Bloomberg News

Money-Market Study, Microsoft, Fannie Mae: Compliance

September 19, 2012

A majority of U.S. Securities and Exchange Commission members are seeking a study of money-market regulations after Chairman Mary Schapiro’s bid to advance new rules failed last month, a person familiar with the matter said.

SEC Republican commissioners Daniel Gallagher and Troy Paredes, together with Democrat Luis Aguilar, sent a letter Sept. 17 to Schapiro and SEC Chief Economist Craig Lewis reiterating a call for an analysis of whether certain rules could disrupt money-market funds and short-term credit markets, said the person, who asked not to be identified because the matter isn’t public.

John Nester, an SEC spokesman, declined to comment immediately.

The request for the study comes about three weeks after Schapiro canceled a vote on staff proposals for new money-market rules, saying that the SEC “will not act” because three of the five commissioners didn’t support them. Schapiro, backed by the Federal Reserve, has worked to make money funds more stable in the wake of the collapse of the $62.5 billion Reserve Primary Fund in September 2008, which triggered a wider run on money funds.

Schapiro’s Aug. 22 announcement canceling the vote marked a victory for the mutual-fund industry, which lobbied against new rules.

Compliance Report

Australia Pension Fund Body Calls for High-Frequency Trading Ban

Australian regulators should consider banning high- frequency trading in the equities market, according to Industry Super Network, an organization promoting the country’s $A1.3 trillion ($1.37 trillion) pension funds industry.

High-frequency trading, in which computer algorithms are used to buy and sell stocks in fractions of a second, can exacerbate slumps in the stock market and undermine investor confidence, the organization said on its website. ISN represents Australian pension funds that have about 5 million individual members, according to its website.

Strategies that use computer algorithms to buy and sell shares are being scrutinized globally amid concern that they can destabilize markets and make them less equitable. The Australian Securities & Investment Commission is considering altering rules on market structure, which include regulations on algorithms and high-frequency trading. Submissions for the consultation to ASIC closed Sept. 14 and proposals are expected next month.

High-frequency and algorithmic trading has come under scrutiny by regulators since May 6, 2010, when about $862 billion was erased from stock values in 20 minutes before share prices recovered from the plunge. A trading malfunction at Knight Capital Group Inc. (KCG:US) last month led to a $440 million trading loss at the market-making firm.

ASIC is currently assessing draft rules on market structure, which include regulations on algorithms and high- frequency trading, and will publish new rules and a regulatory guide in October.

For more, click here.

Compliance Action

Microsoft Said to Face EU Antitrust Complaint on Browser Choice

European Union regulators are preparing an antitrust complaint over Microsoft Corp. (MSFT:US)’s failure to comply with a settlement to give users a choice of web browsers, according to two people familiar with the matter.

There’s no set timing for the European Commission to send the statement of objections, said the people who asked not to be identified because the complaint isn’t public. A statement of objections lists alleged violations of competition rules and is a precursor to possible fines.

Microsoft has already been fined 1.68 billion euros ($2.2 billion) in EU antitrust probes, including an 899 million-euro penalty for failing to obey an order to share data with competitors. The Redmond, Washington-based company agreed to offer access to rival browsers as a part of a 2009 settlement to repair its relationship with the bloc’s regulators. It told regulators last December that it was complying with its commitments.

Microsoft’s press office in Brussels declined to comment beyond a July statement in which the company expressed its regret that the error occurred and understood that regulators may penalize it.

The company said it only learned in July that it didn’t offer its browser choice software to some 28 computers running Windows 7 Service Pack 1, or 10 percent of the computers that should have received it. It blamed a technical error and said it has already started distributing a fix.

The European Commission declined to comment.

Advanced Equities Co-Founders Daubenspeck, Badger Sued by SEC

Dwight Badger and Keith Daubenspeck, the co-founders of Advanced Equities Inc., were sued by the U.S. Securities and Exchange Commission, which claims that the men misled investors in two private-equity offerings.

Badger and Daubenspeck agreed to a settlement without admitting or denying the claims, the commission said in an e- mailed statement.

Fannie Mae Audit Finds BofA Wasn’t Overpaid for Servicing Rights

Fannie Mae (FNMA:US) didn’t give Bank of America Corp. (BAC:US) special consideration in agreeing to pay more than $500 million to transfer servicing of 384,000 mortgages to firms more likely to prevent foreclosures, a U.S. auditor said.

Still, the taxpayer-owned company (FNMA:US) paid more than legally required to Bank of America and 12 other lenders when it spent $1.5 billion for servicing rights on 1.1 million loans from 2008 to 2011, the Federal Housing Finance Agency’s inspector general said in a report released yesterday.

The transfers were part of a Fannie Mae initiative to cut losses on mortgages at greatest risk of default. Bank of America ultimately got $421 million in the 2011 deal because some of the loans were paid off or refinanced by the time it was completed.

The transaction drew attention because it came after Fannie Mae had received $1.3 billion from Bank of America to settle claims over defaulted mortgages.

Fannie Mae, based in Washington, and smaller rival Freddie Mac of McLean, Virginia, have been operating under U.S. conservatorship since they were seized by regulators amid soaring losses in September 2008.

The audit found Fannie Mae paid lenders more than required in most transactions because it wanted to negotiate a smooth transfer. Holders of the servicing rights could have tried to sell them elsewhere if Fannie Mae offered the minimum price.

The inspector general criticized Fannie Mae’s method of computing the value of the loans and suggested that the FHFA should step up its scrutiny of the servicing transfer program.

Jon Greenlee, FHFA’s deputy director of enterprise regulation, said the program was intended to help borrowers stay in their homes, not just to save money.

The FHFA inspector general released a second audit yesterday concluding that the agency should strengthen efforts to ensure Fannie Mae and Freddie Mac are better prepared for the failure of the banks that sell and service loans.

For more, click here.

Volksbanken Wins EU Approval for State Aid, Restructuring Plan

Oesterreichische Volksbanken AG (VBPS), the lender partially nationalized by Austria, won European Union approval for government support after it agreed to a restructuring plan that will refocus its business.

“Under the restructuring plan, the bank will limit the scope of its activity to its core role of providing liquidity management services and intermediation in accessing capital markets” to Austrian credit cooperatives, the European Commission said in a statement today.

Volksbanken since 2009 received government capital injections of 1.25 billion euros ($1.6 billion), the commission said.

Courts

Iceland Neglected U.K., Dutch Icesave Clients, Watchdog Says

Iceland violated European Union law by failing to take measures to ensure U.K. and Dutch depositors were compensated for their losses from the collapse of Landsbanki Islands hf, regulators told a court.

Iceland has a duty under EU law to guarantee a minimum compensation within a time limit and how this is achieved is up to the government, the European Free Trade Association’s court was told yesterday. Neither a “force majeure,” nor financial considerations could justify Iceland’s failure to ensure adequate compensation, the EFTA Surveillance Authority told the Luxembourg-based court.

The U.K. and the Netherlands ended up compensating their citizens and are now demanding that Iceland repay the full amount, with interest. The surveillance authority, the agency in charge of supervising Iceland’s compliance with European rules, sued the island in December over its failings.

Iceland rejected the authority’s arguments that it violated EU law by not honoring $5.4 billion in depositor guarantees on accounts held by British and Dutch savers.

Landsbanki, which had sought to attract foreign depositors through high-yielding Internet accounts that saved it the trouble of opening subsidiaries abroad, collapsed in October 2008 with the rest of Iceland’s debt-laden banking industry.

The case is: E-16/11, EFTA Surveillance Authority v. Iceland.

Speeches/Written Commentary

Black Says Bank Regulators Are Still ‘Too Relaxed’

William K. Black, associate professor of economics and law at the University of Missouri-Kansas City, said bank regulators are still “too relaxed” four years after the collapse of Lehman Brothers Holdings Inc. Black talked to Bloomberg’s Kathleen Hays and Courtney Donohoe on “The Hays Advantage” on Bloomberg Radio on Sept. 17.

For the audio, click here.

Kelleher, Masters Seek Level Playing Field for Markets

Dennis Kelleher, chief executive officer of Better Markets, and Michael Masters, founder of Masters Capital Management and Better Markets, talked about a Better Markets report on the costs of the financial crisis and recession that began in 2007, and continued shortcomings of U.S. financial regulation.

They spoke with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers.”

For the video, click here.

Gracie Says Officials Moving Closer to Working Bail-In Regime

Andrew Gracie, director of the Bank of England’s special resolution unit, commenting on banking policy, said, “We are moving closer to an operational bail-in regime. A number of outstanding challenges remain, but these challenges are largely surmountable.”

He made the remarks in a speech delivered Sept. 17 at a British Bankers’ Association conference in London.

It is important, Gracie said, that “bail-in follows the creditor hierarchy, secured claims are protected and netting arrangements are respected. And bail-in, like the other resolution tools, can only be used when it is necessary to do so in pursuit of clearly defined public interest objectives.”

Dutch Say Financial Stability, Antitrust Rules Should Be Aligned

Caretaker Dutch Finance Minister Jan Kees de Jager said competition and financial stability interests should both be sufficiently safeguarded in state aid restructuring plans.

The Netherlands will discuss the subject with the European Commission, also taking into account European Union proposals for common bank supervision, he said in a letter to parliament.

Comings and Goings

FSA Warned Barclays on Diamond’s Appointment as CEO in 2010

The Financial Services Authority warned Barclays Plc (BARC) in 2010 that the Libor scandal could make it withdraw approval for Robert Diamond’s appointment to run the bank, contradicting Marcus Agius’s version of events.

Hector Sants, who stepped down as head of the U.K. financial regulator in June, warned Agius the FSA could “re- assess” Diamond’s suitability for the post after the investigation was complete, he wrote in an internal e-mail made public by lawmakers on Parliament’s Treasury Committee today.

Agius, who resigned as chairman of Barclays in July, had told the panel of lawmakers that the Libor probe hadn’t been raised by the FSA as a barrier to Diamond’s promotion. Diamond quit after the London-based bank was fined a record 290 million pounds ($470 million) for manipulating the London interbank offered rate.

A Barclays spokesman in London declined to comment.

Citigroup Executives Leave Bank After Loan-Fraud Settlement

Two Citigroup Inc. (C:US) executives are departing after federal prosecutors named them earlier this year in a mortgage-insurance fraud case that resulted in a $158.3 million settlement and an admission of wrongdoing by the bank.

Jeffery Polkinghorne, a senior risk manager at the CitiMortgage division, is leaving after 16 years of “dedicated service,” according to an internal memo obtained by Bloomberg News and confirmed by Mark Rodgers, a spokesman for the New York-based bank. Donald Houghtalin, a compliance officer at the unit, has already left, he said in a phone interview. Neither man was sued by the government.

Both were among CitiMortgage executives named in a suit against Citigroup filed by the U.S. Justice Department earlier this year which claimed the lender saddled taxpayers with losses after falsely declaring defective home loans fit for a federal insurance program. The government alleged that some bank officials pressured other employees to change reports on faulty loans. Citigroup paid to settle the claims in February.

Polkinghorne, who was in charge of loan quality, will continue to work for Citigroup until the end of September, according to the memo. He declined to comment.

The U.S. accused Citigroup of violating requirements of a Federal Housing Administration program that allowed the bank to decide which home loans would be federally insured against loss. The lender, the third-biggest in the U.S., admitted to falsely stating that some loans met FHA and U.S. Department of Housing and Urban Development standards.

The U.S. joined a false-claims lawsuit filed by Sherry Hunt, a whistle-blower and CitiMortgage quality-control vice president. She said that executives buried her findings on defective loans into 2012.

For more, click here.

To contact the reporter on this story: Carla Main in New York at cmain2@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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