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HomeReal-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
Wall Street Compensation Reform in Name Only
Posted by Larry Doyle on October 6th, 2009 9:27 AM |
Say what you want about movie producer Michael Moore, but he is no fool in tapping into the American spirit. Moore takes on Wall Street in highlighting the enormous bank bailouts emanating from this economic crisis. While there are many factors that drove our banking industry and our economy to its knees, ultimately the Wall Street compensation system allowed those taking risk to ‘swing for the fences’ while playing ‘heads we win, tails you lose.’ Washington is going to fix this, right? Having appointed a pay czar in Ken Feinberg, the Obama administration is going to address the crux of this critical issue and reform it, right? I mean, The Wall Street Journal this very morning profiles how Pay Czar Targets Salary Cuts:
The Obama administration’s pay czar is planning to clamp down on compensation at firms receiving large sums of government aid by cutting annual cash salaries for many of the top employees under his authority, according to people familiar with the matter.
Instead of awarding large cash salaries, Kenneth Feinberg is planning to shift a chunk of an employee’s annual salary into stock that cannot be accessed for several years, these people said. Such a move, the most intrusive yet into corporate compensation, would mark the government’s first effort to curb the take-home pay of everyone from auto executives to financial traders.
Folks, with all due respect to Ken Feinberg, these efforts to implement reform in Wall Street compensation practices are largely a joke. Why? While the subtitle of the WSJ’s article includes the term ‘compensation,’ Feinberg’s focus is limited to the term in the title, that being ‘salary.’ (more…)
Beware of Money Managers ‘Talking Their Book’
Posted by Larry Doyle on October 5th, 2009 9:02 AM |
“Oh, come on, Larry, you are just ‘talking your book.'”
I can hear those sentiments ringing in my ears from many Wall Street salespeople with whom I dealt over the years. What trader doesn’t talk his book? For those unfamiliar with this phrase, it is used when a trader or money manager offers a heavily biased view of the market and economy. While it would be naive to think that individuals aren’t biased by their business in developing their opinions, the challenge for investors is to weigh the opinion in light of the bias. To do otherwise would be the equivalent of flying blind.
I see evidence of ‘talking one’s book’ in commentary provided by Bloomberg, Stock Seers Say Gross 5% May Only Be Normal In Debt,
Wall Street projections for the fastest U.S. profit growth in two decades are putting some of the biggest equity investors at odds with Bill Gross.
Money managers are betting that more than two years of declining earnings, the longest stretch since the Great Depression, will end in 2010 when net income rises 26 percent before expanding 22 percent in 2011, according to data compiled by Bloomberg. Gross, who oversees the world’s biggest bond fund at Pacific Investment Management Co., says the economy won’t grow fast enough to sustain the steepest rally since the 1930s and equity returns will be limited to 5 percent a year.
Both Gross and the equity managers are in a perpetual battle for investor assets, the lifeblood of any money management operation.
One would be ill advised not to study the opinions of those involved in managing the largest equity and bond funds in the markets. These funds can move markets given their very size. That said, we need to weigh the manager’s opinions in the context of a wide array of other vastly more important variables. What are these variables and how do they impact my thought process in making investment decisions?
I initially develop an opinion about the economy. From there, I think about respective weightings I would like to allocate to different segments of the market (equities, bonds, cash, real estate, alternative assets). At that point, I review money managers to select those whom I deem to be the best. Only at that juncture would I seriously consider the thoughts and opinions of the money manager so I can most effectively make investment decisions.
I will often immediately dismiss money managers who have never offered opinions which run counter to their business.
Talking one’s book is not necessarily a bad thing. In fact, I would seriously discount a money manager who is not able to make a compelling case for his business. That said, as investors we need to be able to minimize the static and eliminate the noise that comes from managers ‘talking their book.’
LD
The Fault Lies Not in Our Stars but in Ourselves
Posted by Larry Doyle on June 18th, 2009 11:24 AM |
Just as Cassius could not serve both Caesar and the republic, neither can our political leaders today serve two masters. Who are these masters? On the one hand, politicians claim to serve the public interest, while on the other the politicians are beholden to the big money showered upon them by lobbyists representing large financial interests.
Unless and until these conflicts are exposed and extirpated, in my humble opinion, our nation will never regain its stature. The evidence is overwhelming. The gall of the politicians is unending. The media is largely beholden to the same interests and enables the charade to continue.
The Wall Street Journal touches upon these issues in writing Hope vs. Financial Experience:
The main idea behind the Obama Administration’s new financial revamp is essentially this: With more power and a modest reshuffling of the bureaucratic furniture, the same regulators who missed the last credit mania will somehow prevent the next one. If nothing else, this concept is certainly true to President Obama’s campaign theme of “hope.”
From my experience, “hope” is always a lousy hedge. What do I mean? If I, in whatever role I occupy, am relying upon hope rather than thorough preparation, discipline, and ethics to achieve my desired goals, then I am in an unenviable position. As a nation, we occupy that unenviable position currently. Why?
We “hope” the financial system and reforms will serve our national interests. However, those charged with developing and implementing these reforms are conflicted. How so? They feed from the trough of those supposedly being regulated while supposedly representing the interests of the public, i.e. those they are supposed to be serving. No man can serve two masters.
President Obama and his Congressional colleagues from both sides of the aisle would promote the concept that our financial regulatory system had gaps which banks profitably penetrated. The promotion of that concept is pure pandering. Those gaps were created and paid for by the massive flow of lobbying dollars that went from Wall Street to Washington. In turn, the politicians hoped the gaps would not be detected or overly expensive. They “hoped” and we as a nation lost. Where is the acccountability?
Many would say there is much blame to go around for this financial crisis. However, if we do not call those in Washington on the carpet for their culpability in this turmoil, we are doomed to repeat it.
As I watch the Congressional testimony of Secretary Geithner this morning, my blood boils. Seeing the likes of Senators Chris Dodd, Chuck Schumer, and many others pretending to represent the national interest is very hard to swallow. Why?
All we need to do is review the names of those who facilitated the financial fraud that occurred at Freddie Mac and Fannie Mae. President Obama himself, in his short stint in the U.S. Senate, was a huge beneficiary of the largesse from Freddie and Fannie and the financial industry at large. Make no mistake, the intentional “cooking of the books” at both those agencies was fraudulent and criminal behavior. Washington enabled it and profited from it.
The WSJ addresses this very point in the process of reviewing Obama’s proposed regulatory reforms:
This “gaps and weaknesses” theory has the political benefit of ignoring the role that Washington played in creating the credit bubble. There’s not a word in the 85 pages about the Fed’s years of negative real interest rates, and the only mention of Fannie Mae and Freddie Mac is a placeholder paragraph noting that reform of those housing giants will come later. Also nowhere in sight is any explanation for how the Fed, which had every power imaginable to regulate Citigroup, could have allowed Citi to sell tens of billions of dollars of off-balance-sheet mortgage products.
Thus, the debate in Washington will continue. I view that act as a mere sideshow to the main play going on behind the curtain. That “show” burdens the taxpayer, both now and in the future, with an enormous and unknown cost!!
LD
“White House Ties to Wall Street Doom Bank Rescue”
Posted by Larry Doyle on April 17th, 2009 6:37 AM |
None other than Nobel Prize winner Joseph Stiglitz of Columbia University provided a direct shot across Washington’s and Wall Street’s bow today. As I read Bloomberg’s Stiglitz Says White House Ties to Wall Street Doom Bank Rescue, the little voice in my head kept repeating, ” he’s right” or “I agree.” I am reluctant to copy and paste entire articles, but this one is so important that I feel compelled and will add commentary or links as warranted.
The Obama administration’s plan to fix the U.S. banking system is destined to fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.
Seems as if Stiglitz would agree with How Wall Street Bought Washington.
“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.
The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.” (more…)
Good News and Bad News: The Plot Thickens
Posted by Larry Doyle on April 13th, 2009 6:39 PM |
It seems as if Wall Street banks are releasing “surprisingly positive” earnings in stealth fashion these days. Goldman Sachs was expected to release 1st quarter 2009 earnings tomorrow. Well, Goldman just released that they “blew the doors off” the building in a very explosive and positive fashion. Bloomberg reports Goldman Sachs to Sell $5 Billion in Stock, Repay TARP:
The New York-based bank earned $1.81 billion, or $3.39 a share, in the first quarter as a surge in trading revenue outweighed asset writedowns. The results beat the $1.64 a share estimate of 16 analysts surveyed by Bloomberg.
The earnings were driven by a sizable increase in trading activity which reads as a major gain in market share. With Bear, Lehman, and Merrill all gone and Citi and BofA in the hospital, the crowd at Goldman is sowing while the sun shines. What does that mean? For those who want or need to “play,” Goldman is now one of the few shops truly open for biz. The price to “get in the game” just went up and Goldman’s franchise is clearly benefiting:
Goldman Sachs benefited as the gap between what banks pay to buy fixed-income securities and the price at which they sell, the so-called bid-ask spread, almost doubled to 19 basis points in six months, according to data compiled by Bloomberg.
Over and above the earnings, Goldman has sent a clear signal to Uncle Sam requesting him to leave the Goldman “casino.” With Goldman’s earnings power clearly defined, the firm has announced its intention to raise more equity capital and pay back the TARP money it received last Fall. It will make that equity raise after the release of the Bank Stress Tests at the end of the month. Uncle Sam’s intentions to oversee compensation, business practices, and the like is the antithesis of how Goldman operates. While the actual cost of the government TARP money is cheap, the unknown costs are enormous. Goldman has no interest in maintaining those risks. (more…)
Send in the Clown
Posted by Larry Doyle on March 26th, 2009 5:15 AM |
In the process of a business transaction, have you ever encountered the sudden appearance of another interested buyer? Where does this other mysterious buyer suddenly come from? How is it that the new buyer appears at the most inopportune time? If you thought you were the primary buyer, do you feel as if your bid is being shopped? In business, this appearance of a supposed late buyer is known as “send in the clown!”
This part of the circus act is played out on Wall Street all the time. As we enter into the largest liquidation sale in the history of Wall Street, the big fellow with the red nose, floppy feet, baggy pants, and squeaky voice has just shown up, in the form of Citigroup and Bank of America’s bank portfolios. (more…)
Did Wall Street Flip Off Treasury Today?
Posted by Larry Doyle on March 25th, 2009 4:55 PM |
The U.S. government was heavily involved in the bond market today. How did they do? They bought high and sold low. What happened?
The Fed announced last week that they would engage in buying hundreds of billions of government and mortgage securities in an attempt to move interest rates lower and spark consumer and corporate borrowing. Today, the Fed made their initial purchase under this program at mid-morning. Thanks to MB, I learned that Wall Street offered the Fed three times more bonds than it actually purchased. I gather that the Fed wanted to be extremely patient and diligent in their purchases. In any event, at mid-morning the Fed would have bought bonds near the market highs of the day.
Later in the day, Treasury issued multiple billions in 5yr notes. How did they do with this sale? Not very well. Wall Street backed up their bids an almost unheard of 5 basis points (.05%) to fully underwrite these bonds. What happened? (more…)
