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Financial Services Update – September 16, 2011

Geithner Meets with Eurozone Finance Ministers

On Friday, Treasury Secretary Timothy Geithner met with seventeen European finance ministers in Poland to discuss the eurozone’s debt crisis. Jean-Claude Juncker, president of the Eurogroup, announced the group decided to delay till October a decision on whether to pay out the next tranche of a multi-billion euro loan to Greece. The two-day meeting of Europe’s Economic and Financial Affairs (ECOFIN) Council — hosted by Polish Finance Minister Jacek Rostowski and the president of the National Bank of Poland — comes ahead of G20 and IMF meetings later this month. The European Central Bank, along with the Fed, the Bank of England, the Bank of Japan and the Swiss National Bank, also announced that three U.S. dollar auctions would be held between October and December.

Senate Committee Passes Increased Funding for SEC and CFTC

On Thursday, the Senate Appropriations Financial Services Subcommittee passed its FY 2012 funding bill giving banking and commodities regulators large budget increases to help them implement sweeping new financial regulations. The bill, which will now go to the full U.S. Senate for a vote, gives the Securities and Exchange Commission a fiscal 2012 budget of $1.407 billion, an increase of roughly 19 percent from its current fiscal 2011 budget of $1.185 billion and the Commodity Futures Trading Commission an estimated 19 percent increase in its funding, jumping from $202 million to $240 million for fiscal 2012. That bill would also split oversight of the nearly $600 trillion over-the-counter derivatives market between the two regulators and give the SEC greater authority to regulate hedge funds, credit-rating agencies and municipal advisers. However, the fate of the bill remains uncertain because House Republicans oppose many of the Dodd-Frank provisions which increase the need for expanded SEC and CFTC budgets. Earlier this year, the House Appropriations Financial Services Subcommittee passed a bill that would reduce the CFTC’s budget to $171.9 million but maintain the SEC’s funding at its FY 2011 level. With the end of the year approaching, House and Senate leaders are bracing themselves for another omnibus bill that combines all the unpassed appropriations bills into one major bill. The House and Senate will most likely fail to pass similar Financial Services Appropriations bills which will cause the bill to be wrapped into the omnibus thereby reducing the chance of large increases for the SEC or CFTC.

Fitzpayne Nominated for Treasury Legislative Affairs Chief

On Wednesday, the White House announced that President Obama intends to nominate Alastair Fitzpayne as the next assistant secretary of Treasury for legislative affairs. Fitzpayne has been Treasury’s deputy chief of staff since January 2009. He was a legislative assistant to former Sen. Evan Bayh (D-Ind.) from 2001 to 2006. From 2007 to 2009, he served as a senior policy adviser to Rep. Rahm Emanuel (D-Ill.).

House Republicans Introduce Disaster Funding Bill

On Wednesday, House Republican leaders introduced a stopgap spending bill to keep the government operating though mid-November and provide $3.65 billion in short-term federal assistance to replenish strained disaster reserves. The funding resolution would impose a 1.4 percent cut on most agencies and Cabinet departments, including Defense, to stay within 2012 spending caps set in August. FEMA and the Corps of Engineers would immediately benefit from a first installment of $1 billion in emergency funds to avoid any disruption in aid for these last weeks of the 2011 fiscal year ending September 30. The second $2.65 billion represents a down payment toward FEMA’s 2012 budget. With two weeks left in fiscal 2011, FEMA’s disaster reserve fund has dwindled to $377 million and the agency has been operating since late August on an “immediate needs” basis, forcing delays in longer-term recovery projects around the nation. Senate Democrats, who have been pursuing their own much larger $6.9 billion disaster aid package, said they did not support the current House approach, but left open the possibility of agreement if House Republicans consider more disaster aid. The House is schedule to vote on its bill next week.

FDIC Approves New Systematic Risk Rules

On Tuesday, the FDIC approved new sets of rules that the largest banks will have to follow in drafting plans in the event of their own collapse. The panel also approved contingency planning guidelines for insured banks. The new rules, which were authorized in the Dodd-Frank Act, are designed to eliminate the need for bailouts by giving the FDIC power to liquidate large firms whose failure could threaten the financial system. Banks with at least $50 billion in assets will have to file such plans, as will any firm designated as systemically important by the Financial Stability Oversight Council. The final rule changes the filing timeline from an April draft proposal released by the FDIC and Fed, moving toward a tiered phase-in based on the total of non-bank assets held by firms. Companies with more than $250 billion in non-bank assets are required to file the plans by July 1, 2012. Firms with non-bank assets between $100 billion and $250 billion would be required to file by July 1, 2013, and all other firms would be required to submit plans by December 2013. The agency also approved unanimously a separate rule dictating resolution plans for FDIC-insured banks with more than $50 billion in assets. The rule, which the agency began drafting before the completion of the Dodd-Frank Act, would apply to 37 banks and thrifts. Thirty four of those firms would be required to file resolution plans with the Fed because of the size of their parent company. The rule takes effect January 1, 2012, and would be subject to a 60-day public comment period.

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

Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463

 

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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:

Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463

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Financial Services Update – May 20, 2011

IMF Leader Resigns

On Wednesday, International Monetary Fund (IMF) President Dominique Strauss-Kahn resigned following his arrest in New York. European officials quickly moved to assert their claim over the leadership of the IMF, however emerging economic powers Brazil, China and India are seeking a process that prevents the top position from being granted to a European, as has been the convention since the fund was founded 65 years ago. European leaders appeared to unite behind Christine Lagarde, France’s finance minister, as their preferred candidate to succeed Mr. Strauss-Kahn. Other possible candidates include Kemal Dervis, a former finance minister of Turkey; Arminio Fraga Neto, former governor of the central bank of Brazil; Tharman Shanmugaratnam, finance minister of Singapore; Agustín Carstens, governor of the central bank of Mexico; and Montek Singh Ahluwalia, deputy chairman of India’s planning commission. The IMF’s 24-member executive board has begun discussions about the selection process for the new managing director. The board is scheduled to hold its regular weekly meeting on Friday when the timetable for succession, like deadlines for nominations, may be discussed. Countries will nominate their candidates, and then the board will vote, with large financial contributors like the United States and Japan getting a bigger share of voting rights. The entire process could take months, as it has in the past.

Fed to Propose New Stress Tests

On Monday, press reports indicated that a draft of the Federal Reserve’s new rules regarding stress tests is set to be approved by the Federal Reserve Board and put out for public comment within weeks. The Fed is seeking to subject banks to annual capital tests and to reserve the right to veto dividend pay-outs. In between the Fed’s annual reviews, banks would be able to resubmit capital plans should they wish to increase dividend payments or stock buybacks. However, industry executives say the restrictions on capital distribution are excessive and will inhibit their ability to compete globally.

DOJ Forces Nasdaq/ICE to Withdraw NYSE Proposal 

On Wednesday, Nasdaq OMX Group and IntercontinentalExchange said they were withdrawing their April joint proposal of $11 billion to acquire NYSE Euronext, citing discussions with the Justice Department’s Antitrust Division that “surprised and disappointed” Nasdaq and ICE. Speculation has been that the Justice Department’s Antitrust Division blocked the merger for two reasons. First, because the combined company would have too much market power — 50% of the market for U.S. stock trading NYSE with 28%, Nasdaq 22%. Second, because the merger’s $740 million in proposed cost savings would cause massive layoffs. Experts now believe that Deutsche Boerse’s (DB1) $10 billion bid for NYSE Euronext will prevail. The Futures Industry Association estimates that the NYSE/DB1 merger would create the top-ranked global futures trader, controlling 11 derivatives markets in the U.S. and Europe with 4.8 billion in contracts.

HUD to Release Report Accusing Five Biggest Mortgage Firms of Fraud

On Tuesday, press reports indicated that the Department of Housing and Urban Development will soon release audits that accuse the nation’s five largest mortgage companies (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial) of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans. The reports indicate the audits accuse the five major lenders of violating the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The audits were completed between February and March. According to the reports, HUD’s auditor has referred its findings to the Department of Justice, which must now decide whether to file charges.

More Information

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

Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463

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Financial Services Update – January 28, 2011

Fourth Quarter GDP Released

On Friday, the Department of Commerce announced that the U.S. economy grew at a 3.2% rate in the fourth quarter, an improvement from the 2.6% pace in the prior period. For all of 2010, GDP grew by 2.9% after contracting by 2.6% in 2009. The report showed that fourth quarter numbers were boosted by strong personal spending, reflected in the best holiday retail sales since 2006. The report also showed U.S. exports accelerated while the rate of import growth slowed. Company investments also helped the economy, although business spending for equipment and software slowed.

IMF Report Criticizes US Debt

On Thursday, the International Monetary Fund issued a report criticizing the U.S. response to its rising public debt. The IMF report focused on criticism that the United States is falling behind on a promise it made to other top economic countries to halve its budget deficit by 2013. At a gathering of the world’s top economic leaders in Canada last summer, U.S. officials promised to reduce the deficit to roughly 6 percent of gross domestic product. However, according to data released this week by the Congressional Budget Office (CBO), recent tax cuts and expected spending will keep the annual deficit this year at about 10 percent of GDP.

Financial Crisis Inquiry Commission Releases Final Report

On Tuesday, the Financial Crisis Inquiry Commission (FCIC) releases its final majority and dissent reports. The majority report concluded that the 2008 financial crisis was caused by the Fed’s ” pivotal failure to stem the flow of toxic mortgages,” the SEC ” [not] requiring more capital and halted risky practices,” and banks ” recklessly taking on too much risk, with too little capital, and with too much dependence on short-term funding.” The dissent report signed by FCIC Vice Chair Bill Thomas and Commissioners Douglas Holtz-Eakin and Keith Hennessey criticized the majority’s report for being ” more an account of bad events than a focused explanation of what happened and why.” The dissent also focused it blame for the crisis on policymakers who “poorly designed government housing policies that distorted market outcomes and contributed to the creation of unsound mortgages.”

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Financial Services Update

Financial Services Update

November 29, 2010

Authored by: Matt Jessee

Irish Bailout Finalized Sunday

On Sunday, Ireland finalized plans for a bailout from the European Union (EU) and International Monetary Fund (IMF), after approval from EU finance ministers. European leaders hoped that such a measure would be a firewall against further bailouts in other Eurozone countries, but concern has grown over the past week that Portugal and Spain could also need such loans. The rescue package for Ireland is estimated to be worth tens of billions of dollars. Individual European nations have also announced their own loans to Ireland. Britain is putting together a $11.5 billion package and Sweden’s prime minister announced a $1.5 billion loan on Thursday. Irish Prime Minister Brian Cowen last week announced a four-year “austerity plan” designed to cut spending and increase taxes. The plan would save $13.4 billion through welfare cuts and raise $6.7 billion through higher taxes. The plan’s spending cuts include reductions in the minimum wage and public-sector pay and fee increases in the VAT, utilities, education tuition, and income taxes.

Car Czar Announces Reduction in Government Oversight of GM

On Friday, the Obama administration’s “Car Czar” Ron Bloom said the government will reduce its oversight of General Motors (GM) as the government sells more of its GM stock. Since GM emerged from bankruptcy sixteen months ago, it has provided the Treasury with “regular, detailed” briefings on its financial condition. Bloom and other Administration officials took an active role during the run-up to GM’s initial public stock offering Thursday, helping to determine how much stock to sell and what price the underwriters should pay. Bloom and others will also attend GM’s first annual meeting as a public company and will vote the government’s shares on key issues. Bloom denied that the government exerted any pressure and pushed for an early IPO. However, Bloom noted that the size of the deal, the pricing and the fees to be paid to underwriters were in the government’s purview. The government ultimately sold more shares than it previously had planned — 358 million of its 912 million shares — at $33 a share. The government will need to sell its remaining shares at an average price of $52.80 to break even.

Geithner Opposes Reduction in Fed Mandate and Extension of Bush Tax Cuts

November’s election results have empowered Congressional Republicans to assert new found authority, leading Republicans to increase their criticisms of the Federal Reserve’s plan, known as “quantitative easing,” to buy $600 billion in assets, saying it would fuel inflation and asset bubbles. Republicans have cited the Fed’s dual mandate to pursue full employment as well as to promote price stability as the cause of the problem. On Tuesday, in reaction to Republican attacks, U.S. Treasury Secretary Timothy Geithner said the Obama administration would oppose any effort to strip the Federal Reserve of its mandate to pursue full employment, saying such attacks by Republicans would politicize the central bank. While Geithner also declined to say what compromise the Obama administration would be willing to make on extending the Bush income tax cuts, he did say he opposed making permanent the tax reductions for those making more than $250,000.

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Financial Services Update

Financial Services Update

October 11, 2010

Authored by: Matt Jessee

September Jobs Numbers Released

On Friday, the Department of Labor reported that the economy added 64,000 jobs but lost a net of 95,000 nonfarm jobs in September, the result of a 159,000 decline in government jobs. Of the loss in government jobs, 77,000 were temporary Census Bureau employees, 76,000 were in local governments, and 7,000 in state governments. The Bureau of Labor Statistics also released preliminary revisions to the model used to estimate job changes from month to month, indicating that the recovery has been even weaker than initially reported. The Bureau says it expects to revise down the level of employment in March 2010 by 366,000 jobs, which means jobs gains had been about 30,000 weaker each month over the 12-month period that began in March 2009.

New EU Regulations on Bankers’ Bonuses

On Thursday, the Committee of European Banking Supervisors (CEBS), which is made up of the twenty-seven member states of the European Union’s banking regulators, met in London to vote on proposed regulations on bank employees’ compensation. The preliminary rules released on Friday indicate that up to 60 percent of top bankers’ bonuses would be required to be deferred for a minimum of three years and as long as five years. However, the rules remain unclear on the precise duration of retention requirements. The preliminary rules will now be the subject of a month-long consultation process, with the final rules due to come into effect in January 2011. Other key new rules will be a requirement that banks and national regulators jointly impose a maximum multiple of salary that can be paid as a bonus to bankers. On the issue of deferral, the insistence that half of upfront pay be paid in shares, rather than cash, overrides an existing rule in the UK, where the Financial Services Authority regulations currently insist that total bonuses be share-based. The preliminary rules also clarify that deferral periods should typically extend over three years but must in any case be no shorter than one year. The rules also clarify that bankers will be barred from hedging the “claw-back” provision on deferred bonuses. The new rules will apply to EU banks’ operations globally, but only to the European arms of non-EU banks.

DOJ Settles with Visa and Mastercard

On Wednesday, the U.S. Department of Justice announced that Visa and MasterCard have agreed to a settlement concerning the Department’s antitrust civil suit. According to the terms of the settlement, Visa and MasterCard have deleted rules in their contracts that prevented merchants using their cards from encouraging customers to use other card brands carrying lower merchant inter-change fees. The settlement would allow retailers to offer rebates or discounts to consumers who agree to use their preferred method of payment. American Express, who was the third party to the Department’s civil suit, declined to settle and is still fighting the lawsuit.

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