October 9, 2024

Europe Moves to Overhaul Fishing Policies

PARIS — The European Union on Thursday agreed to an overhaul of the region’s fisheries policy, a deal intended to make commercial fishing more sustainable.

While officials hailed it as a landmark agreement, some environmentalists said the deal might not be ambitious enough.

The agreement, the first overhaul of the Common Fisheries Policy since 2002, was reached early Thursday by Maria Damanaki, the European fisheries commissioner; Ulrike Rodust, a German member of the European Parliament; and Simon Coveney, the Irish fisheries minister, on behalf of the European Union’s 27 national fishing ministries. The deal requires the consent of all 27 member countries of the European Union, but their approval is expected.

“This is a historic step for all those involved in the fisheries and aquaculture sectors,” Ms. Damanaki said in a statement. “We are going to change radically the way we fish in the future.”

The current policy has been widely regarded as a failure. According to European Union data, 80 percent of Mediterranean fish stocks and 47 percent of Atlantic stocks have been overfished.

In February, Parliament gave overwhelming support for a strict new policy. But the European fisheries council balked at the plan. Since then, both sides have worked to resolve their differences.

As part of the deal, negotiators agreed to end overfishing by setting quotas at levels consistent with scientific advice and bringing fleet capacity in line with fish stocks. Overfishing is supposed to stop by 2015, with a five-year grace period for exceptional cases. Officials also agreed that stocks should be managed with a goal of being returned to sustainable levels.

They also decided to seek an end to the wasteful practice of discarding unwanted fish at sea. The new rules will also pass on more decision-making to the national and local authorities.

The negotiators rejected a proposal to create transferable fishing rights, which had prompted fears among small operators that Europe’s fishing quotas would end up in the hands of large companies. Ms. Damanaki said the overhaul would also address the claim that European fleets act in environmentally destructive ways in overseas waters.

“We are going to apply the same principles when we are fishing abroad,” she said. “We will fully respect international law and our commitments.”

Conservation organizations generally applauded the deal reached on Thursday, praising Parliament for taking a strong stand. But critics question Europe’s will to enforce its own laws, noting that no deadline had been set for the sustainability goal.

Sergi Tudela, head of the fisheries program at the environmental group WWF Mediterranean, said the language in the agreement meant that it might be 100 years before some stocks recovered to sustainable levels. The deal “fails to end overfishing and ensure recovery of fish stocks within a reasonable time frame,” Mr. Tudela said.

Uta Bellion, a spokeswoman for the Pew Charitable Trusts and Ocean2012, a coalition of environmental organizations, said identifying sustainability as a management principle was an important step, despite the lack of a target date. The deal, she added, showed that Europe had learned the lessons of the Magnuson-Stevens Act, a 1976 law in the United States that is credited with improving the supervision of American commercial fishing.

Ms. Bellion also said she welcomed an element of the new policy that rewards “low impact” fishers by giving them a larger share of the catch, a measure to encourage environmentally responsible practices.

Another battle looms on the horizon, this time over the subsidies the European Union pays out annually to fishermen. Those subsidies are considered to be a cause of unsustainable overfishing, since they keep otherwise unprofitable boats in the water.

Article source: http://www.nytimes.com/2013/05/31/business/energy-environment/europe-moves-to-overhaul-fishing-policies.html?partner=rss&emc=rss

DealBook: Lloyds and R.B.S. Detail Plans to Increase Capital Reserves

A Royal Bank of Scotland branch in London.Toby Melville/ReutersA Royal Bank of Scotland branch in London.

Two of Britain’s largest banks outlined plans on Wednesday to increase their capital reserves after local authorities demanded that the country’s biggest financial institutions raise a combined £25 billion ($38 billion).

The banks, Royal Bank of Scotland and the Lloyds Banking Group, both partly owned by British taxpayers after receiving multibillion-dollar bailouts during the financial crisis, said they would meet the requirement by retaining earnings and selling assets.

They said that they would not have to raise additional capital in the financial markets. Their announcements were made as banks across Europe, including Deutsche Bank and HSBC, acted to bolster capital reserves in line with new accounting standards known as Basel III.

European authorities are eager to protect the Continent’s financial institutions from instability caused by delinquent assets and exposure to risky trading and have outlined plans that require them to bolster their capital reserves.

On Wednesday, the International Monetary Fund said Britain should do more to fuel economic growth and be prepared to put more money into its bailed-out banks if necessary.

The I.M.F. said that some recent economic information from Britain was “encouraging” but that it did not point to a sustainable recovery soon. “Activity appears to be improving, but a slow recovery remains likely,” the fund said.

That view differs from comments by the departing governor of the Bank of England, Mervyn A. King, who said last week that there was “a welcome change in the economic outlook” and that a recovery was “in sight.”

George Osborne, left, the chancellor of the Exchequer, at a news conference Wednesday after meeting with the International Monetary Fund in London.Pool photo by Carl CourtGeorge Osborne, left, the chancellor of the Exchequer, at a news conference Wednesday after meeting with the International Monetary Fund in London.

The fund has criticized the austerity program developed by George Osborne, the chancellor of the Exchequer, saying that the British economy would recover faster if the government slowed its spending cuts and tax increases. The I.M.F. reiterated that opinion on Wednesday and called for additional public spending.

Neither Royal Bank of Scotland nor Lloyds disclosed the specific amount of capital that British regulators have demanded that they raise.

Analysts had expressed concern that the banks were two of the most vulnerable of Britain’s largest financial institutions, despite years of restructuring to shed so-called noncore assets and return to profitability.

After receiving bailouts in 2008, the banks have struggled to jettison legacy assets, including billions of dollars of underperforming loans, that have weighed on financial performance.

Royal Bank of Scotland, in which the British government holds an 81 percent stake, said on Wednesday that it would meet its increased capital needs by continuing to reduce its exposure to risky assets and shrinking its investment banking unit, while also selling more assets.

Since the financial crisis began, the bank has reduced its balance sheet by more than £600 billion of noncore assets and has eliminated more than 30,000 jobs.

The bank, which is based in Edinburgh, also said it would raise additional money through the initial public offering of a stake in its American division, the Citizens Financial Group, which is planned for 2015.

“R.B.S. remains committed to a prudent approach to capital,” the bank said in a statement.

Shares in Royal Bank of Scotland rose 2.2 percent in trading in London on Wednesday, while those of Lloyds rose 2.3 percent.

Lloyds, in which the government holds a 39 percent stake, also said it would meet its capital needs by shedding noncore assets and refocusing on its main retail business.

The bank, which is based in London, added that it planned to have a core Tier 1 capital ratio, a measure of a bank’s ability to weather financial shocks, of 10 percent by the end of 2014, under accounting rules outlined European Union.

Lloyds has announced several divestments, including the £400 million sale of its stake in the wealth manager St. James’s Place, to raise capital.

The government may be preparing to start returning the banks to private ownership.

After years of lackluster financial performance by the two banks, their share prices have rebounded in the last 12 months as restructuring plans have taken root.

The chairman of Royal Bank of Scotland, Phillip Hampton, gave the latest indication of the bank’s return to private ownership this month after he said the government’s stake could start to be sold in the middle of 2014.

“It could be earlier, that’s a matter for the government,” he added at the time.

The Prudential Regulatory Authority, the regulator in charge of Britain’s largest banks, said on Wednesday that it was still in discussions with several institutions about their capital positions.

Recent attention has focused on the Co-operative Bank, a small British lender whose credit rating was recently downgraded to junk status because of its continued exposure to delinquent commercial real estate loans. The bank may have to raise up to £1 billion of additional capital, a recent report by Barclays analysts said.

“Banks are scraping around to raise funds to mitigate the impact of the capital requirements,” said Ian Gordon, a banking analyst at Investec in London. “The pressure has accelerated.”

Article source: http://dealbook.nytimes.com/2013/05/22/r-b-s-and-lloyds-plan-to-raise-capital/?partner=rss&emc=rss

DealBook: R.B.S. and Lloyds Bank Plan to Bolster Capital

The Lloyds Banking Group and Royal Bank of Scotland plan to retain earnings and sell assets to increase their capital reserves.Agence France-Presse — Getty ImagesThe Lloyds Banking Group and Royal Bank of Scotland plan to retain earnings and sell assets to increase their capital reserves.

LONDON – Two of Britain’s largest banks outlined plans on Wednesday to increase their capital reserves after local authorities demanded recently that the country’s largest financial institutions raise a combined £25 billion ($38 billion).

Royal Bank of Scotland and the Lloyds Banking Group, which are both owned in part by British taxpayers after receiving multibillion-dollar bailouts during the financial crisis, said they would meet the shortfall by retaining earnings and selling assets.

Both British banks added that they would not have to raise additional capital in the financial markets to meet the regulatory requirements.

The latest announcements come as banks across Europe, including Deutsche Bank and HSBC, are taking steps to bolster their capital reserves in line with new accounting standards known as Basel III.

European authorities are eager to protect the Continent’s firms from instability caused by delinquent assets and exposure to risky trading and have outlined plans that require financial institutions to bolster their capital reserves.

On Wednesday, neither R.B.S. nor Lloyds disclosed the specific amount of capital that British regulators have demand they raise as part of attempts to shore up British banks in case of future financial shocks.

Analysts had raised concerns, though, that the banks were two of the most vulnerable of the country’s largest financial institutions despite years of restructuring to shed so-called noncore assets and return to profitability.

After receiving bailouts in 2008, both banks have struggled to jettison legacy assets, including billions of dollars of underperforming loans, that have weighed on their financial performances.

R.B.S., in which the British government holds an 81 percent stake, said on Wednesday that it would meet its increased capital needs by continuing to reduce its exposure to risky assets and shrinking its investment banking unit, while also selling more assets.

Since the financial crisis began, the bank has reduced its balance sheet by more than £600 billion of noncore assets and has eliminated more than 30,000 jobs.

The bank, which is based in Edinburgh, also said it would raise additional money through the initial public offering of a stake in its American division, the Citizens Financial Group, which is planned for 2015.

“R.B.S. remains committed to a prudent approach to capital,” the bank said in a statement on Wednesday.

Shares in R.B.S. rose about 1 percent in morning trading in London on Wednesday, while those of Lloyds fell less than 1 percent.

Lloyds, in which the government holds a 39 percent stake, also said it would meet its capital needs by shedding noncore assets and refocusing on its main retail business.

The bank added that it planned to have a core Tier 1 capital ratio, a measure of a bank’s ability to weather financial shocks, of 10 percent by the end of 2014, under accounting rules outlined by the European Union.

Lloyds has announced a series of divestments, including the £400 million sale of its stake in the wealth manager St. James’s Place, in a bid to raise capital.

The British government is moving closer to starting the process of reducing its stakes in R.B.S. and Lloyds.

After years of lackluster financial performance, the share prices of the two banks have rebounded over the last 12 months as restructuring plans have taken root.

The chairman of R.B.S., Phillip Hampton, gave the latest indication of the bank’s return to private ownership this month after he said the government’s stake could start to be sold in the middle of 2014.

“It could be earlier, that’s a matter for the government,” he added at the time.

The Prudential Regulatory Authority, the regulator in charge of Britain’s largest banks, said on Wednesday that it was still in discussions with several institutions about their capital positions.

Recent attention has focused on the Co-operative Bank, a small British lender whose credit rating was recently downgraded to junk status because of its continued exposure to delinquent commercial real estate loans. The bank may have to raise up to £1 billion of additional capital, according to a recent report by Barclays analysts.

“Banks are scraping around to raise funds to mitigate the impact of the capital requirements,” said Ian Gordon, a banking analyst at Investec in London. “The pressure has accelerated.”

Article source: http://dealbook.nytimes.com/2013/05/22/r-b-s-and-lloyds-plan-to-raise-capital/?partner=rss&emc=rss

Euro Zone Officials Give Greece Additional $2.8 Billion in Loans

ATHENS — Euro zone officials on Monday approved the release of €2.8 billion in loans to Greece, the country’s Finance Ministry said, paving the way for the approval of an additional €6 billion installment of aid at a meeting of the currency union’s finance ministers in mid-May.

The Greek Parliament late Sunday approved a controversial plan to dismiss 15,000 civil servants by the end of next year as part of a new package of economic measures that the country must enforce in order to receive continued financing from the troika of foreign creditors: the International Monetary Fund, the European Central Bank and the European Commission.

The €2.8 billion, or $3.7 billion, approved Monday in Brussels was originally to have been disbursed in March but was delayed after negotiations between Greece and the troika stalled over the creditors’ demands for civil service cuts.

“There was a positive evaluation of the implementation of the Greek program and clear references to the decisiveness of the government in proceeding with reforms set out in the program,” the Greek Finance Ministry said.

The disbursement of the €6 billion installment of loans, in May, is dependent on the adoption of further measures by Athens, including an overhaul of the tax collection system.

The government’s latest measures passed into law in a vote held shortly before midnight on Sunday with 168 votes in the 300-seat House.

A last-minute amendment allowing the local authorities to hire young Greeks for less than the minimum wage of €586 a month fueled angry protests by the political opposition. But the inclusion of measures intended to ease some of the financial burden on homeowners, including a 15 percent reduction in a new property tax, clinched the support of lawmakers in the three-party ruling coalition.

Defending the bill, the finance minister, Yannis Stournaras, insisted that there was no choice but to implement the measures. “Greece is still cut off from the markets,” he told lawmakers, adding that the government’s chief aim was to achieve a primary surplus before seeking a further “drastic” reduction of its debt, which stood at 160 percent of gross domestic product at the end of last year.

His claims were derided by the opposition. “With blood, tears and looting, they will achieve surpluses like those achieved by Ceausescu in Romania and Pinochet in Chile,” said Alexis Tsipras, leader of the main leftist opposition party, Syriza, which wants Greece to revoke its agreement with the troika.

“Claim back your lives and your country that they are stealing,” he said as a few hundred people, mostly civil servants, staged a low-key protest outside Parliament.

The ruling coalition, led by Prime Minister Antonis Samaras, faces a difficult balancing act to reassure its foreign creditors and its long-suffering citizens, who have seen their incomes dwindle by a third and unemployment skyrocket to 27 percent in the past three years.

Article source: http://www.nytimes.com/2013/04/30/business/global/30iht-eugreece30.html?partner=rss&emc=rss

Supreme Court Hears Argument on Cellphone Towers

WASHINGTON — In June, two Texas cities asked the Supreme Court to decide a practical question and an abstract one, both concerning how quickly local zoning authorities have to respond to applications from telecommunications companies to build wireless towers.

The practical question was whether the Federal Communications Commission was authorized to set time limits.

But the Supreme Court, which includes four former law professors with an interest in administrative law, agreed to decide only the abstract question of whether an administrative agency like the commission may determine the scope of its own jurisdiction.

At the argument of the case on Wednesday, some of the justices seemed content to tease apart the semantic distinctions posed by the second question, though there did not seem to be much enthusiasm for adding further complexity to an already tangled area.

Others appeared frustrated that the court had gone out of its way to avoid having to give real-world guidance about a concrete and consequential issue.

The case, City of Arlington v. Federal Communications Commission, No. 11-1545, concerns a 1996 federal law that requires state and local authorities to act “within a reasonable period of time” after receiving applications to build or alter wireless facilities. In response to a request from a trade association for the wireless industry, the commission made two decisions.

First, it found that it had jurisdiction to define what a reasonable time was. Second, it said that 90 or 150 days were generally appropriate deadlines, depending on the circumstances.

The Texas cities, Arlington and San Antonio, said Congress had not authorized the commission to act in the first place, pointing to a part of the law that said it was not meant to limit the power of state and local governments.

The general rules in this area were set out in 1984 in Chevron v. Natural Resources Defense Council, which said that judges should defer to an administrative agency’s views when Congress itself has not spoken clearly.

The additional question in the new case was whether Chevron’s general framework applies to an agency’s determination of whether it has the power to act in the first place. Several justices said it did.

“The jurisdictional question, like any other question,” Justice Antonin Scalia said, “is to be decided with deference to the agency.”

Justice Sonia Sotomayor appeared to agree, adding that it was hard to tell the two kinds of questions apart. “It’s almost impossible to talk about what’s jurisdictional and what’s an application of jurisdiction,” she said.

A lawyer for the cities, Thomas C. Goldstein, responded that there are times when courts should draw distinctions between an agency’s general authority to interpret a law and its specific authority to interpret a particular provision of the law based on the text of the statute.

Justice Elena Kagan said that was slicing things too fine. “Mr. Goldstein, at one level you are right,” she said. “It’s just a level that doesn’t help you very much.”

At the end of the day, she said, it is all the same question. “We’ve just had some very simple rules about what gets you into the box where an agency is entitled to deference,” she said.

Solicitor General Donald B. Verrilli Jr., representing the commission, said that a uniform approach was workable. The alternative proposed by the cities, he said, would “open a Pandora’s box” because there was no “clear, neat dividing line” between the two kinds of questions.

Justice Stephen G. Breyer said the court should generally defer to agencies with expertise that lawmakers lack. “Congress, which is not expert, would have wanted the F.C.C. to figure this one out,” he said.

But Chief Justice John G. Roberts Jr. said there might be a special reason not to defer to the commission in this case because it concerned a conflict between federal and state powers. Federal courts, he said, are better suited to policing that boundary than “an agency of unelected bureaucrats.”

Article source: http://www.nytimes.com/2013/01/17/business/supreme-court-hears-argument-on-cellphone-towers.html?partner=rss&emc=rss

Koobface Gang That Spread Worm on Facebook Operates in the Open

The men live comfortable lives in St. Petersburg — and have frolicked on luxury vacations in places like Monte Carlo, Bali and, earlier this month, Turkey, according to photographs posted on social network sites — even though their identities have been known for years to Facebook, computer security investigators and law enforcement officials.

One member of the group, which is popularly known as the Koobface gang, has regularly broadcast the coordinates of its offices by checking in on Foursquare, a location-based social network, and posting the news to Twitter. Photographs on Foursquare also show other suspected members of the group working on Macs in a loftlike room that looks like offices used by tech start-ups in cities around the world.

Beginning in July 2008, the Koobface gang aimed at Web users with invitations to watch a funny or sexy video. Those curious enough to click the link got a message to update their computer’s Flash software, which begins the download of the Koobface malware. Victims’ computers are drafted into a “botnet,” or network of infected PCs, and are sent official-looking advertisements of fake antivirus software and their Web searches are also hijacked and the clicks delivered to unscrupulous marketers. The group made money from people who bought the bogus software and from unsuspecting advertisers.

The security software firm Kaspersky Labs has estimated the network includes 400,000 to 800,000 PCs worldwide at its height in 2010. Victims are often unaware their machines have been compromised.

The Koobface gang’s freedom underscores how hard it is to apprehend international computer criminals, even when identities are known. These groups tend to operate in countries where they can work unmolested by the local authorities, and where cooperation with United States and European law enforcement agencies is poor. Meanwhile, Western law enforcement is awash in computer crime and lacks the resources and skilled manpower to tackle it effectively, especially when evidence putting individuals’ fingers on keyboards must be collected abroad.

On Tuesday, Facebook plans to announce that it will begin sharing information about the group and how to fight them with security researchers and other Internet companies. It believes public namings can make it harder for such groups to operate and send a message to the criminal underground.

None of the men have been charged with a crime and no law enforcement agencies have confirmed they are under investigation.

The group investigators have identified has adopted the tongue-in-cheek name, Ali Baba 4: Anton Korotchenko, who uses the online nickname “KrotReal”; Stanislav Avdeyko, known as “leDed”; Svyatoslav E. Polichuck, who goes by “PsViat” and “PsycoMan”; Roman P. Koturbach, who uses the online moniker “PoMuc”; and Alexander Koltysehv, or “Floppy.” )

Efforts to contact members of the group for comment have been unsuccessful.

Weeks after early versions of the Koobface worm began appearing on Facebook, investigators inside the company were able to trace the attacks to those responsible. “We’ve had a picture of one of the guys in a scuba mask on our wall since 2008,” said Ryan McGeehan, manager of investigations and incident response at Facebook.

Since then, Facebook and several independent security researchers have provided law enforcement agencies, including the Federal Bureau of Investigation, with information and evidence. Most notably, Jan Droemer, a 32-year-old independent researcher in Germany, has provided important information and leads, including a password-free view inside Koobface’s command-and-control system, known as the “Mothership.” Mr. Droemer spent nights and weekends for four months in late 2009 and early 2010 unmasking the gang members using only information available publicly on the Internet.

The F.B.I. declined to comment.

That computer crime pays is fueling a boom that is leaving few Internet users and businesses unscathed. The toll on consumers alone is estimated at $114 billion annually worldwide, according to a September 2011 study by the security software maker Symantec.

Article source: http://feeds.nytimes.com/click.phdo?i=e8727e2dfd54dafa347871c1acf8aa88

DealBook: A German Regulator Seeks to Change NYSE-Deutsche Deal

LONDON — A German regulator has called for changes to the proposed $9 billion merger between Deutsche Börse and NYSE Euronext after raising concerns about how the deal would affect their operations in Frankfurt.

“We have communicated suggestions about how our concerns could be remedied,” said Wolfgang Harmz, a spokesman for the Hessian Ministry of Economy, the local German regulator for the Frankfurt exchange. He would not provide further detail on the proposed changes.

The local ministry has the power to revoke Deutsche Börse’s operating license and can forbid any changes to the ownership structure that result from the merger between Deutsche Börse and NYSE Euronext.

Mr. Harmz said any decision would come after the conclusion of the European Commission’s antitrust investigation, which is expected by the end of January 2012. Deutsche Börse was not immediately available for comment.

Local authorities are concerned about how the proposed deal would affect the companies’ continuing operations in Frankfurt, as well as whether management decisions would be made outside the German city, according to a person with knowledge of the matter.

In response to initial competition concerns by European regulators, the companies agreed in November to certain concessions. NYSE Euronext said it would sell its pan-European single-equity derivatives units, but not the options businesses in its home markets. Deutsche Börse said it would divest similar operations.

The companies added that they would give rivals access to Eurex Clearing, a clearinghouse for derivatives products, to offset regulatory concerns that the pending merger would lead to uncompetitive practices.

Both companies are adamant that any further concessions, particularly related to their fast-growing derivatives business, would put the merger in jeopardy.

“We want to pursue the transaction, but not at all costs,” Deutsche Börse’s chief financial officer, Gregor Pottmeyer, said in a statement last week. “Antitrust conditions should not be allowed to endanger the industry and economic logic of this transformational merger.”

Article source: http://feeds.nytimes.com/click.phdo?i=c164e9984b42caef64e07133e1981014

Fair Game: Wall Street’s Tax on Main Street

Like many states and cities in these hard economic times, Central Falls — population: 19,000 — was caught short by hefty pension obligations and weak tax revenue. It may not be the last municipality to file for bankruptcy. Jefferson County, Ala., is now on the brink of it, thanks to a sewer bond issue gone wildly bad. 

But while pensions and the economy are behind many of municipalities’ troubles, Wall Street has played a role, too. Hidden expenses associated with how local governments finance themselves are compounding financial problems down at city hall.

Wall Street banks have peddled to municipalities all sorts of financial products, some of which have turned out to be costly mistakes. Testifying on July 29 at a public hearing on municipal securities sponsored by the Securities and Exchange Commission, Andrew Kalotay, an expert in financial derivatives who runs a debt management advisory firm in New York, asserted that poorly structured financial transactions involving bonds and derivatives known as interest rate swaps represented “Wall Street’s multibillion-dollar hidden tax on Main Street.”

Mr. Kalotay is talking about a type of complex financing that big banks have pushed on state and local authorities in recent years. The arrangements are typically made when borrowers want to exchange variable-rate debt for fixed-rate obligations.

These deals are lucrative for the banks, but many of the issuers don’t seem to understand them. Mr. Kalotay told the S.E.C. that excessive fees charged by banks had cost issuers, and therefore taxpayers, $20 billion over the last five years. Real money, in other words, that could have been used in other ways by states and towns short on cash.

There’s much for banks to love about these deals. Because there is no central market for interest rate swaps, prices of swaps are shrouded in secrecy. Banks can mark up costs significantly, often without their clients’ knowledge.

Banks offering such deals can act as both adviser and counterparty to borrowers, putting the banks in direct conflict with their customers. And under agreements governing many of these swaps, borrowers that want to unwind these deals must go back to the banks that created them, putting the issuers at a disadvantage.

The costs of unwinding swaps can be onerous. Banks justify their fees by saying they are exposed to credit risk. But Mr. Kalotay asked, “What is the justification for a high margin on unwinding, when credit risk is nonexistent?”

Another plus for the banks is that they book immediately the entire amount earned over the life of the swap; salespeople working on the deals receive bonuses — typically 10 percent — on these windfalls.

Alexander T. Arapoglou, a professor at the Kenan-Flagler Business School of the University of North Carolina, says states and cities often pay too much and don’t get what they bargained for. “Very often, swaps are sold to a customer who sees the bank as a financial adviser,” Professor Arapoglou says. “They are expecting a charge of some sort but expect it to be relatively modest.”

Marketing materials for these deals often say interest rate swaps will be executed at prevailing market prices, he says. But when the deals are about to close, additional costs typically appear. “Many banks say that what’s defined by the Financial Industry Regulatory Authority as fair market practice, such as rules prohibiting excessive markups, does not apply to interest rate swaps,” he says.

As banks have become more risk-averse, debt financings containing swaps have become more common. Unwilling to take on interest rate risk, banks often make borrowers finance operations with variable-rate debt. Borrowers that prefer the predictability of fixed-rate debt have to take on a swap.

Municipalities aren’t the only ones being harmed. Small-business owners are overpaying as well. Consider what happened to Boca Raton Medical and Surgical Specialists, a Florida company that did a $21 million, five-year financing with Wachovia Bank in late 2005.

The deal financed an 80,000-square-foot office complex. But a lawyer for the company says its officials did not realize at the time that Wachovia had incorporated a 25-year interest rate swap into the transaction. This meant that the Boca Raton company would end up paying for a swap with a life five times as long as its financing.

Now the medical company is trying to unwind the deal. It has asked Wells Fargo, which acquired Wachovia in 2008, to return some of the money it paid to put on the swap. Wells has refused.

“We’re in effect trapped with what we have because of the size of the unwind fees,” says David Menkhaus, the lawyer at Moore Menkhaus who represents Boca Raton Medical and Surgical Specialists. “The industry portrays swaps as if it is an established market with consistent rates. That’s not true, but you only find out when you are trying to unwind a swap.”

Greg Warren, managing member of Swap Negotiators, a firm in Winter Park, Fla., that represents borrowers in such transactions, calculated that the Boca Raton deal contained $800,000 in undisclosed fees, equal to roughly 3.8 percent of the loan. Another independent company confirmed this amount.

“The bank has a reason to make a profit — they have to cover their risk,” Mr. Warren says. “But in this situation they had already covered their risk many times over.”

A Wells Fargo spokeswoman declined to talk about specific borrowers. Noting that the bank is among the smaller players in this arena, she said the bank still worked hard “to ensure our customers fully understand the transactions.”

SOME borrowers are questioning the cost of swaps and persuading lenders to reduce them. Wells Fargo, for instance, agreed to cut its price in a recent $10.4 million financing for Hillcrest Convalescent Center in Durham, N.C. Fees associated with the transaction were initially around $200,000, but after Hillcrest asked Swap Negotiators to vet the deal, Wells agreed to reduce its fees. Hillcrest saved $93,000, net of Swap Negotiators’ fees. Mr. Warren says his company charges 0.04 to 0.09 percent on a new transaction, and 0.02 percent when a swap is unwound.

Ted Smith, Hillcrest’s administrator, says, “It turned out to be a great business decision.”

Mr. Warren says unseen fees on such deals can be 1 to 5 percent of the loan. “The size of the hidden profits relative to the loan amounts is disproportionate to any other negotiated fee,” he says.

It is easy to see why big banks want to keep swap prices in the shadows. Until transparency comes to this arena, buyer beware.

Article source: http://www.nytimes.com/2011/08/07/business/wall-streets-tax-on-main-street.html?partner=rss&emc=rss