More problems are on the horizon between government regulators and local U.S. banks (smaller, regional and/or community banks) over how to handle falling commercial property values. Currently, banks are holding roughly $1.9 billion in commercial real estate loans, which equals about a quarter of all outstanding loans, according to Moody’s. The values of such loans have plummeted about 50% since their peak in 2007.
Why is this a problem?
This drastic reduction in value country-wide is disproportionally hurting the smaller bank since they tend to have a larger concentration of capital invested in commercial real estate loans. These smaller institutions compose the majority of banks in the U.S. as they hold a majority of outstanding commercial real estate debt. These smaller banks are less equipped to handle sharp and steady decreases in commercial property values than their larger institutional bank counterparts. As a result, since many of these loans are underperforming and in default, smaller bank failure may be right around the corner as banks struggle to stay afloat. Therefore, there is now mounting pressure from government regulators over how to handle falling commercial property value and to keep these smaller institutions buoyant and lending.
One contentious problem is what constitutes a performing loan. Banks argue that so long as the borrower is making interest payments only, the loan should be rendered performing. Regulators argue that banks should be more realistic in their assessments as to whether a loan will remain performing, given the decreases in value in the marketplace. Further, regulators indicated that a loan should not be reclassified simply because the value of the property has dropped. However, bankers have stated this is exactly what is happening.
Due to this overwhelming problem- banks suffocating on the bad loans they originated- they have less desire to continue lending. In fact, Moody’s has estimated that many smaller banks will not be participating in the Obama Administration’s $30 billion initiative to encourage small business lending because of insufficient capital.
Solutions? Regulators want these banks to writedown the troubled loans. A writedown is when a banks recognizes the reduced value of an impaired asset (an asset’s current market value is less than the market value at the time of loan origination), also commonly known as an underwater asset. The problem for the bank is that a writeoff will leave the asset with a lower value, thus lowering the value of the banks overall assets. This also poses a problem for bank investors. If investors realize that this will become a common bank practice, they will be less inclined to invest, thus resulting in banks being less inclined to lend. Stay tuned as this problem will only get worse before it gets any better…
I was sent this video by my cousin Kia and I thought it worthwhile to share it here on Commercial Law International. It is a lecture given by Phillip K. Howard, the author of The Death of Common Sense, and founder of the not-for-profit Common Good. As taken from its website: “Common Good is a non-profit, non-partisan legal reform coalition dedicated to restoring common sense to America. By conducting polls, hosting forums, and engaging with leaders in health care, education, law, business, and public policy from across the country, Common Good is developing practical solutions to restore reliability to our legal system and minimize the impact of legal fear in American life.” The lecture follows this mission statement to a tee and proposes four ways the US legal system can be reformed for the better.
Global trade was expected to drop as much as 10% in 2009; instead it fell by 12%. That extra two percent may not seem like much but it represents the largest drop in global commerce since 1945.
This greater than expected drop has lead to renewed calls from Pascal Lamy, the Director General of the World Trade Organization, for the successful conclusion of the Doha Round of trade talks. The drop, according to Mr. Lamy made it an “economic imperative” for these trade talks that began in 2001 to be successfully concluded this year.
The Doha – Developmental – Round of trade talks is primarily aimed at the removal of trade barriers faced by developing nations, specifically those in agriculture. The talks which are not at a virtual stand still have stalled for largely due to disagreements between the developing world, as a general collective and the US, European Union (EU) and other industrialized nations , as another collective, over how deep to cut the agricultural subsidy programs operated by the latter.
Another bone of contention is how within the talks is how far and how deep should developing counties like China and India go in removing barriers to trade.
The ACGA’s report comes in the wake of the Satyam Computer Services scandal where the companies head admitted to defrauding the company for many years. The scandal helped expose so of the obvious as well as not so obvious weaknesses in the Indian corporate governance regime.
The report, which will be presented to government officials, the Securities and Exchange Board of India (India’s securities regulator) and stock exchanges, points out several areas in need of reform. Four such areas in need of reform are:
Related-Party Transactions – this is an issue in India as many companies are either owned or controlled within one family and companies are sometimes run like personal fiefdoms.
Corporate disclosures – India needs to improve corporate transparency in a major way given for example as the report points out the misuse and abuse of warrants in India.
Shareholder voting rights –many investors are rob of a chance to air their views at annual meetings as annual meets are often held in far off places, with relatively little notice.
The Auditing profession – the highly fragmented nature the profession in India and regulations mostly geared to insure the survival of small firms often over improvements in quality and service has done a tremendous disservice to what ought to be a cornerstone in any corporate regulatory regime.
The question that remains will law makers, regulators and corporate insiders accept or reject the reports findings and recommendations?
The Office of Fair Trading (OFT), the agency charged with policing trade practices – read unfair trade practices – has launched a study into the high cost associated with business insolvency.
The study will focus on the way insolvency practitioners, namely accountants and lawyers are appointed and how they set their fees. The importance of the study cannot be overstated as the high cost of going bust in the UK has been identified by practitioners, business and the Government as a source of weakness in the UK insolvency regime when compared to other countries.
The study is expected to be completed by the end of next year.
The FSA, charged with policing financial institutions in the UK, has imposed the fourth highest fine in its history on TD for repeatedly failing “to follow established procedures in ensuring the trader’s books were independently verified.” According to the FSA TD failed to ensure that price valuations by one of its traders in its London based Credit Products Group of its Investment Banking division were accurate.
There is no word yet on whether the trader in question was, is or will be subject to investigation. According to the Times the FSA declined to comment on whether these pricing issues were the result of a systematic scheme to falsify information or was just a mistake.
The large fine, while not the largest – that distinction belongs to Royal Dutch Shell in 2004 with a whopping £17 million for overstating its oil and natural gas reserves – was significant being TD’s second violation. The FSA fined TD back in 2007 £490,000 when fixed income trader Simon Brgnall created fictitious trades to hide significant losses. The £17 million fine was imposed to send a message to TD and other financial institutions that repeated violations would not be tolerated by the FSA.
The good news for TD, like there could be good news in this situation, is that due to its full co-operation with the FSA the fine was reduced from £10 million to the current £7 million. Despite the reduction in the fine, I wonder how financial markets on both sides of the Atlantic will respond to this news?
Imagine being told that you could no long buy a BlackBerry or being told that the services of the one you already own will be restricted, just imagine. Think it can’t happen; well think again for this has now entered the range of possibility in the United States.
The Canadian company, Research In Motion Ltd (RIM), the maker of the ubiquitous BlackBerry, could be banned in the US if it receives and adverse ruling by the International Trade Commission (ITC). Please, please don’t panic, your BlackBerry is still safe, please note I said “if”.
Let me be perfectly clear here, it is only a slim possibility, for now, as the ITC has to date not initiated an investigation of RIM. However, there has been a complaint made to the ITC by Prism Technologies LLC (Prism) that RIM has infringed its intellectual property.
The complaint made by made by Prism is its latest move to force a settlement from RIM. The two are embroiled in hotly contested patent case since last year in federal court in Nebraska were Prism claims that RIM through its BlackBerry has violated its patents held on desktop software and servers and an authentication system. In September of this year Microsoft settled its portion of the case with Prism.
In filing the ITC complaint what Prism is in effect trying to do is force RIM to settle the patent infringement case. But how, you might ask.
Well there are two reason and all of them having to do with the characteristics of the ITC. The ITC is a quasi-judicial federal agency set up to investigate and enforce US laws as they pertain to unfair trade practices. The agencies mandate extends from anti-dumping and countervailing duties to patent infringement.
The first of the two reasons is that the ITC unlike in a lawsuit, which could drag on for year, can complete its investigation in about 15 months. If an investigation is actually launched, RIM and its lawyers will have to weigh on the one hand the probability of an adverse finding with the finding surviving the subsequent appeals that are sure to come and on the other hand settling its issues with Prism so that any ITC investigation would be rendered a moot point. The speed with which the ITC can move will defiantly put RIM a weakened negotiating position – well played Prism lawyers, well played.
The second reason is that the ITC unlike courts do not have the authority to order royalties but they do have the power to stop any importation of any new devices; prohibit the sale of devices already imported; and even bar the transmission signals originating from another country. Here again Rim and its lawyers will have to do some business-legal analysis and determine what’s in its best interest – is it better to settle now ( with only an ITC complaint) or is it better to wait and let a potential ITC investigation or even adverse finding force its hand?
The good news for RIM is that it still has time, for now there is only an ITC complaint, no investigation.
There is nothing new with European Commission having to balance competing constituents – both market and geographic. The case remains the same with the anti-dumping duties put in place in 2006 to protect EU shoe manufacturers from cheaper Chinese and Vietnamese imports.
Putting the polish on the shoe trade
The EU will decide tomorrow if it will continue or end the duties on the cheaper Chinese and Vietnamese footwear imports. In 2006 the EU placed anti-dumping duties of up to 16.5% on certain classes of footwear from China and duties of up to 10% on certain classes of footwear from Vietnam after they were found to be being sold below cost of production. In October of last year the duties were further extended for another year pending review by the EU Trade Commissioner at the time, Lord Mandelson – now the UK’s First Secretary of State, Secretary of State for Business, Innovation & Skills.
Under the anti-dumping rules of the World Trade Organization (WTO), after a country has proven that goods are being dumped in its markets – being exported and sold below cost of production – that country has the right to impose duties on said goods. Anti-dumping duties however have limits and ought only to be as high as to bring the imports in line with the price of domestic goods. The dumped goods are an unfair competitive advantage for the imports and therefore represent a threat to domestic sectors. The anti-dumping duties act as shield against this unfair advantage, allowing domestic industries an opportunity to realign to new market realities. Well, so says trade law theory anyway but theory for an infinite number of reasons doesn’t always match up to practice.
One major reason for this dissonance between theory and practice is that trade is global and production often simply shifts somewhere else – a jurisdiction with no or perhaps lower anti-dumping duties on those particular goods. Additionally, and this is where the EU has to balance various constituencies, trade is global. Yes, I know, I already said that but it worth repeating because many companies, if not most, have to varying degrees global supply-production-distribution-promotion-sales chains that span the globe. European shoe companies are no exception.
The UK taxman is now using YouTube to get its message across. I mean literally the “UK Taxman” – Permanent Secretary for Tax in HM Revenue & Customs (HMRC), Dave Hartnett.
And what is his message. Well you guessed it, pay your taxes or else.
Yes I know, that’s just a little bit too simplistic but it none the less still holds to be true. The video, however, has a specific target audience, more than simple the general taxpaying public. It seeks to engage, and gently remind those taxpayers whom may have undeclared offshore savings that they have a legal duty to declare such holdings and those that do not will be prosecuted to the fullest extent of the law – as I said gentle.
The Permanent Secretary or the UK Taxman or as I have taken to calling him, in the video – the first and I suspect not the last use of social media by HMRC – also urges undeclared offshore holders to come forward and take advantage of the HMRC’s tax amnesty program. The New Disclosure Opportunity (NDO) was launched this July and offers tax evaders a chance to avoid criminal prosecution in exchange for declaring offshore accounts, and paying the taxes owed along with a relatively small penalty.
The NDO is set to expire on November 30 of this year. Those who declare on or before this date by phone or in writing have until January 31, 2010 to settle their bill with the UK Taxman. Those that chose to notify by email, interestingly enough, have more time, March 2010 to settle up. Those who do not could face the full rigour of the law – criminal prosecution.
Way the difference? I really can’t tell you, notice is notice is notice and it should not matter the medium. However, I would venture to guess that some policy considerations, taking account of the differences in mediums, must have gone into making this decision – well, I hope that there are policy considerations.
This tax immensity program is the second such for HMRC. Its 2007 campaign nabbed the Treasury £400 million after 45, 000 evaders came forward. The Taxman and his colleagues have taken an increasingly hard line stance on tax evaders, especially those with undeclared offshore accounts, in the wake of dwindling tax revenues during the recession.
Credit Suisse has agreed to settle allegations of insider trading in Brazil for R$19.2 million. The fine is the second largest, after the Banco Safra case of 2007, levied on a company by the Securities and Exchange Commission of Brazil – Commissão de Valores Mobiliários (CVM).
The offer to settle is substantially more than Credit Suisse’s original offer of R$150,000 last year rejected by CVM. The new offer, which was promptly accepted by CVM, is much closer to the values of the alleged illegal trades and better reflects the magnitude of the offence, according to the Financial Times. Well, that’s one way of putting it. I would have simply said that Credit Suisse got caught with its hand in the cookie jar – allegedly – and is simply paying the consequences.
The settlement stems from alleged insider deal of shares in Embraer, the Brazilian aircraft manufacturer between October 2005 and January 2006. At the time Embraer was preparing to undergo capital restructuring with its shares then being traded on the São Paulo Stock Exchange’s Novo Mercado section. By listing on the Novo Mercado a company voluntarily binds itself to higher corporate governance and transparency standards than that required by either Brazilian law or by the CVM. These features have proven to be very attractive to many investors both domestic and foreign.
According to the CVM, Sistel, a pension fund for employees of telecommunications companies and a controlling shareholder of Embraer commissioned Credit Suisse to analyze the capital restructuring plans. However, not long after it was engaged Credit Suisse, it is alleged, began buying shares of Embraer.
The positive news for Credit Suisse is that the settlement as now drawn a line under this issue and it can now move on to doing what it does best – connecting those with money with those in need of it.
By: Ainsley Brown