5 Financial Stories You May Have Missed – With a Dropped Ball

SEC building, Washington DC

1. Citi’s $285 Million SEC Settlement Offer…Bounced By The Court

Citibank and the SEC had come to an initial settlement agreement of $285 million on the claim that the bank had sold a collateralized debt obligation and then bet against the transaction. The allegation is similar in many respects to the matter settled against Goldman Sachs for $550 million last year. In rejecting the settlement the judge focused on two key points –

  1. The fact that Citi has not admitted fault or been found guilty of any charge, and
  2. The SEC did not clearly define how the settlement amount was determined.

Ann Longmore, EVP of Executive Risks, has written a very nice summary of the issues. This may well be an important turning point in the field of regulatory settlements because it may compel regulators, like the SEC, to create a clearer set of guidelines for penalties. Such guidelines could ultimately help insurance carriers and others better understand the potential for fines and penalties associated with unlawful behavior.

Citigroup, SEC settlement rejected, trial ordered

2. Do Credit Ratings Still Matter? The Banks Hope Not.

In one fell swoop, Standard & Poor’s has downgraded the ratings of 37 of the largest banks around the world. Applying their new ratings criteria for banks, published in early November, the ratings agency moved many of the largest global banks to the lower end of investment grade. Credit ratings from the S&P and Moodys still carry incredible financial importance because of the vast number of derivative contracts that are impacted. Before entering into derivative contracts banks generally sign International Swap Dealers Association Agreements (“ISDAs”). Those agreements require that should one of the counterparties credit ratings fall below a specified level that the party will agree to provide collateral in the form of cash or securities. This recent round of downgrades is could likely begin triggering some of those provisions and force banks to post collateral. This is not a phenomenon to be ignored. Once forced to start posting substantial amounts of collateral, the impact on balance sheet could lead to further downgrades – and yes, more calls for collateral. The ratings agencies may have the power to push the banks toward a very slippery slope.

S&P downgrades banks

3. SEC Wants To Raise The Roof…On Fines

SEC Chairman Mary Shapiro

SEC Chairman Mary Shapiro

SEC Chairman Mary Shapiro is seeking to change the way the SEC calculates fines for securities violations. At present the Commission is limited to one of two methods – either 1) an amount equal to the defendant’s ill-gotten gains or 2) $150,000 for individuals or $725,000 per entity. Chairman Shapiro wants to increase that limit to 3 times the amount of ill-gotten gains or $1 million per individual and $10 million per entity. In addition, the Chairman has said that the SEC should have the flexibility to base the fines on losses suffered by investors. If the increased limits are approved, we could see a serious ramping in the scale of fines. Such a rapid increase in the cost of securities violation would be sure to catch the attention of risk managers, insurers, and, we can only hope, deter would-be criminals.

SEC’s Schapiro Asks Congress to Raise Limits on Securities Fines

4. FDIC Zeros In On Director Loan Committees

Since mid-2008 the FDIC has prepared lawsuits against 300 officers and directors of failed banks. A large number of those have focused on a narrow segment – the loan committee members. The “inside” director, or one that is actively involved in the management of the institution, has always been a more likely party to litigation that the outside director. However, the FDIC appears to have focused substantial attention on those directors that have served on loan committees. A large number of the 300 pending suits deal with alleged negligence of the directors. Approval of loans that went spectacularly wrong during the credit crisis have garnered special attention from the FDIC. Normally the business judgment rule protects a director from liability for an honest mistake, even if that mistake causes a loss to the bank. One senior FDIC recently said, “loan committee members had been delegated the authority to approve the loans… but they breached their duties of care and, in some cases, their duties of loyalty to the bank when they approved loans that violated the bank’s loan policy and underwriting standards, among other things, and in some instances… were abusive insider transactions.” If the average bank director must be conscientious, the one on the loan committee should be painstakingly diligent – the FDIC is watching.

Director loan committees are special targets of the FDIC

5. And A Dropped Ball

The SEC is investigating a now-defunct investment firm named HRJ Capital. During 2008, the firm received capital calls that it was unable to meet. The regulators are investigating whether the firm may have tried to mislead investors and shifted debt to those investors to meet cash requirements. This would be another of dozens of investment manager investigations except that the two founders of the firm were football legends Ronnie Lott and Harris Barton, both of the San Francisco 49ers. The firm handled funds for other famous athletes like Peyton Manning. Bloomberg reports that none of the firm’s investors lost money, but I may have lost a couple of my gridiron heroes.

SEC Said Investigating Firm Run by 49er Legends

Photo Credit: AgnosticPreachersKid, Wikipedia

About Richard Magrann-Wells

Richard is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angel…
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