Broad Audit of Chinese Government Agencies Set

HONG KONG — The National Audit Office of China said on Sunday that it would conduct a broad audit of debts incurred by government agencies, in the latest sign of Beijing’s concern that heavy borrowing by local governments and their affiliates might pose a broader threat to the economy.

The audit office issued a single-sentence statement saying that it had been instructed by the State Council, or cabinet, to carry out the audit.

Western economists have estimated total local government debt in China at $2 trillion to $3 trillion and rising.

China avoided most of the effects of the recent global financial crisis through a huge program of government spending financed by debt. The stimulus program has encompassed projects including a national grid of high-speed train routes and the construction of thousands of roads and bridges by municipalities, towns and villages.

In an interview last month with the Web site of People’s Daily, a deputy head of the fiscal audit section of the National Audit Office said that since last year, the outlook for the economy as a whole, and for government revenue in particular, has “not been too sunny.”

“Under these circumstances, how to avert financial risks is quite an urgent issue,” said the official, Ma Xiaofang. Those concerns have already prompted the office to audit 36 local governments this year, after a similar check in 2011, Mr. Ma said. “We must have more insight into problems, risks and hazards in local government debt management,” he said.

China has made periodic efforts over the years to assess the scope of local government debt, and Sunday’s statement by the National Audit Office was too terse to tell how comprehensive the latest effort would be. Bankruptcy proceedings started this month by Detroit surprised and alarmed many in China, however, prompting renewed concern about the financial health of Chinese cities and towns.

While the Chinese government has considerable unused borrowing capacity at the national level as well as $3 trillion in foreign exchange reserves, any move by the central government to bail out profligate local governments would be politically contentious.

Using the foreign exchange reserves to cover local government debts would also be extremely difficult for practical reasons. The central bank has financed those reserves mostly by borrowing from Chinese commercial banks and needs to be able to repay them.

Beijing imposes many restrictions on the ability of local governments to borrow. But local governments have been widely sidestepping them by setting up special financing entities that borrow for the governments.

Many local governments also own businesses and have used their political connections to help these businesses borrow from state-owned banks. This has further increased possible financial liabilities for the local governments themselves.

These governments’ revenues tend to be heavily dependent on the sale to developers of long-term leases for government land, which is then used for building apartments, factories, shopping malls and other projects.

Developers’ interest in these leases tends to be cyclical, soaring when the real estate market is strong and crashing when real estate prices fall. With Beijing trying to make housing more affordable for the last couple of years by limiting real estate speculation, developers have been more cautious about acquiring additional leases.

Many local governments have also guaranteed loans to borrowers in politically favored sectors like solar panel manufacturing. That allows the borrowers to obtain loans at low interest rates. But the local governments are exposed to huge losses if the borrowers default — a constant risk given the overcapacity and declining profit margins that bedevil many Chinese industries.

“These problems must attract serious attention, and there should be effective measures taken to strengthen management of local government debt,” Mr. Ma said.

Five Broad and Cassel Attorneys Join Holland & Knight

From left to right: Isabel Diaz, Vivian de las Cuevas-Diaz, Barbara Ferrer, Anna Marie Hernandez, Rebecca Mendez

Partners Vivian de las Cuevas-Diaz and Barbara Ferrer and three other Broad and Cassel attorneys have jumped to Holland & Knight's real estate practice group.

Anna Marie Hernandez and Isabel Diaz join Holland & Knight as senior counsel. Rebecca Mendez joins the firm as an associate.

"I've never done anything alone. When I came to Broad and Cassel I brought my associate and paralegal. As we grow the practice and continue to build, this move was imperative and the right move for everybody," said de las Cuevas-Diaz, president of the Cuban American Bar Association. "We service clients on a team dynamic. We work together."

The team has "created a very sophisticated and successful real estate practice and we are extremely pleased to have them join our firm," said John Halula, Holland & Knight's Miami real estate practice group leader. "Additionally, each has an impressive background of leadership and community involvement that fits perfectly with the culture of Holland & Knight."

De las Cuevas-Diaz decided to move to Holland after four years of talking with the firm and seeing the focus of her practice shift from a local focus to a more national practice.

"I service my clients not only in Florida but in other states, and Holland has offices in others states, and I can serve my clients better knowing I can call a partner in Los Angeles," de las Cuevas-Diaz said. "Holland also presented an opportunity with their international platform, what I believe to be the future of the transactional world."

She focuses on banking and institutional lending and government relations. Her list of prominent clients includes Doral developer Sergio Pino, who hired her during the construction boom for the purchase of properties and developments. She represents financial institutions in loan modifications, note sales and property sales as well as litigation throughout Florida.

Ferrer, who was of counsel with Broad and Cassel, is a financing, banking, commercial and construction real estate lending attorney. She also handles public-private financing.

She has represented national and local entities in various deals. She represented Total Bank in the structuring and closing of a construction loan for the expansion and renovation of the Flagler Dog Track/Magic City Casino. Ferrer also represented SunTrust in the closing of a $78 million construction loan for the Ritz-Carlton Hotel in Miami Beach, an intricate deal that exposed some troubles with maintenance of the 1953 facade, and a $55 million loan to the Ritz-Carlton Club in Jupiter, Fla. Ferrer also has represented BankUnited.

Holland offers an opportunity to enhance and develop a clientele in the international market, Ferrer said.

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Suit Accuses JPMorgan Unit of Broad Misconduct on Mortgage Securities

The civil suit against Bear Stearns & Company, now a unit of JPMorgan Chase, was brought in New York State court by Eric T. Schneiderman, the state attorney general, who is also a co-chairman of the task force, known as the Residential Mortgage-Backed Securities Working Group.

The complaint contends that Bear Stearns and its lending unit EMC Mortgage defrauded investors who purchased mortgage securities packaged by the companies from 2005 through 2007. The firms made material misrepresentations about the quality of the loans in the securities, the lawsuit said, and ignored evidence of broad defects among the loans that they pooled and sold to investors.

Moreover, when Bear Stearns identified problematic loans that it had agreed to purchase from a lender, it was required to make the originator buy them back. But Bear Stearns demanded cash payments from the lenders and kept the money, rather than passing it on to investors, the suit contends.

Unlike many of the other mortgage crisis cases brought by regulators such as the Securities and Exchange Commission, the action does not focus on a particular deal that harmed investors or an individual who was central to a specific transaction. Rather, the suit contends that the improper practices were institution-wide and affected numerous deals during the period.

A spokesman for Mr. Schneiderman declined to comment on the filing. A representative of JPMorgan, which acquired Bear Stearns in a fire sale in March 2008, said it would contest the allegations. “We’re disappointed that the New York A.G. decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record — instead relying on recycled claims already made by private plaintiffs,” said Joseph Evangelisti, the bank’s spokesman. He added that the allegations all predate JPMorgan’s acquisition.

To be sure, the allegations in the suit against Bear and EMC are not new. The task force complaint closely echoes legal arguments made in recent years by numerous private litigants trying to recover losses in mortgage securities. Most of these cases continue to inch their way through the courts.

Late last week, for example, JPMorgan lost a round in one of these battles when Jed S. Rakoff, a federal judge in Manhattan, rejected the bank’s request to dismiss a complaint brought by Dexia, a Belgian-French bank. The European bank had bought $1.6 billion in mortgage securities issued by Bear Stearns and Washington Mutual, another institution taken over by JPMorgan during the credit crisis.

Nevertheless, some lawyers who are battling the large banks and investment firms on behalf of mortgage investors said they welcomed the action by the task force. Jerry Silk, a lawyer at Bernstein Litowitz Berger & Grossmann in New York, said: “The government’s action represents a complete validation of the cases brought by investors who were duped by the fraudulent sale of mortgage-backed securities by JPMorgan, WaMu and Bear Stearns.”

The suit encompasses work begun by Mr. Schneiderman’s office in the spring of 2011, according to people briefed on the investigation. The attorney general subpoenaed documents from JPMorgan Chase and from large mortgage insurers that had also brought cases against the banks for failing to live up to their promises about the types and quality of mortgages placed in loan pools and sold.

New York investigators also capitalized on a cooperation agreement struck by Andrew Cuomo, the previous attorney general, with Clayton Holdings, a major firm in the business of evaluating mortgages. The firm provided documents and e-mails showing that Bear Stearns routinely ignored major defects on loans it was purchasing and pooling so that it could preserve its relationship with mortgage originators.

After the mortgage fraud task force was created in early 2012, Mr. Schneiderman’s office combined its efforts with the Department of Housing and Urban Development, the S.E.C., the inspector general of the Federal Housing and Finance Agency, the Federal Bureau of Investigation and the Department of Justice.

The lawsuit’s filing, just days before the first presidential debate and a little over a month before the election, may be a way for the Obama administration to try to convince voters that it is working to hold mortgage miscreants accountable for wrongdoing. But, lawyers say, filing a case is not the hard part; winning it is.

The complaint contends that Bear Stearns defrauded investors when it assured them of the stringent reviews being made of the loans the firm was bundling. “Rather than carefully reviewing loans for compliance with underwriting guidelines,” it said, “defendants instead implemented and managed due diligence review that was superficial and that often, and improperly, gave way to originators’ demands.”

Bear Stearns and EMC took other steps to keep mortgages flowing and their originators happy. Even after the loans it was bundling began failing at monumental rates, the complaint said, Bear Stearns did not require originators to buy them back as they were obligated to do. Instead, the firm allowed the originators to settle the put-back claims confidentially “by making cash payments that were a fraction of the contractual repurchase price,” according to the lawsuit.

During 2007 and the first quarter of 2008, the complaint said, Bear Stearns resolved claims relating to $1.3 billion of unpaid mortgage principal balances; it received $367 million in recoveries from the sellers.

The suit was brought against Bear Stearns under New York’s Martin Act, the state law that gives the attorney general wide latitude to bring fraud cases without demonstrating a defendant intended to defraud. The lawsuit does not seek specific damages but asks for restitution for investors victimized by the deceptive practices and disgorgement of money received in connection with the fraud.