Porsche faces probe over stock price manipulation

Press Trust of India | Updated On: February 12, 2013 23:54 (IST)

Frankfurt: German prosecutors said today that they have extended their probe into the suspected stock price manipulation at sports car maker Porsche. The investigation had now been widened to include "everyone who sat on the supervisory board of Porsche's holding company between March and October 2008, as well as a former employee," a spokesman for prosecutors said.
That means that Ferdinand Piech, supervisory board chief of Europe's biggest carmaker Volkswagen, Porsche supervisory board boss Wolfgang Porsche and works council head Uwe Hueck are now implicated in the probe. The accused are being investigated on suspicion of "complicity to manipulate the market," the spokesman added.
In December, prosecutors charged Porsche's former chief executive Wendelin Wiedeking and former finance chief Holger Haerter with manipulating the Porsche's share price in connection with the - ultimately unsuccessful - attempt to take over Volkswagen.
Mr Wiedeking and Mr Haerter allegedly made false statements in public with regard to the Porsche's intentions in 2008. Both Mr Wiedeking and Mr Haerter denied the charges.
The prosecutors argue that Porsche issued at least five public statements between March and October 2008 publicly denying the plans, even though preparations for the takeover were already underway.
It was not until several months later that Porsche revealed in a surprise statement its takeover plans, sending the share price rocketing.
Porsche's bid to acquire the much-bigger Volkswagen eventually unravelled, leaving the luxury sports carmaker with more than $13 billion in debt.
The two companies then made a fresh attempt to tie the knot in 2009, with Volkswagen initially acquiring 49.9 per cent in Porsche in the first stage of the complex takeover agreement, the completion of which ran into a number of legal and tax hurdles.
Last year, a German court rejected two compensation claims brought against Porsche by the investors who felt duped by the company over the tie-up.
Copyright @ Thomson Reuters 2013

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Indian tender twisted ...ITALY ARRESTED..CEO.....

Indian tender twisted to favour Italian firm - prosecutors

-

By Emilio Parodi and Danilo Masoni

BUSTO ARSIZIO, Italy | Wed Feb 13, 2013 4:00am IST

(Reuters) - Three brothers with family ties to a former head of the Indian air force helped to twist rules in a helicopter tender won by Italy's AgustaWestland, prosecutors alleged in an arrest warrant for a top Italian businessman.

Italian prosecutors said in the warrant reviewed by Reuters on Tuesday that two managers at AgustaWestland, a unit of defence group Finmeccanica (SIFI.MI), paid go-betweens to help it win the 2010 contract to supply 12 helicopters to India. Part of these payments ended up with the three Indian brothers, Juli, Docsa and Sandeep Tyagi, whose cousin Sashi Tyagi was former Indian air force chief. None of the Tyagis has been accused of wrongdoing by officials in India.

In a growing corruption scandal, police arrested on Tuesday AgustaWestland's former chief executive Giuseppe Orsi, who now heads Finmeccanica. Orsi denies any wrongdoing over the 556-million-euro deal. The case, which is still in its preliminary investigation phase, has rocked Italy before parliamentary elections on February 24-25, and also in India, the world's largest weapon importer.

Prosecutors in the northern town of Busto Arsizio, near AgustaWestland's headquarters, said Orsi hired U.S.-born Guido Ralph Haschke, who was then a consultant for the Finmeccanica group, to lead dealings in India to secure the contract. Haschke and his partner Carlo Gerosa, prosecutors said, had close ties with the Tyagi brothers. Prosecutors allege that Orsi, along with the current chief executive of AgustaWestland Bruno Spagnolini, paid 400,000 euros in consultancy fees to Haschke and Gerosa. "Of this, 100,000 euros in cash were given to the Tyagi brothers," they said in the 65-page warrant.

The money went to the brothers to pressure Indian officials and help doctor the tender terms to favour the specification of AgustaWestland's helicopters, the prosecutors alleged. The tender was changed to accommodate AgustaWestland by, among other things, lowering required altitudes where the helicopters could operate to 15,000 feet from 18,000 feet, "thus allowing AgustaWestland, which otherwise would not even have been able to present an offer, to take part in the tender", the warrant said. The tender terms were also changed to introduce an engine failure flying test. This favoured AgustaWestland as its helicopters were the only ones in the tender operating with three engines.

Orsi's lawyer said his client denied distributing any money or pocketing a single euro, adding that the investigation did not provide any evidence of illicit payments. AgustaWestland said on Tuesday it supported Spagnolini who was placed under house arrest. The warrant also covered Haschke and Gerosa. Neither has been arrested as they are in Switzerland. A lawyer for Haschke, contacted by reporters, declined to comment on the case while Gerosa could not be reached for comment. Reuters was not immediately able to locate the Tyagi brothers, nor Sashi Tyagi.Sashi Tyagi, head of India's air force from 2004-2007, in November told the India Today news weekly he had no memory of the issue. The warrant did not explain how Tyagi might have been involved in a deal completed after he had left his post.

INDIAN DEAL

The investigation into Finmeccanica, which started more than a year ago, is one of a series of corruption scandals in defence dealmaking in India. Defence Minister A.K. Antony has ordered an inquiry into the deal to be conducted by the Central Bureau of Investigation, the country's federal police force.The arrests over Indian bribery allegations come as Finmeccanica unit Alenia Aermacchi hopes to compete for a contract to supply over 50 military transport aircraft to India in competition with European aerospace group EADS (EAD.PA).

According to specialist defence publication IHS Jane's, Alenia would build 40 of the 56 C-27J Spartan airlifters in India and use the same assembly line to meet future regional demand for tactical air transport.The military arm of EADS subsidiary Airbus told Reuters last week it would offer its C295 military transport plane as an alternative, adding that manufacturers were waiting for a formal competition document from the Indian government.

(Reporting by Emilio Parodi and Danilo Masoni; Additional reporting by A. Ananthalakshmi and Ross Colvin; writing by Stephen Jewkes and Antonella Ciancio; Editing by Lisa Jucca and David Stamp)

Italy arrests Defence firm’s CEO- ALL MANUPULATIONS

CBI to probe chopper deal after Italy arrests Defence firm’s CEO

OUR BUREAUNEW DELHI, FEB 12:  

The Central Bureau of Investigation is to inquire into charges of unethical dealings by Italian company Finmeccanica in the sale of 12 helicopters by its Anglo-Italian subsidiary AgustaWestland to the Ministry of Defence. The deal is valued at around Rs 3,500 crore. The probe announcement came after the Italian media reported that Finmeccanica’s Chief Executive Officer had been arrested for corruption and embezzlement in relation to bribes allegedly given to the Indian government. International agencies stated that Finmeccanica CEO Giuseppe Orsi, who had been under investigation for months, had denied any wrongdoing in the deal for the sale of 12 helicopters. It is alleged that bribes were paid to win the contract, which was signed in February 2010.The helicopters are meant for the use of the President, the Prime Minister and other VVIPs.

NO CLARIFICATIONS

Agencies reported that the Italian magistrate had also ordered that the head of AgustaWestland, Bruno Spagnolini, be placed under house arrest. In a statement, however, Finmeccanica confirmed “that the operating activities and ongoing projects of the Company will continue as usual” despite the precautionary measures taken today towards the Chairman and CEO of Finmeccanica and the CEO of the controlled company AgustaWestland. The decision to hand over the case to the CBI was taken after the Ministry of Defence through the Ministry of External Affairs, sought information from the Governments of Italy and UK. “No specific inputs were, however, received substantiating the allegations” the Government statement said. A Defence Ministry statement adds that the probe has been widened to include the Indian contract that AgustaWestland (UK) signed.The contract signed with AgustaWestland includes specific contractual provisions against bribery and the use of undue influence as well as an Integrity Pact, the Government statement adds. Defence Minister A. K. Antony had earlier said that deliveries of the choppers are scheduled between January and July this year. 

EXPLAIN TO PEOPLE: BJP  Unsatisfied over the Centre’s decision to hold a CBI probe into the VVIP helicopter deal, the Opposition Bharatiya Janata Party said the Government owes the people an explanation for delaying the decision to hold a probe. Party spokesperson Prakash Javadekar said he had written to Antony two months ago that financial irregularities involved in the deal must be probed by the CBI. “Action has been taken in Italy on the VVIP helicopter scam. The CEO of the company has been arrested. But no action has been taken here. The country that would have benefited from the deal has taken action while the country which lost money has not done anything,” Javadekar told reporters here on Tuesday. The BJP plans to bring the matter before Parliament during the forthcoming Budget session.

Ashwini.phadnis@thehindu.co.in  Jigeesham@thehindu.co.in

http://www.thehindubusinessline.com/news/cbi-to-probe-chopper-deal-after-italy-arrests-defence-firms-ceo/article4407718.ece?homepage=true

PE-BOSSES lose sleep-$3 trillion in assets.......

13 FEB, 2013, 05.00AM IST, BLOOMBERG Private equity bosses lose sleep over buyout boom going bust
NEW YORK: Private equity, an investing trade plied by 4,500 firms with $3 trillion in assets, is bracing for a shakeout that's been brewing since the collapse of credit markets choked off a record leveraged-buyout binge. Firms that attracted an unprecedented $702 billion from investors from 2006 to 2008 must replenish their coffers for future deals and avoid a reduction in fee income when the investment periods on those older funds run out, typically after five years. 
As many as 708 firms face such deadlines through 2015, according to researcher Preqin. Private-equity firms pool money from investors including pensionplans and endowments with a mandate to buy companies within five to six years, then sell them and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 per cent to 2 per cent of committed funds and keep 20 per cent of profit from investments. 
While fundraising is a routine part of the buyout business, today's environment is anything but. Many firms are suffering from below-average profits on their boom period funds and top executives from Carlyle Group co-founder David Rubenstein to Blackstone Group president Tony James say future returns will be far more modest than those investors got used to in the past. As investors gravitate to the best-performing managers and cut loose others, 10 per cent to 25 per cent of firms may find themselves without fresh money. 
'RATHER MASSIVE' 
"The shakeout will be rather massive," said Antoine Drean, chief executive officer of Triago, a Paris-based firm that helps private-equity firms raise money. Drean estimates that as many as a quarter of private equitymanagers will see their funding pulled by 2018. The firms are under growing pressure to invest the capital they already have. 
About 28 per cent of the money raised from 2006 to 2008 has been paid back to investors, according toCambridge Associates, a Boston-based research and consulting firm. More than $100 billion, or 14 per cent, of the $702-billion raised, is yet-to-be invested dry powder that firms must use or lose by the end of 2013, according to Triago. 
That's a record for dry powder set to expire in a single year, Triago said. What's more, performance has sagged, most markedly on LBOs done at the peak. Since 2007, the industry's median return has been 6 per cent a year, below the 7.5 per cent that many pensions need to pay retirees and far beneath the industry's historic average of around 13 per cent. Notable among the underachievers are many of the mega funds, multi-billion-dollar pools raised in the boom by brand-name houses like Blackstone, TPG Capital and KKR & Co. 

'SOME CARNAGE' 
Blackstone's $21.7 billion fund from 2006 had a2 per cent net annualised internal rate of return as of December 31, according to a Blackstone regulatory filing. TPG's boom-era funds — an $18.9 billion vehicle raised in 2008 and a $15.4 billion vehicle from 2006 — were generating returns of 2.5 per cent and a negative 4.9 per cent annually as of June 30, according to the California Public Employees' Retirement System, a TPG investor. 
KKR's annual return on its $17.6 billion fund from 2006 was 6.9 per cent as of September 30. That combination of under-performance and funding needs has set the stage for a purge as investors pull the plug on the weakest firms. Only the scope of a shake-out is a matter of debate. 

$1 billion tax demand on $160 million -SHELL iNDIA

$1 billion tax demand on $160 million investment 'absurd', says Shell

Press Trust of India | Updated On: February 12, 2013 17:39 (IST)

New Delhi: Shell India today described as "absurd" the demand for $1 billion in taxes on a $160 million equity infusion done by the Anglo-Dutch oil major four years ago, saying it tantamounted to tax on FDI.
Anglo-Dutch oil major Royal Dutch Shell Plc's India unit head Yasmine Hilton said the company will challenge the notice that alleged tax evasion by under-pricing share transfer between member firms.
"We never comment in public about our tax affairs. The only reasons, and absolutely the only reasons, we commented on the issue was because it was reported that Shell was evading taxes. I cannot have our reputation tarnished that way. Shell does not evade taxes. At Shell, we have the highest business principles," she said.
Hilton said the tax authorities have raised a tax demand of $1 billion (about Rs. 5,400 crore) on an equity infusion of $160 million (about Rs.870 crore)."To service the downstream business, which is not making money, we needed an equity injection in 2008 of $160 million. We have (now) received a tax request of $1 billion on this equity injection of $160 million. Somebody needs to explain (this) because I do not understand," she said.
Income tax department has charged Shell India of under-pricing a share transfer within the group by Rs. 15,220 crore, and consequently evading taxes.The order relates to the issue of 8.7 crore shares by Shell India to an overseas company Shell Gas BV in March 2009. The shares were issued at Rs. 10 a share, which the income-tax authorities contest and peg higher at Rs. 183 a share instead.
She said in order to pay $1 billion in taxes, the company will need another equity infusion as the downstream fuel retailing business is loss making. And on that equity infusion, the company may get a $3 billion tax demand.

"Just think about the absurdity about it," she added.
To attract global giants, India needs to send right signals that it has a stable fiscal, legal and tax regime.

"Lets have a robust investor friendly framework. Do not create waves of fear amongst your investors by unreasonable tax demands or unreasonable statements. What signal does it send," Hilton said.
Shell, she said, will review all its options. It is taking tax and legal advice on the issue, she said but refused to say at what forum would it challenge the tax demand."It is effectively a tax on FDI," she said.
"We do need the right signal that India is going to be stable fiscal, legal, tax regime. We are not going to have surprises along the way."
Last week, Shell in a statement vowed to challenge what it saw as a transfer pricing order that is "based on an incorrect interpretation of the Indian tax regulations and is bad in law," arguing that the move is a capital receipt on which income tax cannot be levied.
At the centre is a 2009 equity injection involving Shell India and parent Shell Gas in which around Rs. 870 crore worth of shares were issued at a value of Rs. 10 per share, stock which taxmen now claim was in fact worth Rs. 183 per share."Funding of a subsidiary through issue of shares is common in India and globally," Shell India said.
"Taxing the money received by Shell India is in effect a tax on Foreign Direct Investment (FDI), which is contrary not only to law but also to the spirit of the recent global trip by the Finance Minister to attract further FDI into India," Hilton was quoted in last week's statement as saying.
The statement said Royal Dutch Shell group has over the last few years made significant investments in India. Equity injection was used to finance these investments and to fund the ordinary business activities of Shell India.

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Mon, Feb 11, 2013 at 22:26

2G row: CBI finds its own prosecutor colluding with accused

For the last three years, the 2G case has become synonymous with a corrupt system and has had many twists and turns. It has been a case which has involved some of the biggest names in politics, corporate India and the bureaucracy.

For the last three years, the 2G case has become synonymous with a corrupt system and has had many twists and turns. It has been a case which has involved some of the biggest names in politics, corporate India and the bureaucracy.

Network 18 has learnt from sources that the CBI suspects its own prosecutor of aiding Unitech MD Sanjay Chandra, one of the accused in the 2G case. A CBI preliminary enquiry report says an investigation is on and lead 2G prosecutor AK Singh has been removed from the case.

In terms of scale and profile the 2G case is as big as it can get. Then telecom minister A Raja spent 15 months in jail, DMK MP Kanimozhi was denied bail for seven months. Telecom secretary Behuria and top corporates including Sanjay Chandra of Unitech were also denied bail for months .

The main accused A Raja, Unitech MD, Sanjay Chandra and 12 others including Kanimozhi have been examined by the prosecution. Cross examination is now on and a verdict is expected by the end of the year.

CNN IBN has accessed a preliminary enquiry (PE) registered by the CBI on February 6 which states that AK Singh who represented the CBI in the 2G case has allegedly colluded with the accused Sanjay Chandra, MD of Unitech. The CBI preliminary enquiry says AK Singh shared the strategy of the CBI prosecution and even advised the accused Sanjay Chandra how to defend himself in the case. The CBI has confirmed that AK Singh has been removed as the agency's prosecutor in the sensitive 2G case.

Sources have told CNN IBN the CBI has in its possession an audio recording which contains a conversation which the agency believes has taken place between its prosecutor AK Singh and Sanjay Chandra. CNN IBN has accessed the recording where two people are being heard discussing the legal strategy and the way forward.

In an exclusive interview to CNN IBN, CBI director Ranjit Sinha confirmed that the agency was using the recording as a basis for their preliminary enquiry and to establish the voices belong to Unitech's Sanjay Chandra and CBI prosecutor AK Singh.

CBI director Ranjit Sinha also told CNN IBN that they have taken this very seriously and has informed the Supreme Court, the CVC, the law ministry and the Department of Personnel & Training (DoPT). Sources confirmed the audio recording with the CBI was at least 17 minutes in duration. 

The PE says prima facie the information reveals gross misconduct on the part of CBI prosecutor AK Singh and accused Sanjay Chandra. 

Sanjay Chandra along with former telecom minister A Raja and 12 others have been charged with conspiracy, forgery and cheating in the 2G case. Raja is accused of tinkering with procedure and policy to help Unitech and other corporates to get 2G licenses. They are also charged with benefiting Unitech to make windfall gains by selling stakes at a premium to Telenor. The trial is currently in the court of justice OP Saini in Delhi's Patiala house.

The preliminary enquiry now raises massive questions over the nexus between the prosecutor and the accused and now raises fresh doubts on what else could have been shared and who else could have been involved since the CBI began its probe and prosecution of the accused.

Meanwhile, Unitech, in a statement, has denied that managing director Sanjay Chandra had any involvement in the alleged backroom negotiations.

"He (Sanjay Chandra) wishes to make it absolutely clear that he has never met the prosecutor in the 2g case outside of court or had any phone conversation with him. He denies the suggestion that his voice is on any alleged recording. It appears a fabricated voice recording has been sent anonymously to the CBI. Any suggestion that Sanjay Chandra is linked with this recording is nothing, but an attempt to malign him and prejudice his defence in the 2G case. It is re-iterated that the recording is a fabrication."

The statement also adds that Chandra has joined the CBI's enquiries, and is co-operating with the CBI probe.

Disclaimer: Network18 cannot independently verify the authenticity of the conversation on the audio tape.

CEO of Citigroup didn’t know about a surge in mortgage risk

Rating Victims Didn’t Know S&P’s Toxic AAA Born of Greed

By Jody Shenn - Feb 11, 2013 12:38 PM GMT+0530

When Charles O. Prince III was chief executive officer of Citigroup Inc. from 2003 to 2007, he didn’t know about a surge in mortgage risk that his own investment bankers loaded on to its bank’s books. Because such debt carried top credit ratings from firms such as Standard & Poor’s, few financial executives paid attention to the potential dangers.“If someone had elevated to my level that we were putting, on a $2 trillion balance sheet, $40 billion of AAA rated, zero risk paper, that would not in any way have excited my attention,” Prince told the Financial Crisis Inquiry Commission, according to a transcript of his testimony released in 2011.

Mortgage securities granted top grades started souring in 2007, leading to ballooning losses. Citigroup required a $45 billion federal rescue, the largest of the bank bailouts that put taxpayer money at risk. The Justice Department sued New York-based S&P and parent McGraw-Hill Cos. last week over the damage caused by the practices allegedly behind the inflated rankings that contributed to the biggest financial crisis since the Great Depression. Some of the biggest losers were banks, including Citigroup and Bank of America Corp., which created and purchased collateralized debt obligations. Many of these investments -- created by packaging mortgage-backed bonds, derivatives and other CDOs and dividing them into new securities with varying degrees of risk -- imploded within a year after they were sold, even though they had pristine credit ratings.

Buffett’s Bank

Smaller financial institutions were also ruined by mortgage-backed debt. Western Federal Corporate Credit Union failed after its executives employed an improperly “aggressive investment strategy” that had no limits on highly rated mortgage bonds, according to a regulatory report on its collapse. Even Warren Buffett was affected. The Justice Department case identified Buffalo, New York-based M&T Bank Corp., whose shareholders include Buffett’s Berkshire Hathaway Inc., as one of the buyers of failed CDOs. Berkshire of Omaha, Nebraska, is also the biggest shareholder of Moody’s Corp., owner of the second-largest ratings firm after S&P.

S&L Law

The world’s leading financial institutions suffered more than $2.1 trillion of writedowns and losses after soaring U.S. mortgage defaults caused the credit crunch. In the complaint filed Feb. 4 in U.S. District Court in Los Angeles, the Justice Department is invoking a law created in response to the savings-and-loan crisis of the 1980s that was designed to offer easier victories when damage has been done to institutions with federally insured deposits. Success is “far from clear,” Jeffrey Manns, an associate professor at George Washington University Law School, said Feb. 7 in a telephone interview. S&P may argue it believed in its ratings or the statute doesn’t apply to the case.

“We start with proposition that we deny there was any fraud,”Floyd Abrams, the Cahill Gordon & Reindel LLP lawyer for S&P who represented the New York Times in the 1971 Pentagon Papers case, said in a telephone interview on Feb. 7. Fraud claims have “a high burden of proof,” he said. Ed Sweeney, a spokesman at S&P, declined further comment.

Shares Slide

McGraw-Hill’s market capitalization, which reached a five- year high of $16.2 billion at the start of the month, has plunged since the company said it anticipated the lawsuit would be filed, reaching $11.9 billion at the end of last week. The company’s stock price declined 27 percent in the five- day period ended Feb. 8 to $42.67, the biggest weekly drop in data compiled by Bloomberg going back to August 1980. The yield on its 2017 bonds leapt 69 basis points to 2.69 percent. The cost of insuring its debt against non-payment through five-year credit-default swaps jumped 135 basis points to 225.5 basis points, according to data provider CMA. McGraw-Hill owns CMA, which compiles prices quoted by dealers in the private market. Citigroup underwrote at least eight of the 12 CDOs from 2007 named in the government’s complaint for which it’s listed as a victim. That included Bonifacius, an issue among the last of its type named for a general called the “last of the Romans” by historian Edward Gibbon because he fought and died for a fading empire. Prince, who was forced out over New York-based Citigroup’s mortgage losses, didn’t return an e-mail last week.

Different Departments

Charlotte, North Carolina-based Bank of America, the second-largest U.S. lender by assets, hired S&P to grade two of the three CDOs for which it’s named as a victim, including one overseen by Bear Stearns Cos.’s Ralph Cioffi, the manager of two hedge funds whose collapse in June 2007 signaled the end of the boom in mortgage-tied CDOs. Bear Stearns collapsed in 2008 and was bought by JPMorgan Chase & Co., the largest U.S. bank, with assistance from the Federal Reserve. Underwriters of CDOs typically signed off on the contents of the deals and the nature of disclosures regarding their risk. Pressure from such firms pushed S&P to weaken its standards and to put off changes in ratings methods that could have made it tougher to receive top rankings, the Justice Department said. Even though the Justice Department lawsuit relies on examples where the same banks sold and bought their own toxic securities, saying they were harmed by S&P “isn’t a totally ridiculous assertion,” said Bert Ely, an Alexandria, Virginia- based bank consultant.

Big Organizations

“One of the things you’ve got to realize about large financial institutions is that they’re big organizations, they’ve got lots of different departments,” he said in a telephone interview. “So the left thumb doesn’t know what the right finger is doing, much less the right big toe.” While no bank or regulator should have had a “blind reliance on ratings,” the correct, lower grades might have prevented risks from building, Thomas Stanton, a former senior staff member at the financial crisis commission, or FCIC, said Feb. 7 in a telephone interview. “If we were in an era where rating agencies were simply incompetent and the investors failed to do due diligence, that’s one thing,” said Stanton, a Washington attorney and fellow at Johns Hopkins University’s Center for the Study of American Government. “But what seems to be coming out is a potentially higher level of culpability at S&P.”

Federal Allegations

Federal prosecutors allege that S&P didn’t adjust its analytical models or take other steps it knew were necessary to reflect the risks of the securities. The claims are tied to whether the company accurately represented the care it took in providing credit grades and avoiding conflicts, not how incorrect its ratings later proved. E-mails and other internal documents show executives were concerned that tougher standards would cause issuers to take their business elsewhere. High ratings were critical to encouraging banks to invest in mortgage securities, Chris Whalen, executive vice president at Carrington Investment Services LLC, said Feb. 7 in a telephone interview. “A bank could not have bought the securities but for the rating” said Whalen, a former managing director at Institutional Risk Analytics, which evaluates banks for investors. That’s because their capital rules “were totally ratings driven.”

Credit Unions

Western Corporate Federal Credit Union, or WesCorp, was seized by its regulator in 2009 after almost $7 billion in losses from investments in mortgage bonds with AAA or AA ratings. Like other so-called corporate credit unions that provide services to credit unions that deal with consumers, it was “only allowed to invest in highly rated securities,” according to a regulatory report on its failure. While the Justice Department called San Dimas, California- based WesCorp a victim of S&P, the National Credit Union Administration said in 2010 in a lawsuit against 15 of its former directors and officers that they had been “grossly negligent” in overseeing the bank. There had also been improper payments from certain executive retention plans, according to the lawsuit filed in federal court in Los Angeles. Robert A. Siravo, its former CEO, agreed to pay $600,000 and was banned from working at credit unions to settle NCUA claims, the regulator said in October. He didn’t admit liability or fault.

Other Victims

Credit unions now pay special assessments to cover the losses on failures of institutions including WesCorp. Those costs may translate to lower savings rates to consumers. Other victims named by the Justice Department included Eastern Financial Florida Credit Union, which was created for Eastern Airline Transport Co. employees and their family members in 1937 and failed in 2009. Also identified were units of M&T Bank, the lender that repaid more than $700 million in Troubled Asset Relief Program, or TARP, funds in 2011, and Chicago-area First Midwest Bancorp Inc. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 that the Justice Department is using to sue S&P stemmed from the savings-and-loan crisis of the 1980s, when the failure of about 750 thrifts cost taxpayers almost $90 billion. “Firrea was the Dodd-Frank of its day,” Cliff Rossi, executive-in-residence at the University of Maryland’s Robert H. Smith School of Business, said Feb. 7 in a telephone interview, referring to the financial-overhaul law enacted in 2010.

Tougher Enforcement

Because Citigroup and Bank of America created some of the CDOs, Rossi said he “found it a little surprising they would try to come at it like these were some unfortunately aggrieved institutions.” Still, the history of why Firrea included tougher enforcement powers reflected the view at the time that thrift executives had often worked with other parties to put their own firms and, ultimately, taxpayers at risk, he said. “A lot of what happened had had nothing to do with looking after the best interest of shareholders and instead about looking after the best interest of senior executives,” Rossi said. The FCIC, which was created by Congress with a 10-member bipartisan board in 2009, said in its final report that Citigroup’s “willingness to use” its bank “to support the CDO business had the desired effect” of boosting it from the 14th ranked underwriter in 2003 to second place in 2007.

Bubble Bursts

In a 2008 letter to Vikram Pandit, Prince’s successor, the Federal Reserve Bank of New York criticized how Citigroup offered its various units “largely unchallenged access to the balance sheet to pursue revenue growth.” Pandit was ousted in October by Citigroup directors.In turn, “what was good for Citigroup’s investment bank was also lucrative for its investment bankers,” the FCIC said. The co-heads of its global CDO business each made about $6 million in 2006, while a co-CEO of the investment bank earned more than $34 million in salary and bonus.Taxpayers were forced to offer the bank the $45 billion bailout, later repaid, as part of the $700 billion TARP.“I know it sounds like the bank robber who gets held up by someone else,” said Ely, the banking consultant. “But bad guys can still be victims of a crime.” The case is U.S. v. McGraw-Hill, 13-00779, U.S. District Court, Central District of California (Los Angeles).

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

http://www.bloomberg.com/news/2013-02-11/credit-rating-victims-didn-t-know-s-p-s-toxic-aaa-born-of-greed.html

S&P Granted Top Grades to Doomed Lehman CDO....

S&P Granted Top Grades to Doomed Lehman CDO as Downgrades Rose 

By Sarah Mulholland - Feb 11, 2013 3:30 AM GMT+0530

A unit of New York Life Insurance Co. issued a $1.5 billion collateralized debt obligation named after a Northern sky constellation in April 2007. The deal burst when it defaulted less than a year later.

The Corona Borealis CDO, underwritten by Lehman Brothers Holdings Inc., is one of dozens of deals named in the Justice Department’s Feb. 4 lawsuit accusing the world’s largest credit- rating company of deliberately misstating the risks of mortgage bonds as it sought to keep its share of the booming business of repackaging home loans for sale as securities.Eastern Financial Florida Credit Union lost its investment after purchasing a portion of the Corona Borealis CDO, relying in part on Standard & Poor’s assessment of the securities, according to the Justice Department’s complaint filed in federal court in Los Angeles. The U.S. is seeking penalties against S&P and its New York-based parent, McGraw-Hill Cos. that may amount to more than $5 billion, based on losses suffered by federally insured financial institutions.S&P was aware of its influence over such firms, and knowingly “devised, participated in, and executed a scheme to defraud investors,” according to the complaint.Ed Sweeney, an S&P spokesman in New York, declined to comment.Eastern Financial, founded in 1937 as the original credit union for Eastern Airlines, was forced to merge with Space Coast Credit Union after being seized by regulators in April 2009.

AAA Rankings

S&P gave more than half of the Corona Borealis deal its highest AAA grade, according to a prospectus from July 2, 2007. Its largest competitor, Moody’s Investors Service, offered an equivalent Aaa on the same portions. About 50 percent of the deal was linked to subprime mortgage bonds carrying grades of BBB or below, according to the Justice Department lawsuit. BBB is the second-lowest rung of investment grade on the rater’s scale.When S&P blessed the deal with top rankings in April 2007, it wasn’t yet known exactly which securities would be included in the transaction. CDO issuers could lay out which types of bonds would be included in deals at the time of the sale while still in the process of acquiring the debt. CDOs pool assets such as mortgage bonds and package them into new securities with varying risks in which revenue from the underlying bonds or loans are used to pay investors.

Lehman Collapse

New York Life’s deadline for purchasing the collateral was July 9, 2007, according to the prospectus. Eligible collateral included credit-default swaps used to wager on the likelihood of subprime home-loan failures. The completion of the deal was contingent upon garnering AAA grades from the rating companies.On June 28, 2007, S&P “authorized immediate large-scale negative rating actions on non-prime RMBS,” according to the government complaint. The downgrades didn’t affect the ratings on the Corona Borealis deal, which defaulted in February 2008, the complaint says.Lehman, the biggest underwriter of mortgage-backed securities as the U.S. real estate market peaked, filed for the largest bankruptcy in history in September 2008, prompting a global credit freeze that led to the worst financial crisis since the Great Depression. Corona Borealis, Latin for northern crown, is a constellation in the northern sky, according to the Encyclopedia Britannica. In Greek mythology the stars are the crown the god Dionysus presented to the Cretan princess Ariadne, who was deserted by Theseus after helping him escape the Labyrinth with a thread of jewels.

The case is U.S. v. McGraw-Hill, 13-00779, U.S. District Court, Central District of California (Los Angeles).To contact the reporter on this story: Sarah Mulholland in New York atsmulholland3@bloomberg.net