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Moody’s $864m penalty for ratings in run-up to 2008 financial crisis

Payout to US justice department, 21 states and District of Columbia for risky mortgage securities ratings before stock market crash

The credit rating agency Moodys has agreed to pay nearly $864m to settle with US federal and state authorities over its ratings of risky mortgage securities in the run-up to the 2008 financial crisis, the department of justice said on Friday.

Moodys reached the deal with the justice department, 21 states and the District of Columbia, resolving allegations that the firm contributed to the worst financial crisis since the Great Depression, the department said in a statement.

Moodys failed to adhere to its own credit-rating standards and fell short on its pledge of transparency in the run-up to the great recession, principal deputy associate attorney general Bill Baer said in the statement.

S&P Globals Standard & Poors entered into a similar accord in 2015 paying out $1.375bn. Standard and Poors is the worlds largest ratings firm, followed by Moodys.

Moodys said it would pay a $437.5m penalty to the justice department, and the remaining $426.3m would be split among the states and Washington DC.

As part of its settlement, Moodys also agreed to measures designed to ensure the integrity of credit ratings going forward, including keeping analytic employees out of commercial-related discussions.

The rating agencys chief executive also must certify compliance with the measures for at least five years.

Moodys said that it stands behind the integrity of its ratings and noted that the settlement contains no finding of a violation of law or admission of liability.

Moodys said it already has implemented some of the compliance measures in the agreement.

Moodys shares closed at $96.96 on Friday. The stock plummeted more than 5% on 21 October, the day it disclosed the justice department had notified the firm it was planning to sue over the ratings.

Moodys settlement on Friday resolved the justice department probe without a federal lawsuit. In the Standard & Poors case, resolution was reached after the US filed a $5bn fraud suit.

Connecticut, whose attorney general helped lead negotiations, filed a lawsuit against Moodys in 2010. Mississippi and South Carolina later sued, and other states had potential claims.

Connecticuts law suit claimed that Moodys ratings were influenced by its desire for fees, despite claims of independence and objectivity. It also accused Moodys of knowingly inflating ratings on toxic mortgage securities.

Moodys ratings were directly influenced by the demands of the powerful investment banking clients who issued the securities and paid Moodys to rate them, Connecticut attorney general, George Jepsen, said in a statement on Friday.

Read more: https://www.theguardian.com/business/2017/jan/14/moodys-864m-penalty-for-ratings-in-run-up-to-2008-financial-crisis


Deutsche Bank and Credit Suisse agree multi-billion-dollar settlements with US

Banks to pay out for mis-selling mortgage securities, as Department of Justice launches legal action against Barclays

The US Department of Justice has extracted $12.5bn in settlements from Deutsche Bank and Credit Suisse for a decade-old toxic bond mis-selling scandal. It has also started legal proceedings against Barclays, which, in an unprecedented move, has refused to settle with the authorities.

Deutsche, Germanys biggest bank, will pay $7.2bn (5.9bn) to the DoJ. The sum is considerably less than the $14bn originally demanded. Credit Suisse has agreed to pay $5.3bn. Both settlements relate to the complex packaging of home loans, which was a lucrative business for the banking industry until the 2008 crisis.

The DoJ did not disclose the size of penalty it wanted to levy on Barclays, but it is understood to be $4bn. It accused the bank of plainly irresponsible and dishonest conduct.

The flurry of announcements just hours before the markets closed for the Christmas holiday came weeks before Donald Trump takes over as US president and follows months of negotiation between the banks and the DoJ, led by the US attorney general, Loretta Lynch.

The scandal dates back to 2005 and 2007, when banks packaged up home loans and used them to help create bonds known as residential mortgage-backed securities (RMBS) which were sold to investors. The mortgage repayments made by borrowers then provided a yield to the investor, so long as the borrower kept paying. The schemes fell apart when loans were made to borrowers who were unable to repay.

The penalties are part of Barack Obamas efforts to hold banks accountable, and the first major agreements to be reached with non-US banks. JP Morgan, Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch and Citi have all been punished already.

There are further penalties to come, notably for Royal Bank of Scotland. The bank could face a bill of as much as 9bn, analysts have said. Its shares rose 1% on hopes that it might soon be able to reach a settlement with the DoJ which it had hoped would take place this year or at least start to estimate its own bill.

Deutsche shares, which initially jumped 4%, ended almost 1% higher. Credit Suisse and Barclays slipped 1% in thin pre-holiday trading.

Barclays
Barclays Capital Bank building near Times Square in New York. Photograph: Alamy Stock Photo

Under the settlement, Deutsche will pay $3.1bn and provide $4.1bn in customer relief, such as loan modifications and other assistance to homeowners and borrowers, spread over five years. Credit Suisse will pay $2.5bn and compensation of $2.8 bn over five years.

Much of the focus was on Deutsche, run by Briton John Cryan, which had been contesting the authorities original $14bn fine. When that news first leaked, its shares plunged to 31-year lows over fears about its ability to withstand such a high bill.

There had been fears that Deutsche would need to embark on a cash call or even ask the German government for assistance, but the fact that $4.1bn of its payout for customer relief was not a lump sum helped soothe some of the anxiety.

A key area of concern has been removed, analysts at Goldman Sachs said, noting that the $1.2bn hit Deutsche would take in its fourth quarter was towards the lower end of market expectations.

Some analysts said Deutsche would need to press on with its restructuring to avoid a cash call. Positively, the deal is settled and out of the way, as it was thought that the issue could drag on into 2017, said Thomas Kinmonth, an analyst at ABN Amro, who added that without restructuring a cash call would have to be undertaken before 2019.

Deutsches shares have been pummelled on stock markets during 2016 over fears about its financial position. It had already set aside billions of euros in anticipation of the fine.

Barclays is the first bank to fail to reach a settlement and now faces lengthy court proceedings in New York to defend itself against claims it said were disconnected from the facts.

Two of its executives, Paul Menefee and John Carroll, are named by the DoJ. Crowell & Moring partner Glen McGorty, representing Carroll, said he would challenge these ill-conceived and baseless allegations, and expects to be fully vindicated.

The DoJ did not comment on the announcements by Deutsche and Credit Suisse, but as it filed legal papers against Barclays, Lynch said: As alleged in this complaint, Barclays jeopardised billions of dollars of wealth through practices that were plainly irresponsible and dishonest. With this filing, we are sending a clear message that the Department of Justice will not tolerate the defrauding of investors and the American people.

Where the money will go

The precise detail of the $6.9bn in customer relief, or redress, that Deutsche Bank and Credit Suisse will have to pay for their misdemeanours is yet to be finalised with the DoJ. The schemes, however, are likely to match those agreed with other banks for the mis-selling of residential mortgage bond securities..

Goldman Sachs agreed in April to pay $1.8bn in consumer relief as part of its $5bn settlement. This was described as writing off loans for underwater homeowners and distressed borrowers and making other payments for construction, rehabilitation and preservation of affordable housing. It also had to provide cash to support debt restructuring, to prevent foreclosure, and to back housing quality improvement programmes. Goldman was also told to put $240m into community projects to finance affordable homes for rent and sale.

The DoJ typically deploys monitors, lawyers or housing experts to police the terms of the customer relief. The banks involved in the DoJ settlements do not necessarily have direct relationships with the homeowners, but have packaged up their loans to back the bonds.

Read more: https://www.theguardian.com/business/2016/dec/23/deutsche-bank-credit-suisse-us-mortgage-securities-barclays


All hail the CFPB: banking watchdog hangs in balance as election nears

The Consumer Financial Protection Bureau, a brainchild of Elizabeth Warren, celebrates its fifth birthday as it faces a Republican threat

Almost, but not quite, lost in all of the noise surrounding the back-to-back presidential nominating conventions in Cleveland and Philadelphia in July was the fact that the Consumer Financial Protection Bureau (CFPB) celebrated its fifth birthday.

What does this have to do with election day? Well, depending on who wins, it might not get a sixth.

The CFPB, the watchdog agency charged with ensuring that the financial markets work for ordinary consumers and to police financial institutions, was the brainchild of Elizabeth Warren, then a law professor at Harvard.

Her advocacy of the financial interests of ordinary, middle-class Americans, and her understanding of the situation in which they found themselves even before the financial crisis wreaked further havoc on their personal balance sheets, catapulted her to political stardom, even as it won her a host of enemies among bankers.

Today, a sizable group of Democrats still quietly mourn the fact that Warren, now a Massachusetts senator, wont be their standard bearer in Novembers election, and wasnt chosen as Clintons vice-presidential candidate. Regardless of her official status, she may wield as much influence as the Vermont senator Bernie Sanders.

But while most Democrats celebrate Warren and her accomplishments, the Republicans deplore both the senator and the CFPB. Warren seems to have gotten under the skin of the Republican presidential nominee, Donald Trump. The two have traded barbs on Twitter.

Donald J. Trump (@realDonaldTrump) June 11, 2016

Goofy Elizabeth Warren, sometimes referred to as Pocahontas, pretended to be a Native American in order to advance her career. Very racist!

Elizabeth Warren (@elizabethforma) May 7, 2016

.@realDonaldTrump spews insults and lies because he cant have an honest conversation about his dangerous vision for America.

And as for the CFPB, well, Republican language turns downright Trumpian. Ted Cruz dubbed it a runaway agency that doesnt do much to protect consumers; the Republican partys platform described it as a rogue agency that should be abolished or overhauled if those consumers are really going to be protected.

I interviewed Warren in July 2009, when the CFPB was still merely a proposal, and I doubt that any of these reactions or overreactions would come as much of a surprise to her today.

The big banks want things to go back to the way they were, she said then, in the immediate aftermath of the financial crisis, and only a few months after the stock market had begun to struggle back to life. They made billions of dollars from consumers who didnt fully understand the products these banks were selling. That whole process brought this economy to the brink of collapse and must be changed. We all have an interest in a safer consumer credit market.

And while hardball Washington politics meant that when it came time for Barack Obama to nominate the first head of the CFPB, he tapped Richard Cordray, the former attorney general of Ohio, rather than Warren, who stood beside the president and Cordray at the Rose Garden ceremony. It had been made very clear that, if Obama had nominated her, the Senate would never have confirmed her in the role.

That didnt stop the CFPB from becoming what Jennifer Lee, a partner in the banking and financial services practice of Dorsey and Whitney (and herself a former CFPB enforcement attorney) describes as one of the most powerful and aggressive agencies in the country. Its accomplishments, she argues, are voluminous for a baby agency.

Lee says one of the reasons the CFPB has been successful is the way it has responded to its track record. With each successive new development, the agency gets emboldened to do more, she explains. The current appetite for increased enforcement is not going to change.

Thats clearly true. Even as the Republicans were rattling their freshly sharpened sabers, the agency announced a new line of attack. This time, it plans to crack down on abusive debt collection practices, tightening the rules that govern the industry. The goal is to ensure that debt collectors are pursuing those who actually owe the debt, that they arent harassing debtors, and that they abide by statutes of limitations barring them from trying to collect on older debt. That would make a significant difference to the estimated one in three Americans who have an a debt that has reached the stage where its in the hands of a collection agency.

So far, the CFPBs pursuit of financial institutions, from banks to payday lenders, that have relied on a lack of financial sophistication or understanding on the part of consumers to take advantage of them has resulted in the payment of about $11.7bn to more than 27 million of those consumers directly. Another $500m or so has been generated in penalties. The largest of those settlements was with Ocwen, the countrys biggest nonbank mortgage loan servicer, under the terms of which the company refunded $2bn to 185,000 borrowers whose mortgages were underwater. Ocwen took advantage of borrowers at every stage of the (mortgage) process, Cordray said at the time.

This is pretty much what Warren hoped the agency would accomplish when she drew up the blueprint for it following the financial crisis.

Any market in which a credit card agreement is more than 30 pages long and mortgage documentation runs into the hundreds of pages none of which is designed to be easily read and understood by the consumer is a broken market, she said. Not all banks suffer from this: smaller banks, for instance, that offer more straightforward products get drowned out by multimillion dollar advertising campaigns for credit cards and mortgages by bigger institutions that may not offer consumers such favorable terms. She saw part of her mission as levelling the playing field. Its not a surprise that the biggest banks with the most powerful lobbyists seem ready to declare all-out war on a readable contract and other minimal consumer protections.

Unsurprisingly, the same groups are still at war today with the CFPB, which carries on Warrens mission.

Even before the November election, warning lights were flashing. Jeb Hensarling, the Republican member of Congress who chairs the House financial services committee, has declared he wont rest until he tosses post-financial crisis reforms like the Dodd-Frank Act on to the trash heap of history. Hensarling is also a fierce opponent of the CFPB, which has calls a dangerously out-of-control agency.

Hensarlings plan to repeal Dodd-Frank and replace it with a patchwork quilt of lightweight, bank-friendly rules, unveiled in June, would gut the CFPB. It would deprive the agency of the right to scrutinize some kinds of lending altogether (such as auto loans), and it would politicize the entire process. Right now, the CFPB is about as independent as any Wall Street agency can be: its head is appointed by the president and left to get on with his job, with independent funding received from the Federal Reserve.

If Hensarling gets his way, the CFPB would become completely accountable to Congress, having five commissioners appointed by party leaders, and having to fight for an annual budget. In other words, the same politicians who receive lobbying funds from Wall Street would be deciding who runs the agency that protects consumers from Wall Street and how much money that agency should get. That hasnt always worked out terribly well for the SEC, which has battled for its budget, and which is still waiting for the Senate to confirm two nominees to its five-member commission.

So lets celebrate the CFPBs fifth birthday, and its success in fighting for the interests of the ordinary borrowers and debtors against the big financial institutions that seem to have the decks stacked in their favor.

Lets also hope that the Republicans remember that there is tremendous bipartisan support for financial regulation, and for the agency in particular. Turning it into a scapegoat to make the banks happy could prove to be a very costly error for all concerned.

Read more: https://www.theguardian.com/business/us-money-blog/2016/jul/31/consumer-financial-protection-bureau-election-2016


UK loses triple-A credit rating after Brexit vote

Standard & Poors issues downgrade and pound hits 31-year low despite chancellors attempts to soothe markets

The UK has been stripped of its last AAA rating as credit agency Standard & Poors warned of the economic, fiscal and constitutional risks the country now faces as a result of the EU referendum result.

The two-notch downgrade came with a warning that S&P could slash its rating again. It described the result of the vote as a seminal event that would lead to a less predictable stable and effective policy framework in the UK.

The agency added that the vote to remain in Scotland and Northern Ireland creates wider constitutional issues for the country as a whole.

S&P was the last of the big three ratings agencies to have a blue-chip rating on the UKs credit-worthiness. Moodys, which stripped the UK of its top notch rating amid the austerity cuts of 2013, said last week it might further cut its view of the UK.

Rating agency moves have the potential to make it more expensive for the government to borrow.

The S&P move came after another torrid day on the financial markets. The pound hit fresh 31-year lows and 40bn was wiped off the value of the UKs biggest companies on Monday, despite efforts by George Osborne to quell investors concerns about the economic and political ramifications of the Brexit vote.

After three days of silence, the chancellor made a statement on Monday morning to try to calm the markets. However, sterling remained under sustained pressure on the foreign exchange markets as economists slashed their forecasts for UK economic growth. Wall Street was also weaker while continental bourses sold off sharply after Fridays record $2tn of losses on global stock markets.

Expectations are mounting that the Bank of England will cut interest rates possibly to zero from their historic low 0.5% to stimulate the economy, and yields on government bonds fell below 1% for the first time, which could spell cheaper mortgage rates.

In a live broadcast just after 7am, as dealers in London braced for another day of turmoil, Osborne insisted: Our economy is about as strong as it could be to confront the challenge our country now faces.

But moderate losses on the FTSE 100quickly deepened and at one point sterling was down 3.5% against the dollar, at $1.3122, its lowest level since 1985. Against the euro, the pound was down 2.4% at 1.19.

Speaking at the World Economic Forum in China, Nouriel Roubini, economist at New York University, described Brexit as a major significant financial shock that would create a whole bunch of economic, financial, political and also geopolitical uncertainties.

By the end of trading, the FTSE 100 index was down 2.6%, or 156.5 points, and below 6,000. The FTSE 250, the next tier of companies and more closely tied to the UK economy, was down 7%, coming on top of a 7% fall on Friday.

Its been another dramatic day of trading on the UK stock market, said Laith Khalaf, senior analyst at the financial firm Hargreaves Lansdown.

Companies likely to be impacted by a Brexit-induced recession were hit hard. In two days, about 40bn has been wiped off the value of banking stocks and 8bn off housebuilders. At one point, shares in the bailed-out Royal Bank of Scotland plunged 25%, while housebuilders such as Persimmon and Taylor Wimpey have lost more than 40% in just two trading days.

Michael Hewson, chief market analyst at CMC Markets, said while Osbornes statement had been measured his comments were unable to prevent the feeling that UK politics remains in a state of paralysis, with no clear contingencies in place to deal with the fallout of a leave vote.

The biggest faller in the FTSE 100 was short-haul airline easyjet, which plunged by 22% after warning that wary consumers would now rethink their travel plans. Exchange rate movements, the carrier added, would add 25m to costs.

Another profit warning came from the London-focused estate agent Foxtons. Its shares dived 25% after it said Brexit would hit sales for the rest of the year. Shares in so-called challenger banks such as Virgin Money were also pummelled.

Osborne spoke after it emerged that the Bank of England governor, Mark Carney, had cancelled a trip to Portugal to remain in the UK to oversee any response from Threadneedle Street.

The Banks financial policy committee, set in the aftermath of the financial crisis to look for threats to stability, will meet on Tuesday, when the Bank of England will again offer emergency loans to banks as part of its Brexit planning.

The fallout from the vote is being felt around the world. Italys main index fell 4%, extending Fridays record losses of 12.5%. In Germany and France there were losses of 3%. At the time of the London close, on Wall Street the main share indices were all down more than 1%.

The chancellor may have taken some comfort from the fall in yields on 10-year government bonds. Yields on these gilts, which move inversely to prices, fell below 1% for the first time. This fall in gilt yields will keep government borrowing costs down and lead to lower mortgage rates. However, they also mean pension companies have started cutting the amount paid to the newly retired.

Osborne refused to repeat his pre-vote warning of a Brexit recession, saying only that the economy would face adjustments. But analysts started to cut their forecasts for UK growth. Goldman Sachs, forecasts just 0.2% growth in 2017, down from 2% predicted previously.

The consultancy Oxford Economics said interest rates could be slashed to 0% within weeks. Morgan Stanley analysts said European and UK stocks would fall up to 10% over the coming months and sterling would fall to between $1.25 and $1.30.

Much of the markets focus has been on the pound, particularly after the speculator George Soros, who made $1bn when sterling fell out of the exchange rate mechanism in 1992, had warned of a black Friday in the event of Brexit. His spokesman stressed that he had not bet against the pound last week.

George Soros did not speculate against sterling while he was arguing for Britain to remain in the European Union, the spokesman told Reuters. However, because of his generally bearish outlook on world markets, Mr Soros did profit from other investments

Read more: https://www.theguardian.com/business/2016/jun/27/property-and-financial-shares-slide-as-referendum-fallout-hits-stock-markets


Greece pushes fresh austerity drive through parliament

Alexis Tsipras gained approval by 152 of 153 of his deputies, despite many of them having previously rejected the proposals

The Greek parliament has approved a fresh round of austerity incorporating 1.8bn in tax increases and widely regarded as the most punitive yet amid hopes the move will lead to much-needed debt relief when eurozone finance ministers meet this week.

Alexis Tsipras, the prime minister, mustered the support of 152 of his 153 deputies on Sunday to vote through policies that many have previously rejected.

Addressing the 300-seat house during the heated three-day debate that preceded the ballot, Giorgos Dimaras, an MP in Tsiprass leftwing party, said he was appalled at being forced to support measures he had spent a lifetime opposing.

I am in mourning, he said. This is what can only be called wretchedness.

As parliamentarians had prepared to vote, large crowds of protestors took to the streets with Panaghiotis Lafazanis, a former minister who broke ranks with Syriza to form the Popular Unity party, taking the demonstration to the foot of the building itself where he unfurled a giant banner proclaiming: The memorandum will not pass.

The belt-tightening legislation, outlined in a 7,500-page omnibus bill, includes measures that range from the taxation of coffee and luxury goods to the creation of a new privatisation fund in charge of real estate assets for the next 99 years. Under the stewardship of EU officials, the body will oversee the sale of about 71,500 pieces of prime public property in what will amount to collateral for the 250bn in bailout loans Greece has received since 2010.

They are with the exception of the Acropolis selling everything under the sun, said Anna Asimakopoulou, the shadow minister for development and competitiveness. We are giving up everything.

The multi-bill, which also foresees VAT being raised from 23% to 24%, is part of a package of increases in tax and excise duties expected to yield an extra 1.8bn in revenue. Earlier this month, Tsiprass leftist-led coalition endorsed pension cuts that were similarly part of an array reforms amounting to 5.4 bn, or 3% of GDP.

At the behest of the EU and International Monetary Fund, the government has agreed to adopt tighter austerity in the form of an automatic fiscal brake referred to as the cutter in the Greek media if fiscal targets are missed.

Despite official claims that goals will be achieved, there is a high degree of scepticism as to whether this is feasible. The Greek economy has seen a depression-era contraction of more than 25% since the outbreak of the debt crisis in late 2009, and with high taxes likely to repulse investment, economic fundamentals are also unlikely to improve.

We are talking about indirect taxes, property taxes and income taxes all going up, Asimakopoulou said. Nobody will be able to pay them, targets will be missed, more austerity will be imposed and of course public rage will have to be vented. People will not only feel angry, they will feel conned.

The measures the ultimate U-turn for a government that once pledged to eradicate austerity are the latest in a set of prior actions Athens must take to complete an economic review that will unlock desperately needed bailout funds to avert default. The country has to meet 3.5bn in debt repayments this summer, starting with a 300m loan instalment to the IMF on 7 June money the country simply does not have.

Eager to avoid more drama before next months in/out EU referendum in the UK, general elections in Spain and regional polls in Germany, lenders have indicated they will disburse the loans at Tuesdays Eurogroup meeting. Berlin, which has provided the bulk of Greeces emergency aid, signalled the instalment could be as much as 11bn more than twice the original 5.4bn, according to the German financial daily Handelsblatt.

But creditors are still fiercely divided over the red-button issue of tackling Athens staggering 321bn mountain of debt. Although the EU and IMF now both concede the load is unsustainable, member states reject outright the prospect of a debt writedown for fear of losses on bailout loans. Euro finance ministers insist that if it is ever to recover, Greece has to achieve a primary budget surplus of 3.5%, excluding debt repayments. They have hinted that at most, they will agree to discuss debt relief when the countrys current – and third bailout programme expires in 2018.

The quarrel deepened last week when the Washington-based IMF, which has openly questioned Athens ability to achieve such a high surplus, proposed that Greece defer all debt repayments until 2040 and extend its repayment period with maturities that would run through 2080 on a capped interest rate of 1.5%. The standoff is expected to intensify on Tuesday.

Addressing parliament on Sunday, Tsipras insisted it was a huge achievement that Greece had finally succeeded in putting the debt issue on the table. Previous governments had done little more than kowtow to creditors without ever dealing with the source of Athens financial woes, he said.

No other party but the left could pass such measures, said Nikos Athanasiou, who has watched the crisis unfold from the kiosks he runs facing parliament in Syntagma square. If the right were in power Athens would be in flames.

Read more: https://www.theguardian.com/world/2016/may/22/greece-to-unveil-fresh-round-of-austerity-to-unlock-bailout-funds


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