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November 13, 2008
Hedge Fund Managers to Testify at
House Hearing
Hedge fund managers Philip Falcone, Kenneth C. Griffin, John Paulson,
James Simons and George Soros will testify before the House Oversight
and Government Reform Committee today to discuss a variety of issues
related to their fund's operations, the New York Times reported today.
The topics are likely to include the managers' use of leverage and
the managers' pay. Also front and center will be the matter of
oversight, one of the most contentious issues confronting the loosely
regulated hedge fund industry. Regulation, or the lack of it, has been
an issue since the 1990s, but it has come to the fore this year as
questions have swirled about hedge funds' role in the financial crisis.
The five managers were selected to testify before the committee because
they each earned more than $1 billion in 2007.
href='http://www.nytimes.com/2008/11/13/business/13hedge.html?ref=business'>Click
here to read the full story.
Click here
for more on the House Oversight and Government Reform Committee's
hearing today titled “Hedge Funds and the Financial
Market.”
House Financial Services Chair to Move
Forward on Mortgage-Restructuring Bill Next Year
House Financial Services Chairman Barney Frank (D-Mass.) said yesterday
that he would move forward next year with legislation to allow home-loan
servicers to more easily modify at-risk mortgages, and expressed
frustration that current rules hinder such workouts because of
resistance from investor pools, CongressDaily reported today.
During a committee hearing on mitigating the foreclosure crisis, Frank
noted the difference between the relatively easy loan modifications when
the loan is owned wholly by the lender and those owned by numerous
investors as part of mortgage-backed security, where contractual rules
can stymie a workout. Congress attempted to address the issue with the
housing stimulus bill enacted in August that would allow the Federal
Housing Administration to guarantee up to $300 billion in new mortgages
for those on the verge of foreclosure. The law also included language
granting legal protection for servicers to maximize total funds for the
loan pool, rather than protection for individual investors.
href='http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr111208.shtml'>Click
here to read the prepared witness testimony.
HUD Unveils New Rules for
Mortgages
The Department of Housing and Urban Development announced rules aimed at
helping Americans shop for mortgages more effectively, but said that it
lacks powers to enforce those rules, the Wall Street Journal
reported today. The rules update requirements of the Real Estate
Settlement Procedures Act of 1974 (RESPA), which sets standards for
home-purchase transactions. The rules require a three-page 'good-faith
estimate' for borrowers explaining rates, fees, any prepayment penalties
and the possibility of later increases in monthly payments. HUD said it
shrank that form from four pages to three in response to industry
complaints. The rules also limit to 10 percent the maximum amount
certain fees can increase from the initial estimate. A new HUD-1 form,
provided to consumers before they sign loan documents, is designed to
help consumers more easily compare what they were promised with what
they are actually being charged. HUD, which pushed ahead with the rules
despite opposition from lenders and others involved in mortgage
transactions, estimated that the changes will bring savings of nearly
$700 in loan-closing costs for the typical consumer.
href='http://online.wsj.com/article/SB122651207372121253.html'>Read
more. (Registration required.)
U.S. Treasury Redefines Its Rescue
Program
Treasury Secretary Henry M. Paulson Jr. announced a series of moves
yesterday that redefine the federal government's $700 billion rescue
plan for the financial industry in order to tackle what he called a dire
situation in the consumer credit markets, the Washington Post
reported today. In recasting the program, the Treasury no longer plans
to buy troubled assets from financial firms, the idea initially
presented to the country, but instead will offer aid to banks and other
firms that issue student, auto and credit card loans in part by
jump-starting the market that provides financing for these companies.
“The illiquidity in this sector is raising the cost and reducing
the availability of car loans, student loans and credit cards,”
Paulson said. “This is creating a heavy burden on the American
people and reducing the number of jobs in our economy.' In recent years,
sales of securities provided the funding for 40 percent of consumer
loans, Paulson said. Lenders issued $42.5 billion worth of such
securities last October. This October, they issued less than 2 percent
of that amount.
href='http://www.washingtonpost.com/wp-dyn/content/article/2008/11/12/AR2008111201124_pf.html'>Read
more.
White House Opposes Use of Financial Rescue Funds
for Automakers
The Bush administration signaled yesterday that it would reject a
proposal by congressional Democrats to immediately advance $25 billion
in government loans to ailing Detroit automakers, the Washington
Post reported today. The White House and Treasury Secretary Henry
M. Paulson Jr. made clear that while they are open to helping the auto
industry, they are strongly opposed to Democrats' plans to carve cash
out of the government's $700 billion financial rescue program. Despite
those warnings, Rep. Barney Frank (D-Mass.) said that he would move
ahead and draft legislation, setting up a final showdown with the Bush
administration. Paulson said that the auto industry is 'critical to the
country,' but that any federal aid must promote the 'long-term
viability' of the car companies, which are hemorrhaging cash in the face
of the sharpest drop in auto sales in two decades. He said Congress
could consider speeding delivery of $25 billion in low-interest loans
that it approved for automakers in September. That package, however, was
designed to help automakers retool their factories to produce more
fuel-efficient vehicles.
href='http://www.washingtonpost.com/wp-dyn/content/article/2008/11/12/AR2008111203305_pf.html'>Read
more.
SEC Looks to Limit Rating-Firm
Conflicts
The Securities and Exchange Commission is expected to vote for rules
next week aimed at limiting conflicts of interest at credit-rating
firms, the Wall Street Journal reported today. The rules would
bar ratings companies from having the same officials negotiate fees with
clients and then rate the debts of those clients. The SEC may choose to
repropose a portion of the rules that would require firms to disclose
historical rating data and the underlying information they use to come
up with their ratings. The SEC isn't expected to take up two other rules
proposed earlier this year. One would reduce companies' and mutual
funds' reliance on credit ratings, which are embedded in SEC rules.
Another idea is to distinguish ratings for 'structured' products, which
may contain slices of various types of debt, from those given to more
plain-vanilla corporate bonds. Both ideas met with strong opposition
from industry.
href='http://online.wsj.com/article/SB122653699587722741.html'>Read
more. (Subscription required.)
Deutsche Bank Sues Lehman to Recover
$72.5 Million
Deutsche Bank AG has sued Lehman Brothers Holdings Inc., claiming a
mistake led to more than $70 million of the German bank's money getting
caught up in the investment giant's bankruptcy, Bankruptcy
Law360 reported yesterday. According to the complaint, filed
Tuesday in the U.S. Bankruptcy Court for the Southern District of New
York, Deutsche Bank owed $72.5 million to a counterparty under a certain
contract. After Lehman filed its chapter 11 petition, Deutsche Bank
transferred the sum to Lehman instead of the counterparty due to both a
clerical error and a miscommunication. After several discussions, Lehman
has not agreed to return the sum, the complaint says. Deutsche Bank
further claims that Lehman refused to return the money on the basis that
one or more Lehman entities - not necessarily Lehman Brothers Holdings -
is owed approximately $290 million by Deutsche Bank. The lawsuit accuses
Lehman of unjust enrichment and demands the return of the money plus
interest, costs and other relief.
href='http://bankruptcy.law360.com/articles/76546'>Read more.
(Registration required.)
U.S. Trustee Objects to Sea Containers
Reorganization Plan
U.S. Trustee Roberta A. DeAngelis on Monday objected to
Sea Containers Ltd.'s second amended reorganization plan, claiming
certain aspects of the plan are overly broad, inappropriate and not
proposed in good faith, Bankruptcy Law360 reported yesterday.
According to DeAngelis' objection, the debtors' proposal to provide
releases of liability of pre- and postpetition conduct by the debtors
and third parties in favor of “debtor releasees” comprised
of more than 140 nondebtor subsidiaries and their officers, lenders, the
creditors' committees and pension scheme trustees, is overbroad and not
proposed in good faith. The broad scope of the definition of released
parties includes a large potential universe of unidentified persons,
such as employees and other professionals, none of whom are before the
court as required by law, the objection said.
href='http://bankruptcy.law360.com/articles/76503'>Read
more. (Registration required.)
Jobless Claims Hit 7-Year
High
The Labor Department said today that the number of U.S. workers filing
new claims for state unemployment benefits unexpectedly soared past the
half-million mark last week for the first time in over seven years, the
Wall Street Journal reported today. Initial claims for jobless
benefits jumped 32,000 to a seasonally adjusted 516,000 in the week
ended Nov. 8, the Labor Department said. The four-week average of new
claims, which aims to smooth volatility in the data, rose 13,250 to
491,000, the highest since 1991 and well above recessionary levels
typically associated with further increases in the unemployment rate.
Meanwhile the tally of continuing claims, those drawn by workers
collecting benefits for more than one week in the week ended Nov. 1,
inched closer to the four-million mark, rising 65,000 to
3,897,000.
href='http://online.wsj.com/article/SB122658250523224291.html'>Read
more. (Registration required.)
San Diego's Pension Deficit Balloons
to $2.78 Billion
The San Diego City Council was told that the deficit in the city
employee pension system has more than doubled to $2.78 billion since the
Wall Street meltdown, the Associated Press reported today. Actuary
Joseph Esuchanko told the council yesterday that the pension fund has
$6.56 billion in commitments, but only $3.78 billion in assets, as of
Oct. 31. The deficit was $1.2 billion before the meltdown. City Chief
Operating Officer Jay Goldstone says the city will likely face
skyrocketing pension payments to make up the difference. According to
projections, the city's annual pension payment of $166 million next year
could increase to $291 million in three years. City Attorney Michael
Aguirre has urged the council to consider filing bankruptcy as a way to
stabilize the fund.
href='http://www.mercurynews.com/news/ci_10969310?nclick_check=1'>Read
more.
Government Will Back Some GE
Loans
General Electric Co. said that its GE Capital financial-services arm
would participate in the federal government's new debt-guarantee
program, making it the first company with significant industrial
operations to tap the program, the Wall Street Journal reported
today. Joining the program could make it easier for GE to issue new debt
in coming months. In recent months, investors have worried about GE's
liquidity, and the price it has to pay to borrow money. GE said
yesterday that under the program, the government will guarantee as much
as $139 billion in long- and short-term debt through next June.
href='http://online.wsj.com/article/SB122652197114121737.html#'>Read
more. (Registration required.)
Volume of Swap Contracts
Declines
The volume of credit-default-swap contracts outstanding fell in the
first half of 2008, the Bank for International Settlements said, marking
the first decline in the derivatives contracts since the bank began
publishing CDS statistics in December 2004, the Wall Street
Journal reported today. CDS contracts valued at $17.4 trillion were
terminated in the first six months of the year, the bank said. Before
this year, the average growth rate for CDS volumes outstanding over the
past three years has been 45 percent. Last month, the International
Swaps and Derivatives Association also reported that industry
initiatives such as 'compression,' which involves ending existing CDS
trades and replacing them with a smaller number of trades that leave a
portfolio with the same risk profile, had helped reduce notional
outstanding CDS volumes in the first half of the year, to $54.6 trillion
from $62.2 trillion.
href='http://online.wsj.com/article/SB122653008585222309.html'>Read
more. (Registration required.)
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