Below are news stories from the week that were easy to miss, but may have some lasting impact.
Waiting for Other Mortgage Shoe to Drop
Most of the major banks signed last year’s $25 billion settlement over foreclosure abuses, but if you thought that was the end of the mortgage repercussions, you are almost certainly wrong. The Residential Mortgage-Backed Securities Working Group (the mortgage task force appointed by President Obama in January and co-chaired by New York AG Eric Schneiderman) is expected to recommend additional legal action soon. The task force spokespeople have been coy about any criminal or civil action against individuals or their employers. But the way the imminent announcement is being touted makes me think that we are going to see large numbers or serious (possibly criminal) charges…soon.
Reuters: U.S. mortgage task force to act soon
Out-Volckered by the Germans
Germany has a tradition of innovation and product development. Despite the fact that the U.S. instituted Dodd-Frank and its “Volcker Rule” two years ago, the Germans may get there first. The Volcker rule was intended to force banks to restrict their proprietary trading. The goal was that government-insured depository institutions would no longer be affected by the bank’s own trading losses. After two years the final rules aren’t complete, and their implementation is expected to take a few years. Last week in Germany, Angela Merkel’s cabinet approved a draft bill that will force every deposit-taking bank to split proprietary trading and hedge-fund lending into a separately capitalized unit. The bill is expected to pass the German parliament in the next few months and could be on the books before the end of the year. “Out-Volckered”…it even sounds German.
Using Insider Info Without Going to Jail
It’s illegal to buy stock when you have insider information that it’s going up. But what if you have insider information that a company is going to announce bad news? You could buy put options and make a killing –that would certainly be illegal. A more difficult question is whether you can use that illicit information to improve your fund’s return by simply not buying the stock in question. In theory, making that investment decision (i.e., not buying that stock) based on material nonpublic information would give you an unfair advantage. However, that omission is extremely difficult for authorities to prosecute. Some analysts are suggesting that some fund managers have been wise to this regulatory conundrum and have taken full advantage. Meaning they’ve…done nothing.
The FDIC Wants You to Know That They Have Not Been Laying Down on the Job
The FDIC updated its website with some powerful reminders of its authority this week. The FDIC has the power to sue people who play a role in the failure of an institution. These individuals can include officers and directors, attorneys, accountants, brokers, or others. In some cases, professional liability claims may include direct claims against insurance carriers such as fidelity bond carriers and title insurance companies.
Usually, professional liability suits are only pursued if it makes business sense to do so. The FDIC, however, may have different motivations for pursing actions against individuals based on its mission to protect the public. Prior to filing the claim, staff will attempt to settle; if a settlement cannot be reached, however, a complaint will be filed, typically in federal court. Directors and officers may be sued for either gross or simple negligence.
As of February 15, 2013, the FDIC has authorized suits in connection with 102 failed institutions against 836 individuals for D&O liability (94 since the beginning of the year). This includes 51 filed D&O lawsuits naming 396 former directors and officers. (Four of these lawsuits have already settled and one has resulted in a favorable jury verdict for the defendants) The FDIC also has authorized 48 other lawsuits for fidelity bond, insurance, attorney malpractice, appraiser malpractice, accounting malpractice, and RMBS claims. In addition, 160 residential mortgage malpractice and fraud lawsuits against individuals are also pending.
Government Governance Gives Government Grief
In case you are not familiar with Sovereign Wealth Funds, they are state-owned investment managers that wield substantial power with their substantial assets. China, Singapore, Dubai, Saudi Arabia and others countries have huge funds that are invested in markets around the world. The largest is, surprisingly, Norway because of their North Sea oil surfeit.
The $650 billion fund is managed by Norges Bank Investment Management (NBIM). The fund made waves this week when it published a note on corporate governance. The fund states that it is interested in protecting minority shareholder rights and board accountability, of course. But surprisingly the note questions the popular idea of formalizing good governance into regulatory or legislative codes or applying a voluntary code of good governance across all companies.
The NBIM note highlights an important point: Corporate governance standards have gotten so technical and complicated that compliance is beyond the understanding of the average investor. Investors and entities complain about government oversight all the time. What makes NBIM’s note interesting is that it is, in essence, the government…