The trial over the American International Group Inc. bailout shifts this week from the architects of the 2008 rescue, who spent days testifying as to why they imposed the terms they did on the ailing insurer, to the executives who accepted their demands, Bloomberg News reported today. Maurice “Hank” Greenberg’s Starr International Co., AIG’s biggest shareholder before the bailout, accuses the U.S. of imposing illegally severe conditions in the rescue and is seeking at least $25 billion in damages. Robert Willumstad and Edward Liddy, two of Greenberg’s successors as chief executive officer at the insurance giant, are set to testify this week in the U.S. Court of Federal Claims in Washington, D.C., where Judge Thomas Wheeler is hearing the case without a jury. The trial started Sept. 29. Key regulators involved in the rescue, including Federal Reserve Bank of New York executives Sarah Dahlgren and Margaret McConnell, and Eric Dinallo, former superintendent of the State of New York Department of Insurance, also are expected to take the witness stand.
The shortfall facing lenders from JPMorgan Chase & Co. to HSBC Holdings Plc could be as much as $870 billion, according to estimates from AllianceBernstein Ltd., or as little as $237 billion forecast by Barclays Plc, Bloomberg News reported yesterday. The range is so wide because proposals from the Basel-based Financial Stability Board (FSB) outline various possibilities for the amount lenders need to have available as a portion of risk-weighted assets. With those holdings in excess of $21 trillion at the lenders most directly affected, small changes to assumptions translate into big numbers. The FSB wants to limit the damage the collapse of a major bank would inflict on the world economy by forcing them to hold debt that can be written down to help recapitalize an insolvent lender. For senior bonds to suffer losses under present rules the institution has to enter bankruptcy, a move that would inflict huge damage on the financial system worldwide if it happened to a global bank.
The U.S. credit card industry has found its sweet spot: a combination of moderate economic growth, low interest rates and consumers who have struck a balance between spending more and paying their bills on time, the Wall Street Journal reported today. The trends are expected to drive profits to post-recession highs at industry giants American Express Co. and Capital One Financial Corp. this year and bolster the bottom line at banks with big card units, including JPMorgan Chase & Co. U.S. card issuers will generate $158.6 billion in revenue this year, a 9 percent increase from 2013, according to estimates from R.K. Hammer, a consulting firm in Thousand Oaks, Calif., that focuses on the industry. It would be the first annual gain since 2008. The bright outlook reflects a change from five years ago when industry executives said that profits and the availability of credit would be hampered by a new federal law, called the Card Act, which put an end to certain industry practices. Among other things, the law restricted card issuers from raising rates on existing purchases if a customer was late on a payment.
The largest lenders in the U.S., Europe and Japan on Saturday agreed to new procedures to help inoculate the global financial system against the failure of giant banks, the Wall Street Journal reported today. Top executives of 18 large U.S., European and Japanese banks, meeting at the Federal Reserve in Washington, agreed in principle to wait up to 48 hours before seeking to terminate derivatives contracts and collect associated payments from a troubled financial institution. The closed-door meeting included top banking executives, including Lloyd Blankfein of Goldman Sachs Group Inc., Antony Jenkins of Barclays PLC and Michael Corbat of Citigroup Inc. The delay will give regulators time to transfer a failing firm’s assets and some obligations into a new “bridge” company, removing the need to unwind derivatives contracts or undertake asset sales during times of turmoil. The changes, pushed for by global regulators and set to go into effect in January, are aimed at helping to end the problem of dealing with “too big to fail” banks that are so large and intertwined their collapse would threaten to trigger broad economic damage or market tumult. They are significant because they would force firms to give up certain rights they have under current contracts.
Jamie Dimon, the chief executive of JPMorgan Chase, made his first public comments about the cyberattack on the bank, referring to the summer breach a “big deal” and calling for help from the government in dealing with these kinds of issues, the New York Times DealBook blog reported on Friday. Dimon emphasized that the financial industry and banks on Wall Street needed to keep working together to prevent other such occurrences. JPMorgan, he said, was spending $250 million a year on the issue — a sum likely to double in four to five years. He also pointed out that JPMorgan was not the only bank to have this problem. “This is going to be a big deal and there will be a lot of battles,” he said. “We need a lot of help.” http://dealbook.nytimes.com/2014/10/10/dimon-calls-for-help-on-cyberatt…
For more on cybersecurity, do not miss former White House CIO Theresa Payton’s keynote at ABI’s Winter Leadership Conference. Register today! http://www.abiworld.org/WLC14
Federal Reserve Bank of Richmond President Jeffrey Lacker said that financial firms’ “living wills” should do a lot to strengthen the financial system, if banks and regulators respect these plans, the Wall Street Journal reported on Saturday. The living wills in question are plans by financial companies detailing how they expect to be wound down in the event of running into trouble. Lacker, speaking at ABI’s luncheon at the 88th Annual NCBJ Conference in Chicago, said that these plans are vital to ending the perception that many firms are considered to be too-big-to-fail and will be bailed out by the government in the event of trouble. “Living wills offer us the only realistic path” to ending the ongoing belief that very large firms will get government bailouts, Lacker said. While living wills “have not received as much attention as other regulatory and legislative responses to the crisis, they may be the most critical, and I applaud the hard work that is being done to make them credible.” Lacker long has argued that the too-big-to-fail problem that played such a large role in the financial crisis was in part the fault of regulators and political authorities who couldn’t resist saving failing financial firms. (Subscription required.) http://blogs.wsj.com/economics/2014/10/10/feds-lacker-living-wills-will…
In related news, Federal Reserve Governor Daniel Tarullo said that risk to the financial system is possible even without firms that are deemed too big to fail, Bloomberg News reported on Friday. Tarullo, speaking in Washington, D.C. on Thursday, also said that international regulators will release some standards on capital and liabilities for big banks “relatively soon.” The Financial Stability Board is considering how quickly to introduce a rule on total loss-absorbency capacity (TLAC) for the world’s systemically important banks. “You can conceive of a financial system in which you could say with credibility no single institution is too big to fail, we could handle it, and yet there would still be systemic vulnerabilities,” Tarullo said. One example would be a “funding structure that was very fragile, under margins in which runs were incentivized.” http://www.businessweek.com/news/2014-10-09/tarullo-says-systemic-risk-…
The U.S. Securities and Exchange Commission is considering establishing a victims’ fund with the $602 million that SAC Capital Advisors LP paid to settle an insider-trading case brought by regulators, Bloomberg News reported yesterday. The SEC told the Manhattan federal judge overseeing the case that it has been in contact about the “fair fund” with shareholders in Elan Corp. Plc and Wyeth LLC who claim they suffered losses as a result of an insider-trading scheme of convicted former fund manager Mathew Martoma. Martoma was sentenced last month to nine years in prison after being convicted of making $275 million for SAC by using illegal tips to trade in the pharmaceutical companies, the most lucrative insider-trading scheme in history. SAC Capital, now called Point72 Asset Management LP, agreed to pay $602 million to settle the regulators’ suit. The money was part of a $1.8 billion payment which SAC paid to the U.S. to settle criminal and civil cases.
A U.S. appeals court ruling yesterday revived a lawsuit against JPMorgan Chase & Co. filed by a former vice president claiming the bank ignored red flags about a client's potential fraud, even after the massive Ponzi scheme operated by Bernard Madoff, another JPMorgan client, was exposed, Reuters reported yesterday. The U.S. Court of Appeals for the Second Circuit reversed a lower court's decision to throw out Jennifer Sharkey's whistleblower suit and ordered the judge to consider whether the case should be allowed to continue under a more lenient standard of whistleblower protection. The ruling from the three-judge panel was unanimous. JPMorgan has rejected Sharkey's allegations.
The federal government said yesterday that it reached a $5 million settlement with Wells Fargo to resolve allegations it discriminated against pregnant women, new mothers and women on maternity leave, the Associated Press reported yesterday. The U.S. Department of Housing and Urban Development said Wells Fargo's home mortgage unit refused to make loans available to some women based on their gender or family status, and forced some women to give up their maternity leave and go back to work before it would close a loan with them. HUD said that bank employees also made discriminatory statements to and about women who were pregnant or had recently given birth. The agency said Wells Fargo will change its underwriting guidelines as part of the settlement and will show its staff how to follow the new guidelines.
A new report by the International Monetary Fund (IMF) says that Wall Street’s “pay incentives may go too far and encourage the bank staff to engage in too much risk taking from the shareholders’ point of view,” the New York Times DealBook blog reported today. “For example,” the IMF report observes, “by taking on loans that appear to be profitable in the short term but come with hidden, long-term risks, bankers can increase their immediate performance-based pay and move on before the risks materialize.” The IMF wants to upend this dynamic, in part by encouraging Wall Street’s leaders to overhaul their firms’ rewards system. The report said that “boards and management must set the expectation for integrity in behavior and make clear that noncompliance will not be tolerated.” It goes on to say that a “bank’s staff must expect to be held accountable for their actions and their impact on risk taking.” http://dealbook.nytimes.com/2014/10/09/i-m-f-takes-aim-at-wall-streets-…
