Financial Guaranty Insurance Co., the bond insurance unit of bankrupt FGIC Corp., said yesterday that the New York State Department of Financial Services had begun a rehabilitation process that will include taking over the business of the bond insurer, Reuters reported yesterday. FGIC filed for bankruptcy in August of 2010 as a result of the financial crisis and a deterioration in the U.S. housing and mortgage markets. It was once the fourth-most active bond insurer. The bond insurance unit stopped writing new financial guaranty insurance policies in January of 2008 in order to preserve capital and also stopped paying dividends to its parent company FGIC, which led to its bankruptcy.
Hydraulic fracturing, or fracking, is bringing new development to the Midwest, creating demand for commercial real estate in the region even as landlords struggle to pay off earlier property loans, Bloomberg News reported today. Chesapeake Energy Corp., the second- largest U.S. natural-gas supplier, has acquired $2 billion in land leases comprising 1.35 million acres in Ohio and contributing to the beginnings of an economic recovery in the state. Ohio, which had the seventh-highest commercial property delinquency rate in the country in December, according to Moody's Investors Service, is already showing signs of improvement. The delinquency rate on commercial mortgages packaged and sold as bonds in Ohio dropped to 8.74 percent in June from 11.28 percent a year earlier, according to data compiled by Bloomberg.
The FDIC and taxpayers are the underwriters of too much private risk taking, and the U.S. financial system should be strengthened by simplifying its structure and making its institutions more accountable for their mistakes, according to a commentary today by FDIC director Thomas M. Hoenig in the Wall Street Journal. Hoenig's proposal would help prevent another 2008-style crisis by prohibiting banking organizations from conducting broker-dealer or other trading activities and by reforming money-market funds and the market for short-term collateralized loans (repurchase agreements, or repos). Before 1999, U.S. banking law kept banks, which are protected by a public safety net (e.g., deposit insurance), separate from broker-dealer activities, including trading and market making. However, in 1999 the law changed to permit bank holding companies to expand their activities to trading and other business lines. Similarly, broker-dealers like Bear Stearns, Lehman Brothers, Goldman Sachs and other "shadow banks" were able to use money-market funds and repos to assume a role similar to that of banks, funding long-term asset purchases with the equivalent of very short-term deposits.
Warren Buffett's Berkshire Hathaway Inc. sold more than a third of its Residential Capital LLC bond holdings this week, shortly after calling for a probe into the mortgage lender's pre-bankruptcy transactions, Reuters reported on Friday. Ted Weschler, a Berkshire investment manager, said his company sold its holdings of more than $500 million of unsecured ResCap bonds on June 5 and 6, according to court papers filed on Thursday. Weschler did not disclose sale prices. Berkshire had held the bonds for several years.
Bankruptcy scholars testifying yesterday before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises refuted the implication that government involvement had disadvantaged investors during the 2001 Argentinian debt default and the 2009 bankruptcies of General Motors and Chrysler, Dow Jones Newswires reported yesterday. "Actions that are unfavorable to one set of investors are frequently favorable to another set, and in at least two of the episodes involved, the [Obama] administration's actions were favorable to many more investors than they were unfavorable," Prof. Adam Levitin of Georgetown University Law School said citing Argentina, General Motors and the recent federal-state mortgage settlement. Levitin called Chrysler's bankruptcy a "textbook affair" and pointed out that without the bankruptcy financing the government provided, the company would have liquidated and unsecured creditors, including bondholders, would have recovered nothing. Prof. Stephen Lubben of Seton Hall University Law School, took a similar stance in his remarks, warning that "investors may be using the Argentinean situation to make bad law." When Argentina defaulted on its debt, a group of bondholders decided to reject Argentina's debt restructuring, opting for liquidation as opposed to restructuring, he said, a choice that had potential risks and rewards.
MediMedia USA Inc. is looking at some debt maturities and interest payments in the coming year that likely will strain the health care media marketing company's liquidity further, Dow Jones DBR Small Capt reported today. The Yardley, Pa.-based company, which is owned by private equity firm Vestar Capital Partners, paid down some of its revolving credit facility and term loan and pushed maturities out last year after selling its veterinary unit to VCA Antech Inc. for $146 million in August 2011. Still, about $15 million of the $45 million revolver matures later this year, and another $6 million of the term loan is due next year.
When Henri Steenkamp, MF Global's chief financial officer, appeared before two congressional panels about the firm's collapse, he said he was in the dark over how some $1.6 billion in customer funds went missing, but a report from the bankruptcy trustee filed this week paints a different picture of an executive closely involved as the firm's liquidity was stretched and it began tapping into customer accounts to help fund operations, Reuters reported today. Congressional investigators have flagged the discrepancies and said they plan to examine them further. Steenkamp has been a central figure for lawmakers and investigators such as the Justice Department and the Commodity Futures Trading Commission who are probing why the firm imploded and left hundreds of farmers and traders without access to funds they thought were safe at the commodities brokerage.
Checking account overdraft fees have jumped during the past two years, despite an effort by regulators to rein in aggressive practices by banks, according to new reports by two nonprofit groups, the Washington Post reported today. Although the basic overdraft fee of $35 has not changed in two years, banks have imposed other harsh penalties on consumers for minor lapses, the papers said. The Pew Health Group, a research organization, called for the new Consumer Financial Protection Bureau to press banks to be more upfront about these “still risky” fees in a paper to be published today. Another report, released Thursday by the Consumer Federation of America, an advocacy group, expressed similar concerns and urged consumers to inform the CFPB of high overdraft fees. Although the Federal Reserve in 2009 required banks to tell customers about overdraft penalities, the disclosure statements were often unclear and tough for consumers to follow, the two reports said. The Fed in 2010 also prohibited banks from imposing overdraft charges unless a customer had signed up for the service. Another regulator set limits on the number of times customers can be charged overdraft fees. The increases were caused by federal legislation last year that reduced bank income from debit-card transactions, the American Bankers Association said. At the same time, a 2010 survey by the association found that 77 percent of customers did not pay overdraft fees, but that figure rose to 84 percent in 2011, according to the ABA.
The Federal Reserve shocked bankers yesterday by approving a proposal that would force even the smallest lenders to comply with the elaborate international bank-capital standards known as Basel III, the Wall Street Journal reported today. The draft requirements would apply to all 7,307 U.S. banks, according to a proposal circulated by the Fed. Many bankers had expected regulators to exempt some small lenders from the new rules, which are aimed at shoring up the biggest global banks whose troubles fueled the financial crisis. While the core Basel III rules will apply to all banks, other aspects of the new regime single out the biggest, most complex banks for tougher treatment than their smaller peers. The Fed, for instance, has embraced slapping a handful of the biggest U.S. banks with a capital surcharge of between 1 and 2.5 percent. The Fed has yet to introduce the specific proposal. The tougher capital rules backed by the Fed Thursday will not take effect until 2019 but will come as an unwelcome surprise to small bankers struggling amid uneven economic growth, tough new rules limiting fees and technological and regulatory moves that have made larger banks more profitable.
Bank of America Corp.'s effort with Societe Generale SA to reverse New York's approval of MBIA Inc.'s 2009 restructuring is being considered by a judge after the conclusion of a four-week trial over the transaction, Bloomberg News reported yesterday. New York State Supreme Court Justice Barbara Kapnick heard final arguments from the banks yesterday, capping a hearing that began last month over the decision by former New York Insurance Department Superintendent Eric Dinallo to approve the bond insurer's restructuring. Kapnick is considering claims by the banks that the state’s approval was based on inaccurate and incomplete information and should be annulled under state insurance laws. Lawyers for banks argued during the trial that the approval was done in secret and based on a rushed, flawed analysis.
