Obama says failure to reach fiscal deal would hurt markets

President Barack Obama delivers remarks at the White House in Washington November 28, 2012.

Credit: Reuters/Kevin Lamarque

By Jeff Mason

WASHINGTON | Sun Dec 30, 2012 11:49am EST

WASHINGTON (Reuters) - Financial markets would be affected adversely if U.S. lawmakers fail to agree on a "fiscal cliff" deal before Tuesday, President Barack Obama said in an interview broadcast on Sunday, while urging Congress to act quickly to extend tax cuts for middle-class Americans.

Lawmakers are seeking a last-minute deal that would set aside $600 billion in tax increases and across-the-board government spending cuts that are set to start within days. If Congress does not make that happen, the first bill brought up in the new year would be to reduce taxes for middle-income families, Obama told NBC's "Meet the Press."

"Now I think that over the next 48 hours, my hope is that people recognize that, regardless of partisan differences, our top priority has to be to make sure that taxes on middle-class families do not go up. That would hurt our economy badly," Obama said in the interview taped on Saturday.

"We can get that done. Democrats and Republicans both say they don't want taxes to go up on middle-class families. That's something we all agree on. If we can get that done, that takes a big bite out of the 'fiscal cliff.' It avoids the worst outcomes," Obama added.

Low income tax rates first put in place under Republican former President George W. Bush are due to expire at the end of the day on Monday - the last day of 2012.

Obama said that failing to reach a deal would have a negative impact on financial markets.

"If people start seeing that on January 1st this problem still hasn't been solved, that we haven't seen the kind of deficit reduction that we could have had had the Republicans been willing to take the deal that I gave them ... then obviously that's going to have an adverse reaction in the markets," he said.

RARE SENATE SESSION ON SUNDAY

Obama met with congressional leaders at the White House on Friday and declared himself cautiously optimistic about the chances of an agreement, but he noted in the interview that nothing had materialized since then.

"I was modestly optimistic yesterday, but we don't yet see an agreement. And now the pressure's on Congress to produce," he said.

The Senate is scheduled to hold a rare Sunday session beginning at 1 p.m. EST (1800 GMT), but it was not clear whether the chamber would have fiscal-cliff legislation to act upon.

Obama sketched out what he believed to be the most likely scenarios the end the back-and-forth between both sides. Either the congressional leaders would come up with a deal, or Democrats in the Senate would bring a bill to the floor seeking an up-or-down vote to extend tax cuts for middle income earners.

"And if all else fails, if Republicans do in fact decide to block it, so that taxes on middle class families do in fact go up on January 1st, then we'll come back with a new Congress on January 4th and the first bill that will be introduced on the floor will be to cut taxes on middle class families," he said.

Obama chided Republicans for resisting his call for tax rates to go up for the top two percent of U.S. earners despite what he viewed as significant compromises on his part to cut spending and reform expensive social programs for the poor and elderly.

"They say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they're behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected. That seems to be their only overriding, unifying theme," Obama said.

"The offers that I've made to them have been so fair that a lot of Democrats get mad at me. I mean I offered to make some significant changes to our entitlement programs in order to reduce the deficit," he said.

(Reporting by Jeff Mason; Editing by David Brunnstrom)

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Insight: Wall Street, facing fiercer watchdog, flees U.S. power markets

A Wall St. sign is seen in New York's financial district September 16, 2008.

Credit: Reuters/Lucas Jackson

By Cezary Podkul, David Sheppard and Scott DiSavino

NEW YORK | Fri Dec 21, 2012 11:10am EST

NEW YORK (Reuters) - When federal regulators proposed a six-month penalty on JPMorgan Chase & Co's electricity trading arm last month, they took aim at what is now a rare sight on Wall Street: a large and growing power sales business.

After five years of rapid and lucrative growth, the world's biggest investment banks are now dramatically scaling back their U.S. power operations, a Reuters analysis of electricity sales has found.

In 2008, when they were most active in the market, the 15 biggest banks sold enough electricity in the United States to power two out of every five residential customers for a year, Reuters found. By last year, their sales would only power about one out of every five customers.

The pull-back means fewer deep-pocketed players in an already shrinking $200 billion U.S. physical power market and strongly invites the question of who will fill the banks' role of cushioning the risks of buying and selling in one of the world's most volatile commodities.

"If big banks leave the market . . . it means that somebody else has to absorb those risks. And it could be utilities or consumers - those would be the two leading candidates," said Craig Pirrong, a University of Houston professor and expert in energy trade regulation.

Others cheer the exit as a potential win for consumers.

"All the banks are doing is feasting on overly complicated market rules to find vulnerabilities, which they pounce on to make large short-term profits," said Tyson Slocum of Public Citizen, a consumer advocacy group.

Regardless, some electricity buyers are already expressing nervousness about JPMorgan's penalty. The bank had been one of just four banks, alongside Bank of America Merrill Lynch, Australia's Macquarie Group and Germany's Deutsche Bank, to sell more electricity in 2011 than in 2008, according to quarterly data sellers are required to provide to the Federal Energy Regulatory Commission (FERC), the country's top power market regulator.

Others have pulled back sharply. Total power market sales reported by Goldman Sachs in 2011 fell to one-sixth of their peak in 2005. Total sales by the banks have continued to slide in the first nine months of 2012 and are almost half the level of a year ago.

There are many reasons for the decline. Power prices have fallen to 10-year lows across most of the United States thanks to an abundance of cheap natural gas. With decades worth of cheap fuel ahead, fewer utilities have been looking to hedge their output; tough new capital requirements and regulations banning proprietary deals have cut into commodity trading; and some European banks, facing a persistent debt crisis back home, have fled dollar-intensive businesses.

But many bankers and analysts see a more alarming cause for the pull-back by banks: the risk that a more aggressive FERC may target them for anything suggestive of nefarious trading.

BANKS' SLICE SHRINKS FASTER THAN PIE

While the total value of the U.S. physical power market has shrunk in recent years, the banks' share has fallen faster.

At their height in 2008, banks sold $46.2 billion worth of electricity across all products, or about 15 percent of the U.S. physical power market. In 2011, they sold $17.5 billion, or about 9 percent. In the first quarter of this year, their share was down to just under 7 percent, FERC data show.

Reuters gauged each bank's footprint in the power sector by analyzing quarterly logs of physical power transactions they have filed with FERC since 2002. Reuters shared the data with each bank represented in the filings, and while all declined to comment publicly for this article, none disputed the figures.

"The pie is definitely shrinking and has been for a few years," said the global head of one bank's power operations. "Our hope is that we are nearing the bottom."

Some of that gap has been filled by hedge funds or merchant traders not facing the same limitations as banks; but, say traders, some of that liquidity has simply evaporated.

ANXIOUS CUSTOMERS

FERC's stepped-up enforcement has grown increasingly apparent since 2005, when Congress beefed-up its penalty powers to help prevent another Enron scandal.

In November, the agency imposed the temporary ban on JPMorgan's physical power trading - over no more than a document discovery dispute in an investigation that is not yet finished. The ban will limit JPMorgan's ability to sell power at profitable rates for six months starting in April 2013.

Asked about the ban by Reuters, JPMorgan Chase CEO Jamie Dimon brushed it off this month as "not that big a deal" for the bank, which is contesting the punishment.

Not everyone is so blasé.

Several customers of the bank -- which includes a range of local utilities from Palo Alto to Seattle -- expressed worries about the impact on their routine power purchases.

"I don't think we are going to get any bid (from JP Morgan) because it takes away their vested interest in getting into these trades," said Yakov Levin, manager of the power department for the Town of Hudson, Massachusetts, which has bought power from the bank.

The California city of Palo Alto "took steps immediately to ensure we wouldn't set up any more deals with (JPMorgan) during the ban," said Debra Katz, who handles communications for the city's utility. It wasn't ideal since "we've been very happy with our transactions with JPMorgan in the past."

JPMorgan spokeswoman Jennifer Zuccarelli said the bank has been in contact with its clients regarding the ban and sought clarification from FERC to make sure it will not impact pre-existing contracts.

The bank's trading counterparties are also taking notice. One trader who has bought power from JPMorgan said any future deals with the bank must be "reviewed by our legal and regulatory departments".

FERC spokeswoman Mary O'Driscoll said the Commission is not worried about banks scaling back their electricity trading operations.

"Power markets ebb and flow and change all the time. Banks have their own reasons for leaving the market," she said.

BOOM AND BUST

Most banks entered the power sector after the California power crisis in 2000-2001, when several energy marketers like Enron were driven from the market by manipulation scandals, bankruptcy and other credit concerns. That left a financing gap in an industry that had recently become deregulated.

Wall Street sensed opportunity.

Between 2001 and 2005, FERC granted power marketing authority to at least eight banks. Others bought their way in: UK-based RBS launched a joint venture with trading powerhouse Sempra Energy in 2008.

"Everyone was seeing how much Goldman and Morgan (Stanley) were making," said one executive at a large bank that wound down its electricity operations after 2008. So banks started "chasing revenue" by poaching top traders from Wall Street's dominant duo and hiring promising up-and-comers from utilities, he said.

Banks make money in the sector by buying electricity from power generators or plants they own or operate. These often long-term agreements help make costs more predictable and projects more bankable for power providers. The deals also make sense to banks, who can then turn around and sell the power to utilities, cities and industrial users at a slight mark-up.

In all, the value of banks' physical power sales surged three-fold from 2003 to 2008, FERC data show. But the 2008 financial crisis - and its regulatory aftermath - accelerated Wall Street's retreat from the market.

RBS was forced to sell its Sempra Energy venture in 2010 after it was bailed out by the UK government. Bear Stearns and Merrill Lynch, both with large power books, were sold to rivals. Lehman Brothers went bankrupt.

Others simply found the costs exceeded the benefits of staying in the market. Credit Suisse lost over $100 million on Texas power trades that went sour at the peak of the financial crisis, according to a person familiar with the bank's operations at the time.

By 2009, Credit Suisse had decided to pull out of power trading because it was too capital intensive and as they faced restrictions on trading for the bank's own book, according to a person familiar with the firm's thinking.

'JIHAD' OR JUST BUSINESS?

Now, some in the industry worry the retreat is accelerating. Amid a glut of natural gas supply, the market's economics haven't improved much. But the potential costs have.

When FERC proposed fining Barclays for alleged market manipulation in October, the record $470 million penalty more than eclipsed all the bank's physical power sales revenue for the first nine months of 2012, FERC data show. Even Barclays' penalties for manipulating Libor - the global interest rate benchmark - were smaller.

"It used to be that they didn't have significant penalty authority. So if you messed up, whatever ill-gotten gains you got, you gave back," said Barbara Bourque, the former head of FERC's quarterly electric sales reporting, who helped Reuters analyze the agency's data.

"Now, they can put people out of business," said Bourque, who runs Energy Compliance Consulting in Phoenix, Arizona.

Besides Barclays and JPMorgan, FERC has also accused Deutsche Bank of market manipulation, though the agency is only seeking to impose a $1.5 million fine on the bank.

Deutsche Bank this month made deep cuts in its U.S. power trading division; Barclays stopped trading West Coast Markets a year ago. Both banks are contesting FERC's charges.

David Perlman, former chief counsel to Lehman's commodity trading business who is now a partner at the law firm of Bracewell & Giuliani, thinks the proceedings could further dampen banks' enthusiasm toward the power business.

"People are looking at the Deutsche Bank case and they are looking at the JPMorgan case and they are wondering what the rules are," Perlman said.

Former FERC Commissioner Marc Spitzer, now a partner at the law firm of Steptoe & Johnson, says the agency is simply doing its job.

"The argument that FERC is on a Jihad or a crusade against banks is not accurate," he said. Spitzer said FERC is just following up on tips it receives from the marketplace, which could come from regional regulators or even rival traders.

For now, at least, more cases like Barclays could be on the way. FERC has increasingly gone after market manipulators under the tenure of current enforcement chief Norman Bay.

During the last three years, 56 percent of 43 investigations opened by FERC involved market manipulation, according to a Reuters review of the agency's enforcement data. That compares with 42 percent of the 93 investigations opened by FERC in the three years prior to Bay's tenure.

Asked earlier this month by Reuters whether the agency is trying to push banks out of the power markets, FERC Chairman Jon Wellinghoff brushed off the suggestion.

"We're an equal opportunity enforcer."

(Additional reporting by Eileen O'Grady in Houston, Jeanine Prezioso and Ryan McNeill in New York, and Roberta Rampton in Washington; Editing by Jim Marshall and Bob Burgdorfer)

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Insiders steal a march in leak prone Asian markets

By Rachel Armstrong

SINGAPORE | Fri Dec 21, 2012 1:41am EST

SINGAPORE (Reuters) - When South Korean automaker Hyundai Motor Co (005380.KS) announced last month it had overstated the fuel efficiency levels on around one million of its cars in the United States and Canada some investors were left fuming more than others.

Some had already sold their shares before the announcement on November 2. The stock fell 4 percent on November 1 with about 2.2 million shares changing hands, the highest trading volume of the year at that point.

"This smells pretty bad," said Robert Boxwell, director of consulting firm Opera Advisors in Kuala Lumpur who has studied insider dealing patterns.

"It would have fallen into our suspect trading category," he added.

Boxwell spots suspect trading by looking at how much the volume diverges from the average level in the days before a market moving announcement. In the Hyundai instance, the volume was more than five standard deviations, a measure of variation, away from the daily average of 598,741 shares over the past year.

A Hyundai spokeswoman declined to comment.

Research from the Capital Markets Co-operative Research Centre (CMCRC), an academic centre in Sydney that studies financial market efficiency, found that 26 percent of price-sensitive announcements in Asia Pacific markets showed signs of leakage in the first quarter of this year, the most recent period for which data was available.

That compared with 13 percent in North American markets.

The CMCRC says it looks for suspected information leaks by examining abnormal price moves and trading volumes ahead of price-sensitive announcements.

Investors say one reason for leaks in Asia has been low enforcement rates for insider trading and breaches of disclosure rules. Enforcement in some markets is virtually non-existent.

There are also misconceptions about whether trading on non-public information is a crime.

"The idea that insider trading is wrong rather than smart is only being ingrained in the current generation of Asian players, not the older generation who are often still in the driving seat," said Peter Douglas, founder of GFIA, a hedge fund consultancy in Singapore.

LOSS OF CONFIDENCE

Japan's largest investment bank Nomura Holdings (8604.T) was embarrassed this year after regulatory investigations found it leaked information to clients ahead of three public share offerings.

Nomura has acknowledged that its employees leaked information on three share issues it underwrote in 2010. In June, it published the results of an internal investigation that found breaches of basic investment banking safeguards against leaking confidential information and announced a raft of measures to prevent recurrence.

The bank was also fined 200 million yen ($2.37 million) by the Tokyo Stock Exchange and 300 million yen by the Japan Securities Dealers Association.

Such leaks hurt companies' share prices in the long run because investors put in less money if they feel they are not on a level playing field.

"It is very damaging. You may not know how much money you've lost but if there is not confidence that the regulators are prosecuting and enforcing the rules on this then it undermines investor confidence and liquidity," said Jamie Allen, secretary general of the Asian Corporate Governance Association.

The issue isn't being ignored. Many Asian markets such as Hong Kong and China have tightened their rules on insider trading over the past decade.

Indeed some investors feel that while leaks and insider dealing are unfair, regulators in the region have more serious issues they should be tackling.

"I would like to see the regulators spend more resources on investigating and prosecuting fraud against listed companies, which severely damages shareholder value," said David Webb, a corporate governance activist in Hong Kong, arguing insider dealing as less of an impact on a company's long-term share price.

HTC AND APPLE

A week after Hyundai's announcement about its problems in the United States, there was an unexpected move on the Taiwan Stock Exchange.

Shares in smartphone maker HTC Corp (2498.TW) jumped almost seven percent on Friday, November 9, hitting the daily upper trading limit. On Sunday came the surprise announcement that the company was ending its long-running patent dispute with Apple Inc (AAPL.O), a move seen as a positive for the stock.

The Taiwan bourse announced it was investigating the trading patterns to see if there was a possible leak.

When asked for comment, HTC referred back to a November 13 statement in which the company said it had kept the Apple settlement process confidential and has strict controls on insider trading.

Michael Lin, a spokesman for the Taiwan Exchange, told Reuters on Friday that the bourse is still working with the regulator on the case.

'ENORMOUS LOSSES'

Michael Aitken, who oversees research at the CMCRC, said many other Asian markets lack tough enough rules to force information to be released as efficiently and timely as possible, a primary reason for the prevalence of leaks.

"Poor regulation hampers enforcement efforts," he said pointing out that few markets have the "continuous disclosure" rules used in Australia which require listed companies to release material information as soon as possible.

In Korea, when Hyundai shares started to fall, rumours began swirling that news about a problem with some of its cars was on its way, but investors say it took the company too long to disclose what exactly was happening.

"Hyundai at that time did not confirm the rumours. We suffered enormous losses because of this," said one fund manager, who declined to be named because he was not authorised to speak to the media.

An official from Korea Exchange declined to comment on whether it was investigating this case, saying only that the exchange looks carefully into possible cases of insider trading.

Across Asia, regulators concede that many company executives and insiders still do not appreciate that leaking or trading on material, non-public information is an offence.

"People don't even know they are engaging in insider trading, for example if their friends are talking about it on the golf course," said Tong Daochi director-general for international affairs at the China Securities Regulatory Commission, during a regulation conference last month.

"We try to tell society, what are the criminal issues, what are the insider trading issues? For example we have held 27 press conferences to tell the public what kind of activities are involved in insider trading and to let people know that this is an active crime." ($1 = 84.2600 Japanese yen) ($1 = 0.6147 British pounds)

(Reporting by Rachel Armstrong; additional reporting by Nishant Kumar in HONG KONG and Hyunjoo Jin in SEOUL; Editing by Emily Kaiser)

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