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U.S. regulators need flexibility in overseeing cross-border swaps, a lawyer for the Commodity Futures Trading Commission told a federal judge as he defended the agency’s reliance on guidance rather than formal rules in a lawsuit brought by Wall Street’s largest lobbying groups, Bloomberg News reported yesterday. Congress directed the CFTC to regulate overseas trading of swaps to prevent a catastrophic market failure like the one involving American International Group Inc. (AIG) in 2008, Robert Schwartz, a lawyer for the agency, said at a hearing in federal court in Washington, D.C. The CFTC didn’t want to bind itself “with inflexible rules,” Schwartz said. “The markets change all the time. They change their business practice to avoid regulation where they believe it is in their interest.” He asked U.S. District Judge Paul Friedman to dismiss the case, arguing that if swaps market participants prevail in court they would have “free rein to conduct their business overseas without consequences.” The lawsuit — also filed by the International Swaps and Derivatives Association and the Institute of International Bankers — following the worst economic collapse since the Great Depression.

The Senate Banking Committee will hold a hearing at 10 a.m. ET today titled “Financial Products for Students: Issues and Challenges.” To view the witness list, prepared testimony and to obtain a link to the hearing, please click here: http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hear…

A judge yesterday said that the trustee unwinding Lehman Brothers Inc. could create a $3 billion-plus fund to pay back unsecured creditors of the brokerage, Dow Jones Daily Bankruptcy Review reported today. A spokesman for James W. Giddens, the trustee in charge of the brokerage, said Bankruptcy Judge Shelley C. Chapman approved the creation of the fund at a hearing yesterday. Giddens said that he expects the distribution to begin in September, marking the first time he has put a timetable on it.

U.S. District Judge Jed Rakoff has ordered the Bank of America to pay $1.27 billion in penalties in connection with a wide-ranging mortgage fraud perpetrated by its Countrywide financial unit, and slapped a $1 million personal judgment on a former Countrywide executive, the New York Law Journal reported today. Judge Rakoff's decision, released yesterday, followed a trial last fall in which jurors found that Countrywide and Rebecca Mairone, the only individual charged in the case, defrauded the government-sponsored Freddie Mac and Fannie Mae programs by peddling at break-neck speed what they knew were substandard loans during the recession of 2007 and 2008. The case was initially rooted in a Securities and Exchange Commission action against three top Countrywide executives who were accused of falsely assuring investors that the company was a prime mortgage lender when in fact it was deeply involved in high risk loans. That case was settled and no criminal charges were lodged.
http://www.newyorklawjournal.com/home/id=1202665302104?kw=BofA%20Ordere…

In related news, Bank of America and federal prosecutors have accelerated their negotiations to resolve an investigation into the bank’s sale of troubled mortgage securities before the financial crisis, the New York Times. The two sides, however, remain far apart on crucial issues and a settlement remained elusive yesterday, even after the bank significantly raised its offer. The bank’s lawyers and Justice Department prosecutors met in Washington, D.C., yesterday to discuss the size of a potential cash penalty, a major sticking point in the settlement talks. Heading into the meeting, the Justice Department was demanding roughly $17 billion to settle the case, more than $10 billion in the form of a cash penalty and the rest in so-called soft dollar payments to help struggling homeowners. The bank was offering a total of $13 billion, including $4 billion in cash. The bank narrowed the gap yesterday, raising its cash offer to about $7 billion and its total proposal to roughly $14 billion.
http://dealbook.nytimes.com/2014/07/30/bank-of-america-ordered-to-pay-n…

Maurice “Hank” Greenberg, the former chairman of American International Group Inc. (AIG), will go on trial in January after more than nine years of legal jousting over former New York Attorney General Eliot Spitzer’s lawsuit accusing him of fraud, Bloomberg News reported yesterday. The state claims Greenberg and former AIG Chief Financial Officer Howard Smith bear responsibility for allegedly sham transactions with General Reinsurance Corp. in 2000 and 2001 that inflated AIG’s loss reserves by $500 million. New York State Supreme Court Justice Charles Ramos in Manhattan yesterday scheduled a trial to start the week of Jan. 19 after the two sides exchange lists of potential experts and witnesses. New York Attorney General Eric Schneiderman is seeking to bar the men from participating in the securities industry or serving as directors or officers of a public company, after his office had dropped a claim for damages. Greenberg stepped down as AIG’s chief executive officer in March 2005, the same month the New York-based insurer said the transaction with General Reinsurance was improper. He had led the company since 1967 and built it into the world’s largest insurer. AIG paid $1.6 billion to settle regulators’ claims. Spitzer sued Greenberg and Smith in May 2005. Greenberg unsuccessfully argued that the lawsuit was fatally flawed after a court approved a $115 million settlement of a shareholder class-action lawsuit against him and Smith. He has said the state’s claim are without merit.

Wall Street and global financial regulators, trying to squash the lingering perception that banks remain “too big to fail,” are looking to an obscure change in derivatives contracts to solve the problem, Bloomberg News reported yesterday. The main industry group for the $700 trillion global swaps market is rewriting international protocols to impose a “stay” or pause designed to prevent trading partners from calling in collateral all at once when a bank nears failure. U.S. and international banking regulators are considering making use of the new protocols mandatory. The International Swaps and Derivatives Association is aiming to release the revised contract guidelines by November. The change is designed to prevent a recurrence of one of the most vexing problems revealed by the 2008 financial crisis: When Lehman Brothers Holdings Inc. failed, counterparties trying to unwind derivatives contracts touched off a panic that triggered a worldwide credit crisis.

The Lloyds Banking Group agreed yesterday to pay more than $380 million to British and U.S. authorities to resolve investigations into the manipulation of rates, including one used to determine fees paid by Lloyds for taxpayer-backed funding during the financial crisis, the New York Times DealBook blog reported yesterday. The British lender is the latest big bank to admit criminal wrongdoing by its employees in trying to manipulate the London interbank offered rate, or Libor, and other global benchmark interest rates. Yet Lloyds — partly owned by the British government as a result of a bailout during the financial crisis — added its own variation to the rate-rigging scandals. The bank will also pay an additional 7.76 million British pounds, or about $13.2 million, to compensate the Bank of England for the manipulation of another benchmark rate, which was used to determine fees paid under an emergency funding program for financial institutions during the financial crisis.

Negotiations between Bank of America Corp. and the Justice Department have hit a snag over whether the firm should pay a cash penalty for the dealings of Countrywide Financial Corp. and Merrill Lynch & Co., the Wall Street Journal reported today. Bank of America has offered $13 billion to end the government's mortgage-securities probe, including a combination of fines and consumer assistance, which could include credit for measures such as writing down the values of mortgages for struggling homeowners. But the Justice Department is demanding billions more — and wants a bigger chunk in fines. Bank of America, which has already shelled out some $60 billion for crisis-era legal problems, has told the Justice Department it is willing to pay for the past misdeeds of Countrywide and Merrill Lynch — but not at levels it considers overly punitive.

The U.S. Treasury Department should use immediate stopgap regulations to make offshore transactions known as corporate inversions less lucrative, said the department’s former top international tax lawyer, Bloomberg News reported yesterday. The administration can unilaterally limit inverted companies from taking interest deductions in the U.S. or from accessing their foreign cash without paying U.S. taxes, Stephen Shay said yesterday. “If you take away the incentives, a large portion of these deals would not happen because they are indeed tax-motivated,” said Shay, who left the Obama administration in 2011 and is now a professor at Harvard Law School. Companies including Medtronic Inc. and AbbVie Inc. have pending inversion transactions in which they would purchase a smaller foreign company and then move the combined corporation’s legal address outside the U.S. In most cases, companies barely change their operations and don’t relocate their executives.

Dollar Tree Inc. agreed to acquire Family Dollar Stores Inc. in a cash-and-stock deal that values the struggling discount retailer at about $8.5 billion, the Wall Street Journal reported today. The agreement, which provides Family Dollar with a roughly 23 percent premium over the company's closing stock price on Friday, comes as activist investor Carl Icahn has been pushing for a sale of Family Dollar and threatening to replace the discount retailer's board. Icahn has amassed a nearly 9.4 percent stake in Family Dollar, according to a recent regulatory filing. Dollar stores have been altering their merchandise lineups to hang on to customers they gained during the recession, as well as to continue to attract those struggling in the current economic environment. The retailers also are facing growing competition from Wal-Mart Stores Inc., which is opening smaller locations.