Creditor Lawsuit Could Undo Auto Bailout Force GM into Bankruptcy
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Analysis Companies Feasting on Cheap Money
Companies are taking advantage of investors' appetite for yield—and fear of riskier bets—by issuing more long-term bonds, aiming to reduce their refinancing needs in coming years, when interest rates are likely to be higher, the Wall Street Journal reported today. Investment-grade companies have sold more 30-year bonds in the U.S. so far in 2012 than in any full year since 1995, according to data provider Dealogic. The $91.9 billion of 30-year bonds sold in 166 offerings this year, is about 26 percent more than the $73.2 billion sold in 145 deals during all of 2011. Issuers are being drawn to the longer maturities by low interest rates, the result of the Federal Reserve's loose monetary policy and the global economy's continuing weakness.
Morgan Stanley Can Be Sued over Moodys S&P Ratings
U.S. District Judge Shira Scheindlin ruled on Friday that Morgan Stanley cannot avoid liability for any inaccurate ratings on a group of notes backed by subprime mortgages by saying that the information came from Moody's Corp. and Standard & Poor's, Bloomberg News reported yesterday. The investors, which include Abu Dhabi Commercial Bank, claim Morgan Stanley was negligent in conveying ratings that it should have know were inaccurate. Scheindlin, applying New York law, rejected Morgan Stanley's argument that the alleged misstatements were made by the rating companies, not the bank. "Morgan Stanley's conveyance of the inaccurate ratings -- combined with its omission of nonpublic facts that it knew would undercut the ratings -- represented a breach of its duty to provide plaintiffs with accurate information," Judge Scheindlin said in her ruling. In August, Judge Scheindlin denied a request by Moody’s and Standard & Poor's to dismiss fraud claims against them in the suit. She also allowed the investors to pursue claims of aiding and abetting fraud against Morgan Stanley.
Stress for Banks as Tests Loom
U.S. banks and the Federal Reserve are battling over a new round of "stress tests" even before the annual exams get going later this fall, the Wall Street Journal reported today. The clash centers on the math regulators are using to produce the results. Bankers want more detail on how the calculations are made, and the Fed thus far has resisted disclosing more than it has already. A senior Fed supervision official, Timothy Clark, irked some bankers last month when he said at a private conference that they would not get additional information about the methodology. Smaller banks will soon have to grapple with similar requirements. Three U.S. banking regulators—the Fed, the Comptroller of the Currency and the Federal Deposit Insurance Corp.—plan today to complete rules requiring smaller banks with more than $10 billion in assets to also run an internal stress test each year. That would widen the pool of test participants beyond the Fed's current requirement of $50 billion in assets, a group comprised of 30 banks.
Analysis Prepaid Cards Enter the Mainstream
While mainstream financial institutions previously shunned people without checking accounts, that demographic is now among the industry's most coveted customers, the Wall Street Journal reported today. The latest example of the shift came yesterday when American Express Co. and Wal-Mart Stores Inc. rolled out a prepaid card aimed at tens of millions of middle-class and lower-income Americans eager to avoid fees charged by banks. The Bluebird card, stamped with AmEx's familiar blue and white logo, will be sold online and at the retail giant's 3,925 U.S. stores, marking an expansion of Wal-Mart's longtime efforts to muscle into financial services. For AmEx, Bluebird is yet another turn away from the company's roots pitching high-end charge cards and credit cards to affluent consumers. The top 50 issuers of prepaid cards rang up $79.9 billion worth of purchases last year, up 25 percent from $64.1 billion in 2010, according to the Nilson Report, a Carpinteria, Calif.-based newsletter.
Libor Now Set by Six Banks Losing Status as a Benchmark
After being rigged by some of the world’s biggest financial institutions, the London interbank offered rate (Libor), the benchmark for more than $300 trillion of securities and loans, is now increasingly being set by a smaller group of banks, Bloomberg News reported today. Bank of America Corp., Citigroup Inc., Bank of Tokyo Mitsubishi UFJ Ltd., Royal Bank of Canada, Sumitomo Mitsui Financial Group Inc. and Lloyds Banking Group Plc's submissions have been used in setting the rate on an almost daily basis in the past four months, data compiled by Bloomberg show. Two years ago, none of the 18 designated lenders made it into every fixing of the measure, which excludes outliers by stripping out the four highest and lowest contributions. While Libor is supposed to represent the interest rates banks pay each other for short-term loans, the dominance of a smaller group shows the measure is failing to accurately reflect the true health of the financial system and borrowing costs. The U.K.'s Financial Services Authority recommended on Sept. 28 that Libor have a broader group of contributors, while acknowledging that developing an alternative would be too disruptive to borrowers around the world because the rate is so embedded in the financial system.
Lehman Brokerage Payout Nearer After 38 Billion Pact
Defunct brokerage Lehman Brothers Inc., which hasn’t paid hedge funds after four years in liquidation, is nearer to making them whole after reaching a "critical milestone" in settling a $38 billion dispute with an affiliate, Bloomberg News reported yesterday. Brokerage trustee James Giddens, who is facing payment demands by New York hedge fund Elliott Management Corp., said the brokerage approved a $7.5 billion customer claim by Lehman Brothers International Europe (LBIE), plus income of $600 million, with another approved claim of $500 million by the affiliate. The brokerage will get a general claim against LBIE of $4 billion, he said in a statement yesterday.
Lehman Brokerage Trustee Strikes Settlement with Finance Unit
The trustee liquidating Lehman Brothers' U.S. brokerage has reached a settlement with its former derivatives unit that will reduce to $550 million an original claim of $6 billion, Reuters reported yesterday. The deal will enhance the ability of the trustee James Giddens to distribute payouts to former clients of Lehman Brothers' brokerage four years after the investment bank collapsed. Lehman Brothers Finance AG, which was based in Switzerland, will receive a $190 million customer claim and a $360 million general unsecured claim against the brokerage, according to a court document filed on Wednesday.
U.S. Probes Credit Suisse over Mortgage-Backed Securities
U.S. federal and state authorities are investigating Credit Suisse AG over mortgage-backed securities packaged and sold by the bank, Reuters reported yesterday. The Justice Department and the New York Attorney General are among those probing Credit Suisse's actions. Zurich-based Credit Suisse is the second bank known to be targeted by U.S. authorities probing how banks bundled mortgage loans into securities during the U.S. housing boom. New York Attorney General Eric Schneiderman filed a civil fraud case against JPMorgan Chase & Co on Monday over mortgage-backed securities originated and sold by Bear Stearns.
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In related news, New York Attorney General Eric Schneiderman is looking into the mortgage securities practices of at least a dozen financial institutions that have agreed to suspend a deadline for him to bring fraud claims, Bloomberg News reported yesterday. Schneiderman, who sued JPMorgan Chase & Co. this week for defrauding mortgage bond investors, has so-called tolling agreements with 12 institutions that preserve claims that could expire during a state investigation. Schneiderman is the co-chairman of a state-federal taskforce that is investigating misconduct in the bundling of mortgage loans into securities in the run-up to the financial crisis. The group includes the U.S. Securities and Exchange Commission and the Justice Department, and the JPMorgan case was its first legal action. Read more: http://www.bloomberg.com/news/2012-10-04/n-y-mortgage-probe-said-to-get…
MF Global Trustee Freeh to Allow Extended Probe of Records
The trustee in charge of MF Global Holdings Ltd. said that he will allow the U.S. government and the trustee unwinding the company's failed brokerage, MF Global Inc., to go further back in their investigation into the company's books concerning segregated funds, which still have a reported shortfall of more than $1 billion, Dow Jones Newswires reported yesterday. Trustee Louis J. Freeh on Wednesday said that he will waive attorney-client privilege and turn over documents and other information about MF Global's segregated accounts from the period of July 1, 2011, until the company's Oct. 31, 2011, bankruptcy filing. Previously, he had agreed to open MF Global's books for the two-week period leading up to its bankruptcy. A judge will consider approving the stipulation at an Oct. 11 hearing.