February 7, 2023

High & Low Finance: Barclays, Caught Short, Is Now in a Bind

So said Chris Lucas, finance director of Barclays, three months ago.

It turns out that a British regulator disagrees.

Shares of Barclays lost 10 percent of their value during the first three trading days of this week after the company disclosed that its capital — as seen by the regulator — needed to grow by 38 percent to be adequate under new rules, unless the bank reduced its assets. And the regulator was not willing to give Barclays as much time as it wanted to raise that capital.

Barclays is scrambling. It plans to sell stock through a rights offering. It plans to raise still more capital through so-called CoCos — contingent convertibles, to the uninitiated. Those are bonds that pay interest unless bank capital levels fall too far. In that case, they automatically convert into stock. It also plans to shed some assets, which reduces the amount of capital that it needs.

Barclays is lucky in one respect. If it were subject to the rules being proposed by regulators for large banks based in the United States, it would need far more capital.

What is going on may come to be known as the revolt of the regulators. They were profoundly embarrassed by the clear evidence that banks were undercapitalized before the credit crisis despite the banks’ claims to the contrary. The revolt is most intense in the financial centers with the biggest banks — the places where the pain to governments would be greatest if another round of bailouts were needed.

It is useful to try to understand why the banks were so undercapitalized that bailouts were needed.

The answer lies in international rules that grew ever more complicated and gave the banks wide latitude to make judgments about the safety of the loans they had made and the securities they had bought.

Bank capital, the financial cushion that banks have to hold to absorb potential losses, is usually expressed as a percentage of “risk-weighted assets.” Some assets receive full weight in the calculations, and some — viewed as virtually risk-free — receive no weight and thus have no effect on how much capital a bank needs.

All that makes sense — if you can figure out the risks. But of course that is not easy. At first, there were fairly simple categories, with a certain type of loan receiving a certain risk allocation. But that led some banks to load up on the riskiest assets within any category and to invent assets that would seem to be low-risk and therefore not need much capital.

As time went on, the rules allowed banks to make more and more judgments. They could use bond ratings from Moody’s or its competitors to determine how safe an asset was. And if they wanted, they could use their own risk models to make the decisions.

How’s that for regulatory abdication? Rather than seek to review and judge bank assets, the regulators essentially allowed the banks to evaluate their own decisions.

After the financial crisis, regulators meeting in Basel, Switzerland, produced a new set of rules, called Basel III. They tightened up what counted as capital and took steps to improve the risk ratings. They raised the required capital levels.

But they did one more thing, and that is turning out to be critical. They adopted leverage ratios for banks.

In principle, a leverage ratio is simple. Calculate how much capital a bank has and divide it by the bank’s total assets, without any risk weighting. In practice, of course, it is not quite so simple. But it is a lot simpler than the other calculation of risk-weighted assets. When all this goes into effect, banks are supposed to meet both sets of rules.

At first, the big banks do not seem to have focused on the leverage ratio. But that is what trapped Barclays and it is what may force several other large banks on both sides of the Atlantic to raise more capital — or dispose of assets to bring down the amount of capital they need.

Article source: http://www.nytimes.com/2013/08/02/business/barclays-caught-short-is-now-in-a-bind.html?partner=rss&emc=rss

DealBook: Regulators Seek Stiffer Bank Rules on Capital

Thomas Hoenig, a Federal Deposit Insurance Corporation official.Yuri Gripas/ReutersThomas Hoenig, a Federal Deposit Insurance Corporation official.

Confronted with large and complex banks, financial regulators have spent years drafting rules that are just as complicated.

On Tuesday, though, regulators signaled that the byzantine approach was inadequate. In a significant shift, the Federal Deposit Insurance Corporation, along with the Federal Reserve and the Office of the Comptroller of the Currency, proposed stricter banking rules that aim for simplicity.

The agencies’ move is part of their continuing efforts to strengthen the financial system and prevent situations where taxpayer-financed bailouts might be required.

The latest regulations focus squarely on capital, the financial cushion that banks have to hold to absorb potential losses. In theory, a bank with higher levels of capital is more likely to weather shocks and less likely to need government aid in a crisis. The proposed rules would raise a crucial requirement for capital held by the largest banks.

“This will increase the overall financial stability of the system,” said Thomas M. Hoenig, vice chairman of the F.D.I.C. “This is an advantage to the banks over the long run, and to the economy. I am confident of that.”

The agencies’ latest push could meet fierce resistance, however. As outlined, the new capital requirements could be costly for the largest banks, which have 60 days to comment on the rules.

The F.D.I.C. estimated that the country’s eight biggest banks would have to find as much as $89 billion to comply with the proposed rules. An analysis of JPMorgan Chase’s books suggested that it might have to bolster its capital position by $50 billion, a number the bank declined to verify.

The added burden for the big banks unnerves some in the industry.

“This goes a little higher than is necessary,” said Tony Fratto, a partner at Hamilton Place Strategies, a research and public relations firm that has represented banking trade groups. Mr. Fratto said the new rules could weigh on the economy and undermine the global competitiveness of the largest American banks. “It’s our view that there has to be a trade-off with greater restrictions,” Mr. Fratto said.

The regulators are acting at a time when some members of Congress are calling for tougher bank regulation because they believe the sweeping overhauls instituted soon after the financial crisis fell short. Senator Sherrod Brown, Democrat of Ohio, and Senator David Vitter, Republican of Louisiana, introduced a bill earlier this year that demanded capital increases exceeding what the agencies are now proposing.

“The Brown-Vitter bill really galvanized the debate about ‘too big to fail’ and capital ratios,” said Camden R. Fine, president of the Independent Community Bankers of America, an industry group that supports the agencies’ proposed rules. “It really focused the regulators’ attention on these capital issues.”

With their latest move, the regulators hope to make the rules clearer and tougher.

After the crisis, American regulators agreed to impose an international banking overhaul known as Basel III. Officials like Mr. Hoenig have criticized Basel regulations because they rely on a method called risk weighting to set capital. With risk weighting, banks estimate the perceived riskiness of assets. They are then allowed to hold less capital, or even no capital, against assets that appear less risky. A bank may have $1 trillion of assets on its balance sheet, for example, but many of those assets could have low risk weightings. As a result, the bank might be able to reduce its total of risk-weighted assets to $500 billion. It would then calculate its needed capital from that lower figure. With a capital requirement of 7 percent, the bank would need $35 billion in capital.

Critics have questioned the risk weighting process, arguing that it can be inconsistent and complex and leave banks short of capital.

The regulations proposed Tuesday are intended to compensate for the shortcomings of risk weighting. Using a yardstick known as the leverage ratio, the proposed rules would not allow the bank with $1 trillion in assets to discount any of that sum. In fact, the bank would have to increase the asset total it uses to calculate capital to reflect risks not readily apparent on its balance sheet.

The agencies estimate that the new calculations would increase the largest banks’ asset totals by around 43 percent. The $1 trillion bank would, in essence, become a $1.43 trillion bank.

The proposed rules would also effectively require the largest banks to hold capital equivalent to 5 to 6 percent of their new asset totals. The hypothetical $1.43 trillion bank would therefore have to hold more than $70 billion. “Risk weighting is based on a very arcane and complicated series of ratios and formulas that are immediately gamed,” Mr. Hoenig said. “The leverage ratio is a check on that.”

Stock market investors appeared to shrug off the tougher requirements. Shares in the largest banks, which have risen sharply in recent months, were mostly up on Tuesday.

“I am surprised by the market reaction,” said Richard Ramsden, a bank analyst at Goldman Sachs. “It’s a fairly demanding proposal.”

Only two big banks, Wells Fargo and Bank of America, appear to already have sufficient capital to meet the proposed leverage ratio requirements, according to an analysis by Keefe, Bruyette Woods.

But other big banks may be more strongly affected. JPMorgan Chase, the nation’s largest bank by assets, has two large subsidiaries with federal deposit insurance. Those subsidiaries would have to hold 6 percent capital, according to the proposed rules. In theory, this could push up their combined capital requirement to $177 billion from the $127 billion they hold today.

Regulators may favor such an outcome because JPMorgan, like some other large banks, uses its insured subsidiaries to hold most of its derivatives. Derivatives, financial instruments that can be used to hedge risks or speculate, can be a source of losses and instability when markets are in severe turbulence.

The banks have until the end of 2017 to comply with the higher requirements. In the next two months, they are likely to push back hard. But with the economy strengthening and bank profits at record highs, the banks may not find sympathetic audiences.

Advocates of higher capital say it can increase confidence in the banking sector and promote lending.

Mr. Fratto, of Hamilton Place Strategies, is skeptical of that viewpoint. “Do we want to conduct that experiment at a time when we’ve seen banks shedding assets, exiting businesses and pulling back a bit on lending?” he asked.

These days, regulators have more power to press ahead in the face of any opposition. The Dodd-Frank overhaul passed by Congress in 2010 gave regulators added leeway to toughen rules for large banks. The leverage ratio is only one initiative regulators are pursuing. The Federal Reserve, for example, is going to propose a rule that raises capital requirements for banks that borrow heavily in the markets. But even with the flurry of new rules, Mr. Hoenig says he does not think the banks’ hands will be tied.

“They have plenty of flexibility to lend and invest,” he said.

A version of this article appeared in print on 07/10/2013, on page B1 of the NewYork edition with the headline: Regulators Seek Stiffer Bank Rules On Capital.

Article source: http://dealbook.nytimes.com/2013/07/09/regulators-seek-stiffer-bank-rules-on-capital/?partner=rss&emc=rss

Today’s Economist: Simon Johnson: Twelve Angry Central Bankers

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Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

This does not happen very often: the 12 presidents of Federal Reserve Banks have spoken with great clarity and in public on a financial reform issue: the need to change the rules for money-market funds. They are explicitly taking on the biggest banks and their allies, including some recalcitrant officials.

Today’s Economist

Perspectives from expert contributors.

While this will be a long haul – and these central bankers need a lot of external support – we are starting to see some progress toward building a new, more skeptical understanding of how the financial system works.

As far as I have been able to determine, the comment letter submitted on Feb. 12 by the Federal Reserve Bank of Boston – on behalf of all the regional Fed banks – was literally the first time these 12 organizations have spoken with one public voice without involving the Fed’s Board of Governors.

The Federal Reserve System – 100 years old this year – has a curious legal structure. The system comprises a very powerful Board of Governors and the 12 regional banks, with each of the latter nominally owned by member banks in its region. (Before the 1930s, the Washington-based board was less important, and the New York Fed was arguably the most powerful element of the system; see Liaquat Ahamed’s brilliant Pulitzer Prize-winning history of that period, “Lords of Finance: The Bankers Who Broke the World.”)

Ben Bernanke, as chairman of the Board of Governors, sits on the Financial Stability Oversight Council, a new body created by the Dodd-Frank financial-reform legislation to watch for systemic risks. This council has called for comments regarding a proposal for the reform of money-market funds, and Mr. Bernanke can hardly comment on his own ideas.

But the regional Feds are separate legal entities, and they are allowed to comment, so we get some unusual insight into sensible official thinking.

The problem is straightforward. Money-market funds operate in some ways like banks – their liabilities are regarded by investors to be just like bank deposits when times are good. But when times are scary – as when Lehman Brothers failed in September 2008 – there can be rapid and destabilizing runs by investors out of the funds. What we saw in fall 2008 had the potential to become even more damaging than the bank runs that characterized moments of panic before the introduction of deposit insurance.

The industry proposes to deal with this by allowing temporary restrictions on withdrawals when the pressure is on. This is a terrible idea that will just encourage people to run sooner and faster.

Of course, what the industry really wants is an implicit government guarantee – downside insurance for funds, preferably without any insurance premium or effective regulation, which is the current status quo. In fall 2008, these funds got an explicit guarantee, and they know that similar support would be available in the future — unless a way is found to make this part of the system less prone to collapse and contagion.

In principle, the Securities and Exchange Commission is in charge of changing money-market fund rules. Unfortunately, the financial-sector lobby has fought this issue to a deadlock at the highest levels of the S.E.C. Fortunately, post-Dodd-Frank, the Financial Stability Oversight Council has the ability to push for stronger standards, which it can either use directly or by bringing enough pressure to move the S.E.C. forward.

On this issue, the 12 regional Fed presidents have their priorities exactly right. There are some nuances on the details, but the most important idea is to float the net asset value for money-market funds, i.e., eliminate the illusion that these investment products necessarily have a stable value. The value of your equity mutual funds goes up and down every day, in a way that you can measure and understand. The same is true for money-market funds, but this reality is currently masked from investors.

We need more transparency and honesty around the nature of these investment products. This is good for consumers and absolutely essential for system stability. The Systemic Risk Council, led by Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation, has also been pushing in this direction (I’m a member of this council).

You might also want equity buffers at money-market funds, and the Fed presidents bring this up as a possibility. It is encouraging to see these individuals push for higher equity (less debt relative to total assets); I favor much higher equity throughout the financial system. But I doubt the levels of equity under discussion will be enough to make a significant difference.

(In addition, the New York Fed is indicating, at least at the technical level, a preference for a minimum balance at risk. In this approach, an investor pulling money out of a fund would have some fraction set aside, perhaps five cents on the dollar, that would be in first-loss position for a period of 30 days or more – with the goal of discouraging runs. I see no sign that this idea is getting traction either among officials or more broadly.)

A generation ago, many banks viewed money-market funds with suspicion and even hostility, as they were competing for part of the same investor base. Now, however, the big bank-holding companies like money-market funds. Some banks manage money-market funds, and almost all of them rely on them for short-term cheap funding.

But this funding is cheap in part because of the implicit government guarantees provided to money-market funds. This encourages banks to rely on unstable funding, and we should be pushing in the other direction – toward longer-term, more stable sources of funding.

Expressing these concerns is not populism; the Fed is perhaps the least populist organization in the country. This is sensible economics with a clear and powerful rallying cry: Float the net asset value.

Article source: http://economix.blogs.nytimes.com/2013/02/21/twelve-angry-central-bankers/?partner=rss&emc=rss

DealBook: New York Fed Faces Questions Over Policing Wall Street

As the Federal Reserve Bank of New York faced criticism for missing a multibillion-dollar trading loss at JPMorgan Chase, the regulator convened a town hall meeting in May to bolster employee morale.

Two months later, the New York Fed staff huddled again, after lawmakers questioned why the regulator had failed to rein in banks that manipulated key interest rates.

“We were told to keep our heads down and stay focused,” said one person present at the July meeting who requested anonymity because the gathering was not public.

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The New York Fed, whose weaknesses were first exposed when the financial crisis hit, is undergoing a new trial by fire as it grapples with how to police Wall Street. While the regulator has revamped its approach to overseeing the nation’s biggest banks since the crisis, recent black eyes suggest that fundamental problems persist.

Lawmakers will most likely focus on the record of the New York Fed when Timothy F. Geithner, the regulator’s former president, testifies on Wednesday before the House Financial Services Committee. Mr. Geithner, now the Treasury secretary, will appear before a Senate panel on Thursday.

Libor Explained

The regional Fed bank, by virtue of its location in Lower Manhattan, is on the front line of financial regulation. With examiners stationed inside the banks, the regulator has a wide window into the inner workings of these institutions.

But the New York Fed does not have enforcement power like many American regulators. Instead, it reports potential wrongdoing to other agencies or the central bank, the Federal Reserve, and leaves its counterparts to dole out punishments if necessary.

The New York Fed’s mission, officials say, is to broadly protect the health and safety of the financial system — not to micromanage individual banks.

“They focus on safety and soundness of the banks, which ultimately means they are not particularly focused on market manipulation,” said Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation, another regulator.

In recent years, the New York Fed has beefed up oversight. Under the president, William C. Dudley, the regulator has increased the expertise of its examiners and hired new senior officials.

Even so, the JPMorgan debacle and the interest-rate investigation have raised questions about the New York Fed. They highlight how the regulator is hampered by its lack of enforcement authority and dogged by concerns that it is overly cozy with the banks.

Mr. Geithner is expected to face questions from lawmakers on Wednesday about the rate-rigging inquiry that has ensnared more than a dozen big banks. In June, Barclays agreed to pay $450 million to authorities for manipulating the London interbank offered rate, or Libor.

Since the settlement, Mr. Geithner has heralded his efforts to reform the rate-setting process in 2008. But the New York Fed, which knew Barclays had been reporting false rates at the time, did not stop the actions.

And when Mr. Geithner briefed other American regulators about Libor in May 2008, he did not disclose the specific wrongdoing, according to people briefed on the meeting. In later briefings, New York Fed officials did warn their counterparts about “allegations of misreporting.”

“The regulator has an obligation to make a criminal referral if it suspects a crime may have occurred,” said Bart Dzivi, who served as special counsel to the Federal Financial Crisis Inquiry Commission. “How this doesn’t rise to that level, simply boggles the mind.”

The New York Fed has been engulfed by controversy since the financial crisis. Mr. Geithner was one of many regulators who had underestimated certain risks spreading through the financial system, saying in a May 2007 speech that “financial innovation has improved the capacity to measure and manage risk” while acknowledging that threats remained. In late 2008, the system nearly collapsed after Lehman Brothers failed.

This year, the New York Fed was again caught off guard when JPMorgan disclosed the trading losses, which have already exceeded $5 billion. The regulator has assigned about 40 examiners to the bank, but none of the officials kept close tabs on the chief investment office, the powerful unit that placed the ill-fated trade.

In the case of Libor, the New York Fed took a somewhat passive approach. Despite mounting evidence of problems, the agency focused on policy solutions rather than the wrongdoing.

People close to the Fed note that, at the time, the regulator was primarily concerned with saving Wall Street from collapse. And the regulator pushed harder than its British counterparts, records show. Mr. Geithner urged British authorities to “eliminate incentive to misreport” Libor, which affects the cost of trillions of dollars in mortgages and other loans.

Some New York Fed examiners are now focused on how the Libor investigation could damage the bottom line at banks like Citigroup and JPMorgan. The examiners, people briefed on the matter say, are assessing whether banks need to build reserves against the growing threat of lawsuits.

The concerns echo the New York Fed’s broader moves to enhance supervision. After the crisis, the Fed formed a special team to spot emerging risks. Mr. Dudley also appointed a new head of bank supervision, Sarah J. Dahlgren, who first joined the Fed more than two decades ago after working as a budget official at Rikers Island jail.

In recent years, the New York Fed has doubled the number of on-site examiners and dispatched some of its most senior officials to big banks. The lead supervisors at each bank are some of the most “battle tested” and sophisticated regulators who are comfortable challenging Wall Street executives, one regulator said.

The New York Fed also notes that it has delved deeper into internal bank data, focusing on business units that generate the most revenue and risk. To better prepare the industry for sudden losses, the regulator has pushed banks to build extra capital.

But there are limits to its power. Despite its leading role in policing the banks, the New York Fed cannot levy fines. When examiners do detect questionable behavior, they often push the company to adopt changes. If the wrongdoing persists, officials can pass along the case to the Federal Reserve board in Washington.

It is up to the central bank to take action. The Fed, which can impose fines and cease-and-desist orders, filed 171 enforcement actions last year. The cases are down 44 percent from the year before, but the actions have increased sharply from the precrisis era.

Some critics also contend there is a revolving door between Wall Street and the New York Fed. Mr. Dudley was formerly the chief domestic economist at Goldman Sachs, and his wife collects deferred compensation from her days at JPMorgan. After Bear Stearns collapsed in 2008, the New York Fed hired the firm’s chief risk officer.

The New York Fed does limit the influence of employees who depart for a career on Wall Street. Some former senior officials cannot discuss regulatory matters with the Fed for up to a year. As an extra measure, examiners rotate between banks every three to five years to prevent a clubby culture from forming.

But some experts say the problem is not solved.

“It’s a cultural problem at all the banking regulators,” said Ms. Bair, who is now a senior adviser to the Pew Charitable Trusts. “There’s not a healthy separation, and you can see that in their hiring practices.”

Article source: http://dealbook.nytimes.com/2012/07/24/new-york-fed-faces-questions-over-policing-wall-street/?partner=rss&emc=rss

DealBook: Barclays to Pay Over $450 Million in Regulatory Deal

A branch of Barclays in London.Andy Rain/European Pressphoto AgencyA branch of Barclays in London.

Barclays has agreed to pay more than $450 million to resolve accusations that it attempted to manipulate key interest rates, the first settlement in a sprawling global investigation involving many of the world’s biggest banks.

The British bank struck a deal with regulators in Washington and London, as well as the Justice Department. The settlement is seen as the first in a series of potential cases against other major financial firms.

“When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined,” said David Meister, the enforcement director of the Commodity Futures Trading Commission, the American regulator involved in the Barclays case.

The broad investigation centers on the way Barclays and other big banks set key benchmarks for borrowing, lending rates that affect corporations and consumers.

Regulators have questioned whether the banks attempted to improperly set certain rates — including the London interbank offered rate, or Libor, and the Euro interbank offered rate, or Euribor — at a level that was favorable to their own institutions. Authorities are also looking at HSBC, Citigroup, JPMorgan Chase and other firms.

In the Barclays case, regulators say they uncovered “pervasive” wrongdoing that spanned a four-year period and touched top rungs of the firm, including members of senior management and traders stationed in London, New York and Tokyo. A 45-page complaint laid bare the scheme, describing how Barclays made false reports with the aim of manipulating rates to increase the bank’s profits.

The complaint also outlines how Barclays, at the height of the financial crisis, submitted artificially low figures to depress the rate and deflect scrutiny about its health. The bank at the time faced concerns that it was reporting high borrowing rates pointing to a weak financial position.

The practice prompted unease among some employees, who worried the bank was “being dishonest by definition.”

The Barclays settlement represents a record for the two regulators. The futures commission levied a $200 million penalty, the largest in its history, while the Financial Services Authority in London imposed a $92.8 million fine. As part of the settlement deal, the Justice Department agreed to not prosecute Barclays, although federal prosecutors are continuing a criminal investigation into other banks and bank employees.

“The events which gave rise to today’s resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business,” the Barclays chief executive, Bob Diamond, said in a statement. “When we identified those issues, we took prompt action to fix them and cooperated extensively and proactively with the authorities.” Mr. Diamond added that he and three other top executives had voluntarily agreed to give up their bonuses this year.

In the aftermath of the financial crisis, global regulators have been looking into whether many of the world’s largest banks attempted to manipulate Libor, a measure of how much banks charge each other for loans. In essence, the benchmark is an average of the interest rates at which that the big banks say they can borrow from the capital markets.

An important barometer of the health of the financial system, the rate not only affects big banks and corporations but also homeowners. Libor and similar rates are used to determine the price for more than $350 trillion worth of financial products, including complex derivatives, student loans, credit cards and mortgages.

At least nine agencies, including the Justice Department, the Financial Services Authority of Britain and Financial Supervisory Agency of Japan, have centered their investigations on Libor. Authorities are also looking into the activity surrounding similar benchmarks known as Tibor, the Tokyo interbank offered rate, and Euribor.

“Barclays’ misconduct was serious, widespread and extended over a number of years,” Tracey McDermott, acting director of enforcement and financial crime at the Financial Services Authority, said in a statement. “Barclays’ behavior threatened the integrity of the rates with the risk of serious harm to other market participants.”

Libor and the other interbank rates provide benchmarks for global short-term borrowing, and are published daily based on surveys from banks about the rates at which they could borrow money in the financial markets. Currently, more than a dozen financial firms, including JPMorgan, Bank of America and HSBC, provide information to set the daily American dollar Libor rate.

Regulators are investigating whether banks shared information between their treasury departments, which help to set Libor, and their trading units, which buy and sell financial products on a daily basis. Financial institutions are expected to maintain so-called Chinese walls between the two divisions to avoid confidential information being used to turn a profit as part of banks’ daily trading operations.

Analysts say the Libor system, which was created in 1986 and is overseen by Thomson Reuters on behalf of the British Bankers’ Association, does not provide sufficient transparency about how banks set their daily interest rates for borrowing in the financial markets.

When many banks were unable to borrow in the financial markets during the financial crisis, authorities raised concerns about the figures that firms were using to set Libor.

As bank funding costs rose to historic highs after the collapse of Lehman Brothers, regulators started to worry that financial firms might have submitted low interest rate figures that underpin Libor to appear in stronger financial positions than they actually were. With limited oversight over how banks set the rates, analysts say a bank could have provided lower figures in an effort to artificially keep its actual borrowing costs down.

Since then, regulators in the United States have issued subpoenas to several banks, including Bank of America, UBS and Citigroup, about how Libor was set. The Competition Bureau of Canada is investigating the activities of JPMorgan, Deutsche Bank and several other major banks about their activities around Libor. Japanese, Swiss and British authorities are also conducting their own inquiries into how the interbank rates have been set over the last five years.

In 2011, Charles Schwab, the brokerage firm and investment manager, sued 11 major banks, including Bank of America, JPMorgan and Citigroup, claiming they conspired to manipulate Libor.

Last August, Barclays disclosed that American and European authorities were investigating the activities of the British bank and other financial institutions concerning how Libor was set. The inquiries had been focused on accusations that Barclays and other firms suppressed interbank rates from 2006 to 2009, according to a statement from the British bank. Barclays had said it was cooperating with the investigation.

The British Bankers’ Association, Libor’s sponsor, defends its rate-setting process, though the trade body established a committee earlier this year to revise how the rate was set. The changes are expected to focus on establishing guidelines, including which bank employees can be told about the daily interbank rates and which specific financial instruments can be used to set Libor.

Barclays statement of facts from the Justice Department

Article source: http://dealbook.nytimes.com/2012/06/27/barclays-said-to-settle-regulatory-claims-over-benchmark-manipulation/?partner=rss&emc=rss

DealBook: Japan Calls for Action Against Citigroup and UBS

TOKYO — Japanese financial regulators called on Friday for penalties against Citigroup and UBS, accusing them of trying to manipulate interest rates at which they borrow from each other, broadening an international inquiry into some of the world’s biggest banks.

In two statements, the Japanese Securities and Exchange Surveillance Commission said employees of the banks’ local units had repeatedly tried to influence the Tokyo Interbank Offered Rate, or Tibor, by asking other banks for an advantageous rate. There was no evidence that the Tibor rate was actually manipulated, the commission said. However, both banks lacked internal controls to make sure employees did not try to manipulate rates, it said, and recommended that Japan’s Financial Services Agency issue censures.

Tibor and its equivalent in Europe, the London Interbank Offered Rate, are measures of how much banks charge one another for loans. They are an important barometer of the health of the market and the financial system, and affect the payments made by millions of homeowners and other borrowers. The rates are set daily by bankers’ associations based on data provided by member banks on costs of borrowing from one another.

In a statement, the Japanese brokerage unit of Citigroup said it was taking “necessary actions” to address regulators’ concerns. Jason Kendy, a spokesman in Tokyo for the Swiss bank UBS, said, ”We take these findings very seriously, and have been working with the S.E.S.C. and the F.S.A. to ensure all issues are addressed and resolved.”

Apart from the Tibor inquiry, Citigroup is facing potential penalties in Japan over possibly failing to fully explain product risk to retail customers, according to Bloomberg News.

Article source: http://feeds.nytimes.com/click.phdo?i=db586b500e4091bf87ce79f45c593ad2

Stocks and Bonds: Shares Are Bolstered by News From Europe

Some traders say that the market is gaining momentum from its recent gains and have begun pointing to signs that the market’s extreme volatility may be giving way to a calmer period. But with all eyes on Europe, even optimists acknowledge the fragility of the recent confidence.

The Dow Jones industrial average closed up 102.55 points, or 0.9 percent, at 11,518.85. It spent much of the day in positive territory for the year before giving up some of its gains in the last hour.

The index was positive for most of the year before plunging in early August. Since then, stock prices have experienced a series of wrenching ups and downs, closing in positive territory for the year only once.

The index closed on Wednesday 0.5 percent below its level at the beginning of 2011.

The Standard and Poor’s 500-stock index, seen as a more complete barometer of the overall market, was up 11.71 points, or 1 percent, at 1,207.25. It remains down more than 3 percent for the year. The Nasdaq composite index rose 21.70 points, or 0.8 percent, to 2,604.73.

Banks continued to make particularly strong gains. Citigroup gained 4.9 percent, while Wells Fargo’s shares were up 3.5 percent.

The European Commission president, José Manuel Barroso, proposed that Europe’s biggest banks be required to temporarily bolster their protection against losses, as part of a broader plan to restore confidence in the European financial system. He also called on the 17 European Union members that use the euro to maximize the capacity of their bailout fund, a clear hint that he favors leveraging the fund to increase its power.

Slovakia is expected to approve changes to the rescue fund, known as the European Financial Stability Facility, on Thursday or Friday.

Lawmakers there initially rejected the bill shortly after markets in the United States closed on Tuesday. The vote led to the collapse of the country’s coalition government, but the parties in the departing government reached an accord with the main opposition party to permit the bill to pass in exchange for early elections.

The other 16 E.U. members that use the euro have approved the measure, which requires unanimous support.

Analysts said recent turmoil in the markets had effectively forced European leaders to show real progress in addressing problems related to sovereign debt.

“The market has screamed loud enough to make the European authorities stand up and listen,” said Andrew Wilkinson, chief economic strategist for Miller Tabak Company.

Some traders also pointed to the falling level of the VIX, which measures volatility, as a sign that markets could be stabilizing. The VIX, popularly known as the fear index, ended at 31.26, its lowest level since mid-September. In addition to positive signs in Europe, the markets were adjusting to a slightly brighter picture of the domestic economy, said Michael Church, president of Addison Capital. A recent spate of economic data has eased fears among economists that a recession is imminent.

“At some point you had to question that thesis, especially when it had become exceptionally popular,” Mr. Church said.

The minutes from the most recent Federal Open Market Committee meeting were released on Wednesday. They showed that two members had favored more aggressive action to stimulate the economy, essentially putting fears of a further slowdown ahead of inflation concerns.

European markets closed higher Wednesday. The benchmark Euro Stoxx 50 index was up 2.43 percent; the FTSE 100 in London rose 0.85 percent; and the DAX in Frankfurt gained 2.2 percent.

The euro, which has been gaining against the dollar for over a week, rose 1.1 percent to $1.3677.

Yields on United States Treasuries also continue to rise. The yield on the benchmark 10-year note was 2.21 percent, up from 2.16 late Tuesday.

This article has been revised to reflect the following correction:

Correction: October 12, 2011

An earlier version of this article erroneously reported the yield on the 30-year bond —   rather than the 10-year note —   as 2.214 percent.

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Banks Brace for Bad News as Earnings Season Arrives

But when it comes to the nation’s biggest banks, they have a lot more in common than you would think. Both are deeply frustrated with financial institutions in general and have little faith in the message coming from bank executives.

Earnings season is about to upset one of those groups even more. Never popular to begin with, the nation’s biggest banks are rapidly becoming a focus of public dissatisfaction with the economy, uniting opponents including consumers upset about new fees, protesters who blame the banks for the nation’s economic woes, and lately, Wall Street types who have dumped their bank shares en masse.

For banks, the situation is likely to get worse before it gets better. They are due to begin reporting earnings this week, and the numbers are likely to leave investors as frustrated as ever, making the banks even more desperate to impose new charges on consumers’ accounts and rack up bigger trading profits. Over all, revenue is expected to fall 4 percent in the third quarter, slipping back to 2005 levels, according to data from Trepp. The industry’s earnings are expected to be about what they were in late 2002.

The biggest banks are expected to be hit hard by a sharp slowdown in their Wall Street-related businesses because of the chaotic third quarter in the markets. But the growth prospects for traditional banking are not great either. Tough new federal regulations restricting overdraft charges and other penalties are already taking a big bite out of profits. And then there are the government-mandated cuts in once-lucrative debit-card swipe fees, which have prompted banks to try to recoup billions of dollars in lost revenue with increases like Bank of America’s controversial new $5 monthly debit card fee.

Besides leaving consumers infuriated, the debit card fees have also drawn the wrath of the White House, with President Obama warning last week that customers should not be “mistreated” in pursuit of profit, while Vice President Joseph R. Biden Jr. characterized moves to hit consumers with new charges “incredibly tone deaf.” Senator Richard J. Durbin of Illinois, the No. 2 Senate Democrat, took the unusual step of denouncing Bank of America on the Senate floor, urging customers to “vote with your feet, get the heck out of that bank.”

Investors certainly have. Bank stocks are at lows not seen since the wake of the financial crisis, and shares of Bank of America, the nation’s biggest bank, are down more than 50 percent since the start of the year, while Citigroup is down more than 40 percent.

David H. Ellison, a mutual fund manager for FBR who invests in financial companies, likens owning bank stocks these days to holding airline stocks in the months after the Sept. 11 attacks in 2001. “Nobody wants to own the group,” he said. “Everybody thinks it is not the place to be.”

And in a kind of unusual convergence, protesters and bank analysts alike have had it with bank management.

For the protesters, financial institutions, among other things, symbolize growing economic inequality in the United States, with bank executives enjoying huge pay packages even as their companies benefit from government support. Investors distrust them because they have disappointed the Street in quarter after quarter, and seem unable to grow.

“There is a huge skepticism, that goes way beyond normal healthy doubt, about how reliable their numbers and guidance are,” said Chris Kotowski, an analyst with Oppenheimer. “People who were bullish are frustrated and beaten down.”

Michael Mayo, a longtime financial services analyst, has been traveling around the world over the last year, calling attention to what he calls his “Japan lite” thesis — the view that the United States and its banks are in for a prolonged period of very slow growth, not unlike Japan’s so-called lost decade in the 1990s.

A year ago, he said, about four in five clients brushed off his investment thesis. Today, he said, most agree.

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For Eric Schneiderman, New York Attorney General, Some Notice

Until fairly recently, he acknowledged, if you had asked the average passer-by to name New York’s attorney general, you might have gotten a mystified “Huh?” or the answer that it was Andrew M. Cuomo (the governor who used to have the job) or Eliot Spitzer (the disgraced former governor who had it before that), rather than the correct response: Mr. Schneiderman.

In the eight months since he has assumed the office, the emphatically unglamorous Mr. Schneiderman has maintained a low profile for the state’s top law-enforcement officer, charting a busy but anonymous course between Spitzerian aggression and Cuomoesque charm. Even his own press aide, Danny Kanner, recently confessed that, before this summer, his own parents did not know who Mr. Schneiderman was. “And I’m their kid; I work for the guy,” Mr. Kanner said.

But then came August, when Mr. Schneiderman, 56, rejected a proposed nationwide settlement releasing some of the country’s biggest banks from a lawsuit brought by the states claiming misconduct in the mortgage markets. Almost overnight, he found his own name mentioned in a series of laudatory articles in publications as varied as Rolling Stone, The Rochester Democrat and Chronicle and the Web site Gawker.

Adding fuel to the profile-raising fire were the phone calls Mr. Schneiderman received this summer from officials in the Obama administration who pressured him to smarten up and join his counterparts in other states in settling the case. There were reports that a Federal Reserve official, Kathryn S. Wylde, had harangued him in public for his stubbornness (at the funeral for Hugh L. Carey, the former New York governor, no less). At the end of August, an unrepentant Mr. Schneiderman was kicked off the executive committee of attorneys general in charge of the case by its leader, Tom Miller, the attorney general of Iowa.

Ever since, the four-member Correspondence Unit in Mr. Schneiderman’s office, in a building wedged between the New York Stock Exchange and the New York Federal Reserve Bank, has been dealing with a flood of mail. It is, by all accounts, a spontaneous and grass-roots eruption of thank-you notes.

From Brooklyn, there was this: “Thank you for upholding the law.”

From Manhattan, this: “I promise to volunteer for your campaign.”

From Baldwinsville, N.Y.: “The people are behind you!”

And an echo, from Ware, Mass.: “You have the people’s support.”

Arriving by the day, sometimes by the hour, there have been e-mails and letters from places like Charlottesville, Va.; Athens, Ohio; Placerville, Calif.; and East Berlin, Conn.

Someone from Long Island wrote to say (in capital letters): “THANK YOU! THANK YOU! THANK YOU!” There was a hat-tip from Los Angeles: “Good luck, sir. You are a beacon of responsibility in a dark and murky landscape.”

Along with the correspondence, there has also been a small tsunami of campaign donations, many in the form of modest checks ($5, $10) from ordinary people in unlikely locations: Clarkston, Ga.; Okemos, Mich.; Anderson, S.C.; Eufala, Ala.  During two weeks in August and September, Mr. Schneiderman received $4,179 in contributions. That may not sound impressive until one learns that they came from 36 people in 34 cities in 19 states.

So far, Mr. Schneiderman seems to have taken this attention in stride, or at least with a convincing semblance of stride.

“Honestly, my day-to-day life hasn’t changed,” he said in an interview last month. “It’s not like people are turning around, staring at me on the street. I have been getting a lot of support from people who are calling in, or writing, or calling my friends or people who work for us, and that’s gratifying. But I think this is kind of a no-brainer. I’m doing my job as a prosecutor. There was a lot of misconduct, and it needs to be looked into.”

Mr. Schneiderman is not alone in questioning the settlement arrangement, which its critics say would wrest up to $20 billion from Bank of America, Wells Fargo, Citigroup, JPMorgan Chase and others for broad immunity from prosecution. The attorneys general in Delaware, Nevada and Minnesota have also expressed qualms that the deal is weak and inappropriately favorable to the banks. On Sept. 22, Jack Conway, the Kentucky attorney general, joined the dissenters, sending out his own announcement in praise of Mr. Schneiderman’s position.

Still, New York State’s attorney general, armed with weapons like the Martin Act, a powerful state securities law, has always been a first among equals and has conventionally held a second, if informal, title as the Sheriff of Wall Street. Some, like Mr. Cuomo and Mr. Spitzer, have parlayed prosecutions of the banks into successful campaigns for governor. Mr. Schneiderman, who has not expressed interest in higher office, has not let his close-up moment go unused. While he was in negotiations with the banks, his political fund-raising committee sent an e-mail to supporters trumpeting his “tough fight” against the industry. The e-mail was titled “Standing Up for You.”

This occasioned a rare instance of criticism, in The Daily News, which scolded Mr. Schneiderman in September for letting his actions be guided “by political considerations.” The New York Post is also on the attack. Two weeks ago, it published an article gleefully announcing that a 36-year-old lawyer in Mr. Schneiderman’s office was moonlighting as a professional dominatrix. (She has been suspended.) Weeks before that, in an editorial criticizing his objection to the settlement, it slighted Mr. Schneiderman himself — in a strange affront to the city — as an “ambitious, liberal New York pol.”

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Investors Reducing Exposure to French Banks

Even as European investors race to abandon shares in French banks, on this side of the Atlantic banks, brokerages and other American financial institutions are quietly reducing their exposure too, turning down requests for fresh loans from the euro currency region and seeking alternative investments.

In August, American money funds and other suppliers of short-term credit chose not to refinance roughly $50 billion of debt issued by European banks, a drop of 14 percent, according to JPMorgan research. Traders are so worried that they are forcing French banks like Société Générale and BNP Paribas to pay more to borrow dollars.

“Money market managers in the U.S. continue to prune risk,” said Alex Roever, who tracks short-term credit markets for JPMorgan Chase. “The issue is headline risk; fund managers may be comfortable with the banks’ credit, but many are hearing from shareholders worried by what they have read about French banks.”

Unlike their American counterparts, France’s biggest banks are more dependent on short-term funding. Money market funds in the United States have been among the biggest lenders, lending $161 billion to French banks in August, although that is down 39 percent from a month earlier.

“It hasn’t been a wholesale pullback,” Mr. Roever said. In 2008, after the collapse of Lehman Brothers, when a key money market fund sustained huge losses on Lehman debt and investors started pulling their money out of the funds, he said, “everybody shut off at once. It was like a cliff. This time the pullback has been more gradual.”

It’s not just money market funds that are getting cold feet.

On Wall Street, some big American banks have become wary of derivatives tied to French banks like Société Générale and BNP Paribas, several traders said. The two French giants are major international players in the derivatives arena, so a pullback would hurt egos and the bottom line of both companies. Derivatives are investment instruments whose value is tied to another underlying security.

And since last month, according to several bankers who insisted on anonymity, hedge funds and others firms have also withdrawn hundreds of millions of dollars from prime brokerage accounts held at French banks. Prime brokers hold assets for hedge funds and other investors, while providing loans for increased leverage on their bets.

While still small, this kind of transfer echoes the larger move hedge funds made as Lehman teetered in 2008, when a tidal wave of withdrawals helped sink the bank.

Not everyone is anxious. Some money market giants like Fidelity and Federated Investors are sticking with French banks despite the increased anxiety. At Federated, which has $114 billion under management in prime money market funds, about 13 to 17 percent of assets remain invested in French bank debt, according to Deborah Cunningham, a senior portfolio manager at Federated.

“We’re always rethinking it and assessing it, but we’ve not come up with a different answer,” she said. “We don’t feel there’s any jeopardy with regard to repayment.”

At Fidelity, which manages a total of $428 billion, Adam Banker, a spokesman, said, “We’re very comfortable with our money market funds’ European bank holdings, including French bank holdings.” As capital becomes more costly or scarce for European banks, the resulting rise in their borrowing costs risks impairing their own ability to lend, economists warn. That threatens to undermine the general economic growth prospects of already-weakened nations like Italy and France, which in turn would make the banks’ position worse.

Eric Dash and Julie Creswell contributed reporting.

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