Federal regulators yesterday accused Capital One and two of its executives of understating millions of dollars in auto loan losses suffered during the financial crisis, the New York Times DealBook blog reported yesterday. In the case of Capital One’s auto-lending business, according to the SEC, the bank "materially understated" its loan loss expenses and "failed to maintain effective internal controls." The SEC contended that Peter A. Schnall, who was Capital One's chief risk officer at the time, and David A. LaGassa, a lower-level executive, failed to prevent the improper statements.
A government watchdog warned that regulators need to be more aggressive in reducing exposure among major Wall Street firms if they want to eliminate concerns about "too-big-to-fail" banks, the Wall Street Journal reported today. Christy Romero, special inspector general for the $700 billion Troubled Asset Relief Program, said in a report released today that not enough has been done by government overseers to address the interconnected nature of the largest and most complex financial companies. The ties among major Wall Street firms that posed a challenge at the height of the 2008 financial crisis remain a problem, she said. The report also took aim at the Treasury Department's efforts to provide assistance to troubled homeowners, which have fallen far short of initial expectations. The report said that 46 percent of borrowers who received a mortgage modification through the government's Home Affordable Modification Program in the third quarter of 2009 wound up re-defaulting on their loans.
Jon Corzine was sued yesterday by the bankruptcy trustee liquidating MF Global Holdings Ltd., who accused the former chief executive of negligently pursuing a high-risk business strategy that culminated in the commodities brokerage's destruction, Reuters reported yesterday. The trustee, Louis Freeh, said in the lawsuit that Corzine and two top deputies overhauled MF Global's business without addressing "systemic weaknesses" in oversight and monitoring. Freeh said that the officials breached their fiduciary duties to shareholders and failed to act in good faith, wiping out more than $1 billion in value by the time of MF Global's Oct. 31, 2011, bankruptcy.
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Federal regulators are poised to crack down on payday loans by taking aim the operations of big bank, the New York Times DealBook blog reported yesterday. A handful of banks offer the loans tied to checking accounts, with the understanding that the lender can automatically withdraw the loan amount, plus the origination fee, when it is due. Regulators from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are expected to clamp down on the loans, which carry interest rates that can soar above 300 percent, by the end of the week.
U.S. banks are bowing to regulators' concerns about the size of executive pay and its role in financial industry risk-taking, the Wall Street Journal reported today. Seven large U.S. financial-services firms, including PNC Financial Services Group, Capital One Financial Corp., and Discover Financial Services Inc., said that they are scaling back the maximum bonuses awarded to executives who beat their performance targets, according to regulatory filings. Since the financial crisis the Fed has urged banks to cap bonuses in cases where they could encourage executives to take too much risk.
Standard & Poor’s, accused of inflating its ratings to win business during the boom in mortgage investments, urged a judge yesterday to dismiss the federal government’s civil case against it, saying that the Justice Department had built a faulty complaint on "isolated snippets" of conversations rather than evidence of real wrongdoing, the New York Times DealBook blog reported yesterday. S&P, the largest ratings agency in the U.S., was responding to civil fraud charges filed in February in the first significant federal action against the ratings industry since the mortgage bubble burst. The Justice Department’s lawsuit accused S&P of knowingly giving complex packages of mortgages higher ratings than they deserved, stoking investor demand for the securities and driving up prices to where they crashed, setting off the global financial crisis.
McGraw-Hill Cos.'s Standard & Poor's unit is set to take its first stab at fending off the U.S. Justice Department’s allegations that the company's mortgage-backed securities ratings were fraudulent, Bloomberg News reported today. The largest U.S. rating company by revenue faces a deadline today to file its response in federal court in Santa Ana, Calif. Justice Department officials said that when the complaint was filed in February that S&P could face more than $5 billion in civil penalties based on losses by federally insured financial institutions that relied on S&P’s ratings. S&P cannot support its request to dismiss the case by supplying evidence to contradict the allegations, legal experts said. The U.S. said in its Feb. 4 complaint that S&P knowingly and intentionally defrauded investors in residential mortgage-backed securities and collateralized-debt obligations that included those securities for which the company provided credit ratings.
One of Residential Capital LLC's largest unsecured creditors is seeking court approval to sue the mortgage firm's parent, Ally Financial Inc., increasing pressure on the government-owned auto lender to pay more money, Dow Jones Newswires reported yesterday. Wilmington Trust, a trustee for $1 billion of ResCap senior unsecured bonds, renewed arguments on Friday that Ally stripped ResCap of valuable assets prior to the mortgage subsidiary's chapter 11 filing last May, assets that Wilmington says are worth billions of dollars. A key transaction at issue is the transfer of ResCap's ownership stake in Ally Bank, the depository subsidiary of Ally Financial that Wilmington and other creditors claim was ResCap's most valuable asset. Ally completed that transaction in 2009, a move Wilmington says exacerbated ResCap's financial problems as it faced rising litigation over soured residential mortgage-backed securities.
A panel of top financial regulators is targeting mortgage real-estate investment trusts as a potential risk to the U.S. financial system, the Wall Street Journal reported today. Next week, the Financial Stability Oversight Council, a panel comprising the top U.S. financial regulators, is expected to cite mortgage REITs as a source of market vulnerability in its annual report, a distinction that could set the stage for stricter oversight of the industry. Even though the economy continues to recover slowly, regulators see potential bubbles forming in a range of financial markets, in part because of the Federal Reserve's easy-money policies, which have driven interest rates to near-record lows and prompted investors to seek higher returns elsewhere. Mortgage REITs, which are publicly traded financial companies that borrow funds to invest in real-estate debt, have seen their assets quadruple to more than $400 billion since 2009. They differ from traditional REITs in that they invest in mortgage debt, rather than actual real-estate like office buildings or shopping malls. The firms take advantage of inexpensive, short-term borrowing to buy mortgage securities backed by Fannie Mae and Freddie Mac, and offer returns to investors of as much as 15 percent.
Fifth Third Bancorp surprised investors with stronger-than-expected lending revenue, bucking an industrywide decline that has plagued banks this year, the Wall Street Journal reported today. Other banks reporting their financial results yesterday saw weak loan growth, but BB&T Corp. and KeyCorp. beat analysts' profit forecasts thanks largely to cost-cutting. For more than a decade, Fifth Third's hallmark was a tight grip on commercial lending in the Midwest, and yesterday the Cincinnati bank demonstrated that it can grow even as its regional bank rivals saw demand for loans dwindling across the country.
