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A pair of Wall Street investment firms is challenging Puerto Rico's new law allowing some public agencies to restructure their debt, saying that it violates the U.S. Constitution, the Wall Street Journal reported today. Funds managed by Franklin Templeton Investments and OppenheimerFunds Inc. asked the U.S. District Court for the District of Puerto Rico to block the law, arguing that only Congress is allowed to create bankruptcy rules. The funds hold about $1.7 billion combined in debt from the Puerto Rico Electric Power Authority, which they say they believe will seek to restructure its debt under the act "imminently." Puerto Rico lawmakers last week approved legislation allowing some agencies such as the island's power, water and transportation authorities to restructure their debt. Those agencies have a combined $19.4 billion in bonds outstanding, according to estimates from Barclays PLC. The law doesn't apply to Puerto Rico's general-obligation or sales-tax bonds, which are backed by the island's taxing authority.

The landmark settlement expected Monday between U.S. authorities and BNP Paribas SA began to take shape last summer, after bank executives flew to New York to share an embarrassing admission: The French bank had been processing potentially illicit dollar transactions with countries blacklisted by Washington years after the U.S. began investigating the lender, the Wall Street Journal reported today. U.S. authorities are expected to announce today that BNP Paribas will pay nearly $9 billion in penalties and plead guilty to attempting to conceal some $30 billion in transactions with sanctioned countries. From January of next year and for a full year, the bank is also expected to lose its capacity to perform certain dollar-clearing transactions.

Argentina lost a last-ditch bid to delay payments to Paul Singer’s NML Capital Ltd. and other holders of its defaulted bonds, adding to pressure on the South American country to negotiate a deal with the holdouts, Bloomberg News reported yesterday. U.S. District Judge Thomas Griesa had ordered Argentina to pay $1.5 billion to the holders of defaulted debt when it makes the next payment on its restructured debt, due June 30. Judge Griesa yesterday denied Argentina’s request for a stay, which it claims is necessary to allow it to negotiate a resolution with the bondholders. Argentina defaulted on $95 billion of debt in 2001. About 92 percent of creditors agreed to swap the defaulted debt for new bonds in 2005 and 2010, while the rest refused to accept losses of about 70 percent. Argentina has threatened a new default if it’s forced to obey Judge Griesa’s orders, saying that it can’t afford to pay holders of its defaulted and performing debt. Griesa’s decision leaves Argentina with the choice of defying his court orders, defaulting on the debt or striking a deal with the holdouts. If Argentina fails to make the $900 million payment due June 30 to holders of its restructured debt, it has an additional 30-day grace period.
http://www.bloomberg.com/news/print/2014-06-26/argentina-bond-fight-jud…

To learn more about the next steps for Argentina and sovereign debt restructuring, be sure to watch James Millstein’s June 20 presentation at ABI’s Cross-Border Symposium: http://news.abi.org/videos

The Treasury Department Secretary Jacob J. Lew said that the department will start an initiative to revive the market for mortgage securities without government backing as part of an effort to aid recovery of the housing market, Bloomberg News reported yesterday. The Treasury also will begin offering financing for loans for affordable apartment buildings and extend aid programs for troubled borrowers for an additional year, Lew said yesterday. “Middle class families continue to find it difficult to find affordable housing,” Lew said. “And more than 6 million Americans still owe more on their homes than their homes are worth. That is why we remain focused on providing relief to responsible homeowners, rebuilding hard-hit communities, and reforming our housing finance system.” Homeowners having trouble making their loan payments will now have until December 31, 2016 to apply for a mortgage modification under Treasury’s Home Affordable Modification Program and other Treasury-run aid programs. The affordable apartment building loans would be backed by Federal Housing Administration and state housing agencies.

Lenders are courting risky credit card borrowers more aggressively than they have since the financial crisis in a bid to jolt revenue in a period of sluggish growth and tight regulation, the Wall Street Journal reported today. Banks and other lenders issued 3.7 million credit cards to so-called subprime borrowers during the first quarter, a 39 percent jump from a year earlier and the most since 2008, according to data provided exclusively to the Wall Street Journal by credit bureau Equifax Inc. About one-third of all credit cards issued in that period were to subprime customers, the biggest share in six years, according to Equifax. The average interest rate for subprime customers was 21.1 percent in the first quarter, up from 20.2 percent a year earlier, according to research firm CardHub.com. In contrast, the highest-quality borrowers paid 12.9 percent on average in the first quarter, virtually unchanged from a year earlier.

Distressed debt funds are raising cash to seek greater opportunities in China, where Standard & Poor’s says corporate borrowing topped the U.S. last year, Bloomberg News reported yesterday. Planned commitments to funds investing in Chinese and other Asian troubled assets are set to surpass $2 billion this year, up from $303 million in 2013, data from researcher Preqin Ltd. show. Morningside Group Holdings Ltd. in Hong Kong plans a $103 million vehicle, Preqin said. Guangzhou-based Shoreline Capital Management Ltd. is seeking $500 million for its third distressed-debt fund, according to co-founder Ben Fanger. China’s economic growth has slowed to the least in more than a decade even as companies increased debt to $14.2 trillion as of Dec. 31, surpassing the $13.1 trillion in the U.S., according to a June 15 S&P report. Non-performing loans jumped the most since 2005 in the first quarter and state-owned asset management companies are raising funds to help clean up lenders’ balance sheets.

Barclays Plc was so bent on lifting its private trading venue to the upper ranks of Wall Street dark pools that it lied to customers and masked the role of high-frequency traders, according to New York’s attorney general, Bloomberg News reported yesterday. Barclays falsified marketing materials to hide how much high-frequency traders were buying and selling, according to a complaint filed yesterday by Eric Schneiderman. Barclays runs one of Wall Street’s largest dark pools, a private trading venue where investors can trade stocks mostly anonymously. Schneiderman has taken a leading role in seeking to reform how equities trade in the $23 trillion U.S. stock market, examining whether exchanges and dark pools give unfair perks to high-frequency traders. His suit against Barclays says that clients such as institutional investors were the losers, led to believe they were safe from predators on a trading venue where aggressive trading strategies were in fact encouraged.

The U.S. House of Representatives on Tuesday voted to weaken the Commodity Futures Trading Commission's power to regulate swaps overseas and take other steps likely to loosen regulation in derivatives markets, Reuters reported yesterday. The bill, which reauthorizes the agency's mandate, would reverse the CFTC's tough rules on U.S. businesses' swaps with counterparties abroad, requiring it to draw up a new regime together with the Securities and Exchange Commission. In addition, the law would make the agency's staff responsible to the full five-strong commission, not just its chairman, which critics said would slow down decisions. It also subjects all the agency's decisions to cost-benefit analysis, a tool that opponents of regulation have used to defeat rules in court. Small market players like farmers, who use futures to protect revenue from their crops against wild swings in market prices, would be exempted from some of the CFTC's costly new rules aimed at speculators. The House adopted the bill with 265-144 against largely along party lines with Republicans in support.

Puerto Rico Governor Alejandro Garcia Padilla unveiled a bankruptcy-like process for some public corporations to restructure their debts yesterday in a fresh bid to shore up the U.S. territory's deteriorating finances, Reuters reported yesterday. The governor's proposed legislation, expected to pass the legislature soon, would apply to the semi-autonomous public authorities that manage Puerto Rico's infrastructure and are unable to pay their debts. It offers two options for adjusting debts: a seven-step voluntary restructuring process approved by creditors or a process overseen by the island's courts. The law would not apply to the territory's general obligations. Puerto Rico's 78 municipalities, Government Development Bank (GDB), retirement systems and some other authorities are also excluded. As a U.S. territory, Puerto Rico is not permitted to file for bankruptcy.

Thomas J. Butler, head of the Securities and Exchange Commission's Office of Credit Ratings, said that he has referred multiple cases to the agency's enforcement division and is helping complete several industry regulations to address quality and transparency in how big debt deals are rated, the Wall Street Journal reported today. Those moves signal a potential flurry of regulatory activity involving ratings firms, which have been largely untouched as government oversight has increased in most other financial sectors in recent years. Butler, a former Citigroup Inc. executive, has been relatively quiet since launching the office in 2012 to oversee firms including Standard & Poor's Ratings Services and Moody's Investors Service. The creation of the office was mandated in the Dodd-Frank financial-overhaul law. His office has produced annual reports summarizing industry activity and monitored ratings firms to make sure they comply with existing rules that dictate how criteria are developed for evaluating bonds and whether internal protocols are followed, among other things. Butler's office doesn't have direct enforcement powers over firms, but monitors their activities and can make referrals to the unit headed by Andrew Ceresney, the SEC's top enforcement chief, for potential action. Butler declined to say how many referrals he has made or what firms are involved.