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April 5, 2010
Commentary: The FDIC Resolution Process Is a
Model for Financial Regulation Reform
The Federal Deposit Insurance Corp. has a well-established process
that works for failing banks, and this model should be available to
close large, failing firms going forward, according to a commentary by
FDIC Chair Sheila Bair in today's Wall Street Journal. Over its
76-year history, the FDIC has handled thousands of resolutions of all
manner of size and complexity, according to Bair. The FDIC resolution
mechanism closes the institution and auctions it to the private sector,
reallocating resources to stronger institutions. Bair said that it gives
the government the right to repudiate executive contracts, eliminate
bonuses, require derivatives counterparties to perform on their
obligations, and impose losses on shareholders and creditors. Both the
already-passed House bill, as well as the bill approved by the Senate
Banking Committee, draw on the FDIC model to create a resolution
authority that specifically applies to large, complex nonbank financial
firms. Under both bills, bankruptcy would be the normal process, but
under extraordinary procedures, the government would have the option to
put the very largest firms into an FDIC-style liquidation process if
necessary to avert a broader systemic collapse. As with banks, the
legislation would allow the FDIC to create a temporary institution in
order to allow continuity and prevent a systemic collapse while the firm
is being liquidated, according to Bair. To provide working capital for
this bridge, both bills would require the largest financial firms to pay
assessments in advance so that taxpayers would not be at risk. The firms
that pose the most risk would pay the most. Bair said that this orderly
liquidation process funded by the firms themselves would force these
institutions to internalize the full costs of the risks they create.
Read the
href='http://online.wsj.com/article/SB10001424052702304871704575159643688328442.html?mod=WSJ_hpp_sections_opinion'>full
commentary. (Subscription required.)
Analysis: Lehman's Repo 105 Controversy
Reveals Tensions over Accounting Rules
Lehman Brothers' Repo 105 controversy suggests that too strict an
adherence to bright-line rules may have encouraged behavior such as
Lehman's, which, while not technically illegal, served only to obscure
the reality of the firm's financial situation, according to an analysis
in Friday's Deal Pipeline. Repo 105 refers to the accounting
treatment that allowed Lehman in late 2007 and 2008 to temporarily
remove billions of dollars from its balance sheet by using repurchase
agreements, a short-term financing technique in which a borrower 'sells'
collateral to a lender and promises to buy it back later. Repos are
normally accounted for as liabilities of the borrower, but Lehman used
Repo 105 to characterize its borrowing as a sale. That allowed it to
reduce its balance sheet by jettisoning assets on paper and using the
money it received to repay short-term debt. All this was done just in
time to report earnings and conveniently reversed afterward. The firm
was able to do this by exploiting a loophole in the Financial Accounting
Standards Board's Statement 140, passed in September 2000, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.' That rule itself was an updating of FAS 125, passed in
1996, which attempted to codify accounting for repo agreements.
id='uisy' title='Read more.'
href='http://pipeline.thedeal.com/tdd/ViewBlog.dl?id=34043'>Read
more.
Commercial Bankruptcies Increase in
March
The total number of companies filing for bankruptcy in the U.S.
jumped by more than 20 percent in March over the previous month, as
business failures in the first quarter outpaced last year's total, the
Wall Street Journal reported today. The total number of
commercial bankruptcy filings hit 8,208 in March, a sharp rise from
February's total of 6,655, according to new data from Automated Access
to Court Electronic Records. March's total brings the total number of
commercial bankruptcies to 21,453 so far this year, almost 1,000 more
than the total for the first quarter of 2009, a breakout year for
business filings.
href='http://online.wsj.com/article/SB10001424052702303912104575164402383741206.html?mod=WSJ_business_whatsNews'>Read
more. (Subscription required.)
Commentary: Foreclosure Prevention
2.0
If all goes according to plan, the Obama administration?s new
antiforeclosure effort will prevent many more foreclosures than its
current one and do more to moderate the decline in home prices,
according to a New York Times editorial today. One of the big
drawbacks to the administration's original plan, launched a year ago, is
that it focuses on reducing a troubled borrower's monthly payment by
lowering the interest rate. That ignores the fact that unemployed
borrowers often cannot afford even reduced payments. Another problem
with the original plan is that participation has been largely voluntary;
lenders were offered incentives to join but were not compelled. The
improved plan attempts to address the problems of borrowers who are
unemployed or underwater on their mortgage. For borrowers receiving
unemployment benefits, lenders will be required to lower payments to no
more than 31 percent of gross income for at least three months under the
administration's new plan, provided the borrower is not more than 90
days delinquent. Unpaid amounts will be added to the loan's principal,
to be repaid later. After several months, the hope is that the borrower
will have found new work and will qualify for a loan modification in
which payments will stay at the reduced amount.
href='http://www.nytimes.com/2010/04/05/opinion/05mon1.html?ref=opinion&pagewanted=print'>Read
more.
Spansion's Reorganization Plan Rejected
over Payouts
Bankruptcy Judge Kevin Carey on Thursday refused to confirm
Spansion Inc.'s reorganization plan, after creditors complained that
incentives that the flash memory maker proposed to award employees were
too generous, Reuters reported on Friday. Judge Carey said that the
company failed to show its intention to set aside 13.2 percent of its
stock for executives and others was 'usual or reasonable for this market
at this time.' He also said that the chapter 11 plan was defective
because Spansion did not reserve $4.23 million to cover a possible claim
by chip technology provider Tessera Technologies Inc. in a patent
infringement lawsuit.
href='http://www.reuters.com/article/idUSN0216567220100402'>Read
more.
Federal Prosecutors Leaning Against Charges
in AIG Probe
Federal prosecutors, after a two-year investigation, may soon decide
not to charge American International Group Inc. executives for their
role surrounding financial contracts that nearly brought down the
company, the Wall Street Journal reported today. The
high-profile probe has centered on Joseph Cassano, who headed a
London-based unit of the giant insurer called AIG Financial Products.
The unit entered into insurance-like contracts with other financial
institutions that ended up being financially disastrous for AIG. When
the mortgage market imploded, AIG had to hand over tens of billions of
dollars worth of collateral to financial institutions that had entered
credit-default swaps with AIG. These collateral calls nearly felled the
company and led to a massive government bailout that's generated intense
public outrage and political scrutiny. At issue in the investigation was
whether, starting in 2007, Cassano and his colleagues deceived investors
and the firm's outside auditor about AIG's financial exposure from those
contracts, which were tied in part to mortgages.
href='http://online.wsj.com/article/SB10001424052702304247104575162310777594370.html?mod=WSJ_hps_LEFTWhatsNews'>Read
more. (Subscription required.)
In related news, American International Group Inc. has agreed to pay
millions of dollars it owes to Lehman Brothers Holdings Inc. under
credit-default swaps it sold to the investment bank in the years before
its collapse, Dow Jones Daily Bankruptcy Review reported today.
Bankruptcy Judge James Peck on Thursday signed off on the deal
resolving a derivatives dispute between two firms that were at the
center of the financial meltdown in the fall of 2008. At issue were
about 125 trades between the two firms involving credit-default swaps.
According to court papers, AIG has agreed to be bound by a
court-approved derivatives ruling governing performance under the swaps,
and Lehman has agreed to withdraw its motion to compel payment.
Judge Dismisses Some Claims in Suit over
$60 Billion Mortgage-backed Securities
U.S. District Judge Jed S. Rakoff on Wednesday threw out some claims
against three underwriters and two rating agencies in a lawsuit over
alleged misstatements regarding the sale of more than $60 billion in
mortgage-backed securities, Dow Jones Daily Bankruptcy Review
reported today. Judge Rakoff dismissed claims against rating agency
Moody's Corp.'s Moody's Investor Service and McGraw-Hill Cos., the
parent of Standard & Poor's with prejudice. He also dismissed some
claims against Bank of America Corp.'s Merrill Lynch & Co., JPMorgan
& Co.'s securities business and ABN Amro Inc. In particular, Judge
Rakoff threw out claims in which named plaintiffs in the case didn't
purchase mortgage-backed securities. The lawsuit had alleged 84
offerings conducted in 2006 and 2007 misrepresented the risks associated
with certain tranches of mortgage pass-through certificates backed by
residential mortgages that were securitized by affiliates of Merrill
Lynch. The offerings involved more than $60 billion in securities.
Pension Funds Still Waiting for Big Payoff
from Private Equity
Private equity deal-makers made billions for themselves when times
were good, but some of their biggest investors, public pension funds,
are still waiting for the hefty rewards they were promised, the
New York Times reported on Saturday. The nation?s 10
largest public pension funds have paid private equity firms more than
$17 billion in fees since 2000, according to a new analysis conducted
for the New York Times, as the funds flocked to these
so-called alternative investments in hopes of reaping market-beating
returns. However, few big public funds ended up collecting the 20 to 30
percent returns that private equity managers often held out to attract
pension money, a review of the funds? performance shows. State and local
pension assets declined by 27.6 percent from the end of 2007 to the end
of 2008, wiping out $900 billion, according to the Government
Accountability Office.
href='http://www.nytimes.com/2010/04/03/business/03equity.html?pagewanted=print'>Read
more.
John Malkovich Seeks Bigger Madoff
Return
Actor John Malkovich is seeking to recover $2.3 million from an
account he had with the securities firm of Bernard L. Madoff, Bloomberg
News reported on Friday. Trustee Irving H. Picard approved a
claim in August for $670,000 for the actor?s pension plan and trust,
more than $1.5 million short of the value of the securities listed on
the November 2008 final statement of Malkovich?s account, lawyers for
the actor said in a filing on Thursday. Picard told Malkovich that he
was not entitled to the full amount because no securities were purchased
for his account and the approved claim reflects what he deposited with
Madoff?s firm, according to the filing.
href='http://www.nytimes.com/2010/04/03/business/03bizbriefs-JOHNMALKOVIC_BRF.html?pagewanted=print'>Read
more.
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