Volcker Rule CLO Relief, Madoff Workers Trial: Compliance

The Volcker Rule, which curbs risk-taking by banks by imposing restrictions on speculating with their own money, excludes collateralized loan obligations that don’t hold assets other than loans, according to the Loan Syndications & Trading Association.

The final rules released Dec. 10 by U.S. banking regulators don’t include ownership and transaction bans on CLOs, thus allowing warehousing and market-making in their assets and liabilities, Bram Smith, executive director of the New York-based trade association, said in an e-mailed statement. The restrictions don’t allow the funds to invest in bonds and other CLOs, and provide no provision to exempt existing CLOs, which means banks holding such obligations would have until July 2015 to divest them, Smith said.

The original proposed rules extended the ban on CLOs and other asset-backed securities before being revised.

Issuance of CLOs may be affected by the implementation of other new regulations such as the risk-retention rules that require fund managers to hold a portion of the debt they package and sell. The LSTA sent a letter in October to federal agencies in response to their proposals, asking the regulators to take into account the kind of debt bundled by CLOs.

Formation of CLOs, the biggest buyers of leveraged loans, may decrease after the implementation of new regulations, Wells Fargo & Co. said in a September report.

Separately, with the release of the Volcker rule, the Dodd-Frank Act’s regulatory overhaul is largely complete, giving banks a new degree of certainty about the limits of their business in the wake of the 2008 credit crisis.

In the three years since Dodd-Frank was enacted, regulators also have completed guidelines on how the government will dismantle the largest financial firms when they fail.

To be sure, about a third of the hundreds of rules mandated by Dodd-Frank remain to be written or completed, including those governing credit-rating firms and disclosure of counterparty credit risk. Banks are challenging derivatives regulations in court. They’ve also managed to reduce the impact of some changes through lobbying as the rules are being written.

Among the remaining mandates are higher bank liquidity requirements to comport with Basel III agreements and removal from SEC rules of third-party credit ratings as an acceptable measure of credit worthiness.

Still, the new regulatory architecture has already begun to reshape the way financial institutions manage risk and conduct operations. Banks are holding more liquid capital. Accounting has become more transparent. Regulators have much better information about the prices realized on completed swap trades, and large hedge funds now report previously secret financial information to regulators.

The result could form part of the legacy of President Barack Obama, who took office just after the financial crisis and made Dodd-Frank a centerpiece of his agenda.

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Compliance Action

Deutsche Bank Unit Cuts Pay for Five Executives on Japan Penalty

Deutsche Bank AG’s Japanese securities unit will cut pay for five senior executives and increase compliance staff after regulators penalized the firm for excessive spending on entertaining pension fund officials.

Japan’s Financial Services Agency ordered Deutsche Securities Inc. to improve operations for providing special benefits to the pension clients, the regulator said in a statement in Tokyo today. The brokerage’s Chief Executive Officer Makoto Kuwahara will receive a 20 percent pay cut for six months, the firm said in a statement.

Deutsche Securities becomes the first brokerage to be penalized in Japan for breaching rules on client entertainment after the regulator found it spent 6.3 million yen ($61,300) on officials at three pension funds. The order comes a week after an employee at the firm was arrested on suspicion of bribing a manager of Mitsui & Co.’s retirement fund.


Madoff Delirious in Bid to Avoid Handcuffed Exit, Jury Is Told

Bernard Madoff planned every detail of his firm’s demise in the days before he was arrested five years ago to avoid being marched past his 200 employees in handcuffs, the con man’s former finance chief told a jury.

Madoff, in papers spread across his desk, wrote a series of names and dates in a schedule of events leading up to the exact day his $17 billion Ponzi scheme would finally come to light, Frank DiPascali, the former executive, testified Dec. 10 in Manhattan federal court in the trial of five ex-colleagues.

DiPascali, who joined Madoff’s company in 1975, said he learned of the plan during a private meeting in the con man’s office.

“He turned to me and said, crying, ‘I’m at the end of my rope,’” DiPascali told a jury. When DiPascali expressed confusion, Madoff shouted, “I don’t have any more goddamned money -- don’t you get it? The whole goddamn thing is a fraud!”

DiPascali is the highest-ranking former Madoff executive to testify in the first criminal trial stemming from the scheme, which was exposed after Madoff’s arrest by federal authorities at his Manhattan apartment on Dec. 11, 2008. Five of his former employees are on trial in federal court in Manhattan, accused of aiding his fraud for decades and getting rich in the process.

DiPascali, the former finance chief, said that while he knew he’d been lying to customers and regulators for years about fake trades, he didn’t know the firm was out of money and that it was a Ponzi scheme, according to his testimony.

Madoff asked DiPascali if he and his wife had money, according to his testimony. Madoff told him his own wife, Ruth, would be taken care of because she had $30 million of her own money saved, as well as houses in her name, DiPascali said. It was then DiPascali realized he was going to jail, according to his testimony.

In the week before his arrest, Madoff confessed to his sons, who worked for the firm, and told the same story to FBI agents who arrested him at his apartment Dec. 11, 2008.

Madoff, 75, is serving a 150-year prison sentence in North Carolina.

The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).

Ex-Glencore Oil Trader Fired for Drinking Loses ‘Ludicrous’ Suit

An ex-Glencore Xstrata Plc trader who was fired in 2010 for drinking too much lost a wrongful-termination lawsuit against the company, with a judge calling the case “ludicrous.”

Judge Richard Seymour in London earlier dismissed a portion of the lawsuit over a share award worth about $1.2 million and yesterday rejected the remaining wrongful-termination claim seeking about 12,000 pounds ($20,000).

Kearns, who earned about $500,000 a year, “regularly consumed excessive amounts of alcohol,” making him unable to function effectively, Seymour said in a written decision.

Kearns must pay Glencore’s legal costs of at least 150,000 pounds, the judge said.

Jonathan Cohen, a lawyer for Baar, Switzerland-based Glencore, said Kearns didn’t realize how much the company tried to help him.

The case is Kearns v. Glencore UK Ltd., High Court of Justice, Queen’s Bench Division (London).


Volcker Rule May Prompt Lawsuits, SEC’s Gallagher Says

The Volcker rule affects a “huge” number of constituents, boosting the chance for litigation, Securities and Exchange Commissioner Daniel Gallagher said.

He made the remarks to reporters after meeting officials from the Warsaw Stock Exchange in Poland’s capital yesterday.

“To dismiss litigation risk would be folly,” Gallagher said. He puts he puts the chance of lawsuits at 50 percent.

“I’ve been told by many folks on the outside that before the rule was final, they were serious about litigating depending on how the rule reads.”

Trade groups and companies will be “seriously combing through the document” to determine whether to legally challenge the Dodd-Frank regulation banning proprietary trading,’’ Gallagher said.

Former FDIC Head Isaac Likes Volcker Rule, Voices Concerns

William Isaac, former head of the Federal Deposit Insurance Corporation, global head of financial institutions at FTI Consulting, chairman of Fifth Third Bancorp and author of “Senseless Panic: How Washington Failed America,” said while he has long been a supporter of the Volcker Rule, he is concerned about the ability of regulators to implement it because of its complexity. Isaac spoke with Bloomberg’s Kathleen Hays and Vonnie Quinn on Dec. 10 on Bloomberg Radio’s “The Hays Advantage.”

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FBR’s Miller Says Volcker Rule Enforcement is Key

Paul Miller, managing director and banking analyst at FBR Capital Markets, said banks have already strengthened their controls over trading desks, with some eradicating some prop trading desks completely. Miller said the rule does limit growth and earnings into the future. Miller speaks with Bloomberg’s Kathleen Hays and Vonnie Quinn on Dec. 10 on Bloomberg Radio’s “The Hays Advantage.”

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Volcker Says He Didn’t Help Write Final Rule That Bears His Name

Paul Volcker said he wasn’t involved with writing the final version of the rule that bears his name, staying abreast of developments from a distance as regulators crafted details of his curbs on trading by banks.

“It’s not my function to stay involved with the agencies,” Volcker, 86, said in an interview. “I personally stayed away from talking with any of the principals.”

The former Federal Reserve chairman said he didn’t know how the final draft was worded before it was published Dec. 10. “You probably have read the rule more than I have,” Volcker said. “It’s complicated, but I was gratified to see that the rule itself is shorter than my own home insurance policy.”

Comings and Goings

France’s Daniele Nouy Appointed as ECB Bank Oversight Chief

The European Parliament appointed Daniele Nouy to the helm of the European Central Bank’s oversight arm by a vote in Strasbourg, France, yesterday of 555 in favor and 50 opposed with 52 abstentions. Nouy, who is French, shepherded her country’s lenders through the dark days of Europe’s debt crisis.

As the chief supervisor of euro-area banks, she’ll have one year to help to build the institution from the ground up and get it ready to assume its supervisory powers in full next November.

ECB oversight is the first step in European Union leaders’ June 2012 pledge to break the cycle in which banks and nations compound each other’s financial strains. The bloc’s finance ministers are now wrangling over a European resolution mechanism to handle euro-area bank failures.

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