January 23, 2021

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

DealBook: California Sues JPMorgan Over Credit Card Cases

Kamala Harris, the California attorney general, is accusing JPMorgan Chase of credit card collection abuses.Richard Vogel/Associated PressKamala Harris, the California attorney general, is accusing JPMorgan Chase of credit card collection abuses.

California’s top law enforcement official accused JPMorgan Chase on Thursday of flooding the state’s courts with questionable lawsuits to collect overdue credit card debt.

The suit, filed in California Superior Court by the state’s attorney general, Kamala D. Harris, contends that JPMorgan, the nation’s largest bank, “committed debt collection abuses against tens of thousands of California consumers.”

For about three years, between January 2008 and April 2011, JPMorgan filed thousands of lawsuits each month to collect soured credit card debt, Ms. Harris said. On a single day, for example, JPMorgan filed 469 lawsuits, court records show.

As the bank plowed through the lawsuits, Ms. Harris said, JPMorgan took shortcuts like relying on court documents that were not reviewed for accuracy. “To maintain this breakneck pace,” according to the lawsuit, JPMorgan relied on “unlawful practices.”

The accusations outlined in the lawsuit echo problems — from questionable documents used in lawsuits to incomplete records — that plagued the foreclosure process and prompted a multibillion-dollar settlement with big banks. One hallmark of the foreclosure crisis, robosigning, in which banks worked through mountains of legal documents without reviewing them for accuracy, is at the center of Ms. Harris’s lawsuit against JPMorgan.

JPMorgan is already navigating a thicket of regulatory woes. The Office of the Comptroller of the Currency, one of the bank’s chief regulators, is preparing an enforcement action against the bank over the way it collects its credit card debt, according to several people close to the matter who spoke on the condition of anonymity because they were not authorized to discuss the cases publicly.

JPMorgan assembled a “debt collection mill that abuses the California judicial process,” according to the lawsuit. Many of the lawsuits filed rely on questionable or incomplete records, Ms. Harris said. “At nearly every stage of the collection process,” the bank “cut corners in the name of speed, cost savings and their own convenience,” she said.

Ms. Harris said she sought “to hold Chase accountable for systematically using illegal tactics to flood California’s courts with specious lawsuits against consumers.” She said she aimed to get “redress for borrowers who have been harmed,” but did not detail any request for specific damages.

While JPMorgan’s debt collection practices are the ones under scrutiny, flaws are increasingly common in credit card lawsuits filed by rival banks, according to interviews with dozens of state judges, regulators and lawyers who defend consumers.

“A vast number of the lawsuits are flawed and most of them can’t prove the individual actually owes the debt,” said Noach Dear, a civil court judge in Brooklyn who said he had presided over as many as 150 such cases a day.

Ted Mermin, executive director of the Public Good Law Center in Berkeley, Calif., said, “This is in no way just a JPMorgan problem.”

JPMorgan Chase declined to comment. The bank, though, has been cooperating with regulators, including the California attorney general’s office, to root out problems with its debt collection lawsuits, according to people briefed on the situation. Amid concerns that some of the underlying documentation was flawed, JPMorgan stopped filing new credit card lawsuits in 2011, these people said. In courts across the country, according to judges, JPMorgan has also been throwing out some pending lawsuits as well.

Some of the nation’s biggest lenders are turning to the courts to collect money they are owed on a range of debts, from credit card balances to soured auto loans, judges and lawyers for consumers say.

Since the financial crisis, fewer customers are falling behind on their bills and the morass of bad debt is shrinking. Still, lenders are working to clean up their books and whittle down the amount of soured loans, the judges say.

In most instances, the customers admit that they owe the money. The problem, though, judges and law enforcement officials say, is that credit card companies sometimes flout proper legal procedures to recover what they are owed. Many of the cases, according to Mr. Dear, the civil court judge in Brooklyn, hinge on erroneous documents, hastily assembled to make up for the fact that lenders have lost the original paperwork needed, like payment histories or the original contract. Some lawsuits rely on fabricated credit card statements, Mr. Dear said.

Lenders have been buffeted by this kind of criticism before over the way they pursued homeowners who had fallen behind on their mortgage payments. Last year, five of the nation’s largest banks reached a $26 billion pact with 49 state attorneys general over claims the lenders wrongfully seized homes.

Now the regulatory spotlight is swinging from mortgages to credit cards. The problems in credit card lawsuits play out in the shadows, judges say. That is because unlike in foreclosure cases, borrowers sued over credit card debt rarely show up to defend themselves. As a result, more than 95 percent of lawsuits result in a default judgment, an automatic victory for the lender.

Armed with a default judgment, lenders can garnish a consumer’s wages or freeze bank accounts to get their money back.

Sometimes borrowers do not even realize that they have been sued until a lender wins a default judgment, consumer lawyers say. The situation arises, consumer lawyers say, when lenders claim to serve borrowers with notice of a suit, as they are required to do under the law, but do not follow through. The practice, called “sewer service,” is rampant across the country, the consumer lawyers say. Ms. Harris accused JPMorgan of sewer service in her lawsuit.

Sonia Caro, 62, who lives in Brooklyn, said she had no idea that Capital One was suing her over credit card debt until the lender won a $2,039.43 judgment against her in 2010.

Ms. Caro, who fell behind on her credit cards after multiple sclerosis forced her to stop working, said that she was shocked. “I just didn’t know,” she said. Faced with the staggering bill, Ms. Caro said she was devastated. “It felt so bad.”

Capital One did not return calls for comment.

Article source: http://dealbook.nytimes.com/2013/05/09/california-sues-jpmorgan-chase-over-credit-card-cases/?partner=rss&emc=rss

HSBC Will Pay $249 Million to Settle Foreclosure Review Case

HSBC agreed to pay $96 million to eligible borrowers who lost their homes to foreclosure in 2009 and 2010, and provide $153 million in other assistance, including loan modifications and forgiveness.

The bank said it was pleased to have reached the agreement and expected to record a pretax charge of $96 million in the fourth quarter of 2012 for the cash portion of the settlement. The bank said it expected to cover the loan assistance through existing reserves.

The settlement, with the Office of the Comptroller of the Currency and the Federal Reserve Board, is the 13th the agencies have reached this month.

The agreements stem from the reviews of individual loan files that regulators ordered in 2011 and 2012, after widespread mistakes were discovered in the way mortgage servicers had processed home seizures.

The reviews, initially expected to determine which borrowers were harmed and to compensate them based on their individual experiences, proved slow and expensive.

Ten banks, including Bank of America, Wells Fargo, Citigroup and JPMorgan Chase, agreed to pay a total of $8.5 billion — some in cash, and the rest in loan assistance — to end the reviews last week.

On Wednesday, Goldman Sachs and Morgan Stanley agreed to a similar $557 million deal.

About 112,000 borrowers whose homes were in foreclosure with HSBC Bank and other HSBC subsidiaries will receive some cash, regulators said.

Article source: http://www.nytimes.com/2013/01/19/business/hsbc-will-pay-249-million-to-settle-foreclosure-review-case.html?partner=rss&emc=rss

Bank Deal Ends Flawed Reviews of Foreclosures

Federal banking regulators are trumpeting an $8.5 billion settlement this week with 10 banks as quick justice for aggrieved homeowners, but the deal is actually a way to quietly paper over a deeply flawed review of foreclosed loans across America, according to current and former regulators and consultants.

To avoid criticism as the review stalled and consultants collected more than $1 billion in fees, the regulators, led by the Office of the Comptroller of the Currency, abandoned the effort after examining a sliver of nearly four million loans in foreclosure, the regulators and consultants said.

Because they have no idea how many borrowers were harmed, the regulators are spreading the cash payments over all 3.8 million borrowers — whether there was evidence of harm or not. As a result, many victims of foreclosure abuses like bungled loan modifications, deficient paperwork, excessive fees and wrongful evictions will most likely get less money.

“It’s absurd that this money will be distributed with such little regard to who was actually harmed,” said Bruce Marks, the chief executive of the nonprofit Neighborhood Assistance Corporation of America.

While the comptroller’s office acknowledged flaws in the review, Bryan Hubbard, a spokesman for the agency, said the “settlement results in $3.3 billion being paid to consumers and that is the largest total cash payout of any settlement involving borrowers affected by foreclosures to date.”

The examination was plagued by problems from its start in November 2011, according to interviews with more than 25 people who reviewed foreclosures, 15 current and former regulators and 6 bank officials, who insisted on anonymity because they were not authorized to speak publicly or feared retribution.

Several former employees of a consulting firm doing reviews said that their managers showed bias toward the bank that hired them. Other reviewers said that the test questions used to evaluate each loan were indecipherable and in some cases the process failed to catch serious harm. Many borrowers said they had never heard of the review or were so baffled by the process that they gave up or dismissed it as just another empty promise.

The review, which was hastily dismantled this week, was mandated by bank regulators amid public outrage over accusations that banks were robo-signing mountains of foreclosure filings without verifying them for accuracy. The review was supposed to cover any loan in foreclosure in 2009 and 2010, regardless of whether there was evidence of dubious practices.

The comptroller and Federal Reserve ordered the banks to hire consultants for the review, and the regulators solicited claims from borrowers.

Patricia McIntosh, 46, said she would have jumped at aid to avoid the foreclosure on her home in Lynn, Mass., but never got notice of the review. “When you go through a foreclosure, you are sifting through so much junk mail and scams,” Ms. McIntosh said, “so I keep my eyes open and I never got anything.”

Ms. McIntosh said she believed she was eligible for relief after U.S. Bank foreclosed on her home in the midst of a loan modification.

Christine Lucier, 32, of Northbridge, Mass., is also in limbo, unsure of what aid she may receive now that the settlement will be widely disbursed. Of the $8.5 billion settlement, $3.3 billion will be shared among the 3.8 million borrowers, and the rest comes mostly from banks’ lowering of interest payments or loan amounts for homeowners. In March 2012, Ms. Lucier received a letter from Bank of America notifying her that she was behind on her mortgage payments and in foreclosure. She thought she was having a nightmare, because the bank had evicted her in 2008.

She learned the bank had inexplicably reversed her foreclosure in November 2010. Since then, the two-bedroom colonial house had been looted by vandals and stripped of its wiring and copper piping. “My life has been turned upside down and I have to go through foreclosure again,” Ms. Lucier said.

Now that the foreclosure review has been shut down, no one will know whether examples like Ms. Lucier are anomalies. Bank executives thought that the review would prove that, while their foreclosure procedures had deficiencies, they did not result in the widespread wrongful eviction of homeowners. And housing advocates thought that the examination would prove extensive wrongdoing by the banks.

As of this week, the comptroller’s office said that it had identified 654,000 potentially problematic foreclosures — a combination of 495,000 claims submitted by borrowers and 159,000 files that the consultants flagged for review. The regulator said it was still determining the number of reviews completed, but the consultants said that only a third of the loans were fully reviewed.

A critical flaw from the start was that the federal government farmed out the work of scouring the millions of foreclosures to several consulting firms that charged as much as $250 an hour and outsourced work to contract employees, many of whom had no experience reviewing mortgages, according to the reviewers, regulators and bankers.

Article source: http://www.nytimes.com/2013/01/11/business/bank-deal-ends-flawed-reviews-of-foreclosures.html?partner=rss&emc=rss

DealBook: Regulators and HSBC Faulted in Report on Money Laundering

Banks that ignore money laundering rules are a big problem for our country, said Senator Carl Levin.Andrew Harrer/Bloomberg News“Banks that ignore money laundering rules are a big problem for our country,” said Senator Carl Levin.

8:55 p.m. | Updated
The global bank HSBC has been used by Mexican drug cartels looking to get cash back into the United States, by Saudi Arabian banks that needed access to dollars despite their terrorist ties and by Iranians who wanted to circumvent United States sanctions, a Senate report says.

The 335-page report released Monday also says that executives at HSBC and regulators at the Office of the Comptroller of the Currency ignored warning signs and failed to stop the illegal behavior at many points between 2001 and 2010.

In one case, an HSBC executive successfully argued that the bank should resume business with a Saudi Arabian bank, Al Rajhi Bank, despite the fact that Al Rajhi’s founder had been an early benefactor of Al Qaeda. HSBC’s American branch ended up supplying a billion dollars to the bank.

The report is the product of a yearlong investigation by a Senate subcommittee, the Permanent Subcommittee on Investigations. It points to the problems at HSBC, Europe’s largest financial institution, as indicators of a broader problem of illegal money flowing through international financial institutions into the United States.

“Banks that ignore money laundering rules are a big problem for our country,” said Senator Carl Levin, a Michigan Democrat who leads the subcommittee. “Also troubling is a bank regulator that does not adequately do its job.” He called HSBC’s compliance culture “pervasively polluted for a long time.”

HSBC executives are expected to apologize for shortcomings in the bank’s internal controls in a hearing of the subcommittee on Tuesday. The company said in a statement on Monday that “we will apologize, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong.”

Mr. Levin, however, said on Monday that HSBC had promised to fix similar problems in years past and failed. “While the bank is saying all the right things, and that is fine, it has said all the right things before,” he said.

The hearing is unlikely to be the end of HSBC’s problems. The bank has disclosed in regulatory filings that the issues with money laundering are also being investigated by the Department of Justice and could lead to criminal charges and “significant” fines, which analysts have said could reach $1 billion.

The report on HSBC is the latest of several scandals that have recently rocked global banks and highlighted the inability of regulators to catch what is claimed to be widespread wrongdoing in the financial industry. The British bank Barclays recently admitted that its traders tried to manipulate a crucial global interest rate, and multiple major banks are under investigation. JPMorgan Chase disclosed last week that its employees may have tried to hide trades that are likely to cost the bank billions of dollars.

Mr. Levin said that wrongdoing in the financial world has been exacerbated by the relatively light touch of government regulators. “As long as a bank just sees that it is going to be dealt with kid gloves, I think we are going to continue to see these shortfalls that have been so endemic,” Mr. Levin said.

The Office of the Comptroller of the Currency has come under particularly harsh criticism for showing too much deference to the banks it regulates. The new leader of the agency, Thomas J. Curry, has promised a stricter approach since he took over in April.

Mr. Curry said in a statement on Monday that members of his staff “fully embrace” the subcommittee’s report, and he is expected to testify Tuesday that the agency is already carrying out many of the report’s recommendations.

Regulators have been paying close attention to the willingness of global banks to facilitate illegal flows of money from outside the United States. The Treasury Department announced last month that ING Bank had agreed to pay $619 million to settle charges that it moved money into the United States from Cuba and Iran, despite sanctions against those countries, for nearly two decades. Since 2009, there have been five similar settlements between American regulators and other banks, including Barclays and Credit Suisse, over illicit transactions.

In the Senate report, HSBC is facing accusations that it helped its clients circumvent rules intended to stop transactions from countries facing international sanctions, and in some cases flouted laws in pursuit of profits.

While HSBC is accused of moving money into the United States from North Korea and Cuba, the most extensive problems involved accounts in Iran. An independent audit, paid for by HSBC, found that the bank facilitated 25,000 questionable payments involving Iran between 2001 and 2007. In some cases, HSBC executives counseled Iranian financial institutions on how to evade the filters of American regulators, the report says.

When the bank developed a way to process transactions for Iran’s largest retail bank, an HSBC executive wrote an e-mail to his colleagues that said, “I wish to be on the record as not comfortable with this piece of business.” None of his colleagues responded and the deal went ahead, according to the report.

The subcommittee also found evidence of widespread wrongdoing in HSBC’s failure to stop money laundering through accounts tied to drug trafficking in Mexico. The bank is accused of shipping $7 billion in cash from Mexico to the United States in 2007 and 2008 despite several warnings that the money was coming from cartels that needed a way to return their profits to the United States.

In many of the cases detailed in the report, the Office of the Comptroller of the Currency is said to have spotted the problematic behavior. But in nearly every case, the subcommittee found that the agency gave HSBC only a warning or mild punishment and did not push the bank to make large-scale changes.

The agency ultimately issued a cease-and-desist order against HSBC in 2010 after other law enforcement agencies began looking into the problems. Mr. Levin, though, said that his subcommittee found that some of the problems had not been fixed by the time the subcommittee began looking into them over the last year.

A new chief executive took over at HSBC early last year and he has committed to making sweeping changes at the company. In its statement, the bank laid out several steps it had recently taken to increase oversight of international flows of money.

Article source: http://dealbook.nytimes.com/2012/07/16/scathing-report-details-money-laundering-problems-at-hsbc/?partner=rss&emc=rss

Raskin Urges Penalties on Mortgage Servicers

“The Federal Reserve and other federal regulators must impose penalties for deficiencies that resulted in unsafe and unsound practices or violations of federal law,” Raskin said in remarks to the Association of American Law Schools. “The Federal Reserve believes monetary sanctions in these cases are appropriate and plans to announce monetary penalties.”

Raskin did not say when the penalties will be announced.

She said that “appropriately sized” penalties would “incentivize mortgage servicers to incorporate strong programs to comply with laws when they build their business models.”

Mortgage servicers, many of which are large banks, collect home loan payments and manage issues like foreclosures.

The servicing issue burst into public view last year when government agencies began investigating bank mortgage practices, including the use of “robo-signers” to sign hundreds of unread foreclosure documents a day.

In April, 14 mortgage servicers, including Bank of America and JPMorgan Chase, entered into a settlement with the Fed, the Office of the Comptroller of the Currency and the now defunct Office of Thrift Supervision on steps that have to be taken to correct and improve their servicing practices, such as providing borrowers with a single point of contact for questions.

As part of the agreement, these mortgage servicers have hired consultants to review foreclosures that took place in 2009 and 2010 to see if any were improper.

REVIEWS ONGOING

Regulators have said these reviews, which are ongoing, will help determine the size of any penalties the servicers will have to pay.

When asked by an audience member whether regulators may as part of the enforcement action seek to have banks reduce mortgage balances for some borrowers in an effort to keep them in their homes, Raskin said it is an option that should “stay on the table.”

“The notion of how we can bring principal reduction into an enforcement action I think is a good question and one that as we think through what remedies and tools that we have is one that should stay on the table,” she said.

Reducing borrowers’ principal has been controversial with critics charging it could create a “moral hazard” – the concept that rescue efforts breed further behavior that exacerbates the existing problem – prompting other borrowers to stop making timely loan payments.

Some consumer groups and congressional Democrats have criticized the use of consultants to do the “look-back” review of mortgage servicers, questioning how independent they will be since their core business is working with banks.

Regulators have defended the decision, saying the consultants, while hired by the banks, report to the agencies.

In her speech Raskin acknowledged the issue is “the subject of much debate” and said regulators would be able to “monitor and judge the completeness of the look-back.”

Democrats have also called for the agencies to publicly release the specifics of what the consultants find and servicers do in response.

On Saturday Raskin endorsed the idea of releasing information publicly but did not get into the specific details of what should be made available.

“The corrective actions that the mortgage servicers are undertaking pursuant to the enforcement actions in an appropriate format also need to be shared with the public,” she said.

(Editing by Andrea Ricci)

Article source: http://feeds.nytimes.com/click.phdo?i=c7da43d523a7379277a12dc6261d8bc1

2 U.S. Agencies, 2 Different Accords With Wachovia

The two law enforcement agencies, together with other federal and state regulators, announced Thursday that they had wrested a $148 million settlement from Wachovia Bank, now part of Wells Fargo, on charges that the bank reaped millions of dollars in profits by rigging bids in the municipal securities market.

The settlements are curious because they seem diametrically opposed. In the Justice Department settlement, Wachovia said it “admits, acknowledges and accepts responsibility for” manipulating the bidding process in the sale of derivatives on tax-exempt bonds to institutional investors like cities, hospitals and pension plans over a six-year period ending in 2004.

But in fashioning a settlement with the S.E.C. for the same actions, based on the same facts, Wachovia agreed to settle the charges “without admitting or denying the allegations.”

Why the S.E.C. would allow a company to avoid admitting conduct that it has already admitted elsewhere is at the center of a continuing debate over how the agency polices Wall Street. The S.E.C. has settled three previous cases involving municipal bond bid-rigging in the same way over the last year. Other federal and state agencies, including the Office of the Comptroller of the Currency and a group of state attorneys general, settled cases on Thursday with Wachovia on the same terms.

The “neither admit nor deny” practice, which has been in use for years, has attracted renewed criticism recently. A federal judge in New York last month rejected an S.E.C. settlement with Citigroup over securities fraud charges, saying that the “neither admit nor deny” language deprived him of the facts necessary to determine if the punishment was adequate.

Wachovia’s settlement, like Citigroup’s and dozens of other S.E.C. agreements with Wall Street firms in recent years, also includes an injunction against future violations of the antifraud provisions of federal securities laws. Wachovia has agreed not to violate the same law three times in the last seven years, including in April of this year.

The failure to admit conduct that has already been admitted has some legal experts baffled. “It just doesn’t compute,” said Cornelius Hurley, the director of the Boston University Center for Finance, Law Policy and a former counsel to the Federal Reserve’s board of governors. “I think an explanation is deserved from the S.E.C. as to why there is this apparent discrepancy.”

John Nester, an S.E.C. spokesman, said these settlements should be viewed as a package, not separately. “This is a joint state and federal resolution that includes an admission and compensates victims.”

Robert Khuzami, the commission’s director of enforcement, said in a recent interview that the S.E.C. fashions its settlements using the “neither admit nor deny” language because it believes it often results in the same penalties it thinks it would achieve in a lengthy, expensive court trial.

In addition, he said, companies demand the language for fear that an admission of securities fraud could then be used against them in class action or shareholder lawsuits seeking damages.

Yet that could be the case for Wells Fargo, according to three former S.E.C. lawyers, who spoke on the condition of anonymity because they now represent clients before the S.E.C. In interviews, the lawyers said that the admission in the settlement with the Justice Department could probably be used to support evidence of fraud in private civil lawsuits against Wells Fargo.

Wells Fargo, which said the case involved employees who were no longer at the company, declined to comment on the discrepancies between the two settlements.

The differences between the two settlements include a nonprosecution agreement signed by the Justice Department with Wells Fargo in which the bank admitted that several former employees had committed criminal violations of the Sherman Antitrust Act.

The Justice settlement says simply that Wachovia “entered into unlawful agreements to manipulate the bidding process and rig bids.”

The S.E.C., which has the authority to bring only civil charges, forged an agreement in which Wachovia neither admits nor denies that it violated Section 17(a) of the Securities Act of 1933, which forbids fraud in securities offerings.

The S.E.C. complaint gives six pages of detail on “representative fraudulent transactions” — implying it could supply much more.

Mr. Khuzami, the S.E.C.’s enforcement director, defends the “neither admit nor deny” settlements in part by saying that because the S.E.C. lays out such detail in its complaints, there can be no doubt what occurred.

“I think that people looking at the entirety of that package,” he said, “would be hard-pressed to come away with a conclusion other than, ‘They did something wrong here.’ ”

Judge Jed S. Rakoff of the United States District Court in Manhattan disagrees. He rejected the S.E.C.’s recent settlement with Citigroup, saying it “is neither fair, nor reasonable, nor adequate, nor in the public interest” because it does not provide the court “with any proven or admitted facts upon which to exercise even a modest degree of independent judgment.”

Judge Rakoff will not rule on the adequacy of the Wachovia settlement, which the S.E.C. filed in federal district court in New Jersey.

Article source: http://feeds.nytimes.com/click.phdo?i=a8d8e47b7e36dc84ea3007ba043d9d17

Wells Fargo Settles Bid-Rigging Cases

Wells Fargo will pay $148.2 million to settle federal and state charges that it rigged dozens of bidding competitions to win business from cities and counties.

The U.S. Department of Justice, along with the federal and state regulators, had been investigating the actions of employees at Charlotte, N.C.-based Wachovia Bank, which Wells Fargo Co. acquired in 2008.

The Securities and Exchange Commission said Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond transactions in 25 states and Puerto Rico.

“Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Banks help states and municipalities raise money for projects like building roads and schools by selling bonds to investors. Portions of those proceeds may not be spent immediately, and banks will help the municipalities invest those funds until they’re needed. The SEC said the banks rigged the bidding process for some of those investments, forcing the municipalities to pay prices for securities that were above fair market value.

The SEC said Wachovia won some bids through a practice known as “last looks,” in which it obtained information from agents about competing bids. It also won bids through “set-ups,” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor.

As part of the settlement, Wells Fargo will pay the Securities and Exchange $46.1 million; the Office of the Comptroller of the Currency will be paid $34.5 million; the Internal Revenue Service gets $8.9 million; and a group of state Attorneys General will be paid $58.75 million.

Wells Fargo settled a separate civil case in federal court in New York last month over similar allegations. The bank paid $37 million to settle that case, which had been brought by several states.

The San Francisco bank said in a statement that it was pleased to have resolved the matter. It noted that the transactions in the case had been done by employees who are no longer with the company. Wells Fargo said the payments wouldn’t have an adverse effect on its financial results. Wells Fargo has $1.3 trillion in assets.

Wells is not the only bank to settle similar fraud charges brought by federal and state authorities over rigging municipal bond bidding.

In July, a unit of JPMorgan Chase agreed to pay $228 million to settle civil fraud charges that it rigged dozens of bidding competitions to win business from cities and counties. Bank of America agreed in December to pay $137 million. UBS agreed in May to pay $160 million.

___

Business Writer David Pitt contributed to this story.

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DealBook: Volcker Rule Divides Regulators

Regulators have faced a barrage of complaints from lawmakers and financial industry lobbyists in their 14-month-long quest to constrain risky trading on Wall Street, an effort known as the Volcker Rule. Now, as regulators begin a push to produce a final draft of the rule, they face hurdles from an unexpected group: themselves.

Though several federal agencies agreed last week to propose the initial version of the Volcker Rule, they are divided over some of its crucial details. The Federal Deposit Insurance Corporation, for example, has pushed for tough language that would require bank executives to vouch for their compliance with the Volcker Rule — a measure that the Office of the Comptroller of the Currency has been fiercely resisting, say people close to the regulators.

In recent weeks, some regulators even quarreled over which agency would vote first on the rule, according to one of the people close to the regulators. And while four regulators ultimately did vote, a fifth agency, the Commodity Futures Trading Commission, was conspicuous by its silence.

The commission, according to another person with direct knowledge of the issue, raised concerns that an earlier draft overlooked the costs and benefits of the Volcker Rule, an important standard whose absence could expose regulators to a legal challenge.

Both the rule’s critics and supporters fear that an escalating turf war could sidetrack regulators as they shape a final version of the overhaul by July 2012. While Wall Street opposes the proposal, it worries that the regulatory fracture will generate additional uncertainty over how to comply.

“You do see a split,” said Thomas Quaadman, a lobbyist for the Chamber of Commerce, which opposes the Volcker Rule. “They might be trying to get to the same place, but it’s difficult to get there.”

Henry Klehm, a lawyer at Jones Day and a former Securities and Exchange Commission official, noted that regulators would try to reconcile their differences, though “this means delay.”

The Volcker Rule bickering reflects broader tensions among financial regulators, who have amassed broad and sometimes overlapping powers in the aftermath of the financial crisis. The Dodd-Frank Act of 2010, the sprawling overhaul that spawned the Volcker Rule among 300 other regulations, transformed the regulatory landscape and is at the heart of the squabbling.

For one, regulators are divided on Dodd-Frank’s requirement that banks keep risk on their books when selling mortgage securities. Proposed rules for the derivatives industry, too, vary between agencies.

The Volcker Rule presents a particularly thorny task. Named for Paul A. Volcker, a former Federal Reserve chairman who campaigned for the rule, it aims to curb outsize risk-taking on Wall Street.

The rule would limit most proprietary trading, where a bank places bets for itself rather than for clients, a major money maker for the industry. Wall Street has warned that the rule will eat into profits just as banks are trying to regain their footing.

Anticipating complaints, regulators have already fashioned multiple exemptions to the ban, allowing banks to place trades when hedging against risk. Banks can also buy securities from one client with an eye toward later selling them to another, though the line is often fuzzy between that business and proprietary betting.

The proposal reflects the rule’s complexity, spanning nearly 300 pages and taking aim at some of the most arcane financial minutia. Davis Polk, a law firm that advises some of the nation’s biggest banks, has churned out multiple summaries of the proposal for clients and even started a Web site, Volckerrule.com.

The regulatory discord, analysts say, only compounds the confusion. While the Volcker Rule itself “would be a worthy study for Talmudic scholars, complicate this with five agencies having to write the rules and you have geometric expansion of complexity,” the accounting firm PricewaterhouseCoopers said in a recent report.

Still, regulators are open to tweaking the rule. The proposal posed nearly 400 questions, replete with multiple follow-up queries, for the industry and the public to ponder.

The question section ballooned in recent weeks as it became a favored destination for controversial provisions. When regulators failed to reach a compromise, a rule was relegated to a question for the public.

In recent weeks, the deepest divide centered on provisions that spelled out how regulators would enforce the Volcker Rule. One idea would require bank executives to promise compliance.

In August, a confidential draft proposal included the “C.E.O. attestation” clause in brackets, meaning it was “included for discussion purposes only, pending resolution at the principal level.”

The Office of the Comptroller of the Currency objected, according to the people close to the regulators, who spoke on the condition of anonymity because the discussions were private. The agency, which oversees national banks, flagged the executive compliance rule as a deal-breaker.

Over the last month, regulators scrambled to draft a compromise. The agencies formed Volcker Rule working groups, which held weekly phone calls and regularly gathered in a conference room at the F.D.I.C.’s Washington headquarters, the people said. Treasury Department lawyers occasionally mediated the dispute.

But in recent days only one compromise emerged: turn the C.E.O. rule into a question. Ultimately, regulators asked whether the rule would “be a preferable approach.”

The Office of the Comptroller of the Currency, with support from the Federal Reserve, also opposed an F.D.I.C. proposal that would force banks to turn over a battery of trading data to independent warehouses where regulators could keep an eye on the trades. Again, the provision was demoted to a question.

Regulators are playing down their differences.

Elise Walter, a Democratic commissioner at the Securities and Exchange Commission, said at a public meeting last week that the Volcker Rule had “been a very effective exercise in cooperation.”

At the same meeting, however, the agency’s lone Republican commissioner, Troy Paredes, voted to approve the rule but warned that he had “significant reservations.”

At the Federal Reserve, which quietly voted by e-mail recently, one board member, Sarah Bloom Raskin, opposed the proposal, according to a person with knowledge of the vote. It is unclear why she voted against the rule.

The Fed and the F.D.I.C. declined to comment.

“Developing any interagency rule is a complex process, particularly when regulators with different missions are involved, and this is quite a complex rule,” Bryan Hubbard, a spokesman for the comptroller’s office, said in a statement. He added that “banking and market supervisors were able to reach consensus.”

But the consensus did not include the Commodity Futures Trading Commission. The agency, according to the person with direct knowledge of the issue, objected to an August version of the proposal because it failed to include a full cost-benefit analysis of the Volcker Rule.

The agency is concerned that Wall Street will mount lawsuits against its policies, especially in light of a court decision over the summer that struck down a separate S.E.C. rule.

The latest draft of the Volcker Rule does outline the economic effects of the proposal.

The C.F.T.C., the smallest of the regulators, also says it feels it cannot currently spare the time and staff needed to review the Volcker Rule while it juggles dozens of other Dodd-Frank policies. It is unclear whether the agency will adopt a similar version of the rule.

Wall Street groups have already seized on what they see as a split among the agencies. One group, the Chamber of Commerce, sent a letter last week outlining its concerns with the Volcker Rule to Treasury Secretary Timothy F. Geithner.

“The Chamber is concerned that the lack of coordination,” the letter said, “injects additional uncertainty into an already fragile economy, and threatens to further endanger the economic recovery.”

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DealBook: Diligence and Trust Are Needed to Grapple With Bank Data

Wells Fargo corporate headquarters in San Francisco. Of the four largest banks in the country, it has the most exposure to residential real estate.Noah Berger/Bloomberg NewsThe headquarters of Wells Fargo in San Francisco. Of the four largest banks in the country, it has the most exposure to residential real estate.

Some people stay sharp in their old age by doing crossword puzzles. Some play memory games or Scrabble or cut back on the heavy drinking.

That’s minor league stuff. If you really want to give your brain a workout to stave off the ravages of mental decline, I recommend trying to read bank financial statements.

In my last column, I wrote about how many bad residential mortgage loans the big banks had on their balance sheets, using numbers from a site called Bankregdata.com, which does the punishing work of wading through regulatory filings known as call reports and aggregating the data.

Take Wells Fargo. About $41.3 billion, or 19.5 percent, of its $212 billion worth of residential first-mortgage customers were either late in paying or had been classified as “nonperforming,” according to the site.

This was in line with calculations by the Office of the Comptroller of the Currency, which estimates that about a fifth of residential loans on bank balance sheets nationwide are delinquent or in the process of being written off.

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Turn to Wells Fargo’s filings with the Securities and Exchange Commission for a full picture, according to Wells. It’s a happier, alternate universe in which $15.6 billion, or 7 percent of $223 billion, of first-mortgage loans are tagged late or “nonaccrual,” a charmingly opaque euphemism for bust.

Two helpful representatives from Wells Fargo gave me a raft of reasons to disregard the call reports and trust the S.E.C. filings. Their main argument is that the federal figure includes a bucket of loans Wells wrote down when it bought Wachovia in 2008.

When Wells Fargo bought Wachovia, it set aside a huge reserve for those loans — mostly pick-a-pay deals, where the borrower could choose to make a minimum payment, with the downside that the rest of the monthly amount owed was tacked onto the outstanding balance. The loans aren’t performing well, but they are doing better than Wells expected back then, which makes investors even more confident that the bank will eventually kick some of that reserve back to the bottom line.

In addition, the representative pointed out, the call figure was an analysis that added up different figures from several bank divisions. But Wells has some divisions that don’t file call reports yet make a modest number of mortgage loans. (All big banks are holding companies with multiple subsidiaries.)

(Disclosure: the pick-a-pay loans were made by Golden West Financial, which was sold to Wachovia in 2006 by Herb and Marion Sandler, the principal financial backers of ProPublica.)

To be fair, banks do file mountain ranges of disclosure documents. They report to the S.E.C. (which protects investors), the Federal Deposit Insurance Corporation (which insures borrowers), the O.C.C. (which regulates banks) and the Federal Reserve (which also regulates banks with slightly different responsibilities).

Day after day, they push out news releases that run dozens of pages. They prepare reams of special presentations for investors, the most recent of which from Wells ran 51 pages, on top of a 41-page news release. The S.E.C. filing from the quarter was 162 pages.

The numbers and presentation differ slightly in all of them and often differ from other banks’ presentations, stirring a struggle among outsiders to compare apples and bananas. No professional admits this publicly, but many investors and analysts privately acknowledge that they can’t fully track the data gushing each quarter from the nation’s banks.

Even if they could somehow reconcile all the numbers, analysts would still be significantly in the dark. In many instances, banks’ financial disclosures are drawn from estimates that only management teams are privy to. Even the simplest of concepts — how much capital a bank has — is a number based on countless calculations that, let’s face it, are not much better than guesswork.

So it is all the more important that we trust bank management and regulators to make sure the numbers we see truly reflect their financial condition.

Wells is one of the four biggest banks in America. After the financial crisis, it vaulted into this top echelon of gigantic institutions, along with JPMorgan Chase, Bank of America and Citigroup. In this group, Wells has the greatest exposure to residential real estate, more recently infamous as the single-worst asset class in America.

For many reasons, some not particularly rational, Wells seems to be scrutinized less by investors and the media. One is that Warren E. Buffett holds a large stake in the bank, the financial equivalent of a Good Housekeeping seal of approval. It is based in San Francisco, far from the madding crowd of American finance and media.

Wells, for its part, has historically displayed disdain for investors and Wall Street, in some regards an appealing attribute. While some of its competitors have tried to wheedle their way into analysts’ hearts, the San Francisco bank refused to engage on even the most basic level. Not until last year did its management deign to take questions on conference calls after earnings reports.

A Wells Fargo representative told me that the bank’s disclosure was “best in class” and listed the enormous amount that it provides.

The bank still falls short of other big banks in disclosure, according to investors and analysts I’ve spoken with. It doesn’t break out the reserves it has made by asset class, unlike Bank of America, making it particularly difficult to understand how much it is reserving for bad residential real estate loans. It doesn’t separate its business lines in the detail that the other banks do.

Then there are its nonperforming loans. For its residential mortgages, it doesn’t classify them as nonaccrual until they are 120 days past due, instead of the more typical 90 days. The effect is to make the numbers look better.

The crucial figure, over time, is the loss rate, the bank representative said. And since the Wells portfolio — not counting the bad Wachovia loans — has been performing consistently well for many years now, investors should believe that the bank is doing something right, and better than its competitors with its mortgage portfolio.

Yet housing prices continue to fall, the economy is weaker than expected, and we are flirting with another financial crisis, as Europe gets its revenge on us for having exported our calamity to their continent in 2008. Wells isn’t likely to remain immune to that. “Trust but verify,” Ronald Reagan used to say of the Soviet Union. Not a bad idea.


Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Follow him on Twitter (@Eisingerj).

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