Bloomberg News

Banks’ Double Costs, Merrill Lynch, Bank Boards: Compliance

November 16, 2011

(Updates with EU naked short-selling in Compliance Policy, Calpers and Sino-Forest in Compliance Action and DeMarco in Interviews/Speeches/Testimony.)

Nov. 15 (Bloomberg) -- British banks may have to pay more than 20 billion pounds ($31.9 billion) a year, twice as much as competitors, because of additional regulation and taxes in their home market, according to Goldman Sachs Group Inc. analysts.

U.K. rules proposed by the Independent Commission on Banking will amount to 9.6 billion pounds, analysts led by London-based Frederik Thomasen wrote in a note to clients yesterday, while the British bank levy costs about 2.5 billion pounds. That’s more than the 11 billion-pound cost of new global rules including the Basel III capital rules, the analysts wrote.

Bank of England policy maker David Miles said in January that the biggest U.K. banks could hold double the amount of capital the Basel rules require without increasing their funding costs. UBS AG and Credit Suisse Group AG, Switzerland’s two biggest banks, were told by regulators last year they may need to hold almost twice the amount of capital required by Basel, a requirement dubbed the “Swiss Finish.”

HSBC Holdings Plc last week said it anticipates a $2.4 billion joint cost for the U.K. bank levy on their foreign operations and the ICB rules.

Chancellor of the Exchequer George Osborne increased a tax on U.K. bank balance sheets to raise an extra 800 million pounds as he continued to press lenders to boost lending targets and curb pay. The rise means the government raised 2.5 billion pounds from the tax in the prior financial year ending in April, more than the previously forecast 1.7 billion pounds, the Treasury said on Feb. 8.

Compliance Policy

EU Lawmakers Approve Naked CDS Curbs in Short-Selling Law

European Union lawmakers backed a proposed short-selling law that paves the way for an optional ban on naked credit- default swaps tied to sovereign debt.

The legislation, which would also curb so-called naked short selling of stocks and government bonds, was approved by the European Parliament at a meeting in Strasbourg, France, today. The U.K. has argued that parts of the agreement may be illegal because they give an EU regulator too big a mandate.

Today’s deal was brokered last month in negotiations between Poland, which holds the rotating EU presidency, and European lawmakers. German Finance Minister Wolfgang Schaeuble and lawmakers in the EU Parliament have called for a ban on naked CDS trades on government debt, citing concerns the practice fueled the euro region’s debt crisis.

Germany already has restrictions on using swaps to bet on sovereign defaults. Some European governments have also criticized the use of short selling to bet against bank stocks, arguing that the practice has roiled markets.

Under the draft law, the European Securities and Markets Authority would be able to ban short positions if there was a threat to the “functioning and integrity or markets” or to the stability of the financial system in all of part of the EU, according to a copy of the measures published on the EU’s website.

For more, click here.

Compliance Action

Magyar Telekom to Deregister Securities in U.S. as of Feb. 12

Magyar Telekom Nyrt, Hungary’s former phone monopoly controlled by Deutsche Telekom AG, will file a request with the U.S. Securities and Exchange Commission to deregister its securities.

The company expects the deregistration to be effective from Feb. 12, Magyar Telekom said in a statement on the Budapest Stock Exchange’s website yesterday.

Wyser-Pratte ‘Strongly Denies’ Insider Trading Claims by EEM

Guy Wyser-Pratte “strongly denies” accusations of insider trading made against him by Francois Gontier, chief executive officer of French investment company Electricite et Eaux de Madagascar.

The New York-based investor didn’t use privileged information in making share purchases, as Gontier alleged in a complaint to French prosecutors, according to Wyser-Pratte’s Paris lawyer, Antoine Arebalo-Camus. He added that Wyser-Pratte “strongly denies” the allegations.

Wyser-Pratte joined the EEM board in June and filed a complaint alleging misuse of corporate funds and improper accounting at the company. The report of the complaint comes a month before an EEM shareholder meeting which will consider a resolution to remove him from the board, according to an agenda released yesterday.

Gontier denied any allegations related to the timing of the complaint ahead of the meeting, he said in a phone interview yesterday.

Calls to the Paris prosecutors and AMF for comment weren’t immediately returned.

Calpers Approves Policy on Corporate Political Contributions

The California Public Employees’ Retirement System approved new guidelines calling on companies in which the largest U.S. public pension invests to disclose their political contributions annually.

The $227.5 billion fund’s governing board yesterday approved an update to its corporate governance principles that asks companies to detail each year all their political and charitable donations, including those made through a third party. The guidelines were sought by California Treasurer Bill Lockyer, a Democrat and member of the Calpers governing board.

The $139 billion California State Teachers’ Retirement System, the second-largest public pension in the U.S., adopted a similar rule Nov. 4.

Sino-Forest Says Probe Refutes Muddy Waters Allegations

Sino-Forest Corp., the Chinese timber company whose shares slumped 74 percent since June, said an independent committee refuted the “substance” of fraud allegations by Carson Block’s research firm Muddy Waters LLC.

The committee confirmed the company’s timber assets, cash balance and titles in an interim report released today, Toronto- listed Sino-Forest said in a statement. The investigators weren’t able to verify the valuation of its forestry holdings or reconcile some of its revenue.

Sino-Forest triggered concerns about accounting at Chinese companies listed abroad that wiped out $5.7 billion of market value since the June 1 Muddy Waters report. Probes by the Royal Canadian Mounted Police and Ontario’s regulator are continuing after the shares were halted in August.

The plunge in Mississauga, Ontario, and Hong Kong-based Sino-Forest alone cost investors including hedge-fund firm Paulson & Co. at least C$3.3 billion ($3.2 billion).

Muddy Waters’ Block today rejected the report’s findings, saying in an e-mailed statement that the timing of Sino-Forest’s press release “makes clear” that the directors and officers of the company are responding to the criminal investigation announced last week by the integrated market enforcement team of the Royal Canadian Mounted Police.

For more, click here.

Courts

Merrill Lynch Wins Appeal of Auction-Rate Securities Case

Bank of America Corp.’s Merrill Lynch unit won an appeal of a ruling dismissing an investor suit over auction-rate securities.

A federal appeals court in New York ruled yesterday that Merrill Lynch provided the investor, Colin Wilson, with sufficient information about its practice of propping up auctions in the securities by submitting its own bids, barring his claim that Merrill misled investors about the securities’ liquidity. Wilson had appealed a lower court’s dismissal of the suit.

Wilson, who sought to represent a class of investors in Merrill’s auction-rate securities, bought $125,000 of the securities from an online brokerage in 2007. In 2008, Merrill and the other major dealers in auction-rate securities withdrew their support for the auctions, causing most of them to fail. Wilson claimed he and other investors were left with securities they couldn’t sell.

Auction-rate securities are municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically re-set through an auction.

Bill Halldin, a spokesman for Charlotte, North Carolina- based Bank of America, said in an e-mail that the company is pleased with the court’s decision. Bank of America bought Merrill in 2009.

The case is Wilson v. Merrill Lynch & Co., 10-1528, Second U.S. Circuit Court of Appeals (New York).

Interviews/Speeches/Testimony

SEC Asked About Ex-Manager Sokol in June, Buffett Tells CNBC

Warren Buffett said the U.S. Securities and Exchange Commission asked him questions in June about David Sokol, a manager who departed from Berkshire Hathaway Inc. after disclosing trades in an acquisition target.

“They asked me a lot of questions, which I gave them the answer to,” Buffett, the 81-year-old chairman and chief executive officer of Omaha, Nebraska-based Berkshire, said yesterday in an interview on CNBC. “I know nothing about what they’re doing beyond the fact that they wanted to ascertain certain facts from Berkshire and from me as to what had taken place. And we cooperated 100 percent.” No court reporter was present, Buffett said.

Sokol resigned from Buffett’s company in March after disclosures of stock trades he made in Lubrizol Corp. before Berkshire announced that it would buy the lubricant maker.

Financial Regulation Needs to Be Coordinated, Allianz Says

The regulation of the financial industry with frameworks such as Solvency II and Basel III needs to be coordinated, Martina Baumgaertel, head of group regulatory policy at Allianz SE, Europe’s biggest insurer, said in Frankfurt yesterday.

“Everybody is under time pressure at the moment, so asking for coordination is maybe a bit utopian,” Baumgaertel said in a speech at the Euro Finance Week conference.

Regulator Plans ‘Gradual Reductions’ of Pay at Fannie, Freddie

The chief regulator for Fannie Mae and Freddie Mac defended salaries and bonuses at the government-owned housing-finance companies and said he is planning for “gradual reductions” in compensation.

Edward J. DeMarco, acting director of the Federal Housing Finance Agency, made the remarks in testimony prepared for delivery today on Capitol Hill before the U.S. Senate Committee on Banking, Housing and Urban Affairs.

“This approach is consistent with the administration’s notion of a gradual wind down” of Fannie and Freddie, which are now in government conservatorship, DeMarco said in the prepared testimony.

Lawmakers have expressed anger at bonuses and pay to top executives at the companies. DeMarco approved packages in 2009 that awarded a total of $17 million over two years to chief executive officers. He has defended his decisions regarding pay.

In his testimony, which was obtained by Bloomberg News, DeMarco criticized proposed legislation that would place employees at the two companies on the government pay scale.

Comings and Goings

Wells Fargo Joins BofA in Naming Ex-Government Leaders to Board

Wells Fargo & Co., the lender that appointed two former U.S. cabinet secretaries as directors since June, joins financial firms including Bank of America Corp. in adding ex- government leaders as regulation increases.

Federico Pena, who had terms running the transportation and energy departments for President Bill Clinton, joined this month, expanding the largest U.S. home lender’s board to 16 members. Elaine Chao, George W. Bush’s labor secretary, was named in June to replace U.S. West Inc. Chairman Emeritus Richard McCormick, who stepped down after serving since 1983.

Lenders are facing limits on credit- and debit-card fees, tighter capital standards and state probes into mortgage- servicing lapses. The oversight is fueling banks’ demand for boardroom guidance from Washington, an asset previously more valued at transportation companies, energy firms and defense contractors, said George Davis, who heads the director placement practice at search company Egon Zehnder International in Boston.

Chao and Pena have led “large, high-profile governmental organizations,” said Ancel Martinez, spokesman for Wells Fargo, the largest U.S. home lender. “Their leadership and regulatory experience is highly relevant to serving as a director.”

Bank of America overhauled its board in 2009, adding directors in June of that year including former Federal Reserve Board Governor Susan Bies and ex-Federal Deposit Insurance Corp. Chairman Donald Powell. Larry DiRita, a spokesman for the Charlotte, North Carolina-based bank, declined to comment on the board changes.

For more, click here.

Deutsche Bank’s Ackermann Abandons Plan to Become Chairman

Deutsche Bank AG Chief Executive Officer Josef Ackermann abandoned a plan to become supervisory board chairman when he steps down as CEO in 2012, saying Europe’s debt crisis commands too much of his time.

Deutsche Bank will instead nominate Paul Achleitner, the finance chief of insurer Allianz SE, the Frankfurt-based lender said in a statement yesterday. Ackermann will step down as chief executive as planned in May, to be succeeded by Juergen Fitschen and Anshu Jain.

Ackermann, 63, Deutsche Bank’s CEO for the last nine years, was set to replace Clemens Boersig as chairman in May, a change of guard that drew criticism when the bank announced the succession plan in July because it appeared to flout German corporate governance rules.

Ackermann led Deutsche Bank through the credit crunch of 2008 without a government bailout and has been at the center of the industry’s response to the European debt crisis.

For more, click here.

Separately, Ackermann’s testimony in a civil lawsuit about the 2002 demise of the late Leo Kirch’s media group is being investigated by prosecutors.

Along with Ackermann, former Deutsche Bank CEO Rolf Breuer and other officials who testified are being investigated, bank spokesman Detlev Rahmsdorf said in an interview. Munich prosecutors searched Deutsche Bank offices as part of the case. The lender separately filed a motion to have the three judges in the 2 billion-euro ($2.7 billion) civil case removed because of “possible illicit cooperation” with prosecutors, he said.

Barbara Stockinger, a spokeswoman for Munich prosecutors, confirmed her office is probing bank managers in connection with a civil suit over allegations of attempted fraud. She declined to name any suspects.

For more, click here.

--With assistance from Edith Balazs in Budapest; Bob Van Voris, Noah Buhayar and Maryellen Tighe in New York; Jeff Green in Detroit; Nicholas Comfort, Aaron Kirchfeld and Oliver Suess in Frankfurt; Heather Smith in Paris; Karin Matussek in Berlin; Jim Brunsden in Brussels; Michael B. Marois in Sacramento; Carter Dougherty in Washington; and Howard Mustoe in London. Editors: Mary Romano, 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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