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Yellen Pressed to Scrutinize Big Banks in Wake of Wells Fargo Scandal

Federal Reserve Chairwoman Janet Yellen promised lawmakers the central bank will scrutinize all big banks in the wake of Wells Fargo & Co.’s phony account scandal, the latest sign that fallout from the firm’s missteps could affect the entire industry, the Wall Street Journal reported today. During a contentious hearing on bank regulation before the House Financial Services Committee, Yellen faced questions from both parties about whether the Fed has adequately addressed the risks posed by the largest U.S. banks. Several Democrats said the Wells Fargo scandal was an indication that big banks are too big to manage and should be broken up. Rep. Sean Duffy (R-Wis.), without citing Wells Fargo, questioned whether the Fed has failed to end the problem of taxpayer bailouts for big banks. Read more.(Subscription required.) 

The House Financial Services Committee will hold a hearing today at 10 a.m. ET titled “Holding Wall Street Accountable: Investigating Wells Fargo’s Opening of Unauthorized Customer Accounts.” John G. Stumpf, Wells Fargo chairman and CEO is the only witness scheduled to testify. For more information, please click here

In related news, the California treasurer took the unusual step yesterday of suspending many of its ties with Wells Fargo as it continues to reel from the scandal over the creation of as many as two million unauthorized bank and credit card accounts, the New York Times reported today. The state treasurer, John Chiang, said that he was suspending Wells Fargo’s “most highly profitable business relationships” with the state for at least a year, including the lucrative business of underwriting certain California municipal bonds. On Tuesday alone, he said, he had pulled Wells Fargo off two large municipal bond deals. Chiang said that he was also suspending making any additional investments in Wells Fargo securities and would suspend the bank’s work as a broker-dealer hired to buy investments on the treasurer’s behalf. Read more

Puerto Rico Pension Fund Joins Suit Against UBS over Muni Bonds

Puerto Rico’s retirement system, on the brink of insolvency, is joining a lawsuit against UBS Group AG, faulting the company for poor investment returns on $3 billion it borrowed in an effort to bolster the pension, Bloomberg News reported yesterday. UBS underwrote bonds sold by the employees and judiciary retirement systems in 2008 and served as the investment consultant. The income from reinvesting the proceeds was supposed to far exceed the cost of borrowing, delivering a profit. Puerto Rico said that much of the proceeds went instead into low-yielding accounts that produced “negative investment income since day one." UBS served as a major banker for the U.S. territory, which has been defaulting on a growing share of its debt and has been placed under federal financial oversight. The bank was able to legally serve as an adviser, underwriter and bond-fund manager even though such multiple roles are barred on the mainland because of the conflicts of interest. Read more

In related news, Puerto Rico's newly created federal oversight board, charged with helping the U.S. commonwealth navigate through a crushing $70 billion debt burden, will hold its first meeting tomorrow in New York City. The seven-member board, created by the U.S. Congress in part to stave off a massive default and help the Puerto Rican government renegotiate its debt obligations, is scheduled to meet at 8:30 a.m. EDT, when it will elect a chairperson. The board also said that it will formally request from Puerto Rico's governor the submission of a fiscal turnaround plan, which is a key requirement of the federal Puerto Rico rescue law that created the board, known as PROMESA. Click here to view the agenda. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage

Restaurant Operator Cosi Files for Bankruptcy Protection

Fast-casual restaurant chain operator Cosi Inc. and its units filed for chapter 11 protection yesterday and said that it would pursue a sale, Reuters reported. The Boston-based company, known for its homemade flat bread, has assets of $31.24 million and debt of about $20 million, according to a court filing. Cosi said that it had received about $4 million in post-petition debtor-in-possession financing to maintain operations during the chapter 11 process. The company said that it had entered into a non-binding agreement with lenders AB Opportunity Fund LLC, AB Value Partners LP and entities affiliated with Milfam II LP under which the DIP lenders offered to buy Cosi's assets and serve as a stalking-horse bidder in a sale process.

Sears, Claire’s at High Risk of Retail Failures, Fitch Says

Sears Holdings Corp., Claire’s Stores Inc. and Nine West Holdings Inc. are among seven chains at high risk of defaulting within a year as shoppers shift to online merchants and spend more on experiences, according to a Fitch Ratings study of retail bankruptcies, Bloomberg News reported yesterday. The companies were named in a report yesterday that found retailers wind up liquidated almost three times more often than other companies in bankruptcy because customer defections are making turnarounds harder to execute. Other chains at risk include True Religion Apparel Inc., 99 Cents Only Stores LLC, Nebraska Book Co. and Rue21 Inc., Fitch said. The credit-grading firm studied 30 recent retail bankruptcies that involved $10.5 billion of debt. Fifty percent didn’t survive the process, compared with 17 percent across other industries, Fitch said. Grocery chains were an exception, with five of six emerging as operating businesses because they had strong locations, Fitch said. Read more

Does bankruptcy still work for retail? Listen to the perspectives of bankruptcy judges and top practitioners at ABI’s Views from the Bench in Washington, D.C. on October 7. Register here

Hilton Hit with $4.7 Million ERISA Lawsuit over Caesars’ Bankruptcy

A group of current and former Hilton Hotels Corp. executives accuse the hotel giant of failing to pay $4.7 million in retirement benefits it allegedly owes as part of its relationship with Caesars Entertainment Corp. (Boyle v. Hilton Hotels Corp., D. Nev., No. 2:16-cv-02250), Bloomberg’s Pension & Benefits Daily reported yesterday. The lawsuit, filed on Monday in the U.S. District Court for the District of Nevada, brings attention to the 1998 spin-off of Hilton’s gaming division — formerly known as Park Place Entertainment Corp. — which later changed its name to Caesars. After Caesars filed for bankruptcy last year, Hilton sued the gaming company for its alleged failure to pay at least $17.7 million in contributions to a pension fund for former Hilton employees. The case was settled this summer in the bankruptcy court.

U.S. to Expand Rules for “Too-Big-to-Fail” Clearing Houses

The U.S. Securities and Exchange Commission yesterday said that it would adopt rules to strengthen the regulatory framework for clearing agencies deemed systemically important or that are involved in complex transactions, such as security-based swaps, Reuters reported today. Clearing agencies act as a middlemen between the parties to securities transactions by ensuring the smooth transfer of funds and securities, and in some cases, serve as a backstop in case a brokerage defaults. The rules are aimed at preventing clearing agencies deemed "too big to fail" from collapsing and spreading systemic market risks. These include the Fixed Income Clearing Corp, the National Securities Clearing Corp and the Options Clearing Corp. The new rules would enhance existing regulations put in place in 2014 though policies and procedures such as requiring daily stress testing, monthly review and annual validation of credit risk models. The rules would also increase capital requirements for the agencies and require them to have plans for an orderly recovery or wind-down of their operations.