Bloomberg News

Ally Subpoenaed, Public Swap Advisers, Ireland: Compliance

June 30, 2011

(Updates with Hong Kong Banks, debit-swipe fee in Compliance Policy; Equitable Life Assurance in Compliance Action; BofA, debit-swipe fee in Courts; and Lloyds in Comings and Goings.)

June 30 (Bloomberg) -- Ally Financial Inc., the auto and home lender that got a $17.2 billion bailout, said it received subpoenas from the U.S. Department of Justice and the U.S. Securities and Exchange Commission relating to how it handled home loans.

The Justice Department is seeking information for an investigation of potential fraud related to “the origination and/or underwriting of mortgage loans,” Ally said yesterday in a filing. The SEC subpoena is in connection with mortgages placed in securitization trusts, the Detroit-based lender said. The subpoenas were received this month, the company said.

Ally, 74 percent owned by the U.S. Treasury Department also said it will record a second-quarter cost of about $100 million to cover losses suffered by trusts that bought its mortgages. A separate April settlement with federal regulators investigating shoddy mortgage practices will also cost between $30 million and $40 million each year through 2013, according to the filing.

Ally, run by former Citigroup Inc. executive Michael Carpenter, is among the five largest U.S. mortgage originators and servicers.

“We are working closely with the Department of Justice and the SEC to deliver the requested information within the required timeframes,” Gina Proia, a spokeswoman for Ally, said in an e- mailed statement.

The disclosures were in an update to the prospectus, initially filed in March, for the company’s planned public share offering. The share sale has been delayed until equity markets improve, a person familiar with the plans said earlier this month.

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Compliance Policy

SEC Proposes Fiduciary Duty for Public-Fund Swap Advisers

The U.S. Securities and Exchange Commission will seek comment on a rule that would require swap dealers advising pension funds, endowments and municipalities to place the interests of such investors above their own.

SEC commissioners voted 5-0 yesterday to propose a rule that would impose the fiduciary duty as part of business-conduct practices for swap dealers advising so-called special entities. Dealers would also have to “reasonably believe” the investors have an independent representative capable of evaluating risks, according to an SEC fact sheet released in Washington.

The Dodd-Frank Act called on regulators including the SEC, which oversees security-based swaps, to crack down on abuses in sales to states, cities and school districts after swaps pushed Jefferson County, Alabama, to the brink of bankruptcy. The Commodity Futures Trading Commission, which oversees swaps tied to interest rates, has already proposed a similar rule.

The SEC will seek public comment through Aug. 29 on the rule, which would also require dealers to provide counterparties with material information about swaps, including risks and conflicts of interest. Dealers would have to provide information on daily valuations and determine whether recommendations to clients meet suitability standards.

Basel Regulators Said to Scrutinize Banks’ ‘Flawed’ Risk Models

Global banking regulators are moving their attention to disparities in the way firms measure the riskiness of their assets on concern lenders may be using their internal models to mitigate rules aimed at making them boost capital.

The Basel Committee on Banking Supervision agreed on June 25 to make systemically important financial institutions hold core Tier 1 capital of as much as 9.5 percent of total risk- weighted assets. Now regulators are preparing to assess how banks set risk weightings amid criticism firms’ calculations are inconsistent, said a person with direct knowledge of the matter who declined to be identified because the talks are private.

The internal ratings rules determine how much capital banks should set aside to cover assets such as mortgages, derivatives as well as consumer and corporate loans. The riskier the asset, the higher weighting it attracts and the more capital a bank is required to allocate. That affects the profitability of trading and investing in those assets for the lender.

Firms use their own internal models to decide how much capital to assign based on their own view of those assets defaulting. The models aren’t disclosed and banks can reach different risk weightings for the same assets, regulators and analysts say. Regulators are considering a peer-review process to help assess comparable assets are being calculated consistently. A spokesman for the committee declined to comment.

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HKMA Says Banks Can Meet Stricter Capital Rules, Apple Reports

Hong Kong Monetary Authority said banks in the city would be able to meet requirements if the regulator set higher capital rules, Apple Daily reported, citing Deputy Chief Executive Arthur Yuen. The authority has worked with more than half of the banks in the city to ensure they can comply regulatory requirements, Yuen said, according to the Chinese-language Hong Kong newspaper.

Fed Board Approves 21-Cent Cap on Debit-Card Swipe Fee

The Federal Reserve Board votes to approve a 21-cent cap on debit-card transaction fees, a less severe limit on banks and payment networks than previously proposed.

Fed governors voted for the fee cap under rules the central bank was required to write under last year’s Dodd-Frank Act. The cap, which was increased from the 12-cent per transaction proposal released for comment in December, would still reduce costs for retailers, who pay an average 44 cents per transaction under the current system.

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For more, see Courts section, below.

Compliance Action

Anglo Irish, Irish Nationwide Win EU Approval for Closure Aid

Anglo Irish Bank Corp. and Irish Nationwide Building Society won European Union approval for Irish government aid to help pay for their closure.

The European Commission authorization allows the banks to be merged and wound down over the next 10 years to compensate for state guarantees and some 34.7 billion euros ($50 billion) in capital injections to cover losses on property loans.

Ireland may spend as much as 100 billion euros to solve Europe’s worst banking crisis, including 29.3 billion euros injected into Anglo Irish, which was nationalized in 2009 as loan losses soared. The country, forced into an international bailout in November, is struggling to convince investors its debt is sustainable after the collapse of a domestic real-estate bubble in 2007.

The Brussels-based commission is responsible for checking whether government subsidies to companies harm competition in the 27-nation EU.

Greek Parliament’s Vote Paves Way for Aid Payment, Juncker Says

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said in an e-mailed statement yesterday that the Greek parliament’s vote to pass the first part of an austerity plan paves the way for payment of the next aid installment from euro-area governments and the International Monetary Fund.

Approval of the 78 billion-euro ($112 billion) plan sparked optimism that Greek Prime Minister George Papandreou will be able to stave off a default for his debt-laden nation. Euro-area finance ministers meet on July 3 in Brussels for talks on releasing the fifth tranche of aid from last year’s 110 billion- euro bailout for Greece.

Juncker called on the Greek opposition to support the government “in these grave and crucial times for Greece.”

U.K. Prosecutors to Assist U.S. on Wealth Fund Bribery Probes

U.K. prosecutors are assisting the U.S. Securities and Exchange Commission on inquiries involving financial institutions and whether bribes were paid in transactions with sovereign wealth funds.

The Serious Fraud Office, which prosecutes corruption and white collar crime in Britain, has been contacted by the U.S. regarding the probes, SFO Director Richard Alderman said in an interview yesterday. He did not specifically identify companies.

The SEC is examining whether transactions with Libya’s sovereign fund may have violated bribery laws, the Wall Street Journal reported earlier this month, citing people it didn’t identify. SEC officials are reviewing documents including those related to a $50 million fee Goldman Sachs Group Inc. agreed to pay the Libyan fund to help recoup losses, the newspaper said. The payment was never made, it said.

HSBC Holdings Plc and Goldman Sachs are among banks that held funds for the Muammar Qaddafi-controlled Libyan sovereign wealth fund, London-based advocacy group Global Witness said last month.

HSBC spokesman Jezz Farr declined to comment, and Goldman Sachs spokeswoman Fiona Laffan declined to immediately comment.

U.K. Treasury Begins Payout to Equitable Life Policyholders

The U.K. government will begin paying compensation to Equitable Life Assurance Society policyholders today, Treasury minister Mark Hoban said.

A three-year program will see 500 million pounds ($800 million) distributed in the coming year and 1.5 billion pounds paid in total, Hoban said in a statement released by his office in London. The Treasury plans to contact all policyholders within a year and priority for early payment will be given to the oldest and the estates of those who have died.

Equitable Life struggled to stave off collapse after the House of Lords ruled in 2000 it couldn’t abandon promises to policyholders to pay bonuses it could no longer afford. The ruling left the company with a 1.5 billion-pound hole in its accounts, forcing it to cut policy payouts to customers in the U.K. and more than 15,000 in other European Union countries including Ireland and Germany.

Courts

Citigroup Settles With Lehman Europe Over $2.5 Billion in Assets

Citigroup Inc. and Lehman Brothers International Europe reached a settlement over assets valued at more than $2.5 billion that were held for the collapsed investment bank by Citigroup in a number of countries.

Citigroup agreed to immediately begin transferring assets held in custody for LBIE, which it held while determining how it was affected by Lehman’s collapse, PricewaterhouseCoopers, Lehman’s U.K. administrator, said in a statement. Both parties will drop all claims against each other, PwC said.

Before going into administration, LBIE and New York-based Citigroup entered into “a large volume” of agreements related to over-the-counter derivatives, stock lending, repurchase transactions, prime brokerage and trading arrangements, both on behalf of the banks and for third parties, LBIE said.

LBIE’s former parent company, Lehman Brothers Holdings Inc., collapsed in September 2008, filing the largest bankruptcy in U.S. history. LBIE, based in London, is in administration in the U.K.

Philippines’ High Court Orders SEC to Investigate PLDT Ownership

The Philippines’ Supreme Court, in a 41-page decision, ordered the Securities and Exchange Commission to investigate Philippine Long Distance Telephone Co. on possible violation of the constitutional cap on foreign ownership.

Ten of 13 justices who voted said the term ‘capital’ refers only to voting stocks or common shares and not the total outstanding capital stock comprised of common and preferred or non-voting shares, according to the order released yesterday. “The SEC is directed to apply this definition of the term capital in determining the extent of allowable foreign ownership” in PLDT, the court decision said.

JPMorgan’s $153.6 Million SEC Settlement Approved by Judge

A New York federal judge approved a $153.6 million settlement by JPMorgan Chase & Co. of allegations by the U.S. Securities and Exchange Commission that the bank misled investors in a mortgage securities transaction just as the housing market was starting to plummet, according to court records.

JPMorgan doesn’t admit or deny allegations in the complaint, and will pay a civil penalty of $133 million, plus $18.6 million repayment of its profits and $2 million in interest, according to papers signed by Judge Richard M. Berman in Manhattan court today. Of the payments, $126 million will be for investors who bought notes in a product called Squared CDO 2007-1.

The order also states that JPMorgan and its employees are barred from making money by “means of any untrue statement of a material fact or any omission of a material fact” or engaging in any transaction which “would operate as a fraud or deceit upon the purchaser.”

The case is In re U.S. Securities and Exchange Commission v. JPMorgan Securities LLC; 11-cv-04206; Southern District of New York (Foley Square).

BofA Agrees to $8.5 Billion Settlement, Sees Quarterly Loss

Bank of America Corp., the biggest U.S. bank, agreed to pay $8.5 billion to resolve claims made by bondholders including BlackRock Inc. over soured mortgages. The lender rose as much as 4 percent in New York trading.

The settlement will contribute to a second-quarter loss of $8.6 billion to $9.1 billion, or 88 cents to 93 cents a share, the Charlotte, North Carolina-based bank said yesterday in a statement. Bank of America also said it will add $5.5 billion to a liability reserve for future loan-repurchase demands in the quarter and post $6.4 billion in other charges including legal costs and a writedown of mortgage-unit goodwill.

Investors, which also include the Federal Reserve Bank of New York, demanded in October that Bank of America repurchase home loans that had been packaged into bonds by Countrywide Financial Corp., which it acquired in 2008. The settlement covers 530 mortgage trusts with an original loan balance of $424 billion, or about half of the bank’s so-called private-label deals, the bank said yesterday.

The actions reduce uncertainty about future costs from defective Countrywide mortgages, Bank of America Chief Executive Officer Brian T. Moynihan said on a conference call. The firm won’t need to sell shares to pay for the settlement, and it may take two quarters to regain capital depleted by the deal, Moynihan said.

The company’s board met June 28 to discuss the settlement, which still needs court approval.

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Bid to Block Debit Card Swipe Cap Denied by Appeals Court

TCF Financial Corp. failed to persuade a U.S. appeals court to block a federal regulation capping the fees the biggest U.S. banks can get from retailers for processing debit-card transactions.

The St. Louis-based U.S. Court of Appeals yesterday, in a unanimous nine-page ruling, upheld an April decision by U.S. District Judge Lawrence L. Piersol that the lender hadn’t shown it was likely to prevail on its claims the cap is unconstitutional.

The swipe-fee cap, to be set by the Federal Reserve, applies to all U.S. banks with at least $10 billion in assets. The measure, sponsored by U.S. Senator Richard Durbin, an Illinois Democrat, was as an addition to last year’s Dodd-Frank financial overhaul legislation.

“No legal prohibition exists against TCF fully recouping the costs of its debit-card services by assessing customer fees,” the three-judge appeals court panel said today.

Swipe, or interchange, fees are set by Visa Inc. and MasterCard Inc., the biggest electronic-payment networks, which collect the money and remit it to card-issuing member banks.

In a June 21 letter to Piersol, attorneys for the government told the court that the Federal Reserve, at a meeting yesterday was scheduled to “consider and vote” on the final regulation. The board yesterday set the top rate for the largest banks at 21 cents.

The lower-court case is TCF National Bank v. Bernanke, 10- cv-04149, U.S. District Court, District of South Dakota (Sioux Falls). The appeal is TCF National Bank v. Bernanke, 11-1805, 8th U.S. Circuit Court of Appeals (St. Louis).

For more, see Compliance Policy section, above

Comings and Goings

Lloyds to Cut 15,000 Jobs as It Unveils U.K.-Focused Strategy

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, will cut 15,000 jobs and reduce costs by an additional 1.5 billion pounds ($2.4 billion) as it withdraws from overseas units and increases its U.K. focus. The shares soared the most in more than a year.

The savings will result from cuts to management functions, by centralizing some roles and by withdrawing from more than 15 of its 30 overseas units, the London-based bank said in a statement issued before its presentation to investors in London. HSBC Holdings Plc today said it would cut 700 posts.

Chief Executive Officer Antonio Horta-Osorio, 47, said the bank must become “leaner, more agile and more responsive” to customer needs.’’ He made the remarks today in a conference call with journalists outlining his first strategic review since he took the job in March.

British banks, including Lloyds, HSBC and Barclays Plc, are reviewing their operations and trimming profitability targets as regulators enforce higher capital requirements to prevent a repeat of the 2008 financial crisis. Horta-Osorio told parliamentarians last month that the 41 percent government-owned lender still had “substantial” problems and would take three to five years to turn into a “great bank.”

Lloyds had already pledged 2 billion pounds of savings annually following its purchase of HBOS Plc three years ago, which has so far resulted in about 27,000 job losses.

The company received a taxpayer-funded bailout of more than 20 billion pounds. Horta-Osorio said the step was necessary to get the bank “back on its feet” and profitable and to pay taxpayers’ money back.

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--With assistance from Gonzalo Vina, Gavin Finch, Lindsay Fortado, Liam Vaughan and Howard Mustoe in London; Stephanie Bodoni in Luxembourg; Aoife White in Brussels; Clarissa Batino in Manila; Hugh Son, Tiffany Kary, Chris Dolmetsch, Bradley Keoun and Donal Griffin in New York; Stanley James in Hong Kong; Andrew Harris in Chicago; and Joshua Gallu 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 story: Michael Hytha at mhytha@bloomberg.net


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