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HomeClinton Presidential Documents c.1998: “Who’s on First?”
Posted by Larry Doyle on April 22nd, 2014 2:27 PM |
Every now and then I come across a document or statement that simply stops me in my tracks. In the process of pondering the weight and importance of the embedded message, I am typically left totally aghast.
Today I had one of those experiences as I continued to review the treasure trove of material in the recently released documents from the Clinton Presidential Library. From a document covering the work of the Council of Economic Advisers, I almost spilled my coffee when I read the following: (more…)
Using Derivatives ‘Like Hard Drugs’
Posted by Larry Doyle on March 9th, 2010 9:16 AM |
Prescription drugs can only be accessed through a physician for a reason. When used appropriately under the guidance of an ethical and informed doctor, the powers of prescription drugs can be life-changing and life-saving. When these prescription drugs are marketed by those more interested in their own bottom line than the health and well-being of their ‘patients’, then use often turns to abuse and the effects are crippling.
A similar dynamic plays out in the high and mighty halls of international finance. (more…)
The Financial Crisis Inquiry Commission Should Investigate…
Posted by Larry Doyle on January 11th, 2010 9:28 AM |
Will America ever truly learn what happened on Wall Street that brought our markets, our economy, and our country to its knees?
We should not expect the incestuous Wall Street-Washington partners to implicate themselves and thoroughly expose their shortcomings. A full 16 months since the failure of Lehman Bros. and how much have we truly learned? What change has really occurred? Who has been fired in Washington? Who has been indicted on Wall Street? Will the Financial Crisis Inquiry Commission, charged with investigating the factors which facilitated our economic disaster, truly be effective?
The truth may hurt but if the hard questions are not asked, the failings are not exposed, and those responsible are not held to account, then the lessons will not be learned, and the experience will likely repeat itself.
Will the commission pretend to investigate, but ultimately wilt under the pressure of the incestuous pillars of power? Will the commission rise above the fray, hold people and institutions to account, and make our country proud? Will the commission use its power to subpoena, if need be?
Whom should the commission pursue? What agencies and institutions should the commission target? If I were on the commission, I would recommend pursuing the following targets: (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
