Reuters blog archive

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) ((; + 1 646-223-6253; Reuters Messaging:
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.
   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) ((, +1 202 898 8324)) Keywords: WAMU/SENATE
Monday, 12 April 2010 22:15:47RTRS [nN12207084] {C}ENDS

from Financial Regulatory Forum:

US watchdogs may still get ‘Volcker rule’-consultant

    FRANKFURT, April 12 (Reuters) - U.S. banking supervisors could get indirect powers to ban proprietary trading by banks even if the "Volcker rule" is not in the financial reform bill, a banking consultant with close contact to decision-makers said.
   White House economic adviser Paul Volcker has said he hoped some form of proprietary trading ban is included in a final draft of a financial reform bill the Obama administration is urging Congress to pass to tighten bank and capital market oversight. [ID:nN06238725]
   Banks do not want the Volcker rule included in the bill, saying it would restrict their ability to make profits.
   "The latest idea is that the Volcker rule will be delegated to the relevant supervisory authorities," said Geoffrey Bell, executive secretary of the Group of Thirty, an informal forum of some of the world's top economic and monetary policymakers, including Volcker.
   "It will be in the bill, through an indirect approach through the regulators," Bell said on Monday.
   Regulators such as the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp would have the power to impose a ban on proprietary trading if they wished to do so, Bell told a briefing of journalists.
   Bell said it was still unclear what would be the final form of the Volcker rule, which would also ban banks from the hedge fund business and limit their future growth.
   "If there is another banking crisis tomorrow ... it might reaffirm the more restrictive approach," he said.
   The U.S. House of Representatives passed a financial reform bill last year that does not include an explicit ban, while a Senate version also lacks an outright ban on proprietary trading but instead instructs regulators to study the issue.
   Volcker, a former Federal Reserve chairman, said last week he thought a bill could be ready for President Obama's signature shortly before or after the Congressional recess in August.
   "Volcker (himself) thinks that there may well be some variant of the Volcker rules," Bell said.
   "If it isn't there directly, it is going to be there indirectly. Of that, I am absolutely certain." (Reporting by Jonathan Gould; editing by Karen Foster) ((Reuters Messaging:; +49 69 7565 1242))
Monday, 12 April 2010 17:44:45RTRS [nLDE63B1KY] {C}ENDS

from Financial Regulatory Forum:

US’s Wolin defends fight for financial overhaul

USA/   WASHINGTON, April 12 (Reuters) - The Obama administration will resist any efforts to weaken a "comprehensive and strong" change to the way the U.S. financial system is regulated that lawmakers are now debating, Deputy Treasury Secretary Neal Wolin said on Monday.
   "We will fight hard against any effort to weaken that legislation, and we will work to strengthen it further where we can," Wolin said in a speech to the Council of Institutional Investors.
   The former insurance company executive said he expects the Senate "soon" to take up its version of the measure, which he called "long overdue."
   Wolin said the U.S. is now "on the path to recovery," but policymakers should not be complacent and avoid fixing a "flawed, outdated regulatory system."
   "We cannot afford to let the memory of the (financial) crisis fade without taking action," Wolin said.
   Wolin's speech is one of a number of high-profile events the administration has scheduled on financial regulation in the wake of congressional passage of comprehensive changes to the U.S. healthcare system.
   The administration has repeatedly said changing the U.S. financial regulatory regime is now the top legislative priority for the administration, though the recent retirement of U.S. Supreme Court Justice John Paul Stevens could complicate those efforts.
   Debate over Stevens' replacement is likely to consume a substantial amount of the oxygen of official Washington in the coming months.
   (Reporting Rachelle Younglai and Corbett B. Daly; Editing by Chizu Nomiyama)
   ((; +1-202-898-8395; Reuters Messaging:
   ((Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit
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Monday, 12 April 2010 15:35:49RTRS [nN12186326] {C}ENDS

from Financial Regulatory Forum:

US bailout cost seen lower at $89 bln -WSJ

    NEW YORK, April 11 (Reuters) - The U.S. government's bailout of the financial system is expected to cost $89 billion, much lower than earlier projections, the Wall Street Journal reported on Sunday, citing Treasury Department officials.
   The Journal also said that Treasury officials were looking into ways to disentangle the government from its nearly 80 percent stake in American International Group Inc <AIG.N>.
   The officials are hopeful that the bailed-out insurer could be on its own within a year, the paper said.
   Last month, Reuters reported that the government was likely to follow an exit strategy similar to what it had used with Citigroup Inc <C.N> to untangle itself from AIG. [ID:nN01244525]
   In April last year, U.S. congressional budget analysts had estimated the net cost to taxpayers for the government's financial rescue program to be $356 billion. [ID:nN04502401]
   The $89 billion estimate is also 42 percent less than the savings-and-loan crisis, the paper said.
   The figure, however, does not include losses at Fannie Mae <FNM.N> and Freddie Mac <FRE.N>, which are projected to be $370 billion through 2020, the Journal said.
   The officials see a profit of $8 billion from the Treasury's investment of $245 billion in banks, the paper said.
   A Treasury official did not have immediate comment. (Reporting by Paritosh Bansal; Editing by Diane Craft) (( +1 646 223 6113; Reuters Messaging: Keywords: FINANCIAL/BAILOUT
Monday, 12 April 2010 02:01:01RTRS [nN11164019] {C}ENDS

from Financial Regulatory Forum:

Bernanke defends Fed small bank supervision role

   By Mark Felsenthal
   WASHINGTON, March 17 (Reuters) - Top U.S. central bankers present and past on Wednesday joined forces against a plan to strip the Fed of its oversight of smaller banks, saying the knowledge it gains from that role is vital to monetary policy.
   U.S. Federal Reserve Chairman Ben Bernanke urged lawmakers to reconsider an element of a Senate regulatory overhaul bill that would shift supervision of thousands of banks to other regulators.
   "The insights provided by our role in supervising a range of banks, including community banks, significantly increase our effectiveness in making monetary policy and fostering financial stability," he told the House of Representatives Financial Services Committee.
   Former Fed Chairman Paul Volcker joined Bernanke in defending the Fed's role in supervising smaller firms.
   "The Fed's regional roots would be weaker and a useful source of information lost," he said. Volcker is now an economic adviser to the Obama White House.
   Lawmakers have heaped criticism on the institution for oversight lapses that contributed to the worst financial crisis in generations. Congressional proposals to overhaul financial supervision could redistribute regulatory powers among different regulatory agencies.
   Senate Banking Committee Chairman Christopher Dodd, who has called the Fed's regulatory performance in the run-up to the crisis an "abysmal failure," proposed in November stripping the central bank of its bank oversight powers.
   Revised legislation he unveiled on Monday would allow the Fed to oversee banks and important financial firms with assets greater than $50 billion.
   However, the measure would pull the Fed out of supervision of more than 5,000 smaller bank holding companies and state-chartered banks, handing those responsibilities to the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency. For more see [ID:nN15221993].
   Bernanke argued that small banks provide the Fed with an important window into financial conditions throughout the nation's economy.
   "We are quite concerned by proposals to make the Fed a regulator only of the biggest banks, making us essentially the 'too big to fail' regulator," he said. "We want to have a connection to Main Street as well as to Wall Street."
   The 11 regional Federal Reserve Banks outside Washington and New York would likely see their responsibilities shrink if the Fed no longer oversees smaller banks.[ID:nLDE62G1EZ].
   Regional Fed banks have come under fire because many of their directors are chosen by banks, leading to charges of regulatory conflicts of interest. Bernanke acknowledged the perception exists but said it is not grounded in reality.
   However, he said the Fed would be open to changes in the way regional Fed bank boards are selected.
   Public resentment at the government's bailout of large financial institutions and anger over a deep recession have helped make regulatory reform a top priority for the Obama administration and lawmakers in a midterm election year.
   Passage of financial reform legislation is uncertain in the Senate where many Republicans remain opposed to the measure Dodd has unveiled.
   The House has passed a bill that would leave the Fed in charge of supervising smaller banks.
   But the House measure contains a provision which the Fed strongly objects to that would allow Congress to review the Fed's monetary policy decisions -- a provision that is not in Dodd's proposed bill.
   Financial Services Committee Chairman Barney Frank said he expects lawmakers to meet to meld the House and Senate bills in April or early May.
  For a text of Bernanke's prepared testimony, see: [ID:nN17148192] ((For more stories on Fed policy, please double click on [FED/AHEAD])) (Reporting by Mark Felsenthal; Editing by Kenneth Barry) ((; Tel: +1 202 898 8329; Reuters Messaging: Keywords: FINANCIAL REGULATION/FED 
Wednesday, 17 March 2010 23:52:08RTRS [nN17144210] {C}ENDS

from Financial Regulatory Forum:

US Senate panel seen approving financial reform

   By Kevin Drawbaugh and Karey Wutkowski
    WASHINGTON, March 16 (Reuters) - The new financial reform bill introduced in the U.S. Senate will likely be approved at the committee level next week, but its shape could change substantially once it comes before the full Senate and winning Republican support comes into play, analysts said on Tuesday.
   The 1,336-page measure leaves major issues still to be worked out, likely on the Senate floor and beyond, including regulating over-the-counter derivatives, applying the "Volcker rule" on curbing risky trading by banks, and imposing stricter bank capital and liquidity standards.
   The bill introduced by Senate Banking Committee Chairman Christopher Dodd, a Democrat, on Monday faces a reasonably smooth road at the committee level, where Democrats hold enough votes to pass the measure without any Republican support.
   But once it advances to the full Senate, the arithmetic changes, with Democrats only controlling 59 of the 60 votes that will be needed to overcome procedural roadblocks that sure to be thrown up by Republicans.
   "We caution the bill is currently without Republican support ... so we expect the bill to undergo significant changes over the next month," said Brian Gardner, an analyst at investment firm Keefe Bruyette & Woods. He expects the bill to be passed by the banking committee next week.
   Dodd told MSNBC that Congress needs to fast-track reform, despite Republican pleas to slow down. He said Congress should not adjourn for a two-week recess on March 26 without acting.
   "We really can't allow this Congress to adjourn without addressing these basic issues," said Dodd, among those concerned that lawmakers will soon become too distracted by the coming November elections to act on major legislation.
   Dodd, who is not seeking reelection in November, released his bill on Monday after marathon talks with Republicans failed to produce a bipartisan deal on proposals for the most sweeping overhaul of bank and capital market oversight since the 1930s.
   The committee will convene on March 22 to debate and amend the bill in a working session known as a mark-up. Dodd hopes the process can be completed within a week.
   Democrats hold 13 committee seats, the Republicans have 10. The bill can win passage in committee with 12 votes.
   Dodd on Tuesday indicated optimism on the bill, but acknowledged that there is work yet to be done.
   "We've made a lot of progress, the bill reflects that," he told reporters in the Capitol. "Some Republicans have indicated we're 80 or 90 percent agreed. I think it's a little more optimistic than I would place it.
   "We think we have consensus on the committee. You never really know that until you get into the markup," he added.
   Working closely with bank lobbyists, Republicans have fought for months to weaken or block regulatory reforms since President Barack Obama's original mid-2009 proposals.
   The U.S. House of Representatives in December approved most of Obama's package, but without a single Republican vote.
   On Tuesday, almost two years since the near-collapse of former Wall Street giant Bear Stearns ushered in the worst financial crisis in generations, Republicans were pushing Dodd to put the brakes on the banking committee's timetable.
   A one-week deadline for committee passage is "way too quick," said Republican Senator Bob Corker, who had tried but failed for weeks to reach a bipartisan deal with Dodd.
   Corker was optimistic, however, about chances of Congress approving a reform bill this year. "The odds are very high, and I think there are people on both sides of the aisle that actually want to see a bipartisan bill," he said on CNBC.
   The bill unveiled on Monday serves as a placeholder, Dodd told CNBC, noting that a proposed government watchdog for financial consumer products and increased shareholder rights are two issues "still in controversy."
   The bill repeats language first proposed by Dodd in November to crack down on the $450-trillion over-the-counter derivatives market. Risky derivatives instruments such as credit default swaps, a type of insurance used by bondholders, have been blamed for helping to cause the financial crisis.
   A compromise proposal being worked on by two other senators, Democrat Jack Reed and Republican Judd Gregg, is expected eventually to replace what is in the bill now.
   Treasury Secretary Timothy Geithner said on Fox Business Network on Tuesday that he supports changing Federal Reserve governance to eliminate any perception of undue influence by banks. Dodd has proposed making the president of the New York Federal Reserve a presidential appointee.
   The New York Fed acts as the U.S. central bank's arm on Wall Street, implementing monetary policy and regulating most of the biggest U.S. banks. Its president is currently chosen by a nine-member board of directors that includes heads of banks it regulates.
    Dodd also proposes enforcing the "Volcker rule" -- first introduced by Obama early this year and named after White House economic adviser Paul Volcker -- that would curb proprietary trading at banks and force them out of the hedge fund business. No rule, however, could be imposed until a study is done by a proposed council to oversee systemic financial risk.
   "This seems like it is less than a total ban and it is a point that will need to be clarified before the committee votes," said Jaret Seiberg, an analyst at Concept Capital.
   The bill also calls for stricter bank capital and liquidity standards, but they are not clearly defined. The details will depend on the efforts of international banking supervisors tasked with developing new standards.
   Both Democrats and Republicans seem to agree on other issues, such as forming the new systemic risk council and putting in place a new process for dealing with large financial firms that get into trouble.
   With that as a backdrop, Dodd is likely to ram his bill through the banking committee next week, possibly with no Republicans voting in favor it, Seiberg said.
   "Once the committee votes, the real negotiations will start," he said. (Additional reporting by David Morgan, Christopher Doering, Mark Felsenthal and Glenn Somerville; Editing by Leslie Adler) ((, +1 202 898 8390, +1 202 488 3459 (fax))) Keywords: FINANCIAL REGULATION/ 
Tuesday, 16 March 2010 22:30:25RTRS [nN16227570] {C}ENDS

from Financial Regulatory Forum:

Wachovia in talks with U.S. to settle probe-WSJ

   March 15 (Reuters) - The Wachovia Bank unit of Wells Fargo & Co <WFC.N> is in talks with the U.S. Justice Department to settle complaints relating to the alleged failure in bank controls that enabled Mexican exchange houses to launder drug money, the Wall Street Journal said, citing people familiar with the situation.
   A settlement could come within weeks, the people told the paper. It is not clear whether cash payment will be part of the settlement, the newspaper said.
   In a statement, Wachovia said it is cooperating with the probe, which concerns matters predating the bank's takeover by Wells Fargo. It said it is "committed to maintaining compliant and effective anti-money laundering policies and practices, and a strong compliance and risk management culture."
   The U.S. attorney's office in Miami began the probe about three years ago, and has focused on the alleged role a Wachovia unit played in processing illegal money transfers for the exchange houses, the newspaper said, citing court documents and people familiar with the matter.
   The exchange houses dot the U.S.-Mexican border and serve as a hub in the global remittance business that allow U.S. immigrants to send money back to Latin America to help relatives, according to the newspaper.
   However, Federal officials also have identified the money transfer business as a way for drug traffickers to move cash around, the newspaper said.
   In an annual filing with the U.S. Securities and Exchange Commission on Feb. 26, Wells Fargo said it "is engaged in discussions to resolve this matter by paying penalties and entering into agreements concerning future conduct." (Reporting by Sakthi Prasad in Bangalore; Editing by Derek Caney and Richard Chang) ((; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: Keywords: WACHOVIA/USDOJ 
Monday, 15 March 2010 23:06:36RTRS [nN15218444] {C}ENDS

from Financial Regulatory Forum:

CFTC’s Gensler says unconvinced about CDS ban

    BRUSSELS, March 16 (Reuters) - The derivatives market remains a "dark ocean" that needs more transparency but it was unclear if a ban on credit default swap trading would work in practice, a top U.S. regulator said on Tuesday.
   "I am not sure how an outright ban would work mechanically," Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, told the European Parliament.
   An outright ban would be difficult to police and the answer was greater transparency and supervisory powers to set position limits, Gensler added.
   European Union finance ministers, also meeting in Brussels on Tuesday, were due to discuss calls from Greece to crack down on so-called naked selling of CDS contracts which it blamed for amplifying its debt woes. (Writing by Huw Jones, editing by Mike Peacock) ((Reuters messaging:; + 44 207 542 3326;
Tuesday, 16 March 2010 09:00:08RTRS [nLDE62F0FJ] {C}ENDS