Bloomberg News

‘Abnormal’ Trading Drops, FHA Report, Lloyds-BOE: Compliance

June 14, 2011

(Updates with Rothschild, FSA fine in Compliance Action; UBS-Finra in Courts/Arbitration Panels.)

June 14 (Bloomberg) -- Unusual share price movements in the two days before takeovers announced by U.K. companies last year fell 9.4 percent, in a sign that insider trading may be decreasing.

There were “abnormal pre-announcement price movements” before 21.2 percent of the 118 deal notices in the U.K. in 2010, the Financial Services Authority said in its annual report, published yesterday. That was down from 30.6 percent in 2009, and the lowest rate since 2003.

Factors other than insider trading, such as speculation by analysts or the press about an upcoming deal, or information leaks, could be the cause of the share price movements, the regulator said. The FSA has made market abuse and insider trading by top bankers a focus of its enforcement efforts.

Also over the past year, the FSA required all banks and building societies to carry out reverse stress-testing, where firms list scenarios that could lead to a financial collapse. The watchdog said it will review the results “over the next year or so” and respond to the firms that took part.

The FSA implemented rules approved by European Union regulators last year intended to curb incentives for excessive risk-taking last year, imposing limits on cash payouts and the size of bankers’ bonuses.

Compliance Action

Rothschild Loses to Evercore as Boutique Left Off FSA Bonus List

Evercore Partners Inc. and Greenhill and Co. will be able to pay employees guaranteed bonuses forbidden at rival deal advisers such as NM Rothschild & Sons Ltd., after escaping scrutiny from the U.K. Financial Services Authority.

Evercore, founded by former U.S. Deputy Treasury Secretary Roger Altman, is among companies offering financial advice such as Gleacher Shacklock LLP and Moelis & Co. that aren’t on a list of 2,776 firms covered by FSA bonus rules. Competitors including Rothschild, New York-based Perella Weinberg Partners LP and Lazard Ltd. are on the list, obtained by Bloomberg News after a Freedom of Information request.

The guidelines apply to firms taking risks with their own cash or that of clients, leading to the exclusion of advisory firms that may not manage money in the U.K. Companies covered by the rules, which must be implemented by next month, can’t offer multiyear guaranteed bonuses and will only be able to pay one- year guarantees in “exceptional circumstances,” the FSA said.

The rules enact guidelines approved by European Union regulators last year to curb excessive risk-taking. The FSA expanded the firms covered by bonus rules a hundredfold from the 27 biggest banks to more than 2,700 entities last year to conform to the European guidelines.

Joseph Eyre, FSA spokesman, declined to comment, as did officials at New York-based Moelis, Perella Weinberg, Rothschild, Evercore, Greenhill, Lazard and London-based Gleacher Shacklock.

The agency applied the guidelines from the EU to its revised bonus rules and separated financial firms into four groups based on their size.

For more, click here.

U.S. Regulator Says Taxpayers Still at Risk From Fannie, Freddie

Fannie Mae and Freddie Mac, the mortgage companies operating under U.S. control, are improving their financial condition but remain a risk to taxpayers, the companies’ regulator reported.

In its third annual report to Congress released yesterday, the Federal Housing Finance Agency said improved underwriting on the loans that the companies package into mortgage-backed securities helped slow the agencies’ losses to $28 billion in 2010, from $93.6 billion a year earlier.

The agency “has improved underwriting standards for loan purchases in the past two years,” Edward DeMarco, its acting director, said in the report.

Still, DeMarco said, the companies “remain critical supervisory concerns,” largely because of a backlog of bad loans originated from 2005 to 2007.

The government-run enterprises, which own or guarantee more than half of the $10 trillion U.S. mortgage market, operated as private companies before they were taken into government conservatorship in September 2008 after soaring losses linked to subprime home loans. Since then, Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, have survived on a promise of unlimited U.S. aid and drawn more than $160 billion in Treasury Department funding.

For more, click here.

OCC Extends Deadline for Mortgage-Servicer Action Plans

The Office of the Comptroller of the Currency, at the request of the U.S. Department of Justice, has extended the deadline for action plans required under consent orders issued on April 13 against eight residential mortgage servicers.

The 30-day extension will allow coordination by federal and state agencies, the OCC said yesterday in a statement.

Barclays Will Pay U.K. Customers’ Payment Insurance Claims

Barclays Plc will reimburse the full payment-protection insurance premiums plus 8 percent interest to customers whose claims were put on hold during a court challenge.

The bank will compensate customers sold payment-protection insurance without being told they could buy it from another lender, Barclays said in an e-mailed statement yesterday. The British Bankers’ Association, an industry group, lost a court challenge in April to the Financial Services Authority’s PPI guidelines.

Barclays, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc were given more time to handle the customer complaints by the FSA yesterday after the court challenge created a backlog. Barclays said in May it would set aside 1 billion pounds ($1.63 billion) to resolve the claims.

The banks have as much as 16 weeks to respond to the complaints, rather than eight weeks, the Financial Services Authority said in a statement yesterday.

PPI generates as much as 5.5 billion pounds in annual revenue for U.K. banks, the FSA has estimated.

ECB-German Standoff Risks Damage That May Force Compromise

The confrontation between the European Central Bank and Germany over bailing out Greece risks causing so much damage that officials may be forced to compromise.

ECB President Jean-Claude Trichet and German Finance Minister Wolfgang Schaeuble are at odds over investors’ role in the second Greek rescue in 14 months. The dispute turns on how politicians make good on a promise to push creditors to pay some of the cost, a step that Trichet said on June 9 could be an “enormous mistake.”

Unless a deal can be struck to guarantee Greece’s financing needs for the next 12 months, the International Monetary Fund has threatened to withhold its share of what remains of Greece’s original 110 billion-euro ($159 billion) bailout. Finance ministers have called a special meeting scheduled for today as they try to avoid what European Economic and Monetary Affairs Commissioner Olli Rehn called a “Lehman Brothers catastrophe on European soil.”

The cost to insure Greek debt against default, already the most expensive in the world, rose to a record yesterday and bonds of Europe’s bailed-out nations slumped. The swaps indicate a 74 percent chance of default in the next five years.

The debt crisis has already forced Trichet to tear up the rule book. The ECB is lending unlimited amounts of cash to support banking systems and has relaxed collateral requirements.

For more, click here.

Lloyds Poised to End Bank of England Support, Canaccord Says

Lloyds Banking Group Plc, the U.K.’s biggest mortgage lender, may wean itself off emergency central bank funding support by the end of the month, according to an analyst at Canaccord Genuity Ltd.

The Bank of England yesterday said lenders had reduced dependence on its Special Liquidity Scheme to 37 billion pounds ($60 billion) at the end of May, from 185 billion pounds in January 2009. Lloyds, led by Antonio Horta-Osorio had about 26 billion pounds of support from the program remaining at the end of March.

Lloyds, 41 percent government-owned, and Royal Bank of Scotland Group Plc, Britain’s biggest taxpayer-owned bank, were the biggest users of the scheme, introduced during the 2008 banking crisis to allow lenders to swap hard-to-trade mortgage- backed securities for government bonds and so improve liquidity. The termination of government and central bank support is a vital prerequisite for the sale of taxpayer’s bank stakes, analysts have said.

Horta-Osorio, who succeeded Eric Daniels in May, will outline his strategy for Lloyds on June 30.

For more, click here.

Ex-Trader Alexander to Pay $1.6 Million for Manipulating Shares

A self-employed trader was fined 700,000 pounds ($1.15 million) and ordered to pay more than 300,000 pounds in restitution for manipulating the price of shares traded on the London Stock Exchange.

Barnett Michael Alexander, a former private-client stockbroker, made multiple small buy and sell orders in an effort to manipulate the price of contracts-for-differences, or CfDs, and spread bets so he could benefit, the Financial Services Authority said in a statement today. He generated a 629,130-pound profit over 16 months, the FSA said. The regulator banned him from working in the finance industry for five years.

The regulator obtained a permanent injunction against Alexander committing market abuse. The Glasgow-based trader qualified for the FSA’s standard 30 percent discount for cooperating with the probe and must pay restitution of 301,005 pounds to City Index Ltd., 4,609 pounds to London Capital Group Holdings Plc, and 17,204 pounds to Monecor (London) Ltd.

A number for Alexander wasn’t available from the FSA registry and the agency couldn’t immediately provide contact information for his attorney.

Courts/Arbitration Panels

UBS Loses Finra Arbitration Case Brought by Former 76ers Owner

UBS AG, Switzerland’s biggest bank, will pay Pat Croce, former part-owner of the Philadelphia 76ers basketball team, about $2 million to compensate for losses on structured products backed by Lehman Brothers Holdings Inc.

A Financial Industry Regulatory Authority arbitration panel ruled June 9 that UBS is responsible for $1.52 million plus interest in damages. A UBS broker sold $2 million of “principal-protected” Lehman notes to Croce and his wife, Diane, on June 25, 2008, less than three months before the bank failed, said Jacob Zamansky, their attorney.

The Zurich-based bank sold $1 billion of the Lehman products to U.S. investors, according to spokeswoman Allison Chin-Leong. It’s been ordered to repay investors some or all of their losses in seven of the eight cases involving the securities that have been decided by Finra panels.

The broker who sold the notes has since quit the firm, saying he was misled by UBS, Zamansky said. The New York-based lawyer has more than 40 pending cases against UBS for Lehman “100% Principal-Protection Notes,” totaling more $25 million, he said.

“The vast majority of Lehman notes were sold appropriately,” and the failure of Lehman was “unexpected and unprecedented,” Chin-Leong said. The panel voted 2 to 1 and didn’t provide a reason for its decision.

Banks create structured products by bundling debt with derivatives and offer them to individual investors as an alternative to traditional investments.

Ex-Galleon Trader Zvi Goffer Convicted of Insider Trading

Former Galleon Group LLC hedge fund trader Zvi Goffer was convicted on all counts by a federal jury in Manhattan in the second trial to result from the U.S. government’s nationwide crackdown on insider trading.

Goffer’s brother Emanuel and Michael Kimelman were also found guilty of conspiracy and securities fraud yesterday by a jury that began deliberations June 2. The verdict comes about a month after Goffer’s boss, Galleon co-founder Raj Rajaratnam, was found guilty in the same courthouse of directing the biggest hedge fund insider trading scheme in history.

Rajaratnam and Zvi Goffer were key players in three overlapping insider-trading conspiracies that implicated banks, technology firms, hedge funds and so-called expert networking firms.

Goffer, 34, his brother and Kimelman were charged with using tips from two lawyers to profit on trades in 3Com Corp., Axcan Pharma Inc., Kronos Inc. and Hilton Hotels Corp.

Zvi Goffer’s lawyers argued their client sometimes bluffed about having inside information to impress other Wall Street traders. Lawyers for Emanuel Goffer and Kimelman said that their clients weren’t part of any alleged conspiracy with Zvi Goffer.

Rajaratnam, who was convicted on all 14 counts against him, faces as long as 19 1/2 years in prison when he’s sentenced on July 29.

The case is U.S. v. Goffer, 10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Interviews/Speeches

Cohan Says ‘No Question’ Goldman Shorted Mortgage Market

William Cohan, author of “Money and Power: How Goldman Sachs Came to Rule the World” and a Bloomberg Television contributing editor, talked about Goldman Sachs’s position on mortgage securities before the market’s collapse.

Cohan spoke with Erik Schatzker and Deirdre Bolton on Bloomberg Television’s “InsideTrack.” (William D. Cohan is a Bloomberg View columnist. The opinions expressed are his own.)

For the video, click here.

Goldberg Says Banks Beginning to Experience Loan Growth

Jason Goldberg, senior analyst at Barclays Capital Inc. discussed the potential impact of new federal government financial regulations on U.S. banking industry earnings.

Goldberg spoke on Bloomberg Television’s “InBusiness with Margaret Brennan.”

For the video, click here.

Comings and Goings

Obama Picks Martin Gruenberg to Succeed Bair at FDIC

President Barack Obama intends to nominate Federal Deposit Insurance Corp. Vice Chairman Martin J. Gruenberg to succeed Sheila Bair as chairman, according to a White House statement.

Gruenberg has served as the agency’s vice chairman since 2005, and served as acting chairman for six months in 2005 and 2006. Obama announced his selection in an e-mailed statement June 10. Bloomberg News previously reported Obama’s decision.

Gruenberg would replace Bair, who took office in June 2006. Before joining the agency, Gruenberg served as senior counsel to Senator Paul Sarbanes, a Maryland Democrat, and as staff counsel to the Senate Banking subcommittee on international finance and monetary policy.

His nomination is subject to confirmation by the Senate.

--With assistance from Bob Van Voris, Patricia Hurtado and Matt Robinson in New York; Liam Vaughan, Jon Menon, Lindsay Fortado, Howard Mustoe and Ben Moshinsky in London; James Hertling in Paris; Jonathan Stearns in Brussels; and Gregory Mott, Lorraine Woellert, Clea Benson, Joshua Gallu and Meera Louis in Washington. Editor: Glenn Holdcraft

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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