Bloomberg News

Muni Tax, Egypt’s Bourse, Offshore Accounts: Compliance

June 03, 2011

(Updates with capital surcharge in Compliance Policy, Mitsubishi UFJ and Greek bailout in Compliance Action and Dimon and Barnier in Interviews/Speeches.)

June 3 (Bloomberg) -- Renewed proposals to eliminate the tax-exempt status of municipal bonds as a way to reduce the $1.5 trillion federal deficit are unlikely to succeed, Bank of New York Mellon Corp. said in a report.

Abolishing the asset class would drive up borrowing costs and further strain the budgets of muni issuers, leading to cuts in services and capital projects, according to the report yesterday by Standish Mellon Asset Management Co., the fixed- income arm of the New York-based investment bank.

A proposed budget submitted by Representative Paul Ryan, the House Budget Committee chairman, and a report from the Simpson-Bowles debt commission embraced by President Barack Obama in December both sought to eradicate the tax-exempt treatment of municipal bonds, the report said.

While the effort to address the federal deficit will bring tax loopholes under scrutiny, “it is unlikely that municipal entities will be penalized,” Steven Harvey, a senior portfolio manager, and Nathan Harris, a research analyst, wrote in the report.

Compliance Policy

Egypt Bourse Says New Tax Won’t Affect Stock-Trading Profits

The Egyptian government’s plan to levy a capital-gains tax only applies to company dividend distributions and not to profits from trading in stocks, the Egyptian Exchange said yesterday.

The bourse is studying the plan and will discuss it with the business community and the markets regulator before advising the government, the exchange said in an e-mailed statement.

The 10 percent tax “is still a proposed law that will be discussed” with local business councils “to figure out how to best implement it so as not to affect foreign investment in Egypt,” bourse Chairman Mohamed Abdel Salam said in the statement.

The North African country plans to levy the tax starting in the next fiscal year on dividend payments, mergers and acquisitions and asset revaluations, Finance Minister Samir Radwan said. Egypt is trying to rein in a widening budget deficit as it raises subsidy spending and public salaries to meet public demand for improved living standards following the overthrow of former President Hosni Mubarak in February.

Global Capital Surcharge May Affect 26 Firms, Memo Says

As many as 26 financial firms could be forced to hold extra capital to avoid collapses that would threaten global financial stability, according to a participant at a meeting of the Financial Stability Board last week.

“We understand that it is likely that the number will be in the 15-26 range,” Tim Ryan, chief executive officer of the Global Financial Markets Association, a finance-industry group, said in a memo sent to board members following the meeting in Frankfurt. “Though a capital buffer is likely, the structure, amount and implementation timeline is still undecided,” Ryan said in the memo, obtained by Bloomberg News.

The Basel Committee on Banking Supervision is discussing forcing so-called global systemically important financial institutions to hold additional capital buffers equivalent to as much as 3 percent of risk-weighted assets, people familiar with the negotiations said in March. New York-based GFMA, whose board includes executives from Morgan Stanley and Goldman Sachs Group Inc., says the surcharge will suppress returns on equity that will already be under pressure from new capital requirements that will apply to all banks, not just the largest.

For more, click here and see Dimon remarks in Interview section, below.

Compliance Action

Goldman Sachs Said to Get Subpoena From New York Prosecutor

Goldman Sachs Group Inc., the fifth-biggest U.S. bank by assets, received a subpoena from the Manhattan District Attorney’s office seeking information on the firm’s activities leading into the credit crisis, according to two people familiar with the matter.

“We don’t comment on specific regulatory or legal issues, but subpoenas are a normal part of the information request process and, of course, when we receive them we cooperate fully,” said David Wells, a company spokesman.

The request relates to the U.S. Senate’s Permanent Subcommittee on Investigations report on Wall Street’s role in the housing market collapse, which accused New York-based Goldman Sachs of misleading buyers of mortgage-linked investments, the people said, speaking on condition of anonymity because the inquiry isn’t public. The Senate report was referred to the U.S. Justice Department and the Securities and Exchange Commission, which are also investigating.

Erin Duggan, chief spokeswoman for Manhattan District Attorney Cyrus Vance Jr., declined to comment.

A subpoena is a request for information and doesn’t mean the company is a target of a criminal investigation. Analysts including Sanford C. Bernstein’s Brad Hintz have said they don’t expect the firm to be criminally prosecuted.

For commentary by Douglas Burns, click here.

Google Antitrust Probe by U.S. May Mean Years of Self-Defense

Google Inc. may be forced to spend years defending itself in a U.S. Federal Trade Commission investigation that could be the government’s biggest antitrust probe since the Microsoft Corp. case.

Even if Google ultimately prevails, the probe might create uncertainty around the company’s business, slowing its momentum, lawyers and analysts said. Federal courts ruled that Microsoft engaged in illegal monopoly practices in a dispute that stretched over two U.S. presidential administrations.

The agency is likely to examine whether Google is using its position in Internet search to subdue rivals in adjacent markets with threats and jacked-up advertising rates, the lawyers said. The company’s conduct in new sectors, such as mobile devices, also will probably be a focus, they said.

The FTC has alerted technology companies that it plans to gather information from them for the probe, three people familiar with the matter said last month.

The FTC’s investigation is the latest example of government regulators’ growing concern that the Mountain View, California- based company is restricting competition on the Internet.

The European Union and the state of Texas have begun investigations and the U.S. Justice Department is monitoring Google’s compliance with an agreement letting it purchase ITA Software Inc.

Google has set aside $500 million for a U.S. government investigation into online pharmacy ads the company accepted that may have violated the law, a person familiar with the matter said.

Mistique Cano, a spokeswoman for Google, said in an e-mail that the company “understands that with success comes scrutiny.”

“We are happy to answer questions about our business, as we have during four separate reviews by the federal government over the past four years,” she said.

For more, click here.

Korean Regulator Criticized for Failing to Probe Banks

South Korea’s financial watchdog came under increased scrutiny over its monitoring of savings banks after Prime Minister Kim Hwang Sik said it resisted probes by the state auditor into the lenders last year.

The Financial Supervisory Service, or FSS, tried to dissuade the Board of Audit and Inspection from examining savings banks between January and April 2010 for suspicion of improper lending, Kim told lawmakers yesterday in Seoul. Kim was chairman of the state auditor at the time, before taking his current post in October.

The ruling Grand National Party on June 1 proposed a probe by an independent counsel into savings banks amid growing speculation that regulators overlooked illicit activity at the lenders.

Allegations by the prosecutor’s office come as the FSS is tightening oversight of foreign banks’ securities trading to prevent rapid capital flows from disrupting markets. The regulator said this week London-based HSBC Holdings Plc and Paris-based Credit Agricole SA were penalized for improperly outsourcing Korean branches’ derivatives trading to branches in Hong Kong.

For more, click here.

IRS Allows Extension of Deadline for Offshore Disclosure

The Internal Revenue Service will let taxpayers with undeclared offshore accounts apply for a 90-day extension of the Aug. 31 deadline for coming forward.

The change, announced on the IRS website yesterday, would let taxpayers apply for the extension in writing by showing that they have made a “good-faith attempt” to meet the deadline and explain what information they are missing.

The IRS is conducting its second voluntary offshore disclosure program, allowing taxpayers to pay penalties related to undeclared accounts to avoid criminal prosecution.

A similar program ended in October 2009 and attracted about 15,000 taxpayers.

MUFG May Get Systemically Important Status, Deutsche Bank Says

Mitsubishi UFJ Financial Group Inc., Japan’s biggest publicly traded bank, may be defined as one of the most important lenders to the international financial system, according to Deutsche Bank AG.

Status as a so-called global systemically important financial institution will probably be given to the Tokyo-based bank because of its ties with Morgan Stanley, said Yoshinobu Yamada, an analyst at Deutsche Bank in Tokyo.

The designation would subject Mitsubishi UFJ to higher capital requirements that it can likely meet without selling new shares, he said. Smaller rivals Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. may be classified as national systemically important financial institutions because their operations overseas are comparatively limited, Yamada said.

Global regulators are tightening capital and liquidity rules to prevent another financial crisis. The Basel Committee on Banking Supervision is discussing forcing the world’s most important banks to hold capital buffers equivalent to as much as 3 percent of risk-weighted assets, people familiar with the negotiations said in March. As many as 26 financial firms could be forced to hold extra capital, according to a participant at a meeting of the Financial Stability Board last week.

EU, IMF Wind Up Greek Review as Second Bailout Readied

European Union and International Monetary Fund officials today complete a review of Greece’s plan for 78 billion euros ($113 billion) in asset sales and austerity measures as they prepare the nation’s second bailout in little more than a year.

The assessment caps a week when Greece’s fiscal crisis worsened enough for Moody’s Investors Service to raise the probability of a default to 50 percent. Greek Prime Minister George Papandreou will discuss the findings at 3 p.m. on a visit to his Luxembourg counterpart, Jean-Claude Juncker, who leads the group of euro-area finance ministers.

The lifeline may incorporate a role for bondholders as European leaders try again to prevent the euro area’s first sovereign default. Their May 2010 rescue failed to stem an investor exodus from Greece and the Greek government now faces a funding gap of 30 billion euros next year with 10-year borrowing cost above 16 percent, Europe’s highest debt load and the economy in a three-year slump.

Papandreou is promising 6.4 billion euros of spending cuts this year, another 22 billion euros up to 2015, and 50 billion euros in sales of assets. Moody’s downgraded Greece to Caa1, on a par with Cuba, and raised the nation’s risk of default on June 1. The move prompted Greek 10-year bonds to fall to the lowest since January.

For more, click here.

Courts

Namibia Competition Commission to Appeal Wal-Mart Court Ruling

The Namibian Competition Commission said it appealed a ruling that declared conditions it imposed on the takeover by Wal-Mart Stores Inc. of Massmart Holdings Ltd. as invalid.

The appeal was lodged yesterday in the Supreme Court, the Windhoek-based regulator said in a faxed statement yesterday. Wal-Mart this week won the approval of South Africa’s Competition Tribunal to buy a controlling stake in Johannesburg- based Massmart with conditions. It needs the same approval in Namibia for the transaction to take effect in the southern African country.

Namibia’s Competition Commission recommended the transaction be approved in that country on condition that it guarantee jobs won’t be cut and that it offers shares to black citizens.

Interviews/Speeches

Carbon Market May Bring Financial Bubble, Bolivian Envoy Says

The global carbon market, valued at about $124 billion in 2010, may create a new financial bubble and is a poor way to address the climate crisis, Bolivia’s United Nations ambassador said.

“The possibility of a new financial bubble that will be created through this carbon market is very big,” Pablo Solon, Bolivia’s ambassador to the UN and the country’s chief climate negotiator, said in a telephone interview.

The comments open a new argument in Bolivia’s effort to keep CO2 trading off the agenda at the UN climate talks. Solon spearheaded an effort at last year’s gathering in Cancun, Mexico, to exclude carbon-market mechanisms from a program designed to protect forests.

Solon’s opposition to the measures fed into a rift between rich and poor nations that derailed the UN talks two years ago in Copenhagen. His concerns were overruled in December in Cancun, allowing the discussions to progress.

Climate negotiators will gather for UN talks in Bonn beginning June 6.

For more, click here.

Dodd-Frank Rules Will Help Derivatives End-Users, Gensler Says

Dodd-Frank Act rules for the derivatives market will help manufacturers and other corporate end-users compete for better prices from Wall Street dealers, said Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission.

“The financial community maintains information advantages over their nonfinancial counterparties,” Gensler said in a speech prepared for a New York conference of the National Association of Corporate Treasurers. Swap buyers don’t generally know how much other customers pay for similar trades because Wall Street banks don’t disclose the prices, Gensler said.

The CFTC and Securities and Exchange Commission are writing new regulations required by the Dodd-Frank Act, the financial overhaul enacted last July, after largely unregulated swaps helped fuel the 2008 credit crisis. Dodd-Frank seeks to reduce risk and boost transparency in the $601 trillion global swaps market by having most swaps guaranteed by central clearinghouses and traded on exchanges or other venues.

Lobbying groups including the Business Roundtable are pressing regulators to ensure that end-users don’t need to set aside margin in their swap transactions to reduce risk, which would force them to set aside millions of dollars that could be invested elsewhere. Lobbyists for end-users have criticized a proposal from bank regulators that could require the companies to post margin.

For more, click here.

Dimon to Shun Mortgage Ownership Under Proposed Capital Rules

Jamie Dimon, chairman and chief executive officer of JPMorgan Chase & Co., said the bank probably won’t keep mortgages on its books under a plan requiring the largest lenders to hold extra capital.

Dimon made the remarks yesterday at a Sanford C. Bernstein & Co. investor conference in New York.

The proposal will distort U.S. markets, what consumers pay for credit and the types of risk banks would be willing to retain on their balance sheets, Dimon said.

“It’s got consequences that I don’t think they’ve really thought about,” Dimon said of regulators.

Central bankers and financial supervisors worldwide are devising capital, liquidity and risk-management standards for banks, known as Basel III.

The plan also may distort the market favorably for JPMorgan as its borrowing costs probably will decrease and deposits may climb compared with less-capitalized competitors, he said.

For more, click here.

EU’s Barnier Says Convergence Can Prevent Regulatory Arbitrage

U.S. and European regulators must work toward convergence on financial-industry rules that prevent firms from benefiting from regulatory arbitrage, European Union financial markets commissioner Michel Barnier said.

“I want to make sure we act in parallel,” Barnier, the EU’s top financial regulator, said yesterday during a Bloomberg News interview in Washington. “We are not there yet.”

Barnier came to the U.S. capital to meet with officials including Treasury Secretary Timothy F. Geithner as he pushes for greater coordination on rules to govern firms whose failure might imperil the global economic system, as well as the $601 trillion over-the-counter swaps market.

Differences have emerged between the U.S. and EU since leaders from the Group of 20 biggest industrialized and emerging economies agreed after the 2008 credit crisis to implement broad financial regulation principles by the end of 2012.

“Europe is not going to be under American supervision,” he said. “ There will be reciprocity. There will be either convergence or reciprocity.”

For more, click here.

--With assistance from Cheyenne Hopkins, Jeff Bliss, Silla Brush, Craig Torres and Sara Forden in Washington; Andrew Herndon in San Francisco; Bomi Lim and Seonjin Cha in Seoul; Chamwe Kaira in Windhoek; Christine Harper, Dawn Kopecki and Esmé E. Deprez in New York; Takako Taniguchi in Tokyo; Ben Moshinsky in London; Maria Petrakis and Marcus Bensasson in Athens; and Ahmed A. Namatalla in Cairo. Editor: Stephen Farr.

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.


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