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HomeMore Price Fixing on Wall Street?
Posted by Larry Doyle on March 27th, 2013 6:17 AM |
Here we go again.
With the investigation of the greatest financial fraud ever perpetrated on Wall Street — that being the manipulation of Libor — still in the early stages, news emanating from Europe this morning redirects the shadow from that organized activity into the dark and dank world of credit derivatives, aka CDS.
Recall that cornerstone principles of an industry that operates as an oligopoly are: (more…)
JP Morgan’s Concentration Risk and Outsized Egos
Posted by Larry Doyle on May 15th, 2012 8:38 AM |
How does one firm “lose” $2 billion…and likely more….in the course of less than two months?
Well, it is doable if there is a massive market move. In the case of JP Morgan and the loss it announced last week, though, the markets broadly speaking had not moved that significantly. Certainly nothing like we experienced during the middle of 2011, let alone 2008. So the question begs, how does a firm lose that amount of money?
Concentration risk combined with another factor. What might that be? Let’s navigate. (more…)
Who/What is Driving European Sovereign Spreads?
Posted by Larry Doyle on April 27th, 2012 9:11 AM |
The center of our global financial crisis squarely rests upon the Euro-zone in general and a number of peripheral sovereign states specifically. The movement in spreads within this market are often vicious.
The European Central Bank has thrown the kitchen sink in the form of its 3-year LTRO (long term refinancing operation) at the massive debt problem. The LTRO aside, do you get the sense that there is a far greater force at work behind the scenes driving these markets? I do. Who and what are really driving spreads within the Euro-zone?
Let’s navigate as the Journal of International Money and Finance addresses this critically important topic in its April 2012 issue. (more…)
Judge Rakoff: “Truth is Confined to Secretive, Fearful Whispers”
Posted by Larry Doyle on November 28th, 2011 6:53 PM |
Many participants in our financial markets and political circles clearly have little interest in allowing a full exposition of facts and figures on a wide array of topics. Why let those trifling principles get in the way of maximizing profits and currying favor for political gain, right?
“That’s not how we roll” here at Sense on Cents. Truth, transparency, and integrity are ALWAYS the order of the day.
Our prized virtues may not be embraced in our nation and the world at large, but that does not mean we should or will ever forsake them. (more…)
David Einhorn Provides Sense on Cents
Posted by Larry Doyle on October 21st, 2009 11:52 AM |
David Einhorn of Greenlight Capital
In the midst of my ‘navigating the economic landscape,’ I thoroughly enjoy reading the work of intelligent people. While I certainly never agree with all that I read, intelligent people force me to think and review my own opinions and beliefs. That process is always healthy. I also enjoy sharing the insights and perspectives of these people with those who read Sense on Cents. High five to KD of 12th Street Capital for bringing just such an individual to my attention.
David Einhorn runs Greenlight Capital, an investment management firm. He recently delivered an address entitled “Liquor Before Beer…In the Clear.” For those interested in an overview of David’s thoughts, I will clip those points I found most informative. For those with a keen interest in the economy and markets, the linked nine page document is a ‘must read.’ I agree with David’s views and welcome highlighting some of his points. Here are excerpts from David Einhorn’s speech:
1. The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom up” investor. Having my eyes open to the big picture doesn’t mean abandoning stock picking, but it does mean managing the long-short exposure ratio more actively, worrying about what may be brewing in certain industries, and when appropriate, buying some just-in-case insurance for foreseeable macro risks even if they are hard to time.
2. As I see it, there are two basic problems in how we have designed our government. The first is that officials favor policies with short-term impact over those in our long-term interest because they need to be popular while they are in office and they want to be reelected. In recent times, opinion tracking polls, the immediate reactions of focus groups, the 24/7 news cycle, the constant campaign, and the moment-to-moment obsession with the Dow Jones Industrial Average have magnified the political pressures to favor short-term solutions.
3. The second weakness in our government is “concentrated benefit versus diffuse harm” also known as the problem of special interests. Decision makers help small groups who care about narrow issues and whose “special interests” invest substantial resources to be better heard through lobbying, public relations and campaign support. The special interests benefit while the associated costs and consequences are spread broadly through the rest of the population.
4. Americans understand that the Washington-Wall Street relationship has rewarded the least deserving people and institutions at the expense of the prudent.
5. The proper way to deal with too-big-to-fail, or too inter-connected to fail, is to make sure that no institution is too big or inter-connected to fail. The test ought to be that no institution should ever be of individual importance such that if we were faced with its demise the government would be forced to intervene. The real solution is to break up anything that fails that test. (more…)
Real-Time Information Is “Everything” on Wall Street
Posted by Larry Doyle on October 7th, 2009 3:45 PM |
One of the overriding reasons why I left First Boston in 1990 to join Bear Stearns was Bear’s advanced real-time risk management system. This system allowed me the ability to more proactively manage my trading risk. In the process, I was able to take more risk in the pursuit of greater profit. I became familiar with Bear’s system during the recruiting and interviewing process and was flabbergasted to realize how far behind First Boston was in its capabilities.
Real-time risk management and real-time data processing are critically important for thorough and proper oversight of any financial enterprise. A regulator will be lost in an attempt to maintain market oversight without the proper systems and access to real-time data.
Having heard and read of the systems deficiencies at both the SEC and FINRA, I am concerned at how far behind the curve these regulators are right now and how long it will take for them to recover.
While pondering this topic, I read in Securities Industry News that the SEC is looking to capture real-time data on derivatives transactions. This commentary, SEC Wants to Gather Real-Time Data on Swaps, addresses the exact topic I broached on July 17th in writing, “Can We ‘TRACE’ JP Morgan’s Business?” I wrote:
There is little to no transparency in the world of customized derivatives and as a result the bid-ask spreads are very wide. Cha-ching, cha-ching. Jamie (Dimon) and his friends on Wall Street are working extremely hard to keep it this way.
In their defense, it is likely not functionally feasible to move many customized derivatives to an exchange. What should regulators compel them to do? JP Morgan and every other financial firm on Wall Street should have to report every derivatives transaction to a system known as TRACE, which stands for Trade Reporting and Compliance Engine. This system currently only covers transactions within the cash markets and not derivatives. What does that mean for investors? No transparency and price discovery for investors in the customized derivatives space. As such, Jamie and friends can keep those bid-ask spreads nice and wide and ring up huge profits in the process.
Securities Industry News writes:
The Securities and Exchange Commission told Congress today to grant regulators “direct access to real-time data” on credit default swaps (CDS) and other derivatives.
The request comes, the agency said, because the lack of such information hampered its efforts to investigate potential fraud and market manipulation in the over-the-counter (OTC) derivatives markets during last fall’s financial crisis.
The SEC’s enforcement actions in investigating market manipulation in OTC derivatives “were seriously complicated by the lack of a mechanism for promptly obtaining critical information – who traded, how much, and when – that is complete and accurate,” said Henry Hu, the director of the SEC’s new division of risk, strategy and financial innovation, in written testimony to the House Financial Services Committee.
Hu testified that “data on securities-related OTC derivative transactions were not readily available, and needed to be reconstructed manually.” He asked Congress to expand the SEC’s inspection authority over trade data repositories and clearinghouses for derivatives.
The comments represented a rebuke to industry efforts aimed thus far at making more information on CDS and other OTC derivatives data more readily available.
What do we learn here? Information is EVERYTHING!! Wall Street is fighting tooth and nail to protect its golden goose within the derivatives space by hoarding this information.
Why is the SEC even asking for the information? If anybody in Washington truly had a set of cojones, they would merely TELL Wall Street how it is going to work going forward . . . take the information, and fulfill their responsibility to protect the public interest.
LD
Financial Derivatives, Prescription Medication, and Designer Drugs
Posted by Larry Doyle on June 18th, 2009 8:38 AM |
Derivatives….where does one even start? Can you touch it? How do you know when you’ve seen one? What does it look like? Is it edible?
The fact is, we have derivatives throughout our economy. From consumer products, to medications, to new technologies, one could make the case that almost all new developments are derivatives in one way, shape or form.
Wall Street developed financial derivatives under the guise of mitigating risk. Regrettably, the guile and greed of those on Wall Street abused the development of derivatives and many of these financial instruments were not risk mitigants, but risk propellants. Let’s navigate the derivatives landscape and see why Wall Street will not cede this turf without a fight.
The base products on Wall Street include government securities, agency securities, mortgage-backed securities, corporate bonds, municipal securities, short term bonds, emerging market bonds, foreign currencies, convertible bonds, preferred stock, and common equities. Each of these “cash” products is a large market in and of itself. That said, the “wizards on Wall Street” connected to each of these product lines have manufactured products “derived” from the cash flows of the underlying “cash” product. Welcome to the world of derivatives.
When properly used, derivatives – much like new, approved medications – can be amazingly helpful in augmenting returns and managing risk. However, not unlike “designer drugs,” the abuse of these financial instruments can be deadly. Wall Street has made enormous sums of money across the board on these “medications.”
Now we learn that under the Obama financial regulatory reforms, derivatives will be traded on an exchange and thus monitored much more closely. This is a good thing, right? Please focus very carefully on this point because this is where Wall Street has largely already won the derivatives battle.
“Standardized” derivatives will be traded on an exchange. “Customized” derivatives, much like prescription drugs or designer drugs, will not trade on an exchange. Why is this such an important point?
Products traded on an exchange have total transparency and limited profitability. Products traded away from an exchange have much wider bid-ask spreads, much greater profitability, much greater risks, and much greater likelihood for abuse. The Wall Street lobbying machine has already been fighting this battle in Washington and winning it.
Financial derivatives can be amazingly beneficial if properly used. That said, even legal and prescribed medications can be deadly when abused. The cops on the Wall Street beat will remain seriously challenged to monitor those “designing,” “marketing,” and “selling” the “customized derivatives.”
LD
What’s Driving the Market Lower Today?
Posted by Larry Doyle on March 2nd, 2009 9:50 AM |
Stock markets are expected to open lower by another 1.5% on the open this morning. What’s driving them lower….again?
1. News that AIG reported an actual 4th quarter 2008 loss of $61 billion. The government will inject ANOTHER $30 billion into this black hole. WHY? Very simply because AIG is the largest holder of CDS (credit default swaps) that serve as insurance for a number of banks and money managers. These CDS cover a wide array of assets but primarily the sub-prime mortgage space. Kevin Doyle of 12th Street Capital, and a guest here on my weekly No Quarter Radio program back in early January, shares that the index that tracks the sub-prime market is at its lows. No surprise there.
While the various media outlets are highlighting this story now, I wrote extensively about AIG and How Does One Lose $125 Billion? on February 24th. I not only wrote about the losses, but also delved into the culture that developed over the years at AIG under Hank Greenberg. Not a pretty picture and seemingly not a lot of integrity in that company. Now we pay. (more…)
