Goldman Sachs agrees $3.15bn mortgage settlement

BY  Richard Summerfield

Goldman Sachs has agreed to settle its biggest financial crisis bill to date, agreeing a $1.2bn settlement with the Federal Housing Finance Agency (FHFA).

Under the terms of the deal, the bank has arranged to buy back $3.15bn in mortgage bonds from Fannie Mae and Freddie Mac, paying around $1bn to Fannie and $2.15bn to Freddie respectively. The move will bring about an end a lawsuit filed in 2011 by the FHFA in which the agency alleged that Goldman misled the two mortgage finance groups regarding the sale of over $11.1bn in mortgage-backed securities between 2005 and 2007. Although Goldman agreed to the settlement, the bank has continued to deny any allegations of wrongdoing; the bank’s settlement deal did not contain any admission of wrongdoing on Goldman’s behalf. The FHFA, which valued the settlement at $1.2bn, said the deal "effectively makes Fannie Mae and Freddie Mac whole on their investments in the securities at issue".

Goldman’s settlement is the latest in a string of deals related to the financial crisis, and is the largest legal penalty that the bank has paid in its 140-year history. The deal easily eclipsed the $550m settlement that the firm agreed in 2010 to conclude a complaint from the Securities and Exchange Commission regarding the bank’s handling of a complex mortgage-linked deal. The settlement with the FHFA comes shortly after Bank of America Corp agreed a separate mortgage deal with the Justice Department and a number of other government offices which totalled around $16.65bn. “We are pleased to have resolved these matters," said Gregory Palm, Goldman's general counsel, in a statement.

By reaching a settlement with the FHFA in August, Goldman has avoided the ignominy of a trial on 29 September. The trial would have been in relation to a pair of lawsuits that the FHFA filed against Goldman in 2011. The agency filed the suits hoping to recover damages from a number of financial institutions behind some $200bn in mortgage bonds bought by Fannie and Freddie that later experienced difficulty. The FHFA has concluded all but three of the 18 lawsuits it filed; to date the agency has recovered approximately $17.3bn from a cadre of banks including Bank of America Corp, Deutsche Bank AG and Morgan Stanley.

The Department of Justice will continue to investigate Goldman’s marketing of mortgage-backed securities. The FHFA is continuing to press ahead with its litigation against three other banks: HSBC Holdings Plc, Nomura Holdings Inc and Royal Bank of Scotland Group Plc.

News: http://www.bloomberg.com/news/2014-08-22/goldman-to-buy-mortgage-debt-for-3-15-billion-to-end-fhfa-probe.html

Standard Chartered probes fresh allegations

BY Matt Atkins

In response to fresh US allegations over money laundering, the UK bank Standard Chartered will soon begin trawling its extensive data banks for signs of questionable activity, in an effort to avoid additional penalties. Standard Chartered clears approximately two million US dollar transactions each month. The process of sifting through the data will therefore prove a mammoth task.

The UK bank came under scrutiny in 2012, when flaws in its anti-money laundering program were uncovered by a monitor imposed by the New York Department of Financial Services (DFS). The DFS and federal authorities took separate actions against Standard Chartered at the time fining the bank a total of $667m for violating US sanctions by hiding transactions linked to Iran.

Standard Chartered is again under scrutiny from the DFS, the bank disclosed in an earnings announcement last week. A penalty of more than $100m and an extension of the monitorship is possible.

The bank's issues stem from a  problematic transaction-monitoring software system installed in the 2000s. The system is intended to flag suspect transactions, however the so-called 'detection scenarios' that tell the system what activity to flag for human review have not been properly calibrated, according to a Reuters source. Most of the scenarios have now been corrected, said the source, and efforts are underway to fix the others before the bank moves to a new system early in 2015.

The news comes in the same week that a senior executive at Standard Chartered slammed regulators for treating banks and their employees unfairly. "Banks have been asked to play the role of policing anti-money laundering … [but when] we have a lapse we don't get treated like a policeman, we are treated like a criminal," said Jaspal Bindra, who runs Standard Chartered's business in Asia.

The bank said the remarks by Mr Bindra reflected his personal views. Standard Bank's CEO, Peter Sands, said when he was presenting the bank's results, that he respected the views of regulators.

News: Standard Chartered to scour records for money laundering, with penalty at stake

Portugal fights bank collapse

BY Matt Atkins

To the relief of anxious investors, Portugal’s central bank has announced measures to prevent the collapse of one of its biggest lenders, Banco Espirito Santo (BES). On Sunday 3 August, the board of directors at Banco de Portugal laid out plans for the €5bn rescue of BES, pulling it back from the brink and easing fears of contagion across Europe’s banking sector. The announcement comes days after the Banco de Portugal offered assurances that BES could raise enough money from private investors to recover from a first-half loss of €3.58bn.

The plan will see BES split into two. Problem assets will be held by the ‘bad bank’ BES. The remaining assets will be held by a ‘good bank’ – the newly formed Novo Banco, run under the supervision of Banco de Portugal. Novo Banco will be made up of BES’s core business of taking deposits and lending to home-buyers and companies. The bank will be receive an initial €4.9bn cash injection from Portugal’s bailout fund and eventually be sold off, with the proceeds used to pay back the loan.

As yet, it is unclear what will happen to the ‘bad bank’, most of which relates to other businesses in the Espirito Santo Group, including tourism, health and agriculture. Shareholders and creditors have been warned, however, that they may stand to lose all of their money.

Banco de Portugal has said customers of BES will be able to conduct transactions normally, and employees will be transferred to the new entity, which will retain the company logo.

“For our customers and staff only one thing has changed — their bank is now stronger and safer than it was before,” said Victor Bento, who will head Novo Banco. “The key uncertainties that have been hanging over the institution for some time have now been removed.”

Press Release: The application of a resolution measure to Banco Espírito Santo, S.A.

South Korea receives shot in arm

BY Matt Atkins

In response to a decline in economic activity, South Korea has announced a $40bn stimulus package to help turn around the country’s sluggish output. The package has been earmarked largely to support small and medium enterprises and boost the property market.

This is the second attempt to boost growth this year, after the South Korean government pushed through a $15bn stimulus plan in April.

Data released on Thursday 24 July revealed the extent of South Korea’s decline. While GDP grew 3.6 percent from a year earlier in the second quarter, the figure represents a slowdown of 0.3 percent on the first quarter of 2014.

South Korea is Asia’s fourth-largest economy, but relies heavily on exports which have suffered from low global demand. In addition, the country has been hit hard by the sinking of the Sewol ferry, which claimed the lives of 300 people. Earlier in July, South Korea’s central bank lowered its forecast for economic growth, citing the impact of the tragedy on consumption.

The country’s finance ministry lowered the country's growth forecast for this year from 3.9 percent from 3.7 percent – the second revision in recent weeks. The new stimulus package marks the first push by recently appointed finance minister, Choi Kyung-hwan, to introduce promised aggressive measures to bolster growth.

News: S Korea reveals $40bn stimulus package as growth slows

BRICS bank to reshape international finance

BY Matt Atkins

Tuesday 16 July saw the leaders of the BRICS nations launch a $100bn development bank and currency reserve pool aimed at funding development projects in emerging nations. The move has been heralded as the first concrete step toward reshaping a Western-dominated international financial system, symbolised by the IMF and World Bank.

Based in Shanghai, the bank will be led by India for the first five years, followed by Brazil and then Russia. The new bank reflects the growing influence of the BRICS, which account for almost half the world's population and approximately one-fifth of global economic output.

The bank will begin with a subscribed capital of $50bn divided equally between its five founders (Brazil, Russia, India, China and South Africa), with an initial total of $10bn in cash put in over seven years and $40bn in guarantees. It is scheduled to start lending in 2016 and be open to membership by other countries, but the capital share of the BRICS cannot drop below 55 percent.

The contingency currency pool will be held in the reserves of each BRICS country and can be shifted to another member to cushion balance-of-payments difficulties. China will contribute the bulk of the contingency currency pool, at $41bn. Brazil, India and Russia will put in $18bn each and South Africa $5bn.

Negotiations to create the bank lasted two years as Brazil and India fought China’s attempts to get a bigger share in the lender than the others.

Negotiations over the headquarters and first presidency lasted until Monday 15 July due to further differences between India and China. These difficulties reflect the issues Brazil, Russia, India, China and South Africa have faced in reconciling their economic and political differences.

While Brazil and India have prevailed in keeping equal equity at the bank’s launch, there are still some fears that China, as the world's second largest economy, could try to assert greater influence over the bank to expand its political influence.

News: BRICS set up bank to counter Western hold on global finances