Gold-Rigging Probe, EU Funds, China IPO Rules: Compliance

JPMorgan Chase & Co. will pay a record $13 billion to resolve U.S. Justice Department probes into the bank’s sale of mortgage bonds that officials said helped feed the financial chaos of 2008.

The accord settles allegations that JPMorgan, the biggest U.S. lender by assets, misled investors and the public when it sold bonds backed by faulty residential mortgages, according to Justice Department statement yesterday.

U.S. and state officials blamed the bank’s actions in the statement for helping to cause the credit crisis, and said the settlement doesn’t shield JPMorgan or its employees from criminal charges.

“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Attorney General Eric Holder said in the statement. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior.”

Jamie Dimon, JPMorgan’s chief executive officer, said in a separate statement that the settlement resolves a significant portion of claims tied to mortgage-backed securities issued by the lender and two firms it bought during the credit crisis, Bear Stearns Cos. and Washington Mutual Inc.’s bank unit. The sum is covered by reserves, and JPMorgan is cooperating with the Justice Department’s criminal case, the bank said.

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Compliance Policy

Money-Market Funds Face Push for Tougher Rules by EU Lawmaker

Money-market funds with a fixed share price should be banned from operating in the European Union from 2020, according to an EU lawmaker seeking tougher rules than Michel Barnier, the bloc’s financial services chief.

Banning funds that don’t have a floating share price would make the industry “less susceptible to runs,” according to plans prepared by Said El Khadraoui, a Belgian member of the assembly’s Socialist group.

El Khadraoui’s plans were published on the assembly’s website. He is also seeking tougher pay transparency rules, and for the largest funds to be supervised at EU level.

Regulators have sought stricter curbs on money-market funds since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, caused by losses on debt issued by Lehman Brothers Holdings Inc., triggered a wider run on the industry that helped freeze global credit markets.

Money-market funds hold more than a fifth of short-term debt securities issued by governments and corporates in the EU and more than a third of short-term bank debt. The EU industry has about 1 trillion euros ($1.35 trillion) of assets under management, accounting for around 15 percent of the European fund industry, according to EU data.

Barnier unveiled proposals to regulate the sector in September, including requiring funds that maintain a fixed share price, known as constant net-asset value, or CNAV, funds, to build up a cash buffer equivalent to 3 percent of their assets.

Under El Khadraoui’s plan, CNAV funds would have until the end of 2019 to convert into funds with floating share prices.

Yellen Says Fed to ‘Carefully Consider’ SIFI Rules for Insurers

Federal Reserve Vice Chairman Janet Yellen said the central bank will “carefully consider” how to apply new regulatory standards to insurance companies that fall under the central bank’s supervision.

The Dodd-Frank Act gives regulators the authority to place insurance companies and other non-bank financial institutions under Fed supervision if they are large enough to pose systemic risk to the financial system. Companies such as New York-based MetLife Inc. argue that their businesses aren’t suited to bank-like regulation in part because their liabilities are in the form of policies rather than short-term deposits.

In a written response to questions from Louisiana Republican Senator David Vitter, Yellen pointed out that Dodd-Frank does not permit regulators to apply minimum capital requirements that are lower than those for banks.

President Barack Obama nominated Yellen last month to serve as Fed chairman.

Xiao Says China IPO Rules to Cut Bureaucracy, Boost Markets

China’s planned new rules for share sales will boost the role of market forces, securities regulator Xiao Gang said, as the government pledges to loosen its control of the world’s second-largest economy.

The switch to a system of registration rather than approval of IPOs is the key to all capital-market reforms, Xiao said at a conference in Beijing yesterday, in his first major public speech since taking over the China Securities Regulatory Commission in March. Under the rules, regulators will be responsible only for ensuring companies’ disclosures meet requirements, rather than approving the share sale itself, he said.

Under current rules for public share sales, the CSRC’s listing committee must examine each application and determine whether a company is fit for listing. The country hasn’t had an IPO since October last year, leaving more than 700 companies awaiting regulatory approval.

The shift to the new system must be gradual to avoid shocks to the market, Xiao said. Before ending the freeze the CSRC is also drafting rules to curb misconduct that would establish stiff penalties for investment banks.

Lawmakers Urge Reid to Reject Dodd-Frank Exemptions for Oil

House Democrats asked U.S. Senate Majority Leader Harry Reid, a Democrat from Nevada, in a letter to reject any efforts to waive Dodd-Frank rules requiring that oil companies disclose payments to foreign governments during implementation of a U.S.- Mexico drilling agreement.

The Senate and House are working to agree on final legislation to implement the U.S.-Mexico Transboundary Agreement, which was agreed to by the Mexican Senate in 2012 and the U.S. Senate in October.

The House has its own implementing bill for the Transboundary Agreement, known as H.R. 1613.

Compliance Action

SEC Examiner Arrested for Lying About Ownership of Bank Stocks

An SEC official was arrested and charged with lying about owning stocks in banks including Citigroup Inc., Bank of America Corp. and Morgan Stanley, in violation of the agency’s ethics rules.

Steven Gilchrist, a compliance examiner with the U.S. Securities and Exchange Commission’s New York office, was charged with three counts of making false statements in a complaint filed yesterday in Manhattan federal court.

Gilchrist, 48, of Bethpage, New York, is accused of lying to the SEC in January and February about his holdings, which also included Ambac Financial Group Inc. and MBIA Inc. If convicted, he faces as long as 15 years in prison.

“Each of the financial services companies is regulated by the SEC, and therefore constitute prohibited holdings for SEC employees,” Jordan Goodman, a criminal investigator in the office of Manhattan U.S. Attorney Preet Bharara, said in the complaint.

Gilchrist, who appeared in federal court in Manhattan yesterday, was ordered released without bail. His lawyer, Laura Miranda, declined to comment on the charges after her client’s court appearance.

“We are very disappointed that an employee allegedly made false statements to conceal prohibited holdings after being told by our ethics office to divest,” John Nester, an SEC spokesman, said in an e-mail.

The case is U.S. v. Gilchrist, 13-mg-02707, U.S. District Court, Southern District of New York (New York).

Gold Benchmarks Said to Be Under Review as U.K. Probe Widens

The U.K. Financial Conduct Authority is reviewing gold benchmarks as part of its wider probe of how global rates are set, a person with knowledge of the matter said.

The FCA review is preliminary and hasn’t risen to the level of a formal investigation, said the person, who asked not to be identified because the matter isn’t public. The person declined to say which gold benchmarks were under scrutiny.

One of the key benchmarks is the London gold fixing, which determines the spot price for physical gold and is set twice daily by a panel of five banks.

Regulators around the world are examining alleged abuses of a number of financial benchmarks by companies that play a central role in setting them after it emerged the London interbank offered rate, the benchmark interest rate for more than $360 trillion of securities worldwide, was being manipulated.

The scandal also sparked reviews of how to improve the way rates are set to prevent them from being rigged in the future, as well as which ones should have formal oversight.

Lara Joseph, a spokeswoman for the FCA, declined to comment on the review.

JPMorgan Said to Quit Everbright Bank Share Sale Amid U.S. Probe

JPMorgan Chase & Co. ended plans to manage China Everbright Bank Co.’s Hong Kong share sale amid a U.S. investigation into the Wall Street firm’s hiring practices in China, two people with knowledge of the matter said.

The U.S. bank told Everbright it would quit the deal, which at $2 billion would be the largest first-time offering by a Chinese lender in Hong Kong since 2009, because the probe delayed an internal approval process, the people said. They asked not to be identified because the matter is confidential. Brian Marchiony, a JPMorgan spokesman, declined to comment.

The U.S. Securities and Exchange Commission in May requested records from JPMorgan concerning Tang Xiaoning, the son of China Everbright Group Chairman Tang Shuangning, the New York Times reported in August, citing a confidential government document.

Everbright Bank said last month that it won regulatory approval to sell as many as 12 billion shares in Hong Kong. Lu Hong, a board secretary at the bank’s Beijing office, didn’t return a call seeking comment after working hours yesterday.

The Wall Street Journal reported JPMorgan’s decision to exit the equity offering yesterday.


JPMorgan Legal Woes Have Peaked, Algebris’s Serra Says

Davide Serra, founding partner and portfolio manager at Algebris Investments, talked about the record $13 billion settlement between JPMorgan Chase & Co. and the U.S. Justice Department over civil, state and U.S. probes involving the sale of mortgage bonds.

Serra, who spoke with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers,” also talked about the outlook for financials.

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Lew Says Treasury’s Debt Measures to Last About a Month

U.S. Treasury Secretary Jacob J. Lew talked about the prospects for increasing the country’s debt ceiling, the economy and banking regulation.

Lew, who spoke with the Wall Street Journal’s Gerard Baker at the Wall Street Journal CEO Council conference in Washington, also discussed China’s economy and government policies.

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Special Section: Frankfurt Conference

Clausen Says Banks Approaching Limits on Adding Capital

Nordea Bank AB Chief Executive Officer and European Banking Federation President Christian Clausen talked about capital adequacy rules.

He spoke on a panel session at Euro Finance Week in Frankfurt.

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Wieser Says EU Bank Reviews Will Have Similar Effect to TARP

The euro area’s bank reviews and transition to a common oversight regime will have a similar effect to U.S. bank recapitalization programs even though the specifics differ, Thomas Wieser, the official in charge of preparing meetings of euro-area finance ministers, said at the Frankfurt conference.

“It would be a mistake to look at a carbon copy of TARP and TALF and so on and so forth because of the very different circumstances,” Wieser said. “Financial market stability has been essentially regained. That was not the case at that stage in the U.S.”

Still, “there will be a high degree of similarity and economic effect to what the single supervisor will be doing, even though it looks totally different,” he said.

Walter, Pleister, Veron on European Bad Bank Outlook

Hans-Juergen Walter, partner at Deloitte Financial Services, Christopher Pleister, chairman of the German Financial Market Stabilization Agency, and Nicolas Veron, senior fellow at Bruegel, spoke on a panel discussion about the prospects of a European so-called bad bank.

Bloomberg’s Paul Gordon moderated the session at Euro Finance Week in Frankfurt.

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