Bloomberg (July 25, 2008 7:17 am) -- The Financial Industry Regulatory Authority will test a change in how it resolves investor-broker disputes, removing industry representatives from three-person arbitration panels in select cases.

Six firms, including Merrill Lynch & Co., Morgan Stanley, and Citigroup Global Markets, volunteered to participate. More than 400 cases will be decided under the new rules during the two-year trial program, Finra said yesterday.

Finra's step comes after a House Judiciary Subcommittee on July 15 approved legislation dubbed the Arbitration Fairness Act that would limit the use of binding-arbitration agreements in some consumer industries. A similar bill introduced last year by Senator Russell Feingold, a Wisconsin Democrat, was the subject of a hearing by the Senate Judiciary Committee.

"This pilot will give investors greater choice when selecting an arbitration panel,'' said Finra Chief Executive Officer Mary Schapiro. "This program will allow us to see if a change in the way arbitration panels are selected is a better way to serve and protect the interests of investors.''

Investor lawyers said Washington-based Finra is floating a short-term fix before Congress throws out a system that is fundamentally unfair to the clients of brokerage firms.

"Why don't they just get rid of it altogether?'' said Seth Lipner, a founder of the Public Investors Arbitration Bar Association and professor at Baruch College in New York. "It's purely to deflect the heat. They're trying to delay the day of reckoning.''

Investors doing business with brokerage and securities firms sign agreements to resolve complaints out-of-court. The binding arbitration panels, administered by Finra, include two public arbitrators and one from the industry.

Under the new rules, investors will have the option of having their cases heard by an all-public panel or the traditional Finra panel. Investors will be given a list of panelists and have a chance to strike those with ties to the industry. Participating firms won't have a say in which cases are chosen.

Under Finra's current arbitration rules, the industry representative has considerable sway on the three-member panels, said Andrew Stoltmann, a securities lawyer in Chicago who's handled about 500 arbitration claims. About 95 percent of the cases are decided on 3-0 votes, he said.

"The brokerage firms have guarded that industry arbitrator like a golden child,'' Stoltmann said.

For the full story, click here.

Fed Weighs Three Plans to Spur Bank Investments by Buyout Firms

The Federal Reserve, looking to spur investment in banks hit by credit losses, is weighing three measures to ease regulatory constraints on private-equity funds that buy stakes in lenders, people with knowledge of the deliberations said.

One proposal would permit buyout firms to use so-called silo funds walled off from their other investments to buy the stakes without subjecting the rest of their holdings to more federal oversight, said the people, who declined to be identified because the talks aren't public. Under another scenario, the Fed would allow private-equity firms to exercise more control of banks they invest in. A third plan would encourage buyout firms to invest together.

"The banks need capital, and private equity has it,'' said Thomas Vartanian, a partner at Fried Frank Harris Shriver & Jacobson LLP in Washington who advises buyout funds and lenders. "Necessity is often the mother of invention.''

Treasury Secretary Henry Paulson has called on banks and brokerages to raise cash as their losses from the collapse of the mortgage market and the ensuing credit-contraction climb to more than $466 billion. Blackstone Group LP and Carlyle Group, the world's two biggest private-equity firms, discussed the topic when they met with Paulson this month, say people briefed on the talks.

A few private-equity firms ventured into bank investments this year. David Bonderman's TPG Inc. led a group that injected $7 billion into Washington Mutual Inc. in April. National City Corp., Ohio's biggest bank, agreed the same month to sell a $7 billion stake to investors led by Corsair Capital LLC. Hedge fund manager John Paulson plans to start a fund this year to invest in banks and brokerages, people with knowledge of the matter said yesterday.

The Fed subjects private equity firms to more oversight when they exceed a 9.9 percent voting stake in a bank. If they buy more, they may be deemed to have a "controlling influence'' and be classified as a bank holding company, which triggers restrictions on non-banking activities and the amount of debt they can take on. To avoid that classification, investors may agree to be passive, which can mean limits on board representation.

The Fed is considering liberalizing the control guidelines, the people with knowledge of the deliberations said.

The Service Employees International Union, a Washington-based labor group that led a protest this month calling for higher taxes on buyout firms, said the Fed shouldn't encourage them to invest in the banking industry.

"It would be absurd to ease regulations and make it easier for private equity to buy banks,'' said SEIU official Stephen Lerner. "Their business model of running up huge amounts of debt jeopardizes the consumer.''

For the full story, click here.

Cox Seeks More Clout Over Risk, Compliance at Investment Banks

U.S. Securities and Exchange Commission Chairman Christopher Cox asked lawmakers to bolster the agency's authority to police investment banks, as the Federal Reserve seeks to expand oversight of the world's biggest financial firms.

Wall Street firms including Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. should have mandatory SEC oversight of their capital, liquidity and risk management, Cox told the House Financial Services Committee yesterday. Federal Reserve Bank of New York President Timothy Geithner asked the panel for more authority over firms that can borrow from the central bank and play a "critical role'' in markets.

"Legislative improvements are necessary,'' Cox said. "The Commission should be given a statutory mandate to perform this function at the holding company level, along with the authority to require compliance.''

Cox also said in his testimony that applying commercial-bank regulation to securities firms "would be a mistake.'' Intentionally discouraging risk and restricting business "would fundamentally alter the role that investment banks play in the capital formation that has fueled economic growth and innovation domestically and abroad.''

Representative Barney Frank, the Massachusetts Democrat who leads the financial services panel, has said he supports giving the Federal Reserve a role in setting capital, liquidity and risk management policies at investment banks. Former securities regulators say a more powerful Fed risks undermining the SEC and its responsibility for protecting investors.

With the Fed "lending money to investment banks, they can do a great deal'' to influence regulation of securities firms, former SEC Chairman Arthur Levitt said in an interview. "It's up to Cox to make sure that great deal doesn't run over the SEC.''

The Fed, as the primary regulator of commercial banks such as Citigroup Inc. and JPMorgan Chase & Co., is focused on keeping financial institutions solvent. The SEC's priority has been protecting shareholders from fraud.

"The risk is that the culture of safety and soundness, which is the bank culture, will trump the culture of investor protection,'' Levitt said.

Credit-Default Swap Tear-Ups May Shrink $62 Trillion Market

An effort to scale down the $62 trillion credit-default swap market by eliminating duplicate trades may cut the amount of some outstanding contracts between banks by as much as 75 percent.

Tests conducted this month by broker Creditex Group Inc. and derivatives data provider Markit Group Ltd. show that a cluster of $100 million in outstanding credit-default swaps, for example, may be cut by $50 million to $75 million as the derivatives are offset with new, smaller trades.

So-called tear-ups may help tame a market that over seven years grew almost 100-fold from $632 billion, raising concern it became unwieldy and a threat to the financial system's stability. Prompted by the Federal Reserve Bank of New York, credit derivatives dealers including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. committed last month to a plan that would reduce errors and speed up trading.

"The early testing that we've done with the banks has been very smooth,'' Mazy Dar, chief strategy officer at New York-based Creditex, said in an interview. The first round of cancellations is expected to start next month, Dar said, at first focusing on contracts linked to companies in North America and Europe.

Credit-default swaps are privately negotiated contracts between banks, hedge funds and other investors that are used to speculate on a borrower's creditworthiness or to hedge against losses. The derivatives, which aren't traded on an exchange, pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.

The tear-ups will aid another initiative by credit-default swap dealers to start clearing their trades this year through Chicago-based Clearing Corp., which will act as a central counterparty to the banks, said Jason Quinn, head of high-grade trading at New York-based Lehman.

"It shows that we're actually being forward-thinking about moving this to a clearing type of a system,'' Quinn said.

New York Fed President Timothy Geithner has pushed banks to improve processing of credit-default swaps since 2005, when a backlog of unsigned trades raised concern of a market collapse. After a run on Bear Stearns Cos. in March led to an emergency sale of the firm to JPMorgan, regulators grew concerned that the collapse of a derivatives dealer such as Bear Stearns could spark a wave of losses across the market. Geithner stepped up pressure on dealers to make changes.

The trade tear-ups and the central clearinghouse, which will be designed to absorb the failure of a market-maker, were part of a list of initiatives agreed to last month by the Fed, dealers and industry groups.

For the full story, click here.

Paulson's Fannie-Freddie Deal Scraps Bush's Free-Market Push

In October 2003, Treasury Secretary John Snow told Congress "we need to be on guard'' against the ``perception'' that the U.S. government stood behind the stocks and bonds of Fannie Mae and Freddie Mac.

This week his successor, Henry Paulson, has seen a plan to make such a guarantee explicit to the brink of passage, getting a presidential veto threat withdrawn and reversing years of Republican-led efforts to unhook the companies' fortunes from the government's finances.

The Fannie-Freddie legislation -- it cleared the House July 23 and the Senate may vote as soon as today -- is the result of circumstances and personality. A lame-duck White House is struggling to revive the economy and prevent a further meltdown in the housing market that would demolish the centerpiece of President George W. Bush's "ownership society.'' Meanwhile, Paulson's desire to get a deal through the Democratic-majority Congress outweighed the administration's free-market orthodoxy.

"Paulson has been able to use a lot of leverage on the White House,'' said Vince Reinhart, who used to head the Federal Reserve's monetary-affairs division and is now at the American Enterprise Institute in Washington. The former chairman of Goldman Sachs Group Inc. "has authority associated with his previous job, and events are such that if policy makers have to do something, they ultimately do it.''

The final concession on this week's deal came when Paulson persuaded the president to drop a veto threat over $3.9 billion in housing grants to communities pushed by Democrats.

"Congress knew it had the Bush administration over a barrel,'' said Peter Wallison, a Washington-based former Treasury general counsel and an author of a book on Fannie Mae and Freddie Mac. "Paulson has had to make the best of a bad job.''

It's not the first time the Bush administration's free-market ideology was put aside to avoid a deeper crisis. Bush's first Treasury chief, Paul O'Neill, backed International Monetary Fund loans to Argentina and Turkey as the countries struggled with sliding currencies.

"O'Neill and Snow had headwinds to deal with,'' said Rob Nichols, a former Treasury official under O'Neill and Snow who is president of the Financial Services Forum, a Washington-based trade group for the nation's biggest banks. "Paulson has had gale-force winds.''

For the full story, click here.

Mortgage Writedowns to Total $1 Trillion, Gross Predicts

Falling U.S. home prices will force financial firms to write down $1 trillion from their balance sheets, curbing bank lending and sparking sales of assets, said Bill Gross, who manages the world's biggest bond fund.

A total of $5 trillion of mortgage loans, or almost half of the nation's home loans, belong to "risky asset categories'' such as subprime and Alt-A, Gross, of Pacific Investment Management Co., said in commentary posted on the firm's Web site yesterday. About 25 million U.S. homes are at risk of negative equity, which may lead to more foreclosures and a further drop in prices, he said. A home has negative equity when it's worth less than the mortgage with which it was bought.

"The problem with writing off $1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth,'' Gross wrote.

Cuomo Charges UBS with Deceptive Auction Sales in Down Market

New York Attorney General Andrew Cuomo sued UBS AG over its role in the sale of auction-rate securities, five months after the market collapsed, stranding investors.

Cuomo alleges the Zurich-based bank committed fraud by misleading investors in its marketing of the long-term securities as money market-like instruments that were easy to buy and sell. UBS continued selling the debt even as the market unraveled and top bank executives unloaded $21 million in personal auction-rate holdings, Cuomo's suit alleges.

"Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag,'' Cuomo said in a statement released at the same time he announced the suit at a New York City press conference.

New York is the third state to bring a complaint against UBS, the second-biggest underwriter of municipal auction-rate debt after Citigroup Inc., over its role in the $330 billion market. UBS and other banks stopped buying the securities in February when there were no other bidders at the auctions they ran to determine interest rates, permitting thousands of failures and leaving investors unable to sell their securities.

Cuomo earlier this year subpoenaed 18 banks that sold auction-rate securities and ran the weekly or monthly bidding. States, cities, hospitals, closed-end funds and student loan organizations sold the taxable and tax-exempt debt, which often matures in 20 or 40 years.

UBS spokeswoman Karina Byrne in e-mailed statement said the bank will "vigorously defend'' itself against the allegations in the suit, and "categorically rejects any claim that the firm engaged in a widespread campaign'' to shift auction-rate debt off its books and into client accounts.

"While UBS does not believe that there was illegal conduct by any employee, we have found cases of poor judgment by certain individuals and are evaluating appropriate disciplinary measures for these individuals,'' Byrne said.

Massachusetts Secretary of State William Galvin filed a lawsuit last month against UBS, seeking to force the bank to buy back at par, or 100 cents on the dollar, the securities it sold to investors in the state. The Texas State Securities Board this week filed a notice of hearing to suspend UBS's state license, claiming the bank engaged in fraud by marketing the long-term bonds as "liquid investments.''

Massachusetts and Texas are among 12 states coordinating their investigations into the collapse of the market, according to the North American Securities Administrators Association. The Securities and Exchange Commission and the Financial Industry Regulatory Authority are also probing the banks that sold the securities.

CFTC Alleges Dutch Firm Manipulated Energy Market

The U.S. Commodity Futures Trading Commission, under pressure from Congress to regulate markets in the wake of record oil prices, accused Optiver Holding BV of manipulating U.S. energy markets.

The allegations against the Amsterdam-based hedge fund come as the Senate prepares to vote on legislation to curb speculation in energy markets and expand the commission's authority and staffing.

"Congress is looking for someone to blame,'' said Kevin Book, senior vice president for Friedman, Billings, Ramsey & Co. Inc. in Arlington, Virginia. "The CFTC is trying to make sure it's not them.''

The commission took what it called the "extraordinary step'' earlier this year of publicly stating it had begun a nationwide investigation last December into trading, transportation, storage and purchase of crude oil. This is the first enforcement action to arise from that investigation.

For the full story, click here.

Lawyer Charged With Illegally Donating to Presidential Campaign

A lawyer whose clients have included Metro-Goldwyn-Mayer Inc., actress Faye Dunaway and Sempra Energy customers in California was charged with making illegal campaign contributions.

Pierce O'Donnell, 61, is accused of making $26,000 in so-called conduit contributions through employees of his law firm to the campaign of a presidential candidate, U.S. Attorney Thomas O'Brien in Los Angeles said yesterday in a statement. The Los Angeles lawyer reimbursed the employees for contributions made in 2003, according to the statement.

For news on risk and compliance, click here, here, here, here, here and here.

Courts

MBIA, Ambac Sued by Los Angeles on 'Unnecessary' Bond Insurance

MBIA Inc., Ambac Financial Group Inc. and other four other bond insurers were sued by Los Angeles for allegedly conspiring to maintain a credit-rating system that led local governments to buy "unnecessary'' policies on their bonds.

City Attorney Rocky Delgadillo filed the lawsuit July 23 in Los Angeles Superior Court. The second-most populous U.S. city after New York says it is seeking to recover damages it endured by paying "millions'' for guarantees that turned worthless when the insurers lost their top credit ratings.

Borrowers in the $2.66 trillion U.S. municipal market have for decades paid insurance companies to guarantee their bonds, seeking to lower their borrowing costs by paying AAA-rated companies to stand behind the securities. That practice has drawn fire this year from public officials who say it exaggerates the risk that municipal bonds will default, forcing states, cities and schools to buy backing they don't need.

"This dual credit rating scheme is maintained by bond insurers to take advantage of the taxpayers, by compelling cities to purchase unnecessary bond insurance,'' Delgadillo said in a statement.

Hundreds of state and local governments were stung by higher borrowing costs this year after bond insurers, including Armonk, New York-based MBIA and Ambac, were stripped of their top credit ratings because of losses on securities linked to U.S. home loans. Officials including California Treasurer Bill Lockyer have said that insurance wouldn't be necessary if state and local bonds were assessed using the same criteria as corporate debt.

The lawsuit is at least the second to be filed against a bond guarantor since cuts to the companies' credit-ratings roiled the municipal bond market. In Massachusetts this month, an affiliate of the New England Patriots football team sued the bond insurance unit of Ambac after rates on its bonds jumped as high as 20 percent.

SEC Filings, Commentary, Company News

FDIC Imposes Curbs on Cerberus, Feinberg in GMAC Bank Order

GMAC LLC, the auto and housing lender owned by General Motors Corp. and Cerberus Capital Management LP, signed an accord with U.S. regulators that puts new curbs on how the company's bank is operated.

The agreement with the Federal Deposit Insurance Corp. calls for GMAC to provide a $3 billion credit line to its banking unit, according to a posting on the FDIC's Web site yesterday. The deal also requires GMAC Bank to maintain so-called liquidity levels that the FDIC ``deems appropriate.''

"They are trying to insure that the institution will have significant support and send a message to others that if you want to get into banking, it's going to cost you,'' said Robert Serino, a partner at the Buckley Kolar law firm in Washington. Serino is a former director of the enforcement and compliance division of the Office of the Comptroller of the Currency.

GMAC arranged more than $60 billion of new and refinanced credit last month after rising foreclosures left its home-lending unit on the brink of bankruptcy. The New York-based company said last week that the FDIC granted a 10-year waiver that permits GMAC Bank to remain under current ownership.

The accord limits transactions among affiliates and also requires that the FDIC give consent before the bank hires executives with ties to Cerberus co-founder Stephen Feinberg or any of his entities. New York-based Cerberus manages about $26 billion in private equity and hedge funds.

Feinberg, 48, must give the agency any information "as the FDIC deems necessary concerning any Feinberg entity and its relationship with the bank,'' according to the FDIC document. Feinberg also is prohibited from controlling more than 25 percent of the board of GMAC Bank, and the company is blocked from putting branches, loan offices or automated teller machines in property owned, leased or occupied by Feinberg's entities.

For the full story, click here.

Credit Suisse Earnings Beat Analysts' Estimates; Shares Climb

Credit Suisse Group AG, Switzerland's second-biggest bank, said earnings dropped 62 percent, less than analysts estimated, as the securities unit returned to profit and wealth management attracted the most new assets in two years.

Credit Suisse rose 5.3 percent in Zurich trading yesterday after reporting second-quarter net income of 1.22 billion Swiss francs ($1.18 billion), compared with 3.19 billion francs a year earlier. Profit was almost double what analysts estimated.

Chief Executive Officer Brady Dougan cut leveraged loans and real estate assets by 68 percent during the past nine months to limit second-quarter writedowns to 22 million francs and said he will continue to manage the bank "conservatively.'' Credit Suisse's wealth-management unit got a net 15.4 billion francs in the quarter, after the 48-year-old American stepped up hiring of money managers while larger Zurich rival UBS AG reels from the biggest subprime mortgage losses of any European bank.

"Management decisions have been far better at Credit Suisse,'' said Ralph Silva, research director at Tower Group Plc in London, in an interview. "They're taking a considerable number of clients away from UBS.''

WaMu Swaps Increase as Gimme Credit Pulls Funds Over Losses

Washington Mutual Inc. tumbled 13 percent, a day after dropping 20 percent, as Gimme Credit LLC said unsecured creditors were "pulling funds'' from the biggest U.S. savings and loan.

Gimme Credit analyst Kathleen Shanley cited the decline in federal funds purchased and commercial paper to $75 million from $2 billion at year-end, which Washington Mutual reported this week in its second-quarter results. Securities sold under agreements to repurchase dropped to $214 million from $4.1 billion at the end of 2007, she wrote.

Washington Mutual, known as WaMu, reported a $3.3 billion second-quarter loss on July 23. Rising delinquencies forced the Seattle-based company to boost provisions for bad loans. While WaMu said it has enough capital after raising more than $7 billion this year, Shanley said liquidity remains a concern.

"We won't use the phrase 'run on the bank,' but we would be remiss if we did not observe that many creditors have quietly been pulling funds,'' wrote Shanley, based in Chicago. Gimme Credit is an independent research firm serving corporate bond investors.

For the full story, click here.

Ford Loses $8.7 Billion, Will Sell Small European Cars in U.S.

Ford Motor Co., the world's third-biggest automaker, posted a record quarterly loss of $8.7 billion and accelerated a conversion to fuel-efficient vehicles to wean itself from money-losing trucks.

Ford shares fell the most in eight years after the company reported a second-quarter deficit of $3.88 a share compared with a profit of $750 million, or 31 cents, a year earlier. The figure included $8 billion in pretax writedowns for plant closings and the declining value of truck leases at Ford Motor Credit Co.

The automaker said it will double production of hybrid vehicles, sell more European autos such as the Fiesta in the U.S. and convert three North American truck factories to make a redesigned Focus and other small cars. The revamping is a response to record gasoline prices that have ravaged sales of large pickups and sport-utility vehicles and derailed Chief Executive Officer Alan Mulally's turnaround plan.

E*Trade Falls After Wider-Than-Expected Loss From Bad Loans

E*Trade Financial Corp., the fourth-largest online brokerage by client assets, had its biggest drop on the Nasdaq Stock Market since January after reporting a wider-than-expected second-quarter loss because of bad loans.

E*Trade declined 16 percent after the company reported an operating loss of 24 cents a share, missing the 14-cent average estimate of analysts surveyed by Bloomberg. Chief Executive Officer Donald Layton yesterday said loan losses may continue rising instead of peaking in the second quarter, which may delay the company's return to profitability.

Comings and Goings

Wachovia Finance Chief Wurtz to Resign Following CEO's Ouster

Wachovia Corp., the fourth-largest U.S. bank, said Chief Financial Officer Thomas Wurtz will resign after the company finds a replacement.

Wurtz, 46, has been CFO at the Charlotte, North Carolina-based bank since January 2006. His departure was disclosed in a regulatory filing yesterday.

The CFO's pending departure follows the June ouster of Chief Executive Officer Kennedy Thompson, whose purchase of Golden West Financial Corp. in 2006 left Wachovia facing soaring losses on real-estate loans in California and Florida. Robert Steel, who became CEO on July 9, this week disclosed a dividend cut, plans to eliminate 6,350 jobs and the possible sale of ``non-core'' assets.

"Wurtz is part of the collateral damage at Wachovia and I expect more is coming,'' said Gerard Cassidy, an analyst at RBC Capital Markets. Former CFO Robert Kelly, who was Wurtz's predecessor, "could stand up to Ken Thompson but the analyst community never had that feeling with Tom Wurtz.''

Muni-Bond Hedge Fund Aravali Hires Ex-Morgan Stanley Salesman

Aravali Partners LLC, a municipal bond hedge-fund manager, hired David J. McMahon, who spent 22 years at Morgan Stanley focusing on U.S. municipal-bond and derivative sales to institutions.

"He's witnessed virtually everything the market has had to contend with,'' said Mark Young, president of New York-based Aravali, which manages more than $225 million. "Having someone that's got 20 years of knowledge is an asset.''

Derivatives are unregulated contracts tied to the underlying value of a security, commodity or index.

Municipal arbitrage funds seek to profit from the yield gap between tax-exempt floating-rate notes and long-term state and local government bonds, borrowing to boost returns. Some funds collapsed in February after tax-exempt bond values plummeted and Treasuries rose, damaging hedges designed to protect against rising interest rates and prompting margin calls.

Tax-exempt bonds, weakened by the collapse in auction-rate securities and sell-off in hedge funds, dropped almost 5 percent in February, the most in at least two decades, based on Merrill Lynch & Co.'s total-return Municipal Master Index. Municipal bond prices are still relatively low, and Aravali plans to take advantage of that, Young said.

"It's still, in our view, historically cheap,'' he said. "We believe the opportunity is tremendous.''

Tyco's Ex-Top Lawyer Lytton Joins Dechert's New York Office

William B. Lytton, who retired in February as general counsel of Tyco International Ltd., has joined Dechert's Philadelphia office as senior counsel.

Lytton, 59, worked as a senior adviser to Tyco Chief Executive Edward Breen until earlier this month. He was named Tyco general counsel in September 2002 and retired in connection with the conglomerate's breakup.

"We are thrilled that Bill will be joining the firm,'' Dechert Chairman Barton J. Winokur said in a statement. "His experience in navigating the most challenging legal issues is extraordinary, and will be of invaluable assistance to our clients.''

International Compliance

India Pushes Lifting Bank Restrictions on Foreign Investors

India's government, victorious in a confidence vote this week, will push to lift restrictions on overseas investors' control of privately run banks, Finance Minister Palaniappan Chidambaram said.

Stalled legislation removing a 10 percent cap on foreigners' voting rights in banks may be revived before laws on pensions and insurance, Chidambaram said yesterday. Prime Minister Manmohan Singh remained in power July 22 with support from new allies who replaced communists opposed to foreign investment.

"We seem to have acquired the political space to take the liberalization process forward,'' Chidambaram said in a telephone interview from New Delhi. "We are looking into various aspects of the foreign direct investment regime, trying to see whether further liberalization is possible.''

The Bombay Stock Exchange's banking index is set for its biggest weekly gain since it was created 6 1/2 years ago after Singh's victory. The bill would give ING Groep NV, the largest Dutch financial services company, more control over Bangalore-based ING Vysya Bank Ltd. with its 44 percent stake.

"There is likelihood of further reforms,'' said Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc. "Given the limited time at the government's disposal, and the motley group of new allies, reforms are by no means certain.''

Former Cazenove Partner Will Be Charged With Insider Trading

Former Cazenove & Co. partner Malcolm Calvert is being prosecuted by the U.K. markets regulator for insider trading.

Calvert appeared at a London court to face charges yesterday. Financial Services Authority enforcement chief Margaret Cole said last month that the FSA has three criminal prosecutions for insider trading pending in U.K. courts.

A JPMorgan Cazenove spokeswoman said Calvert left eight years ago and she was unable to provide contact details for him.

The FSA declined to provide further information other than to confirm the prosecution. A number for Calvert couldn't be immediately found on directory assistance.

JPMorgan Chase & Co. and Cazenove & Co. formed a joint venture, JPMorgan Cazenove, in 2005.

Defaults Make CLO Management 'Challenging,' Morgan Stanley Says

Collateralized loan obligation managers face an increasing challenge of rising corporate defaults and a shrinking supply of the debt used to create the securities, according to Morgan Stanley analysts.

U.S. companies including Pierre Foods Inc. and transport company Greatwide Logistics Services Inc. defaulted on 2.92 percent of loans in July, up from 0.26 percent in December, according Standard & Poor's Loan Syndications and Trading Association index. In the first half, new loan sales slumped 84 percent to $46 billion from a year ago, S&P's LCD data show.

Managing CLOs is an "increasingly challenging endeavour,'' analysts led by Vishwanath Tirupattur in New York wrote in the report dated July 22. "New issuance of loans has certainly fallen off the proverbial cliff.''

CLOs package loans and channel the income to investors in portions of varying risk and credit ratings. The funds have rules governing the minimum credit ranking or interest income of the underlying portfolio, which means CLO managers have to find new loans when debt matures or is downgraded.

Fitch Ratings predicted that about 20 percent of Europe's 62 CLO managers will be forced to shut or merge in the next three years as the credit crisis makes it harder for the funds to generate revenue.