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from Financial Regulatory Forum:

JPMorgan AGM punctured by thorny hedge issues

By Christopher Elias

LONDON/NEW YORK, May 17 (Business Law Currents) - JPMorgan’s disastrous $2 billion hedge loss has raised some thorny issues on management oversight, corporate governance and the effectiveness of the Volcker Rule, as division at the banking giant’s annual general meeting highlight a growing tension between its shareholders and management.

Little more than a week ago, prior to Tuesday’s annual general meeting (AGM), JPMorgan announced that it had incurred a $2 billion loss as a result of a hedge gone wrong from its London offices with the possibility of $1 billion in additional losses to follow.The exact nature of JPMorgan’s derivative betting and what went wrong remain remarkably vague, despite JPMorgan’s numerous public statements. While the prevalent theory being made by financial analysts is that this was a “flattener” bet or a directional bet on credit default indices, the consensus that for the hedge to have generated $2 billion in losses, its unwinding was likely as disastrous, if not more so, than the “hedge” itself.

The fallout from this baneful bet became a comedy of errors after JPMorgan CEO Jamie Dimon described the matter as a “tempest in a teapot”. Dimon was later forced to admit at a hastily convened conference call that the “new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored.”

With management desperately trying to plug a hole in the balance sheet, questions are being raised about the competency of JPMorgan’s management and how corporate governance and risk procedures could have allowed such a volatile and ultimately disastrous investment to have manifested itself.

Age-old shareholder concerns over the dangers of one person holding the combined role of CEO and Chairman, and of the effectiveness of management oversight, surfaced and made for a tense AGM. Despite the discord, JPMorgan’s executive team remained largely intact, with the exception of chief investment officer Ina Drew, the lone casualty – having retired shortly before the start of meeting.

The matter has highlighted persistent corporate governance issues at large banks that look increasingly “too big to manage” as well as “too big to fail”.

from Unstructured Finance:

Over dinner in Sin City, Gore and hedge fund honchos talk taxes and Obama

Fund manager Anthony Scaramucci, also known as the "Mooch," likes to bring big-name politicos to his annual hedge fund convention-cum-carouse, the Skybridge Alternatives Conference, or, as most simply call it: SALT.

Last year, Scaramucci procured former President George W. Bush to be SALT's keynote speaker. This year, former vice-president Al Gore scored the keynote time-slot.

The enormous and palatial Grand Ballroom at the Bellagio Hotel was packed to the brim for Gore's appearance, but Gore's next date with SALT attendees was more exclusive. As was the case with Bush one year earlier, Gore's talk was followed by a dinner for twenty or so handpicked guests at the Bellagio's private Tuscany dining room.

Seated on either side of Gore were financier and Obama bundler Orin Kramer and Los Angeles Mayor Antonio Villaraigosa, according to someone who attended the dinner. Also at the table was hedge fund supremo Leon Cooperman of Omega Advisors, a panelist at SALT who had also been a guest at the Bush dinner last year (Bush's dining partners in 2011 included SAC Capital's Steve Cohen, Maverick Capital's Lee Ainslie and Millenium Partners Israel Englander).

Gore was also joined by other Wall Street veterans including Frank Meyer, founder of Glenwood Capital,  Barry Sternlicht, CEO of Starwood Capital Group, and Ted Seides, of Protege Partners, the person said, as well as other private investors.

Topics of conversation, not surprisingly, included the so-called Fiscal Cliff - billions in tax cuts set to expire at the end of the year - a topic that had peppered panel discussions all day; the so-called "Battle of the Bobs," a 1993 showdown between then-President Bill Clinton’s labor secretary Bob Reich and his treasury secretary and former Goldman Sachs exec Bob Rubin, about how to restart the flailing economy; and Obama's rocky relationship with Wall Street and tax hikes on America's richest.

At one point during the  "very spirited" but friendly debate, Al Gore turned to Leon Cooperman and asked if he would mind if his taxes were raised, according to two people at the dinner.  Cooperman responded he cared less about his taxes being raised and more about President Obama dialing back anti-Wall Street rhetoric, the attendees said.

from Financial Regulatory Forum:

U.S. SEC set to monitor private equity funds, official says

By Stuart Gittleman

NEW YORK, May 8 (Thomson Reuters Accelus) - Many of the world's top private equity funds will soon be examined by the U.S. Securities and Exchange Commission, Carlo di Florio, director of OCIE, the SEC's Office of Compliance Inspections and Examinations, said.

Fourteen of the 50 largest hedge fund advisers in the world, and 18 of the 50 largest private equity funds in the world, are newly registered with the SEC under the Dodd-Frank Act, di Florio said at a private fund compliance conference in Manhattan last week. Bain Capital, Blackstone, Carlyle and TPG are among the 37 of the top-50 PE managers di Florio said have registered with the SEC, and 48 of the top 50 hedge fund advisers also have registered.

"A significant percentage of new registrants" will face "coordinated examinations … focusing on the highest risk areas of their business" as part of a risk-rating process, di Florio said. The exams are part of a three-step process that starts by sharing the SEC compliance office's expectations and perceptions of the highest-risk areas with PE firms. The process will end with reports on the broad issues, risks and themes OCIE identified.

The compliance office developed the initial risk factors through its past exams of these and similar types of registrants as well as through staff expertise based on hiring industry experts and having them help train and support the examiners, di Carlo and other OCIE officials have said.

The SEC is developing systems to help organize and evaluate the information firms will provide on Form ADV, for advisers, and Form PF, for private funds, di Florio said.

Form PF is a new form for private fund advisers to report information on potentially systemic risks to the Financial Stability Oversight Council, through the SEC and the Commodity Futures Trading Commission, which will collect the forms.

from Unstructured Finance:

UF Weekend Reads

A dreary looking day in the NYC environs today, but that won't overshadow birthday celebrations and other good news too cheer! A big shout to all UF members today. Oh, and fight for your right to party. Here then is Sam Forgione's suggested readings.

From The New York Times:

A former managing director of Bain Capital has a telling beef with art-history majors.

From AR:

Hedge fund managers are still leaving their safety zones for emerging markets, even as John Paulson is recovering from his Sino-Forest bet, writes Jan Alexander.

From The Washington Post:

from Unstructured Finance:

UF Weekend Reads

A beautiful spring day in the NYC metro area. Let's Go Mets! Here's this weekend's stories courtesy of Sam Forgione.

From The New York Times: 

Jennifer Medina reports that California's economy is either booming and busting, depending on which city you're in.

From The Nation: 

William Greider has some suggestions on how the Federal Reserve can work with politicians to improve the housing crisis.

From Foreign Affairs:

from Global Investing:

March bulls give way to April bears in emerging markets

The dust has settled on a scintillating first quarter for emerging markets but the cross-asset rally of the first three months has already run out of steam. A survey by Societe Generale of 69 EM investors shows that over half are bearish -- at least for the near-term.

This marks quite a turn-around from the March survey, when 80 percent of investors declared themselves bullish on emerging markets. What’s more, investors are currently running very little risk and 47 percent of hedge fund respondents (these make up half the survey) feel they are over-invested in EM.  (The following graphic shows the findings -- click on it to enlarge)

Almost a quarter of the hedge fund and real money investors are neutral tactically on the market, compared to just 4.5 percent last month. Serious optimism has dried up, SocGen commented:

Looking at the distribution of answers, it is quite clear that the mega-bullish investor on EM has disappeared at this point.

The return of worries about the euro zone debt crisis, U.S. growth and a slowdown in China have all contributed to a higher degree of pessimism on financial markets. It's not all gloom though. Looking at emerging markets over the next 3 months, sentiment does pick up, with 64 percent of investors bullish. So this falling out of love with EM could be a temporary blip.

Only 13 percent of investors were more bearish on a 3-month time horizon than over the next two weeks. That included 83 percent of real money investors that believed in an improvement in the GEM outlook from two weeks to three months.

from Financial Regulatory Forum:

JOBS Act provision opens door to hedge fund advertising, trade group urges caution

By Emmanuel Olaoye

NEW YORK, April 9 (Thomson Reuters Accelus) - A little known provision of the new small-business capital JOBS Act opens the door to advertising by hedge funds, but an industry organization cautioned members that the advertisements must still comply with state laws and other regulations.

Firms registered with the U.S. Commodity Futures Trading Commission or state regulators should seek legal advice before advertising to the public to avoid the threat of enforcement, Ron Geffner, vice president at the Hedge Fund Association and partner at the law firm Sadis & Goldberg, told Thomson Reuters."They may be subject to other rules that regulate the activity they seek to engage," Geffner said. "Any form of hyperbole or exaggeration no matter how mild may result in the prosecution of the firm, which will have a detrimental impact not only in the legal costs of defending a civil penalty but in reputational damage."

The Jumpstart Our Business Startups Act (JOBS) allows hedge funds to advertise their offerings to the public “whether online, in person, or through any other means." The Act, which was signed into law last week, gives the Securities and Exchange Commission 90 days to eliminate the ban on advertising for an offering by a private issuer.

But hedge funds can only sell to qualified institutional investors (companies that manage a minimum $100 million in assets) or accredited investors such as individuals with a minimum net worth of $1 million.

Lifting of the advertising ban will pose different challenges to hedge funds depending on their size, Geffner said. "[With] larger firms, depending on the controls, there is a greater likelihood for inconsistencies to appear between advertisements, marketing pieces and questionnaires. Smaller firms often don’t realize the importance of information they are providing and [the] ramifications liability."

The Hedge Fund Association said the lifting of the advertising ban would benefit registered smaller hedge funds whose size had made it difficult to reach investors "despite studies that show smaller hedge funds outperform large ones."

from Financial Regulatory Forum:

Financial institutions and investment funds should prepare now for FATCA

By Steven D Bortnick, contributing author for Thomson Reuters Accelus

NEW YORK, April 4 (Thomson Reuters Accelus) - The enactment of the Foreign Account Tax Compliance Act (FATCA) as in March of 2010 has sent shock waves through financial institutions and investment fund management companies. FATCA aims to obtain information to prevent U.S. persons from evading taxation through the use of foreign entities. Although the law does not fully enter in force until January 1, 2013, the effort to become compliant with FATCA should begin immediately. Some tips on how to do so are noted below.

The legislation is the direct result of the events that led to UBS’ admission that it helped U.S. taxpayers evade U.S. income tax on U.S.-source income. While the goal is the increased collection of tax, the intention is not to create any new tax. FATCA’s goal is accomplished by adding an entirely new chapter to the Internal Revenue Code devoted to due diligence, reporting and withholding. Failure to comply will result in withholding tax at the rate of 30 percent, including withholding on items understood not to be taxable in the hands of foreign persons. While the proposed regulations reduce the burden that initially may have been expected, especially through reduced due-diligence requirements, FATCA compliance still will be an involved and costly process for many financial institutions and investment funds. To the surprise of many, when the proposed regulations were issued, so was a joint statement from the United States, United Kingdom, France, Germany, Italy and Spain regarding an intergovernmental approach to improving international tax compliance and implementing FATCA. These countries have agreed to enact legislation to enforce FATCA and increase tax compliance among the various countries.

FATCA IN GENERAL TERMS

FATCA generally divides the universe of foreign entities into two broad categories: foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs). A withholding agent (generally anyone who has control of payments, including participating FFIs) must withhold tax at 30 percent on any "withholdable payment" to an FFI, unless such FFI is a "participating FFI." A participating FFI is an FFI that has reached an agreement with the Internal Revenue Service (IRS) to obtain certain information, provide certain information to the IRS and withhold on certain payments. These requirements are discussed further below.

A withholding agent must withhold tax at 30 percent on any withholdable payment to an NFFE, unless the NFFE: (a) certifies that it has no U.S. investors that own 10 percent or more of such NFFE or (b) identifies U.S. investors that own 10 percent or more of such NFFE.

IS PAYMENT MADE TO AN FFI?

from Unstructured Finance:

UF Weekend Reads

Don't get pranked tomorrow. Remember, it's April Fool's Day. Here are the latest Weekend Reads as selected by Sam Forgione.

From Fortune:

Hedge fund manager Paul Singer's hardball approach has benefited Republican candidates as his fund battles in court with nation's that have defaulted on their debt.

From The Guardian:

Zoe Williams writes about how Stephanie Flanders, the BBC economics editor and a former speechwriter for Tim Geithner, relishes bad news.

From Columbia Journalism Review:

from Breakingviews:

Ally’s mortgage misery needs a clean ending

By Agnes T. Crane and Antony Currie The authors are Reuters Breakingviews columnists. The opinions epxressed are their own.

Ally Financial finally seems to have woken up to the need to get rid of ResCap, its ailing mortgage unit. Once the jewel in the former GM finance unit’s crown, the home lending and servicing operation has been a prime candidate for the bankruptcy court for years. ResCap has been on U.S. taxpayer-funded life support since 2008 - sucking up most of the $17.2 billion in aid the U.S. Treasury funneled to Ally. Now a Chapter 11 restructuring may finally be on the cards. But Ally needs to ensure its mortgage misery comes to a clean ending.

Bankruptcy ought to allow that. Back in 2005, Ally - or GMAC, as it was then called - revamped ResCap’s corporate structure so that it became a fully independent subsidiary with its own board and funding strategy. The purpose was to insulate the mortgage lender from any problems at GM and the auto finance arm. At the time, ResCap’s bondholders seemed perfectly satisfied they were protected.

Now, though, activist hedge fund Elliott Capital Management, which owns 2.3 percent of Ally, is questioning how watertight that arrangement is. It’s concerned a bankrupt ResCap could still drag its arms-length parent into another protracted mess. If that happened, Elliott argues, Ally would be embroiled in a flood of mortgage-related claims the hedge fund reckons could swamp the court. What’s more, Ally would have to duke it out with other creditors - its home-lending arm relies on its parent for $1 billion of secured loans and a $1.6 billion credit line.

Ally appears to think that’s less of a risk. According to Reuters it is considering whether to sell ResCap to another hedge fund, Fortress, through the bankruptcy process. If successful, that would remove most of the problem assets that caused it to fail the recent Federal Reserve stress test and may even put its mooted common stock offering back on track.

Taxpayers should cheer that: the unencumbered core auto business may be worth as much as $23 billion, more than enough to repay the $14 billion still owed Uncle Sam. But Ally Chief Executive Michael Carpenter needs to show that the risk of Ally being laid low by a ResCap bankruptcy is minimal. The last thing the firm, and taxpayers, need is for a bad decision to prolong its own pain.