Goldman Sachs Group Inc. (GS) saw $2.15 billion of its market value wiped out after an employee assailed Chief Executive Officer Lloyd C. Blankfein’s management and the firm’s treatment of clients, sparking debate across Wall Street.
The shares dropped 3.4 percent in New York trading yesterday, the third-biggest decline in the 81-company Standard & Poor’s 500 Financials Index, after London-based Greg Smith made the accusations in a New York Times op-ed piece.
Smith, who also wrote that he was quitting after 12 years at the company, blamed Blankfein, 57, and President Gary D. Cohn, 51, for a “decline in the firm’s moral fiber.” They responded in a memo to current and former employees, saying that Smith’s assertions don’t reflect the firm’s values, culture or “how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.”
Former Federal Reserve Chairman Paul Volcker, 84, whose “Volcker rule” would limit banks like New York-based Goldman Sachs from making bets with their own money, called Smith’s article “a radical, strong” piece. “I’m afraid it’s a business that leads to a lot of conflicts of interest,” Volcker said at a conference in Washington sponsored by the Atlantic.
David Wells, a spokesman for Goldman Sachs in New York, declined to comment beyond the contents of the memo and an earlier e-mailed statement in which the firm said it disagrees with the views expressed in the op-ed.
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Basel Head Says Liquidity Rules May Be Clarified Late 2012
The head of the Basel Committee on Banking Supervision said the group is seeking to publish an updated liquidity rule for banks later this year. The committee is hoping to give more clarity on the measure, known as a liquidity coverage ratio, “at some point during the latter part of this year,” said Stefan Ingves, the group’s chairman.
A provisional version of the standard was published in December 2010.
Austria Regulators Don’t See Bank Deleverage Danger on New Rules
Austrian regulators said new rules on strengthening the “sustainability of the business models” of the country’s top lenders won’t lead to a reduction of loans in Eastern Europe.
“During the consultation process, some stakeholders raised their concern regarding potential unintended consequences and more specifically regarding any induced deleveraging pressure in central, eastern and south-eastern Europe,” Austria’s Central Bank and Financial Markets Authority said in a joint statement yesterday. “According to the Austrian supervisors’ impact assessment, none of the measures will lead to additional deleveraging pressure for Austrian banks abroad.”
The regulators in November presented a plan that restricts new loan business to 1.1 times the deposits and wholesale funding that Raiffeisen Zentralbank Oesterreich AG (RZBOPA), Erste Group Bank AG (EBS), and UniCredit Bank Austria AG (BACA)’s local units in eastern Europe are able to raise on their own. They also accelerated the implementation of capital rules from the Basel Committee on Banking Supervision. The comprehensive version of the rules was published yesterday.
Banks will also be required to present “recovery and resolution plans for potential crisis situations” by the end of the year, the regulators said.
Mortgage Rules Needed to Avoid Sub-Prime Crisis, Turner Says
Tougher rules on mortgage lending will rein in the type of practices that led to the U.S. sub-prime crisis, Adair Turner, chairman of the Financial Services Authority, said yesterday.
The review of the mortgage market, which will restrict interest-only and self-certified mortgages, will stop banks relying on rising property prices to balance the risk that a borrower might not repay their loan, Turner told lawmakers in London yesterday.
The FSA has proposed plans to reform the U.K.’s 1.2 trillion-pound ($1.89 trillion) mortgage market, arguing some practices exacerbated the banking crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008. The watchdog is seeking views on the proposals for the seventh time since the review began in 2009. The full set of proposals will be implemented in 2013.
SEC’s Schapiro Wants More Limits on IPO On-Ramp, Crowdfunding
U.S. lawmakers should reduce the $1 billion annual revenue threshold for easing regulations on newly public companies in legislation now being considered by the Senate, said Securities and Exchange Commission Chairman Mary Schapiro.
Several provisions of a House-approved bill designed to ease regulations for small and emerging companies go too far, Schapiro said in a letter to Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, and Richard Shelby of Alabama, the committee’s senior Republican. The House language would allow “even very large companies” to bypass investor protections, Schapiro said.
“A lower annual revenue threshold would pose less risk to investors and would more appropriately focus benefits provided by the new provisions on those smaller businesses that are the engine of growth for our economy,” Schapiro said in the letter, dated March 13. Giving so-called on ramp companies a break from internal controls audits is “unwarranted,” she said.
Schapiro, who wrote to the lawmakers following criticism of the legislation, said senators now working on the bill should also consider further restrictions on its so-called crowdfunding idea to let companies solicit and pool investment online. The provision should include regulatory oversight of professionals who handle such offerings and additional disclosures about the companies seeking investors, she said in the letter.
Kasich Wants Tougher Regulations, Taxes on Ohio’s Drillers
Ohio Governor John Kasich is proposing changes to how the state taxes and regulates oil and natural-gas drilling with what he calls a goal of “leading the nation with a comprehensive energy strategy.”
The plans, many of which require legislative approval, include a higher tax on drillers to pay for an income-tax cut, updating standards for well construction, disclosing chemicals used in hydraulic fracturing and new regulations for natural-gas gathering lines, according to information released by Kasich’s office.
Kasich was expected to release his proposals yesterday as part of a “Mid-Biennium Review” halfway through Ohio (STOOH1)’s two- year budget. States including Ohio (STOOH1), Pennsylvania (STOPA1) and North Dakota (STOND1) are confronting the costs and benefits of hydraulic fracturing, or fracking, which involves injecting water, sand and chemicals underground at high pressure. While the industry says fracking is safe and has allowed increased production, environmental groups say it can lead to contamination.
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IOSCO Seeks Views on Rules for Exchange-Traded Funds
The International Organization of Securities Commissions said it’s seeking views on proposed rules for exchange-traded funds.
“Interest in ETFs has increased worldwide as evidenced by the significant amount of money invested in these types of products,” IOSCO said in a statement on its website. “This dynamic growth has drawn the attention of regulators who are concerned about the potential impact of ETFs on investors and the marketplace,” it said.
MetLife Leads Life Insurers Lower After Failing Fed Test (1)
MetLife Inc. (MET), whose plan for a share buyback was rejected March 13 by the Federal Reserve, led life insurers lower in New York trading yesterday on speculation the industry’s biggest companies may face tighter capital rules.
U.S. regulators are taking greater responsibility over an industry that has traditionally been overseen by individual states. MetLife is required to get Fed approval for its capital plans because it owns a bank, while Newark, New Jersey-based Prudential isn’t subject to the same scrutiny. Both companies may face Fed oversight if they are classified as systemically important financial institutions, or SIFIs.
The SIFI designation was created after the 2008 financial crisis when gaps in oversight between federal and state regulators allowed insurer American International Group Inc. (AGI) to slide to the brink of bankruptcy. Prudential and MetLife, which is unwinding its banking business to reduce federal oversight, have said they may be subject to SIFI rules.
MetLife, led by Chief Executive Officer Steven Kandarian, would fall short of a U.S. capital standard in a severe economic downturn, the Fed said March 13. The insurer was one of four companies to fail the Fed’s Comprehensive Capital Analysis and Review, which was applied to 19 of the largest U.S. financial firms. Kandarian, who had requested permission for $2 billion of buybacks, said he disagreed with the ruling and remains “fully committed” to returning funds to investors.
“We are deeply disappointed with the Federal Reserve’s announcement,” Kandarian said. “We do not believe that the bank-centric methodologies used under the CCAR are appropriate for insurance companies, which operate under a different business model than banks.”
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Canter Says Insurers Expect Rise in Hedge Fund Probes
Richard Canter, president and chief operating officer of SKCG Group, a White Plains, New York-based insurance broker, talked about insurance for expenses incurred by hedge funds related to government investigations into insider trading.
Hedge funds’ risk of lawsuits is rising after regulatory probes of insider trading at Galleon Group LLC and the collapse of MF Global Holdings Ltd., insurance rates show. Canter speaks on Bloomberg Television’s “InBusiness With Margaret Brennan.”
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U.K. to Consolidate Two Antitrust Agencies, Prioritize Probes
The U.K. government will consolidate two antitrust agencies to streamline the current process and make it easier to prosecute for cartel-law violations.
The new agency will include what’s now the Competition Commission and parts of the Office of Fair Trading, the Department for Business, Innovation and Skills in London said in an e-mailed statement today.
The Competition and Markets Authority, which should be operating by April 2014, is being set up because the current system is complicated and contains too much duplication, the government said. The agency will have responsibility for merger regulation, market investigations and prosecuting cartel cases.
SEC Settles With SharesPost Over Private-Share Trading Probe
SharesPost Inc. and its president will pay $100,000 to resolve claims that the online marketplace for private-company shares acted as an unregistered broker, as U.S. regulators took their first action in a probe of trades involving non-public startups.
As part of the same investigation, Laurence Albukerk and his firm EB Financial Group LLC, and Frank Mazzola, principal and chief executive officer of Felix Investments LLC, were accused by the U.S. Securities and Exchange Commission of misleading investors and charging undisclosed fees in raising more than $70 million from investors seeking stakes in Silicon Valley firms, including Facebook Inc. (FB), the SEC said yesterday.
The agency has been scrutinizing trading in closely held companies such as Facebook, which has filed to sell shares in the largest initial public offering of an Internet company. The SEC is examining whether the trades expose investors to fraud because the companies aren’t required to disclose financial data, including revenue, cash flow and debt obligations, and frequently carry restrictions, such as limits on share sales.
SharesPost will pay $80,000 to resolve the SEC claims and company President Greg Brogger will pay $20,000. Albukerk and EB Financial agreed to pay about $310,000 to settle the claims without admitting or denying wrongdoing. Mazzola has denied the SEC’s claims in public broker filings.
The SEC approached SharesPost in December 2010 to probe its compliance strategy, Brogger said in a telephone interview.
“The exact legal question is whether or not SharesPost itself should have been a broker-dealer in 2010,” he said. “They came to the conclusion that we ought to have been a broker-dealer in 2010.”
Mazzola and John Hewitt, a lawyer for McCarter & English LLP, which represents Felix Investments, didn’t immediately respond to phone calls seeking comment. Larry Albukerk didn’t immediately respond to a voice mail seeking comment.
Analyst Kinnucan Pleads Not Guilty to Insider Trading
Broadband Research LLC founder John Kinnucan, who challenged U.S. authorities to arrest him for more than 18 months, pleaded not guilty to federal insider trading charges and remains in custody because he’s unable to make bail.
Kinnucan was indicted on Feb. 21 by a federal grand jury in New York, accused of passing inside tips to hedge fund clients about SanDisk Corp. (SNDK), OmniVision Technologies Inc. (OVTI) and other companies. He was arrested at his home in Portland, Oregon, on Feb. 16 by agents with the Federal Bureau of Investigation.
Kinnucan “befriended” employees of public technology companies, obtained nonpublic information from them and passed it to his fund manager clients, prosecutors in the office of Manhattan U.S. Attorney Preet Bharara alleged.
Kinnucan announced in October 2010 that he had refused a request by FBI agents in New York to wear a wire and inform on his clients, a move that presaged more than two dozen insider- trading arrests.
He faces as long as 20 years in prison if convicted of securities fraud.
The judge yesterday appointed Jennifer Brown and Sarah Jane Baumgartel, federal defenders in New York, to represent Kinnucan. Both declined to comment after court on whether they would seek his release pending trial.
The case is U.S. v. Kinnucan, 12-cv-163, U.S District Court, Southern District of New York (Manhattan).
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Ex-Brazilian Lover of Convicted VW Labor Boss Charged Over Bribe
The former Brazilian lover of an ex-Volkswagen AG (VOW) labor leader was charged for aiding in breach of trust over her role in a bribery scandal at Europe’s largest carmaker.
Prosecutors said the 47-year-old woman received 350,000 euros ($457,000) under sham contracts between 2002 and 2005, according to an e-mailed statement today from the Regional Court of Braunschweig, Germany. The trial for the woman, who wasn’t identified by name, is scheduled to begin March 27.
The case is part of a probe over bribes paid to union leaders in exchange for favorable votes on Volkswagen policy from 1995 through 2005. According to the statement, the woman is the former companion of Klaus Volkert, the former chief worker representative on VW’s supervisory board who was convicted of accepting 2.6 million euros in benefits.
Volkswagen’s press office didn’t immediately return a call seeking comment.
Brown Sees Need for Better On-Site Examination of Banks
Thomas Brown, chief executive officer at Second Curve Capital LLC and a Bloomberg contributing editor, talked about the results of the Federal Reserve’s bank stress tests.
Brown spoke with Betty Liu on Bloomberg Television’s “In the Loop.” Mohamed El-Erian, chief executive officer and co- chief investment officer at Pacific Investment Management Co., also spoke.
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Ross ‘Surprised’ at Citi, BofA, MetLife Test Results
Wilbur Ross, the billionaire chairman of private-equity firm WL Ross & Co., talked about results of Federal Reserve stress tests for banks and yesterday’s New York Times opinion piece by an outgoing Goldman Sachs Group executive.
Ross spoke with Betty Liu on Bloomberg Television’s “In the Loop.”
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Ghizzoni Says Bank Stress-Test Results ‘Positive News’
UniCredit SpA (UCG) Chief Executive Officer Federico Ghizzoni talked with reporters in Rome about the results of the U.S. Federal Reserve’s bank stress tests and credit conditions.
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Regulators Must Rein In $47 Trillion Shadow Banks, Turner Says
Global financial supervisors must act to contain the $47 trillion shadow-banking industry, Adair Turner, chairman of the U.K. Financial Services Authority, said in a speech in London.
Shadow banking, which encompasses financial activities that take place outside the regulated banking system, is “potentially very unstable,” and vulnerable to liquidity shocks, Turner said. The shadow banking industry in Europe is worth $22 trillion, and $25 trillion in the U.S., by some estimates, he said.
“Our regulatory response should therefore entail a bias to prudence,” Turner, 56, said in the speech at the Cass Business School yesterday. Supervisors shouldn’t allow “complex interconnectivity” and “high leverage to develop in unregulated institutions or markets.”
The Financial Stability Board, which brings together regulators, G-20 central bankers and finance ministry officials, said last year that shadow banks may create “an opportunity for regulatory arbitrage.” Shadow banking includes money-market funds, securitizations and off-balance-sheet investment vehicles.
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