Big Compliance Implications in StanChart Settlement

In a new wrinkle for compliance, Britain's Standard Chartered Bank will pay $340 million to settle claims that it laundered hundreds of billions of dollars in illegal foreign transactions for Iran and other parties. The twist here revolves around who brought the case. Treasury? Nope. Fed? Uh-uh. DOJ? Try again. This settlement is with New York State Department of Financial Services, a relatively new regulator who is using what we will call "licensing-leverage" to get results from SC.

The NYDFS and its Superintendent, Benjamin Lawsky, accused Standard Chartered of scheming with Iran to launder as much as $250B. Without getting too deep into the details of U-Turns and wire stripping which you can find here, let's focus on what this means going forward and what the fallout will be.

The settlement is important in a number of ways. First, it is an example of a state regulator, using its power of oversight in the licensing area, to bypass its more powerful Federal brethren and strike its own deal with a large foreign bank. Federal regulators were incensed that Lawsky and Co. would dare to "jump the line" and forge its own settlement with SC, and the subsequent rhetoric painted the NY agency as a "rogue regulator", a "non-team player" and the reincarnation of the headline-grabbing Eliot Spitzer. Detractors also claim that despite the settlement being the largest amount ever paid to a single regulator, SC could have been separated from an even bigger amount if forced to settle with multiple regulators simultaneously.

In this case, Lawsky and NYDFS have shaken up the old order. SC offered him $5 million to settle initially, which likely was the final impetus for the state to push forward on its own, threatening to revoke the NY State banking license. SC ultimately caved, and the fine is only one of the things they agreed to do to remedy the situation.

In addition to the fine, SC agreed to give the DFS significant access to its operations to monitor for compliance. The bank will install a monitor for at least two years who will report directly to DFS, and DFS examiners will be placed directly at the bank. The bank also agreed to permanently install personnel within its NY branch to oversee and audit any offshore money-laundering due diligence and monitoring undertaken by the big bank. That, to me, is the big one. Does this lead to a whole new, high-profile AML compliance role cropping up at banks that do business in New York? Perhaps.

As Meredith Rathbone, a partner at the law firm of Steptoe & Johnson stated, the threat to pull SC's license may be viewed as much more ominous than even the biggest fines. If this licensing-leverage becomes the "new normal" in banking, then most firms would be well-served to get out in front of this by following SC's lead and hiring their own money-laundering chiefs. It just makes sense.

Warren Buffett on Risk

"A CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries… If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer."

--Warren Buffett, 2010 Berkshire Hathaway Letter to Shareholders

One of the investor rites of spring (as I look out my window at piles of snow....) is the Berkshire Hathaway Letter to Shareholders which showcases Buffett's folksy wisdom on things financial. Forbes has some good excerpts from the latest.

Can a Financial Meltdown Happen Again?

Happy New Year. Most people in the financial industry are likely happy to see the 2009 calendar go in the trash and have high hopes that 2010 brings a continued recovery for the battered sector. The American Economic Association is currently gathered in Atlanta, and while most agree that the worst is behind us, they are skeptical about real progress being made to avoid a similar crisis in the future. In fact, count Tom Sargent, an economist from NYU, among those who think the response so far has actually made us more vulnerable to a deeper crisis! The logic goes that the bailout has created an expectation of future bailouts for big banks, and as a result management will feel emboldened to take even more risk, knowing that the government safety net will be there. Some wonder, like we have at GlobalRiskJobs, that the window for real meaningful reform may be closing. One of the current problems is that bank lending, especially in light of the collapse of the shadow banking system, is crucial to sustaining this fragile recovery. Hence, any Draconian measures the regulators might enact must not forestall banks' willingness to lend. Other economists worry that central banks' interventions have exposed them to greater financial and political risk which could hinder their effectiveness in future crises.

Also at the top of today's news is the decision by US Senator Chris Dodd (D-CT), the chairman of the Senate banking committee and a central figure in the government’s financial bailout of 2008 and the economic stimulus package adopted last year, not to seek reelection. What effect will his lame-duck status on pending financial reform legislation? Only time will tell. Will he ignore the demands of the special interests on the left? Will he go back to his roots and stand with the banks and financial firms who traditionally donated to his campaigns? Or, will he ignore partisanship altogether as he exits and push for simply the most effective reform that he can? Interesting questions as we start the new year and push toward the finish line on financial reform.

Pelosi to Wall Street: "Party's Over". House passes financial overhaul.

The U.S. House of Representatives today passed the Wall Street Reform and Consumer Protection Act, 223-202. The House tightened rules for derivatives and created powers to break up large financial firms that threaten the economy, despite opposition from Wall Street and Republicans. Also included was the creation of a Consumer Financial Protection Agency and stronger oversight of hedge funds. The bill also ends a ban that shielded the Federal Reserve from audits of its monetary policy decisions. The House failed to add language for mortgage "cram-downs". Passage of the House bill moves one step closer to achieving the White House objectives for financial reform. The focus now shifts to the Senate, where lawmakers lack a schedule for action on a bill.

House Could Vote Friday on Financial Overhaul

The bigger they come, they harder they.....get hit? The giant banks could be the biggest losers in Congress' efforts to overhaul financial regulation. A populist groundswell in the majority Democrat House of Representatives has led to the addition of amendments that are unfriendly to the largest financial institutions. The bill seems to be going way beyond what the White House envisioned when it sent its proposal to Congress last June. The House bill contains much of what the White Hose wanted: powers to take over/break up large companies, new consumer protection rules, tougher regulation of derivatives, executive pay limits. The Senate bill differs considerably, so real change may not be imminent.

Some of the highlights aimed at policing the Big Banks:

• Regulators would be able to block healthy banks from certain practices or mergers, and even order a bank to shrink if it posed systemic risk.
• Financial companies with more than $50B of assets wold have to pay into a $150B fund to deal with future collapses of large financial institutions.
• The government would be able to order certain large banks to split off their commercial bank from their investment bank if regulators are concerned.
• Large banks would have to submit to consumer compliance exams from a new Federal Agency, while many small banks would be exempt.
  

More regulation on tap for Munis?

Federal laws that exempt much of the $2.8 trillion municipal bond market from filing quarterly financial statements and U.S. Securities and Exchange Commission regulation should be repealed, Commissioner Elisse Walter said.

Walter is the third commissioner this year to call for municipal bond issuers to follow the same rules as sellers of corporate securities. SEC Chairman Mary Schapiro has hinted that the commission would seek expanded authority over the market sometime in 2010, and Commissioner Luis Aguilar called for greater oversight. All three have been appointed since 2008.

The Government Finance Officers Association, which represents state and local municipal officials, “strongly opposes any actions by the SEC or Congress” to give the commission “direct authority over municipal bond issuers or to directly or indirectly impose new disclosure or accounting standards,” according to a comment letter filed with the SEC in September.

Committee Approves Private Advisor Registration Bill

Could it be that the long awaited first step toward the anticipated increase in demand for compliance professionals has been taken? Yesterday, the House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act, introduced by Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The Committee passed H.R. 3818 with extensive bipartisan support by a vote of 67-1. Today, the Committee is expected to vote on Chairman Kanjorski’s H.R. 3817, the Investor Protection Act and H.R. 3890, the Accountability and Transparency in Rating Agencies Act.

But the bill fell short of a White House proposal to oversee private pools of capital. The committee exempted venture capital funds and funds with less than $150 million in assets.

Securities and Exchange Commission Chairman Mary Schapiro warned broadly at a Wall Street conference on Tuesday against too many exemptions, saying she would work with Congress to avoid creating new carve-outs that "could come back to haunt investors in later years."

Stay tuned to GlobalRiskJobs and GlobalComplianceJobs for opportunities as the regulatory story continues to unfold.

Bernanke to Congress: Now's the Time

Fed Chairman Ben Bernanke urged Congress on Friday to enact legislation overhauling the nations' financial regulatory system to prevent a repeat of the banking and credit turmoil that created the financial crisis.

“With the financial turmoil abating, now is the time for policymakers to take action to reduce the probability and severity of any future crises,” Mr. Bernanke said in remarks to a Fed conference in Chatham, Mass.

The Fed has recently been moving to strengthen oversight of banks, and intensify consumer protections. On Thursday it announced a sweeping proposal to police banks’ pay policies to make sure they do not encourage top executives and other employees to take outsize risks.

But Congress needs to step in and close regulatory gaps and make other changes that only lawmakers have the power to make, Mr. Bernanke said.

At the top of Mr. Bernanke’s list: Congress must set up a mechanism similar to the FDIC to safely wind down big financial firms whose failure could endanger the entire financial system.

And, the costs for such a mechanism should be paid for through an assessment on the financial industry, not by taxpayers, the Fed chief said.

Moreover, Congress needs to set up better systems for regulators to monitor risks lurking in the financial system, he said.

The Obama administration has proposed such action as part of its revamp of financial rules. Its plan would expand the Fed’s powers over big financial institutions but reduce it over consumers. Congress, however, is leery of expanding the Fed’s reach because it and other regulators failed to crack down on problems that led to the crisis.

A House panel on Thursday approved a piece of the Obama plan, the creation of a federal agency devoted to protecting consumers from predatory lending, abusive overdraft fees and unfair rate increases.

Stay current on career opportunities in the ever-changing risk and compliance world by visiting GlobalRiskJobs and GlobalComplianceJobs.

Geithner Running Point on Reform

Although healthcare reform seemed to be pushing ahead of financial reform in the political dialogue race, President Obama's Lehman Anniversary speech on Wall Street last week seems to have re-energized the movement somewhat. While GlobalRiskJobs and Risk Talent Associates are definitely seeing an increase in activity on the financial risk and compliance front, we definitely expected more to see more robust signs of recovery on the hiring front at this point in the year. One of the preconditions to a wholesale shift has always been a more intense regulatory/reporting environment, which we still believe will come, but things have been slow to develop largely because of the traffic jam in Washington. So, with Geithner's focus now moving from crisis manager to running the point on financial reform, we will see where it takes us. Geithner seems to have simplified the message, focusing on three key points that legislators should consider when enacting financial reform: 1) offer “substantial” new protections to consumers and investors, 2) make the financial system less vulnerable to crisis, and 3) protect taxpayers from having to bail out future crises.

Are some of the regulators past the point of fixing? Bloomberg commentator Susan Antilla wonders as much about the SEC in a recent piece. She looks at Judge Rakoff's beat-down of the SEC-Bank of America settlement as just the latest example of a regulator that needs an overhaul. Meanwhile, the SEC is seeking more power to oversee derivatives markets.

GlobalRiskBlog favorite Andy Kessler weighs in on bank pay controls in today's Wall Street Journal. Kessler argues that it was excessive leverage, rather than excessive risk that drove the financial system to the brink of disaster.

As the G-20 convenes in Pittsburgh, U.S. and European leaders remain divided on how much capital the world's largest financial institutions should keep on hand to meet unexpected losses. Most agree that a major lesson of the Crisis is that higher capital requirements are essential, and G-20 leaders hope to have an agreement on new standards by the end of 2010, with implementation by the end of 2012.

Congress has turned its attention to the Rating Agencies. New allegations by a recently departed Moody's analyst named Eric Kolchinsky have added fuel to the debate over the role and influence of credit ratings and whether recent reforms are sufficient to prevent a repeat of past missteps.

The FDIC is being criticized for its handling of many of the recent bank failures. A recent report about the failure of Colorado-based New Frontier Bank criticizes the agency and other regulators for not being aggressive enough in handling the brewing financial crisis.

And finally, the controversial filmmaker Michael Moore is back in the headlines with "Capitalism: A Love Story", a scathing look at the financial system through the lens of the Crisis.

Risk is Back! Sort of.

The New York Times has a special DealBook section today examining the current state of Wall Street one year after Lehman. In Sorkin's cover story, "Taking a Chance on Risk Again", he assesses the state of risk taking as the pendulum swings from refusal to take risk back toward the balanced middle. Where is the "critical point" on the risk spectrum? The usual discussion of VaR and its shortcomings takes place as Sorkin tries to capture the state of the market...Zachary Kouwe looks at the hedge fund fee model as the old standard of "2-and-20" is questioned...Risk is back in the bond market. But the robust high yield market is raising concerns...Harvard Professor William George just published "Seven Lessons for Leading in Crisis", a look at how the banking chieftains responded to the financial meltdown...The Deal Professor has an idea. You want to reduce hedge fund risk? Open them up to Main Street...And finally, it pleases GlobalRiskJobs to know that Gordon Gekko is back! Yes, it's true: Oliver Stone is remaking Wall $treet (1987) to focus on 2001-2008. Thankfully, Michael Douglas will reprise the Gekko role (post-prison), and the cast includes Josh Brolin Susan Sarandon, Frank Langella and Shia LaBeouf. Nouriel Roubini and Jim Chanos are technical advisors and Jim Cramer makes a cameo of course. Can't wait for that one.

Stiglitz says system worse than pre-Lehman

Nobel Prize winning economist Joseph Stiglitz says that little has changed in the year since Lehman and that system is on even shakier ground than it was before the collapse. “It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”

(un)Happy Anniversary!

Well, we have begun to be treated to the first of what are sure to be dozens of pieces marking Tuesday's One Year Anniversary of the death of Lehman Brothers. Everyone should remember just how dire the global financial situation seemed in the wake of Lehman's bankruptcy. We at Risk Talent Associates and GlobalRiskJobs certainly remember, as like many who make their living in and around Wall Street, it was a time like no other. "Bulge Bracket" firms disappearing seemingly overnight, stock markets plunging, and of course, the layoffs. Yet, even in those darkest of days, we advised that things would indeed get better at some point, and job seekers needed to get up off the canvas and be ready for that time. Certainly, the first order of business was to use all means necessary to stabilize the system, but when that financial triage was finished, players (particularly regulators) would turn their attention to figuring out how to never let us get in that position again. As I stated in the blog last week, much of that push to reform has been bogged down in political wrangling, shifting of the topic to healthcare, etc. But, just as we start to doubt the Administration's resolve, Here comes President Obama to Wall Street to stoke the fire of reform by reminding us of where we were a year ago. Obama’s speech apparently will focus on the need to take the next series of steps on financial regulatory reform, enacting safeguards to ensure such a crisis doesn’t happen again. Let's hope he can jump start the process and push us through this period of "regulatory limbo".

As we consider the Lehman collapse a year later, there will be many arguments either way that letting Lehman fail was either the right/wrong thing to do. Joe Nocera of the NY Times had a good piece on Saturday where he reconsiders the Lehman failure. My own thoughts about this haven't changed much over the year. I believe that when a Bear Stearns failure became inevitable, the Powers-that-Be (Paulson, Bernanke, et. al.) decided they would give the U.S. banks and investment banks a "Mulligan". Against the pure capitalist philosophy of non-intervention, they rushed in to arrange the orderly sale of Bear to JPM. In its wake, the warning was given: the next guy wouldn't be so lucky. Whether that "next guy" was going to be Lehman, Merrill, Morgan Stanley or someone else (not Goldman of course, being too well-connected), it seemed pretty clear there was going to be some BIG financial institution that would become a lab rat for too-big-to-fail. Unfortunately for its employees and investors, lehman won the race to the bottom and the experiment was in full force. Everyone would find out just what happens and how far-reaching the repercussions are when one of these institutions fails. Well, the rest is well-documented and we can probably say the result was the ability of Paulson to light a fire under Congress and get the resources to fight the crisis. Step 2, however, is far from complete. We still need to figure out how to structure or regulate the system in a way that allows risk taking without the collateral damage that was clearly part of the Lehman failure. Maybe Obama can get that process back on track this week.

Feds locked in "Regulatory Limbo"?

Well, after a quiet end of summer at GlobalRiskJobs and the Blog, it's time to get back to business. I spent most of August in Europe, doing first hand due diligence on the effect of the weak dollar on American tourism. It really hit home in Switzerland, when I shelled out the equivalent of $11.00 for a Big Mac, fries and a Coke at rest area outside of Zurich. Ouch!

Back to the markets...

The summer was characterized by lots of talk but not enough action on the regulatory front. After nearly nine months of the Obama administration, we have been treated to lots of ideas about how the regulatory structure should/could/might look when the dust settles, but there has not been a ton of substantive change. It has been nearly a year since the collapse of Lehman Brothers, and the financial world is, admittedly, a different place. Real change on the regulatory front has not materialized, as efforts to remake the rules of finance have been stymied by infighting among regulators, pushback from banks, and opposition from lawmakers who are skeptical of increased government power and scope. Ironically, banks' appetite for risk has grown, with the Wall Street Journal reporting today that the daily VaR of the nation's top 5 banks was over $1B in the second Quarter of 2009, a record level. Geithner went to Capitol Hill with Obama's financial reform outline on March 26! There was a big sense of urgency at the time, but that was nearly six months ago. Geithner urged lawmakers to grant the authority for the government to take over failing financial institutions quickly, yet here we are. Is momentum for change fading? Or is the regulatory reform movement going to slowly and steadily work its way through the financial system...?

The links...

• Peter Wallison of the AEI says asking the Fed to monitor "systemic risk" is like asking a thief to police himself in this opinion piece from the WSJ.
• Goldman Chief Blankfein spoke in Frankfurt today and said anger over banker pay is justified, but overregulation would prove harmful to the markets.
• NY AG Cuomo is investigating the timing of Bank of America's firing of its former General Counsel, Timothy Mayopoulos.
• Dutch Banks (are there any left...?) agreed to bonus limitations.
  

FHFA's Lockhart to step down

Federal Housing Finance Agency Director James Lockhart, who oversaw last year’s federal takeover of mortgage-finance giants Fannie Mae and Freddie Mac, said he plans to leave the agency later this month.

“The timing is appropriate,” Lockhart said. Freddie Mac hired a new chief executive last month and the housing market is starting to show some signs of recovery, the regulator said in an interview today.

Fed to launch new bank exam teams

The Federal Reserve plans to intensify its scrutiny of bank lending and financial health with teams made up of experts in a variety of new areas. Fed Governor Daniel Tarullo outlined the plan during a Senate Banking Committee hearing in Washington today. The overhaul, which would make reviews more uniform across the banking system, builds on the stress tests the central bank completed on the biggest 19 banks in May, he said. “We are prioritizing and expanding” the examination process to “assess key operations, risks and risk management activities of large institutions,” Tarullo said in his testimony today. “This program will be distinct from the activities of on-site examination teams so as to provide an independent supervisory perspective. This work will be performed by a multidisciplinary group composed of our economic and market researchers, supervisors, market operations specialists and accounting and legal experts,” Tarullo said.

A regulatory tussle has been unfolding since the Obama administration proposed strengthening the Fed's regulatory profile. The major regulators have each opposed some aspect of the plan in hopes of maintaining their own powers as the winds of change blow in.

Two sides to the Fed-as-Regulator debate

Lee C. Bollinger, president of Columbia University in New York, says the U.S. needs a "First Amendment for the economy" after a failure of regulation that could be fixed by giving the Fed more responsibility. Bollinger called the economic crisis a “huge failure of public regulation”, and proposed an independent regulator based upon the judicial system which could issue written rulings and change precedents. Bollinger said the Fed had the capacity to stand outside the system as an independent regulator to monitor risk.

On the flip side, Harvard professor and author Amar Bhide says in a WSJ opinion piece that the Fed has done such a terrible job at financial regulation it would be unthinkable to give it more power, and goes so far as to say we should be talking about dismantling the Fed, not increasing its power. Bhide goes on to write that Fed's regulatory mission has become so big as to be unmanageable and proposes a minimum of splitting the monetary policy and regulatory functions of the Fed as was done with the Maastricht Treaty that established the European Central Bank.

Also in the news...

CFTC Chairman Gary Gensler said he believes the agency must seriously consider setting stricter limits on traders who place bets on energy contracts. His remarks are the just the latest example of a shift in tone for the commodities regulator vis a vis trading curbs and other regulatory measures. Gensler went on to say that "every option must be on the table to curb "excessive speculation", which the WSJ called out as politically expedient remarks in its editorial on "The Politics of Speculation". In addition, Goldman Sachs talked its own book by saying attempts to curb speculation may prove "disruptive" to markets.

House bill proposes ban on naked CDS

House Financial Services Committee Chairman Barney Frank said "naked" credit default swaps may be banned in the overhaul of derivatives industry oversight. House Agriculture Committee Chairman Collin Peterson (D-MN) said he is helping draft the legislation which would ban credit-default swaps where the investor doesn't own the underlying debt. Under the current proposal, market makers would be exempt from the ban. As much as 80% of the $26T CDS market is traded by investors who don't own the underlying debt.

Regulators sit in judgment of CIT

While bond investors seem to have come through with a $3B private bailout for CIT Group, it appears regulators will have the final say on the troubled lender. CIT needs an exemption from the Federal Reserve and approval from the Federal Deposit Insurance Corp. to transfer assets from a holding company to its bank in Utah. It can then raise customer deposits to fund those assets. Earlier this year the regulators allowed a transfer of $5.7 billion in student loans by CIT, but more recently they have seemed reluctant to grant additional transfers. Bondholders hope, however, that with a private-sector deal in hand, the regulators will take a second look and allow more transfers. Even though CIT's long-term plans center around the regulatory waiver, no imminent action is expected on that front, a person familiar with the matter said. For more details on the CIT situation, check out this story from the WSJ.

FSA under fire from UK conservatives

The UK's conservative party appears to be flexing its muscles with a proposal to scrap the regulatory body created by Prime Minister Gordon Brown in 1997. The conservatives are pushing to hand bank supervision over to the Bank of England, while creating a separate consumer finance protection agency, which is similar to the changes that the Obama Administration has proposed in the US.

For full story go to Forbes.com.

UK's Darling pushes "global rulebook" for banks

U.K. Chancellor of the Exchequer Alistair Darling, following a meeting with U.S. Treasury Secretary Timothy Geithner, said the world needs a global rulebook for banks to prevent future crises. ‘‘There is recognition that because banking is global it needs to be dealt with in the global arena. There is also recognition that many issues need international cooperation.’’

Darling said he expects ‘‘in September that progress will be made’’ when leaders of the Group of 20 nations meet in Pittsburg. He said finance ministers of the G-20 will meet in London on Sept. 4 and Sept. 5.