March 29, 2024

Economix Blog: Memo to Europe: What About T-Bills?

In my column on Friday, I looked at the proposed European transaction tax from a stock market perspective, and found it to be reasonable.

FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

A friend who is a tax lawyer says — rightly — that I should have considered bonds, particularly short-term Treasury securities. He has a point.

The proposed tax would be applied to all trades in stocks, bonds and derivatives that were engaged in by European financial institutions, or in European markets. That encompasses about everything. For stocks and bonds that tax would be one-tenth of 1 percent of the value of the bond. There would be no tax when the bond is sold at issuance, but there would be a tax whenever it changes hands after that.

The trouble is that Treasury bills these days yield almost nothing. The current rate on one-month bills is a little under 0.1 percent. A tax of 0.1 percent would wipe out the yield entirely.

Treasury bills are prized for their liquidity, meaning that if you need cash you can sell one at any moment. Who would buy it in the secondary market with this tax? When I asked one European official about that, he pointed out that there would be no tax on borrowings, so you could repo the T-bill without paying the tax.

The tax would not apply if American institutions traded the bills, but would if banks from the European countries planning to levy the tax chose to do so. That list includes France, Germany, Italy and Spain.

The tax would apply to any bank anywhere trading German government securities. Their yields are — believe it or not — a tad bit lower than American yields.

It seems to me that there will need to be some exceptions made.

Article source: http://economix.blogs.nytimes.com/2013/02/25/memo-to-europe-what-about-t-bills/?partner=rss&emc=rss

Spanish Court Rejects Part of Pardon for Santander Chief

MADRID — The Spanish Supreme Court ruled unexpectedly Tuesday that the previous government had gone too far in its pardon of Alfredo Sáenz, the chief executive of Banco Santander, reinstating his criminal record and throwing into question his continued tenure at the bank.

The decision put a cloud over the future leadership of Santander. As chief executive, Mr. Sáenz, 70, has long been second in command to Emilio Botín, the bank’s chairman. Mr. Botín, 78, has been Spain’s most influential banker for almost three decades, transforming what had been a midsize Spanish bank into one of the largest financial institutions in the euro zone.

It now falls to the Bank of Spain to decide whether Mr. Sáenz must step down.

Santander declined to comment immediately on the ruling.

Luis de Guindos, the economy minister, would not comment on Mr. Sáenz’s case but he insisted that “both the Bank of Spain and the government will apply the law and respect court rulings.”

Mr. Sáenz received a pardon in November 2011 after fighting an unsuccessful court battle over charges that he had made false accusations against alleged debtors to Banesto, a troubled bank that was eventually taken over by Santander, in a case that began in 1994.

In March of 2011, the Supreme Court upheld the rulings against Mr. Sáenz.

The pardon came weeks before José Luis Rodríguez Zapatero, the outgoing Socialist prime minister, was scheduled to hand over power to a conservative government under Mariano Rajoy.

The government offered no justification for the pardon, which commuted a three-month prison sentence and a temporary ban from working as a banker into a fine.

The Supreme Court on Tuesday unanimously rejected the government’s contention that having a criminal record did not affect one’s ability to conduct banking activities. The high court maintained the other terms of the pardon.

Despite his legal problems, Mr. Sáenz remained as chief executive, helping steer Santander through a Spanish banking crisis that started in 2008 and eventually required the government to seek a bailout from Europe for the country’s most troubled banks. It secured that bailout last June.

While Santander suffered from its exposure to a collapsed property market, its assets outside Spain, particularly in Brazil, have allowed it to weather the crisis better than many of its counterparts.

Mr. de Guindos underlined on Tuesday the importance of Santander. “I am convinced that its management capacity will lead it to keep being one of the principal banks in Europe and the world,” he said.

Article source: http://www.nytimes.com/2013/02/13/business/global/spanish-court-rejects-part-of-pardon-for-santander-chief.html?partner=rss&emc=rss

Fair Game: Banks, at Least, Had a Friend in Geithner

As financial adviser to the president in the tumultuous years immediately after the credit crisis, Mr. Geithner had immense sway over the government’s approach to all things economic. For everyday Americans, his major tasks included responding to the home foreclosure mess, unwinding federal bailouts under the Troubled Asset Relief Program and tackling the problem of financial institutions that are too big to manage and too interconnected for America’s good.

But in scanning these agenda items, a pattern of winners and losers emerges. Let’s just say the financial institutions that dominate the United States were rarely on the losing end in the Geithner years.

I wanted to speak with Mr. Geithner to allow him to respond to his critics and to get his take on his years in the job. A spokeswoman said he was on vacation and unavailable.

So I turned to the Treasury’s Web site, where I found a list of 75 facts about Mr. Geithner’s tenure. Among other things, I learned that on his watch the Financial Crimes Enforcement Network assessed its two biggest penalties against banks for money-laundering and that the Treasury Department cracked down on offshore tax evasion. I also found he has logged more than 600,000 miles on international trips, played basketball in China and cricket in India, and has his signature on $17 billion of United States currency.

Clearly, Mr. Geithner was busy. He had to deal with severe financial troubles overseas, navigate relationships with China and Europe and negotiate with Congress on contentious tax matters.

Mr. Geithner has spoken to other journalists about the work that he and his colleagues did in the aftermath of the financial crisis. He said that this work “was incredibly effective for the broad interest of the economy and the financial system,” and that he believed his financial reform efforts “will significantly reduce the probability and the intensity of crises for a long period of time.” He also denied that bankers have too much political influence in Washington.

That’s news to Jeff Connaughton, who was chief of staff to Ted Kaufman, a former Democratic senator from Delaware. Mr. Connaughton, author of “The Payoff: Why Wall Street Always Wins,” said he believed that Treasury’s kid-glove treatment of the big banks would have the lasting effect of ensuring future crises.

While banks recovered quickly and the Dow is around 14,000, he said last week, “the economy is still sputtering for millions of Americans whose livelihoods were devastated by the financial crisis.” He added: “The legal and regulatory framework that Geithner leaves behind for preventing a future financial crisis inspires little confidence, especially amid scandals emerging almost weekly at banks too big and complex to manage, regulate, police and fail.”

How did Treasury favor the banks? Consider its answer to the foreclosure mess. After promising to help four million borrowers, its Home Affordable Modification Program at last count had helped about one-quarter of that number.

One reason for this is that the program was flawed from the start.

First, the Treasury made the program voluntary, awarding funds to participating banks but failing to penalize those that did not. The program was all carrot, no stick.

Worse, the initial plan didn’t require the banks to write down second liens they may have held — like home equity lines — from borrowers whose original loans were modified. This let the banks put their interests ahead of both borrowers and those who held the first mortgages.

Unwinding the Troubled Asset Relief Program was another area where the department fell short. Eager to trumpet the success of TARP and other bailout programs, for example, Treasury boasted last spring that taxpayers would likely make money on them.

Such a claim, said Dean Baker, co-director of the Center for Economic and Policy Research, should “immediately discredit the teller.”

Treasury’s accounting for TARP and the other programs didn’t factor in the below-market rates the recipients paid on these loans. “We did them an enormous favor,” Mr. Baker said in an interview last week, “at a time when liquidity commanded an incredible premium.”

Neither, critics say, was Treasury transparent about TARP or willing to provide data to Congress on the program’s progress. “Under Secretary Geithner’s leadership, Treasury consistently overstated the results of its actions, painting a rosier picture than reality,” said Senator Charles E. Grassley, the Iowa Republican who is the ranking Republican on the Senate Finance Committee. “Without the special inspector general, the public wouldn’t have a clear, numbers-driven point of view on TARP.” 

FINALLY, there’s the matter of Treasury’s response to the weightiest issue of all: banks that are too large to succeed.

Back in 2010, Senator Sherrod Brown, Democrat of Ohio, and Mr. Kaufman were co-sponsors of the Safe Banking Act, which proposed placing tough limits on banks’ size. If it had passed, it would have imposed a strict 10 percent cap on any bank holding company’s share of United States deposits and set a 6 percent limit on leverage.

The act was a way to begin reining in the huge institutions that had caused so much trouble in the credit debacle. It could also have protected taxpayers from having to make future rescues.

A good thing for Main Street, in other words.

But it was not to be. Among the bill’s most aggressive opponents was, yes, the Treasury.

“We were disappointed,” Mr. Brown said in an interview on Thursday. “Not only did Treasury oppose it, but they proudly opposed it. If the Treasury had spoken out for it we could have gotten very close to winning.”

Thankfully, Mr. Brown has not given up on the idea of reducing big banks’ size and threat to taxpayers. He and Senator David Vitter, a Louisiana Republican, have asked the Government Accountability Office to quantify the size of the advantages — and implied taxpayer subsidies — that large financial institutions enjoy over their smaller brethren. The study is expected to take about a year to complete.

“I like Tim personally,” Mr. Brown said of Mr. Geithner. “But he was better at putting out the fire than preventing the next one.”

Article source: http://www.nytimes.com/2013/02/03/business/banks-at-least-had-a-friend-in-geithner.html?partner=rss&emc=rss

DealBook: Dutch Government Takes Control of SNS Reaal

The Dutch government took control of one of the country’s biggest financial institutions, SNS Reaal, after the troubled company failed to find a private-sector buyer.

The Dutch finance minister, Jeroen Dijsselbloem, said the government would spend 3.7 billion euros, or $5 billion, in taxpayer money to clean up the bank, which has struggled for years with unprofitable real estate loans. The government will also require the country’s top three banks — ING, ABN Amro and Rabobank — to contribute 1 billion euros next year in a one-time payment, he said.

The moves comes as Europe continues to deal with a sluggish economic and debt problems. Last year, Spain took over Bankia, a mortgage lender also hurt by property deals.

Problems at SNS Reaal, which is based in Utrecht, had intensified in the last two weeks as depositors began losing faith, fearing talks with potential buyers would fail. The company had been reportedly negotiating possible investments with CVC Capital Partners and other funds in the hope of averting disaster.

Mr. Dijsselbloem, the finance minister, said in a statement that the takeover ‘‘was made necessary by the extreme situation’’ of the bank and the ‘‘serious and immediate threat posed by that situation to the stability of the financial system.’’

Shareholders and subordinated bondholders of SNS Reaal will be wiped out, effective immediately, Mr. Dijsselbloem said. The holders of senior debt will be repaid and depositors will not lose their money.

Three top executives of SNS Reaal said in a statement that they were stepping down, as ‘‘they do not want to and cannot take responsibility for the nationalization scenario.’’ The three — Ronald Latenstein, the bank’s chief executive, Rob Zwartendijk, the chairman, and Ference Lamp, the chief financial officer — said they had done ‘‘everything in their power’’ to avoid a bailout.

‘‘The persons in question do not advocate the chosen solution, but respect the choice of the Ministry of Finance,’’ according to a statement.

The announcement is the latest in a spate of recent bad news about European banks. On Thursday, Deutsche Bank posted a surprise fourth-quarter loss of 2.2 billion euros, and problems continue at Monti dei Paschi di Siena, which received a bailout from the Italian government last year.

The case of SNS Reaal also adds urgency to efforts to set up procedures to identify and wind down terminally ill banks in a way that does not burden taxpayers.

The move also signaled the transfer of another of the Netherlands’ biggest financial institutions into state hands. The Dutch business of ABN Amro was nationalized in October 2008 after the collapse of Lehman Brothers sent the world financial system into shock.

ABN Amro had been taken over and split up by Royal Bank of Scotland, Fortis and Santander in a 2007 deal that has since come to epitomize the worst excesses of the credit bubble. Both Royal Bank of Scotland and Fortis, once the biggest Belgian financial house, were laid low by the debt burdens they took on for the ABN Amro deal when the credit crisis struck.

The ABN Amro deal also marred SNS Reaal, which needed a bailout in 2008 after it acquired the broken-up lender’s property business. That bailout has not been fully repaid.

As part of the deal announced Friday, the state will forgive 800 million euros of the unpaid bailout loans, inject 2.2 billion euros into SNS and write off 700 million euros from the bank’s property portfolio. ING estimated that its share of the cost of bailing out SNS Reaal would come to 300 million to 350 million euros, but said the impact on its finances would be limited.


This post has been revised to reflect the following correction:

Correction: February 1, 2013

An earlier version of the article incorrectly spelled the name of the nationalized company. It is SNS Reaal, not SNS Reall.

Article source: http://dealbook.nytimes.com/2013/02/01/dutch-government-takes-control-of-sns-reaal/?partner=rss&emc=rss

Bill to Extend Deposit Insurance Program Moves Forward in Senate

WASHINGTON — A bill extending a federal program guaranteeing deposits in noninterest-bearing accounts at federally insured banks easily cleared a procedural hurdle on Tuesday, setting it up for a vote on final passage later this week.

But the bill, which is supported by most of the banking industry and by the White House, still faces an uphill battle in the Senate and the House.

The Senate voted 76-20 to continue debate on the bill, which would extend by two years a program created to help stabilize the banking system in the 2008 crisis. It was extended in 2010 until the end of this year.

Managed through the Federal Deposit Insurance Corporation, the so-called Transaction Account Guarantee program provides unlimited federal deposit insurance to what are known as transaction accounts — basically noninterest-bearing accounts generally used by businesses for payroll, accounts payable and other immediate needs.

Bankers at nearly all but the largest financial institutions have pleaded with Congress to extend the program after Dec. 31. About $1.5 trillion in transaction accounts would be affected, according to the Independent Community Bankers of America, and industry officials said they expected $200 billion to $300 billion to move out of banks if the program ended.

The F.D.I.C.’s standard deposit insurance covers amounts up to $250,000 per account, a limit that was raised from $100,000 before the financial crisis. The higher limit was made permanent in 2010; it is not being considered for change.

The Transaction Account Guarantee program is financed through assessments on banks by the F.D.I.C., similar to the standard deposit insurance program. Taxpayer money could be at risk if the fund did not have enough money to pay the insured accounts, but that has never happened. The F.D.I.C. says that accounts covered by transaction guarantee program have accounted for 3 percent of all losses because of bank failures.

The program is critically important to the smallest community banks, Senator Tim Johnson, a South Dakota Democrat and supporter of the bill, said on the Senate floor Tuesday. “This program allows these institutions to serve the banking needs of the small businesses in their communities, keeping deposits local,” he said.

But procedural moves by the Senate majority leader, Harry Reid of Nevada, have left the bill’s future uncertain. Immediately after the 76-20 approval to move the bill forward, Mr. Reid said he would not allow any amendments to the bill, something Republicans oppose.

The two sides were still negotiating on whether amendments to the bill would be allowed. If an agreement is not reached, it is unlikely that Senate Republicans will help provide the 60 votes needed for the bill to pass the next procedural milestone.

The debate is occurring against the backdrop of the Senate’s fight over its rules regarding the filibuster, which center on whether every bill essentially should continue to require the support of 60 senators — rather than a simple majority of 51 — to pass.

The deposit insurance bill could also face a much tougher time in the House, where the mood has been one of allowing the supports and bailout programs put in place during the financial crisis to expire.

While the extension is being supported by the powerful American Bankers Association and by the Independent Community Bankers of America, it is opposed by the Financial Services Roundtable, which represents roughly 100 of the largest financial institutions, including banks, mutual fund companies and other asset managers.

Industry analysts say the big banks oppose the extension because they figure they are viewed by many depositors as too big to fail. “They basically are saying, ‘No one views us as a failure risk and so our clients are not going to flee,’ ” said Joshua Siegel, managing principal of StoneCastle Partners, an asset management firm that invests in banks.

Community bankers say their ability to make loans to small businesses will suffer if the program is withdrawn. Cynthia Blankenship, vice chairwoman of Bank of the West in Grapevine, Tex., a Dallas suburb, said that about 15 percent of its $350 million in assets were protected under the program.

“I don’t think all of our deposits under the program would go away if it expired,” she said. “But a lot of them will convert to interest-bearing accounts, which cost us more and drives up the price of credit.”

Curiously, the Credit Union National Association opposes the extension, putting its relatively small institutions on the same side as behemoths like Bank of America and Citigroup. Credit unions are trying to expand their lending to small businesses, and think ending the guarantee program would put them on a more level playing field.

“TAG is a crisis-inspired program which Congress intended to be temporary,” Bill Cheney, president of the credit union association, wrote in a letter to Senate leaders. “The crisis is over. The program should expire.”

Article source: http://www.nytimes.com/2012/12/12/business/bill-to-extend-deposit-insurance-program-moves-forward-in-senate.html?partner=rss&emc=rss

DealBook: European Banks Push to Meet Capital Goals

The European Central Bank in Frankfurt, Germany.Hannelore Foerster/Bloomberg NewsThe European Central Bank in Frankfurt, Germany.

LONDON — European banks have been busy.

Financial institutions on the Continent have raised at least 40.7 billion euros, or $52.8 billion, in new capital as of the fourth quarter of last year, according to estimates by Citigroup.

The effort is part of policy makers’ push to increase banks’ core Tier 1 ratios, a measure of a firm’s ability to weather financial shocks, to 9 percent by June. Banks must raise a combined 115 billion euros by the summer to meet that target.

Activity over the next few weeks will add to the tally. Europe’s major banks report earnings in February, and Citigroup said it expected institutions to raise a further 24.6 billion euros by June 2012 through so-called retained earnings, a category that includes reductions in employee bonuses and cuts to overall bank lending.

Deutsche Bank of Germany, for example, could pocket up to 3.6 billion euros in retained earnings by June, based on Citigroup estimates. The figure would be more than enough to cover the 3.2 billion euro shortfall the European Banking Authority wants the bank to fill by this summer. Similarly, the Citigroup research shows BNP Paribas of France may add 4.1 billion euros in the same period through this method, well ahead of its 1.4 billion euro capital-raising target.

“BNP has huge capital needs, but can make the target in one swoop by retaining its shareholder dividend,” said an investment banker at a leading European firm, who spoke on condition on anonymity because he was not authorized to talk publicly.

While some of Europe’s largest financial institutions are likely to fill the capital gap by holding on to their profits, others will have to employ different strategies. So far, the most popular method for raising new money has been through so-called liability management exercises. Citigroup estimated European institutions had raised a combined 16 billion euros through the practice, which involves buying back, or exchanging, hybrid securities — investments that pay dividends like bonds, but can be converted into equity — at a discount from investors.

Accountancy rules allow financial institutions to book the difference between the original face value of the securities and the current discounted price as a profit toward their core Tier 1 equity. Raiffeisen of Austria, for example, has pocketed 1.3 billion euros toward its 2.1 billion euro target in this manner. The Italian bank Banco Popolare has raised a further 996 million euros.

Adjustments to banks’ balance sheets have outpaced so-called rights offerings, which allow existing shareholders to buy new stock in a company at a discount. Authorities had expected many institutions to tap investors for new capital. But only one bank, UniCredit, based in Milan, has done so. Its 7.5 billion euro rights issue, which is expected to be well subscribed by investors, closes on Friday.

Many firms are relying on multiple strategies. Along with its rights offering, UniCredit is reorganizing its balance sheet. On Wednesday, the Italian lender said it would buy as much as 3 billion euros of hybrid securities at a discount of up to 50 percent. The move could raise up to 500 million euros toward the bank’s core Tier 1 ratio. UniCredit is also planning to issue up to 25 billion euros of covered bonds — debt securities that are backed by the bank’s own assets — to ease its financing problems, according to a filing with the Luxembourg Stock Exchange on Wednesday.

Other banks are shedding assets to meet the new requirements. Citigroup estimates European banks have disposed of operations worth almost 100 billion euros, as of the fourth quarter of 2011. That helped firms, including Banco Santander of Spain, to increase their capital reserves by a combined 6.6 billion euros over the period.

“The list of asset sales is the longest I’ve seen in 10 years,” said Richard Thompson, a partner at accountancy firm PricewaterhouseCoopers in London. “Banks want to reshape their balance sheets to focus on specific territories or sectors.”

Article source: http://dealbook.nytimes.com/2012/01/25/european-banks-raise-53-billion-to-appease-regulators/?partner=rss&emc=rss

DealBook: In Europe, a Conflict Over Bank Capital

UniCredit headquarters in Milan. Banks in Europe need to find $147 billion to raise their Tier 1 capital ratios.Luca Bruno/Associated PressUniCredit headquarters in Milan. Banks in Europe need to find $147 billion to raise their Tier 1 capital ratios.

LONDON — Europe’s banks and regulators are at odds about how financial institutions should increase their capital reserves.

Authorities want European banks to tap existing shareholders and reduce employee bonuses to find a combined $147 billion to increase their core Tier 1 ratios, a measure of a firm’s ability to weather financial shocks, to 9 percent by June. Citigroup estimates that Europe’s financial institutions, minus the Greek banks, had raised at least 40 billion euros, or $51 billion, as of the fourth quarter of 2011.

Banks, however, would prefer to sell or write down unprofitable operations, as well as adjust their balance sheets, to free up cash to meet the new requirements.

One solution could be to increase capital reserves through rights offerings, which allow existing shareholders to buy new stock at a discount. But volatility in the financial markets amid Europe’s sovereign debt crisis has damped investor interest.

Many banks are waiting on the outcome of the Italian bank UniCredit’s 7.5 billion euro rights issue, which closes at the end of this week. After initial investor skepticism, market participants say the Milan-based bank, which must raise almost 8 billion euros by June, is now expected to gain shareholder backing for the multibillion-euro capital increase.

“Everyone is looking at the UniCredit deal as a litmus test for future capital raisings,” said a senior investment banker from a leading bank in Europe, who spoke on the condition of anonymity because he was not authorized to talk publicly.

If other options are not attractive, some banks may eventually turn to local governments for a helping hand. Last year, the European Union created the European Financial Stability Facility, a 440 billion euro fund that can be used to shore up firms’ capital reserves.

Banks will soon find out what regulators think of their plans. Financial institutions, including Deutsche Bank of Germany and BNP Paribas of France, had to submit their recapitalization strategies to national regulators by Friday. The European Banking Authority will review the plans in early February, and regulators have the power to veto any capital-raising plan they don’t agree with.

Much of Europe is expected to enter recession this year, so authorities are likely to reject capital-raising efforts, like cutting lending to businesses, that reduce support for the European economy.

The banking authority has called on banks to raise the money through cuts in shareholder dividends and issuance of new stock. It has warned that the sale of any operation, particularly in banks’ home markets, that hurts business lending won’t be allowed.

“Regulators are asking for the impossible,” said Etay Katz, a banking regulatory partner at the law firm Allen Overy in London. “They want banks to keep lending to the real economy, and there’s an expectation banks will have to swallow the bitter pill of offering new equity at times when investors’ appetite is negative.”

Nonetheless, some banks have been following authorities’ demands. Société Générale must raise 2.1 billion euros, and announced last November it was slashing bonuses and scrapping its 2011 shareholder dividend to meet the new regulatory requirements. It also plans to cut almost 1,600 jobs in its investment bank unit and has offloaded billions of euros of sovereign bonds to reduce its exposure to euro zone debt. As of the end of September, Société Générale’s core Tier 1 ratio stood at 9.5 percent.

Not every European bank, however, can rely on its own earnings. Many midsize banks, especially in Southern Europe, face deteriorating local economic conditions and rising customer defaults. In Spain, for example, authorities say the ratio of bad loans to bank lending has hit a 17-year high. And the European Union expects the country’s economy to grow a mere 0.7 percent this year, compared with 1.5 percent for the United States.

“The outlook is mostly negative for banks in countries like Spain, Italy and Portugal,” said James Longsdon, managing director in Fitch Ratings’ financial institutions group, in London.

Other banks are hoping the sale of so-called noncore assets in overseas markets will help to increase their capital reserves. The fire sale could be enormous. The European financial sector is expected to sell or write down more than $1.8 trillion in loan assets during the next decade, according to the consulting firm PricewaterhouseCoopers. That compares with just $97 billion from 2003 to 2010.

Last week, the Royal Bank of Scotland, which already has met the European Banking Authority’s capital requirements, sold its aircraft leasing business to a consortium of Japanese companies for $7.3 billion. Ireland’s nationalized Anglo Irish Bank also has offloaded $3.3 billion in commercial real estate loans in the United States to Wells Fargo. In all, the Irish bank wants to cut nearly $10 billion in American loans as part of a government requirement to reduce its assets and trim its operations.

Potential buyers, including American private equity firms, are lining up to take advantage, though analysts say the amount of assets up for sale will depress prices. That could reduce the impact on banks’ capital reserves. Local European politicians also may block deals that they believe will hurt domestic consumers.

“Banks may be restricted on deleveraging within Europe,” said Simon McGeary, managing director for European new products at Citigroup in London.

Banks also are restructuring their balance sheets to squeeze out extra capital. In a move known as liability management, banks can improve capital levels without raising additional funds. The strategy involves buying back or exchanging hybrid securities — investments that pay dividends like bonds, but can be converted into equity — at a discount from investors.

Under accounting rules, financial institutions can then book the difference between the original face value of the securities and the current discounted price as a profit toward core Tier 1 equity.

The strategy has been popular. Morgan Stanley estimates financial institutions, including Commerzbank of Germany and the Lloyds Banking Group of Britain, will raise a combined 8.7 billion euros by buying back, or exchanging, hybrid securities from investors.

The adjusting of companies’ balance sheets also includes so-called capital optimization, which involves tweaking banks’ back-office systems to free up funds to meet the capital requirements. Credit Suisse estimates that Spanish banks, which must raise a combined 26.1 billion euros, could free up more than 3 billion euros by fine-tuning how they use capital without raising any new funds.

“The only way for banks to succeed is to be more efficient with the limited capital available,” said Steve Culp, global managing director of the risk management practice at the consulting firm Accenture in London.

Banks, particularly in struggling southern European economies, may eventually have to turn to government bailouts. Deals already have been announced. In December, the National Bank of Greece and its local rival Piraeus Bank sold a combined 1.4 billion euros of shares to the government to increase their core Tier 1 ratios.

“There’s no magic bullet to this problem,” said Karl Goggin, a banking analyst at NCB Stockbrokers in Dublin. “The market has a finite appetite for banking stocks, so governments may have to step in.”

Article source: http://feeds.nytimes.com/click.phdo?i=067837ec54a4a05c20b4c4369ca6dfdb

Olympus Fined by Tokyo Exchange, but Not Delisted

A delisting probably would have destroyed its share price, which has fallen by half since the scandal began. The decision also makes the company less vulnerable to being dismantled and sold for its parts.

Still, the move to keep the company listed brings into sharp relief the inconsistent way Japanese authorities and financial institutions have policed and censured white-collar crime in recent years. Analysts have warned that the inconsistencies are confusing foreign investors and undermining confidence in Japanese equities.

The Tokyo exchange, which exercises considerable leeway in deciding whether to keep a troubled stock listed, said that the fraud at Olympus had been “the sole work of a number of participants” and that their actions “had no direct relation to the core business.” The exchange “cannot deem that investor judgment was considerably distorted to the extent of warranting delisting,” it said.

Olympus, which also makes medical and industrial endoscopes, will be fined 10 million yen, or $130,000, the maximum penalty set by the exchange. The company will also be placed on a “security on alert” list and will be required to report to the Tokyo exchange, over a period of three years, ways that it is improving its corporate governance.

The issue contrasts with a case in 2005, when the Internet start-up company Livedoor was accused of manipulating its earnings by more than $40 million and was quickly delisted. Its top executives were arrested and sentenced to jail terms.

The next year, financial regulators accused Nikko Cordial, a Japanese brokerage firm, of padding its books by almost $350 million. But like Olympus, Nikko Cordial avoided a delisting, fueling accusations that the Japanese authorities coddled established players while punishing newcomers.

The perception of arbitrary outcomes, and the message it sends about Japan’s tolerance for bad corporate governance, is hurting investor confidence, analysts say.

“Would I give the car keys to the drivers of Japanese equities?” Nicholas Smith, a strategist at CLSA Asia Pacific Markets, wrote in a research note. “On the basis of this sorry story, it is hard to find a reason to give them the remote for the video game of the car.”

Olympus said it “solemnly accepted” the Tokyo exchange’s decision and promised to improve its commitment to corporate governance. “We understand that this decision is based on the view that there is a strong need for us to improve our internal supervision,” it said.

Top Olympus executives admitted in November that the company had conducted an effort, which spanned decades, to cover up $1.7 billion in investment losses. In December, Olympus accounted for some of the losses by revising five years of statements. The accounting showed shareholders’ equity falling to just 42.9 billion yen ($557 million) and cast a shadow over the company’s long-term viability.

The admissions came after Olympus fired its former chief executive, Michael C. Woodford, who had questioned the company’s board over a series of unusually large acquisition payouts that were later found to be part of the company’s false accounting. Mr. Woodford, who is British, blew the whistle on those payouts, helping to uncover a global scheme that led to public investigations in Japan, Britain and the United States.

Mr. Woodford later started a campaign to return to Olympus with fresh directors who were untainted by the scandal. Despite backing from foreign investors, however, he abandoned his bid this month, after the company’s biggest institutional investors in Japan stood by the current management.

This week, Olympus said a panel of lawyers hired by the company had found that its outside auditors, KPMG Azsa and Ernst Young ShinNihon, had not been complicit in the false accounting, though those firms remained under investigation by the Japanese authorities over their possible roles in the scandal. The report, instead, blamed five former and current Olympus internal auditors for allowing the company to misstate its finances.

Article source: http://feeds.nytimes.com/click.phdo?i=ddb4868163e0dcd0927afc800a2b7a3c

Richard Cordray, New Consumer Chief, Promises Vigorous Agenda

The director, Richard Cordray, who was appointed to the post Wednesday by President Obama, encouraged consumers to contact the agency with their stories and complaints about banks, payday lenders and other financial institutions that they feel have sold deceptive products or engaged in abusive behavior.

“The consumer bureau will make clear that there are real consequences to breaking the law,” Mr. Cordray, who had been in charge of enforcement at the agency, said in a speech at the Brookings Institution.

“We have given informants and whistle-blowers direct access to us,” he said. “We took over a number of investigations from other agencies in July, and we are pursuing some investigations jointly with them. We have also started our own investigations. Some may be resolved through cooperative efforts to correct problems. Others may require enforcement actions to stop illegal behavior.”

Asked whether he would hesitate to use any of the bureau’s new rule-making or enforcement powers given that his recess appointment could draw a legal challenge and has drawn sharp criticism from Republican members of Congress, Mr. Cordray said no.

“The appointment is valid,” he said. “I’m now director of the bureau.”

Mr. Cordray was nominated by President Obama last year, but Senate Republicans blocked his nomination from coming to the floor for a vote. Opponents in Congress and in the banking and business sectors have said that the agency has too much power and autonomy and lacks adequate financial oversight and review of its regulatory actions.

He said that he did not take the Congressional opposition personally. “They, after all, represent the same people that we are serving,” he said. “We really have the same interests, I believe, at heart.” Nor, he said, did he question the motives of critics of the agency, and he said he intended to try to work with members of both parties in Congress.

“I’m not someone who impugns people’s motives,” he said. “That’s not my way. I don’t think that’s helpful. I tend to assume that people are always trying to do what they think is right. We may just disagree at times on what that is.”

The agency will focus most immediately on the so-called nonbank financial companies — money transfer agencies, credit bureaus and private mortgage lenders, for example — that previously have fallen outside the authority of most bank regulators and consumer protection agencies, Mr. Cordray said.

Although the consumer agency was given authority over those types of companies in the Dodd-Frank Act, the regulatory overhaul passed in the wake of the financial crisis, those powers could not take effect until the bureau had a director.

“Today, we are launching the bureau’s program for supervising nonbanks,” Mr. Cordray said. “Many provide valuable services to customers who lack access to other forms of credit. And they are big markets. Nearly 20 million American households use payday lenders and pay roughly $7.4 billion in fees every year.

“Many subprime loans during the housing bubble were made by nonbank mortgage brokers,” he added. “Since most of these businesses are not used to any federal oversight, our new supervision program may be a challenge for them. But we must establish clear standards of conduct so that all financial providers play by the rules.”

Mr. Cordray asked consumers to contact the agency directly through its Web site, consumerfinance.gov. “Our team is taking complaints about credit cards and mortgages, with other products to be added as we move forward,” he said. “Our work will support the honest businesses in financial markets against those who deceive consumers or otherwise break the law.”

The public appearance by Mr. Cordray, who has kept a low profile since being nominated to the post, was arranged quickly after the announcement Wednesday of Mr. Cordray’s appointment, which was made without Senate approval under the constitutional provision for making appointments when lawmakers are in recess.

Mr. Cordray’s remarks seemed intended to show that the agency would move promptly and aggressively, in the hope that getting public support could quell some of the criticism from members of Congress.

Several members of Congress vowed on Wednesday to try to overturn the appointment, and one House subcommittee summoned Mr. Cordray to a hearing on Capitol Hill to discuss his agency and how he intends to manage it.

 

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U.S. Firms See Europe Woes as Opportunities

The sales are being spurred on because European banks are scrambling to raise capital and shrink their balance sheets, often under orders from regulators. European financial institutions will unload up to $3 trillion in assets over the next 18 months, according to an estimate from Huw van Steenis, an analyst with Morgan Stanley.

This month a team of three bankers from the London office of the buyout giant Kohlberg Kravis Roberts headed to Greece to examine a promising private company that cannot get Greek banks to provide credit for future growth. The Blackstone Group agreed to buy from the German financial giant Commerzbank $300 million in real estate loans that are backed by properties, including the Mondrian South Beach hotel in Florida and four Sofitel hotels in Chicago, Miami, Minneapolis and San Francisco. Commerzbank is under pressure from regulators to raise 5.3 billion euros ($6.9 billion) in new capital by mid-2012.

Google too saw an opportunity. It bought the Montevetro building in Dublin this year from Ireland’s National Asset Management Agency, which acquired it after a huge bank rescue by the Irish government.

“There is clearly a restructuring and shrinking of European financial institutions,” said Timothy J. Sloan, chief financial officer of Wells Fargo, which last month acquired $3.3 billion in real estate loans from a bank in Ireland. “And many of the assets they’re shedding are in the United States.”

He added, “We’re keeping our eyes and ears open for the right situations.”

American financial firms are taking the plunge in a troubled Europe despite problems of their own. In the last quarter, JPMorgan Chase, which has taken hits to its earnings, increased its total loans to European borrowers.

At Kohlberg Kravis, Nathaniel M. Zilkha, co-head of the special situations group, is expanding his London team to eight, from two, and hoping to take advantage of opportunities in Europe. The firm is even considering potential investments in the country where the crisis began, Greece, despite headlines warning of a default by Athens or the possibility that Greece may withdraw from the euro zone.

“If no one is willing to turn over the rocks, that’s when you can make extraordinary investments,” Mr. Zilkha said. “The market dislocation in Greece is creating significant opportunities that wouldn’t be otherwise available.”

Besides Greece, Kohlberg Kravis bankers have also been looking for deals in Spain and Portugal, where private companies are having a similarly hard time winning new credit or extending existing loans.

Ireland, whose banks were devastated by the collapse of a real estate bubble rivaling the one in the United States, also has deep-pocketed American buyers like Google circling.

But in many cases, the assets are much closer to home.

Last month, Wells Fargo bought the $3.3 billion in real estate loans, which are backed by commercial properties in the United States, that had been owned by the former Anglo Irish Bank. Wells has also bought $2.4 billion in loans and other assets from the private Bank of Ireland, which is trying to raise 10 billion euros ($13 billion) after a bailout by the European Union and the International Monetary Fund.

Even with opposition from consumer advocates, Capital One Financial could soon win final approval from the Federal Reserve for its $9 billion acquisition of ING Direct in the United States, one of the year’s biggest banking deals. Based in the Netherlands, ING has been forced by European authorities to divest ING Direct, an online bank, after ING required a $14 billion bailout following the 2008 financial crisis.

Experts expect these kinds of sales to jump as European banks race to meet the June deadline imposed by the European Banking Authority to raise more than 114 billion euros in fresh capital. Financial institutions also have to increase their Tier 1 capital ratio — the strictest yardstick of a bank’s ability to absorb financial blows — to 9 percent of assets.

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