Bank Index of 24 U.S. lenders. The stock slipped to $54.28 in European trading today, down from its $54.30 close in New York on Oct. 18.

“Jamie Dimon will remain Iron Man on Wall Street,” Mayo said. “He’s still seen as very strong with investors’ interests at heart.”

The accord, which increased from an $11 billion proposal last month, would mark the largest amount paid by a financial firm in a settlement with the U.S. The payments amount to more than half of JPMorgan’s profit last year. Only seven companies in the Dow Jones Industrial Average earned more than $13 billion in 2012, according to data compiled by Bloomberg.

The negotiations and terms were described by two people with knowledge of the situation who asked not to be named because the meetings were private. Brian Fallon, a Justice Department spokesman, declined to comment.

The deal would resolve civil probes by three U.S. attorneys offices, two state attorneys general and three federal regulators, according to one of the people. It includes $4 billion in relief for consumers hit hardest by the housing downturn in regions where JPMorgan has branches and $9 billion in fines and other payments, the person said. The payouts would cover a $4 billion accord with the Federal Housing Finance Agency over the bank’s sale of mortgage-backed securities for Fannie Mae and Freddie Mac.

JPMorgan disclosed in August that the U.S. Attorney’s office in Sacramento, California, has been conducting a criminal probe of the company’s bond sales. The settlement wouldn’t eliminate the possibility of charges against the bank or its employees, according to the other person.

“To not get the waiver from criminal prosecution is not good,” said Nancy Bush, a bank analyst who founded NAB Research LLC in New Jersey. “What we’re looking for in a settlement of this size is certainty from things like the criminal prosecution of a company. The Street wants certainty.”

In anticipation of a deal, JPMorgan took a $7.2 billion charge for expenses tied to regulatory matters and litigation in the third quarter, leading the bank to announce a $380 million loss on Oct. 11. Laban P. Jackson, a JPMorgan board member, voiced support for Dimon two days later.

“He’s the best manager I’ve ever seen, and I’m old,” Jackson, 71, said at the National Association of Corporate Directors’ annual conference in Oxon Hill, Maryland. “He has, as we all do, flaws.”

It helps Dimon that other banks are facing similar probes and FHFA demands and that at least two-thirds of JPMorgan’s mortgage-bond liability came from Bear Stearns and WaMu, said Glenn Schorr, an analyst with New York-based International Strategy & Investment Group LLC.

“I don’t think investors will put that on him,” Schorr said. “JPMorgan took it on the chin and is leading the pack with the big settlement, but you will see other settlements once this is set by the other banks.”

The case is Federal Housing Finance Agency v. JPMorgan Chase & Co., 11-06188, U.S. District Court Southern District of New York (Manhattan).

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Geithner Feuds With Greenberg Over Book in AIG Bailout Suit

Former Treasury Secretary Timothy Geithner joined the Federal Reserve Bank of New York in declining to give drafts of a book he’s writing to Maurice “Hank” Greenberg for a lawsuit challenging the government’s bailout of American International Group Inc.

Greenberg is seeking book material, interview transcripts and other documents that are irrelevant to his $25 billion class-action suit, Geithner said in a filing Oct. 18 in the U.S. Court of Federal Claims in Washington. He filed suit through his closely held Starr International Co., a shareholder in the insurer.

Greenberg, 88, the former chairman and chief executive officer of New York-based AIG, claims the September 2008 assumption of 80 percent of the insurer’s stock by the New York Fed, which Geithner headed at the time, violated shareholders’ rights to due process and equal protection of the law.

Disputed items include interview transcripts and drafts shared between Geithner, 52, and journalists Michael Grunwald and Charlie Anderson, who are helping write the book, as well as documents the U.S. Treasury Department gave Geithner when he was president of the New York Fed.

The case is Starr International Co. v. U.S., 11-cv-00779, U.S. Court of Federal Claims (Washington).

Kohn Wins Lawsuit Over Madoff Ponzi-Scheme Losses in Europe

Former Bank Medici AG chairwoman Sonja Kohn and previous directors of Bernard L. Madoff’s European operations don’t owe anything to the liquidators seeking to recoup losses to repay the convicted conman’s victims.

Judge Andrew Popplewell dismissed a lawsuit Oct. 18 filed by London-based liquidators of Madoff Securities International Ltd. They were seeking to recover about $50 million.

Kohn and former SG Warburg executive Stephen Raven, both longtime associates of Madoff, also gave evidence in the case against them, which ended in July. Lawyers for Kohn and Raven said they welcome the Oct. 18 ruling in separate e-mailed statements.

Madoff, 75, is serving a 150-year sentence for what prosecutors said was the biggest Ponzi scheme in U.S. history.

Madoff’s European operations were owned almost exclusively by Madoff and served as his proprietary trading unit. More than $910 million was transferred between the London unit and Bernard L. Madoff Investment Securities LLC in New York.

“We are obviously extremely disappointed with the judgment handed down today as claims made against the defendants were serious and there was undoubtedly a case to answer,” Simon Rothschild, a spokesman for Grant Thornton LLP, the liquidators winding down Madoff’s U.K. unit, said in an e-mailed statement Oct. 18.

The case is Madoff Securities International Ltd. v. Raven, 10-1468, High Court of Justice, Queen’s Bench Division.


JPMorgan Settlement Would Set Precedent, Peabody Says

Charles Peabody, an analyst at Portales Partners LLC, talked about JPMorgan Chase & Co.’s tentative agreement to pay a record $13 billion to end civil claims over its sales of mortgage bonds.

Peabody spoke with Tom Keene, Sara Eisen and Scarlet Fu on Bloomberg Television’s “Surveillance.” Ellen Zentner, senior U.S. economist at Morgan Stanley, also spoke.

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Mizuho’s Sato Urged to Appear in Parliament by DPJ Lawmaker

Mizuho Financial Group President Yasuhiro Sato should appear in parliament to answer questions about the bank’s loans to crime groups, opposition Democratic Party of Japan lawmaker Akira Nagatsuma said in a Diet session.

Financial Services Minister Taro Aso declined to comment on the Financial Services Agency’s inspections of individual banks, in response to question by Nagatsuma on the investigation.

Aso said he will wait until there are results of Mizuho’s third-party committee investigation before commenting on the specific case.

Aso also said in general the FSA operates with limited resources and tries to find evidence based on a company’s reports.

The ruling Liberal Democratic Party plans to ask Sato to appear before its financial committee to explain the crime-loan issue.

Bank Business Model Awaits Rules Clarity, Arledge Says

Curtis Arledge, chief executive officer for investment management at Bank of New York Mellon, talked Oct. 18 about bank earnings and financial regulations.

Arledge talked with Betty Liu on Bloomberg Television’s “In the Loop.” James Reynolds, CEO of Loop Capital Markets LLC, also spoke.

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Fed’s Dudley Says Resolution Plans Don’t Solve Too Big to Fail

Federal Reserve Bank of New York President William C. Dudley said that government plans to wind down large financial firms, while helping reduce the odds of a taxpayer bailout, don’t eliminate the need for increased capital and oversight of financial institutions.

“These two paths -- reducing the financial-stability costs associated with the failure of a systemically important financial firm versus applying tougher capital and liquidity standards for such firms that reduce the probability of failure -- are complements not substitutes,” Dudley said in the text of remarks for a speech in Washington Oct. 18.

“We need to keep pushing forward with both approaches in order to make the financial system more resilient and robust,” he said at a conference on how to handle failing banks.

The meeting was sponsored by the Federal Reserve Board of Governors and the Richmond Fed.

The 2010 Dodd-Frank Act requires large lenders to prepare living wills that describe how they would be wound down in a bankruptcy.

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