Financial Regulatory Forum

from Christopher Whalen:

Did the FDIC really kill the repo market?

Back in April 2011, Jim Bianco penned a commentary, “Why The Federal Reserve May Have A Hard Time Raising Rates.” He argued that the increase in the FDIC insurance assessment rate for large banks adds to bank funding costs, and thus offsets the impact of Fed ease. Bianco and others infer a roughly 15bp tax or “wedge” on money market assets is created by the FDIC assessment rule.  By way of reference, the Fed’s target band for fed funds is 0 to 25bp but has been at low end of this range for months.

David Kotok of Cumberland Advisors subsequently wrote that the FDIC tax is offsetting the 25 bp paid to banks on Fed reserves and is effectively forcing U.S. banks out of the market.  (See my paper published by Networks Financial Institute at ISU, “What is a Core Deposit and Why Does It Matter?”, which goes into the changes to the deposit insurance made by the Dodd-Frank legislation.)

Let’s agree with the central contention of the “Bianco-Kotok Hypothesis” (or BKH), namely that the new FDIC assessment is affecting the money markets. But is this change the most compelling explanation for the alarming exodus of banks from the institutional credit markets?  Bianco’s research illustrates the collapse of yields in the securities repurchase (or repo) market since April, when the FDIC implemented the new deposit insurance assessment rules. He talks about the task the Fed faces to raise rates given the FDIC assessment:

“If the Federal Reserve attempts to overcome this FDIC fee by raising [interest earned on excess reserves] IOER from 025% to 0.75% or to 1.00%, will the market  understand? More than likely such a move would be seen as an extreme tightening.” Indeed, but would we even be talking about the FDIC assessment if Fed funds were trading at 1%?

The new FDIC assessment regime does not raise much more money than the old rule, but the burden is now carried more proportionately by the big banks.  This pound of flesh was extracted from Congress by the community bankers to win approval of Dodd-Frank.  The other was a future “special assessment” by FDIC on the largest banks to push the insurance fund well above pre-crisis levels. Stay tuned on that count.

from Tales from the Trail:

The wishful thinking behind a repatriation tax holiday

By Ryan McCarthy

The opinions expressed are his own.

Big U.S. multinationals have a strange sense of timing: apparently, now is the ideal time to fight for a tax holiday. The New York Times on Monday had an in-depth look at the topic of a repatriation tax holiday, with lovely charts and a helpful video detailing the myriad ways corporations cut their tax bills by stashing profits overseas. Given the clamoring about lack of demand in the economy, the deficit talks and swollen corporate cash holdings, the lobbying push seems poorly timed at best.

New York Times' David Kocieniewski is rightly skeptical of the effort that’s currently backed by even tech titans like Apple and Google. He ferrets out an NBER study that excoriates the results of an abysmal 2004 dalliance with a repatriation tax holiday, which the study finds, led to little actual hiring and investment in the U.S. The appeal of a repatriation tax holiday is that large U.S.-based corporations could temporarily see much of their taxable income fall to 5.25 percent -- the rate often paid through overseas subsidiaries -- from 35 percent, the U.S. corporate rate. In theory, this windfall would temporarily prevent corporations from stashing profits overseas, bring in tax revenue, create jobs and spur investment.

And while Kocieniewski spends nearly 2,000 words on the issue, he doesn't mention specifics of the actual legislation in play, which make the latest tax repatriation push seem just as unpromising as its predecessor.

A letter to JPMorgan: Dimon is wrong -COLUMN

By Anat Admati, guest columnist. The views expressed are her own

PALO ALTO, California, June 15 (Thomson Reuters Accelus) -

Dear JPMorgan Chase Directors

I own some JPMorgan Chase (JPM) shares through mutual funds in my retirement account. I have read Mr. Dimon’s recent letter to shareholders and some of his public comments. I write to urge you to reconsider JPM’s actions related to capital regulation. For the overall economy, as well as for JPM, these actions are misguided. (more…)

Fabrice Tourre dodged one bullet, at least

By Alison Frankel

The views expressed are her own.

It’s too bad for Fabrice Tourre, the former Goldman Sachs securities trader, that the portfolio manager on Goldman’s notorious ABACUS investment vehicle, isn’t a foreign company. If it were, Tourre might have entirely escaped Securities and Exchange Commission charges that he engaged in securities fraud in structuring and marketing the ABACUS synthetic collateralized debt obligation.

Under a June 10 ruling by Manhattan federal district court judge Barbara Jones, Tourre is off the hook for allegedly defrauding ABACUS investors IKB and ABN Amro because they’re foreign companies that dealt with overseas-based Goldman entities. So at least for those companies, Tourre’s actions fall outside the purview of U.S. courts under the U.S. Supreme Court’s 2010 Morrison v. National Australia Bank opinion. Here’s Judge Jones’s 41-page opinion—the first in which a federal district court judge has applied Morrison in an SEC enforcement case–and here’s the Reuters story on the ruling.

Tourre still has lots to worry about. In an odd, split-the-baby conclusion, Judge Jones drew a distinction between Goldman’s “offers” and “sales” of ABACUS securities, and ruled that, despite Morrison, the SEC can proceed with certain claims involving IKB and ABN Amro under the Exchange Act. Tourre’s lawyers at Allen & Overy will undoubtedly challenge Judge Jones’s novel interpretation on that point. More predictably, Judge Jones ruled that Morrison doesn’t apply to the SEC’s allegations that Tourre deceived the U.S.-based ACA Management, which served as the ABACUS portfolio selection agent, and ACA Capital, an investor, for failing to disclose that the hedge fund Paulson & Co., had been involved in picking the securities underlying ABACUS and was betting on the CDO to tank. Tourre’s lawyers have said they’re confident they’ll be able to defend those allegations.

Firms must prepare for UK approved persons grilling

Joanne Wallen

LONDON, May 31 (ThomsonReuters Accelus)

Corporate executives and directors in Britain must be prepared for increasingly rigorous interviews by the Financial Services Authority to be accepted as “approved persons” eligible to hold positions of significant responsibility in their firms.

Nadia Swann, a partner in Linklaters’ financial regulation group, told a briefing that the Financial Services Authority’s interview process had become more formal after the government-commissionerd Walker Review on Corporate Governance in late 2009 recommended an overhaul of the FSA’s approved persons oversight. Now there is an increased focus on the competence of approved persons and those in significant influence functions.

The first to be called to the FSA panel for interviews hadn’t expected the grilling, Swann said. Interviewees now face detailed practical questions to assess their competence. Questions included: “What have you failed to achieve for this company?” or “What are your greatest weaknesses?” and even “What are you personal development plans?”

Global regulators raise fears over exchange traded funds

By Christopher Elias

LONDON, May 24 (Business Law Currents) Promising low tax and returns from even the most unlikely of assets, the market in exchange traded funds (ETFs) shows no sign of slowing down. Fears of systemic risk are, however, causing some global regulators to rethink the growth of synthetic ETFs.

With ETFs having all the hallmarks of a troubling financial innovation, regulators are raising concerns over the growth of exchange traded funds and their ability to have unintended consequences for the financial industry. As ETFs are capable of taking the form of derivatives on derivatives, a comparison with collateralised debt obligations (CDOs) is not unwarranted, leading many to conclude that exchange traded funds might have the same explosive potential as CDOs had in the subprime crisis.

(more…)

Foreign private equity braces for rough ride to China -ANALYSIS

Helen H. Chan

HONG KONG, May 20 (Business Law Currents) Foreign-invested private equity firms are rallying in Shanghai, eagerly awaiting the results of a second round of applications for the Qualified Foreign Limited Partners (QFLP) scheme. In recent weeks, large international buyout firms such as Blackstone and the Carlyle Group have rejoiced over being some of the first to be awarded a QFLP license.

Although the QFLP seems to have gone one step further in liberalizing private equity deals between foreign investors and domestic targets, perks of the scheme come with a tangle of very sticky red tape. Recently, financial authorities in Shanghai have published several guidelines to facilitate the second round of approvals for QFLP licenses. Aiming to aid domestic entrepreneurial efforts, the newly-issued requirements appear to favor applicants with connections to government-backed funds and homegrown Chinese enterprises.

Established in early 2011, the QFLP permits licensed non-Chinese private equity firms to convert foreign currency into renminbi for onshore investment in China. Once approved, a firm may convert foreign currency, up to a quota permitted by its license, without approval by the State Administration of Foreign Exchange (SAFE).

The Rajaratnam Verdict: Tip of the Iceberg – ANALYSIS

NEW YORK, May 18 (Business Law Currents) – The U.S. Securities and Exchange Commission’s trophy case gets a new addition with the conviction of Raj Rajaratnam, but shelf room is still available.

For all its publicity, the Rajaratnam case was merely one of many; since late 2009, insider trading probes related to Galleon have resulted in 13 additional guilty pleas. In recent months, some of the country’s most prestigious names have been linked to what appears to be a widening net of scandals. Fallout from these and others yet to be named should continue to generate headlines for the foreseeable future. (more…)

Private placements and conflicts of interest: do consenting adults need more protection? – COLUMN

By Helen Parry, Thomson Reuters Accelus regulatory intelligence expert. The views expressed are her own.

LONDON, May 16 (Thomson Reuters Accelus) -

“The first private placement memorandum disclosed the possibility that new investors may help pay distributions to old investors but this was not a risk; it was a certainty.” (US Securities and Exchange Commission v Bravata 2011 WL 339458.)

“This disclosure indicates that GSI may invest in securities that are ‘adverse to’ the Hudson investments … Goldman had already determined to keep 100 per cent of the short side of the Hudson CDO.” U.S.  Senate Investigations Subcommittee Levin-Coburn Report on the Financial Crisis.

COLUMN: British bankers give up payment-protection appeal – the implications

By Adam Samuel, Thomson Reuters Accelus contributor. The opinions expressed are his own.

LONDON, May 13 (Thomson Reuters Accelus) – The British Bankers’ Association left it until the day before the last available one to appeal against its defeat in the Administrative Court, to throw in the towel in its payment protection insurance judicial review application.

Having lost on every point in front of Mr Justice Ouseley, the BBA’s undignified judicial review challenge to both the Financial Services Authority and the Financial Ombudsman Service’s material on PPI complaint handling is over.

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