UPDATED – Amendments to NYMEX and COMEX Product Titles

As previously announced in Special Executive Report (SER) 6427, dated October 10, 2012, please be reminded that, during the week of October 15, 2012, the New York Mercantile Exchange, Inc. (NYMEX) and the Commodity Exchange, Inc. (COMEX, and collectively, the Exchanges) will amend their product titles in order to, among other administrative things, remove the word "swap" from the titles of the Exchanges' futures and option contracts.

wfnn 13 Oct, 2012

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RBS Said to Sell German Buildings Valued at $1 Billion to Axa

Axa Investment Managers SA and Norway’s sovereign-wealth fund agreed to buy two buildings in Frankfurt and Berlin for 784 million euros ($1 billion), the biggest German commercial real estate transaction this year.

The properties were sold by Royal Bank of Scotland Group Plc in a deal that will probably be completed by the end of the year, Axa Real Estate and Norges Bank Investment Management said in separate statements today. 

“The price level in Germany is attractive,” Harald Magnus Andreassen, chief economist at Swedbank First Securities in Oslo, said by phone. “The prices may go up and down, but the rental income from good properties is quite stable over time.”

German commercial property transactions have slowed this year as banks curb lending to meet stricter capital rules. Pension funds and insurance companies with cash reserves are better to able to make acquisitions without borrowing money. In 2010, the Norwegian wealth fund got approval to invest as much as 5 percent of its capital in real estate.

The Berlin building, on the Kurfuerstendamm Boulevard, has 72,400 square meters (779,000 square feet) of office and retail space on 16 floors, according to today’s statements. The other property, in Frankfurt’s business district, has 81,600 square meters of mainly office space.
Pegasus Portfolio

The buildings are part of the Pegasus portfolio, which RBS took over from Morgan Stanley (MS) when the New York-based bank liquidated its P2 Value German-property fund in 2010, a person with knowledge of the deal said. The Berlin property is the Neues Kranzler Eck, while the one in Frankfurt is a wave-shaped glass tower known as Die Welle, according to the person, who asked not to be identified because the information is private.

RBS was up 2.1 percent at the close of trading in London, while the benchmark FTSE 100 Index fell 0.6 percent. The International Monetary Fund today said European banks may need to sell as much as $4.5 trillion in assets through 2013 if policy makers fall short of pledges to stem the region’s fiscal crisis, an 18 percent increase from its April estimate.

Norges Bank and Axa SA (CS) formed a joint venture last year in which the French company’s Axa Real Estate unit acts as an asset manager, the companies said in their statements. It’s the venture’s first investment in Germany.

“Germany has a big real estate market and will form an important long-term part of our portfolio,” Karsten Kallevig, chief investment officer for real estate at the Norwegian fund, said in an interview today. The fund will look for more investment opportunities in the country, he said.
Fewer Investments

Investors bought German offices, malls and logistics centers valued at about 14.9 billion euros in the first nine months of 2012, 14 percent less than a year earlier, according to data compiled by Jones Lang LaSalle Inc.

“We like a bit of scale in our deals because we think it’s a less crowded space,” Kallevig said in the interview.

Union Investment Real Estate AG sold Die Welle for 703 million euros to a Morgan Stanley real estate unit in 2007, according to a statement at the time from the German company. Neues Kranzler Eck was also sold by Union Investment as part of a separate sale of 28 properties to Morgan Stanley at the same time for a combined 1.36 billion euros, according to the statement.

The Norwegian fund bought a 50 percent stake in the U.K.’s Meadowhall shopping center on Oct. 8. In July, it purchased shares in five French office and retail buildings, according to its website.

Axa SA was down 0.9 percent at 11.56 euros at the 5:30 p.m. close in Paris. RBS has climbed 6.8 percent in the past 12 months, while Axa is little changed.

CBRE Group Inc. (CBG) advised Axa, while Jones Lang acted for Edinburgh-based RBS, two people with knowledge of the transaction said. Freshfields Bruckhaus Deringer LLP and Clifford Chance LLP were the legal advisers, according to the people.

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Narula Masters Fed, Beats Funds With 500% Gain: Mortgages

Deepak Narula hit bottom in 2007 when investors pulled cash from his hedge fund, leaving him to unwind mortgage bond bets in a frozen market that would have made money if he’d just held on a few more months

Five years later, Narula, 49, is at the top of the best- performing category of funds. Metacapital Management LP, the New York-based firm he founded in 2001 after leaving Lehman Brothers Holdings Inc., is up 34 percent this year, almost 10 times the industry average. Since restarting in July 2008, returns exceed 500 percent and the firm has expanded to oversee $1.4 billion.

“Mortgage funds generally are doing fabulously well, but he’s outperforming everyone,” said Rael Gorelick, co-founder and principal of Charlotte, North Carolina-based Gorelick Brothers Capital LLC, a $250 million fund of mortgage hedge funds invested in 20 managers. He’s “creative, smart, experienced and can play with two hands: This is his time.”

Narula has built his recent run on predicting how the Federal Reserve, the Obama administration and financial industry would react to the worst housing crash since the 1930s. He’s outpacing competitors by investing in both government-backed securities and riskier property debt, profiting from buying bonds that rallied as real estate recovered, and trading around government attempts to stoke refinancing.

Hedge funds focusing on mortgages returned 17 percent this year through September, according to data compiled by Bloomberg, the best performing of 18 groups. That’s almost five times the 3.6 percent gain for the industry, and compares with a loss of 0.5 percent for so-called macro funds that bet on economic trends, the data show.
Brevan Howard

Brevan Howard Asset Management LLP, Europe’s second-largest hedge-fund manager, posted a 1.6 percent gain this year in its flagship $25 billion fund, according to a person familiar with the returns. John Paulson, who made $15 billion in 2007 betting against subprime mortgages, has lost 14 percent this year in his Advantage Plus Fund.

By contrast, Pine River Capital Management LP’s $3.4 billion fixed-income fund, which like Narula invests in a various types of home-loan debt, has gained 29 percent this year, according to a performance update sent to investors.

LibreMax Capital LLC, the firm founded by former Deutsche Bank AG trader Greg Lippmann, who benefited in 2007 from the subprime-mortgage collapse, is up about 16 percent, beating peers that focus on non-agency bonds, such as subprime and commercial property securities that don’t have government backing, according to a person briefed on the returns.

Narula, whose 12-person firm occupies a sparsely decorated 38th floor office overlooking Central Park, declined to comment on his returns, which were provided by his investors and letters sent to them obtained by Bloomberg News.
Subprime Debt

Those communications show he made money this year by buying bonds ahead of the Fed’s latest announcement of purchases; targeting securities with protection against refinancing as President Barack Obama’s administration expanded programs to help homeowners get cheaper loans; and increasing holdings of subprime debt, after avoiding it last year when it slumped.

The New Delhi, India, native, who came to the U.S. as a graduate student in 1985, started trading at Metacapital in January 2002 in a very different mortgage market.

Metacapital -- which Narula said he named as a reference to transformation -- grew to $750 million within three years as he posted annual returns from 7.7 percent to 17.1 percent. He navigated 2003 as homeowner refinancing set records and bond markets swung as the Fed began signaling it would end its efforts to lift the economy out of the last recession.
Underwriting Standards

Returns dwindled in 2005 and 2006 as the Fed’s then Chairman Alan Greenspan raised rates, making borrowing more expensive for investors. At the same time, bond buyers were pouring cash into risky debt, driving down yields.

Narula, seeing the decline in underwriting standards, began in January 2005 to bet against bonds tied to borrowers with poor credit, primarily through a credit-default swaps market created by Wall Street dealers including Lippmann. The investments were a drag on performance as banks repackaged the notes into collateralized debt obligations and inflated demand even as home prices peaked and then foreclosures began soaring.

The fund returned 3.3 percent in 2005 and 5.2 percent a year later, trailing an industry average of 8 percent in 2006, according to documents obtained by Bloomberg.
‘Successful Defense’

“I look at those two years as having played successful defense and having avoided going to the dark side,” Narula said in an interview, referring to managers that added “real estate credit risk at the top of the market.”

Investors though lost patience as rivals took on greater risk to boost returns. The fund shrank to about $170 million at the start of 2007 and after five months hadn’t made any money.

Clients became more concerned when two Bear Stearns Cos. funds invested in subprime securities collapsed in June, fueling misgivings about mortgage managers generally and highlighting potential dangers within the financial system.

He decided to liquidate the fund even though Metacapital held trades that would profit the rest of the year, including bets against subprime and commercial-mortgage bonds and wagers on increasing volatility, he said.

He’d been too early shorting subprime and hadn’t committed enough.

“I look back over the last 10 years and that’s the one regret,” Narula said. “Even though we had the right idea, we were just way too early. Timing is everything.”

As he tried to wind down the fund in 2007, Wall Street brokers demanded greater premiums to buy and sell securities and he lost 7 percent that year.
Analyzing Behavior

Narula went back to analyzing borrower behavior almost two decades after gaining a PhD in 1989 from Columbia University’s business school where mortgage-backed securities were part of his studies. He’d enrolled after earning a degree in electrical engineering from the Indian Institute of Technology Kanpur, one of the country’s top universities, where admittance is solely by examination.

After joining Lehman, Narula established himself as one of the leading Wall Street mortgage analysts, eventually running the strategy for the investment bank and getting ranked in Institutional Investor Magazine’s annual survey for three years. His success running a model portfolio that investors followed earned him a move to trading in 1995, Narula said.

What made him unique is that he married a technical background with the ability “to develop and explain his views in a very persuasive way,” said Amitabh Arora, who would join the mortgage-research department that Narula had left two years later.
Trend Spotting

As a trader, he was “always very quick to spot trends, and sometimes much quicker than people who were spending a lot of time on the same question,” said Arora, who oversees Citigroup Inc.’s research on government bonds from the 10 largest economies as well as securitized products.

By 1998 Narula ran several agency-mortgage trading desks for New York-based Lehman, which put him near the front line when a series of global events roiled bond markets.

Then Russia defaulted on its bonds, hedge fund Long Term Capital Management imploded and mortgage investor Ellington Management Group LLC almost collapsed. Lehman, facing daily rumors of insolvency because of its holdings of emerging market debt and commercial mortgages, had to shrink its balance sheet in an illiquid market.

“Every passing storm that has hit the financial markets helps you learn and 1998 really was an eye opener,” said Narula.
Applying Lessons

He left Lehman two years later as the firm moved away from proprietary trading and toward matching trades for investors --a strategy Chief Executive Officer Richard Fuld reversed during the last credit bubble, leading to its 2008 downfall.

That year, when Metacapital began raising money to manage again, he applied those lessons, including the dangers of buying when the rest of the market has to sell.

He passed as subprime and other non-agency mortgage bonds plunged to less than 30 cents on the dollar, speculating that the number of potential sellers far outnumbered the firepower available to buyers, he said.

In 2009, he more than doubled his investors’ money when he bought non-agency debt once the government created public- private funds to bolster prices. In 2010, he profited by speculating fewer borrowers than investors anticipated would refinance government-backed loans even after changes introduced by Obama. He also bet against debt after the Fed halted its first bond buying program, known as quantitative easing or QE.
Protecting Returns

After non-agency debt prices had soared in early 2011, he sold some of the investments. That protected the fund from declines that hurt rivals when the Fed said it would auction bonds inherited during the rescue of American International Group Inc. and Europe’s debt crisis erupted.

He later targeted loans to borrowers with Fannie Mae and Freddie Mac mortgages that had taken advantage of a program to refinance their debt even when they didn’t have home equity. Those loans were then excluded from expanded Obama administration rules after mortgage rates had dropped, boosting the value of securities that couldn’t immediately prepay.

This year, he also added securities that have risen to record prices after the Fed said in September it would buy to bolster housing and the economy, under QE3.

The success of mortgage strategies has attracted new entrants.
Crowded Market

In July, DW Investment Management, which handles some credit investing for Brevan Howard, hired Sean Macleod from Metacapital to expand into government-backed securities. The Brevan Howard Credit Catalysts Master Fund, which has $2.5 billion in assets and is managed by DW’s David Warren, rose 12 percent this year, according to a person familiar with the matter.

John Burbank’s Passport Capital LLC added a non-agency trader from JPMorgan Chase & Co. this year, after hiring an agency investor who helped mortgage fund Structured Portfolio Management LLC top Bloomberg Markets magazine’s 2010 list of best-performing big managers.

The market is getting crowded and investors will eventually need to deal with a Fed that’s tightening monetary policy, which could “absolutely destroy” some managers, said Peter Rup, chief investment officer at Artemis Wealth Advisors LLC.

“We’re in the eighth inning with regards to that opportunity,” said Rup, whose New York-based firm oversees $600 million for high net worth families. “We’re avoiding it.”
Investment Choices

Narula disagrees. He’s seeking to profit from the Fed buying about $75 billion a month in the $5.2 trillion agency bond market, creating price distortions among the different types of securities, the firm wrote in a Sept. 17 letter.

His firm is looking for opportunities to trade on the “specific investment choices” being made by the Fed, which has different goals than private managers, according to the letter. Its buying will affect prices of Ginnie Mae securities relative to Fannie Mae bonds, generic pools relative to specified ones, and the value of 30-year versus 15-year debt.

He’s also adding non-agency securities, the type of bonds that helped fuel the housing bust, his former employer Lehman’s bankruptcy and sent him to the sidelines in 2007.

That debt is gaining along with home prices as the Fed pushes borrowing costs to record lows and the government guarantees about 90 percent of new lending.

The S&P/Case-Shiller index, which gauges property values in 20 cities, rose 1.2 percent in July from a year earlier, the biggest 12-month jump since August 2010. The measure fell 35 percent from the peak in July 2006 to February 2012.

According to Corelogic Inc., a Santa Ana, California-based mortgage data firm, home prices rose 4.6 percent in August from a year earlier, the biggest increase since July 2006.

“At the start of the year we thought that housing could surprise on the upside,” Narula said. “It looks like this is the year housing turns and that’s largely attributable to actions the government has taken.” 

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Obama-Fueled Mortgages Boost Profit at U.S. Home Lenders

Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM), the largest U.S. home lenders, will post third-quarter profit buoyed by government policies intended to help borrowers.

Those firms, along with No. 3 U.S. Bancorp and fourth- ranked Bank of America Corp., may report $6.9 billion of mortgage-banking revenue in the period, a 37 percent increase from a year earlier, Christopher Kotowski, an Oppenheimer & Co. analyst, said in a research note. That will help the companies generate a combined $10.9 billion in profit, according to the average estimate of analysts surveyed by Bloomberg.

The figures show the degree to which U.S. lenders have become dependent on revenue from mortgages to cushion weakness in other lending and investment-banking businesses. The banks are benefiting as President Barack Obama’s administration targets housing in an effort to stimulate the economy. They’re earning more on each home loan they sell as Federal Reserve purchases of mortgage debt widen profit margins.

“Government policy is encouraging banks to make mortgages, and they want to keep it that way,” said Nancy Bush, an analyst and contributing editor at SNL Financial LC, a bank-research firm in Charlottesville, Virginia. “For them it’s sort of a beneficent cycle right now.”

Lenders are generating revenue as middlemen between government-controlled mortgage firms such as Fannie Mae and Freddie Mac, which provide about 90 percent of the funds to the housing market, and borrowers looking to take advantage of record-low interest rates.

The four banks will post $7.25 billion in mortgage revenue, according to estimates by KBW Inc.
Refinancing Boom

Obama has pushed for more refinancing for homeowners underwater on their mortgages, and the administration last year broadened the Home Affordable Refinance Program, known as HARP, so that more people qualify. Almost 900,000 homeowners have used the program to refinance since 2009, according to the Federal Housing Finance Agency.

In all, consumers refinanced $305 billion of home loans in the three months ended Sept. 30, according to estimates from the Washington-based Mortgage Bankers Association. That’s the most since the fourth quarter of 2010, and a 52 percent increase from a year earlier, the group estimates. Refinancings accounted for 74 percent of the $412 billion in originations, the MBA said.

Central bank policy also is helping lenders. On Sept. 13, the Fed said it would buy $40 billion more in mortgage securities each month to stimulate the economy. The housing market is “one of the missing pistons in the engine” of the economic recovery, Chairman Ben S. Bernanke said at a press conference after the announcement.
‘Useful Outcome’

“Housing is usually a big part of a recovery process,” he said. “We haven’t had that nearly to the usual extent. And to the extent that we can support housing, I think that would be a very useful outcome.”

The announcement, dubbed QE3 after two earlier efforts, pushed rates that already had reached historic lows to new depths. That helped increase lenders’ profit margins in the quarter, a trend that probably will persist, Ed Najarian, an analyst at International Strategy & Investment Group Inc. in New York, wrote in a Sept. 30 note.

The biggest banks benefit the most from the Fed’s actions because they have the largest pools of clients to approach for refinancing and already have customer information needed to underwrite loans, said Thomas Lawler, a former Fannie Mae economist who’s now a housing consultant in Leesburg, Virginia.
Pricing Power

“They have more pricing power, and it comes down to what the market will support,” said Jennifer Thompson, a bank analyst at Portales Partners LLC in New York. “Banks are in the business of making money.”

Between the Fed’s announcement and Sept. 28, the last business day of the quarter, the rates offered for new 30-year mortgages fell by 0.10 percentage point, compared with a drop of about 0.28 percentage point for yields on the bonds into which the loans get packaged, according to data compiled by Bloomberg and Bankrate.com. The gap between the two, which typically signals increasing lender revenue when it widens, reached a record of more than 1.7 percentage points on Sept. 25.

“This is another form of a bailout,” said William Black, an associate professor of economics and law at the University of Missouri-Kansas City and a former U.S. bank regulator. “It transfers a whole lot more money to the banks than to people. It also gives homeowners more disposable income and potentially creates a wealth effect. The lower the interest rate, the higher home values should be. But in that transmission process, the banks will end up wealthier.”
Mortgage Settlement

Those same banks helped fuel the housing boom and subsequent financial crisis by easing underwriting standards and packaging defective loans into securities for sale to investors.

In February, the five biggest mortgage servicers agreed to a $25 billion settlement of state and federal probes into shoddy foreclosure practices. New York Attorney General Eric T. Schneiderman this month accused a unit taken over by JPMorgan of deceiving investors on the quality of mortgage bonds and said the industry faces billions of dollars in damages. The U.S. government yesterday sued Wells Fargo over claims the bank committed fraud by making reckless mortgage loans.
Shares Rebound

Mortgage-banking may account for 9.3 percent of third- quarter revenue at the four largest home lenders, up from 6.5 percent a year earlier, Oppenheimer’s Kotowski wrote in a Sept. 25 report. He estimated a record $2.95 billion for Wells Fargo, $1.85 billion for New York-based JPMorgan, $1.6 billion for Bank of America and $450 million for U.S. Bancorp.

Ancel Martinez, a Wells Fargo spokesman, declined to comment, as did Dan Frahm of Charlotte, North Carolina-based Bank of America, JPMorgan’s Amy Bonitatibus and Tom Joyce at U.S. Bancorp.

Wells Fargo originated 33.1 percent of all U.S. mortgages in the first six months of the year, according to Inside Mortgage Finance, an industry publication. JPMorgan originated 11.1 percent; U.S. Bancorp, 5.4 percent; and Bank of America, 4.4 percent, according to IMF.

Lenders’ shares have rebounded in 2012 after last year’s declines amid signs that U.S. housing was improving. Bank of America surged 66 percent, U.S. Bancorp jumped 28 percent, Wells Fargo rose 28 percent and JPMorgan advanced 26 percent. The 24- company KBW Bank Index (BKX), which dropped 25 percent last year, has gained 29 percent in 2012. Housing prices bottomed earlier this year and have climbed since March, according to the S&P/Case- Shiller index of 20 U.S. metropolitan areas.
Interest Margins

Some banks have said analysts are overestimating profits. Wells Fargo Chief Financial Officer Timothy Sloan said July 13 that reports saying margins on HARP loans were larger than other originations “wasn’t the case” and “isn’t the case now.”

There may be factors that erode or eliminate the impact of mortgage-banking revenue on profits. Expenses may climb, and income from mortgage bonds that lenders hold as investments may be curtailed if yields decline, analysts including Portales’s Thompson said.

Wells Fargo, which outlined a plan last year to cut $1.5 billion in quarterly costs by the end of the year, has stepped away from that goal as more revenue becomes available. The San Francisco-based bank added more than 2,000 workers in the second quarter, and Chief Executive Officer John Stumpf, 59, said on May 31 that “revenue still is king or queen” and that he “won’t be slavish” to the cost-cutting goal.
‘Margin Pressure’

Wells Fargo’s Sloan told analysts last month that third- quarter net interest margin, the difference between what the bank makes on loans and pays for funds, may narrow by about the same as last year’s 0.17 percentage point.

“The drop in mortgage and MBS yields will lead to even more severe net interest margin pressure than previously anticipated,” Najarian wrote.

Still, mortgage banking is expected to help the largest lenders. JPMorgan, led by CEO Jamie Dimon, 56, will post a $4.87 billion profit for the quarter, according to estimates of 13 analysts surveyed by Bloomberg, an increase of 14 percent over the same period last year. Wells Fargo will report net income rose 19 percent to $4.83 billion, according to estimates of 14 analysts. Both firms report results Oct. 12.

U.S. Bancorp (USB) will post $1.43 billion in third-quarter net income, a 13 percent increase from a year earlier, according to 13 analysts surveyed by Bloomberg. The Minneapolis-based company will report results Oct. 17.
Moynihan Retreat

At Bank of America, revenue from the business may mitigate a $1.6 billion litigation expense the firm said it will take in the quarter after agreeing to pay $2.43 billion to investors who suffered losses tied to its purchase of Merrill Lynch & Co.

The bank will post a $276.3 million loss when it reports results Oct. 17, according to the estimates of seven analysts surveyed by Bloomberg. That compares with a $6.23 billion profit in last year’s third quarter driven by more than $6 billion in accounting gains tied to deterioration of its credit spreads.

Bank of America’s 2008 purchase of Countrywide Financial Corp., which made it the biggest mortgage lender and servicer as the bottom was falling out of the U.S. housing market, saddled the firm with more than $40 billion in costs tied to shoddy loans and foreclosures.

In response, CEO Brian T. Moynihan, 53, pulled back on originations to move employees into servicing delinquent borrowers and to reduce assets regulators deemed risky. In February, some Bank of America customers were asked to wait as long as 90 days before starting to refinance mortgages.

Moynihan, whose bank missed out on the surge in mortgage business this year, has said the firm’s market share will rise as it increases sales of home loans to existing customers.

“The banks have to generate profits” from somewhere, SNL Financial’s Bush said. “The housing market is one of the few bright spots.”

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Consumer Groups Ask CFPB to Scrap Mortgage Rules as Inadequate

A coalition of groups supporting tougher financial regulations has asked the Consumer Financial Protection Bureau to scrap its proposed revamping of mortgage rules over what it called inadequate safeguards for borrowers.

“Major improvements in these areas are needed -- including withdrawing and re-issuing a proposal if that is necessary in order to make the major changes required,” Americans for Financial Reform wrote in a letter to the agency on Oct. 9, the last day of a public comment period on the proposal. 

The bureau plans to issue final regulations in January. Richard Cordray, the CFPB’s director, on Aug. 10 proposed the rules for mortgage servicing that he summed up as “no surprises and no runarounds.”

One set of rules is intended to provide homeowners with clearer, timelier information about changes to interest rates and options for avoiding foreclosure. A second set requires servicers to credit payments promptly, correct errors, stay accessible and limit foreclosures if homeowners are working on loan modifications.

The rules would cover major bank servicers, such as Charlotte, North Carolina-based Bank of America Corp. and San Francisco-based Wells Fargo & Co. (WFC), as well as non-depository companies such as Ocwen Financial Corp. (OCN), based in West Palm Beach, Florida.

Americans for Financial Reform, a Washington-based umbrella group that includes the AFL-CIO and the NAACP, faulted the CFPB proposal for focusing on procedures to the exclusion of more stringent consumer protections.
‘Basic Lesson’

“The proposed foreclosure rules need to reflect the most basic lesson from the foreclosure crisis: the rules must mandate that before foreclosing, servicers must take specific, enforceable steps to evaluate homeowners for affordable and sustainable loan modifications,” Margot Saunders, an attorney for the Boston-based National Consumer Law Center, said in a statement.

Elizabeth Warren, the Obama administration adviser who set up the bureau, promoted the new agency by stressing its role in promoting transparency and disclosure in financial services.

The objections of consumer groups to the mortgage rules highlight the tension over whether the CFPB should go further and impose substantive obligations on financial service providers, said Ronald Rubin, a former CFPB enforcement attorney.

There is “a tug-of-war over whether the bureau’s mission should be to ensure that consumers are fully informed when making important financial decisions, or to force financial service providers to give consumers a better deal,” Rubin, now a partner at the Hunton & Williams LLP law firm in Washington, said in an e-mail. “Elizabeth Warren promoted the agency as the former, but most of the people who work there want it to be the latter.”
Dual-Tracking

The consumer law center, a part of the coalition, said it objects to the permission given in the proposal for “dual- tracking,” the process of pursuing foreclosure while evaluating a homeowner for a loan modification.

The American Bankers Association called on the agency to move in the opposite direction, eliminating any requirement not specifically authorized by the Dodd-Frank Act of 2010. It also asked the bureau not to codify into regulation a $25 billion agreement concluded between the largest bank servicers and state attorneys general in February.

The Washington-based association said that the agency’s plan should be studied for its “cumulative impact” on the mortgage market.
Bankers ‘Re-evaluating’

“Due to the potential costs and sweeping nature of the CFPB’s proposals, many banks are re-evaluating their business models, assessing costs and risks that may result from the new regulations, and are considering how they may need to change their business plan, including whether they will continue to offer certain products and services,” the ABA wrote in an Aug. 9 letter.

The Dodd-Frank financial-regulation overhaul that created the agency allows it to provide a transition period of as much as a year before implementing the rules. The bureau has made no decision on that, according to its website.

The Small Business Association asked the CFPB to expand a proposed exemption from the rules for servicers that handle fewer than 1,000 loans per year. And it asked the agency to make the implementation period “as long as possible.”

“If the small servicers leave the market due to these regulations, the price of services will go up due to the reduced pool of providers,” the SBA’s chief counsel for advocacy, Winslow Sargent, wrote in an Oct. 5 letter. “This could result in more business for the larger providers that caused the underlying problem” of the financial crisis.

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Realogy Climbs in Debut After Pricing at Top of IPO Range

Realogy Holdings Corp. (RLGY), the real estate brokerage company controlled by Apollo Global Management LLC (APO), rose as much as 29 percent in its first day of trading as investors bet on a housing recovery.

Realogy climbed as high as $34.90 in New York after selling 40 million shares for $27 each yesterday, the top of its offering range. The owner of the Coldwell Banker and Century 21 brands raised $1.08 billion through the sale of a 31 percent stake, according to a statement. 

The IPO price gave Parsippany, New Jersey-based Realogy a market value of about $3.5 billion. The firm had planned to use the proceeds from the sale to help reduce debt by more than a third to $4.5 billion. Realogy was taken private by Apollo in 2007 in the largest U.S. leveraged buyout of a real-estate services firm on record, just as U.S. home prices headed for the worst slump since the 1930s.

“We’re happy with the outcome but we have a lot of work to do,” Chief Executive Officer Richard Smith said in a telephone interview today. “If you want broad housing exposure as a component of your portfolio, this is the only pure play for you.”

The shares rose 24 percent to $33.54 as of 1:14 p.m. Realogy had sought $23 to $27 a share in the IPO.

Realogy and such rivals such as closely held Re/Max International Inc. and Keller Williams Realty Inc. are poised to benefit as home sales and prices recover. The market is being propelled by tight supplies of listings and borrowing costs that are close to a record low.
Prices Rise

Home prices rose 4.6 percent in August from a year earlier, the biggest increase since July 2006, according to CoreLogic Inc. (CLGX), a Santa Ana, California-based mortgage data firm. Sales of existing houses in August jumped to the highest in more than two years, rising 7.8 percent from the previous month, the National Association of Realtors said.

Smith said that Realogy plans to retire about $1 billion of debt a year as it works to reach profitability. The company had a net loss of $25 million in the second quarter after recording $176 million of interest expense and $44 million of depreciation and amortization costs. Revenue rose 11 percent from a year earlier to $1.31 billion.

Realogy will benefit even if the economy recovers slowly because of divorces, births and other life events that spur Americans to buy and sell homes, he said. Realogy has cut its annual costs by about $500 million and reduced its employee count by 30 percent during the six-year housing slump, he said.

“We are well positioned for a strong recovery, a moderate recovery or a choppy recovery,” Smith said.
New Fund

Apollo, co-founded by Leon Black more than two decades ago, took Realogy public as it prepares to raise a new fund of as much as $12 billion, people familiar with the situation have said. Last week, New York-based Apollo’s Berry Plastics Group Inc. (BERY) completed its own IPO, pricing its shares at the bottom of its planned price range.

Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) led the offering for Realogy, which is listed on the New York Stock Exchange (NYX) under the symbol RLGY.

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California Pension Freezes Executives’ Pay, Cuts Bonuses

The California Public Employees’ Retirement System, the largest public pension in the U.S., paid 12 percent less in bonuses to investment officers after stocks dragged down returns. Most also went without pay raises.

The pension distributed $3.6 million in performance bonuses among 55 investment officers, down from $4.1 million last year, according to Calpers data. The sums are based on investment results over three years, including a 1 percent return last year and 21.7 percent a year earlier. Chief Investment Officer Joe Dear was granted $87,750. 

“The performance awards are based on multiple years of performance and we are a long-term investor, and that’s what we are trying to incentivize,” Brad Pacheco, a Calpers spokesman said yesterday. “For us to keep highly skilled investment managers to run this fund, we have to be competitive and these awards are part of that compensation.”

Volatility in capital markets has caused swings in the $244.5 billion pension fund’s returns while it assumes it will earn 7.5 percent annually to meet projected obligations. When it underperforms, the state and its municipalities must make up the difference. The pension’s 20-year investment return is 7.7 percent.

The average Wall Street bonus fell 13 percent to $121,150 in 2011, the lowest since 2008, and down almost 40 percent from a peak of $191,360 in 2006, according to estimates by New York state Comptroller Thomas DiNapoli in February.
Beat Benchmarks

“The one-year shortfall is within the expected range of returns for a portfolio like Calpers,” Dear said in a statement yesterday. “The incentive payments are based on three-year performance of 10.6 percent. Global equity and fixed income, comprising 70 percent of the portfolio, beat their three-year benchmarks, adding $1.6 billion of value, so it is appropriate to compensate the portfolio managers for their success.”

The biggest bonus went to Arnie Phillips, a senior fixed- income portfolio manager, who was awarded $152,608, Pacheco said.

Calpers spends $40 million a year on compensation and benefits for investment staff, compared with $44 million for consultants and $1 billion on external managers. Using internal management saves an estimated $114 million annually that would have been paid to Wall Street in fees, Pacheco said.

Calpers froze wages this year for its executive staff and all but 11 of the investment officers. Rank-and-file employees still received merit raises.

“Now is not the time to be granting raises, given the current fiscal challenges facing our state and local governments,” Pacheco said.

Dear earned $522,594 in calendar year 2011 including bonus, according to data provided by the state’s controller. He’s one of 174 employees from the fund who were paid more than $100,000 last year. The pension system paid out a total of $167 million in wages, the controller’s data shows.

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MetLife Joins Wal-Mart Selling Insurance in a Snoopy Box

MetLife Inc. (MET), the largest U.S. life insurer, is turning to the world’s biggest retailer and Snoopy to boost sales of its policies to less-affluent consumers.

The insurer began offering prepaid life policies at about 200 Wal-Mart (WMT) Stores Inc. locations in South Carolina and Georgia last month, Shane Winn, a spokesman for New York-based MetLife, said in an e-mail today. Shoppers can buy a package adorned with an image of the comic-strip beagle Snoopy that offers as much as $25,000 of coverage for one year. 

MetLife is seeking to increase the proportion of policies it sells directly to consumers to add clients and cut costs tied to middlemen. The insurer has set a goal to cut expenses by $600 million by 2016 as it targets return on equity of as much as 14 percent. Direct sales, including those through the internet, may climb to 13 percent of the U.S. individual life market in 2016 from 8 percent in 2010, the company said in a May 23 presentation, citing data from Limra.

“That’s where the growth is, that’s where we need to be,” William Wheeler, president of the company’s Americas division, said that day.

A one-year policy, providing a $10,000 death benefit, is advertised at $69 for people ages 18 to 44. Those 60 to 65 would pay $429 for $25,000 of coverage lasting a year. Customers purchase a prepaid card that holds enough value to cover the policy’s cost and then call MetLife to answer health questions and activate the coverage. Those who don’t qualify can return their purchase or use the card to shop for other products.
Everyday Services

The program marks the first time Bentonville, Arkansas- based Wal-Mart has sold life insurance and is part of the company’s efforts to expand offerings of financial products, said Sarah Spencer, a company spokeswoman. She said it’s too early to gauge the customer response.

“We’re trying to make sure our customers have access to affordable, everyday money services,” she said by phone.

The Wal-Mart program is “an effort to pilot a new product in a new channel and in a new market,” and not directly related to the cost-cutting efforts, Winn said.

U.S. life insurers typically focus on selling policies with larger face values to more affluent individuals, said Randy Binner, an analyst at FBR Capital Markets. By distributing coverage at Wal-Mart, MetLife can reach consumers at different income levels, he said.

Insurers “largely focused on affluent and mass affluent Americans, effectively the upper end of the income scale,” Binner said by phone. “There’s a large population in the U.S. that’s pretty underserved.”
Peanuts, Blimp

MetLife’s branding efforts include its blimp, naming rights for the stadium that’s home to the National Football League’s New York Jets and New York Giants, and Peanuts characters created by the late comic-strip artist Charles Schulz.

“Snoopy and the Peanuts characters are strongly associated with MetLife and they’re obviously very valuable,” Binner said. “To the extent that you have a brand like that that has mass appeal, it’s interesting to think about ways you can make your product more available.”

A website explaining the life insurance sold at Wal-Mart lists prices and terms, and also answers questions about the coverage including “Is it really that easy?”

“Does Snoopy live in a doghouse?” is MetLife’s answer.

The program doesn’t have a set end date and MetLife will evaluate the results later this year, Winn wrote in an e-mail.

MetLife already offers life insurance on the firm’s website and sold $5 million of new premium via that channel in the first three months of this year, Wheeler said. Manulife Financial Corp. offers policies to Canadian customers of Costco Wholesale Corp. (COST), the biggest U.S. warehouse-club chain.

Wal-Mart has been expanding in financial services by offering money transfers, check cashing and bill payment in stores. The retailer sought to open a limited-service U.S. bank for more than a year before abandoning that effort in 2007.

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Pensions Weaken 4th Year as Illinois Leads Decline: Muni Credit

Funding for U.S. state retirement plans fell for a fourth straight year as insufficient contributions and inadequate investment gains overwhelmed cuts that more than 40 legislatures have made to benefits since 2007.

The median funding ratio was 71.7 percent for the year through June 2011, down from 74.3 percent the prior period, data compiled by Bloomberg show. Taxpayers in Illinois, the weakest of the group for the fourth straight year at 43.4 percent, are paying the price: the relative borrowing cost of the state and its localities is almost double the five-year average. 

More than 30 states, including New Jersey and California, had less than 80 percent of assets needed to meet obligations to workers and retirees, the data show. That left them short of the threshold for sustainability of their plans.

“A lot of the states have done the easiest stuff first,” Christopher Mier, chief municipal strategist at Loop Capital Markets in Chicago, said regarding benefit cuts. “From there it gets progressively more difficult.”

The funding drop shows the challenge states face trying to recover from investment losses suffered during the recession that ended more than three years ago. The Standard & Poor’s 500 Index (SPX) sank 38.5 percent in 2008, the most since 1937.
Not Enough

Lawmakers have lifted retirement ages, forced workers to contribute more to plans and suspended cost-of-living increases. Yet more than 30 states still failed to deposit enough into their systems last year as they struggled to balance budgets, according to Mier.

“If they had been diligently making their contributions there wouldn’t have been this crisis,” said David Draine, a senior researcher in Washington at the Pew Center on the States. “It’s the states that came into the recession with poorly funded plans and a history of failing to make sufficient contributions that were already in a very vulnerable spot.”

Estimates of states’ combined pension deficit have ranged from $1 trillion to as much as $4 trillion as lawmakers and regulators debate the appropriate rate for discounting liabilities. The Governmental Accounting Standards Board has adopted new rules for next year that could swell the gaps.
Lower Rates

Funding levels are falling as lawmakers cave to pressure to lower assumed rates of return amid volatility in performance.

New York, which has consistently made its actuarially required payments, had less than 100 percent of the assets it needed in 2011 after lowering its rate to 7.5 percent from 8 percent, Bloomberg data show.

The board of the California Public Employees’ Retirement System, the largest public pension fund with $244 billion of assets, voted in March to cut its rate to 7.5 percent from 7.75 percent. The fund earned 1 percent in the year ended June 30, after gaining 21 percent the year before.

California Governor Jerry Brown, a Democrat, last month signed the broadest rollback of public-employee pension benefits in the history of the most-populous state. The changes may save taxpayers as much as $55 billion over 30 years by requiring new employees to pay half the cost of benefits and work longer before retiring. The state’s funding ratio was 78.4 percent, down from 80.7 percent.
Adding Stocks

While corporate plans have been cutting equities in favor of fixed-income, public funds have done the opposite. They’ve increased stocks to nearly 70 percent of portfolios on average over the last decade as they seek higher returns, according to the Center for Retirement Research at Boston College. State systems are also boosting stakes in alternatives such as hedge funds, Cliffwater LLC, an investment advisory firm with offices in New York and Los Angeles, said in a June report.

“They are essentially doubling down to earn their way out of this problem and it’s not working,” said Kimberlee Lisella, vice president of customized strategies at Cutwater Asset Management Corp. in Armonk, New York, which oversees $32 billion. “These strategies have had mediocre returns at best and the volatility has been off the charts.”

Illinois lawmakers in August failed to act on a cost- cutting pension overhaul, ending a one-day legislative session called by Democratic Governor Pat Quinn.

The Democratic-controlled legislature considered increasing employee contributions, passing some costs to local school districts, and forcing workers to choose between the current system and receiving free retirement health care. None won majority support.
Rating Cut

Standard & Poor’s in August cut Illinois’s rating one step to A, sixth-highest, citing “weak pension funding levels and lack of action on reform measures.” New Jersey had its grade dropped by the three major credit raters last year, in part because of its unfunded retirement liability.

Investors demand about 1.5 percentage points of extra yield to own 10-year general-obligation bonds from Illinois issuers rather than AAA securities, compared with a five-year average of 0.88 percentage point, data compiled by Bloomberg show.

California, at A-, is the only state whose grade is lower from S&P.

“We all look like idiots,” Representative Daniel Biss, an Evanston, Illinois, Democrat, said in a speech in August as the House failed to advance a bill that would have eliminated the legislature’s own pension plan, one of five the state manages. “Not the governor, not the other side, not our side -- we all look like idiots.”
Court Challenge

Rhode Island, with an unfunded ratio of about 62 percent, passed one of the most ambitious retirement-system overhauls last year, as the Democratic-controlled legislature defied union opposition. Yet the law, which suspended cost-of-living increases and raised retirement ages, is among the handful being challenged by employees and retirees in court.

Lawmakers “were reckless in the way that they failed to fund the plans, and now they’re being equally reckless in the way they’re going to fix them,” said Steven Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees in Washington. “This is an example of politicians at their worst.”

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Retirement Planning 2.0: Retrain Your Brain for Financial Success

Dismal market returns haven’t exactly created a tailwind for 401(k) and IRA portfolios over the last decade or so, but an equally pernicious -- and more entrenched -- problem is that our brains are messing with our retirement plans.

“We are wired for financial defeat,” says Rapid City, South Dakota, certified financial planner Rick Kahler. “Whatever has the most emotional juice right now is what gets our attention. Invest $5,000 in your IRA for a retirement that is 10, 20, 30 years away? Or spend the $5,000 for a vacation to the Bahamas?” All too often, the Bahamas wins out. 

William Meyer, founder of Social Security Solutions, notes that our thirst for immediate gratification can easily take a six-figure toll. More than two-thirds of folks opt to claim a lower Social Security benefit starting as early as age 62. For a married couple, than can mean leaving as much as $100,000 on the table. “If you wait to claim until age 70, you’re locking in a benefit that is 76 percent larger," says Meyer.

More productive planning

Forever tweaking your asset allocation probably won’t get you near the retirement payoff that tweaking your brain will achieve. Consider these strategies for engaging your brain in more productive retirement planning:

Get Thee to a Calculator, Pronto: OK, you know you probably should be saving more for retirement. And when life keeps intervening -- that Bahamas vacation you and yours really really need, or the realization that the kid’s orthodontia isn’t covered by insurance -- you tell yourself that next year, you’ll ramp up your savings rate. You’ve got plenty of time, right?

What you may not realize is how expensive that time is. Research conducted by Craig McKenzie, a psychology professor at the University of California, San Diego, shows that we have a tendency to “massively underestimate the cost of waiting to save. It’s difficult to appreciate the difference between giving yourself 20 years to save and 40 years.”

For example, a 30-year-old who is saving $10,000 a year and earning an annualized 6 percent will have $1.2 million at age 65. Care to guess what someone starting at 45 will have? About $390,000. The younger saver invests $150,000 more than the 45-year-old does, and in return has an ending balance that's $800,000 larger. Even if you’re already past your 20s and 30s, you might find it eye-opening to see how extending your investment timeline by delaying retirement on the back end of the calculation can help matters. Your company retirement plan probably has an online calculator you can play with; or try this one.

Make it Personal: How you frame retirement savings decisions can help boost your ability to delay gratification. When individuals were asked if they'd prefer to have $3,400 in one month or $3,800 in two months, 57 percent chose the latter. When the same scenario was framed in terms of one’s personal age -- “when you are 2 months older” -- 83 percent chose to wait for the bigger payoff.

How does that translate to better retirement planning? Yale School of Management marketing professor Shane Frederick, one of the study’s authors, says a 50-year-old who frames a savings goal as “when I am 65” will likely be more patient to focus on that delayed gratification, than someone who frames it as a more generic “in 15 years.”

Time Travel: Another unique challenge for retirement planning is that the end goal is so far away that it’s hard to see how actions we take or don’t take today will have a huge impact on our older selves. When researchers showed individuals doctored photos of their future selves, the human guinea pigs said they would save more than twice as much for retirement, compared to a control group that wasn’t given a glimpse of their older self.

Work is afoot to bring this visual exercise to a 401(k) plan near you. In the meantime, Hal Hershfield, who led the research, says he wouldn’t recommending using apps that age your face. “They're just not accurate enough, and I think seeing a strange-looking version of your future self may actually have the perverse effect of causing you to identify less.”

Hershfield, an assistant professor of marketing at New York University’s Stern School of Business, says new research that has yet to be published shows that simply writing a letter to your future self can help you become more invested in the welfare of that older person. “In a way, this task is a very low-tech version of the age-progression [photo morphing] techniques: Both have the same goal of creating a more vivid image of the future self.” Hershfield says hanging out with older folks -- parents, grandparents, volunteering with an organization for the elderly -- can also have a beneficial impact on your resolve to save more today.

Channel Ulysses. Most of us suffer from a bad case of recency bias, the tendency to extrapolate that whatever is happening today will keep happening. That’s why it’s so hard to buy low and sell high. If your recent experience is a falling market and bad returns, it’s not exactly easy to belly up to the bar and buy stocks, or simply stay committed to what you already own.

A Ulysses Contract -- a one-page statement that lays out your long-term strategy and the fact that you’re committed to staying the course -- can be a line of defense against over-reacting to current events. Like the Greek warrior, you are pre-planning for how you will circumvent alluring emotional sirens that can thwart your retirement plan.

For example, a sample Ulysses contract -- created by the Allianz Global Investors Center for Behavioral Finance for financial advisers to use with clients -- includes this passage: “Should the portfolio value decline by 25 percent, we commit to avoid the urge to panic and sell the portfolio. Similarly, should the portfolio value increase by 25 percent, we commit to avoid the urge to chase the hottest investments.”

Another useful step is to include a clause in your contract saying that before you ever deviate from your plan, you will write down your rationale. As Nobel Laureate Daniel Kahnemann explained in his book, "Thinking, Fast and Slow," you don’t want to cede all power to the quick-twitch intuitive part of your brain. Slowing down and simply writing down why you want to change course triggers more deliberate rational thinking. That’s the key to getting ahead and staying ahead.

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Principal to Acquire Chile’s AFP Cuprum for $1.5 Billion

Principal Financial Group Inc. (PFG) agreed to buy Chile’s AFP Cuprum SA (CUPRUM) in a $1.5 billion deal, the largest acquisition for the U.S.-based seller of life insurance and retirement products.

Principal is adding more than 600,000 mandatory-pension clients with $32.1 billion in assets under management to the annuity and mutual-fund businesses it runs in Chile. The firm has sought to buy a pension provider “almost from the start” of its Chilean business in 1995, Chief Executive Officer Larry Zimpleman said yesterday after the deal was announced. 

“This was really the one part of the system we had not been able to penetrate,” Zimpleman said in an interview. “We can clearly pursue additional opportunities for contributions and revenue on the voluntary side, no question.”

Zimpleman is expanding in Latin American nations including Chile, Brazil and Mexico to capitalize on the increasing role of private companies in managing retirement funds. Chile pioneered the private pension system in 1981 to build up the country’s savings rate, help develop its capital markets and reduce the long-term strain on its budget.

“This acquisition continues our effort to find targeted, strategic acquisitions that strengthen our competitive position in the most attractive emerging retirement and long-term savings markets,” Zimpleman said in a statement. “Cuprum represents the sixth such transaction in the past two years and adds meaningfully to our fee-based earnings.”
Brazil’s Claritas

Principal announced a deal in March to buy part of Brazil’s Claritas to expand in mutual funds and asset management after extending a retirement-product partnership with Banco do Brasil SA (BBAS3) in 2010. The firm agreed last year to buy Mexican pension provider HSBC Afore SA de C.V.

The Chilean system of individual pension savings accounts was created during the government of dictator Augusto Pinochet to replace a “pay-as-you-go” program. Similar pension systems have been started in countries including Russia, Peru, Colombia, Uruguay, Mexico, India and Poland, according to the website of the International Federation of Pension Fund Managers.

Chile requires workers to contribute a portion of their pay to a private retirement account, and people with more income can save additional cash in voluntary accounts. Principal will work to convince Cuprum customers to invest in the voluntary accounts it already offers, said Luis Valdes, president of Principal International.

“You have access to 600,000 clients where you have all the information that is needed in order to customize your value proposition for them,” he said by phone. “This is a tremendous competitive advantage going forward.”
Transaction Price

Principal is paying about 1.76 unidades de fomento, Chile’s inflation-adjusted accounting unit, per share, or about 39,794 pesos, according to a statement posted on the website of Chile’s securities regulator.

Cuprum’s shares soared a record 41 percent to 36,880 pesos at 10:38 a.m. in Santiago trading. Other pension fund managers also rose, with AFP Provida SA gaining 8.9 percent and AFP Habitat SA jumping 7.2 percent. Provida’s controller, Spain’s Banco Bilbao Vizcaya Argentaria SA (BBVA), said in May it’s studying the sale of its pension funds businesses in Latin America.

The deal requires Empresas Penta SA and Inversiones Banpenta Ltda. to sell their 63 percent stake pursuant to a tender offer to include the remaining shares, Principal said.

Principal declined 1.7 percent to $27.31 at 9:47 a.m. in New York. The acquisition uses capital that could have been spent to repurchase shares, John Nadel, an analyst at Sterne Agee & Leach Inc., wrote in a research note.
Cuprum Dividend

“We are disappointed in the initial accretion for PFG’s current shareholders,” he said, using the firm’s ticker symbol.

Principal’s final purchase price will be adjusted for a dividend of as much as about $130 million that Cuprum will pay to shareholders before the deal is completed. The U.S. firm expects to pay about $1.38 billion, Susan Houser, a company spokeswoman, wrote in an e-mail.

The deal may be completed in the first quarter, Principal said in the statement. It’s subject to approval by Chile’s securities and pension regulators, Zimpleman said. The acquisition may increase Principal’s per-share earnings by about 3 percent next year and 5 percent in 2014, according to a presentation on the company’s website.

Lazard Ltd. (LAZ) was Principal’s bank on the transaction. Cariola Diez Perez-Cotapos and Debevoise & Plimpton acted as legal counsel. JPMorgan Chase & Co. (JPM) provided Cuprum with financial advice, while Estudio Alcaino Rodriguez was legal representative.

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UBS Executive Probing Adoboli Trades Ignored Co-Workers

The UBS AG (UBSN) executive who conducted an internal review of Kweku Adoboli’s trades that allegedly caused a $2.3 billion loss didn’t look into the actions of any other traders on his desk or review their communications.

Ruwan Weerasekera, chief operating officer of securities at UBS’s investment bank, testified yesterday that, had he seen them, he would have reviewed the messages between Adoboli and John Hughes. Hughes, another former trader on the exchange- traded funds desk, exchanged messages with Adoboli that referenced a so-called umbrella account. 

Prosecutors say Adoboli, who is on trial for fraud and false accounting tied to the trading loss at Zurich-based UBS, created a secret account known as the umbrella while working on the bank’s ETF desk in London where he parked trading profits to cover future losses. Adoboli, 32, has pleaded not guilty and his lawyers have sought to show others knew of the secret fund.

“You didn’t factor into your considerations the extent to which others at UBS were complicit,” Paul Garlick, a lawyer for Adoboli, said to Weerasekera.

Weerasekera said he used an e-mail from Adoboli confessing to booking fictitious trades and saying he acted alone as the starting point for his review, dubbed Project Bronze. He said his probe was limited to the trades entered into the bank’s system by Adoboli, focusing on the period from June 1, 2011, until the trader’s arrest in September of last year.
FSA Investigation

He didn’t look at trades by anyone else on the desk or whether they used the umbrella account or knew about it.

“Had I known the term umbrella and had I looked at the communications, I would have looked into it further,” Weerasekera said. “At the same time, I was working with an independent investigator whose focus was to take all of that into consideration.”

The accounting firm KPMG LLP has conducted its own investigation at the request of the U.K. Financial Services Authority into the controls failures at UBS that allowed the trades to happen. Weerasekera said he worked with KPMG daily.

Weerasekera testified previously he didn’t look at ETF desk trades that exceeded risk limits made last year while Adoboli was on vacation.

Adoboli’s lawyers have sought to show he didn’t act alone and traders were encouraged to exceed trading limits to increase profits.
Senior Trader

Hughes, the most senior of four traders on the bank’s ETF desk, testified last week that he made trades that benefited the umbrella account after one of the defendant’s lawyers showed him evidence of at least five transactions made while Adoboli was on vacation in Greece. The lawyer, Charles Sherrard, said that KPMG had found evidence of similar trades.

Hughes confirmed he’d made the trades, which were real transactions on the bank’s books tied to fake hedges that hid risk from the desk’s regular trading book. Profit from such trades went into the umbrella fund for later use by the desk, Sherrard said.

Hughes testified that his firing for gross misconduct was fair.

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Schaeuble Clashes With IMF, Rejects Government Writeoffs

German Finance Minister Wolfgang Schaeuble said European governments can’t accept losses on Greek debt holdings, clashing with the International Monetary Fund.

“At the International Monetary Fund, there are indeed considerations that if the total Greek debt was reduced by means of a haircut borne by public creditors, the gap would be easier to close” in terms of Greece’s debt sustainability, Schaeuble said in Tokyo today before a meeting of finance chiefs. 

Almost all European member states have rules stipulating that guarantees can’t be extended without some assurance that the loan will be repaid, Schaeuble said. If an official sector involvement, dubbed OSI, was carried out, “the preconditions for further guarantees or payments would be destroyed,” he said.

IMF Managing Director Christine Lagarde has suggested that Greece may need another debt cut, saying on Sept. 24 that the country at the source of Europe’s financial crisis faces a financing gap that won’t be solved by budget measures alone. European Central Bank Executive Board member Joerg Asmussen said last month that Greece may need more aid.

International lenders have so far pledged funds totaling 240 billion euros ($309 billion) to Greece, which also had 100 billion euros of debt written off by private-sector investors this year in the biggest restructuring in history.
Troika in Athens

Inspectors from the troika, which comprises the European Commission, the IMF and the ECB, returned to Athens at the end of last month to continue to assess whether Greece is meeting the terms of its bailout and can receive the next installment.

In a March report on Greece, IMF economists said the country may need more aid from Europe or further debt restructuring if the current loan program went off track.

Rainer Bruederle, a former German economy minister who is now parliamentary caucus leader of Chancellor Angela Merkel’s Free Democratic coalition partner, said that public creditors may forgo repayment of some Greek debt, Die Welt newspaper cited him as saying in an article published today.

Time has come for European creditor governments to think about the costs and benefits of OSI for Greece, Pimco’s Mohamed El-Erian said Sept. 28 in a commentary in the Financial Times. The longer governments wait, the greater the likelihood of an unplanned, badly managed debt reduction, he said.

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Charging on Deposits Will Hurt Banks Most, Denmark’s Sohn Says

Danish banks discussing whether to charge for deposits will end up hurting themselves as they repel customers and raise their reliance on wholesale funding, Business and Growth Minister Ole Sohn said.

Denmark’s banks have come under pressure after the central bank in July cut its deposit rate to an unprecedented minus 0.2 percent. Governor Nils Bernstein, who uses monetary policy to defend the krone’s peg to the euro, has said he can’t soften his focus on the exchange rate even as banks pay the price. 

Lenders in the Nordic nation have since discussed the option of passing the negative deposit rate on to clients in an effort to cover their costs, according to the Danish Bankers Association. Danske Bank A/S (DANSKE) and Sydbank A/S, Denmark’s biggest and third-largest lenders, said this week some professional counterparties already pay as short-term money market rates sink below zero. Banks in the U.S., Sweden and Canada have also started charging clients on Danish krone deposits.

“I have a hard time imagining that this is a good business move,” Sohn said in an e-mailed reply to questions. “My expectation would be that customers would leave pretty quickly. Some banks still need to attract customers to help address their deposit shortfalls.”

State Street Corp. and Bank of New York Mellon Corp. (BK), two of the world’s biggest custody banks, are charging clients for krone deposits. State Street accounts will carry a rate of minus 0.75 percent annually, according to a client note, while BNY Mellon started charging for krone deposits last month, a person familiar with the matter said.
RBC, SEB

Last week, Swedish bank SEB AB started charging some customers for deposits held in Danish kroner, said Laurence Westerlund, a spokesman for the Stockholm-based lender.

Royal Bank of Canada (RY) is also imposing negative interest rates on some customers who hold Danish kroner and Swiss francs. Should nominal interest rates turn positive again, “we would reflect this change in the interest rates applicable to client balances,” Katherine Gay, a spokeswoman at the Toronto-based bank, said in an e-mailed statement.

Danske Bank “doesn’t want to be arbitraged by professional counterparties,” said Jens Peter Neergaard, global head of markets at Danske. “If they leave balances on the account, depending on the client and if it’s a big amount, there will be a negative rate.”

For most of the bank’s clients, Danske continues to offer a flat or positive deposit rate, he said.
Rate Freedom

“Banks have repeatedly tightened their credit standards and raised their prices to boost their earnings,” Sohn said. “The banks are free to set their own rates, but imposing negative deposit rates would naturally limit their competitiveness.”

Interest rates on new bank lending to households rose to 6.6 percent in the second quarter on average, from 6.2 percent a year earlier, while rates on outstanding loans increased to 6.1 percent from 5.3 percent, according to central bank data.

The increase helped boost the industry’s aggregate net interest income an annual 2 percent in the first six months to 25.7 billion kroner, the Financial Supervisory Authority said Oct. 1. Banks and mortgage lenders extended the increases into the third quarter and expect to raise prices further, the central bank said Oct. 8 in its quarterly lending survey.

Denmark’s banks have been weakened by the central bank’s decision to cut its deposit rate below zero, Fitch Ratings said last month. According to Anders Dam, the chief executive officer of Jyske Bank A/S (JYSK), Denmark’s financial industry will lose about half its banks by 2020 as troubled lenders struggle to fund themselves.

“There’s healthy competition in the Danish banking sector,” Sohn said. “There’s always the possibility that people will start to prefer cash.”

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BofA’s Moynihan Sees More Job Cuts as Economy Sputters

Bank of America Corp. Chief Executive Officer Brian Moynihan will press on with a plan to cut more than 30,000 jobs as revenue stays flat.

“I think we continue to reduce our headcount -- you can see it in our patterns, it’s really based on demand,” Moynihan, 53, said in an interview with Bloomberg Television in Tokyo today. “As we continue to get through the mortgage issues at Countrywide, you’ll see the headcount come down substantially.” 

Bank of America, the second-biggest U.S. lender, is among financial firms cutting expenses to restore profitability after the 2008 crisis sent borrowers into delinquency and pushed the global economy into the deepest slump in at least seven decades. Moynihan announced $3 billion of cuts at the company’s investment bank, trading and wealth-management units in July.

In March, Moynihan promised “demonstrable progress” on job cuts every quarter, with more than 30,000 positions in retail and support targeted for elimination.

The company’s shares were unchanged at $9.21 in New York yesterday. Gains this year were 66 percent, outpacing the 18 percent advance of the MSCI World Financials Index.

“Our revenues are flat because of the interest-rate environment, the economic environment, therefore we have to bring in the costs in,” Moynihan said. “When I talk to our clients and customers, they don’t expect to hire a lot more people because of the amount of uncertainty in the market.”
Housing Recovery

Losses at Bank of America’s Countrywide Financial Corp., the mortgage unit that was careering toward collapse in 2008, narrowed to $768 million in the second quarter from $14.5 billion in the same quarter of last year.

In housing, “everything that we see points that the worst is over, from the amount of delinquent loans, to the amount of seriously delinquent loans to the amount of backlog homes that are still going through the process,” Moynihan said today.

Trading and investment-banking revenue at the five largest Wall Street firms dropped 18 percent in the second quarter. Deal and trading volume fell amid concern that Greece would leave the euro and the region’s sovereign-debt crisis would spread to other nations, including Spain. The decline led to questions about whether banks could cut costs to improve returns.

Banks’ profitability is being squeezed by sluggish deal making and new rules on capital, McKinsey & Co. said in an annual review of the industry published this week.

“Like many of our peers, equity issuance is down, so we’re downsizing some of those businesses,” said Moynihan. “But our corporate banking business and our treasury management business continue to grow and we continue to add people in Asia and around the world.”

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JPMorgan Finance Chief Braunstein Said to Weigh New Role

JPMorgan Chase & Co. (JPM) Chief Financial Officer Douglas Braunstein is considering leaving his position and may seek a role in the firm’s investment bank, where he previously led dealmaking, according to a person with direct knowledge of the matter.

Braunstein, who was promoted to CFO in June 2010, is likely to remain in that role for at least several months, said the person, who requested anonymity because a decision on the move isn’t final. The finance chief had reported to Chief Executive Officer Jamie Dimon until July, when Matt Zames, 41, became his boss and co-chief operating officer amid management changes in the wake of a $5.8 billion trading loss. 

Braunstein, 51, didn’t respond to a phone call seeking comment. The Wall Street Journal reported late yesterday that he is expected to leave his post.

The trading loss, tied to wrong-way bets on derivatives, is being reviewed by agencies including the Federal Bureau of Investigation, Securities and Exchange Commission, the U.K. Financial Services Authority and the U.S. Senate Permanent Subcommittee on Investigations. An internal probe showed traders in London priced their books “aggressively” and may have tried to hide the full extent of their losses, the company has said.

The FBI is focusing its inquiry on four former London-based executives in the bank’s chief investment office, where the loss occurred, and the bureau could make arrests in the next several months, the New York Times reported late yesterday, citing officials briefed on the case.
London Whale

The newspaper said the FBI is scrutinizing former JPMorgan traders including Bruno Iksil, nicknamed the London Whale because his wagers were big enough to move the market, as well as his boss, Javier Martin-Artajo, and former Europe CIO head Achilles Macris.

A lawyer for Macris, 51, declined to comment and an attorney for Iksil didn’t respond to requests for comment, according to the New York Times. Greg Campbell, a lawyer for Martin-Artajo, said his client “is confident” that he will be cleared of wrongdoing after a “fair reconstruction of these complex events is completed,” the newspaper reported.

Joe Evangelisti, a JPMorgan spokesman, declined to comment.

A series of personnel changes stemmed from the botched bets, starting with the resignation in May of Chief Investment Officer Ina Drew, 56, less than a week after Dimon, 56, disclosed the trading loss. Her exit was followed by that of Iksil, Martin-Artajo and Macris.
Senate Panel

Dimon and Drew are among executives who have been questioned by aides to the Senate panel, overseen by Chairman Carl Levin, a Michigan Democrat, people familiar with the discussions said. Joseph Bonocore, a former CIO finance chief, and David Olson, an ex-credit trader in the unit, also have been interviewed, said the people, who asked not to be identified because the talks are private.

Bonocore and Olson now work at New York-based Citigroup Inc. Shannon Bell, a spokeswoman for that bank, declined to comment.

Two senior managers last week also disclosed that they intend to leave the company. Irene Tse, 43, who ran the CIO for North America under Drew, told employees that she’s resigning and people familiar with the matter have said she plans to start a hedge fund. Former Chief Risk Officer Barry Zubrow, 59, who runs JPMorgan’s lobbying operation, announced Oct. 5 that he will retire at year-end.

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Policy Makers Bemoan Currency Strength as Yellen Defends Fed

Policy makers from around the world bemoaned the economic threat of strong exchange rates as the Federal Reserve played down its influence in currency markets.

As officials landed in Tokyo for annual meetings of the International Monetary Fund, central bankers from Japan and Switzerland yesterday expressed discomfort with the value of their currencies, and the Philippines said Fed decisions are complicating monetary policy. Japanese Prime Minister Yoshihiko Noda echoed the concerns, saying in an interview that his government will act against disorderly gains by the yen. 

Such worries across both industrial and developing nations are being heightened by an IMF warning that global growth and trade are slowing, leaving countries at risk of losing an export edge if their exchange rates climb. The Fed again drew fire from emerging markets for propelling their currencies higher, prompting a riposte from Vice Chairman Janet Yellen that was echoed by Israel’s central bank chief Stanley Fischer.

“We are heading into a far more difficult period for the world economy and so there’s an exacerbation of currency wars again,” said Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon Corp. (BK) in London.
Global Slowdown

Policy makers are paying greater attention to the value of their currencies as the IMF predicts worldwide expansion will fade to 3.3 percent this year and estimates international trade expansion will slow to 3.2 percent from 12.6 percent as recently as 2010. The officials spoke ahead of today’s gathering of Group of Seven finance chiefs in Tokyo.

With the yen about 4 percent below the postwar high of 75.35 per dollar reached last October, Noda said in an interview in his office yesterday that the yen is a ‘serious problem,’’ out of step with Japan’s economic performance and “when necessary, we will take decisive action.”

Bank of Japan (8301) Governor Masaaki Shirakawa said at a conference he is “conscious of the effects that the rapid appreciation of the yen could have on Japan’s economy and inflation outlook.”

Thirteen months since the Swiss National Bank imposed a ceiling for its franc of 1.20 versus the euro, Chairman Thomas Jordan told the same event that the cap will remain for the “foreseeable future” and even at that level, the currency posed a “serious” threat to growth.
Currency Tensions

The concerns suggest rich nations are becoming increasingly irritated by exchange rates they see as overvalued, adding a new dimension to the so-called currency wars which were previously fought by emerging markets critical of easy monetary policy in the U.S. and Europe, said Kit Juckes, head of foreign exchange research at Societe Generale SA in London.

“The currency wars are building slowly again and are becoming an issue within the advanced countries too this time,” he said.

Emerging market officials again warned of the risks they face as the Fed embraces easier monetary policy, this time in the form of last month’s decision to embark on open-ended asset purchases. The concern is a third round of quantitative easing will weaken the dollar and propel unwanted capital into their economies.
Fed’s Impact

The Fed “is causing challenges to monetary policy in emerging markets,” Philippine central bank Governor Amando Tetangco said in an interview in Tokyo. “We are watchful of that.”

Indian Finance Minister Palaniappan Chidambaram said Oct. 9 he raised concern the Fed’s actions “may impact commodity prices” with U.S. Treasury Secretary Timothy F. Geithner.

Asked about such worries, Yellen said in Tokyo that if the Fed succeeded in rallying the U.S. economy then the whole world would win. While acknowledging different monetary policies affect capital flows and currency values, she said the Fed is not the main factor and governments have tools of their own to protect their economies.

“It’s not the intention of the U.S. and Fed to make this more difficult,” Yellen said. “On balance, stronger U.S. growth is beneficial for the entire global economy.”

Yellen had some backing from Israel’s Fischer, who said today that the criticism of quantitative easing “is not well founded.”
’Unfounded Criticism’

“The countries that are critical have to explain how they expect the U.S. to return to growth when it has a huge budget deficit to deal with if it’s not allowed to use monetary policy,” he told reporters in Tokyo.

That argument may hold greater weight now and help avoid a full-blown repeat of the so-called currency wars of 2010 when booming developing nations led by Brazil criticized the Fed’s previous bond-buying program for threatening their competitiveness and inflating asset bubbles.

What’s changed is emerging markets are now also slowing, leaving them in need of an uplift from the U.S. The most accurate currency forecasters also expect the dollar to strengthen as U.S. growth outpaces its developed nation counterparts.

“There is also, of course, a beneficial side,” Chidambaram said. “Some of that money may come to India as investments, but we need to balance both the advantages and disadvantages.”

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Picasso’s $8.5 Million Lovers Sell as VIPs Browse Frieze

"Homme et Femme au bouquet" (1970) by Pablo Picasso. The painting, priced at $8.5 million, sold at the booth of the New York dealer Van de Weghe Ltd., at the inaugural edition of the Frieze Masters fair at Regent's Park in London.

Frieze Masters, a new fair devoted to a range of pre-21st century art in Regent's Park, London. Created to complement Frieze London, the event runs through Oct. 14. Photo: Scott Reyburn,

 "White Snow Head," a 2012 silicone, fiberglass and steel sculpture by Paul McCarthy, sold for $1.3 million at the booth of the London- and Zurich-based dealer Hauser & Wirth during the preview of the Frieze London contemporary art fair on Oct. 10.

 "Battle of the Skeletons," an 1880s "Black" drawing by the Symbolist artist Odilon Redon, is being offered by the London-based dealer Jean-Luc Baroni at the inaugural Frieze Masters fair in Regent's Park, London, which runs through Oct. 14.

 "High Key Magenta," a 2012 acrylic on linen work by Carol Bove was sold by the New York- and London-based dealer David Zwirner for $80,000 at the VIP preview of Frieze London on Oct. 10.

"Big Joy," a 1984 painting by Jean-Michel Basquiat, is among 37 lots of contemporary art being offered at auction by Phillips de Pury & Co. on Oct. 10 during Frieze Week in London.

A Pablo Picasso painting priced at $8.5 million was among early sales as billionaires browsed London’s biggest Frieze Week.

The Picasso was bought at the inaugural Frieze Masters fair, as its 10-year-old neighbor, Frieze London, yesterday opened to VIP collectors of contemporary art, including Dasha Zhukova, the partner of Roman Abramovich. London fairs, galleries and auction houses are testing demand with more than $1.5 billion of art, a record. 

“Frieze Masters works well,” the New York-based dealer David Nisinson said. “It’s more serious than other fairs that combine periods. With a 2000 cut-off, it allows dealers to re- sell works by established contemporary artists. They also made a good decision to avoid the decorative arts.”

An unidentified U.S.-based collector bought the 1970 Picasso lovers’ portrait, “Homme et Femme au bouquet,” first exhibited at the 1973 Palais des Papes show in Avignon. It was on the stand of New York dealer Christophe Van de Weghe, who also sold a 1932 Fernand Leger painting for $2.6 million.

The Frieze Masters works were presented against neutral backgrounds, prompting jokes about “Fifty Shades of Grey.” There were fewer big-ticket sales by Old-Master dealers.

“The Old Masters aren’t good enough or sufficiently numerous to make a statement,” said London-based Jean-Luc Baroni, who is showing an 1880s Odilon Redon drawing, “The Battle of the Skeletons,” priced 350,000 pounds ($560,350).
Masters Boost

The Masters event boosts the total valuation of the new two-venue Regent’s Park event to more than $1 billion, according to preliminary estimates by the insurer Hiscox Ltd. (HSX)

“Some collectors are interested in the notion of buying from different periods, particularly after looking at relative values,” Nisinson said. “Not many are making decisions yet.”

At Frieze itself, a unique 2012 Paul McCarthy mixed-media sculpture, “White Snow Head,” was among the early purchases, selling to a European collector for $1.3 million on the booth of the London-and Zurich-based dealer Hauser & Wirth during the first 10 minutes.

Though more crowded than Frieze Masters, this 10-year-old contemporary fair saw measured buying, reflecting economic concerns and a proliferation of equivalent events, dealers said.

“It’s not as frantic as previous years,” Angela Choon, director of the new London branch of the New York-based dealership David Zwirner, said. “It’s steady.”
Zwirner Sales

The 2012 painting “High Key Magenta” by the New York artist Carol Bove, incorporating a silver-chain net, was among the early Zwirner sales, bought by a U.S. collector for $80,000.

Galleries offering new works by artists considered to be “hot” investments were as busy as ever. Stephen Friedman was showing recent still life paintings by Ged Quinn, whose quirky take on Old Masters has inspired auction bids of as much as 187,250 pounds. All nine works were reserved or sold with prices ranging from 35,000 pounds to 130,000 pounds.

Jeweler Laurence Graff was a buyer of 20th-century furniture at the opening of a satellite event, the Pavilion of Art and Design London, now in its sixth year, dealers said.

At the fair, a 1964 Andy Warhol “Flowers” painting was sold for $2.5 million by the New York-based Skarstedt Gallery, which opened a branch at 23 Old Bond Street yesterday.

As every year, Tate shopped at Frieze with cash donated by the Outset charity. The 150,000 pounds available was spent on four works, three of them paintings: “Arthur Kennedy” (2012) by Caragh Thuring, showing a billboard seen from a New York window; “Ko 8” (1963) by the late Hideko Fukushima; and “Epsilon Group II” (1977) by Jack Whitten.
African Sculpture

The fourth purchase was a sculpture by South African artist Nicholas Hlobo titled “Balindile I” (2012) and made with hosepipe, inner tire tubes, canvas and steel.

U.S. business magnate Martha Stewart, PPR Chief Executive Officer Francois Pinault and New York mayor Michael Bloomberg, who is founder and majority owner of Bloomberg News parent Bloomberg LP, were also spotted browsing London art events.

Last night, the 1984 Jean-Michel Basquiat painting “Big Joy” sold for 2.6 million pounds with fees at Phillips de Pury & Co. The canvas, estimated at 2.5 million pounds to 3.5 million pounds, sold to an unidentified bidder in the room. It was one of 24 lots that sold for hammer prices that were within or below estimate. The remaining 12 failed to sell.

“There are a lot of places to shop this week,” Michael McGinnis, the company’s worldwide head of contemporary art, said after the sale. “It could be to do with the sheer amount of fairs, gallery shows and auctions.”

The event raised 12.2 million pounds with fees against a low estimate of 15 million pounds, based on hammer prices.

The U.K. magazine Estates Gazette reported that Phillips has paid more than 100 million pounds for a new seven-story European headquarters building in Berkeley Square.

“We’re not in a position to say,” Phillips’s chairman Simon de Pury replied when asked to confirm the acquisition. “We will the moment we can.” 

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