New York AG Investigates Whether Big Banks Deceived Rating Agencies

The New York Times reports this morning that the New York Attorney General has issued subpoenas to eight banks, investigating whether they provided false information to rating agencies to obtain higher ratings for mortgage-related securities.  The banks include the usual suspects — Goldman Sachs, Morgan Stanley, UBS, Citigroup, and Merrill Lynch.  NYTimes, Prosecutors Ask if 8 Banks Duped Rating Agencies.

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US Banks Face Insider Trading Probe

Neil Barofsky, the special inspector-general overseeing the US government’s financial rescue efforts, is to probe allegations of insider trading among bank executives and their associates.

Eight of the largest banks in the US received between $2bn and $25bn in October 2008 under a programme to prop up the financial system led by Hank Paulson, then Treasury secretary.

Dozens more institutions followed and Mr Barofsky, who examines the troubled asset relief programme, is looking into whether information improperly made its way to trading rooms during a feverish period in which the government and banks were frequently exchanging information.

“We have pending investigations looking into that – typically into insider trading,” he said. “Once upon a time getting Tarp funds actually meant your stock price would go up and we are looking at specific trading around Tarp announcements by insiders or looking at potential tips from insiders.”

Sig-Tarp, the office of the special inspector-general, published its quarterly report to Congress on Sunday, criticising the capital investments in banks as having failed to stimulate lending.

“Part of the problem is, when the Tarp funds were extended . . . although there was this public disclosure that the purpose of these programmes was to increase lending, very little, if anything, was done to encourage or direct lending,” said Mr Barofsky.

The Treasury is celebrating faster than expected Tarp repayments from the financial sector; it now expects relatively small losses, with some elements generating big profits.

While Mr Barofsky acknowledges this, he said there remained substantial problems with the struc-ture of the public-private investment programme, which is designed to encourage investors to buy troubled assets from banks to clean their balance sheets and stimulate lending.

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President Proposes Additional Banking Reforms

President Obama announced two additional proposals for reforming the nation’s banks.  The first, which he named the Volcker Rule after its proponent, Paul Volcker (who stood behind the President at the press briefing), would prohibit banks from owning, investing, or sponsoring hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.  The second would  prevent the further consolidation of our financial system.  There has long been a deposit cap (10%) in place to guard against too much risk being concentrated in a single bank.  Under the proposed reform, the same principle would apply to wider forms of funding employed by large financial institutions in today’s economy.
Continuing with his verbal campaign against big banks, the President said:

So if these folks want a fight, it’s a fight I’m ready to have.  And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can’t lend more to small business, they can’t keep credit card rates low, they can’t pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers — that’s the claims they’re making.  It’s exactly this kind of irresponsibility that makes clear reform is necessary.

Some early press coverage of his announcement:

NYTimes, Obama Moves to Limit ‘Reckless Risks’ of Big Banks

WPost, Obama proposes tough new limits on large banks’ size and investments

From SIFMA President Tim Ryan’s response to the President’s proposals:

“Like the President proposed last year, we continue to believe the best way of achieving those goals is to establish a tough, competent and accountable systemic risk regulator. We believe providing for strengthened regulatory oversight and flexibility like that originally proposed by the Administration, as opposed to arbitrary restrictions on growth and activities, is a more effective way of mitigating systemic risk and ending ‘too big to fail’.

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Five House Democrats Want Banks Split Up

Five House Democrats will call this week for a return to a Depression-era law that separated Wall Street investment banking from Main Street commercial banking.

If adopted, the measure would give banks one year to choose between being commercial banks or investment banks. The nation’s biggest — those now commonly referred to as “too big to fail” — would be broken up. The Obama administration opposes the measure.

The amendment’s five co-sponsors — Maurice Hinchey of New York, John Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington, and John Tierney of Massachusetts - want to restore the Glass-Steagall Act of 1933, which prohibited commercial banks from underwriting stocks and bonds. The act was repealed in 1999 at the urging of, among others, Larry Summers, now President Barack Obama’s chief economic adviser.

The five congressman all voted against the repeal then — and now they want it back.

More: Congressmen To Call For Break-Up Of Biggest Banks

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