Securities Attorney Briefing for 29 June 2016

Securities Attorney Tom Krebs


The Story of Britain’s Biggest Insider-Trading Trial

Iraj Parvizi, aka Fatty or the Mad Punter, a Bentley-driving, racehorse-owning Iranian, whose life had been one endlessly escalating wager, walked to the witness box with uncharacteristic anxiety. His hands shook, and he was dressed carelessly, in jeans, sneakers, and an untucked shirt. Parvizi was on trial in London for participating in what prosecutors described as the biggest insider-trading ring in U.K. history, and four co-defendants, the other alleged conspirators, looked on from the dock. It was Week 13 of the proceedings, a Wednesday in April, and Parvizi faced years in prison if convicted. Once he’d taken his place, his barrister reminded him: Just be yourself. The Mad Punter smiled and took control of the courtroom. Resting one foot on a nearby chair, Parvizi described his anarchic life in the markets. “There are no rules,” he said. “Anyone can start a rumor. It’s just gung-ho, go for it, do what you want.” The jurors, who’d struggled to stay awake during discussions of contracts-for-difference and margin calls, were rapt, as if Parvizi were a different species. He’d gone from making doner kebabs to transacting with royals, he said, developing a network that never stopped gossiping about stocks. Three days into Parvizi’s testimony, prosecutors tried to show that his gains were the result of an illegal advantage. How had he traded up a fortune when ordinary investors struggle to get single-digit returns? “You’re making out like I’m the only liar in the stock market,” Parvizi said. He described a world where rumors circulate on phone screens, fabricated stories are fed to a gullible press, and returns correlate with whom you know. The only difference between stocks and any other form of gambling, he said, as if talking to a roomful of children, is that the stakes are higher. His co-defendants nodded in agreement. “When I was arrested,” Parvizi said at another point, “I was thinking, ‘Why isn’t every trader in the market being arrested?’ Where does insider trading start, where does it stop?” In a gallery at the back of the chamber, it was a small team of investigators’ turn to be nervous. Some of them had devoted eight years to the case. Operation Tabernula, as it was known, was a landmark for the Financial Conduct Authority, a rebuttal to critics who said the regulator was too soft. The FCA had compiled 46 binders of evidence and 320 hours of surveillance audio. But this wasn’t the U.S., where the government has a well-rehearsed routine of flipping targets and locking in plea deals. The men in the Tabernula dock liked their odds with a jury. In the same courthouse three months earlier, the FCA’s sister agency, the Serious Fraud Office, had seen a different trophy case collapse. The competence of British financial regulation was on trial, too. More:

‘Brexit’ Fall Out in the US: Loan Officers Worried About Losing Loans Because of Plunging Rates?

The sharp decline in interest rates in the wake of the “Brexit” vote is causing some unrealized headaches: consumers backing out of rate locks, and worries that some lenders could be hit with margin calls on loans backed by servicing rights. David Lykken, president and managing partner in Transformational Mortgage Solutions, said he’s hearing reports about LOs “worried sick” about consumers changing their minds and getting wooed away by competitors. “I guarantee you will see this happen: consumers backing out of loans because they get offered a better deal,” he said. David Fleig, president of MorVest Capital, said it’s “almost certain” that some margin calls will come on servicing loans “if the 10-year [Treasury bond] remains at or below where it is today.”

Hard-to-Sell Assets Complicate European Banks’ ‘Brexit’ Risks

Even before Britain voted to cut ties with the rest of Europe, large European banks with global ambitions and sprawling operations in London were struggling. Now, as banks scramble to assess the impact of a British exit from the European Union, Deutsche Bank, Credit Suisse, Barclays and others face increased pressure from investors. While they recovered some ground on Tuesday, the stock prices of these banks have fallen sharply after the British vote, on increased fears that they will be unable to sell the billions of dollars of derivatives, securitized mortgages and other hard-to-value and sell securities that they so desperately need to get rid of. Mike Mayo, a banking analyst with CLSA, refers to what he calls the 5 C’s in describing what ails the big European banks — a number of which he has worked for during his peripatetic career. These are costs, complexity, capital markets, currency risks and central banks, which engineered the superlow interest rates that are squeezing margins. “The pain is not going away anytime soon,” he said. Britain’s decision, however, also raises more existential questions about the futures of these entities, which over the decades became rooted in the notion that London was — and would always be — the financial locus of Europe. While it is not expected that European banks will immediately resettle their London-based bankers and traders in Zurich, Hong Kong, Frankfurt or New York, the vote — and its political consequences — certainly challenges the view that London will continue to be the spiritual and financial hub of these institutions. It was precisely this mind-set that led Deutsche Bank, Barclays and Credit Suisse to hire many thousands of investment bankers and traders to staff fast-growing London offices in the 20 years leading up to the financial crisis. The wisdom at the time was that destinies were being driven by high-risk, high-return trading businesses tapping into a global finance boom centered largely in London. More:

Britain Wants a Do-Over

There are no adequate words to describe the rolling political, economic, and constitutional crises that have developed in the days since Britain voted, by a narrow majority, to leave the European Union. The country has been swept by a kind of political Ebola whose symptoms include paralysis, mass unreason, and, most disturbingly, a rise in racist and anti-immigrant hate crimes. We are now watching a sprawling disaster in which everything that once seemed certain about the British political character—its tolerance, love of consent, moderation, and sense—appears to have vanished essentially overnight. Astonishingly, there is also a complete absence of a plan. Neither side in the referendum actually expected the people to vote to leave. As a result, no one quite knows who should trigger Article 50 of the Lisbon Treaty, which initiates the two-year exit negotiation with the European Union. And no one knows whether this can be done without the consent of a sovereign Parliament. In fact, no one can tell you whether Britain is headed for a general election, or if it is instead about to see a complete re-alignment of its politics, with the country dividing along the lines of the European issue. As a European and a patriotic Brit myself, it has been appalling to witness. On Monday, the House of Commons returned from recess to watch the lame-duck prime minister David Cameron answer M.P.s’ questions. Cameron looked drained and defeated. Across the Dispatch Box stood the ineffably useless Jeremy Corbyn, the leader of Her Majesty’s Opposition, who had just suffered a revolt in his own party, with two-thirds of his shadow cabinet resigning and calling for him to step down on account of his failure to sincerely back his own party’s pro-E.U. campaign. Corbyn, too, looked drained and defeated. Meanwhile, the entire House wore the expression of passengers on a jetliner who had just been told to adopt the brace position. Many Leave supporters, it seems, placed their dislike of immigrants above the economic consequences of seceding from Europe. But outside, in the real world, those consequences are already becoming quite real and far-reaching. The pound has fallen further to reach a 31-year low, and the Dow Jones has dropped 900 points in two days. Britain has lost its AAA credit rating; deals seem to be dead in the water; signs are already emerging that inward investment will begin to dry up; and no one seems to have the faintest idea about how Britain might finance a 7 percent deficit. (The U.K., after all, relies on foreign investors, now spooked, to fund the shortfall on its balance of payments.) A de-valuation of the pound sterling now seems possible. None of this is all that surprising. It was all predicted by those, like myself, who campaigned to remain in the E.U. Now the question is whether Leave voters will change their opinions as interest rates rise and people lose their jobs. Across Britain, there are now large numbers of people already expressing remorse. If we had the vote tomorrow, knowing what we do now, I’m certain that the majority would choose to remain.


Goldman, Morgan Stanley deny plans for Frankfurt office switch after Brexit

U.S. investment banks Goldman Sachs (GS.N) and Morgan Stanley (MS.N) have denied speculation they are poised to shift London-based staff and operations to Frankfurt as soon as Britain’s divorce proceedings from the European Union formally begin. “We have not made any changes to our real estate requirements in Frankfurt as a result of the referendum result,” Goldman said in a statement issued on Wednesday. “As we have already communicated to our employees, there is no immediate change to the way we conduct our business or where we conduct our business.” Echoing its Wall Street rival, Morgan Stanley also moved to quell chatter it was planning to relocate to the German financial hub when the UK government evokes Article 50 — the first official step in its disentanglement from the 28-nation bloc.

“Morgan Stanley does not have pre-let office space in Frankfurt,” the spokesman said in an emailed statement. Goldman CEO Lloyd Blankfein said the bank, a big donor to the defeated ‘Remain’ campaign had planned for either referendum outcome for many months, in a statement issued after the outcome of the historic referendum became clear on Friday. “Goldman Sachs has a long history of adapting to change, and we will work with relevant authorities as the terms of the exit become clear. Our primary focus, as always, remains serving our clients’ needs.”



Stress Test Inc.: Billions of Dollars, Bank Consultants to Manage Other Consultants

WASHINGTON—After Citigroup Inc. unexpectedly failed the Federal Reserve’s annual stress tests in March 2014, the bank opened its checkbook and called in the consultants. The firm had to address several of the regulator’s concerns in a short time frame, and no single consulting firm could do the job, according to people familiar with the matter. The bank hired multiple firms and said it spent about $180 million on stress tests during the second half of 2014. The next year, it passed. The stress tests—designed to determine whether banks can withstand severe economic shocks—have made U.S. banks stronger. Also more robust is the multibillion-dollar industry that has developed around the annual exercise. Last week, the Fed said the 33 largest U.S. banks cleared the first round of stress tests. On Wednesday, the firms will find out which ones can boost dividends or buy back shares. Globally, banks spent about $29 billion on consultants last year, much of that for stress tests in the U.S. and elsewhere, according to analysis firm ALM Intelligence. That compares with $16.35 billion in 2007. The total has increased every year since 2009, a period when banks have been relentlessly cutting expenses and employees in areas such as trading and branches. The Big Four accounting firms and Big Three consulting firms all have built practices offering manpower and advice to pass regulatory muster. Big financial advisers are also in on the act. Last year, BlackRock Inc. sold forecasting help to about two-thirds of the banks taking the tests. There are even consultants offering advice on the most economical use of other stress-test consultants. “Kick out the consultants,” risk analysis firm Novantas advertised recently, telling banks it can help them cut back. The industry has sprung up because failing the stress tests, which the Fed made mandatory in their current form in 2011, can have grave consequences. Banks that don’t pass the test can be limited in their ability to raise dividends or buy back shares. More:

SEC proposes business continuity and transition planning rule

Investment advisers registered with the Securities and Exchange Commission would have to adopt and implement written business continuity and transition plans under a rule proposed Tuesday by the agency. The rules are aimed at minimizing client and investor harm in the event of temporary or permanent disruptions, such as technology failures, cyberattacks, personnel changes or natural disasters. SEC Chairwoman Mary Jo White said in a statement that the proposal is “the latest action in the commission’s efforts to modernize and enhance regulatory safeguards for the asset management industry.” Once published in the Federal Register, the proposal would allow 60 days for comments. Karen Barr, president and CEO of the Investment Adviser Association, declined to formally comment but said in a statement that it was encouraging that the proposed rule is principles-based and would allow each investment advisory firm to tailor plans to its own business model.

North America leaders meet with trade threats, Brexit on their minds

“We’ve seen around the world many examples of protectionism, of concern, of stepping away from trade agreements,” Canadian Prime Minister Justin Trudeau told reporters on Tuesday, stressing the need for more rather than less cooperation. “Better partnerships are a path to prosperity and that’s a compelling example that we want to showcase at a time where unfortunately people are prone to turning inwards, which will be at the cost of economic growth and their own success.” Trudeau, U.S. President Barack Obama and Mexican President Enrique Pena Nieto will meet in Ottawa and are scheduled to hold a news conference at 3 p.m. (1900 GMT). The leaders, known informally as the Three Amigos, usually meet about once a year. “We anticipate that leaders will spend a significant time talking about trade, for example, how to facilitate trade by automating our borders,” U.S. National Security Council official Mark Feierstein told reporters on Tuesday. The trio will also discuss Britain’s so-called Brexit vote, which wiped more than $2 trillion off global equity markets and dealt a huge blow to the EU. “The president will obviously want an opportunity to discuss … how we may be able to coordinate our efforts to insulate ourselves to the extent possible,” said Feierstein. Earl Wayne, Obama’s former ambassador to Mexico, said that amid increasing criticism of NAFTA, leaders had to find a better way to explain that up to 14 million U.S. jobs depend on trade with Canada and Mexico. “That’s a hard story to tell,” he told reporters. “There is a lot of skepticism, and it’s easier to sell the negative arguments.” The three men will also pledge to produce 50 percent of their nations’ electricity from clean energy by 2025. Obama is due to address the Canadian Parliament at 5.25 p.m. (2125 GMT).

Two years and $7 million later, the Benghazi report is finally out

After two years and $7 million, Republicans on the House Benghazi Committee have released their long-awaited report on the September 11, 2012 terrorist attacks in Libya — a report that concludes then-Secretary of State Hillary Clinton was not directly at fault for the events that led to the deaths of four American citizens. The report did slam the Obama administration for its handling of the aftermath of the attacks, citing a combination of bureaucratic inefficiency, personal error, and willful ignorance of intelligence for the bungled response. But the committee’s findings do not directly indict Clinton for the death of Ambassador Chris Stevens and three other Americans, or find that she willfully ignored calls for security, charges that Republicans have continuously leveled at her. In fact, the report barely focuses on Clinton at all, but rather reveals a more comprehensive timeline of events based on interviews with eyewitnesses and senior intelligence officials. Among the revelations in the Committee’s 800-page report is that the CIA missed real-time intelligence about the situation on the ground that led the agency to bungle its response to the incident. The government then misled the public about what had happened in the immediate aftermath of the attacks. “It is not clear what additional intelligence would have satisfied either [State Department aide Patrick] Kennedy or the Secretary in understanding the Benghazi mission compound was at risk — short of an attack,” the report says. Donald Trump, among other Republicans, has aggressively pushed the theory that Clinton slept through a 3am phone call on the night of the attacks and her inaction directly led to the death of Americans. Nothing in the report corroborates this account, although that is unlikely to change Trump’s and many other Republicans’ narrative of what happened. The report also includes evidence that goes against the official government narrative provided at the time. The US government initially thought the attack on the diplomatic compound in Benghazi was caused by a “spontaneous protest” over an anti-Islamic film that sparked demonstrations across the Muslim world after it was uploaded to YouTube earlier in 2011. But according to the report, that version of events was not reflected in any of the eyewitness accounts. “Obama Administration officials, including the Secretary of State, learned almost in real time that the attack in Benghazi was a terrorist attack,” Republican Representative Jim Jordan said in a statement upon the release of the report. “Rather than tell the American people the truth, the administration told one story privately and a different story publicly.” More:

Chris Stevens’s Family: Don’t Blame Hillary Clinton for Benghazi

On Tuesday, the House Select Committee on Benghazi, which is controlled by a Republican majority, charged the Obama Administration with diplomatic miscalculations, security failures, and a lengthy delay in rescue efforts, which contributed to the deaths of four Americans, including Ambassador Chris Stevens, after an attack on the United States Mission in Benghazi, Libya, in 2012. Initially, the State Department believed that the attack was inspired by an anti-Muslim video. The Committee’s eight-hundred page report, which wraps up a two-year, seven-million-dollar investigation, specifically reprimanded the State Department, then under Secretary of State Hillary Clinton; the Pentagon, headed at the time by Defense Secretary Leon Panetta; and the C.I.A. In a separate, forty-eight-page addendum, two Republican Committee members, Mike Pompeo, of Kansas, and Jim Jordan, of Ohio, went even further, alleging that the Administration deliberately covered up the full truth about the attack at a time when President Obama was facing a tough reëlection campaign. “We expect our government to make every effort to save the lives of Americans who serve in harm’s way,” Pompeo said, in a statement. “That did not happen in Benghazi. Politics were put ahead of the lives of Americans.” At a press conference on Tuesday, Pompeo charged that Clinton’s actions on Benghazi were “morally reprehensible.” Democrats on the House Committee released their own, three-hundred-and-thirty-nine-page report on Monday. They also cited “woefully inadequate” security in Benghazi. But they claimed to have been virtually shut out of the official Committee report. They called the probe, led by the South Carolina Republican Trey Gowdy, a witch hunt. “Gowdy has been conducting this investigation like an overzealous prosecutor desperately trying to land a front-page conviction rather than a neutral judge of facts seeking to improve the security of our diplomatic corps,” the report said. There have been other investigations as well. Within the State Department itself, a review board examined the incident and found systemic security shortcomings and issued a series of recommendations for addressing them. Dr. Anne Stevens, the sister of Ambassador Chris Stevens, has served as a family spokesperson since his death. She is the chief of pediatric rheumatology at Seattle Children’s Hospital. We spoke twice in the past three days, including shortly after the House Select Committee report was issued. Dr. Stevens recalled that her brother had been fascinated by the Middle East since childhood, when he dressed up as Lawrence of Arabia, with a towel and a pot atop his head. He served in the Peace Corps, in Morocco, before joining the Foreign Service, and he served twice in Libya before his final posting there, as well as in Damascus, Cairo, Jerusalem, and Riyadh. My interview with Dr. Stevens has been condensed and edited for clarity.

Who got rich off the student debt crisis

A generation ago, Congress privatized a student loan program intended to give more Americans access to higher education. In its place, lawmakers created another profit center for Wall Street and a system of college finance that has fed the nation’s cycle of inequality. Step by step, Congress has enacted one law after another to make student debt the worst kind of debt for Americans – and the best kind for banks and debt collectors. Today, just about everyone involved in the student loan industry makes money off students – the banks, private investors, even the federal government. Jessie Suren is an energetic 28-year-old who wanted a career in law enforcement. Albert Lord is a 70-year-old former accountant who became a multimillionaire executive. The two have never met, but their stories tell the history of America’s student debt crisis. Suren attended a free boarding school for underprivileged youth in Hershey, Pennsylvania, and enrolled in La Salle University in Philadelphia. Scholarships didn’t cover the cost of the private college, so she borrowed about $71,000, much of it from Sallie Mae, the financial giant of the student loan industry. Suren did well in school. But a job with the U.S. Marshals Service fell through, and by graduation in 2010, she had a soaring loan balance and no career prospects. In the years since then, Suren has scrambled to keep current on her loans, sometimes working 16 hours a day at two low-paying jobs. Her finances are incredibly tight, and she has made no headway on her loans. Today, her balance tops $90,000. “My loans are a black cloud hanging over me,” she said. “I’m a student debt slave.” For Lord, student loans have been the road to riches. He was the CEO who built Sallie Mae into a financial colossus through fees, interest and commissions on billions of dollars of federally guaranteed student loans. For delivering handsome profits to investors, Lord received pay and stock worth hundreds of millions of dollars. His success made him one of the highest-paid executives in Washington, gave him entrée into an elite circle of power brokers and won him a seat on the board of the Washington Redskins Charitable Foundation. With his wealth, he started a private equity company and built his own golf course, Anne Arundell Mannor, near the Chesapeake Bay. After a 30-year career at the forefront of the student loan industry, Lord retired in 2013 and now shuttles between houses in Naples, Florida, and Annapolis, Maryland. Almost every American knows someone like Suren, an adult burdened by a student loan. Fewer know that growing alongside the legions of indebted students is a formidable private industry that has been enriched by student debt. Decades ago, the federal government relinquished direct control of the student loan program, opening its bank to corporations concerned with profits, not diplomas. Private equity companies and Wall Street banks seized on the flow of federal loan dollars by peddling loans that students sometimes could not afford and then collecting fees from the government to hound those students when they defaulted. Once in place, the privatized student loan industry has succeeded largely in preserving its status in Washington. Student loans are virtually the only consumer debt that cannot be discharged in bankruptcy except in the rarest of cases – one of the industry’s greatest lobbying triumphs.

At the same time, societal changes conspired to drive up the basic need for these loans: Middle-class incomes stagnated, college costs soared and states retreated from their historical investment in public universities. If states had continued to support public higher education at the rate they had in 1980, they would have invested at least an additional $500 billion in their university systems, according to an analysis by Reveal from The Center for Investigative Reporting. More:


Is Bitcoin Money? Florida Judge to Decide

WASHINGTON — Whether bitcoin is actual currency is at the forefront of a first-of-its-kind money-laundering case in Florida to be decided Friday. In February 2014, Michel Espinoza was arrested in a Miami Beach motel for agreeing to sell $30,000 worth of bitcoin to an undercover police officer he had met on an exchange site called Prosecutors charged that Espinoza violated Florida statutes on money laundering and for operating an unlicensed money transmitting business. But the defense has argued that these laws do not apply to Espinoza’s case, because he was not selling currency — he was selling bitcoin. “It’s just like you selling your own personal property,” Rene Palomino Jr., Espinoza’s attorney, said in a court filing. “Since bitcoins are ‘goods,’ Espinoza’s alleged conduct is excluded from the definition of the term ‘money transmitter’ ” under both state and federal law.

The case highlights a conundrum that has confused digital currency companies and state regulators alike: how to deal with a digital asset that is not a legal tender but can still hold value. “Florida is dealing with the same definitional issues that many other states are dealing with, and that is how the terms currency, money, money transmission and even monetary value are defined,” said Carol Van Cleef, a partner at Manatt, Phelps & Phillips. The question is being addressed in various ways by the states’ governing bodies. North Carolina’s legislature on Monday passed a bill to modify the definition of money transmitters to account for virtual currency companies. In New York, the state’s financial regulator took the matter into its own hands last year by creating the BitLicense, which implicitly acknowledges that bitcoin is a store of value. Even federal regulators are divided about how to address bitcoin: the Internal Revenue Service regards it as property, whereas the Treasury Department’s Financial Crimes Enforcement Network regulates it as a currency. “The U.S. state and federal government is highly fragmented and each seem to have their own view on this,” said Perianne Boring, the founder and president of the Chamber of Digital Commerce. “At the Chamber, we recognize bitcoin as a digital asset because depending on the use case it can take on characteristics of all of the above” — from a property or commodity to a currency or securities instrument, Boring added. In 2008, Florida changed its definition of money transmitter to account for companies dealing with virtual currency — but the modification was not wide-ranging enough, according to Van Cleef. “Florida actually did intend to cover digital currencies,” she said. But it did not address how money exchanges — which cannot be performed without a license — could account for virtual currencies, she added. “If you’re giving me the digital currency in exchange for [dollars] in a face-to-face transaction, you’re not moving it to another place or you’re not moving it to another person,” Van Cleef said. The matter has been placed in the hands of Judge Teresa Pooler of the Miami-Dade Circuit of Florida, who is expected to deliver a ruling on the issue Friday. “The status of the law has not caught up with technology,” Palomino said. “Everybody thought [bitcoin] was going to be a fad, it would just go away. And guess what? I think it’s going to stay.” In a press release after the arrests, authorities acknowledged the novelty of the case. “All of us in law enforcement know that criminals are always seeking new ways to make their activities profitable,” said State Attorney Katherine Fernandez Rundle, noting that the U.S. Secret Service had participated in the investigation. “BitCoins are just a new tool in the cyber criminal’s toolkit.” Her office declined to comment further on the case. Beyond Florida, the case could serve as an example for other states, digital currency advocates say. “If the judge rules that bitcoin is a currency , it would only apply in that state,” Boring said. “However, other states could use that decision or ruling as persuasive material in their own legal systems or legislation to guide their own policy making or case decisions.” The case is likely to be litigated after Pooler’s ruling. Both parties confirmed they would go to trial if they lost.


The Real Problem with Arbitration? The Alternative

Class action lawsuits were supposed to promote judicial efficiency and provide a means to resolve small harms committed on a large scale, but they rarely work that way. Large class actions are not justice. They are a racket. These lawsuits have become the holy grail of plaintiff’s lawyers because they can be used to magnify even flimsy and inconsequential claims into large legal threats. Settlements of these cases are notorious for resulting in huge fees for attorneys while providing little actual benefit to the people in the class, some of whom receive awards worth less than the postage to send the claim forms. A Consumer Financial Protection Bureau study, prepared in advance of the bureau’s recent proposal to restrict arbitration clauses, confirms this. It found that 87% of class actions provided no money to class members and in settled cases only 4% of class members received a payout, which averaged just $32. Many settlements actually harm class members. These cases are an abuse of the judicial process and in some cases can pose a significant threat to legitimate businesses. The CFPB’s May proposal limiting the use of arbitration to settle disputes would inevitably lead to be more class actions. But class actions pose too many problems in their present form to serve as a good way to resolve disputes. They are riddled with conflicts of interest. Because the class lawyers control the litigation, they effectively decide when to settle and their decision is primarily based on the size of the fees awarded to them, not what the class members receive. It is no exaggeration to say that most class actions are simple extortion committed in the name of people who have no real role in the process. This is acknowledged in the handbook provided to federal judges for handling class actions. It notes that “[b]ecause the class itself typically lacks the motivation, knowledge, and resources to protect its own interests, and because settling counsel for both plaintiff and defendant have little or no incentive to offer information adverse to [a] settlement …”, the judge must function as a “fiduciary of the class” and become an advocate for the class. In other words, the lawyers are in it for themselves and cannot be expected to protect their purported clients. More:


Senate faces critical vote on Puerto Rico

Senate leaders from both parties threw their support behind a House bill to provide debt relief to Puerto Rico on Tuesday. They also struck a confident tone that the legislation will be approved — assuming the other side can deliver enough votes. The Senate has until the end of Thursday to approve the Puerto Rico legislation before the island is expected to default Friday on $2 billion in bond payments. The bill would establish an outside fiscal control board to steer the island’s finances. In addition, the territory would be able to restructure its $70 billion in debt, which island officials say is no longer payable. Sen. John Cornyn (R-Texas), the Senate Majority Whip, refused to entertain the idea that the bill could fail, which could expose the island to a raft of litigation from investors following the massive default. “Failure is not an option,” he said. “I’m not going to speculate because this isn’t going down.” The bill is set for a procedural vote Wednesday. If it clears that 60-vote hurdle, the chamber could send it to the president as soon as Thursday — one day before the island defaults. Defections are expected from both parties, meaning Senate Majority Leader Mitch McConnell (R-Ky.) and Senate Minority Leader Harry Reid (D-Nev.) will need to win over enough of their members to get to 60 votes. On the left, opponents include Sen. Bob Menendez (D-N.J.) and Sen. Bernie Sanders (I-Vt.), the progressive presidential candidate. “I will do everything I can to defeat this horrific bill,” Sanders said Tuesday. He argues the legislation would represent a victory for hedge funds at the expense of Puerto Rico’s citizens. Sen. Chuck Schumer (D-N.Y.) said he believes there are “probably 30 Democrats who will vote for this bill.” “We need a lot of Republican votes. Let’s see if we get them,” he said. The main gripe for Democrats, even among those who plan to support the bill, is their inability to offer any amendments to the measure. Reid announced his support on Tuesday, but he then slammed McConnell for blocking amendments. Republicans argue that the closed process is the only way to ensure a bill reaches the president’s desk before the July 1 default. “Ideally, we would like to have an open process…but we just don’t have the time here,” said Cornyn. More:


Arizona man arrested for stocks scam in Alabama

An Arizona man was arrested for a scam committed in Tuscaloosa County, the Alabama Securities Commission announced. James Friend Liebes, of Paradise Valley, Arizona, allegedly spent $39,683 of an Alabama investor’s money on personal items after Liebes told the investor he could buy and sell stock, the commission said. The investor expected 39,683 Careview Communications, Inc. shares after the payment. The victim didn’t receive anything. Investigators said Liebes only owned warrants to obtain the stocks. Those warrants were assigned to a third party instead of giving them to the investor, authorities said. As repayment, Liebes also promised the investor 7,000 shares of Lifelock, Inc. stock. The shares never came, authorities said. Liebes did not tell the investor he didn’t register as a dealer or agent with the security commission, according to the statement. Liebes was arrested in Arizona on Friday after being indicted by a grand jury in Tuscaloosa County in April. He is facing a sale of securities by an unregistered agent charge. The punishment is not more than 10 years or less than 1 year and 1 day in jail and a $15,000 or less fine. He was also charged with two counts of fraud in connection with the sale of securities. If convicted, he could serve between two to 20 years in jail and pay a $30,000 or less fine for each charge. Authorities said Liebes is held in the Maricopa County Jail in Arizona and is awaiting extradition to Alabama.


What Happened in Vegas: Troy Professor’s Mission to “Bring Down” RSA

MONTGOMERY—The leadership of the Republican supermajority wants to reform the Retirement Systems of Alabama (RSA). Along the way, their efforts have been buoyed by, The Manuel H. Johnson Center for Political Economy at Troy University. The Johnson Center is one of many institutions which is funded by the Charles Koch Foundation (Koch is pronounced like the soft drink, Coke). During a gathering in Las Vegas this past April, Dr. George R. Crowley, Associate Professor of Economics and Associate Chair of Economics & Finance at Troy’s Johnson Center, spoke at the event, hosted by the Association of Private Enterprise Education (APEE). Crowley was introduced by Brennan Brown, with the Charles Koch Foundation, who claims he is a “recovering economics professor” having found the light through Koch inspired teaching. He called those who would speak that day edupreneurs, a combination education and entrepreneur. Crowley was one of four panelists who Brown hoped would inspire other professors to follow his lead. Audio Available Here. During a discussion on the political work the Johnson Center is doing in Alabama, they cited the anti-Obamacare campaign lead by John Dove and Dan Smith, other Johnson Center Professors whom he says, “kind of made some waves,” with their “Mercatus, kind of, State diagnostics.” He was referring to the type of work being produced at the Mercatus Center at George Mason University, which is also funded by the Koch Foundation, as well other industrialists. The Mercatus Center is not an official part of George Mason University, but a 501(c)3 non-profit which is funded through donations, including corporate donations from ExxonMobil. Next, Crowley brags about how Smith is working to “bring down” the RSA. “Smith has kind of taken it upon himself to try to bring down the State pension system [laughter] ..] at least in getting the conversation going there.” He also says, “I’ve done my stuff on tax reform, I’ve got a Mercatus [thing?] that will be coming out soon.” “Bring down” the State retirement pension fund and “stuff on tax reform,” Crowley sees as a legitimate academic pursuit, stating, “ And in each one of these cases, it actually makes it, so that when you go into the classroom, you talk about these things, you try to get students interested, you can point out, ‘Look we actually are doing stuff, this stuff actually matters out there in the real world.’” More:


Morning Money

WARREN TO ROLL OUT NEW DERIVATIVES BILL — Sen. Elizabeth Warren (D-Mass.) on Wednesday will roll out a new derivatives regulation bill with Senator Mark Warner (D-Va.). From the one-pager: “The Act strengthens derivatives oversight by: Directing the CFTC to collect user fees from financial firms to cover its budget, similar to the [SEC] … which will help the CFTC manage the enormous new oversight responsibilities it was given in Dodd-Frank.

“Updating the CFTC’s enforcement authority so that the agency can impose meaningful civil penalties on firms that break the law and deter misconduct by repeat offenders. Closing the cross-border loophole … Ending the exemption of certain foreign exchange swaps from CFTC jurisdiction, ensuring adequate oversight of a key derivatives market.” Full bill:

Q2 GDP POP? — In what would be welcome news for Hillary Clinton, Pantheon’s Ian Shepherdson: “The Atlanta Fed’s GDPNow estimate for second quarter GDP growth will be revised today, in light of the data released over the past few days. We aren’t expecting a big change from the June 24 estimate, 2.6 percent …

“We are not so constrained, and we’re assuming the April construction numbers — both private and public — will be revised higher. … Government spending accounts for 18 percent of GDP — slightly more than all capex, including housing — so this explains almost half the difference between GDPNow and our 3.5 percent estimate”

CLINTON ALLY CALLS FOR TOUGHER ANTI-TRUST ENFORCEMENT — Via POLITICO’s Patrick Temple-West: “Government regulators need to toughen enforcement of anti-competition laws, according to a report published today from the Center for American Progress, a liberal think tank with ties to Hillary Clinton. The report coincides with an event on Wednesday at New America, another liberal-leaning think tank, about ‘America’s monopoly problem.’ The event will feature Sen. Elizabeth Warren.

““Antitrust leadership matters,’ the report said. ‘The next president must enlist able antitrust experts with strong vision and awareness of the costs of permissive enforcement.’ Read the report here:

SO MUCH FOR BREXIT CRASH IN THE U.S. — Wells Capital’s Jim Paulsen emails: “At least for the US Markets, this has been a wimpy crisis. The S&P is less than 2 percent below its level of a week ago Friday, the dxy dollar index is only a little more than 1 percent higher than it was a week ago Friday and the 10- year bond yield is less than 10 basis points below where it was a week ago Friday. Would US investors even know it was a ‘crisis’ unless they listened or read the news?”

TRUMP: OUTSOURCING IS GREAT! — Donald Trump in a 2005 blog post: “We hear terrible things about outsourcing jobs … But in this instance I have to take the unpopular stance that it is not always a terrible thing. … I know that doesn’t make it any easier for people whose jobs have been outsourced overseas, but if a company’s only means of survival is by farming jobs outside its walls, then sometimes it’s a necessary step.”

TRUMP: OUTSOURCING IS BAD! — From Trump’s economics speech in Pennsylvania on Tuesday: “Our politicians have aggressively pursued a policy of globalization – moving our jobs, our wealth and our factories to Mexico and overseas. Globalization has made the financial elite who donate to politicians very wealthy. But it has left millions of our workers with nothing but poverty and heartache”

TRUMP went a bit further in Ohio, calling TPP the “rape” of America. Among groups supporting TPP: Dairy farmers, beef farmers and manufacturers. All rape enablers?

RELATED — Bloomberg: “Donald Trump’s campaign aides are lining up a slate of … sports figures to appear at the national convention in Cleveland next month — including former undisputed world heavyweight champion Mike Tyson”

TRUMP’S FANTASY WORLD — NYT’s Neil Irwin: “He’s right that the number of steel industry jobs … is down by 44 percent in the Pittsburgh area since 1990, a span in which the United States entered [NAFTA] and engaged in much more extensive trade with China. But two things are worth knowing. Before Nafta was even a gleam in a trade negotiator’s eye, Pittsburgh had already lost the biggest chunk of its steelworking jobs.

“The culprit in that era was both international competition and the introduction of mini-mills, which allowed the production of steel with far fewer man-hours. Because of that and other technological innovations that improved productivity, total American steel output is about the same now as it was in 1990, even with far fewer workers. That steep contraction in steel production jobs has been more than counterbalanced by a rise in other types of work. The 5,100 steel production jobs lost in Pittsburgh are dwarfed by the 66,000 health care jobs gained in the same span. Pittsburgh has often been viewed as the very model of a city moving beyond its heavy industrial history to find new prosperity in areas like health care, banking and professional services”

US CHAMBER tweeted on Trump’s economic proposals: “Under Trump’s trade plans, we would see higher prices, fewer jobs, and a weaker economy” and said he plans “would strip us of at least 3.5 million jobs.”

Stanford’s Keith Hennessy: “Mr. Trump should ask the workers who make dishwashers at Whirlpool’s plant in Findlay, Ohio whether they’re in favor or more expensive steel. Or he can ask the John Deere workers who use steel at their factories in Iowa, Kansas, Louisiana, North Carolina, North Dakota, Tennessee, and Wisconsin. Or the auto workers at almost any U.S. car and truck assembly line. Raising prices for imported steel hurts all of these American workers.”

Q1 GDP REVISION (up to 1.1 percent) cheat sheet:

TREASURY DEPARTURE LOUNGE — Per a little birdie: “Brodi Fontenot, the assistant secretary for management since the beginning of 2015, is leaving Treasury. This is his last week. This is what Secretary Lew had to say about Brodi: ‘Brodi Fontenot has been a key member of the Treasury team for the past two years.

“A dedicated public servant, Brodi emphasized employee engagement and leadership development as the Assistant Secretary for Management, while managing Treasury’s budget and executing our strategic plan. We wish him all the best in the future.”

DRIVING THE DAY — President Obama travels to Canada for a North American Leaders Summit … Treasury Secretary Jack Lew delivers opening remarks at the Financial Literacy and Education Commission (FLEC) meeting at the Treasury Department … Personal income and spending at 8:30 a.m. both expected to rise 0.3 percent.

MORE ON HRC TREASURY SECRETARY — Per a DC observer: “Lael’s chances are way overstated. She has some major negatives with the left. Some thoughts: In the current political environment is Clinton likely to appoint someone who was the administration’s biggest advocate for free trade with China and TPP, and defender of China’s currency manipulation, as her treasury secretary? It seems like an immediate reversal on campaign commitments.

CAMERON SAYS AU REVOIR TO EU — FT’s George Parker, Guy Chazan, Anne-Sylvaine Chassany and Jim Brunsden in Brussels: “David Cameron bade an emotional farewell to the EU on Tuesday night, saying Britain would not ‘turn its back on Europe’ but claiming that he could have avoided Brexit if European leaders had let him control migration. … French officials said Mr Cameron insisted that he could have won last week’s referendum had EU leaders granted him his wish of an ‘emergency brake’ on migration which, he said, was ‘a driving factor’ behind the Out vote.

“[A]lready there was a sense that Angela Merkel, German chancellor, and other European leaders had turned a page and were moving on to a future as a club of 27 without Britain. The message from Ms Merkel was that last week’s Brexit vote was irreversible and there was no going back. ‘I don’t see a way of turning this round. It’s not the time for wishful thinking but for looking at reality.’”

TRUMP LAYS OUT ECONOMIC VISION — POLITICO’s Nolan D. McCaskill and Eli Stokols: “Donald Trump doubled down on economic populism and protectionism in a speech Tuesday, effectively taking conservative orthodoxy on free trade and tossing it onto the trash pile rising behind him. Promising to tear up existing trade deals — from the Bill Clinton-era North American Free Trade Agreement to the recently negotiated Trans-Pacific Partnership — and to punish China and other countries that he argued are dealing unfairly with the U.S., the presumptive GOP presidential nominee called for a new era of American economic independence.

“Cloaking himself in the anti-globalist garb of British Brexit voters and rising nationalist movements beyond the U.S., Trump blasted … Clinton … for selling out American workers to ‘global elites’ by supporting free trade. … But in running to Clinton’s left on trade as part of a pitch to disaffected blue-collar workers in America’s Rust Belt, Trump managed to further alienate mainstream conservatives”

MERKEL WARNS THE U.K. — WSJ’s Laurence Norman, Valentina Pop and Jenny Gross: “Ms. Merkel delivered a warning that the U.K. wouldn’t be allowed to cherry-pick the things it wanted out of its future relationship. Speaking to the German parliament, she said that the U.K. wouldn’t be able to gain full access to the single market of goods and services unless it shared some of the obligations of membership. … ‘Those wanting to leave the family can’t expect all obligations to become obsolete while privileges would continue to exist.’

“Mr. Cameron said he would do everything he could to argue for a close relationship between Britain, the EU and its member countries. But he acknowledged that it would be impossible for the U.K. to have all the benefits of EU membership without some of the costs. ‘That’s something the British government is going to have to think through very carefully,’ he said.”

BANKS UNDER PRESSURE — NYT’s Landon Thomas Jr.: “Even before Britain voted to cut ties with the rest of Europe, large European banks with global ambitions and sprawling operations in London were struggling. Now, as banks scramble to assess the impact of a British exit from the European Union, Deutsche Bank, Credit Suisse, Barclays and others face increased pressure from investors.

“While they recovered some ground on Tuesday, the stock prices of these banks have fallen sharply after the British vote, on increased fears that they will be unable to sell the billions of dollars of derivatives, securitized mortgages and other hard-to-value and sell securities that they so desperately need to get rid of. … Britain’s decision, however, also raises more existential questions about the futures of these entities, which over the decades became rooted in the notion that London was — and would always be — the financial locus of Europe”

FED GOVERNOR WARNS OF U.S. IMPACT — FT’s Sam Fleming: “The UK’s vote to exit the EU has boosted global risks and may have knock-on effects for the US economy and monetary policy, a senior Federal Reserve policymaker has warned. Jerome Powell, a member of the Fed’s Board of Governors … The comments were the first by a Fed governor since the UK’s referendum, which has triggered heavy losses in stock markets as well as sharp gyrations in currency markets.

“They will reinforce expectations that the central bank will tread very carefully in the coming months before considering another rate rise following its December increase. … Mr Powell said that there had already been risks to the US from overseas factors such as stubbornly low growth and inflation in key trading partners, and the hazards had only grown since the events in Britain. … ‘The Brexit vote has the potential to create new headwinds for economies around the world, including our own’”

STRESS TEST INC — WSJ’s Ryan Tracy: “After Citigroup Inc. unexpectedly failed the Federal Reserve’s annual stress tests in March 2014, the bank opened its checkbook and called in the consultants. … The bank hired multiple firms and said it spent about $180 million on stress tests during the second half of 2014. The next year, it passed. The stress tests — designed to determine whether banks can withstand severe economic shocks — have made U.S. banks stronger. Also more robust is the multibillion-dollar industry that has developed around the annual exercise.

“Globally, banks spent about $29 billion on consultants last year, much of that for stress tests in the U.S. and elsewhere, according to analysis firm ALM Intelligence. That compares with $16.35 billion in 2007. The total has increased every year since 2009, a period when banks have been relentlessly cutting expenses and employees in areas such as trading and branches. The Big Four accounting firms and Big Three consulting firms all have built practices offering manpower and advice to pass regulatory muster”

NO, POLLS ARE NOT SKEWED AGAINST TRUMP — POLITICO’s Steven Shepherd: “Is there a pool of voters who are too embarrassed to admit to pollsters they’re voting for Donald Trump? As Trump falls consistently behind Hillary Clinton in general-election polls, his campaign is counting on it. … But there’s little evidence that ‘shy Trump voters’ actually exist. In the Republican primaries, he didn’t outperform his poll numbers relative to his leading challengers — and, until he ran away with the nomination in late April and May, he performed significantly worse than the polls suggested”

BIG WIN FOR EXCHANGES — WSJ’s Dave Michaels: “In a sweeping victory for stock exchanges such as Intercontinental Exchange Inc. and Nasdaq Inc., an in-house judge for the [SEC] ruled the exchanges have charged competitive prices for market data sold to Wall Street brokerages and high-frequency traders.

“Judge Brenda Murray rejected claims by the brokerages and traders that fee increases approved in 2010 were exorbitant, siding with the exchanges, which benefit from selling the rich data feeds to sophisticated market participants such as Wall Street banks, proprietary traders and financial information providers such as Bloomberg LP and Thomson Reuters. The hard-fought case, which began three years ago, is expected to be appealed to the full, three-member SEC, according to lawyers and analysts”