JPMorgan Chase Faces Questions on Potential New Capital Rules

It’s often the case that when someone doesn’t want to talk about something, it only invites more questions.

That’s certainly how it felt on a conference call that JPMorgan Chase held Friday to discuss its second-quarter financial results. The earnings were relatively strong. Yet for much of the call, the stock analysts who cover JPMorgan asked questions about how a potentially nettlesome regulation might affect the bank.

The bank’s chief financial officer, Marianne Lake, was willing to discuss the subject, but only up to a point. There was one number she seemed to not want to reveal. The issue relates to something called the leverage ratio, a measure of how much capital a bank has.

Since the financial crisis of 2008, regulators have been introducing new rules on capital because they feel higher capital levels makes banks more able to weather storms. That’s because capital can act as a financial cushion that absorbs losses in troubled times. To measure whether it is sufficient, capital is often expressed as a percentage of a bank’s assets. For instance, a bank with $3 in capital and $100 in assets would have a leverage ratio of 3 percent.

This week, regulators proposed a new leverage ratio rule. They want large banks to hold capital that meets a certain percentage of assets, plus other risks embedded in their balance sheets. And it measures the ratios at different places in the bank’s corporate structure.

At the parent company, the leverage ratio would effectively have to be 5 percent. Meanwhile, regulators want the ratio to be 6 percent at the banking subsidiaries that are covered by federal deposit insurance.

The banks have two months to comment on the rules, during which they are almost certainly going to request changes. Once the proposed rules are put into effect, banks will have until the end of 2017 to comply with the new leverage ratios.

On Friday, JPMorgan Chase estimated that it was already close to meeting the 5 percent requirement at its holding company, saying it had enough capital to get to a 4.7 percent leverage ratio there.

Naturally, analysts also wanted to know whether JPMorgan Chase’s deposit-gathering subsidiaries, which are far larger than the holding company, were close to meeting the 6 percent requirement.

“Do you have any sense that you could give us of where you stand on the leverage ratio at the bank level today relative to the 6 percent requirement?” John McDonald, a bank analyst at Bernstein Research, asked on Friday.

Ms. Lake responded that she would not disclose the bank leverage ratio. She added that it was lower than at the holding company.

A few minutes later, Betsy Graseck, a bank analyst at Morgan Stanley, tried. “I’m just wondering why no bank-sub disclosure. I realize that is different, but â€" and I heard your answer earlier â€" but I’m just wondering,” she asked, why the number was not provided.

Ms. Lake replied, “So, Betsy, there’s nothing sinister underlying it.”

The chief financial officer did offer some hints, however.

She said the bank subsidiary leverage ratio would be “small tens of basis points” lower than the 4.7 percent level at the holding company. A basis point is a hundredth of a percentage point. Therefore, the leverage ratio for JPMorgan Chase’s bank subsidiaries might be around 4.4 percent.

Under the proposed rules, those entities would eventually have to increase their capital holdings so they are at 6 percent.

Right now, that would mean JPMorgan Chase would have to raise capital by $40 to $50 billion at the subsidiaries. Analysts at Goldman Sachs and Keefe, Bruyette & Woods estimate a shortfall of as much as $47 billion, which is a far higher theoretical dollar deficit than exists at other large banks’ insured subsidiaries.

(However, Bank of New York Mellon’s deficit is higher as a percentage of existing capital, according to Keefe, Bruyette & Woods).

A capital hole of nearly $50 billion is significant even for a bank as big and profitable as JPMorgan Chase. That may be why the bank didn’t want to go into further detail. The fact that its dollar deficit seems to dwarf that of other banks may also be a source of discomfort. For instance, Goldman analysts estimate Citigroup only falls short by $10 billion at its insured entities.

Mark Kornblau, a JPMorgan Chase spokesman, declined to add to what the bank’s executives said on the Friday call about the leverage ratio.

On that call, JPMorgan Chase executives said the bank could increase its leverage ratio at the bank subsidiaries by moving assets or unwinding derivatives, the financial contracts that generate substantial trading revenue for JPMorgan Chase (as well as some losses, as shown by the London whale debacle last year).

Indeed, if JPMorgan does end up getting hit harder by the new leverage ratio, it may not be a complete accident.

Regulators have long tolerated immense amounts of Wall Street business taking place within insured subsidiaries. But the proposed leverage ratio may be the regulators’ new way of forcing banks to hold higher capital to protect against potential trading losses in such entities.

Goldman Sachs estimates it would take JPMorgan Chase two and a half years to earn the capital it needs to plug the hypothetical gap at is subsidiaries. This matters for shareholders. Using earnings to bolster capital might restrict what the bank can pay out in dividends and spend on stock buybacks. On Friday, JPMorgan Chase’s chief executive, Jamie Dimon, said the bank could step up distributions to shareholders and meet the new leverage ratio requirements. A bank of JPMorgan Chase’s profitability probably can do both.

Still, shareholders might feel more confidence about that assertion if the bank had detailed just how much extra capital it might have to find.

AT&T to Buy Leap Wireless for $1.2 Billion

AT&T, thwarted by regulators nearly two years ago on a planned $39 billion acquisition of T-Mobile USA, is back in the merger hunt, albeit with a much smaller target.

The telecommunications giant said on Friday that it had agreed to acquire its smaller rival Leap Wireless International for nearly $1.2 billion, the latest sign of consolidation in the telecommunications industry.

AT&T is paying $15 a share in cash for Leap, a prepaid cellphone service provider â€" a premium of 88 percent from Leap’s closing price on Friday. Under the terms of the deal, AT&T would gain 5 million new customers and acquire Leap network, licenses and retail stores. Leap had $2.8 billion of net debt as of April 15.

Leap’s stock more than doubled in after-hours trading on Friday, climbing to almost $17 a share. It closed Friday at $7.98 a share.

Leap, based in San Diego, operates under the Cricket brand name, which AT&T plans to retain. Its network covers about 96 million people in 35 states.

“Cricket’s employees, operations and distribution will jump start AT&T’s expansion into the highly competitive prepaid segment,” said Brad Burns, AT&T spokesman.

The deal comes after months of speculation about the future of AT&T and other wireless companies. Smaller carriers like Sprint and T-Mobile have recently found merger partners, fueling questions about AT&T’s strategy.

AT&T previously approached Leap in 2011 while it was pursuing a deal with T-Mobile. At that time, AT&T discussed the possibility of selling a piece of T-Mobile’s customer accounts to Leap. But the T-Mobile deal was later blocked by regulators.

Since then, analysts have wondered how AT&T would find a partner to help it grow and defend against increasing competition. In June, a Spanish newspaper reported that authorities had blocked a bid by AT&T for Telefónica, the Spanish carrier.

The deal for Leap is unlikely to solve AT&T’s challenges, said Craig Moffett, a telecommunications analyst who recently started his own firm.

“It does not really change the trajectory of AT&T or its deal making,” Mr. Moffett said. “There’s not much that AT&T can do anymore in the United States. The rest of the wireless business is probably off limits for regulatory reasons.”

But for Leap, the deal “puts them out of their misery,” Mr. Moffett said. “The only real question for Leap is whether AT&T is the best and final offer.”

Driving the urgency of the consolidation is the hunt for valuable spectrum. Under Friday’s deal, Leap shareholders will receive a contingent right to net proceeds from the sale of spectrum in Chicago that Leap bought for $204 million in 2012.

If the deal goes through, Cricket customers will get access to AT&T’s 4G mobile network, and AT&T will expand Cricket’s reach. For AT&T, the deal will give it access to the prepaid market.

“The combined company will have the financial resources, scale and spectrum to better compete with other major national providers for customers interested in low-cost prepaid service,” AT&T said in a release on Friday.

AT&T said that shareholders representing about 29.8 percent of Leap’s stock have agreed to support the transaction, which is subject to a review by regulators. AT&T expects the deal to close in the next six to nine months.

Evercore Partners advised AT&T.

Lazard and the law firm Wachtell, Lipton, Rosen & Katz advised Leap.

Michael J. de la Merced contributed reporting.

Investor Hires Advisers in Push for Smithfield Breakup

An activist hedge fund has hired financial advisers to promote an alternative to the proposed $4.7 billion sale of Smithfield Foods to China’s largest producer of pork.

The hedge fund, Starboard Value, wrote to Smithfield’s board last month, arguing that the company â€" whose brands include Armour and Farmland â€" was worth more split up in pieces than a sale of it as a whole to Shuanghui International of China for $34 a share. The all-cash deal was announced in late May and is currently being reviewed by regulators.

Starboard disclosed in a securities filing on Friday that it had hired the boutique investment bank Moelis & Company and BDA Advisors. In the filing, the fund said it had agreed

to pay each such financial advisor in consideration of their respective services performed a fee based and conditioned upon the appreciation of Starboard’s ownership position in the Issuer above $34 per share over a specified period of time and in accordance with the terms and conditions specified therein.

The filing also showed that Starboard, which in the past has pushed to shake up AOL and Office Depot, now owns 5.7 percent of Smithfield, making it the second-largest shareholder after giant money manager BlackRock.

Foreign Banks Win New Delay in Tax Evasion Rule

Foreign banks on Friday won yet another delay in a sweeping Treasury Department law intended to end tax evasion by Americans and will now have until next July to begin complying with the requirements, the Internal Revenue Service said.

The unusually broad law, the Foreign Account Tax Compliance Act, or Fatca, requires foreign financial institutions, including banks and mutual funds, to either collect and disclose data on American clients with accounts holding at least $50,000, or to withhold 30 percent of the dividend, interest and other payments due those clients and to send that money to the I.R.S.

The latest unexpected rollback of the deadline, an extension of six months to July 1, 2014, underscores a struggle by the Treasury Department to enforce the new rules. The law was approved in 2010 amid heightened scrutiny of offshore private banking services sold to wealthy Americans, and it was originally scheduled  to go into effect last January. But in late 2012, facing heavy criticism, the government delayed its rollout until January 2014.

Foreign banks have argued that the regulation will cost too much to carry out and is too broad, particularly regarding cross-border payments on swaps and other derivatives. Many European financial trade groups have derided it as an imperialistic push by the United States to impose its own tax laws on the rest of the world. The United States taxes its citizens and residents on their worldwide income, regardless of where they live.

Kenneth Kies, a lobbyist in Washington, D.C., said that the extension “underscores what has been obvious â€" that this is an enormously complex and burdensome regime to deal with,” adding, “People just aren’t ready.”

Foreign financial institutions that do not comply with the law could face past-due tax bills and penalties of 40 percent of the amounts in question.

The Treasury Department, which oversees the I.R.S., has taken a two-pronged approach with the law. In some cases, it has signed broad agreements with countries that they, rather than individual banks, will collect and turn over data. Agreements have been signed with Britain, Ireland, Mexico and Spain, and dozens more are in the works, including some with offshore tax havens.

Robert Stack, the Treasury deputy assistant secretary for international tax affairs, said in a statement on the latest extension, “We are providing an additional six months to complete intergovernmental agreements with countries and jurisdictions across the globe.”

Critics of the law say that it is unclear how many other governments, including China’s, are actually willing to sign agreements. The Treasury Department “is behind where it expected to be,” said James G. Jatras, a lawyer and lobbyist against the law. “Why else would they need another six months to push everybody into the intergovernmental agreements?”

James Hines, a corporate taxation professor at the University of Michigan, said some foreign governments were refusing to cooperate with the new rules. “It puts the Treasury in a tough position,” he said. “It’s not clear how many delays they can have before Fatca starts to get undermined.”

U.S. Regulators Approve Stricter Trading Rules Abroad

Federal regulators in Washington reached a last-minute compromise on Friday to expand their oversight far beyond American shores, overcoming internal squabbles and Wall Street lobbying to rein in some of the overseas trading that imploded during the financial crisis.

The Commodity Futures Trading Commission voted 3 to 1 to adopt its so-called cross-border guidance, a deal struck just hours before a self-imposed deadline was set to expire. Gary Gensler, the agency’s chairman and a fierce critic of Wall Street risk-taking, applauded the decision to approve the guidance, which dictates how to apply United States trading regulations to American banks doing business in London and beyond.

Yet the agency’s battle, both internally and with Wall Street, will drag on for months.

While firms like Goldman Sachs International and the London branch of Citigroup will face a wave of new scrutiny, the agency made crucial concessions to big banks, which could delay when the rules take effect. Most notably, the requirements will be phased in over several months and the agency will defer to European regulators if they adopt similar rules.

The agency also afforded Wall Street additional time to comment on the plan to phase in the regulation, inviting an onslaught of lobbying from banks that could seek more time. One financial group, the Institute of International Bankers, called the agency’s announcements “a big step forward” to a “workable approach.”

Dennis M. Kelleher, president and chief executive of Better Markets, a nonprofit advocacy group, said, “It’s the lobbyist full employment act.” While he praised Mr. Gensler for securing a deal, he added that “this mixed bag of some very good, some not-so-good and some to-be-determined provisions will mean that Wall Street’s war on regulation of high-risk cross-border derivatives dealing will not end today.”

This delay could be costly. Mr. Gensler, a former Goldman Sachs executive who has been an aggressive regulator, is expected to leave the agency before the end of the year. His departure could leave certain aspects of the cross-border plan in the hands of someone who might not adopt as tough a stance toward the banks.

Even with the compromise, however, the guidance is a victory for Mr. Gensler, who had vowed to meet the Friday deadline without fully caving in to Wall Street’s demands. The 2008 crisis, he noted, demonstrated the huge risks of overseas trading to financial stability.

“At the center of this crisis were the far-flung operations of U.S. financial institutions,” he said in an interview. “What we did is kept those lessons in mind and kept our eye on protecting the American public.”

Trades by a London unit of the insurance giant American International Group, he noted, nearly toppled the company. And JPMorgan Chase’s $6 billion trading loss in London last year reignited concerns that risk-taking could come crashing back to American shores.

The crisis led Congress to enact the Dodd-Frank Act in 2010, a law that mandated an overhaul of the $700 trillion marketplace for derivatives, financial contracts that derive their value from an underlying asset like a bond or an interest rate. Under that law, the trading commission is supposed to extend new derivatives changes â€" including tougher capital standards, a requirement that trades go through regulated clearinghouses and other requirements â€" if overseas trading has “a direct and significant connection with activities” of the United States.

Over the last year, the agency has battled infighting over how aggressively to interpret the law, and when to do it.

The guidance, the most contentious issue facing the agency, had strong support from Mr. Gensler and Bart Chilton, a fellow Democratic commissioner at the agency who also supported completing the guidance by the Friday deadline. Mr. Chilton noted that, with the deadline coming three years after Dodd-Frank was passed, “It didn’t just sneak up on us.”

But Mark P. Wetjen, a Democratic commissioner with an independent streak, had expressed concern that the Friday deadline was “arbitrary.”

With the agency’s Republican commissioner, Scott D. O’Malia, opposing the guidance, Mr. Wetjen held the swing vote.

A compromise appeared unlikely until Wednesday, people close to the agency said, when Mr. Wetjen and Mr. Gensler reached a deal in principle.

A central component of Mr. Gensler’s final plan will apply the Dodd-Frank rules to overseas firms that are guaranteed by an American bank, including Goldman Sachs International. Foreign branches like the British branch of JPMorgan Chase, where the recent losses occurred, will also face the agency’s oversight.

Mr. Gensler also included offshore hedge funds, many based in the Cayman Islands, so long as their “nerve center” is based in the United States.

But Mr. Gensler’s victory came with some sacrifice. He agreed, for example, to defer to foreign regulators in Europe and elsewhere that have adopted “comparable and comprehensive” regulations to Dodd-Frank. It is up to Mr. Gensler’s agency to decide whether the other regulators’ rules meet the standard.

While European regulators have adopted many similar rules, authorities in Hong Kong, Switzerland and elsewhere have fallen far behind. Unless those regulators catch up by December, Dodd-Frank will apply to American banks doing business in those regions.

In another concession to Mr. Wetjen, Mr. Gensler agreed to delay the requirements, so the start date for most banks for the new rules would be Dec. 21. In soliciting the additional comments from Wall Street, the agency also signaled that it was open to a longer delay.

The compromise traces to a plan that Mr. Chilton floated in June. While he noted that foreign regulators could use the additional time to catch up, he also argued that the agency should not delay indefinitely.

“Like in the movie ‘Field of Dreams,’ when the voice from the corn field says, ‘If you build it, he will come,’ ” Mr. Chilton said on Friday. “I’ve said repeatedly that if we and the E.U. build balanced and fairly harmonized financial regulatory regimes, the rest of the world will come.”

Bringing Bank Regulation to the Masses

BONN â€" In the arcane world of bank regulation, it is a provocative idea: Force bankers to plow all their profit back into their balance sheets until they have built up such a large pile of capital that no one need ever again worry about bailing them out.

That is a central proposal put forth by Anat Admati and Martin Hellwig in their book ‘‘The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It.’’ Released in February and now ranked 10th on Amazon’s list of books on banking, the book is attracting attention not only for arguments that seem designed to give bankers nightmares but also for its attempt to make a dry subject appealing to ordinary people. It is bank regulation as beach reading.

Among well-known economists at prestigious institutions, it is unusual to write a book featuring a fictional character â€" in this case, one named Kate, whose mortgage and borrowing habits are used throughout the text to explain the principles of leverage.

But Ms. Admati, a Stanford University professor, said that she and Mr. Hellwig, co-director of a branch of the Max Planck Society research organization in Bonn, became frustrated as, they perceived, policy makers and the news media swallowed arguments made by the banking lobby that, in their view, were ‘‘absolute nonsense.’’

Ms. Admati refers to it as ‘‘big shotness,’’ the tendency for people to concede to the wealthy and powerful. ‘‘The problem with banking is people give it a pass on everything,’’ she said by phone from California. ‘‘All of a sudden the laws of nature don’t apply. It’s staggering.’’

‘‘Buzz’’ may be too strong a word for the reaction generated by a book that is about topics like risk-weighted assets, return on equity and the deliberations of the Basel Committee on Banking Supervision. But, in a sign that ‘‘Bankers’ New Clothes’’ has been attracting notice, it has been cited in a speech by Thomas M. Hoenig, vice chairman of the Federal Deposit Insurance Corporation, and an academic paper by Andy Haldane, executive director of financial stability at the Bank of England. Paul A. Volcker, former chairman of the Federal Reserve, and Mervyn A. King, former governor of the Bank of England, supplied blurbs for the book’s jacket.

Ms. Admati and Mr. Hellwig are prominent among a larger group of economists who have been arguing for years that banks remain dangerously dependent on leverage and prone to disasters that taxpayers would have to clean up. Lately, there are signs that their arguments are prevailing against those of the banking industry.

Last Tuesday in Washington, the Federal Reserve Board, the F.D.I.C and the Office of the Comptroller of the Currency proposed doubling the minimum amount of capital that the eight largest United States banks would be required to maintain.

The day before, the Basel Committee on Banking Supervision, a group of regulators and central bankers that sets regulatory benchmarks for the United States, Europe and most large countries, issued a discussion paper indicating that it may also advocate higher capital requirements for the largest global banks, in addition to rules already agreed upon.

‘‘Clearly, after what happened in the last six years, the global consensus has been that there wasn’t enough capital,’’ Stefan Ingves, governor of the Swedish central bank and chairman of the Basel Committee, said by phone. ‘‘There will be a continuous debate about what the level of capital should be.’’

The central issue in ‘‘Bankers’ New Clothes,’’ as well as in policy-making circles, is how much of their own money banks should be required to use when making loans or other investments, and how much they may borrow. The Basel Committee rules as written now would allow banks to borrow up to 97 percent of the money they lend or invest. The remaining 3 percent, known as a leverage ratio, would have to be capital, either retained bank profit or shares of the bank’s own stock. The new Fed proposal would raise the leverage ratio for large United States banks to 6 percent.

Banking industry representatives argue that a 3 percent leverage ratio, which would not become mandatory until 2019 under the Basel rules, is already enough and that it is too early to raise it further.

‘‘We need to give it some time,’’ said Kevin Nixon, deputy managing director of the Institute of International Finance, an organization that represents most of the world’s largest banks. ‘‘There is an urgency to keep doing things when we haven’t yet seen the reform actually become embedded in the system.’’

Requiring banks to maintain too much capital would stifle lending and hurt economic growth, Mr. Nixon said, repeating an assertion made often by the banking industry. ‘‘You need to think very carefully about the impact on economy,’’ he said.

That is one of the arguments that Ms. Admati and Mr. Hellwig find spurious. A 3 percent leverage ratio, they write, means that a bank goes bankrupt if the value of its assets loses more than 3 percent in value. The only people who benefit from so much risk, they say, are the bankers, and only because they assume that taxpayers will bail them out.

Many of the banks that required bailouts after the financial crisis in 2008 were highly leveraged, including UBS in Switzerland and Hypo Real Estate in Germany. Lehman Brothers, whose failure helped precipitate the crisis, was also highly leveraged. Ms. Admati and Mr. Hellwig advocate a leverage ratio of 20 percent or even 30 percent to protect society from the economic destruction created by a large-scale banking crisis. Banks themselves would never grant loans to companies that had only 3 percent equity, the authors write.

They argue that there is no reason why healthy banks cannot raise more capital by retaining profits or selling new shares. The only thing banks and their shareholders would lose is the de facto free insurance against losses that they receive because governments cannot allow them to fail.

‘‘Society would obtain large benefits for free,’’ write Ms. Admati and Mr. Hellwig, whose professional association began when she consulted him on her doctoral work in the 1980s. ‘‘The Bankers’ New Clothes’’ grew from a paper â€" Ms. Admati calls it a manifesto â€" that they wrote in 2010 with two other Stanford professors, Peter M. DeMarzo and Paul C. Pfleiderer.

There is a large body of research showing a correlation between excessive leverage and failure of banks like Dexia, the Franco-Belgian institution that required a second bailout in 2011. But many economists are frustrated by the quality of the public debate about regulation, said Simon Taylor, director of the master of finance program at Judge Business School at Cambridge University.

‘‘The academic world has been exasperated at the quality of the arguments being put forward by the banks and the fact they weren’t being challenged,’’ said Mr. Taylor, who has praised ‘‘Bankers’ New Clothes’’ on his blog. ‘‘That’s where a lot of the anger â€" I think it is anger â€" is coming from. Basic principles of corporate finance were not being acknowledged.’’

The book is also aimed at what the authors consider an ill-informed media. Mr. Hellwig said he was surprised to learn from Ms. Admati that many American business journalists spent college studying subjects like literature rather than economics. German financial journalists, on the other hand, tend to have an economics background, he said. Policy makers, they say, are also often misinformed.

‘‘When Anat went to discuss these things in the political arena, she found there were many people who simply did not understand,’’ Mr. Hellwig said in an interview conducted by this reporter, a former history major. Mr. Hellwig, whose cluttered office is in a spacious villa a short walk from the Rhine, has long been involved in public policy. He serves on panels that advise the German government on economics and the European Commission on competition policy.

But he said he had no illusions about the ability of economists to influence public officials, who in Germany and France have tried to shield banks from too many leverage restrictions. ‘‘What is important,’’ Mr. Hellwig said, ‘‘is to contribute to the public debate and force the vested interests, force the politicians, to be clear on why they are doing these things and bear the cost of having the weaker arguments.’’

Bringing Bank Regulation to the Masses

BONN â€" In the arcane world of bank regulation, it is a provocative idea: Force bankers to plow all their profit back into their balance sheets until they have built up such a large pile of capital that no one need ever again worry about bailing them out.

That is a central proposal put forth by Anat Admati and Martin Hellwig in their book ‘‘The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It.’’ Released in February and now ranked 10th on Amazon’s list of books on banking, the book is attracting attention not only for arguments that seem designed to give bankers nightmares but also for its attempt to make a dry subject appealing to ordinary people. It is bank regulation as beach reading.

Among well-known economists at prestigious institutions, it is unusual to write a book featuring a fictional character â€" in this case, one named Kate, whose mortgage and borrowing habits are used throughout the text to explain the principles of leverage.

But Ms. Admati, a Stanford University professor, said that she and Mr. Hellwig, co-director of a branch of the Max Planck Society research organization in Bonn, became frustrated as, they perceived, policy makers and the news media swallowed arguments made by the banking lobby that, in their view, were ‘‘absolute nonsense.’’

Ms. Admati refers to it as ‘‘big shotness,’’ the tendency for people to concede to the wealthy and powerful. ‘‘The problem with banking is people give it a pass on everything,’’ she said by phone from California. ‘‘All of a sudden the laws of nature don’t apply. It’s staggering.’’

‘‘Buzz’’ may be too strong a word for the reaction generated by a book that is about topics like risk-weighted assets, return on equity and the deliberations of the Basel Committee on Banking Supervision. But, in a sign that ‘‘Bankers’ New Clothes’’ has been attracting notice, it has been cited in a speech by Thomas M. Hoenig, vice chairman of the Federal Deposit Insurance Corporation, and an academic paper by Andy Haldane, executive director of financial stability at the Bank of England. Paul A. Volcker, former chairman of the Federal Reserve, and Mervyn A. King, former governor of the Bank of England, supplied blurbs for the book’s jacket.

Ms. Admati and Mr. Hellwig are prominent among a larger group of economists who have been arguing for years that banks remain dangerously dependent on leverage and prone to disasters that taxpayers would have to clean up. Lately, there are signs that their arguments are prevailing against those of the banking industry.

Last Tuesday in Washington, the Federal Reserve Board, the F.D.I.C and the Office of the Comptroller of the Currency proposed doubling the minimum amount of capital that the eight largest United States banks would be required to maintain.

The day before, the Basel Committee on Banking Supervision, a group of regulators and central bankers that sets regulatory benchmarks for the United States, Europe and most large countries, issued a discussion paper indicating that it may also advocate higher capital requirements for the largest global banks, in addition to rules already agreed upon.

‘‘Clearly, after what happened in the last six years, the global consensus has been that there wasn’t enough capital,’’ Stefan Ingves, governor of the Swedish central bank and chairman of the Basel Committee, said by phone. ‘‘There will be a continuous debate about what the level of capital should be.’’

The central issue in ‘‘Bankers’ New Clothes,’’ as well as in policy-making circles, is how much of their own money banks should be required to use when making loans or other investments, and how much they may borrow. The Basel Committee rules as written now would allow banks to borrow up to 97 percent of the money they lend or invest. The remaining 3 percent, known as a leverage ratio, would have to be capital, either retained bank profit or shares of the bank’s own stock. The new Fed proposal would raise the leverage ratio for large United States banks to 6 percent.

Banking industry representatives argue that a 3 percent leverage ratio, which would not become mandatory until 2019 under the Basel rules, is already enough and that it is too early to raise it further.

‘‘We need to give it some time,’’ said Kevin Nixon, deputy managing director of the Institute of International Finance, an organization that represents most of the world’s largest banks. ‘‘There is an urgency to keep doing things when we haven’t yet seen the reform actually become embedded in the system.’’

Requiring banks to maintain too much capital would stifle lending and hurt economic growth, Mr. Nixon said, repeating an assertion made often by the banking industry. ‘‘You need to think very carefully about the impact on economy,’’ he said.

That is one of the arguments that Ms. Admati and Mr. Hellwig find spurious. A 3 percent leverage ratio, they write, means that a bank goes bankrupt if the value of its assets loses more than 3 percent in value. The only people who benefit from so much risk, they say, are the bankers, and only because they assume that taxpayers will bail them out.

Many of the banks that required bailouts after the financial crisis in 2008 were highly leveraged, including UBS in Switzerland and Hypo Real Estate in Germany. Lehman Brothers, whose failure helped precipitate the crisis, was also highly leveraged. Ms. Admati and Mr. Hellwig advocate a leverage ratio of 20 percent or even 30 percent to protect society from the economic destruction created by a large-scale banking crisis. Banks themselves would never grant loans to companies that had only 3 percent equity, the authors write.

They argue that there is no reason why healthy banks cannot raise more capital by retaining profits or selling new shares. The only thing banks and their shareholders would lose is the de facto free insurance against losses that they receive because governments cannot allow them to fail.

‘‘Society would obtain large benefits for free,’’ write Ms. Admati and Mr. Hellwig, whose professional association began when she consulted him on her doctoral work in the 1980s. ‘‘The Bankers’ New Clothes’’ grew from a paper â€" Ms. Admati calls it a manifesto â€" that they wrote in 2010 with two other Stanford professors, Peter M. DeMarzo and Paul C. Pfleiderer.

There is a large body of research showing a correlation between excessive leverage and failure of banks like Dexia, the Franco-Belgian institution that required a second bailout in 2011. But many economists are frustrated by the quality of the public debate about regulation, said Simon Taylor, director of the master of finance program at Judge Business School at Cambridge University.

‘‘The academic world has been exasperated at the quality of the arguments being put forward by the banks and the fact they weren’t being challenged,’’ said Mr. Taylor, who has praised ‘‘Bankers’ New Clothes’’ on his blog. ‘‘That’s where a lot of the anger â€" I think it is anger â€" is coming from. Basic principles of corporate finance were not being acknowledged.’’

The book is also aimed at what the authors consider an ill-informed media. Mr. Hellwig said he was surprised to learn from Ms. Admati that many American business journalists spent college studying subjects like literature rather than economics. German financial journalists, on the other hand, tend to have an economics background, he said. Policy makers, they say, are also often misinformed.

‘‘When Anat went to discuss these things in the political arena, she found there were many people who simply did not understand,’’ Mr. Hellwig said in an interview conducted by this reporter, a former history major. Mr. Hellwig, whose cluttered office is in a spacious villa a short walk from the Rhine, has long been involved in public policy. He serves on panels that advise the German government on economics and the European Commission on competition policy.

But he said he had no illusions about the ability of economists to influence public officials, who in Germany and France have tried to shield banks from too many leverage restrictions. ‘‘What is important,’’ Mr. Hellwig said, ‘‘is to contribute to the public debate and force the vested interests, force the politicians, to be clear on why they are doing these things and bear the cost of having the weaker arguments.’’

Week in Review: Reining in American Banks in London

Deal reached to rein in overseas trading. | Kroger buys rival grocer Harris Teeter, citing potential for growth. | U.S. vows to battle abusive bill collectors. | S.E.C. hopes for validation in a Goldman Sachs trader case. Andrew Ross Sorkin says Fabrice Tourre’s day in court may lack some details. | Regulators seek stiffer bank rules on capital. | Ronald Perelman sues old friend Michael Milken (Not to worry. It isn’t personal.). | Regulators examining sales of early financial data. | Many paths remain for a case against SAC.

A look back on our reporting of the past week’s highs and lows in finance.

Senators Question Chinese Takeover of Smithfield | Several senators said they feared that promises by Shuanghui International would not be honored over the long term. DealBook »

Kroger Buys Rival Grocer Harris Teeter, Citing Potential for Growth | The nation’s second-largest retailer is buying an upscale grocer known for fresh foods and produce, in a deal valued at about $2.44 billion. DealBook »

Big Seal of Approval for Dell Founder’s Buyout Bid | Institutional Shareholder Services recommended that Dell investors accept the $24.4 billion offer made by the company’s founder and chief executive, Michael S. Dell. DealBook »

LVMH Is Buying the Luxury Clothier Loro Piana | Sergio and Pier Luigi Loro Piana, the co-chief executives who are great-great-grandchildren of the cloth merchant Giacomo Loro Piana, will continue to run the company. DealBook »

Deal Professor: A Standard Criticism of Activist Investors That No Longer Holds Up | Studies have shown that “short-term” hedge funds can actually create long-term value for a company, says Steven M. Davidoff. DealBook »

Potential for Deals Drives a Big Surge in the Biotech Sector | There were five acquisitions in the second quarter, six initial public offerings in June and five more expected soon as big pharmaceutical companies to home in on smaller biotechnology firms. DealBook »

Senators Introduce Bill to Separate Trading Activities From Big Banks | Senator Elizabeth Warren and Senator John McCain are sponsoring a 21st-century version of the Glass-Steagall Act from the 1930s, to break up large banks. DealBook »

16 Senators Seek Inquiry of A.T.M.-Style Pay Cards | Instead of paper checks or direct deposit, employers are issuing A.T.M.-style cards that can have large fees associated with them. DealBook »

Deal Reached to Rein in Overseas Trading | Regulators in Washington agreed in principle on a plan to rein in risky trading by banks overseas, a truce that follows a messy split in the Commodity Futures Trading Commission. DealBook »

S.E.C. Rule Allows Ads on Private Offerings | The end of an 80-year-old ban on advertising by hedge funds, buyout firms and start-up companies seeking capital will fundamentally change the way that many issuers raise money in the private marketplace. DealBook »

State Inquiry Into Sale of Risky Investments | Massachusetts’s top financial regulator has subpoenaed 15 firms as part of an investigation into the practice of selling complex financial products to unsophisticated customers. DealBook »

U.S. Vows to Battle Abusive Bill Collectors | The Consumer Financial Protection Bureau says it has the authority to regulate debt collection practices, and other agencies are moving against aggressive practices. DealBook »

S.E.C. Hopes for Validation in Goldman Trader Case | For Fabrice Tourre, an unfavorable verdict could yield a fine, or a ban from the securities industry. For the S.E.C., the trial is a defining moment that follows one courtroom disappointment after another. DealBook »

• DealBook Column: Trader’s Day in Court May Lack Some Details | Fabrice Tourre’s case is seen within the S.E.C. and on Wall Street as a referendum on Goldman Sachs. But all of the details might not be presented, says Andrew Ross Sorkin. DealBook »

Regulators Seek Stiffer Bank Rules on Capital | The proposal would increase the financial cushion banks must maintain to protect their assets in a crisis. DealBook »

NYSE EuroNext to Take Over Administration of Libor | The move is a symbolic blow to a British financial industry that has been rocked by scandals and forced to look to the outside for leadership. DealBook »

Regulators Examining Sales of Early Financial Data | The New York attorney general’s office is taking a close look at a common practice that allows trading firms to pay data providers like Thomson Reuters and Dow Jones for early access to market-moving news and information. DealBook »

• Reuters to Suspend Early Peeks at Key Index | Yielding to pressure from New York’s attorney general, Thomson Reuters is expected to suspend the early release of a closely watched consumer confidence index to clients willing to pay extra. DealBook »

Perelman Sues Old Friend Milken (Not to Worry. It Isn’t Personal.) | One of Ronald Perelman’s companies has sued Michael Milken and others on accusations of fraud. DealBook »

Madoff Case Puts Focus on the Duties of Custodial Banks | A lawsuit brought by investors who lost $60 million in Bernard L. Madoff’s Ponzi scheme claims that Westport National Bank failed to protect their money. DealBook »

Pension Effort Aims to Ease Burden on States and Cities | A proposal by Senator Orrin Hatch of Utah aims to enable governments to turn their pension plans over to life insurers. DealBook »

Britain Backs Rules Aimed at Stemming Risky Banking | The chancellor of the Exchequer said the government would adopt the wide-ranging proposals, including measures that could have bankers facing jail time for poor business decisions. DealBook »

Many Paths Remain for a Case Against SAC | Prosecutors continue to consider insider trading charges against SAC Capital Advisors, despite a setback. DealBook »

‘Stormy Weather’ | In 1933, Congress passed the Glass-Steagall Act and Ethel Waters topped the charts with a song about a “Sharknado.” YouTube »

Week in Review: Reining in American Banks in London

Deal reached to rein in overseas trading. | Kroger buys rival grocer Harris Teeter, citing potential for growth. | U.S. vows to battle abusive bill collectors. | S.E.C. hopes for validation in a Goldman Sachs trader case. Andrew Ross Sorkin says Fabrice Tourre’s day in court may lack some details. | Regulators seek stiffer bank rules on capital. | Ronald Perelman sues old friend Michael Milken (Not to worry. It isn’t personal.). | Regulators examining sales of early financial data. | Many paths remain for a case against SAC.

A look back on our reporting of the past week’s highs and lows in finance.

Senators Question Chinese Takeover of Smithfield | Several senators said they feared that promises by Shuanghui International would not be honored over the long term. DealBook »

Kroger Buys Rival Grocer Harris Teeter, Citing Potential for Growth | The nation’s second-largest retailer is buying an upscale grocer known for fresh foods and produce, in a deal valued at about $2.44 billion. DealBook »

Big Seal of Approval for Dell Founder’s Buyout Bid | Institutional Shareholder Services recommended that Dell investors accept the $24.4 billion offer made by the company’s founder and chief executive, Michael S. Dell. DealBook »

LVMH Is Buying the Luxury Clothier Loro Piana | Sergio and Pier Luigi Loro Piana, the co-chief executives who are great-great-grandchildren of the cloth merchant Giacomo Loro Piana, will continue to run the company. DealBook »

Deal Professor: A Standard Criticism of Activist Investors That No Longer Holds Up | Studies have shown that “short-term” hedge funds can actually create long-term value for a company, says Steven M. Davidoff. DealBook »

Potential for Deals Drives a Big Surge in the Biotech Sector | There were five acquisitions in the second quarter, six initial public offerings in June and five more expected soon as big pharmaceutical companies to home in on smaller biotechnology firms. DealBook »

Senators Introduce Bill to Separate Trading Activities From Big Banks | Senator Elizabeth Warren and Senator John McCain are sponsoring a 21st-century version of the Glass-Steagall Act from the 1930s, to break up large banks. DealBook »

16 Senators Seek Inquiry of A.T.M.-Style Pay Cards | Instead of paper checks or direct deposit, employers are issuing A.T.M.-style cards that can have large fees associated with them. DealBook »

Deal Reached to Rein in Overseas Trading | Regulators in Washington agreed in principle on a plan to rein in risky trading by banks overseas, a truce that follows a messy split in the Commodity Futures Trading Commission. DealBook »

S.E.C. Rule Allows Ads on Private Offerings | The end of an 80-year-old ban on advertising by hedge funds, buyout firms and start-up companies seeking capital will fundamentally change the way that many issuers raise money in the private marketplace. DealBook »

State Inquiry Into Sale of Risky Investments | Massachusetts’s top financial regulator has subpoenaed 15 firms as part of an investigation into the practice of selling complex financial products to unsophisticated customers. DealBook »

U.S. Vows to Battle Abusive Bill Collectors | The Consumer Financial Protection Bureau says it has the authority to regulate debt collection practices, and other agencies are moving against aggressive practices. DealBook »

S.E.C. Hopes for Validation in Goldman Trader Case | For Fabrice Tourre, an unfavorable verdict could yield a fine, or a ban from the securities industry. For the S.E.C., the trial is a defining moment that follows one courtroom disappointment after another. DealBook »

• DealBook Column: Trader’s Day in Court May Lack Some Details | Fabrice Tourre’s case is seen within the S.E.C. and on Wall Street as a referendum on Goldman Sachs. But all of the details might not be presented, says Andrew Ross Sorkin. DealBook »

Regulators Seek Stiffer Bank Rules on Capital | The proposal would increase the financial cushion banks must maintain to protect their assets in a crisis. DealBook »

NYSE EuroNext to Take Over Administration of Libor | The move is a symbolic blow to a British financial industry that has been rocked by scandals and forced to look to the outside for leadership. DealBook »

Regulators Examining Sales of Early Financial Data | The New York attorney general’s office is taking a close look at a common practice that allows trading firms to pay data providers like Thomson Reuters and Dow Jones for early access to market-moving news and information. DealBook »

• Reuters to Suspend Early Peeks at Key Index | Yielding to pressure from New York’s attorney general, Thomson Reuters is expected to suspend the early release of a closely watched consumer confidence index to clients willing to pay extra. DealBook »

Perelman Sues Old Friend Milken (Not to Worry. It Isn’t Personal.) | One of Ronald Perelman’s companies has sued Michael Milken and others on accusations of fraud. DealBook »

Madoff Case Puts Focus on the Duties of Custodial Banks | A lawsuit brought by investors who lost $60 million in Bernard L. Madoff’s Ponzi scheme claims that Westport National Bank failed to protect their money. DealBook »

Pension Effort Aims to Ease Burden on States and Cities | A proposal by Senator Orrin Hatch of Utah aims to enable governments to turn their pension plans over to life insurers. DealBook »

Britain Backs Rules Aimed at Stemming Risky Banking | The chancellor of the Exchequer said the government would adopt the wide-ranging proposals, including measures that could have bankers facing jail time for poor business decisions. DealBook »

Many Paths Remain for a Case Against SAC | Prosecutors continue to consider insider trading charges against SAC Capital Advisors, despite a setback. DealBook »

‘Stormy Weather’ | In 1933, Congress passed the Glass-Steagall Act and Ethel Waters topped the charts with a song about a “Sharknado.” YouTube »

Google Executives Discuss YouTube, the Phone Business and Taxes

SUN VALLEY, Idaho â€" It’s a gathering where many executives make it a point to stay largely mum. But Google’s representatives at the Allen & Company media and technology conference here used their time to promote their business.

At a news conference that began with the teasing of a forthcoming Android phone made by Google’s Motorola unit, representatives of the technology giant depicted a company that has moved far beyond search ads.

Here are some of the highlights of the Google executives’ comments:

• Much of the session centered on YouTube, which the company is continuing to move toward a quasi-TV model, built on channels instead of search. Salar Kamangar, the Google veteran who now leads the video service, spoke about his efforts to build up content, with payouts to partners rising 60 percent over the past year.

  “You can’t have the MTV of the future,” he said, “if these partners aren’t making money.”

  And that promise of profitability is becoming more important as Google seeks to realize its vision of an ever-more expansive set of offerings. Just as the shift from broadcast television to cable added more channels, the Internet offers the prospect of even more viewing opportunities: imagine, Mr. Kamangar said, watching a football game and being able to pick from multiple helmet-camera views.

  Eric Schmidt, Google’s executive chairman, added that he and his colleagues had met with “every single possible person, multiple times” at the conference.

  The company, they said, wasn’t standing pat in the changing landscape of consumer consumption. Roughly 40 percent of YouTube’s traffic now comes from mobile, Mr. Kamangar said, and his team is working on ways to make advertising work in that medium.

• But what would probably remain for some time, Mr. Schmidt said, was the traditional offering of video services as bundles. Though many consumers have called for so-called à la carte offerings â€" being able to pay less to subscribe to, say, Food Network while skipping ESPN â€" he argued that many issues with taking apart those bundles have yet to be solved.
• Tied to online video is the Google Fiber ultrafast Internet services project. Now available in three cities, the endeavor has outperformed expectations, Mr. Schmidt said, adding that companies are being established in homes to take advantage of exceptionally speedy service.
• While shying away from the word “dominate,” Mr. Schmidt was pleased to note the leading position of Google’s Android mobile operating system. Picking up the phone of his colleague Nikesh Arora, a Galaxy S4, he noted that the device had become a true challenger to Apple’s iPhone â€" even outselling it in some markets.

  One matter that Mr. Schmidt and Mr. Arora, who is Google’s chief business officer, said they aren’t worried about is the enormous dominance of the Galaxy’s manufacturer, Samsung. Though analyst reports have noted that the Korean conglomerate dominates sales of Android devices, the Google executives offered nothing but praise for its strong operating prowess and salesmanship.

  “If you want to pick a great partner, Samsung is a great partner,” Mr. Schmidt said. “Look at what Samsung has accomplished.”

• One area that Google remains concerned about is the telecommunications industry, with phone companies often hamstrung by government regulations. In the United States and Western Europe, service providers have struggled with low or no growth, hampering the ability to innovate in mobile, Mr. Schmidt said.

  “My friends, whom we are critically dependent on, are having problems,” he said.

• Mr. Schmidt reiterated that Google in no way offers the federal government a direct path into its servers, following up on strongly worded denials by the company’s general counsel. But he said that he remains concerned about the transparency of the National Security Agency’s surveillance programs, adding that the company is seeking legal ways to disclose more information about its compliance with government requests.

  “We’re very happy to discuss this â€" if the law allowed us to do that,” he said.

• In the wake of a British parliamentary committee’s scathing criticism of Google’s tax policies â€" the panel contended that the company doesn’t pay its fair share â€" Mr. Schmidt said that the company complies with the law. He said that Google’s current global tax rate is about 19.5 percent, with the rates in individual countries higher or lower depending on the regime.

  “It’s an outcome of the way the global tax system works,” he said. “If the tax law changes, we will pay the taxes.”

  In Britain specifically, Mr. Schmidt added that the company had an enormous opportunity with the construction of a new campus in London’s Shoreditch area. The project could add as many as 5,000 new employees and could raise Google’s tax bill.

  “We’re doing a lot to invest,” he said.

• Despite sometimes strained relations between two once-friendly companies, Google and Apple Inc. are on “better” terms now, the executives said. Mr. Arora has arranged many meetings, Mr. Schmidt said, and the two are in constant talks.

  “These are two proud, well-run, different companies,” Mr. Schmidt said.

  And the two will remain at the top of the technology heap for some time, he said, sticking to a prediction three years ago that four companies would dominate device platforms: Apple, Amazon.com, Google and Facebook.

  As luck would have it, Apple’s chief executive, Timothy Cook, happened to walk by the news event a number of times, with photographers immediately moving to snap pictures.

  “Tim, everyone wants to take your picture,” Mr. Arora called out. The Apple chief merely smiled and kept walking.

  “We got Tim to smile,” Mr. Schmidt told the reporters. “That’s always a good thing.”

The Fairness of a Split-Second Advantage for Traders

Regulators are taking a second look at media companies that try to generate revenue by charging fees for early access to financial information, says James B. Stewart, the Common Sense columnist for The New York Times. Read more »

The Fairness of a Split-Second Advantage for Traders

Regulators are taking a second look at media companies that try to generate revenue by charging fees for early access to financial information, says James B. Stewart, the Common Sense columnist for The New York Times. Read more »

What It Takes to Fully Engage Your Employees

Over the 15 years I’ve been consulting in the corporate world, I’ve only met a handful of senior leaders wgi had as a primary goal for their companies making a positive difference in the world.

Surely, there are more such people, including a good number who are highly philanthropic outside their work. Still, as best as I can tell, higher purpose is not a common characteristic of the corporate world.

I don’t say this to bash business, nor to make a moral case for why leaders ought to focus more on serving the greater good. I fully understand that a primary obligation of any business is to earn a profit, and that without one, nothing else is possible. I also know that no amount of righteous haranguing is going to prompt leaders to fully embrace priorities beyond the bottom line.

But what if they believed that articulating and embracing a nobler purpose would help them to attract, inspire and retain better employees, and ultimately make their companies more profitable?

As John Mackey and Raj Sisodia put it in their book “Conscious Capitalism,” “Just as happiness is best experienced by not aiming for it directly, profits are best achieved by not making them the primary goal of the business. They are the outcome when companies do business with a higher sense of purpose.”

Professor Sisodia’s research, which I’ve cited before, suggests that “conscious companies”â€" characterized in part by an explicit commitment to a higher purpose - outperformed the Standard & Poor’s 500-stock index from 1996 to 2011 by an astonishing 10.5 to 1.

Much of this is common sense. All things being equal, would you rather work at a company focused solely on maximizing profits, or one with a deep commitment to adding real value to the world through its products, practices and services? Wouldn’t you find a greater sense of meaning by working for the latter, feel a greater sense of commitment and be less likely to leave?

Employee engagement in the United States (and throughout most of the world) remains depressingly low. According to the latest Gallup poll, 70 percent of Americans are either not engaged or are actively disengaged from their companies. According to Gallup, the cost to productivity just from the actively disengaged employees is $450 billion to $550 billion a year.

In the simplest terms, a purpose defines the difference an organization is trying to make in the world. In some cases, that’s a natural and straightforward outgrowth of what the organization actually does to earn a profit.

Whole Foods, for example, is explicitly committed to helping people to eat well, as a way to improve the quality of their lives and increase their lifespan.

Patagonia sets out to model sustainable environmental practices by taking complete responsibility for every product it makes - repairing, recycling and helping people sell those products when they no longer need them.

Eileen Fisher, the clothing company, has a five-part mission that includes producing “only what we love,” creating a “joyful atmosphere in the workplace” and “supporting women through social initiatives that address their well-being.” Or put even more simply: “Have our mission drive our business and our profitability foster our mission.”

There are many ways to create a nobler purpose in an organization, even if the products or services themselves intrinsically do not. Toms Shoes, for example, makes a very conventional product, but founder Blake Mycoskie has infused passion among employees partly by giving away, with each purchase of a pair of shoes, a second pair to someone needy. Now Toms is expanding that model to other products, including eyewear.

The company is also consistently profitable, not least because its noble purpose is differentiating, and appealing to consumers. We live in a highly commoditized world. Why couldn’t a big bank differentiate itself by using a matching model like Toms does and offer, say, financial planning to those who are needy?

It’s also possible to build a noble purpose around caring deeply about your customers. Think of Amazon.com, Zappos, Ritz Carlton and Southwest Airlines. Likewise, you can create a higher purpose around the commitment to truly great products and inspiring design, as Apple did under Steven P. Jobs.

Here are three questions I believe all chief executives ought to regularly ask themselves, not just to be good citizens, but as a powerful way to build competitive advantage:

1. What is our noblest purpose and are we fulfilling it?

2. How can we give our employees a greater sense of meaning in what they do, so they feel more enthusiastic about coming to work every morning?

3. In what practical ways can we add more value in the world (and do less harm)?

About the Author

Tony Schwartz is the chief executive of the Energy Project and the author, most recently, of “Be Excellent at Anything: The Four Keys to Transforming the Way We Work and Live.” Twitter: @tonyschwartz

Bid for Invensys Gives Investors Appetite for More

LONDON - Invensys, the British maker of industrial control products and software that has long been the subject of takeover speculation, is in talks to be acquired by Schneider Electric of France for about $5 billion. But investors are indicating that they expect a competing offer.

Schneider, which provides low- and medium-voltage electrical equipment and services, offered to pay 5.05 pounds a share in cash and new shares for Invensys, valuing the company at 3.3 billion pounds, the company said late Thursday. While the talks are at an early stage, Invensys said it was likely to accept such an offer.

“The board of Invensys has indicated to Schneider that it is likely to recommend a firm offer at the offer price,” Invensys said in a statement.

The proposed price is 15 percent above Invensys’s closing share price on Thursday. The company’s shares jumped 16 percent, to 5.1 pounds, in London on Friday on expectations by some investors that Schneider will increase the offer or face competition from another bidder. Shares of Schneider fell more than 4 percent in Paris.

According to takeover rules, Schneider has until Aug. 8 at 5 p.m. to make a formal offer.

Invensys has been considered a takeover target since at least last year when takeover discussions broke down with Emerson Electric, which is based in St. Louis. Invensys had been shackled by pension liabilities of more than $700 million at the time. But the company sold its rail-infrastructure business to Siemens of Germany in May, which not only allowed it to ease its pension burden but also made it a more attractive takeover target. In addition to Schneider, other potential suitors could include General Electric and ABB, analysts have said. G.E. and ABB declined to comment.

Juho Lahdenpera, an analyst at Nomura, said Invensys was the most obvious takeover target in its industry and that it was unlikely that Schneider’s takeover approach would touch off a wave of other deals in the sector.

“Valuations are quite high and managers are generally still hesitant because of the economic situation,” Mr. Lahdenpera said. He added that he was skeptical that another bidder would emerge for Invensys. “It’s a full price, fair for Invensys and given what Schneider can do with these assets, it would be surprising to see another bidder,” he said.

Schneider said last summer that it was back on the acquisition trail after completing and integrating a string of takeovers that included companies in Spain and India. It said the strategic and financial rationale for buying Invensys was “compelling” and that an “enlarged group would significantly expand its access to key electro-intensive segments.”

A takeover would give Schneider access to Invensys’ large customer base in the oil and gas industries for which it provides control and safety systems. Invensys also sells heating and ventilation controls to large manufacturing companies as well as room thermostats and other temperature control systems to private households.

Schneider’s products include emergency lighting, fuse switches, weather observation hardware and charging devices for electric vehicles. Schneider said it expected the takeover would create “significant cost savings.”

As Promised, Icahn Adds to His Bid for Dell

Carl C. Icahn lived up to his word on Friday, offering a sweetener to his alternative to a $24.4 billion leveraged buyout of Dell Inc. by adding a warrant to his stock buyback plan.

In a letter to Dell shareholders, Mr. Icahn and his partner, Southeastern Asset Management, proposed giving shareholders a warrant to buy a share in the struggling computer company at $20 apiece for every four shares that they tender. That’s in addition to buying back 1.1 billion shares at $14 each. The activist investor says the entire package is worth $15.50 to $18 a share.

The move is the latest gambit by Mr. Icahn to sway shareholders away from supporting a $13.65-a-share takeover bid by Michael S. Dell and the investment firm Silver Lake, an offer that he has criticized as too low. The increased jockeying for investors’ loyalties comes ahead of a vote scheduled for Thursday on Mr. Dell’s offer.

Earlier this week, Mr. Icahn urged Dell shareholders to seek so-called appraisal rights for their holdings, in case the leveraged buyout is approved. That would allow investors to potentially receive more â€" or less â€" for their stock, once a Delaware state judge delivers a pronouncement on the company’s worth.

To advisers to Mr. Dell and to a special committee of Dell’s board, that move smacked of desperation and an effort to force the would-be buyers into raising their bid. But in his letter on Friday, Mr. Icahn contended that he was not seeking merely a bump in price. Instead, he argued that his efforts were aimed at replacing Mr. Dell as chief executive and leading a turnaround of the company himself.

“We are completely committed to our proposal and believe that it is economically better for stockholders than the Michael Dell/Silver Lake freeze out transaction,” he wrote. “We are also completely committed to bringing in management that we expect to be far superior to Michael Dell who we believe has had an abysmal record during the last three years.”

Mr. Icahn again took exception to a report by Institutional Shareholder Services, the proxy advisory firm, recommending that investors vote for Mr. Dell’s offer. His argument: I.S.S., as the firm is known, assumed that the leveraged buyout would lead to be a speedy payout to shareholders, while the stock buyback plan was uncertain and could drag out.

The billionaire activist contended that he believed his proposal could close faster than the proposed takeover. But he neglected to mention that his plan requires the election of an entirely new board, something that Mr. Dell â€" who owns a 16 percent stake â€" is unlikely to support.

As Promised, Icahn Adds to His Bid for Dell

Carl C. Icahn lived up to his word on Friday, offering a sweetener to his alternative to a $24.4 billion leveraged buyout of Dell Inc. by adding a warrant to his stock buyback plan.

In a letter to Dell shareholders, Mr. Icahn and his partner, Southeastern Asset Management, proposed giving shareholders a warrant to buy a share in the struggling computer company at $20 apiece for every four shares that they tender. That’s in addition to buying back 1.1 billion shares at $14 each. The activist investor says the entire package is worth $15.50 to $18 a share.

The move is the latest gambit by Mr. Icahn to sway shareholders away from supporting a $13.65-a-share takeover bid by Michael S. Dell and the investment firm Silver Lake, an offer that he has criticized as too low. The increased jockeying for investors’ loyalties comes ahead of a vote scheduled for Thursday on Mr. Dell’s offer.

Earlier this week, Mr. Icahn urged Dell shareholders to seek so-called appraisal rights for their holdings, in case the leveraged buyout is approved. That would allow investors to potentially receive more â€" or less â€" for their stock, once a Delaware state judge delivers a pronouncement on the company’s worth.

To advisers to Mr. Dell and to a special committee of Dell’s board, that move smacked of desperation and an effort to force the would-be buyers into raising their bid. But in his letter on Friday, Mr. Icahn contended that he was not seeking merely a bump in price. Instead, he argued that his efforts were aimed at replacing Mr. Dell as chief executive and leading a turnaround of the company himself.

“We are completely committed to our proposal and believe that it is economically better for stockholders than the Michael Dell/Silver Lake freeze out transaction,” he wrote. “We are also completely committed to bringing in management that we expect to be far superior to Michael Dell who we believe has had an abysmal record during the last three years.”

Mr. Icahn again took exception to a report by Institutional Shareholder Services, the proxy advisory firm, recommending that investors vote for Mr. Dell’s offer. His argument: I.S.S., as the firm is known, assumed that the leveraged buyout would lead to be a speedy payout to shareholders, while the stock buyback plan was uncertain and could drag out.

The billionaire activist contended that he believed his proposal could close faster than the proposed takeover. But he neglected to mention that his plan requires the election of an entirely new board, something that Mr. Dell â€" who owns a 16 percent stake â€" is unlikely to support.

Wells Fargo Profit Jumps 19 Percent

Wells Fargo, the nation’s largest home lender, posted a 19 percent increase in second-quarter profit on Friday as it overcame a slowdown in the mortgage market on its way to record earnings.

Despite a recent uptick in interest rates, a development that has discouraged borrowers from refinancing their mortgages, Wells recorded its 14th consecutive rise in quarterly profit and ninth straight record report.

The results, bolstered by overall improvements in the economy and growth across its deposit business, included net income of $5.5 billion, or 98 cents a share. That compared with $4.6 billion, or 82 cents a share, in the period a year earlier. The new returns outpaced the expectations of analysts polled by Thomson Reuters, which had forecast earnings of 93 cents a share.

Revenue, roughly flat at $21.4 billion, also exceeded expectations.

“Wells Fargo achieved outstanding results for the second quarter,” the bank’s chief executive, John G. Stumpf, said in a statement.

Wells Fargo, along with JPMorgan Chase, kicked off bank earnings season. Citigroup, Goldman Sachs and other Wall Street giants will report next week.

Wells Fargo Profit Jumps 19 Percent

Wells Fargo, the nation’s largest home lender, posted a 19 percent increase in second-quarter profit on Friday as it overcame a slowdown in the mortgage market on its way to record earnings.

Despite a recent uptick in interest rates, a development that has discouraged borrowers from refinancing their mortgages, Wells recorded its 14th consecutive rise in quarterly profit and ninth straight record report.

The results, bolstered by overall improvements in the economy and growth across its deposit business, included net income of $5.5 billion, or 98 cents a share. That compared with $4.6 billion, or 82 cents a share, in the period a year earlier. The new returns outpaced the expectations of analysts polled by Thomson Reuters, which had forecast earnings of 93 cents a share.

Revenue, roughly flat at $21.4 billion, also exceeded expectations.

“Wells Fargo achieved outstanding results for the second quarter,” the bank’s chief executive, John G. Stumpf, said in a statement.

Wells Fargo, along with JPMorgan Chase, kicked off bank earnings season. Citigroup, Goldman Sachs and other Wall Street giants will report next week.

JPMorgan Beats Expectations

JPMORGAN EARNINGS SURGE 31%  |  JPMorgan Chase reported a 31 percent increase in second-quarter earnings on Friday, helped by strong gains in its investment banking business, its credit card operations and in its mortgage lending division. Net income of $6.5 billion, or $1.60 a share, exceeded analysts’ expectations of $5.47 billion, or $1.44 a share. Revenue was $20 billion, compared with $26 billion in the period a year earlier.

ICAHN’S NEXT MOVE  |  In the battle for Dell, it doesn’t pay to underestimate Carl C. Icahn, Steven M. Davidoff writes in the Deal Professor column. The billionaire investor, in his latest move to challenge the buyout offer of $13.65 a share from Michael S. Dell and the investment firm Silver Lake, is urging fellow shareholders of Dell to start preparing appraisal rights for their shares. This would be a risky process that “can be charitably described as a Hail Mary pass,” Mr. Davidoff writes.

But maybe Mr. Icahn “has another strategy in mind, and this announcement is only one part of it,” Mr. Davidoff says. “To exercise appraisal you have to vote no for the deal, and notify Dell before the vote occurs. By preparing appraisal rights, Mr. Icahn may be making a Hail Mary pass, but one aimed at signaling ‘no’ votes before the actual shareholder vote. Perhaps he is merely trying to show that he has a bigger block of ‘no’ votes than Mr. Dell and Silver Lake think. It’s a small bargaining chip, but at this point everything counts.”

On Friday, Mr. Icahn is expected to sweeten his offer by adding a warrant to allow shareholders to buy additional stock in the future. This would be Mr. Icahn’s fourth attempt to challenge the Dell buyout, Bloomberg News reports.

GRUMBLES FOLLOW A PLAN TO RAISE CAPITAL  |  After the financial crisis, American banks raised more capital than their European counterparts, making them better equipped to lend, Floyd Norris, a columnist for The New York Times, writes. And yet, when United States regulators proposed new rules this week that could force the largest American banks to have a lot more capital in a few years, bank trade groups voiced familiar complaints, Mr. Norris writes.

Mr. Norris continues: “That there are bank capital rules at all stems from the issues a country faces when it provides deposit insurance. Depositors have no reason to care whether the bank is healthy, so a risky bank is not at a competitive disadvantage. The problem gets worse when those who buy bonds issued by banks conclude that their investments are effectively guaranteed by the government.”

ON THE AGENDA  |  Wells Fargo reports earnings this morning. The Thomson Reuters/University of Michigan consumer sentiment index for July is out at 9:55 a.m. Bart Chilton, a Democratic member of the Commodity Futures Trading Commission, is on CNBC at 7:40 a.m. Jamie Dimon, chief of JPMorgan Chase, is on CNBC at 10:15 a.m. Barney Frank, the former congressman from Massachusetts, is on CNBC at 10:35 a.m.

SENATORS INTRODUCE BILL TO SPLIT BIG BANKS  |  “Senator Elizabeth Warren on Thursday introduced an aggressive piece of legislation that intends to take the financial industry back to an era when there was a strict divide between traditional banking and speculative activities,” DealBook’s Peter Eavis writes.

“The bill, which is also sponsored by Senator John McCain, Republican of Arizona, and two other senators, is named the 21st Century Glass-Steagall Act. Its intention is to create a modern version of the seminal Glass-Steagall legislation from the 1930s, which placed firm limits on what regulated banks could do. It was fully repealed in 1999, laying the groundwork for the mergers that created some of the biggest banks of today. If passed, it could force many of those banks to let go of their trading operations.”

Mergers & Acquisitions »

Potential for Deals Drives a Big Surge in the Biotech Sector  |  The rise of personalized medicine has spurred giant pharmaceutical companies to home in on small biotechnology firms.
DealBook »

Invensys Receives Bid From Schneider Electric  |  The British engineering group Invensys said on Thursday that it had received a bid from Schneider Electric of France that valued the company at 3.3 billion pounds, or about $5 billion, The Financial Times reports.
FINANCIAL TIMES

At Sun Valley, Watching to See if the Chatter Is More Than Idle Talk  |  The Allen & Company media and technology conference is best known for the deals that have emerged from hush-hush meetings that take place in the ensuing months.
DealBook »

Telecoms Draw Antitrust Scrutiny in Europe  |  The New York Times reports: “European Union antitrust authorities said on Thursday that they had investigated major telecommunications companies, including Deutsche Telekom of Germany, on suspicion that the companies were using their dominant market positions to limit Internet providers’ access to their networks.”
NEW YORK TIMES

William Morris to Buy Stake in Droga5, an Ad Agency  |  William Morris Endeavor, the giant talent agency, is close to a deal to acquire a 49 percent stake in Droga5, an independent advertising agency based in New York, for roughly $225 million, The New York Times reports.
NEW YORK TIMES

Bumi Chairman Agrees to Buy Out Bakrie Family  |  The proposed $223 million transaction by the chairman, Samin Tan, is the latest twist in a long-running dispute about control of the coal producer. It is opposed by the financier Nathaniel Rothschild.
DealBook »

At Least 3 Bidders in Contention for Boston Globe  |  The rival bids range from $65 million to $80 million, The Boston Globe reports.
BOSTON GLOBE

In Microsoft Overhaul, Signs of Apple  |  Microsoft plans to “dissolve its eight product divisions in favor of four new ones arranged around broader functional themes, a change meant to encourage a tighter marriage among technologies as competitors like Apple and Google outflank it in the mobile and Internet markets,” The New York Times writes.
NEW YORK TIMES

INVESTMENT BANKING »

Swiss Banks Approach a Deal on Tax Evasion  |  The Wall Street Journal reports: “A group of Swiss banks is lining up to deliver key information to U.S. authorities investigating tax evasion, potentially moving a long-running legal battle further toward a close.”
WALL STREET JOURNAL

In Britain, Former Official Speaks Out on Banks  |  “I fear that the banks have bamboozled government into believing that society must choose between safety and growth, between safer banks and bank shareholder value, and between a safer financial framework and a competitive City of London,” Robert Jenkins, a former member of the Bank of England’s financial policy committee, told Bloomberg News.
BLOOMBERG NEWS

Big Payout by Moelis May Whet the Appetite for More  |  Moelis & Company’s $35 million payout to its mainly staff owners shows the partnership model in investment banking can deliver. The snag is that partners will expect a repeat, Dominic Elliott of Reuters Breakingviews writes.
REUTERS BREAKINGVIEWS

Goldman Scoops Up Emerging-Market Bonds  |  The purchases by Goldman Sachs Asset Management have come amid a sell-off, The Wall Street Journal writes.
WALL STREET JOURNAL

PRIVATE EQUITY »

Terreal of France Is Taken Over by Creditors  |  Terreal, a private equity-owned French company that makes tiles and bricks, has been taken over by creditors including Goldman Sachs and Park Square Capital as part of a restructuring deal, The Financial Times reports.
FINANCIAL TIMES

Orix of Japan Has an Appetite for Buyouts  |  The Japanese financial firm Orix plans to spend 50 billion yen ($506 million) on deals in Southeast Asia and the Middle East in the next 12 months, according to Bloomberg News.
BLOOMBERG NEWS

HEDGE FUNDS »

Chief of Highbridge Capital to Step Down  |  Glenn Dubin, who co-founded Highbridge Capital Management more than 20 years ago, is stepping down as chief executive but will remain chairman, The Wall Street Journal reports. The firm is owned by JPMorgan Chase.
WALL STREET JOURNAL

Hedge Fund Analyst Plans a New Firm  |  Sean Grogan, a longtime senior analyst at Conatus Capital Management who left in June, is in the “early stages” of starting his own hedge fund firm, Absolute Return reports.
ABSOLUTE RETURN

I.P.O./OFFERINGS »

A Venture Capitalist Discusses I.P.O.’s  |  Marc Andreessen told CNBC: “The I.P.O. market is deeply broken. It’s become sort of a two-class market. In general the private companies are growing very fast, doing very well, delaying their I.P.O.’s. There are a small number of public companies doing very well in tech, but there are much larger companies that should be public that aren’t.”
CNBC

VENTURE CAPITAL »

Valiant Leads Investment Round in Brazilian Pharmacy Benefits Firm  |  Valiant Capital Management, a San Francisco-based hedge fund, and Aberdare Ventures have jointly acquired a 45 percent stake in a pharmacy benefits company, ePharma, for an estimated 169 million reais ($74.6 million).
DealBook »

LEGAL/REGULATORY »

16 Senators Seek Inquiry of A.T.M.-Style Pay Cards  |  Instead of paper checks or direct deposit, employers are issuing A.T.M.-style cards that can have large fees associated with them.
DealBook »

Jurors to Hear About ‘Fabulous Fab’  |  A federal judge ruled that jurors in the civil trial of Fabrice Tourre, the former Goldman Sachs trader, can hear about an e-mail that references the nickname “Fabulous Fab.”
DealBook »

Geithner Sells House Near Washington  |  The former Treasury secretary Timothy F. Geithner and his wife, Carole, have sold their home in Bethesda, Md., for the $995,000 asking price, The Washington Post reports.
WASHINGTON POST

Elizabeth Duke, Fed Governor, to Step Down  |  Elizabeth A. Duke, a Federal Reserve governor who has helped overhaul the central bank’s approach to financial regulation and has been a consistent supporter of Ben S. Bernanke, said on Thursday that she would step down at the end of August, The New York Times reports.
NEW YORK TIMES

U.S. and China to Discuss Investment Treaty  |  But concerns over cybersecurity have complicated the talks, The New York Times reports.
NEW YORK TIMES