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from Financial Regulatory Forum:
Rep Frank says Goldman case helps financial reform
WASHINGTON, April 19 (Reuters) - U.S. Representative Barney Frank said on Monday that securities regulators' fraud case against Goldman Sachs <GS.N> increases the chance that financial reform will pass.
Frank, chairman of the House Financial Services Committee, also said he does not believe all 41 Republicans in the Senate will vote against the financial reform bill.
"It reinforces the need for much of what we were doing" on financial reform, Frank said on CNBC Television. On Friday, the U.S. Securities and Exchange Commission charged Goldman with fraud for its marketing of a subprime mortgage product.
Frank also said it is not essential to create a standing fund of capital to dismantle troubled financial firms, responding to Republican objections that it would amount to a bailout fund. (Reporting by Karey Wutkowski; Editing by Lisa Von Ahn) ((E-mail:karey.wutkowski@thomsonreuters.com +1 202 898 8374)) Keywords: FINANCIAL REGULATION/FRANK
Monday, 19 April 2010 12:15:18RTRS [nWEN2887 ] {C}ENDS
from Financial Regulatory Forum:
BREAKINGVIEWS-Goldman’s CDO investors: fools or victims?
By Hugo Dixon and Richard Beales
LONDON/NEW YORK, April 19 (Reuters Breakingviews) - Were the investors who lost $1 billion by buying a fearfully complex product sold by Goldman Sachs <GS.N> in the dying days of the credit boom fools or victims? That's the key distinction on which the U.S. Securities and Exchange Commission's fraud charges, which roiled the investment bank when they were unveiled on Friday, hinge.
Back in 2007, Goldman sold investors a $1 billion synthetic collateralised debt obligation (CDO). A CDO is a pool of securities, in this case 90 subprime residential mortgage backed securities. A synthetic CDO is based on a pool of derivatives that reference securities rather than the securities themselves.
The SEC's key allegation is that Goldman marketed this synthetic CDO to investors without telling them that Paulson & Co, the hedge fund, had been involved in selecting the securities that were subject to the bet. What's more, it didn't tell investors -- or ACA, an independent firm that officially selected the underlying securities -- that Paulson was simultaneously placing bets with Goldman that these securities would fall in value.
Goldman's defence has four elements. First, that it lost $90 million on the transaction. This shows, it says, that "we did not structure a portfolio that was designed to lose money".
However, the firm has not said how it lost the $90 million. Did it intend to retain a long position or did it just get stuck with it? The answer to the question is crucial in judging the defense. The SEC has produced an email from Fabrice Tourre, the Goldman vice-president who handled the deal, in which the self-christened "fabulous Fab", said: "The whole building is about to collapse anytime now". This, at least, suggests that Goldman wasn't gung-ho about the market. But on the other hand, the fact that the firm went long at all does undermine suggestions it knew the CDO would lose money.
Goldman's second line of defence is that "extensive disclosure was provided". It points out that these investors also understood that a "synthetic CDO transaction necessarily included both a long and short side". The suggestion is that these were big boys who should have done their own homework.
But the SEC alleges a key fact - that Paulson was both betting against the CDO and heavily involved in selecting the underlying securities - was omitted.
This is where Goldman's third defence kicks in. It admits that Paulson was involved in discussions about the selection but says this was "entirely typical of these types of transactions". What's more, ACA - as well as selecting the securities - was exposed to the transaction to the tune of $951 million. As such, according to Goldman, "it had an "obligation and every incentive to select appropriate securities." Paulson, which has not been charged, also says ACA had authority over the selection.
But again there are counterpoints. For a start, Paulson's involvement, according the SEC, was pretty intimate. In one email, the Fabulous Fab said the portfolio had been "selected by ACA/Paulson". In another, he says "I am at this ACA Paulson meeting, this is surreal" - a comment that raises the possibility that this type of meeting wasn't typical.
The SEC also says Goldman knew that a key investor IKB, a bank which ultimately had to be rescued by the German state, would not invest in synthetic CDOs unless there was an independent agent selecting the underlying securities. The regulator further alleges that ACA believed that Paulson was going to be a long investor in the synthetic CDO. As such, ACA arguably did not mind when Paulson helped it select the underlying securities.
This is where Goldman's final line of defence -- so far -- comes in. It says it "never represented to ACA that Paulson was going to be a long investor". The SEC, however, puts a different gloss on things. It has dug up an email from ACA to Goldman which makes clear that it believed Paulson was going long. The SEC says the Fabulous Fab knew or was reckless in not knowing that ACA had been misled about the matter.
Goldman's defenders reckon the timing of the charges was motivated more by political considerations than the completeness of the SEC's case. Be that as it may, the SEC and Goldman are now set to fight this out in court. But even if the charges don't stick, they will be expensive in terms of time, money and reputation for the investment bank.
CONTEXT NEWS
-- The U.S. Securities and Exchange Commission filed charges against Goldman Sachs on April 16, accusing the bank of securities fraud related to the structuring and marketing of a synthetic collateralised debt obligation linked to subprime residential mortgage-backed securities.
-- SEC releases: http://link.reuters.com/qyx38j
http://link.reuters.com/ryx38j
http://link.reuters.com/syx38j
-- Goldman releases: http://link.reuters.com/tyx38j
http://link.reuters.com/vyx38j
-- Paulson statement: http://link.reuters.com/baz38j
-- Reuters Take a Look [ID:nN16131161]
RELATED STORIES
Trimming hedges [ID:nLDE63F1ZH]
Burning ambition [ID:nLDE63F1X7]
Back on the beat [ID:nLDE63F1M2]
Mugs' game [ID:nLDE63F1ZL]
-- For previous columns by the author, Reuters customers can click on [DIXON/]
(Editing by Hugo Dixon and Aliza Rosenbaum)
((hugo.dixon@thomsonreuters.com))
Keywords: BREAKINGVIEWS GS/INVESTORS
Monday, 19 April 2010 09:22:51RTRS [nLDE63I0G9] {EN}ENDS
from Financial Regulatory Forum:
UK’s Brown wants investigation into Goldman Sachs
By Adrian Croft
LONDON, April 18 (Reuters) - Prime Minister Gordon Brown said on Sunday he wanted Britain's financial watchdog to investigate U.S. bank Goldman Sachs <GS.N> after it was charged with fraud by U.S. regulators.
Brown, who is fighting an election campaign, piled pressure on Wall Street's most powerful bank, accusing it of "moral bankruptcy" over reported plans to pay big bonuses.
Goldman Sachs was charged with fraud by the U.S. Securities and Exchange Commission (SEC) on Friday over its marketing of a subprime mortgage product. Goldman has called the U.S. lawsuit "completely unfounded" and has vowed to defend itself.
"I want a special investigation done into the entanglement of Goldman Sachs and the companies there with other banks and what happened," Brown told BBC television.
"There are hundreds of millions of pounds have been traded here and it looks as if people were misled about what happened. I want the Financial Services Authority (FSA) to investigate it immediately," he said.
"I know that the banks themselves will be considering legal action," Brown said, apparently referring to European banks that lost money on the product marketed by Goldman Sachs.
"We will work with the Securities and Exchange Commission in the United States," he said.
A spokeswoman for the FSA declined comment. "We would never confirm or deny we are investigating anybody," she said.
A person familiar with the matter said the FSA was liaising with the SEC, but currently viewed the investigation as primarily a U.S. matter.
Brown's Labour Party lags in the polls before the May 6 election and a tough stance against bankers is popular with voters angry about high bonuses paid by banks, particularly those that received state bailouts during the financial crisis.
The FSA is operationally independent and the British government cannot order it to launch an investigation.
BIGGEST CRISIS
The civil lawsuit Goldman faces in the United States is the biggest crisis in years for the company that emerged from the financial meltdown as Wall Street's most influential bank.
Goldman shares slid 12.8 percent on Friday, wiping out more than $12 billion of market value.
According to the SEC complaint, Britain's Royal Bank of Scotland <RBS.L> paid Goldman $840 million in August 2008 to unwind a position built up by ABN Amro, some of whose operations RBS had acquired.
RBS is 84 percent owned by the British government after a series of bailouts during the financial crisis.
It declined to comment on whether it was considering legal action against Goldman Sachs.
Brown also attacked Goldman Sachs over a report in Britain's Sunday Times newspaper that the bank planned to pay its staff more than 3.5 billion pounds ($5.6 billion) for three months' work, including 600 million pounds to 5,500 London-based staff.
"I am shocked at this moral bankruptcy. This is probably one of the worst cases that we have seen," he said.
"It makes me absolutely determined we are going to have a new global constitution for the banking system ... a global financial levy for the banks, that all countries that are major financial centres pay, and we quash remuneration packages such as at Goldman Sachs," he said.
"If this is proved to be the case, they have got to return that money. I cannot allow this to continue," he said.
Goldman Sachs declined to comment on the level of any bonuses, which would not be paid until the end of the year. (Additional reporting by Tim Castle and Mark Potter; editing by Elaine Hardcastle) ((tim.castle@reuters.com; +44 207 542 7947; Reuters Messaging: tim.castle.reuters.com@reuters.net)) operationally
($1=.6233 Pound)
Keywords: BRITAIN ELECTION/GOLDMAN
Sunday, 18 April 2010 13:36:26RTRS [nLDE63H0AA] {C}ENDS
from Financial Regulatory Forum:
Top Republican senator, White House clash on financial reform
McConnell says 'No'
By Kevin Drawbaugh
WASHINGTON, April 13 (Reuters) - The White House said "yes we can" on financial regulatory reform on Tuesday, while the top Republican in the U.S. Senate said "no we won't."
A bare-knuckles fight is coming in days ahead as the Obama administration and congressional Democrats push for a crackdown on banks and capital markets against Republican opposition. With lawmakers recently returned from a two-week recess, a final vote on Senate legislation is near.
The shape and profitability of the financial services industry for years to come hangs in the balance, as well as the U.S. economy's ability to withstand future financial crises.
A White House official said momentum for regulatory reform seemed to be building. "We hope Republicans in Congress will join us in a constructive conversation about how to move a strong bill forward," White House spokeswoman Amy Brundage said in a statement.
(For a full story on the White House official's comments, double-click on [ID:nN1314851])
But that upbeat assessment clashed with a defiant message delivered by Senator Mitch McConnell, the chamber's top Republican.
"We must not pass the financial reform bill that's about to hit the floor. The fact is, this bill wouldn't solve the problems that led to the financial crisis. It would make them worse," said McConnell on the Senate floor.
"The American people have been telling us for nearly two years that any solution must do one thing -- it must put an end to taxpayer-funded bailouts for Wall Street banks.
"This bill not only allows for taxpayer-funded bailouts of Wall Street banks; it institutionalizes them," he said.
(For a full story on McConnell's remarks, double-click on [ID:nN13235415])
Though Republicans oppose a number of provisions in the Democrats' proposed reforms, opposition is turning to measures designed to address the problem of firms seen as too-big-to-fail because of the risks they pose to the financial system.
Republicans, in particular, oppose a measure that would allow regulators to borrow money from the Treasury -- that means taxpayers -- to help finance the seizure and dismantling of large, troubled firms.
President Barack Obama is scheduled to meet on Wednesday with congressional leaders from both parties, including McConnell and Senate Democratic Leader Harry Reid, to discuss the Democratic bill expected any day in the full Senate.
"I do not think there is a tenable position that anyone could take ... that says we don't need to fix the system, to reform the system," U.S. Treasury Secretary Timothy Geither said on Tuesday in a panel discussion.
"Look at the devastation caused by the financial crisis. Look at the damage it did to the lives of millions of Americans ... what it did to American businesses," he said.
REGULATION LITTLE CHANGED
Yet, government oversight of banks and markets has changed little more than two years since the near collapse of former Wall Street giant Bear Stearns ushered in the worst financial crisis in decades that tipped the economy into a deep recession.
The House of Representatives approved a sweeping reform bill in December. It embraced most of the many proposals Obama issued in mid-2009. But the slow-moving Senate has yet to act on a 1,336-page bill offered by Senator Christopher Dodd.
(For a Factbox on major U.S. financial regulation reform proposals, double-click on [ID:nN12191809])
The Senate banking committee that Dodd chairs approved his bill last month, but did so without any Republican support. Dodd will need some Republican backing to get his measure through the full Senate. A final vote is likely this month or next.
"It's going to be a fight," Senator Richard Durbin, the No. 2 Democrat in the chamber, said in floor remarks.
He said the financial firms that are working to block reforms are the same ones that piled up excessive risks and leverage in their "excitement and greed" during the real estate bubble that broke in 2007-2008, precipitating the crisis.
The debate in the Senate heated up as investigations revealed damaging details about the practices of financial firms leading up to the financial crisis.
Democrats are betting that, as investigations continue, bankers' already deep political unpopularity will worsen, making Republicans increasingly reluctant to stand too close to them in the reform fight ahead of November's elections.
SENATOR LEVIN BLASTS WAMU
Democratic Senator Carl Levin, chairman of an investigative subcommittee, on Tuesday accused former managers of Washington Mutual -- which was the largest U.S. savings and loan when it was seized by regulators in September 2008 -- of creating a "mortgage time bomb" in their quest for profits.
He said WaMu made hundreds of billions of dollars in shoddy loans. Many of them lacked documentation or were based on fraudulent paperwork and were packaged and sold to investors as mortgage-backed securities, Levin said at a hearing.
WaMu's former chief executive, Kerry Killinger, replied that regulators unfairly seized the thrift just as it was working its way through the crisis. JPMorgan Chase & Co <JPM.N> bought WaMu's banking operations from regulators for $1.9 billion.
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* Fed's Tarullo: Consider routine bank stress tests, double-click on [ID:nN13246137])
* CFTC energy limits could hurt small exchanges-ICE, double-click on [ID:nN13238656])
* White House invites top lawmakers to discuss bank rules, double-click on [ID:nN13246781])
* CFTC's Gensler warns on reforms exemptions, double-click on [ID:nN19131960])
(Additional reporting by Caren Bohan, Alister Bull, Glenn Somerville, Emily Kaiser, Rachelle Younglai, Dan Margolies, ((kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax))) Keywords: FINANCIAL REGULATION/
. Keywords: FINANCIAL REGULATION/
Tuesday, 13 April 2010 23:15:37RTRS [nN13258546] {C}ENDS
from Financial Regulatory Forum:
U.S. Treasury seeks to protect federal benefits – WSJ
April 14 (Reuters) - The U.S. Treasury department will release new rules on Wednesday that would prevent banks from seizing a borrower's social security to recover unpaid debt, the Wall Street Journal said.
The proposed new rules, to be published in the Federal Register, will require banks to check if the borrower has received any direct deposits of federal benefits within the past 60 days, the Journal said.
In case the borrower had received a federal benefit then the new rule would require the banks to establish a protected amount equal to the sum of the benefits deposited, the paper said.
For example, if a person had two federal benefit deposits of $1000 each, then the banks must establish a protected amount of $2000, even if the person had spent the benefits, the Journal said.
Any amount above the protected amount would be handled according to the garnishment rules of each state, the newspaper said.
Garnishment is a debt collection practice that involves a bank seizing the assets of a borrower in case the debt remains unpaid.
The U.S Treasury could not be immediately reached for comment by Reuters outside regular U.S. business hours. (Reporting by Sakthi Prasad in Bangalore ) ((sakthi.prasad@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: sakthi.prasad.reuters.com@reuters.net))
Keywords: USTREASURY/NEWRULE
Wednesday, 14 April 2010 08:44:42RTRS [nSGE63D07U] {C}ENDS
from Financial Regulatory Forum:
U.S. watchdog says mortgage modifications too slow
By Corbett B.Daly
WASHINGTON, April 14 (Reuters) - An Obama administration program to help struggling homeowners modify their mortgages is not moving fast enough to keep up with the growing number of foreclosures, a U.S. congressional watchdog said on Wednesday.
And even if borrowers are helped in the short-run, many troubled borrowers will likely end up re-defaulting on their new loan down the road, said a report released Wednesday by the Congressional Oversight Panel of the Troubled Asset Relief Program.
"The re-defaults signal the worst form of failure of the HAMP program: billions of taxpayer dollars will have been spent to delay rather than prevent foreclosures," the report said, referring to the Obama administration's $75 billion Home Affordable Modification Program.
The panel noted that 2.8 million homeowners received a foreclosure notification last year.
Weakness in the housing market and high unemployment continue to weigh on the U.S. economic recovery, though consumer confidence is recovery.
The White House announced major changes to its homeowner assistance program last month, expanding it to include incentives for borrowers who temporarily suspend payments to unemployed workers.
And they added subsidies for lenders to write-down some principal from the loan for borrowers who owe more than their home is worth.
The panel, which had advocated those measures in earlier an earlier report, praised those moves but said they are likely too late.
"Foreclosures prevented by HAMP will still likely be eclipsed by the number of actualforeclosures filed in any given year of the program's existence," the report said.
Treasury spokeswoman Meg Reilly said the program's progress has already exceeded the figures used in the report.
She noted that the HAMP program has more than 1.4 million borrowers in temporary modifications through March and 230,000 of those borrowers have had loan modifications made permanent.
That's up from about 1 million temporary modifications and 170,000 permanent modifications through February.
The administration has said it hopes to help 3 to 4 million homeowners by 2012,though the watchdog said "the goal itself seems small in comparison to the magnitude of the problem."
The report said it is too soon to say for certain how many borrowers would end up re-defaulting, though it called the existing data "worrisome."
The panel predicted Treasury would only prevent about 276,000 foreclosures, or less than 4 percent, of the 6 million loans that are behind on payments by 60 days or more through February.
The total number of loans past due by more than 60 days through March has not yet been published.
"When the total picture of HAMP is taken into account, low conversion rates plus potentially high redefault rates mean that the total number of sustainable, permanent modifications generated by HAMP will be quite limited," the report said.
(Editing by Kim Coghill)
((corbett.daly@thomsonreuters.com; +1-202-310-5487)) ((Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com
* BridgeStation: view story .134 For more information on Top News: http://topnews.reuters.com))
Keywords: USA HOUSING/MODIFICATIONS
Wednesday, 14 April 2010 05:01:13RTRS [nN13116665] {C}ENDS
from Financial Regulatory Forum:
U.S. bank chief mobbed by angry borrowers
WASHINGTON, April 13 (Reuters) - The mortgage chief of the United States' second largest bank was mobbed by angry borrowers on Tuesday after he invited customers to speak to him if they feared foreclosure of their homes.
The JPMorgan Chase & Co <JPM.N> executive was at a congressional hearing in Washington when a lawmaker asked him who mortgage borrowers could turn to if they felt his bank's employees were not helping them hold onto their homes.
"Come to me," said David Lowman, chief executive for JPMorgan Chase & Co's home mortgage business in response to the question from Massachusetts Democrat Barney Frank.
Minutes later, around 50 borrowers burst from the audience and presented Lowman with a a 6-page document alleging his bank reneged on a pledge to help struggling homeowners.
The activist who organised the protest said Lowman did not want to talk and left the hearing.
"He ran. He ran like a dog with its tail between his legs," said Bruce Marks of the Neighborhood Assistance Corporation of America (NACA), which helps homeowners avoid foreclosure. "He was scared to death because he doesn't really want to talk to homeowners."
The incident is symptomatic of frustrations among U.S. homeowners as defaults and foreclosure filings dominate the housing sector more than three years after the property bubble began to deflate.
NACA organizes events where borrowers try to get loan modifications with lenders. The group says JPMorgan signed up to the NACA program but dropped out in December.
A JPMorgan spokesman declined to comment on the complaint.
(Reporting by Corbett Daly, additional reporting by Al Yoon; writing by Andrew Hay)
((corbett.daly@thomsonreuters.com; +1-202-310-5487)) ((Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com
* BridgeStation: view story .134 For more information on Top News: http://topnews.reuters.com)) Keywords: USA HOUSING/ACTIVISTS
Wednesday, 14 April 2010 00:29:09RTRS [nN13107113] {C}ENDS
from Financial Regulatory Forum:
Ex-Washington Mutual CEO cries foul; risky loans slammed
By Dan Margolies
WASHINGTON, April 13 (Reuters) - The former chief executive of Washington Mutual said banking regulators seized it unfairly in 2008 as the Seattle-based savings and loan fell outside an inner circle of banks that were "too clubby to fail."
But the chairman of the Senate's Permanent Subcommittee on Investigations said Washington Mutual had created a "mortgage time bomb" by writing risky loans and selling them off to investors in its quest for profit.
Former WaMu CEO Kerry Killinger testified on Tuesday that, while the company suffered from rising loan losses, it was working its way through the financial crisis and would have benefited from measures announced within days of its seizure in the biggest bank failure in U.S. history.
"It was with great shock and sadness that I read of the seizure and bargain sale of Washington Mutual on Sept. 25, 2008," he said. JPMorgan Chase & Co <JPM.N> bought WaMu's banking operations from regulators for $1.9 billion.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Reuters Breakingviews [ID:nLDE63B1LD]
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Killinger, who was paid more than $100 million between 2003 and 2008, was forced out just weeks before WaMu was seized.
In October of 2008, U.S. officials announced measures including an increase to $250,000 for insured deposits and a federal guarantee of bank debt.
Killinger also complained that WaMu had been excluded in July 2008 from a list of Wall Street bank stocks protected from abusive short-selling, and was cut out of crisis discussions between Wall Street executives and policy leaders.
"For those that were part of the inner circle and were 'too clubby to fail,' the benefits were obvious," Killinger said.
But Senator Carl Levin, the chairman of the subcommittee, blasted the bank's management for ignoring warning signs that bank employees were making shoddy loans to high-risk borrowers.
Levin concluded the hearing saying Washington Mutual under Killinger became "just a conveyor belt that dropped into the stream of commerce literally hundreds of billions of dollars of mortgages that were substandard and dubious."
TIME BOMB
The Michigan Democrat said WaMu contributed to the financial crisis by selling its loans, which were packaged into securities and sold to investors.
"To keep that conveyor belt running and feed the securitization machine on Wall Street, Washington Mutual engaged in lending practices that created a mortgage time bomb," Levin said.
He told reporters on Monday that he would leave it up to the U.S. Department of Justice whether any executives at Washington Mutual should be charged with criminal wrongdoing.
A staffer on the subcommittee, asked on Tuesday if any referrals would be made by the committee to the FBI, said a decision had not been made.
Killinger maintained an easy-going demeanor even as he was confronted with internal emails urging the sale of delinquent loans to investors, and evidence that employees responsible for fraudulent loans were rewarded with paid vacations.
Levin repeatedly asked him if he was troubled by the emails. Finally, Killinger grudgingly responded, "I would have inquired more."
"Well, I guess that's progress," Levin muttered.
RISK OFFICER
James Vanasek, WaMu's chief risk officer from 1999 to 2005, told the subcommittee that the mortgage industry generally began taking on more risk ahead of financial crisis.
The dangers were "recognized by some but ignored by many," said Vanasek, who faulted a broad swath of industry players including loan originators, lenders, regulators, rating agencies and investment banks.
Vanasek said he had tried to cap the percentage of high risk and subprime loans in the thrift's portfolio but was thwarted by lower-level managers.
Regulators seized Washington Mutual less than two weeks after Lehman Brothers filed for bankruptcy and touched off a global panic that led to the freezing of credit markets and the biggest U.S. financial crisis since the Great Depression.
Washington Mutual was the largest savings and loan in the country with more than $300 billion in assets and $188 billion in deposits.
The Seattle-based thrift was a traditional home mortgage lender for more than 100 years, focusing on 30-year, fixed-rate and government-backed loans, before it decided to chase after riskier borrowers.
Washington Mutual's parent company, Washington Mutual Inc <WAMUQ.PK>, announced an agreement last month to share about $5.6 billion in tax refunds with the FDIC and JP Morgan Chase.
Its plan to exit bankruptcy court includes a rights offering to raise an undetermined amount of money to support the company, which would reorganize itself around an investment subsidiary and a mortgage reinsurer. (Reporting by Dan Margolies; Editing by Tim Dobbyn) ((dan.margolies@thomsonreuters.com, +1 202 898 8324)) Keywords: FINANCIAL WAMU/
Wednesday, 14 April 2010 00:08:47RTRS [nN13244066] {C}ENDS
from Financial Regulatory Forum:
Exchanges to Washington: don’t flood us with swaps
By Jonathan Spicer
NEW YORK, April 13 (Reuters) - Big exchanges and clearinghouses are key planks in the U.S. government's plan to revamp derivatives markets, but the fierce competitors warned in near-unison on Tuesday that lawmakers should not recklessly force more products through them than is appropriate.
A day before a White House meeting on financial regulatory reform, officials from CME Group Inc <CME.O>, NYSE Euronext <NYX.N> and others that stand to gain from handling more over-the-counter swaps said the political push was nonetheless a big concern.
"It's a fear for all of us that operate clearinghouses that we'll now be told how to manage risk when we've proven again and again through some of the worst financial crises ... we can manage that risk flawlessly," Derek Sammann, managing director of CME's financial products and services unit, told Reuters.
"Why does the government feel it can do that better when we're spending the bulk of our time educating those very legislators as to what it is we do, and how we do it?" he said on the sidelines of a Futures Industry Association conference.
"I think you risk overreaching and actually creating risk where there was none before."
Complicated derivatives, such as credit default swaps, are seen as a major cause of the 2007-2009 financial crisis. Lawmakers and regulators internationally want more visibility into the private $450 trillion market, and proposed running the "standardized" products through exchanges and clearinghouses.
A bipartisan draft bill fell through last month in the U.S. Senate Banking Committee, while a parallel effort in the Agriculture Committee has been delayed repeatedly. The Senate may soon tackle a draft Banking Committee bill that would push as many swaps as possible through exchanges and clearinghouses. [ID:nN13250708]
Clearinghouses stand between all parties in a market, guaranteeing their obligations in the case of a default.
Exchange operators have raced to launch clearinghouses ahead of any new laws, often signing on big dealers as revenue-sharing members in order to attract trading. They have warned in the past that not all OTC products are suitable for clearing, and that even fewer are suitable for exchange-trading.
"The two issues that were at the core of the financial crisis were lack of transparency and lack of central clearing," Thomas Callahan, head of NYSE Euronext's U.S. futures business, told the conference. "What you're seeing is all sorts of people with various agendas coming in and piling on these issues, and certainly some of these issues could be horrifically disruptive to our business."
Thomas Farley, president of IntercontinentalExchange Inc's <ICE.N> U.S. futures unit, said forced clearing of swaps is his biggest concern of several possible regulatory changes including forced swaps trading; commodity market position limits; and the debate over freely moving positions between exchanges. [ID:nN13140447]
"All those give us some pause in part because we feel it's coming a bit from an anti-bank bias," he told the conference.
Farley likened the overall reform push to too many doctors performing too many operations on an injured patient:
"You could have just solved that dislocated shoulder problem, in the case of financial reform, really with trade repositories and some minimal systemic risk oversight," he said. "We in this room are now the patient getting the 14 unnecessary surgeries -- and by the way, those surgeries are being done with a hatchet and not a scalpel." (Reporting by Jonathan Spicer, editing by Matthew Lewis) ((jonathan.spicer@thomsonreuters.com; + 1 646-223-6253; Reuters Messaging: jonathan.spicer.reuters.com@reuters.net))
Keywords: REGULATION EXCHANGES/SWAPS
Tuesday, 13 April 2010 22:35:11RTRS [nN13255173] {C}ENDS
from Financial Regulatory Forum:
US Senate panel: high-risk loans brought down WaMu
By Dan Margolies
WASHINGTON, April 12 (Reuters) - Despite fraud rates of over 58 percent and 83 percent at two of Washington Mutual Bank's top-producing loan production offices in 2005, the bank did nothing to address the problem, according to findings released Monday by a congressional panel.
The loans were made after the the bank, a subsidiary of now bankrupt Washington Mutual Inc <WAMUQ.PK>, decided in 2003 to focus on high-risk mortgages because they were more profitable, the subcommittee found.
The strategy, endorsed by Washington Mutual Chief Executive Kerry Killinger, led the bank and an affiliate, Long Beach Mortgage Corp, to securitize more than $77 billion in subprime home loans and billions more in other high-risk mortgages.
The focus on high-risk loans eventually contributed to WaMu's failure in September 2008.
Killinger will be among the former Washington Mutual executives testifying before the Senate Permanent Subcommittee on Investigations on Tuesday. Washington Mutual is the biggest bank failure in U.S. history.
"Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river," Senator Carl Levin, chairman of the subcommittee, said at a briefing for reporters on Monday.
"Using a toxic mix of high risk lending, lax controls, and destructive compensation policies, Washington Mutual flooded the market with shoddy loans and securities that went bad," the Michigan Democrat said.
Seattle-based Washington Mutual was the nation's biggest thrift with more than $300 billion in assets and $188 billion in deposits before regulators seized it and sold the banking operations to JPMorgan Chase & Co <JPM.N>.
Washington Mutual's parent company is in bankruptcy proceedings and may have a second life thanks to billions of dollars of tax refunds owed to it. [ID:nN29104131]
The failure occurred a couple of weeks after investment bank Lehman Brothers declared bankruptcy, triggering a global financial panic that led to the freezing of credit markets and the biggest financial crisis in the United States since the Great Depression.
Levin's subcommittee said it reviewed millions of pages of documents and conducted more than 100 interviews and depositions as part of its investigation, which started in November 2008.
The subcommittee plans to hold four hearings to address the roles played in the crisis by high-risk mortgages, regulators, credit rating agencies and Wall Street investment banks.
The hearing on Tuesday will focus on Washington Mutual itself, a once traditional lending institution that had been around for more than a century and focused on fixed-rate and government-backed loans before shifting to higher-risk home loans in 2003.
Among those scheduled to testify are Killinger, whom the subcommittee said was paid $103.2 million between 2003 and 2008; Stephen Rotella, the bank's former president and chief operating officer; David Schneider, the former president of Washington Mutual's home loan division; and two of the thrift's former chief risk officers.
The subcommittee found that Washington Mutual's pay policies rewarded loan officers and processors for originating high volumes of high interest-rate loans, paid extra to loan officers who overcharged or imposed stiff prepayment penalties on borrowers, and granted top executives millions of dollars in compensation even when Washington Mutual's lending strategy put the bank at financial risk.
"Volume was king," Levin said.
"IT IS UGLY"
Washington Mutual and the Long Beach unit originated billions of dollars in subprime and other high-risk loans through their own loan offices and third-party mortgage brokers. Washington Mutual also made bulk purchases from other lenders.
The thrift retained some loans on its books and sold the rest to Wall Street, usually after bundling them into securities, or to the government-sponsored home finance companies Fannie Mae <FNM.N> and Freddie Mac <FRE.N>.
The high fraud rates at two of Washington Mutual's top producing loan offices, both in southern California, were uncovered during a 2005 internal review by Washington Mutual, according to the subcommittee's findings. The review found that the fraud, which involved falsified documents, was caused mainly by employees circumventing bank policies.
Yet the two loan officers responsible for the loans continued working for the bank until 2008 and received prizes for their loan production, the subcommittee found.
Washington Mutual's own executives issued warnings as early as 2003 about lending and securitization deficiencies at the thrift and at Long Beach, according to documents obtained by the subcommittee.
"Delinquencies are up 140 percent and foreclosures close to 70 percent," Rotella wrote in an April 2006 e-mail cited by the subcommittee. "... It is ugly."
Washington Mutual shut down Long Beach in mid-2007 and took over its subprime operations. A Long Beach employee was subsequently indicted for taking kickbacks to process fraudulent and substandard loans.
The Puget Sound Business Journal reported on Monday that Killinger plans to tell the subcommittee that the bank could have survived and that regulators seized it precipitously. (Reporting by Dan Margolies; Editing by Tim Dobbyn) ((dan.margolies@thomsonreuters.com, +1 202 898 8324)) Keywords: WAMU/SENATE
Monday, 12 April 2010 22:15:47RTRS [nN12207084] {C}ENDS
