Banks are reducing risky assets to show regulators how strong they are. But sometimes the assets don’t actually move - the bank just shifts the risk, DealBook’s Susanne Craig reports. “As regulators press for banks to be safer, demand for these maneuvers â€" known as capital relief trades or regulatory capital trades â€" has been growing, especially in Europe.â€
Banks like Citigroup, Credit Suisse and UBS have used such trades to make their assets look less worrisome, allowing them to hold less capital. “Rather than selling the assets, potentially at a loss, the banks transfer a slice of the risk associated with the assets, usually loans. The buyers are typically hedge funds, whose investors are often pensions that manage the life savings of schoolteachers and city workers. The buyers agree to cover a percentage of losses on these assets for a fee, sometimes 15 percent a year or more.â€
Some regulators express concern that these transactions sometimes do not actually take risk off bank balance sheets. Most of the trades are structured as credit-default swaps, the instruments that pushed the American International Group to the brink in 2008. “These trades allow the banks to go to regulators and say the risk is gone,†said Anat R. Admati, a professor of finance at Stanford University. “But it’s not gone at all; it’s just been pushed into a murky corner of the market.†Still, bankers point out privately that the transactions can move risk to a less systemic part of the financial industry than the big banks.
REGULATING CONSULTANTS WON’T BE EASY  | Lawmakers are increasingly concerned about a multibillion-dollar consulting industry, which will be the focus of a Senate Banking Committee hearing at 10 a.m. on Thursday. But efforts to rein in the consultants, who are paid by the banks they are expected to reform, could be stymied, “given regulators’ close ties to consultants and limited legal authority to penalize them,†Ben Protess and Jessica Silver-Greenberg report in DealBook.
“The early signs are discouraging, lawmakers say. After concerns surfaced that a consulting firm was bungling the broad review of foreclosures, regulators wrote to the firm complaining about the conduct, but did not fire the consultant, said Congressional officials with knowledge of the matter who were not authorized to speak publicly.â€
Some regulators have been exploring ways to curb the use of consultants since the foreclosure review was canceled in January, according to testimony prepared for the hearing. Daniel P. Stipano, a senior official at the Office of the Comptroller of the Currency, said in the testimony that the agency planned to “enhance our oversight of the consultants when they are utilized.†But he is also expected to cite legal limitations undercutting the regulators’ authority over consultants, stemming from an episode in 2006 when the comptroller’s office levied a fine that was ultimately overruled.
TIPS ON GOLF COURSE LED TO AUDITOR’S DOWNFALL  | Scott I. London, the former KPMG executive who was fired by the accounting firm, leaked secret information to Bryan Shaw, a longtime friend and frequent golf partner, DealBook’s Peter Lattman reports. Federal agents secretly photographed Mr. London accepting a cash payment in exchange for the information about companies he audited, according to a person with direct knowledge of the case.
The government learned of suspicious trading in Mr. Shaw’s brokerage accounts, ultimately leading KPMG to resign this week as the auditor for the nutrition supplement maker Herbalife and the footwear manufacturer Skechers. “Mr. Shaw began cooperating with the authorities and turned against Mr. London, according to the person with knowledge of the case,†Mr. Lattman writes. “Mr. London and Mr. Shaw have each admitted to the insider trading scheme. Federal prosecutors in Los Angeles and securities regulators are expected to bring charges against the two by the end of the week, another person briefed on the case said.â€
The scandal is casting a harsh spotlight on the accounting industry. “Accounting firms are being forced to take a fresh look at their practices,†Lynnley Browning reports in DealBook, “as new rules requiring more transparency by the firms are already being considered.â€
ON THE AGENDA Â |Â President Obama is expected to meet with bank chief executives including Jamie Dimon of JPMorgan Chase, Brian T. Moynihan of Bank of America, Michael L. Corbat of Citigroup and Lloyd C. Blankfein of Goldman Sachs, according to Reuters. A House Financial Services subcommittee conducts a hearing at 10 a.m. on legislative proposals regarding derivatives. Dennis Crowley, co-founder of Foursquare, is on Bloomberg TV at 1 p.m.
FED MISTAKENLY GIVES DATA EARLY TO BANKS  | Minutes from a Federal Reserve meeting in March “were released five hours earlier than originally planned because a Fed official mistakenly e-mailed them Tuesday afternoon to a host of legislative staff members and bank representatives,†The New York Times reports. “The disclosure raised eyebrows both in Washington and on Wall Street, and legal and compliance departments at the banks were poring over e-mail records to determine exactly what transpired because of the early release.†Still, the central bank insisted that “there was no evidence traders on Wall Street had benefited.â€
Banks like Goldman Sachs and JPMorgan Chase were among the recipients. The Carlyle Group, Guggenheim Partners and the hedge fund King Street also got the information early, according to a list compiled by The Wall Street Journal.
Deutsche Telekom Sweetens T-Mobile Bid for MetroPCS  | Deutsche Telekom offered to cut the amount of debt that the combined company would bear by about $3.8 billion and reduce the interest rate. DealBook »
Rio Tinto Puts More Assets on the Block  | The mining giant Rio Tinto “is accelerating a plan to sell billions of dollars in noncore assets despite a slowdown in commodities that could lower the price tags on the deals,†The Wall Street Journal reports. WALL STREET JOURNAL
Protective Life to Buy an AXA Portfolio for $1.1 Billion  |Â
REUTERS
Gleacher in Deal Talks Again  | The embattled boutique bank Gleacher & Company says it is in “preliminary discussions†with an unnamed third party about a possible business combination, months after the firm ended merger talks with Stifel Financial. DealBook »
Mexican Billionaire Increases Stake in America Movil  |Â
REUTERS
Goldman Reaches Deal to Let C.E.O. Be Chairman  | Goldman Sachs has reached a deal with the CtW Investment Group, an organization that advises union pension funds, to halt a vote on a proposal to split the roles of chairman and chief executive. DealBook »
Gold Loses Some Luster, as Economic Signs Improve  | “Wall Street is growing increasingly bearish on gold, an investment banks and others had deftly marketed to the masses only a few years ago,†The New York Times writes. NEW YORK TIMES
Citigroup Hires McKinsey Consultant to Help Cut Costs  |Â
BLOOMBERG NEWS
Banking’s Crocodile Tears  | The annual pension payment for James Crosby, former chief executive of the failed British bank HBOS, will still be more than £400,000, 23 times more than the average income of £17,700 for retired households in Britain, Edward Hadas of Reuters Breakingviews writes. REUTERS BREAKINGVIEWS
A Proposal to Increase Private Equity Taxes  | President Obama’s proposed budget would tax carried interest as ordinary income. “Hedge fund managers and the like use the carried interest loophole to pay preferential rates on their earnings,†the Economix blog writes. NEW YORK TIMES ECONOMIX
Former SAC Trader Gets Court Permission for African Honeymoon  | A judge has approved a request from Donald Longueuil, a former employee of the hedge fund SAC Capital Advisors, to take a three-week honeymoon to Africa after his prison sentence is over. DealBook »
Manager at Millennium Hedge Fund to Start New Firm  |Â
ABSOLUTE RETURN
Facebook Refines Its Targeted Advertising  | “Facebook has partnered with four data companies that track, to varying degrees, online and offline purchase behavior: Acxiom, Blue Kai, Epsilon and Datalogix,†the Bits blog reports. NEW YORK TIMES BITS
Venture Capitalists on the Hunt for Google Glass Apps  | Google Ventures, Kleiner Perkins Caufield & Byers and Andreessen Horowitz announced an investment partnership to back start-ups developing software for Google Glass, the Internet-connected glasses. NEW YORK TIMES BITS
2 Investors Give $35 Million to Brown  | Theresia Gouw of Accel Partners and Charles H. Giancarlo of Silver Lake have donated millions as part of a $160 million fund-raising effort for Brown University’s engineering school. DealBook »
Tesla Seeks to Sell Cars Directly to Customers in Texas  |Â
REUTERS
What’s Wrong With the Chapter 14 Proposal  | A big problem with a proposed change in the bankruptcy procedure is its effort to penalize the provider of debtor-in-possession financing if the new financing is used to “overpay†creditors, Stephen J. Lubben writes in the In Debt column. DealBook »
Former Consultant Challenges Conviction in Insider Trading Case  | A lawyer for Winifred Jiau, a former technology consultant, argued that people who gave her secret information received no benefit from her, The Wall Street Journal reports. WALL STREET JOURNAL
I.M.F. Leader Says Loose Monetary Policy Should Continue  | “In present circumstances, it makes sense for monetary policy to do the heavy lifting in this recovery by remaining accommodative,†Christine Lagarde, the head of the International Monetary Fund, said on Wednesday. REUTERS
