Bloomberg News

India Mergers, BofA Suit, Chilton on Commodities: Compliance

September 26, 2011

(Updates with S&P in Compliance Action section.)

Sept. 26 (Bloomberg) -- India’s market regulator said investors can raise their holdings in companies to as high as 25 percent without having to offer to buy additional shares from the public starting next month.

The Securities and Exchange Board of India raised the limit from 15 percent, according to a statement on its website. Investors who exceed the limit will have to buy an additional 26 percent, according to SEBI.

The regulations will help companies attract investors amid a fall in the stock market. India’s benchmark stock index had its biggest two-day drop in 31 months with the BSE India Sensitive Index, or Sensex, declining 1.2 percent Sept. 23. The gauge retreated 4.6 percent last week.

In Japan, the trigger for an open offer is 33.3 percent, while in Hong Kong it is 30 percent and in Singapore 29.99 percent. In all three, breaching the limit requires an acquirer to make an offer for the entire company.

Compliance Policy

Insurers, Asset Managers May Face EU Curbs on Use of Ratings

Michel Barnier, the European Union’s financial-services chief, said he may propose rules to combat “potential overreliance” of the insurance and asset-management industries on assessments by credit-ratings firms.

Barnier said the measures may be added to other proposals to rein in banks’ use of external credit ratings. He was responding to a written question from a member of the European Parliament published on the assembly’s website.

While the European Commission is examining the “high concentration in the rating industry,” it “has no concrete evidence” that ratings companies are abusing their dominant position in the market, Barnier added.

European Bank Capital Raising Not the Answer, Goldman Sachs Says

Recapitalizing 16 European banks, which came close to failing stress tests, won’t ease the financial crisis because the banks are small and the market’s attention is on larger French lenders, Goldman Sachs Group Inc. analysts said.

The banks that didn’t achieve a core Tier-1 capital ratio of at least 6 percent under the European Banking Authority’s tests are “individually small,” and they weren’t examined for their entire investments in sovereign debt, which is now the market’s concern, the analysts led by Jernej Omahen in London wrote in a note to clients Sept. 23.

European Union officials may speed up the recapitalization of the 16 banks, the Financial Times reported Sept. 22. The EBA is pushing banks to raise more and better capital to meet the Basel III guidelines and boost investor confidence in the industry amid the sovereign debt crisis.

“The current bank crisis is a symptom of markets’ skepticism in sustainability of European public finances; to this, recaps do not provide an answer,” the note said.

The 16 banks include Banco Comercial Portugues SA, Espirito Santo Financial Group SA, Germany’s HSH Nordbank AG and Norddeutsche Landesbank.

Compliance Action

Staffing Woes Harm Fannie and Freddie Oversight, Watchdog Says

Regulators lack the staff to effectively oversee Fannie Mae and Freddie Mac and have scaled back examinations of the two mortgage companies as a result, a government watchdog reported.

A hiring campaign by the Federal Housing Finance Agency has missed targets and, when completed, will still leave the agency shorthanded. Those conclusions were part of a report released Sept. 23 by the FHFA’s Office of Inspector General.

The report singled out the agency’s monitoring of the housing inventory that Fannie Mae and Freddie Mac own. Despite a surge in foreclosures that has increased Fannie Mae’s inventory sixfold since 2007, “FHFA has yet to conduct a targeted examination” of how the companies manage repossessed homes, known as real-estate owned properties or REO, the report said.

The FHFA this year set out to recruit and hire 26 people to join its team of about 120 examiners. Even if those hires are completed, agency executives told the inspector general they will have only about half the examiners they need.

FHFA Deputy Director Stephen M. Cross said the agency has hired 18 examiners since January. Noting that the inspector general’s conclusions were based on interviews with unnamed FHFA officials, Cross said the report offers “no evidence” that the agency’s oversight has been compromised.

S&P May Face SEC Sanctions Over 2007 Rating of Subprime CDO

McGraw-Hill Cos. said the U.S. Securities and Exchange Commission may recommend a civil injunction against the company’s Standard & Poor’s unit in connection with its rating of a 2007 mortgage-linked security.

The SEC’s so-called Wells notice is related to a $1.6 billion collateralized debt obligation known as Delphinus CDO 2007-1, New York-based McGraw-Hill said today in a statement. Agency staff may recommend civil penalties, disgorgement of fee and other actions, the company said.

Delphinus was highlighted in a U.S. Senate panel’s report as a “striking example” of how banks and ratings firms branded mortgage-linked products safe even as the housing market worsened in 2007. S&P rated six tranches of Delphinus AAA in August 2007 and began downgrading the securities by the end of the year, according to the report released in April by the Senate Permanent Subcommittee on Investigations. By the end of 2008, they were rated as junk, according to the report.

About three-quarters of the CDO, which was underwritten by Mizuho Financial Group Inc. and managed by Delaware Asset Advisors, was based on subprime mortgages, according to a Fitch Ratings Ltd. report. Magnetar Capital Partners LLC invested in the deal, according to a ProPublica report.

“S&P has been cooperating with the commission in this matter and intends to continue to do so,” McGraw-Hill said in the statement. A phone call to Steven Lipin, a spokesman for Magnetar, wasn’t immediately returned.

Clearwire Is Latest U.S. Stock Halted by Circuit Breakers

Clearwire Corp. is the latest U.S. stock halted by circuit breakers implemented in June 2010.

The curbs were created after the 20-minute rout on May 6, 2010, erased $862 billion from the value of U.S. equities before prices rebounded. New rules proposed by exchanges on April 5, 2011, would shift the market to a limit-up/limit-down system that prevents shares from moving more than a certain amount.

China’s Banking Regulator Reviews Trust Loans to Developers

China’s banking regulator is looking into financing of developers through trust companies as part of a broader evaluation of real estate lending, a person familiar with the matter said.

The inquiries by the China Banking Regulatory Commission are part of regular monitoring and aren’t targeting any individual company, said the person, who declined to be identified because the regulator’s queries were meant to be private.

Chinese property developers led by Greentown China Holdings Ltd. plunged in Hong Kong trading for two days last week on concern tightened access to loans will force them to cut prices. Greentown said it hasn’t received any notice following a Reuters report that the banking regulator ordered trust companies to report dealings with the developer.

Greentown, the largest builder in the eastern province of Zhejiang, said it has no trouble financing its loans and it hasn’t been queried by the banking regulator.

For more, click here.

Courts

BofA Case May Be Followed by More Mortgage Suits by Counties

Bank of America Corp. is among a group of lenders that may face a wave of new lawsuits claiming cash-strapped counties were cheated out of millions of dollars by a system used for more than a decade to register mortgages.

Dallas County District Attorney Craig Watkins said state attorneys general and county officials across the U.S. have expressed interest in his lawsuit against Mortgage Electronic Registration Systems Inc. and Bank of America, filed in Texas state court on Sept. 21. Dallas County could be owed as much as $100 million in filing fees, he said.

MERS, a unit of Reston, Virginia-based Merscorp Inc., says on its website that its aim is to place every mortgage in the country on an electronic, rather than a paper, system that allows members to buy and sell mortgages.

MERS acts as the lender’s nominee and remains the mortgagee of record as long as the note promising repayment is owned by a MERS member. Dallas County claims this allows banks to buy and sell loans without properly recording transfers with counties and paying the fee.

“The MERS business model and practices are legal and comply with the recording statutes and regulations of Texas,” Janis Smith, a spokeswoman for Merscorp, said in an e-mail. The claims in the lawsuit “are without legal or factual merit.”

Shirley Norton, a spokeswoman for Charlotte, North Carolina-based Bank of America, the biggest U.S. lender by assets, declined to comment on the suit.

Liability in the Dallas case could exceed $1 billion, based on the number of mortgages in the county, Peterson said. Local laws impose substantial penalties, as well as back payments of fees and taxes, if false documents were filed in land transactions, said Christopher L. Peterson, associate dean and professor at the University of Utah S.J. Quinney College of Law, who has advised private plaintiffs making similar claims.

Faulty mortgages and foreclosures have already cost the five biggest home lenders $66 billion, according to data compiled by Bloomberg.

For more, click here.

Interviews/Speeches

Commodity Rules Needed to Control Speculation, Chilton Says

Regulation of international commodities markets will control price volatility and benefit consumers by making trading more efficient and effective, said Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission.

The commission is writing rules on market regulation as supply and demand fundamentals can’t explain the high price volatility seen this year and in 2008, Chilton said in a speech to the United Nations Sept. 22, according to transcript of his comments on the CFTC’s website. Policy makers globally should work together so regulations and position limits correspond internationally, he said.

“We need to ensure that to the extent that we can, respecting sovereignty of course, we do our best to harmonize rules and regulations,” Chilton said. “Those nations that do so will reap a reward in my judgment in that they will make themselves more competitive, more efficient and effective.”

Comings and Goings

Barclays Says Rake to Replace Broadbent as Independent Director

Barclays Plc, the U.K.’s second-largest bank by assets, said Michael Rake will become senior independent director replacing Richard Broadbent, who retires on Sept. 30.

Rake is chairman of the lender’s audit committee and takes up the new role on Oct. 1, the London-based bank said Sept. 23 in a statement. Barclays said in May that Broadbent, who is also deputy chairman, would step down after accepting the position of chairman at Tesco Plc.

Broadbent joined Barclays’s board in September 2003, after retiring as executive chairman of the U.K.’s customs office.

--With assistance from Margaret Cronin Fisk in Detroit; James Sterngold, Zeke Faux and Nick Baker in New York; Joshua Gallu and Lorraine Woellert inWashington; Jim Brunsden in Brussels; Bonnie Cao in Shanghai; Kartik Goyal in New Delhi; and Tony C. Dreibus and Howard Mustoe in London. Editor: Mary Romano.

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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