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Financial Services Update – July 22, 2011

Debt Limit Negotiations Continue

On Tuesday, the House passed its “Cut, Cap and Balance” legislation which would cut government spending now, cap it in the future and approve a constitutional amendment to balance the federal budget. On Friday, the Senate voted to table a motion to consider the measure. However, after another tense week of negotiations between the Senate Republicans, Senate Democrats, House Republicans, House Democrats, and the President Obama, the outline of a purported deal seemed to emerge late Thursday. Congressional Democrats reported that President Obama discussed with them a deal he had reached with Speaker John Boehner to raise the debt ceiling by $2.4 trillion, enough to get through the 2012 elections, with at least as much in immediate spending cuts and a promise of  “tax reform”  in 2012. On Friday, in response to the news of a “deal,” Speaker Boehner told the House Republican Conference there was “no deal,”  but that he will continue to negotiate with the White House over the weekend. The most important questions remaining are how many House Republicans will vote for a deal that does not include immediate tax increases but does include the promise of broader “tax reform” next year and how many House Democrats will vote for a deal with no tax increases.

Greece Gets Another Bailout

On Thursday, European finance ministers agreed to a new $157 billion financial aid package for Greece in exchange for forcing Greece’s bond holders to accept a bond exchange that gives them less than originally promised. The new plan for Greece will provide for the euro zone’s bailout fund and the International Monetary Fund to lend Greece $157 billion over the next three years at 3.5% interest. Private creditors who hold Greek debt that matures in the coming years will “voluntarily” turn in their bonds and accept new ones that mature far in the future.

The EU also agreed Thursday to an expansion of its bailout fund. That vehicle, once restricted to lending to countries near the brink of collapse, will now be able to buy euro-zone bonds on secondary markets to move prices and lend directly to countries even before they lose access to private funding and could even include lending to finance bank recapitalizations. The leaders also agreed to cut the once-lofty interest rates that the bailout fund charges and extend to as much as 30 years the maturities of the loans it provides. Ireland and Portugal, both currently receiving European aid, will get breaks on their interest rates to 3.5%. Ireland was paying around 6% on the EU portion of its euro 67.5 billion bailout.

Treasury Sells Off Remaining Stake of Chrysler

On Thursday, the Treasury Department sold its remaining stake in Chrysler losing a total of $1.3 billion. Italian automaker Fiat purchased the U.S. government’s remaining 6% stake in Chrysler for $560 million, formally concluding the $12.5-billion bailout.

Suit Against Goldman Dismissed

On Thursday, former Australian hedge fund Basis Yield Alpha’s legal challenge to Goldman Sachs’ infamous Timberwolf 2007-1 collateralized debt obligation was dismissed by Judge Barbara Jones of the U.S. District Court for the Southern District of New York. Jones cited a Supreme Court decision that held that U.S. securities-fraud laws apply only to domestic transactions.

Senate Banking Hearing on One Year Anniversary of Dodd-Frank

On Thursday, in a hearing before the Senate Banking Committee, federal banking regulators testified on the implementation of the Dodd-Frank Wall Street Reform Act. Regulators said they are moving fast enough to give markets certainty, but slow enough to get hundreds of new rules right. A handful of regulatory agencies are writing hundreds of new rules to police the swaps market, reduce risk at the biggest financial firms, and bring the so-called shadow banking system — which includes hedge funds and non-traditional lenders — into the traditional regulatory framework. The SEC and CFTC have struggled to keep pace with the swift rule-writing timeline laid out in Dodd-Frank, and are months behind schedule on many key rules. However, in a surprising move, Federal Reserve Chairman Ben Bernanke said federal bank regulators may rethink their crackdown on derivatives if a global agreement cannot be reached on margin requirements thereby acknowledging that U.S. banks would be at a significant competitive disadvantage if their foreign rivals do not have to demand margin, or collateral, for derivatives trades.

More Information:

If you have any questions regarding any of these issues, please contact:

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Financial Services Update – May 6, 2011

April Unemployment Rises to 9%

On Friday, the Department of Labor announced that the United States economy added 244,000 jobs in April, but the unemployment rate rose to 9 percent from 8.8 percent in March. The jobs numbers beat forecasts estimates of an expected gain of 185,000 jobs.

Bank Regulators to Testify on Dodd-Frank in Senate

The Senate Banking Committee announced that next Thursday, May 12, Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corp Chairman Sheila Bair, Commodity Futures Trading Commission Chairman Gary Gensler, Securities and Exchange Commission Chairman Mary Schapiro, Acting Comptroller of the Currency John Walsh and Deputy Treasury Secretary Neal Wolin will testify on the implementation of the Dodd-Frank financial oversight law. The hearing is slated to focus on monitoring systemic risk and promoting financial stability and will likely include questions over a recent settlement bank regulators entered into last month with large banks over mortgage servicing abuses.

Roemer Is Newest Rumor to be Next Commerce Secretary

As current Commerce Secretary Gary Locke prepares to depart for his new assignment as Ambassador to China, former Representative and current Ambassador to India Timothy Roemer’s name has surfaced as Locke’s possible successor. Roemer was an early backer of President Obama’s 2008 presidential campaign. Obama is also rumored to be considering current U.S. Trade Representative Ron Kirk and General Electric CEO Jeffrey Immelt for the position.

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Financial Services Update – April 15, 2011

Shutdown Averted, House Passes Budget, Debt Ceiling Vote Next

Last Friday night, Senator Harry Reid (D-NV), Speaker John Boehner (R-OH), and President Obama came to an agreement to fund the federal government for the remainder of the fiscal year, averting a possible shutdown.  On Thursday, the House passed the legislation by a bipartisan vote of 260-167.  59 Republicans voted against the bill, and 81 Democrats voted for it.  Hours later, the Senate acted with far less suspense but again on a bipartisan 81-19 roll call.  With over six months of the current fiscal year already completed, the funding bill reduces the spending level by nearly $38 billion below what it was when the new Congress began in January, making it the largest one-year cut from the President’s budget request in the nation’s history.

This Friday, the House approved a fiscal year 2012 budget resolution drafted by Budget Committee Chairman Paul Ryan (R-WI), which imposes $5.8 trillion in spending cuts over the next decade.  The final tally was 235-193, with four Republicans and every Democrat opposing it.  The GOP resolution will not be approved by the Senate, and budget resolutions do not go to the president or hold the force of law.  However, Ryan has said that the GOP will deem his budget as the ceiling for spending for 2012.  For this reason, the most important aspect of the resolution is the allocation it gives to the Appropriations Committee for next year: $1.019 trillion in non-emergency spending.  This number will play a big role in a looming spending fight in the fall.  If Republicans and Democrats cannot agree on appropriations spending by September 30, the end of the current fiscal year, the government will shutdown. 

Congress will now turn to the issue of raising the so-called “debt ceiling,” or the statutory limit on federal debt.  The U.S. government had $14.216 trillion in total debt outstanding as of Monday, and the cap is $14.294 trillion.  The U.S. Treasury Department released a statement saying the ceiling is projected to be breached in the next 30 days, although it could make adjustments to postpone default until early July.  On Thursday, Majority Leader Harry Reid (D-NV) said he wants a clean vote to raise the debt ceiling, but Republicans have insisted they want the vote paired with other budget reform measures.

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Financial Services Update – Issue 16

Financial Regulatory Reform Bill

Last Wednesday, Republicans agreed to drop objections to a unanimous consent agreement to allow debate to begin after Senator Richard Shelby (R-AL), the ranking Republican on the Banking Committee, announced that his negotiations with Banking Chairman Chris Dodd (D-CT) had reached an impasse over disagreements in the bill. However, Republicans believe the standoff brought them concessions, including the removal of a $50 billion industry-financed resolution authority fund.

Last Tuesday, Republicans offered their own financial services reform plan that would have tightened regulation of Fannie Mae and Freddie Mac, and created a liquidation process of a troubled financial company, paid for by the company’s creditors and its shareholders. The Republican plan would have established a limited consumer protection agency to deal with financial companies, but the agency’s powers would regulate only smaller banks and nonfinancial companies.

Moving forward, Senate Democrats still need to resolve several internal differences, including a section of the bill regulating derivatives. The Senate bill goes farther than the Obama Administration and the Federal Reserve would like in requiring financial firms to spin off their derivatives trading operations. On Friday, FDIC Chairman Sheila Bair urged the Senate to remove the controversial provision saying it could destabilize banks and drive risk into unregulated parts of the financial sector.

The Senate will resume debate on Tuesday, and Senate Majority Leader Harry Reid (D-NV) has promised an open amendment process. Both Democrats and Republicans are preparing hundreds of amendments, including Sen. Ben Nelson (D-NE) who voted with Republicans to block debate on the bill. Nelson has expressed concern about a provision that would require companies such as his home-state’s Berkshire Hathaway to put forward billions of dollars as collateral on existing derivatives contracts. Republicans will need either a majority of Senators or sixty votes to pass amendments to the underlying bill. Senate leaders expect debate to last through the end of next week.

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Financial Services Update – Issues 14 and 15

April 23, 2010 Issue 15

Financial Regulatory Reform Bill

On Wednesday, the Senate Agriculture Committee voted 13 to 8 to approve its financial regulatory bill, which was sponsored by the panel’s chairwoman Senator Blanche Lincoln (D-AR). The bill is expected to be part of the wider regulatory overhaul put forward by the Banking Committee, though Democrats are still figuring out how to combine the proposals. One Agriculture Committee Republican, Senator Charles Grassley (R-IA) joined all twelve Democrats in voting for the bill, however in a statement later, Grassley said that his vote did not mean he would support the larger financial reform bill when it comes to the Senate floor. The bill that passed out of the Agriculture Committee was marginally different than a draft previously unveiled by Chairwoman Lincoln. One important amendment added to the bill by Mrs. Lincoln just before Wednesday’s vote would allow the Secretary of the Treasury to exempt derivatives tied to foreign currency rates from the new rules requiring swaps contracts to be traded on an exchange and routed through a clearing agency. The bill would require most derivative contracts to be traded on a public exchange and to be processed, or cleared, through a third party to guarantee payment if one of the parties to a trade went out of business. The Agriculture Committee bill would also require Wall Street firms to spin off their derivatives trading into a separate subsidiary. That provision is opposed by the major banks as well as President Obama and therefore could emerge as an issue of compromise before the bill reaches the floor.

Last week, Senate Republican leaders expressed strong opposition to the financial regulation bill, but by Wednesday, with Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) making progress on negotiations over changes to the larger legislative package, Minority Leader Mitch McConnell (R-KY) claimed victory over forcing Democrats to make changes to the bill including dropping from the bill a provision to create a $50 billion fund, paid for by big banks, which would be used to unwind failing financial institutions, and expressed a willingness to work with Democrats to advance the bill. In order to pass the bill on the floor, Senate Democrats need the backing of at least one Republican to overcome a possible filibuster, and on Thursday Senate Majority Leader Harry Reid (D-NV) announced his plans to push for a first procedural vote on Monday that will test Republican opposition.

Monday’s test vote raises the pressure on Dodd and Shelby to reach a deal, perhaps even one that would address only major elements of the legislation. Points of disagreement include the role of the federal government in winding down failing financial firms; the independence of a new consumer financial protection agency; and the extent of regulations to be placed on derivatives.

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