Insider Ties in a Prospect for Deputy at the S.E.C.

Mary Jo White, set to become a top Wall Street regulator, is seeking to allay skepticism about her spins through the revolving door between government service and private practice.

Yet even as she confronts concerns about her work for JPMorgan Chase in financial crisis cases and Morgan Stanley’s board in vetting a chief executive, she is turning to a colleague who has tread a similar path.

Andrew J. Ceresney, who served as Ms. White’s lieutenant as both a defense lawyer and as a federal prosecutor in Manhattan, is a leading candidate to ultimately become her enforcement chief at the Securities and Exchange Commission, according to people briefed on the matter. A Washington outsider an relative unknown beyond legal circles, Mr. Ceresney would help set the tone for policing financial fraud, effectively making him a top cop on Wall Street.

He could join as soon as spring, potentially serving as co-chief with the agency’s acting head of enforcement, the people briefed on the matter said. But the job is not yet his. Ms. White, who is expected to sail through a Senate confirmation hearing on Tuesday, must first confront questions about her ties to Wall Street. And Mr. Ceresney (pronounced Sir-rez-ney) could heighten such scrutiny.

At the S.E.C., Mr. Ceresney, 41, would have to police some of the same firms he spent a decade defending.

After working at the United States attorney’s office in Manhattan, he built a lucrative legal practice at Debevoise & Plimpton. At the firm, he represented the likes of Kenneth D. Lewis, the former chief executive of Bank of America who faced regulatory investigations over the bank’s hasty takeover of Merrill Lynch during the depths of the financial crisis.

Mr. Ceresney, who defended JPMorgan from federal inquiries into wrongful foreclosure practices, also worked side by side with clients under scrutiny for selling toxic mortgage securities at the height of the housing boom.

His career path mirrors that of Ms. White, who alternated between Debevoise and the federal government for three decades.

During stints as a federal prosecutor in Brooklyn and later as the first woman to be United States atorney in Manhattan, she helped oversee the prosecution of the crime figure John Gotti and directed the case against those responsible for the 1993 World Trade Center bombing. She left in 2002 with the reputation as a tenacious prosecutor with an independent streak.

Since then, at Debevoise, she has represented nearly every big bank on Wall Street. Her clients included JPMorgan Chase, UBS and Michael Geoghegan, the former head of HSBC.

To avert potential conflicts stemming from her work on behalf of Wall Street giants, Ms. White had already agreed to recuse herself for one year from most matters that involve former clients. Ms. White also vowed “as far as can be foreseen” never to return to De! bevoise an! d plans to soon cut financial ties with the firm.

Some Senate Banking Committee members are not satisfied. Senator Sherrod Brown, Democrat of Ohio, has questioned whether Ms. White’s pledge to avoid matters involving former clients would undercut her ability to run the agency. Mr. Ceresney would probably follow Ms. White’s lead and recuse himself from certain cases, an important ethical move but also a potential hindrance to his authority.

The questions surrounding the revolving door illustrate how, even as Ms. White and Mr. Ceresney prepare to usher in a new era at the S.E.C., the agency is dogged by old concerns. While the agency has mounted cases against Goldman Sachs and other Wall Street giants, consumer advocates continue to complain that the enforcement unit remains too timid.

But there is another school of thought on the evolving door â€" that it actually bolsters prosecutorial instincts. Anyone fit to shine a light on the darkest corners of Wall Street, S.E.C. officials say, must navigate its ins and outs. The arguments echo claims that Franklin Delano Roosevelt picked the famed financier Joseph P. Kennedy as the first S.E.C. chairman because Kennedy “knew where the bodies were buried.”

Mr. Ceresney could also breathe new life into the enforcement unit as it enters a critical phase.

Some enforcement officials, according to people briefed on the matter, are seeking a leadership overhaul after the recent departure of Robert Khuzami, who revamped the unit after it missed years of warning signs of the Ponzi scheme operated by Bernard L. Madoff.

“Coming out of Madoff you needed a guy like Khuzami who was going to reform the place,” said Thomas A. Sporkin, a senior S.E.C. enforcement official until last year when he departed for BuckleySandler. “This next person has to boost morale and broaden the agenda.”

Mr. Ceresney, however, is unlikely to present a radical shift from his predecessor, given their similar résumés. Mr. Khuzami cut his teeth prosecuting terrorists for Ms. White when she was the United States attorney in Manhattan.

Mr. Ceresney’s potential arrival also coincides with the tenure of another protégé of Ms. White, George Canellos, who became the S.E.C.’s interim enforcement chief last month. Te pair, believed to be friends, are expected to overlap for a while, people briefed on the matter said.

Mr. Ceresney, a Yale Law School graduate who clerked for Judge Michael Mukasey, the former United States attorney general who is now a partner at Debevoise, would also inherit a deep bench of investigators. David P. Bergers, director of the S.E.C.’s Boston office who slid into the deputy role under Mr. Canellos, could continue as the enforcement unit’s No. 2. Matthew T. Martens, the enforcement division’s chief litigation counsel, and Daniel Hawke, who leads the market abuse unit, are also among the officials who have received consideration for more senior roles.

An S.E.C. spokesman declined to comment, as did a spokeswoman for Debevoise.

The news of Mr. Ceresney’s possible hire comes as the American Bar Association’s annual conference on white-collar crime gets under way. More than 1,000 criminal defense lawyers and government prosecutors from across the country have convened at the Cosmopolitan Hotel in Las Vegas for three days of symposiums and panels. Among the sessions is “The New Landscape of Insider Trading Cases,” featuring Mr. Khuzami, the outgoing enforcement chief.

Colleagues on Wednesday said Mr. Ceresney, who lives in Brooklyn with his wife and two children, was a brilliant lawyer and noted that, unlike Mr. Khuzami, is not a towering figure. One former colleague described him like this: “short in stature but long on brains.”

Icahn Said Ready to Oppose Dell Deal

Carl C. Icahn, the activist investor, is poised to announce his opposition to Dell‘s proposed $24.4 billion sale to its founder, a person briefed on the matter said on Wednesday.

The likely emergence of Mr. Icahn as a foe of the sale heightens the pressure on Dell as it urges shareholders to approve the $13.65-a-share offer proposed by Michael S. Dell and the investment firm Silver Lake.

Two of Dell’s biggest outside shareholders, Southeastern Asset Management and T. Rowe Price, have already publicly opposed the current deal. Southeastern has gone so far as to suggest that it would oppose any takeover that is less than $20 a share.

A special committee of Dell’s board, which had overseen the company’s negotiations with Mr. Dell and Silver Lake and which is overseeing a go-shop process meant to find higher bids, has said that the current deal represented the best outcome for shareholders.

Mr. Icahn, who began buying shares in the embattled computer company in recent weeks, has met with advisers to the special committee of Dell’s board, this person said. He has described $13.65 as too low, and instead proposed what’s known as a leveraged recapitalization. That would involve Dell borrowing money and paying out a special! dividend; Mr. Icahn has suggested a payment of $9 a share.

The size of Mr. Icahn’s position couldn’t be learned. He was not immediately available for comment.

News of Mr. Icahn’s plans was reported earlier by CNBC.

Sheryl Sandberg Takes Her Message to Wall Street

Sheryl Sandberg, the chief operating officer of Facebook, is heading to Wall Street with her message about women in the workplace.

Ms. Sandberg, whose book “Lean In” is scheduled to be published on March 11, is visiting three big banks and a consulting firm this week for private events with women to discuss the ideas in her book. The events in New York, which are closed to the general public, will kick off Ms. Sandberg’s book tour on the east coast.

On Thursday, Ms. Sandberg is visiting Goldman Sachs for an afternoon conference, according to three people with knowledge of the event who were not authorized to speak publicly about it. All of the women in Goldman’s offices are invited.

The same day, Ms. Sandberg also has a meeting about her book at Morgan Stanley, according to two people familiar with the matter.

On Friday morning, Ms. Sandberg is headed to JPMorgan Chase for an event with women at the bank and JPMorgan clients, according to Jennifer Zuccarelli, a JPMorgan spoeswoman. That event is hosted by Mary Callahan Erdoes, head of the asset management division; James B. Lee Jr., vice chairman of the bank; and Jamie Dimon, the chief executive.

Also on Friday, Ms. Sandberg has a meeting at Accenture, the consulting firm, according to a person familiar with the matter. (Friday happens to be International Women’s Day.)

As it happens, Morgan Stanley, Goldman Sachs and JPMorgan were the lead banks handling Facebook’s initial public offering last May, a deal that was widely criticized as the social network’s stock fell in the following months. While investors lately have been warming up to Facebook, the stock is still trading well below its initial offering price.

The events come as Ms. Sandberg prepares to spread her message to a broader audience. The Web site for her book, leanin.org, went live on Wednesday.

Through groups known as “Lean In Circles,” M! s. Sandberg hopes to start a national discussion about gender and encourage women to try certain strategies for professional success, The New York Times’s Jodi Kantor reported.

Wall Street, of course, is notorious for a male-dominated culture. While women have made some progress in recent decades, they still make a small percentage of the top positions.

“By talking openly about the challenges that we all face in the workplace and at home, we can work towards solutions together,” Ms. Sandberg says in a post on the book’s Web site.

After the private meetings this week, Ms. Sandberg has some public events on her calendar.

On March 12, she’s visiting the Barnes & Noble at Union Square in Manhattan for an event with Chelsea Clinton. Then, on March 14, she heads to the Sixth and I Historic Synagogue in Washington, DC.

Ms. Sandberg is also speaking on April 5 at Harvard Business School for an event celebrating the 50th anniversary of women being admitted to the MBA program. Later that day, she is scheduled to speak at Colgate University’s entrepreneur weekend.

Why Vodafone Should Head for a Verizon Exit

Vodafone should dash for a U.S. exit if it’s open. Shares of the British telecommunications company soared on Wednesday on hopes that Verizon Communications could buy it out of their $250 billion-plus joint venture. Ending a long standoff while U.S. assets are at high valuations makes sense â€" as long as Vodafone doesn’t squander the proceeds on a costly makeover.

Verizon Wireless, the 45-55 joint venture, has been a sticking point for years. The main gripe was once that Verizon blocked dividend payments. Nowadays the problem is about scale. As U.S. telecommunications have thrived and European rivals have languished, ever more of Vodafone’s value is bound up in an asset that it does not control. So it makes sense to get out. And U.S. telecommunications valuations may be near a peak - the market is likely to get tougher after SoftBank of Japan bought into Sprint Nextel.

The unit may be worth 8 times earnings before interest, taxes, depreciation and amortization, or Ebitda, implying a vlue of $120 billion for Vodafone’s stake, using Deutsche Bank estimates. Without raising a crazy amount of debt, Verizon could pay $40 billion to $50 billion in cash, with the rest in its own stock. That would leave Vodafone owning about a third of Verizon.

A potential tax bill of $20 billion to $30 billion makes agreeing a price that’s acceptable to both sides much harder, although paying mostly in shares could delay the due date. And the British company would still retain a large, passive U.S. holding, which would probably not be given a full rating by the market and analysts. The obvious alternative â€" a full Verizon-Vodafone merger â€" looks unwieldy and unlikely. For all its complications, an exit from the joint venture would be a good result.

Even if a deal can be struck, its real benefit depends on what Vodafone does with the strategic options that come with it. The temptation would be to use the proceeds to plug strategic gaps in Europe, perhaps by pursuing richly valued cabl! e assets like Kabel Deutschland, Spain’s Ono or even a combined Liberty Global/Virgin Media. But Europe’s telecommunications have a terrible track record of creating value through acquisitions. The rally in Vodafone’s shares suggests investors may have already forgotten that.

Quentin Webb is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Holder Says Big Banks Are Too-Big-to-Charge

Attorney General Eric Holder suggested Wednesday that some financial institutions have become too large and are escaping full-fledged prosecution as a result.

Testifying before the Senate Judiciary Committee, Holder told lawmakers that he is concerned that some institutions have become so massive and influential that bringing criminal charges against them could imperil the financial system and the broader economy. His remarks come as a growing number of lawmakers have suggested that big banks are, effectively, "too big to jail."

"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy," he said. "And I think that is a function of the fact that some of these institutions have become too large."

He suggested that prior attempts to bring enforcement against banks may have been stifled by their outsize influence, saying it has an "inhibiting influence ... on our ability to bring resolutions that I think would be more appropriate."

The Justice Department is required to consider the economic impact of its actions, but Holder's comments should bolster an increasingly vocal group of lawmakers that argue the nation's biggest banks have gotten too large and need to be curbed.

Sens. Chuck Grassley (R-Iowa) and Sherrod Brown (D-Ohio) pressed Holder on the issue in a letter sent in February, airing their disappointment that no major criminal charges had been filed against banks or their employees in the wake of the financial crisis. And Sen. Elizabeth Warren (D-Mass.) drew headlines when she blasted financial regulators during a separate hearing for failing to bring any major financial institutions to trial since the meltdown.

Grassley pressed Holder again on the issue during testimony Wednesday, at which point Holder said he essentially agreed.

"The concern that you have raised is one that I, frankly, share," he said, adding that ultimately the best deterrent would be if they could bring charges against individuals instead of companies.

However, he also added that all of the bad behavior on Wall Street leading up to the crisis may not necessarily have been criminal and that his criminal team has been "as aggressive as they could be."

Holder touted the Justice Department's efforts on financial fraud, specifically noting the government's civil suit against the credit rating agency Standard & Poor's, in which the government is seeking at least $5 billion in damages. The rater has said the lawsuit is without merit and is challenging it.

The Benefits of Working in the Office

Yahoo’s chief executive, Marissa Mayer, inspired much debate and rebuke when she recently abolished Yahoo’s work-at-home policy. In academia, “working from home” is a treasured euphemism for heading home after your morning class to have lunch, read the newspaper and take a nap. I hate to see anything that would endanger this hallowed tradition.

But encouraging working at in the office makes sense, especially for a company like Yahoo. While some studies suggest that working from home can increase worker productivity, a different line of research shows that in knowledge-based industries, casual interaction among employees enhances creativity and innovation.

Ms. Mayer is right to pursue this goal, although she might have better luck ith carrots than sticks. For one thing, the “carrots” of working at the office might actually give the employees a tax break.

Ms. Mayer came to Yahoo from Google, which is famous for its extravagant benefits, including free food and snacks, on-site gyms, subsidized massages, concierge services, on-site doctors, free on-site haircuts and so on. (Mashable illustrated some of the common workplace amenities in Silicon Valley.)

Some items, like free or subsidized dry-cleaning, are clearly taxable benefits for the employee. Other benefits, like an on-site gym, are permitted to be provided tax free by regulation. Still others, like free meals, are probably taxable, but may not always be reported as income, and are unlikely to become the target of an ! I.R.S. crackdown.

The legal test for meals is whether the meals are provided on-site “for the convenience of the employer.” There must be a substantial noncompensatory business purpose, like a need to have employees available for emergencies, or an absence of sufficient restaurants nearby.

From Google’s perspective, lavish benefits do more than keep employees happy. A pleasant environment keeps them at work, draws them into the office on weekends and makes it easier for them to be productive when they are on site. Free haircuts minimize time away from the office. Free food encourages employees to eat together, collaborating on projects and encouraging the cross-pollination of ideas. If eating meals on site is tantamount to a condition of employment, then perhaps the meals are properly excluded from income.

The tax policy challenge is that while many of these perks may help the employer, they also provide substantial untaxed ersonal benefits to the employee. Not every lunch conversation will be focused on work. Why is that a problem The logic of taxing fringe benefits is rooted in the concept of horizontal equity.

Suppose Abe works at Yahoo, makes $150,000 a year and is taxed at an effective 33 percent rate, thereby paying $50,000 in taxes. Bridget, by contrast, makes $120,000 and also enjoys $30,000 of untaxed fringe benefits.

Bridget’s tax liability is only $40,000 (33 percent of $120,000), meaning that she pays $10,000 (or 20 percent) less in taxes, yet received the same economic compensation as Abe. To the extent that Bridget’s benefits are really compensation, and not for the convenience of the employer, this is unfair.

Still, it seems churlish to ask the government to crack down on efforts to make the workplace a more pleasant environment. Given the importance of creativity and innovation to economic growth, a tax subsidy for benefits that foster casual interaction at work makes a lot of sen! se, even ! if some portion of the benefits might really be a form of compensation.

Rather than requiring the I.R.S. to ask whether fringe benefits are compensatory, the Treasury Department could write regulations directing the agency to exclude from income items and services â€" like meals, climbing walls or foosball â€" if those items are consumed in a work environment intended to increase collaboration. Services that merely substitute for otherwise nondeductible, everyday living expenses, like dry-cleaning, would remain taxable.

One concern is the distributional impact of such an approach: it mostly helps those who are already well-off. Fringe benefits are commonplace for computer programmers in Silicon Valley, but I haven’t heard of too many auto mechanics or janitors who get similar perks at work.

A common example of a fringe benefit that is technically income but goes untaxed is the employee retention of frequent flier miles earned during the course of business travel. For a discussion of thi and other customary deviations from the Internal Revenue Code, see Lawrence Zelenak, Custom and the Rule of Law in the Administration of the Income Tax, 62 Duke L.J. 829 (2013).

Honey, We Barely Shrunk the Financial System

The global financial system isn’t dead. But it might be shrinking.

For the past four years, bankers have fretted that finance is retreating behind national borders, with dire consequences for trade and economic growth. The reality is that a diminution of the financial sector was overdue. And outside the euro zone, cross-border flows are still reasonably healthy.

The expansion of the financial system before the crisis was undeniably rapid: a new report by the McKinsey Global Institute shows that the combined value of equity markets, corporate and government bonds, and bank loans expanded by 7.9 percent a year between 1990 and 2007. However, this breakneck growth relied more on bad elements than good ones.

McKinsey applies the concept of “financial deepening”: the overall value of financial assets as a proportion of gross domestic product. In 1995, this was 256 percent of global economic output. By 2007, it had reached 355 percent. Yet most of the expansion was a result of rising shae prices and higher leverage in the financial system. Barely a quarter of the world’s financial growth over the period went to consumers and companies. As the McKinsey authors put it: “This is an astonishingly small share, given that this is the fundamental purpose of finance.”

Such rapid, reckless expansion had to come to an end. Increased financial leverage had increased earnings, which supported equity prices, which in turn helped justify even higher levels of debt. Deleveraging was sure to follow. Since the crisis, the overall stock of financial assets has continued to expand at a lower rate of 1.9 percent a year. But as a share of global G.D.P. it has fallen to 312 percent. Without the expansion in government borrowing, it would have been even lower.

The crunch hasn’t been felt equally around the world. True, international capital flows have slumped: an estimated $4.6 trillion flowed across borders last year, compared with $11.8 trillion in 2007. Yet much of the change can be! explained by Europe’s recent woes. According to McKinsey, the nations of Western Europe generated 56 percent of the growth in global capital flows between 1980 and 2007. The same countries are responsible for 72 percent of the subsequent collapse.

The rest of the world’s financial system looks less sickly. Capital flows to emerging markets were $1.5 trillion last year, close to the pre-crisis peak. In 2012, emerging markets actually exported $1.8 trillion in capital - more than they received in inflows - as many stuffed their current account surpluses into Western currencies and capital markets. So-called “south-south” flows are a tiny proportion of the total but growing quickly.

It would also be a mistake to gauge the health of the financial system from the troubles faced by global banks. European lenders in particular have trimmed cross-border lending both inside and outside the euro zone. And regulatory demands that banks hold more capital and liquidity in local subsidiaries make it arder to quickly move money around the globe.

Yet while banks feel the pain, the broader financial system is not suffering as much. For example, companies are increasingly turning to corporate bonds rather than loans. This has further to go: McKinsey calculates that if companies with revenue of more than $500 million shifted 60 percent of their total debt to bonds, they would collectively issue $1 trillion in fresh paper.

The question McKinsey’s study doesn’t answer is how much finance the world actually needs. Much of the West’s expansion over the last two decades was powered by a rapid and unsustainable expansion in debt. In the United States, Japan and western Europe, financial assets are still equivalent to more than four times G.D.P. In the developing world, the ratio is less than half that amount: only in China does it exceed 200 percent.

As these countries develop, some further financial deepening seems likely - as does a continued role for cross-border capital flows. T! he challe! nge will be ensuring that, in their urge to keep economic growth on track, developing nations concentrate on stimulating the good aspects of financial development, and focusing on the kind of finance that benefits the productive economy, while avoiding the West’s mistakes.

Peter Thal Larsen is Asia editor at at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

With Legal Reserves Low, Bank of America Faces a Big Lawsuit

Bank of America has been underestimating its legal risks for years, and brazenly so, according to its critics. Is that strategy about to pay off with the Federal Reserve

On Thursday, the Fed will release figures on how much capital the nation’s biggest banks must have to cover a “stress” situation. The following week, investors find out whether those banks will be able to return more of their capital to shareholders by paying dividends or buying back stock.

Last year, the Fed passed most of the big banks and let them pay out billions. Bank of America, picking up an unwelcoming vibe, didn’t even ask. This year, however, WallStreet expects that Bank of America will get the green light.

Yet the bank continues to face gargantuan payouts to clean up legal disputes from the bubble years. Now a lawsuit suggests that the bank’s mortgage portfolio could cost it tens of billions more than it had planned. In one big case, if things go wrong, Bank of America may be required to make good on many more billions worth of bad mortgages from Countrywide Financial, which the bank acquired, in the sense that one acquires Ebola virus, in 2008.

Bank of America, however, has kept its legal reserves low â€" perhaps dangerously so.

The dispute involves a 2011 settlement that Bank of America reached with some of the world’s biggest investors, including Pimco and BlackRock for $8.5 billion. That amount covers more than $400 billion of Countrywide loans, on which there have been tens of billions of losses. The actual loss total is in dispute because they are estimates, but it ranges from $70 billion or so to well over $100 billion. That means, at the high end of the range, the settlement was for pennies on the dollar. On a conference call last week held by Mike Mayo, the CLSA bank analyst, a legal expert suggested that if things went south in the courts for Bank of America, the settlement might rise to $25 billion to $30 billion.

Bank of America contends that its reserves are reasonable, based on its estimated probable payouts. The bank wouldn’t raise them “based on speculation from third-party observers who are not directly involved in any of these matters,” a spokesman said.

Even in the fun house of litigation about mortgages, this one is particularly comlicated. The dispute revolves around the question of whether another bank, BNY Mellon, working on behalf of mortgage-backed securities investors, was reasonable and acted in good faith in agreeing to the settlement. It is being hashed out in New York State Supreme Court. BNY Mellon is the trustee on 530 securitizations, or bundles of Countrywide mortgages, that were sold to investors.

The insurer American International Group, along with some others, including the New York and Delaware attorneys general, are fighting about the settlement. Eric T. Schneiderman, the New York attorney general, has accused BNY Mellon of breaching its fiduciary duty! . A BNY M! ellon spokesman said, “We believe we have fulfilled all of our duties as trustee in this case.”

The small settlement doesn’t sit right. The group of investors who agreed to it hold only about a quarter of the securities, making it appear as if a minority has forced a bad deal on the majority in order to get few quick bucks and resolve any dispute. The Pimcos and BlackRocks of the world don’t like to sue big banks. Things can get a little uncomfortable on the golf links. (They contend it was reasonable, given all the legal uncertainties of a protracted dispute.)

And who blessed the $8.5 billion figure anyway To figure out whether it was fair, BNY Mellon relied on a firm called RRMS Advisors, a mortgage analysis firm.

The RRMS estimate has been in dispute for some time now. The firm relied on information from Bank of America, and critics contend it underestimated problems in the loans and the total losses. How BNY Mellon found little RRMS isn’t clear; the bank wouldn’t comment. RMS’s Brian Lin, who conducted the analysis, stood by his report, but declined to comment further.

Recently, other court rulings have boded ill for Bank of America. Judge Jed S. Rakoff of the Federal District Court in Manhattan has ruled that an insurer called Assured Guaranty was able to dispute mortgages that it backed and that were made by a small bank called Flagstar, without having to show that the contractual breach was the direct cause of the loss. In other words, the borrower may have defaulted, but Assured didn’t have to demonstrate that it was because she didn’t make $150,000 a year as a tarot card reader, as had been claimed on the borrower’s loan appli! cation. I! f Bank of America is hit by such a ruling too, it might have to pay more. It argues its contracts are different.

So is Bank of America vulnerable Not surprisingly, it is keeping whole swaths of expensive Manhattan law firms working all hours of the day to make the case that it isn’t. BNY Mellon, too, contends it acted reasonably.

And the banks contend the $8.5 billion settlement is in line with other similar settlements. Of course, the investors continue to face huge hurdles even if rulings in this case start to go their way.

But even if the chances are low that the cases don’t go in Bank of America’s favor, an increase in legal reserves could be huge. So this is a low-probability, high-risk event. Another way of saying that is that it is a “stress” situation. And who just put banks through stress situations Ah, right, the Federal Reserve.

The Fed, whose earlier decisions have been generous to the banks, declined to comment for this column.

As Professors Anat Admati and Martin Hellwig, authors of the new book, “The Banker’s New Clothes,” have argued, the big banks are undercapitalized and the simplest way for them to start building capital is to keep their profits instead of returning them to shareholders.

A look at Bank of America’s estimates for how much it will have to pay for its mortgage liability is telling. It has gone up steadily each year. In 2009, the bank had a reserve of $3.5 billion. By last year, it had jumped to $19 billion, with an estimate of additional loss of up to another $4 billion.

And so Bank of America seems to have been consistently underestimating its legal exposure. (And it has other, undisclosed legal reserves for different cases. The incentives to lowball those are much greater, because the public cannot scrutinize them.)

In keeping the reserves low, Bank of America has already won. If it turns out that! the bank! loses its cases and has to fork over much more money, it nevertheless has managed to make its books look that much better for years. That surely helped as it has tried to dig itself out of its financial crisis hole.

“This is an accounting arbitrage,” says Manal Mehta, a hedge fund manager who has been on a lonely crusade for years to follow the complexities of these cases. “The accounting rules give you a lot of latitude in setting reserves,” he says. Bank of America is “hiding behind that.”

Fortune may favor the bold, but regulators just give them a pass.

With Legal Reserves Low, Bank of America Faces a Big Lawsuit

Bank of America has been underestimating its legal risks for years, and brazenly so, according to its critics. Is that strategy about to pay off with the Federal Reserve

On Thursday, the Fed will release figures on how much capital the nation’s biggest banks must have to cover a “stress” situation. The following week, investors find out whether those banks will be able to return more of their capital to shareholders by paying dividends or buying back stock.

Last year, the Fed passed most of the big banks and let them pay out billions. Bank of America, picking up an unwelcoming vibe, didn’t even ask. This year, however, WallStreet expects that Bank of America will get the green light.

Yet the bank continues to face gargantuan payouts to clean up legal disputes from the bubble years. Now a lawsuit suggests that the bank’s mortgage portfolio could cost it tens of billions more than it had planned. In one big case, if things go wrong, Bank of America may be required to make good on many more billions worth of bad mortgages from Countrywide Financial, which the bank acquired, in the sense that one acquires Ebola virus, in 2008.

Bank of America, however, has kept its legal reserves low â€" perhaps dangerously so.

The dispute involves a 2011 settlement that Bank of America reached with some of the world’s biggest investors, including Pimco and BlackRock for $8.5 billion. That amount covers more than $400 billion of Countrywide loans, on which there have been tens of billions of losses. The actual loss total is in dispute because they are estimates, but it ranges from $70 billion or so to well over $100 billion. That means, at the high end of the range, the settlement was for pennies on the dollar. On a conference call last week held by Mike Mayo, the CLSA bank analyst, a legal expert suggested that if things went south in the courts for Bank of America, the settlement might rise to $25 billion to $30 billion.

Bank of America contends that its reserves are reasonable, based on its estimated probable payouts. The bank wouldn’t raise them “based on speculation from third-party observers who are not directly involved in any of these matters,” a spokesman said.

Even in the fun house of litigation about mortgages, this one is particularly comlicated. The dispute revolves around the question of whether another bank, BNY Mellon, working on behalf of mortgage-backed securities investors, was reasonable and acted in good faith in agreeing to the settlement. It is being hashed out in New York State Supreme Court. BNY Mellon is the trustee on 530 securitizations, or bundles of Countrywide mortgages, that were sold to investors.

The insurer American International Group, along with some others, including the New York and Delaware attorneys general, are fighting about the settlement. Eric T. Schneiderman, the New York attorney general, has accused BNY Mellon of breaching its fiduciary duty! . A BNY M! ellon spokesman said, “We believe we have fulfilled all of our duties as trustee in this case.”

The small settlement doesn’t sit right. The group of investors who agreed to it hold only about a quarter of the securities, making it appear as if a minority has forced a bad deal on the majority in order to get few quick bucks and resolve any dispute. The Pimcos and BlackRocks of the world don’t like to sue big banks. Things can get a little uncomfortable on the golf links. (They contend it was reasonable, given all the legal uncertainties of a protracted dispute.)

And who blessed the $8.5 billion figure anyway To figure out whether it was fair, BNY Mellon relied on a firm called RRMS Advisors, a mortgage analysis firm.

The RRMS estimate has been in dispute for some time now. The firm relied on information from Bank of America, and critics contend it underestimated problems in the loans and the total losses. How BNY Mellon found little RRMS isn’t clear; the bank wouldn’t comment. RMS’s Brian Lin, who conducted the analysis, stood by his report, but declined to comment further.

Recently, other court rulings have boded ill for Bank of America. Judge Jed S. Rakoff of the Federal District Court in Manhattan has ruled that an insurer called Assured Guaranty was able to dispute mortgages that it backed and that were made by a small bank called Flagstar, without having to show that the contractual breach was the direct cause of the loss. In other words, the borrower may have defaulted, but Assured didn’t have to demonstrate that it was because she didn’t make $150,000 a year as a tarot card reader, as had been claimed on the borrower’s loan appli! cation. I! f Bank of America is hit by such a ruling too, it might have to pay more. It argues its contracts are different.

So is Bank of America vulnerable Not surprisingly, it is keeping whole swaths of expensive Manhattan law firms working all hours of the day to make the case that it isn’t. BNY Mellon, too, contends it acted reasonably.

And the banks contend the $8.5 billion settlement is in line with other similar settlements. Of course, the investors continue to face huge hurdles even if rulings in this case start to go their way.

But even if the chances are low that the cases don’t go in Bank of America’s favor, an increase in legal reserves could be huge. So this is a low-probability, high-risk event. Another way of saying that is that it is a “stress” situation. And who just put banks through stress situations Ah, right, the Federal Reserve.

The Fed, whose earlier decisions have been generous to the banks, declined to comment for this column.

As Professors Anat Admati and Martin Hellwig, authors of the new book, “The Banker’s New Clothes,” have argued, the big banks are undercapitalized and the simplest way for them to start building capital is to keep their profits instead of returning them to shareholders.

A look at Bank of America’s estimates for how much it will have to pay for its mortgage liability is telling. It has gone up steadily each year. In 2009, the bank had a reserve of $3.5 billion. By last year, it had jumped to $19 billion, with an estimate of additional loss of up to another $4 billion.

And so Bank of America seems to have been consistently underestimating its legal exposure. (And it has other, undisclosed legal reserves for different cases. The incentives to lowball those are much greater, because the public cannot scrutinize them.)

In keeping the reserves low, Bank of America has already won. If it turns out that! the bank! loses its cases and has to fork over much more money, it nevertheless has managed to make its books look that much better for years. That surely helped as it has tried to dig itself out of its financial crisis hole.

“This is an accounting arbitrage,” says Manal Mehta, a hedge fund manager who has been on a lonely crusade for years to follow the complexities of these cases. “The accounting rules give you a lot of latitude in setting reserves,” he says. Bank of America is “hiding behind that.”

Fortune may favor the bold, but regulators just give them a pass.

Elliott Criticizes Hess Chief as Unaccountable

The battle over the Hess Corporation‘s board has become a tiny war of words.

Elliott Management on Wednesday criticized a letter sent by the oil producer’s chief executive, John B. Hess, to another dissident investor, arguing that the communiqué showed that the company and its management were out of touch.

“The letter relays the attitude of a C.E.O. that has never been held accountable,” Elliott said in its statement.

For those trying to follow along, the sequence of events has been this: Relational Investors, an activist hedge fund, wrote a letter to Hess’ board on Tuesday reiterating its support for Elliott’s efforts. Mr. Hess replied, asking Relational to urge its fellow shareholder to drop its campaign.

That fight doesn€™t look likely to end anytime soon. In its response on Wednesday, Elliott argued that Mr. Hess was trying to use “scare tactics” by suggesting that the hedge fund’s plan to break up the company into domestic and international oil producers amounted to a liquidation.

Elliott also criticized the slate of six new directors that Hess has nominated, arguing that only two have experience running exploration and production businesses, and none have experience in working with unconventional drilling areas, like the Bakken shale formation that is the company’s most promising domestic asset.

The hedge fund also noted that while Hess said that it had begun looking for new directors last August, it was then that it named Samuel Nunn, a former United States senator from Georgia with no oil industry experience, to its board.

Elliott Criticizes Hess Chief as Unaccountable

The battle over the Hess Corporation‘s board has become a tiny war of words.

Elliott Management on Wednesday criticized a letter sent by the oil producer’s chief executive, John B. Hess, to another dissident investor, arguing that the communiqué showed that the company and its management were out of touch.

“The letter relays the attitude of a C.E.O. that has never been held accountable,” Elliott said in its statement.

For those trying to follow along, the sequence of events has been this: Relational Investors, an activist hedge fund, wrote a letter to Hess’ board on Tuesday reiterating its support for Elliott’s efforts. Mr. Hess replied, asking Relational to urge its fellow shareholder to drop its campaign.

That fight doesn€™t look likely to end anytime soon. In its response on Wednesday, Elliott argued that Mr. Hess was trying to use “scare tactics” by suggesting that the hedge fund’s plan to break up the company into domestic and international oil producers amounted to a liquidation.

Elliott also criticized the slate of six new directors that Hess has nominated, arguing that only two have experience running exploration and production businesses, and none have experience in working with unconventional drilling areas, like the Bakken shale formation that is the company’s most promising domestic asset.

The hedge fund also noted that while Hess said that it had begun looking for new directors last August, it was then that it named Samuel Nunn, a former United States senator from Georgia with no oil industry experience, to its board.

Paul Capital Takes Stake in Brazilian Venture Fund

RIO DE JANEIRO - Paul Capital, a private equity firm focused on secondary market transactions, has acquired 18.2 percent of a fund managed by the Brazilian technology venture capital firm Ideiasnet, paying 79 million reais ($40 million).

The purchase is the New York-based firm’s second asset in Brazil, according to Duncan Littlejohn, managing partner at Paul Capital.

The fund, known as FIP 1, is one of two funds managed by Rio de Janeiro-based Ideiasnet, and invests in companies in digital media, e-commerce, mobile and software. Other American partners it has brought on include Liberty Media, which acquired five percent of Ideiasnet shares in 2012.

Ideiasnet is publicly raded, a rare feat for a venture capital firm, and counts the Brazilian billionaire Eike Batista as one of its largest shareholders through his holding company, EBX.

In an interview with DealBook, Mr. Littlejohn said that, “our money is not that significant to them.” But he said that, “the idea of attracting an institutional investor was attractive to them.”

The Paul Capital deal values Ideiasnet’s FIP 1 fund at $221 million. The New York firm has an option to acquire up to 25 percent of FIP 1.

Sami Haddad, the chief executive of Ideiasnet, said that the cash would be used in part to finance a portfolio company Padtec. It will also go toward starting up new growth equity funds focused on technology in Brazil starting this year.

The deal is expected to close by March 15.

Dell Board Committee Insists Sale Was Best Outcome

The special committee of Dell’s board that supervised the company’s $24.4 billion sale to its founder reiterated on Wednesday that the deal was the best option for shareholders.

The committee said it bargained hard before the current offer to take it private was finalized.

“We negotiated aggressively to ensure that stockholders received the best possible value,” it said.

The statement comes after weeks of bickering between Dell and some of its shareholders, including its two biggest outside investors, over the $13.65-a-share bid from the company’s founder and chief executive, Michael S. Dell, and the investment firm Silver Lake Partners.

Southeastern Aset Management and T. Rowe Price, who together hold about 13 percent of Dell, have said they will not support the current offer.

Southeastern, an asset management firm with an activist streak, has hired advisers to advance its cause, and it demanded a list of Dell’s shareholders on Tuesday. The firm has said it values Dell at over $20 a share, and people briefed on the matter said it would prefer to see the deal die rather than let the current sale go forward.

For much of the last month, shares in Dell have traded above the offer price, suggesting investors are anticipating an improved offer from its founder. So far, Mr. Dell and Si! lver Lake have resisted improving their bid. Shares closed on Tuesday at $14.07.

In its letter to Dell’s directors on Tuesday, Southeastern wrote that the board “appears to have dismissed better alternatives for public owners and selected a transaction, which has been publicly derided by shareholders as opportunistic and grossly undervalued, that favors management.”

But the special committee said in its statement on Wednesday that it had considered all possible alternatives, including continuing Dell’s current business strategy; borrowing money and then paying out a special dividend; and selling all or part of the company.

The group, led by Alex J. Mandl, handled the sale negotiations, which were directed on the buyers’ side by Egon Durban, an executive at Silver Lake.

The committee also said it had requested a number of provisions designed to help any competing bidders make a higher offer, including a contract with the investment bank Evercore Partners that rewards the firm for finding a better offer.

Evercore has until March 22 to find a superior bid, though people briefed on the matter have said they do not expect any to arise.

Cautious Mood as Stocks Rise

The nominal high that the Dow Jones industrial average reached on Tuesday prompted few cheers on Wall Street, in contrast to the recoveries of years past. Even as the gain capped nearly five and a half years of progress since the depths of the financial crisis, there were questions about whether the forces that fueled the rally â€" in large part, the Federal Reserve’s stimulus and strong corporate profits â€" would be enough to keep it going, Peter Eavis writes in The New York Times. James P. Gorman, Morgan Stanley’s chief executive, cautioned that “prudent investors would be well served to tread carefully and look for improving economic evidence to support any moves to higher levels.”

Will the rally lead to more deals Recent weeks have shown that deal makers are not deterred by a surging market, even amid concerns that some vauations may be getting particularly lofty, as The New York Times’s James B. Stewart recently noted. For now, market experts say stocks have room to go higher, especially as the Fed plans to continue its efforts to stimulate the economy. “The Fed and other central banks have been driving the market, and there’s no sign that’s going to stop,” Byron Wien of the Blackstone Group told Jeff Sommer of The New York Times.

While many note that the broader economy is still struggling, some are arguing that the strength of the corporate sector provides a solid foundation for a rally. “I think 2013 is a year where those who’ve been really skeptical of this market have to rethink their arguments,” said Thomas Lee, the chief United States equity strategist at JPMorgan Chase. “It’s been a pretty healthy rally.”

Still, not all companies in the Dow are seeing the benefit of rising stock values, Nathaniel Popper writes in The New York Times. Bank of America, for instance, is today worth half of what it was five years ago, as it continues to work through the legacy of the housing collapse and the financial crisis.

MISSING THE POINT ON HERBALIFE  |  The battle among Wall Street investors over Herbalife amounts to a reverse of the famous “Godfather” line, Steven M. Davidoff writes in the Deal Professor column: it’s not business, it’s personal. Accordingly, the talk surrounding the nutritional supplements company is focusing not on the health of the company itself but on the arguments made by the prominent hedge fund managers in what resembles a junior high school feud.

“No one appears to be doing an actual investigation or asking the right questions. The central issue, in case you need reminding, is whether Herbalife is a pyramid scheme,” as the hedge fund manager William A. Ackman claims, Mr. Davidoff writes. “This is important, as not just billions are at stake, but an entire company and the tens of thousands of people who are affiliated with it.”

ON THE AGENDA  |  Data on factory orders in January is out at 10 a.m. The Federal Reserve releases its “beige book” about the economy at 2 p.m. At noon, Walt Disney has its annual meeting. Mervyn A. King, the governor of the Bank of England, and Andrew Bailey, the central bank official who will lead a new British regulator, are questioned by a parliamentary committee. A House Financial Services subcommittee holds a hearing on Fannie Mae and Freddie Mac at 10 a.m. Leon G. Cooperman of Omega Advisors is on CNBC at 7 a.m. Ralph L. Schlosstein, chief executive of Evercore Partners, is on Bloomberg TV at 4 p.m.

GENSLER IS EXPECTED TO STAY  |  Gary Gensler, chairman of the Commodity Futures Trading Commission, is telling officials that he plans to stay in the Obama administration through at least December, even as he considers other options, DealBook’s Ben Protess reports. The White House approached Mr. Gensler in Jauary about serving a second term at the agency, and while he has yet to commit, he has no deadline and is considering staying, Mr. Protess says, citing three people briefed on the matter.

“But another corner of the Obama administration could draw him away from the trading commission, a once sleepy agency that he overhauled after the financial crisis. Mr. Gensler, the people briefed on the matter said, has discussed other senior financial roles with the White House. The jobs could include deputy Treasury secretary and head of the Commerce Department. Two of the people said Mr. Gensler was once interested in running the Securities and Exchange Commission, though President Obama recently nominated Mary Jo White for that job.”

Mr. Gensler maintains that his task at his current agency is not complete. “It’s an incredible privilege and there’s still a lot of work to be done here at the C.F.T.C.,” he said in an interview.

Mergers & Acquisitions »

Samsung to Invest $110 Million in Sharp  |  By agreeing to buy a stake in the beleaguered technology company Sharp, Samsung Electronics “will broaden its supplier base, gain access to low-power thin screen technology and get a foot in the door at one of Apple Inc.’s key Asian display suppliers,” Reuters writes. REUTERS

J.C. Penney Board Said to Weigh Changes if Sales Don’t Recover  |  The Wall Street Journal reports: “Members of Penney’s board will consider selling the company or replacing the chief executive if a deep drop in sales canâ™t be reversed this year, people familiar with the matter said. The group includes activist hedge fund manager William Ackman.” WALL STREET JOURNAL

Buyout Firms Said to Consider Teaming Up for Life Technologies  |  Firms including the Blackstone Group and the Carlyle Group are “exploring a joint offer” for Life Technologies, Reuters reports. REUTERS

Still-Unhappy Southeastern Seeks Dell Shareholder List  |  Southeastern Asset Management is seeki! ng a list! of shareholders and other books and records from Dell, according to a letter sent on Tuesday to the computer maker’s board. DealBook »

Verizon Said to Seek Resolution in Vodafone Relationship  |  Verizon is “working to resolve its relationship” with Vodafone this year, and the companies have “weighed options that range from ending its wireless venture with its European ally to a full merger of the two phone companies, said people familiar with the situation,” Bloomberg News reports. BLOOMBERG NEWS

3 Women Named to Australian Panel on Takeovers  | 
WALL STREET JOURNAL

INVESTMENT BANKING »

Banks Move to Reduce Role in Setting Certain Rates  |  JPMorgan Chase and UBS “are withdrawing from a panel that sets Australia’s benchmark swap rate and Citigroup Inc. is reducing its role in Malaysia amid increased scrutiny following the global rate-rigging scandal,” Bloomberg News reports. BLOOMBERG NEWS

Bonus for Capital One Chief Is in Cash  | ! Richard Fairbank, the chief executive of Capital One, received a $2.19 million deferred cash bonus as part of his $17.5 million pay package for last year, Bloomberg News reports. BLOOMBERG NEWS

HSBC Sells U.S. Loan Portfolio for $3.2 Billion  |  The British banking giant HSBC is making progress in shrinking its consumer loan portfolio in the United States, which has been a drag on its earnings. DealBook »

Getting to Know a Young Banker  |  A “friendly conversation” with a 28-year-old vice president of a big bank. THE BILLFOLD

Standard Chartered to Move African Business to Johannesburg  | 
BLOOMBERG NEWS

PRIVATE EQUITY »

Private Equity and Venture Capital Investments Rise in Latin America  |  Private equity and venture capital firms last year committed $7.9 billion to invest in Latin America, although fund-raising was down significantly as smaller firms raised more than big firms. DealBook »

In Video Series, Wall St. Leaders Reflect on Their Careers  |  Hamilton E. James, president and chief operating officer of the Blackstone Group, discusses his life and career in a video series created by OneWire, a financial services recruitment firm. DealBook »

Permira Said to Scale Back Goals for Fund-Raising  | 
FINANCIAL TIMES

HEDGE FUNDS »

Relational Urges Hess to Talk With Elliott  |  Relational Investors wrote in a letter to Hess’s board on Tuesday that, like Elliott Management, it has found the company’s response lacking. DealBook »

In Asia, Some Hedge Fund Workers Call It Quits  |  Managers, traders and analysts at hedge funds in Asia “are quitting as assets have failed to recover after the 2008 global financial crisis, and trading losses have left a majority of funds unable to collect performance fees,” Bloomberg News reports. BLOOMBERG NEWS

Robe! rtson’s Seeding Fund Is Said to Recover  |  Tiger Accelerator, a fund started in 2011 by Julian Robertson to seed hedge funds, is in the black after strong gains in the first six weeks of this year, according to Absolute Return. ABSOLUTE RETURN

I.P.O./OFFERINGS »

Money Manager Tries Again With I.P.O.  |  After withdrawing plans to go public in 2011, Artisan Partners Asset Management, a money manager based in Milwaukee, “is seeking as much as $333 million in an initial public offering today,” Bloomberg News reports. BLOOMBERG NEWS

Asian Airline May Revise Timing of I.P.O.  | 
BLOOMBERG NEWS

VENTURE CAPITAL »

Kleiner Perkins Vows to Improve Performance  |  Reuters reports: “Blue-chip venture-capital firm Kleiner Perkins Caufield & Byers expressed frustration with poor fund performance and promised to do better at gatherings for investors last month, according to people familiar with the discussions.” REUTERS

LEGAL/REGULATORY »

Former SAC Trader Gets More Time to Prepare Defense  |  A federal judge has granted a former employee of the hedge fund SAC Capital Advisors additional time to review the government’s evidence in an insider trading case brought against him. DealBook »

Microsoft Is Fined $732 Million in Europe Over Browser  |  The New York Times reports: “The European Commission on Wednesday fined Microsoft 561 million euros for failing to live up to a settlement agreement offering consumers a choice of Internet brosers.” NEW YORK TIMES

Former Wells Fargo Broker Is Sentenced to 2 Years  |  A former Wells Fargo broker who pleaded guilty to defrauding more than a dozen clients was sentenced to two years in jail. DealBook »

Dallas Mavericks Owner May Face S.E.C. Insider Trading Trial  |  A Federal District Court judge in Dallas denied a request by Mark Cuban to dismiss a nearly five-year-old insider-trading lawsuit brought against him by federal securities regulators. A June trial is scheduled. DealBook »

British Regulators Slow to Respond to Libor Scandal, Audit Says  |  British officials were too focused on containing the financial crisis to analyze information connected to potential interest-rate manipulation, an audit by the Financial Services Authority said on Tuesday. DealBook »

In Favor of a Tax on Financial Transactions  |  “After years of Wall Street excess, and at a moment when new revenues are badly needed, the time has surely come for a financial transaction tax,” Katrina vanden Heuvel writes in an opinion essay in The Washington Post. WASHINGTON POST

On Banker Bonuses, Britain Still Stands Alone  |  “The British government stood isolated on an important European Union issue Tuesday after finance ministers from elsewhere in the bloc rejected its effort to water down proposed limits on bankers’ bonuses,” The New York Times reports. NEW YORK TIMES

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Banks Say Libor Lawsuits Should Be Dismissed  | 
REUTERS

JPMorgan Resolves Dispute Over MF Global Claims  | 
REUTERS