MBIA Inc (MBI)

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Risk Board, Asset-Backed Bonds, SEC: Compliance
Carla Main
Jan 21, 2011

The European Systemic Risk Board, Europe’s new 65-member risk watchdog, met for the first time in Frankfurt yesterday amid economists’ and analysts’ doubts about how well it could avert the region’s next financial crisis.

The ESRB, which aims to identify and warn of brewing risks in the financial system, may fail to prevent future imbalances as it doesn’t have any legal power to enforce action, according to economists at ING Group, Barclays Capital and ABN Amro.

The European Union is trying to avoid a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. and resulted in European governments setting aside more than $5 trillion to support banks. Part of a wider regulatory overhaul, the ESRB is similar to the Financial Stability Oversight Council in the U.S.

The ESRB is chaired by European Central Bank President Jean-Claude Trichet, with Bank of England Governor Mervyn King acting as vice chairman.

Trichet said at a joint press conference with King in Frankfurt yesterday that while the board can only do as much as the legislation asks it to, it has “a lot of moral authority” and will employ a strategy of “comply or explain.”

It can pass on matters to the heads of European governments if its warnings aren’t heeded.

Some analysts say the ESRB’s advice will be hard to ignore. While the body will monitor macro-prudential risks, it may turn its attention to single institutions deemed systemically important. It has yet to identify those institutions or say what methodology it will use in its risk analysis.



Compliance Policy

Dodd-Frank Spurs Hundreds of Regulations, Increased Lobbying

Federal agencies are now writing at least 330 new rules governing everything from derivatives trading to the mortgage industry, implementing the broad outlines established by the Dodd-Frank law in July.

Decisions being made at the Securities and Exchange Commission, the Federal Reserve, and other agencies will not just ordain how companies must act. They also will determine which ones are dealt into moneymaking opportunities created by Dodd-Frank -- and which are shut out.

In addition to writing the Dodd-Frank rules this year, regulators will launch 122 oversight panels and offices required by the law, according to an analysis by Bloomberg Government. They range from a federal insurance office at the Treasury Dept. to an office overseeing credit ratings at the SEC. As these entities are formed and staffed, they will provide businesses with opportunities to influence the rules controlling their industries.

Financial firms such as Wells Fargo & Co., one of the nation’s largest mortgage lenders, are already attempting to use the new regulatory system to gain a competitive advantage.

Regulators, who face a July deadline for writing many of the rules, are getting some political pressure to slow down. Republicans regained a majority in the House of Representatives this year and have vowed to repeal some Dodd-Frank provisions or cut funding for regulators such as the SEC.

Their power to do that will be limited because Democrats still control the White House and the Senate.



Fed Abandons Plan to Curb Borrower Rights to Rescind Mortgages

The Federal Reserve Board abandoned plans to curb homeowners’ right to invalidate loans based on flawed documents.

Leonard Chanin, the deputy director of the Fed’s division of consumer and community affairs, told a meeting of the American Bar Association on Jan. 10 in Naples, Florida, that the Fed would hold off on changes to borrowers’ “right of rescission.” Instead, he said, the new Bureau of Consumer Financial Protection would assume responsibility for the issue later this year, according to two people present at the meeting.

Jeffrey Naimon, an attorney with the law firm BuckleySandler LLP in Washington, said Chanin left little doubt the Fed wouldn’t move any further with the rule, which it proposed in September. He described Chanin’s statement as an “announcement.”

Fed spokeswoman Susan Stawick declined a request for comment by e-mail.

The proposal to revoke the rescission right, which comes from the Truth in Lending Law, drew a vociferous response from consumer groups, which charged that the Fed was taking away one of the few tools borrowers can use to slow down or halt unfair foreclosures.

The Fed currently writes regulations related to the law. This power is scheduled to shift to the consumer bureau in July.

FSA Studying Aid for Japan Firms Facing Yen Swap Loss

Japan’s Financial Services Agency said it is examining ways to help small businesses cope with losses on foreign-exchange derivatives, after the yen climbed 15 percent against the dollar last year.

The financial watchdog is talking with officials from commercial banks to study what measures can be taken, Shozaburo Jimi, the minister in charge of the agency, said at a news briefing in Tokyo today. Banks sell derivatives to help companies hedge against fluctuations in currency values.

Corporate bankruptcies related to the yen’s appreciation more than tripled to 75 in 2010 from 22 a year earlier, according to a Jan. 13 report compiled by Tokyo Shoko Research Ltd. Failures associated with currency-derivatives losses amounted to 26, or 35 percent of the total.

Derivatives sold five years ago to smaller businesses include a financial tool designed to reduce risks of the yen weakening against the dollar, said Kunio Hashimoto, a senior researcher at Tokyo Shoko Research. The yen’s advance since the global financial crisis has resulted in losses for companies that bought such products, Hashimoto said.

As part of its efforts to prop up companies, the agency has unveiled plans to extend a moratorium on loan repayments for small and midsized businesses by a year.

EU Considers Basel-Rule Changes for Covered Bonds

Covered bonds and savings banks in the European Union may face less strict capital and liquidity rules than called for by global regulators, as the EU seeks to limit side-effects that may hamper the economic recovery.

The European Commission said it’s considering changes to the way the bonds, backed by pools of mortgages or state loans, and savings banks are treated as part of an “in-depth impact assessment” of rules approved by the Basel Committee on Banking Supervision.

The Group of 20 nations decided to bolster banks’ liquidity and capital to prevent a repeat of the worst financial crisis since the Great Depression. The measures, known as Basel III, were published by regulators in December, and more than double the highest-quality reserves that banks must hold. G-20 leaders pledged in November to “implement fully” the new standards.

Covered bonds typically get higher credit ratings and pay less interest because they’re backed by assets, such as mortgages, that stay on the lender’s balance sheet and that can be sold in the event of a default.

Basel III will require banks to hold a buffer of highly liquid assets, but the extent to which it can be filled with covered bonds will generally be capped at 40 percent, with the bonds subject to a cut in value. The minimum liquidity requirement is set to be introduced at the start of 2015.

The Danish government has said that Basel III will force banks to dump covered bonds. Danish economy Minister Brian Mikkelsen has raised the matter with the commission.

Compliance Action

SEC Votes to Require Disclosures on Asset-Backed Bonds

The U.S. Securities and Exchange Commission approved rules that will require issuers of asset-backed securities to disclose repurchase requests and completions related to the pooled assets.

The rules, part of the SEC’s rulemaking under the Dodd- Frank financial-regulation overhaul, were approved by commissioners at a meeting in Washington yesterday. Commissioners also approved a second set of rules requiring issuers to review assets underlying the securities as the agency moved to restore investor confidence in the ABS market.

The rule changes reflect claims, sometimes in lawsuits, by mortgage-securities investors and insurers including Allstate Corp., Pacific Investment Management Co. and MBIA Inc. that loan sellers and bond underwriters misrepresented the quality of the underlying credits and should be forced to repurchase debt. So- called mortgage putbacks may cost sellers as much as $90 billion, JPMorgan Chase & Co. analysts said in October.

Securitizers will be required to disclose their history of requests and repurchases related to outstanding ABS in tables that investors can use to review and compare the securities, the SEC said. Issuers will be required by Feb. 14, 2012, to provide tables dating back three years, the agency said.

A three-year phase-in period for the rules will give local officials plenty of time to prepare, and give the commission room to change the rules if needed, SEC Chairman Mary Schapiro said at the meeting.



SEC’s Khuzami Says New Budget Constraints Damaging Enforcement

Robert Khuzami, the U.S. Securities and Exchange Commission’s top enforcement official, said the agency’s efforts to root out fraud are being hampered by Congress’s decision to restrict funding.

Khuzami made the remarks at a securities law conference yesterday in Coronado, California.

The lack of adequate money is impairing the agency and forcing it to make “difficult choices,” such as limiting travel to interview witnesses and postponing the hiring of experts to help monitor Wall Street, he said.

Government funding for the fiscal year ending Sept. 30 has been caught up in partisan battles over taxes and spending, particularly after Republican gains in November elections. Federal lawmakers agreed Dec. 21 to fund the government at current levels through March 4, denying budget increases sought by the SEC to implement the Dodd-Frank financial-regulatory overhaul.

The division also can’t afford the technology upgrades it needs to store and manage as much as two terabytes of data it receives each month, he said.

City Index Fined $783,000 for Not Providing Accurate Reports

City Index Ltd., a spread-betting brokerage firm, was fined 490,000 pounds ($783,000) for not submitting accurate transaction reports to the U.K. finance regulator over a two- year period.

City Index failed to give the Financial Services Authority reports on about 2 million transactions, or close to 60 percent of its reportable trades, the regulator said in a statement yesterday. The FSA uses the reports to detect market abuse.

The brokerage also failed to have accurate systems in place to ensure the reports were accurate, the regulator said. The firm qualified for the FSA’s standard 30 percent discount for cooperating in the probe and commissioned a review of its reporting processes.

City Index spokesman Joshua Raymond didn’t immediately return a call for comment.

Courts

Italian Swap Cases Increase as Merrill Lynch, UBS Sue

JPMorgan Chase & Co., UBS AG and Bank of America Corp. are among banks bringing more than a half dozen Italian municipalities to London’s courts over swaps that are turning sour for both sides.

The banks are suing towns and regions across Italy, from Florence, a city of about 370,000 people, to Piedmont, the northern region with a population of 4.5 million, as some local governments threaten to stop making payments on contracts and others seek to recover fees they allege were hidden.

Italian municipalities, emboldened by Milan’s criminal trial of Deutsche Bank AG, Depfa Bank Plc, JPMorgan and UBS over allegedly fraudulent selling practices on swaps, are increasingly filing complaints at home to avoid losses on derivatives contracts. The banks are turning to U.K. courts, where they expect to get swifter and fairer judgments.

The pace of the U.K. lawsuits increased in the past month. Banks are going on the offensive to ensure their cases are heard in London, said Laurence Harris, a litigation lawyer at Edwards Angell Palmer & Dodge LLP in London. Italian courts are more likely to favor the country’s municipalities and the legal system there is slower and subject to limitation periods that could make things harder for the banks.

Italian municipalities face derivatives losses of at least 1.2 billion euros ($1.6 billion), Bank of Italy data from June 30 show.

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Ex-PM Group Manager Gets 27 Months for Insider Trading in U.K.

A former PM Group Plc manager was sentenced to 27 months in prison by a London judge for insider trading and money laundering.

Neil Rollins was sentenced by Judge James Wadsworth at a hearing in London today. Rollins was convicted in November of five counts of insider trading and four counts of money laundering brought by the U.K.’s Financial Services Authority.

Rollins is the seventh person to be sentenced to jail for the crime following a prosecution by the FSA. Three more people, a former Dresdner investment banker, his wife and an accomplice, are scheduled to be sentenced next month. Before 2008, the regulator had never brought an insider-dealing case.

Prosecutors alleged Rollins sold shares of Bradford, England-based PM Group, a U.K. maker of scales used in the waste-management industry where he was a senior executive, before it announced orders had fallen. The company was bought by Vishay Intertechnology Inc. in 2007.

Rollins denied all wrongdoing.

Comings and Goings

Ex-Treasury Aide Lee Sachs Forms Small-Bank Lending Venture

Lee Sachs, a former aide to U.S. Treasury Secretary Timothy F. Geithner, and banker John Delaney formed a company that aims to help smaller banks lend to a wider range of borrowers.

The management company, AlliancePartners, is assembling a cooperative network of banks and will look nationally for loans, Sachs said in an interview on Jan. 19. Lenders that join the BancAlliance network will be able to elect the partnership’s board of directors.

The Obama administration has struggled to encourage more lending from smaller banks to small businesses, in its effort to make it easier for companies to expand and hire more workers. Plans set up under the $700 billion Troubled Asset Relief Program drew few participants, and another initiative outside the rescue effort is just getting under way.

The network will service the loans and retain an interest in every loan it refers to member banks, Sachs said. The goal is to help small and mid-sized banks find and evaluate loans in new asset classes so they can manage portfolios that may be currently concentrated in commercial real estate, he said.

Johnson Quits, Balls Named U.K. Labour Treasury Spokesman

Alan Johnson resigned as the U.K. opposition Labour Party’s top Treasury spokesman, citing personal reasons, after three months in the job. Former Education Secretary Ed Balls was named to replace him.

Balls has been one of the most vocal Labour critics of government plans to slash spending by the most since World War II to narrow the record budget deficit.

Johnson said in a statement issued by the party that he was quitting for reasons “to do with my family.” Conservative Prime Minister David Cameron and Chancellor of the Exchequer George Osborne have attacked Johnson for not mastering his Treasury brief.

Labour Party leader Ed Miliband said in a statement issued in London yesterday that he accepted the resignation with “great regret.”

http://www.bloomberg.com/news/2011-01-21/risk-board-asset-backed-bonds-sec-hampered-compliance.html?cmpid=yhoo