The Wold Report

UPDATE: Get Ready for $5.00 Gasoline

2012-01-19T13:13:00.000-05:00

UPDATE to my blog dated 12/29/2011

Added to the 500,000 b/d of lost productionin closed/closing US refineries (see blog below) we now face the loss of thevenerable St. Croix Hovensa refinery, operated by Hess and PDVSA, theVenezuelan state-owned oil company, says CNBC. The refinery produces 350,000b/d and supplies about 13% of the East Coast's gasoline. Hello $5.00 pergallon.

Get Ready: $5 Gasoline on the Horizon

2011-12-29T16:27:00.001-05:00

Iran's (probably) hollow threat to close the Strait of Hormuz is a danger that has long faced the oil-consuming world. The 34-mile wide strait offers a strategic chokehold on the Persian Gulf, and Iran appears to have the upper hand in controlling it. In my (as yet unpublished) book Trust Me, I painted a picture of what would happen if Hormuz were closed after an Iranian missile strike on Israel:

Almost 40% of the world's seaborne oil supply goes through the Strait of Hormuz, around 15 million barrels per day. The loss of this oil on the open market, even for a day or so, would send prices even further through the roof. The traders were ready. If the Strait was closed, they would hold and profit. If it didn't they would sell tomorrow morning - and still profit. There was bound to be a bit of a panic in the Asian and European markets when they opened. Oh, life was sweet! Oil markets love a good disaster.

Although Trust Me is fiction, I have drawn a fairly accurate portrait of the oil trading community. Oil is a scarce, highly desired commodity, making it a magnet for traders.

Even at today's prices oil is an extremely cheap source of energy. The reason that prices have been rising gradually but doggedly for the past 30 years is because developing nations need more and more oil to power their cars and factories. But because it comes from countries where democracy is a pipe dream and despots and dictators treat oil reserves as their personal 401K's, it will not remain cheap. From the smallest coup to the most outrageous missile strike against a neighboring country, many of the producing countries' instability is palpable, Every ripple reflects in the price of oil, making the market easy to hype and to spook.

Add to this general uncertainty the snail's pace of refinery development in the western world, and we will see refined products such as gasoline and diesel become increasingly more expensive as demand rises. In fact, the refinery count is decreasing in certain countries. In the US, few permits to build new refineries make it past the environmental lobbyists or local residents. One old, but still productive, 145,000 b/d East Coast refinery owned by Sunoco is slated for dis-assembly to be taken lock, stock and smokestack to India.

Conoco Phillips shut its 185,000 b/d Trainer, PA refinery in September, and Sunoco closed the 175,000 b/d Marcus Hook, PA refinery recently. That effectively removes over 500,000 barrels of refined product per day from the US East Coast market - nearly 3% of daily US consumption.

In Europe the largest independent refiner, Petroplus, has had such terrible margins that its $1bn line of credit has been cut off. It will be tough for it to buy crude to refine if it survives, and even tougher for it to find buyers for its five refineries in this climate if it doesn't.

If there is anyone out there who does not believe that oil prices will stay over $100 a barrel, and probably rise to nearer $200, then they are delusional. And gasoline, jet, diesel and heating oil will rise disproportionately more. Get ready for $5.00 gasoline.

Deja Vu All Over Again for JP Morgan

2011-12-21T10:32:00.001-05:00

Twitter is alight with MF Global customers asking for the boycotting of JP Morgan. The bank may have received "stolen goods" when MF Global settled a debt allegedly using $200m of customer money. Dealbook said:

One e-mail chain refers to the transfer of roughly $200 million that MF Global owed JPMorgan Chase on Oct. 28 — the firm’s last business day before it filed for bankruptcy. In that chain, a senior official in the firm’s Chicago office was told to make the transfer, said the people close to the investigation who requested anonymity because the inquiry was still open... The roughly $200 million that JPMorgan Chase received is said to be entirely customer money.

This must seem like deja vu for JP Morgan, which also pulled a snatch-and-grab before Lehman Brothers hit the dust. JPM asked for two lots of $5bn each in collateral just days before Lehman collapsed, prompting speculation that it and Citi (which did a similar thing) may have caused the lack of liquidity that brought Lehman down. (The case is still in court.)
I'm no fan of JP Morgan, it comes off as greedy and callous, but from where I sit it looks like it has some bloody good risk management people and processes. Maybe if Lehman and MF Global had had the same, they would still be around.

The Culture of Corruption

2011-12-19T16:00:00.001-05:00

I spent 20 years working on the fringes of the oil industry - mostly writing about trading and oil prices and OPEC, but also broking a bit and doing some (dreaded) marketing of oil price services. Once I left Platts, the oil industry bible owned by McGraw-Hill's Standard & Poors, people within the industry opened up to me a little and I got a taste for just how corrupt the oil industry is. From blatant bribery of government officials to inspectors and, yes, reporters the corruption in that business was (and still is to an extent) all in a day's work.
The corruption I see today in the financial services arena makes oil traders look like amateurs: Rogue traders such as Kweku Adoboli at UBS, with his $2.3 billion worth of hidden trading losses; MF Global with $1.2 billion of customer money seemingly vanishing into the maw of a bad trade on European debt; Ponzi schemes such as Bernie Madoff's.
Few oil traders would steal money from their firms to pay a bribe or for a client's night with an 'escort'. Also, few of them would hide trading losses until they escalated into disaster. It is difficult to hide losses on a cargo that got delivered and paid for. Most of their activities, while under the radar of much of the world, were above board and known by management (if slightly less than legal).
There is a culture of greed infiltrating the financial markets and it isn't pretty. It leads to the kinds of major corruption we saw in 2011 and all sorts of minor, though still significant, acts of creative accounting which we may never see. But shareholders and customers of these firms are paying the price. Occupy Wall Street may have had a point, even if they weren't quite sure what it was.
Happy Christmas!

MF Global Story Goes from Bad to Personal

2011-12-05T13:19:00.002-05:00

The MF Global story gets worse and worse; the firm had been dipping into client funds for weeks and the customer shortfall may be as high as $1.2 billion. Therefore I was thrilled to hear that the Board resigned last week, and that Jon Corzine will be forced to testify in front of Congress. Meanwhile regulators moved quickly for a change. Bloomberg reported:

U.S. derivatives regulators voted today to restrict how brokers can invest customer funds, acting on a delayed rule after as much as $1.2 billion went missing before MF Global Holdings Ltd. sought bankruptcy protection. The Commodity Futures Trading Commission voted 5-0 at a Washington meeting to limit how brokers invest clients’ margin in money market funds, and ban investments in foreign sovereign debt and in-house transactions such as repurchase agreements.

This is a good start, but it doesn't address the client money segregation bit of the problem. In today's FT, two professors had some suggestions though. Darrell Duffie, Professor of Finance at Stanford University’s Graduate School of Business, and Joe Grundfest, Professor of Law and Business at Stanford Law School and a former Commissioner of the SEC, penned a comment suggesting that the rules be more stringent.

They offered two possibilities: 1.) Segregate customer funds with an independent custodian, and 2.) Form an information-technology firewall at the broker, creating a “virtual custodian”. Both of these are valuable and realizable solutions. So why did the comments to the article say things like this is "old news" and one wondered why such a big deal is being made of "tiny MF?"

I'll tell you why it is a big deal. A good friend of my husband's, his boss, and some colleagues of his are missing hundreds of thousands of dollars of their investments. MF Global has made good only a tiny percentage of their money thus far, and they are very concerned that they may not get any more back. And I know people who are MF Global employees, they are also receiving a good rogering by the firm; part of their compensation was tied up in MF Global shares which are now as good as worthless.

The fallout is large, it is personal and it tells a story of what happens when transparency is not mandated. And although investors are getting more savvy, as purported by the FT's Gillian Tett's column on November 24th, it should not be incumbent upon them to inspect every crevice and cranny of their broker's books before they turn over their money to be invested.

Who Comes First - Traders or Shareholders?

2011-11-21T12:21:00.000-05:00

When UBS caught alleged rogue trader Kweku Adoboli with his hand in the till, it must have been pretty clear to other UBS traders that bonus season might be a tad disappointing. Indeed if the missing $2.3 billion wiped 40% off of third quarter profits for UBS, that new Lamborghini Gallardo could be a bit OTT. But it seems the bank had ring-fenced 90% of Q3 revenues for staff pay and bonuses. And although the new CEO Sergio Ermotti has said that the bonus pool will probably be cut (FT) it is likely to be only by 10%.
This has infuriated shareholders who believe they are left holding the bag for UBS' shocking lack of credible risk management practices. But are they holding the bag? UBS' share price on NYSE actually went UP after the scandal was revealed, and it is hovering around the same levels today as it was pre-scandal. And although one rogue trader did a hell of a lot of financial damage, the other traders appeared to be making money. Do they deserve to be punished for Kweku Adoboli's actions?
It is an age-old argument in any company that has trading desks. If one desk loses and the rest make money, do the winners get punished with lower-than-expected bonuses? The answer is invariably yes, unless they have iron-clad contracts that guarantee a share of profits. Andy Hall at Phibro had a contract like that, which is one of the reasons Citi had to get rid of Phibro - Hall's $100 million compensation during what can only be termed a market crash was considered obscene. Even though he had made Citi a lot of money (close to $2 billion).
If UBS cuts trader bonuses by 10% or more, they will probably leave for greener pastures. This leaves UBS temporarily without the money-makers as it scrambles to attract new ones. Traders outside UBS will take one look at the mess the bank got into last year and demand a premium to work there. So UBS will end up paying more for traders than it would if it paid its existing ones their expected bonuses. Shareholders have to be careful what they wish for, because the pay and bonus pool could RISE.
On the other hand, if UBS is really downsizing its investment banking arm maybe bonus cuts is a good way to achieve that.

Financial Firms' Shenanigans Show Need for Transparency

2011-11-17T15:46:00.008-05:00

I have been thinking a lot about transparency lately (sad, I know), especially since Pipeline Trading's sneaky tricks and MF Global's seemingly full-scale fraudulent activities were exposed. Since the dawn of financial markets (I include energy and commodities here) people have been able to make great profits, not all of them legal. Over the years I have reported on some of these barely-legal activities, and there are many more that I cannot write about for fear of reprisals. So whenever lawmakers and regulators try to make strides toward transparency I applaud. Transparency makes investors happy, it gives them a warm and fuzzy feeling that the markets or companies they are investing in are as straight-forward as possible.
MF Global let the transparency side down for brokers and broker-dealers by using segregated customer money for prop trading. What it allegedly did was not only illegal, but immoral. Customers were harmed, the CFTC and CME's reputations for being the good guys were damaged. A slightly loony post today on Zerohedge went so far as to say that MF Global has destroyed the whole system. Written by a broker called Ann Barnhardt from Barnhardt Capital Management, the post blames everyone from Obama to the government for orchestrating a conspiracy to defraud her customers. She has closed her business and says she won't get back in until everyone in power today is either dead or deposed. Here is one alarming passage:
Finally, I will not, under any circumstance, consider reforming and re-opening Barnhardt Capital Management, or any other iteration of a brokerage business, until Barack Obama has been removed from office AND the government of the United States has been sufficiently reformed and repopulated so as to engender my total and complete confidence in the government, its adherence to and enforcement of the rule of law, and in its competent and just regulatory oversight of any commodities markets that may reform. So long as the government remains criminal, it would serve no purpose whatsoever to attempt to rebuild the futures industry or my firm, because in a lawless environment, the same thievery and fraud would simply happen again, and the criminals would go unpunished, sheltered by the criminal oligarchy.
Hers is an extreme case, she even invokes God at one point, but it shows how pissed off people can be when their protectors let them down. But regulators and exchanges are only human, and cannot read the minds of fraudsters and tricksters. They can only sniff around the edges and try to ensure that financial firms are doing the right thing. MF Global clearly wasn't, but its timing was perhaps the key to getting away with swiping customer money. A Dealbook article in today's New York Times says that the brokerage probably used some of the money to cover trading losses. Where the rest went is thus far a mystery. The NYT said: "The firm may have used some of the cash to keep its own lenders at bay, which means the money could be sitting in an account at another firm." OK...which firm? Who are the trading partners? This is the opposite of transparency and I can see where this might royally piss off clients and counterparties.
One firm's actions post-M F Global warmed my little heart. Market maker Jefferies Group's shares got hammered when it was mentioned in the same breath as MF Global as having a preponderance of European debt on its books. Jefferies took the bold step of revealing its positions, then selling out of about half of them to mollify shareholders. Now that's what I call transparency. Unfortunately, the firm remains tarred with the MF Global brush.

Goldman Sachs Taste on an MF Global Budget

2011-11-01T12:04:00.002-04:00

Jon Corzine, the Goldman Sachs trader/governor/Senator/broker, thought he had MF Global under control. He would leverage what little cash the brokerage had, make a huge bet on European debt, flatter his contacts at the ratings agencies, and walk away with a gigantic bonus for 2011. Except he ran out of money - even customers' money it appears.
There is an old saying in the markets that goes "He who has the most money wins". It refers to playing poker, where if you have more money than your opponents you can keep on betting until they all fold - broke. But it is also applicable to trading. If you have a very large position which you believe is right and will be profitable, you have to have enough capital to stick with it when it is going wrong. Jon Corzine made the mistake of using his Goldman Sachs champagne taste on MF Global's beer/broker budget. The money wasn't there. Capital requirements are not just for large investment banks, Mr. Corzine.
Corzine never really seemed to understand what a brokerage actually did. He started out on the wrong foot, I heard, when he told the brokers that they would all take pay and bonus cuts. They responded by putting two fingers up and walking into other brokerage shops, for the same money they had been making previously at MF Global. I get the feeling he had no idea what brokers actually do, and tried to treat them like lowly floor traders. Then took the money they brought in and tried to leverage it into a Goldman-like fortune. You can file this blog under "hubris."

Pipeline Trading Systems Takes Privacy Too Far

2011-10-26T15:09:00.003-04:00

One of my favorite companies to cover over the past few years, dark pool provider Pipeline Trading Systems, has been nailed by the SEC for operating an affiliate company that was actually trading against its customers.

The Pipeline case is disappointing, and brings to light a whole new area that regulators now have to worry about - privately held trading venues. Because Pipeline Trading Systems LLC and Pipeline Financial Group are both registered in Delaware, the state that offers the least litigation and the most privacy (does not require director or officer names to be listed in the formation documents), there is little information to be found on its owners or its subsidiaries.

What can be found online is that Federspiel's original company - eXchange Advantage Corporation - exhibited at a venture capital beauty pageant in 2001, so it stands to reason that it received backing somewhere. This was apparently Pipeline's vehicle for providing liquidity to its dark pool ATS, it changed the name to Aurora then to Milstream, and was residing in the same NYC building as Pipeline. The whole thing flew in the face of Regulation ATS, and you would think both partners must have known that. Yet no one sussed that something was off.
The financial press has barely scratched the surface in this story, only looking at the SEC filing and not digging much further.The FT did turn up one interesting nugget: A non-exec at Pipeline, Giles Vardey, also serves as non-exec chairman at London micro cap exchange Plus Markets Group. He has been asked to step down from Plus Markets by a Middle Eastern investment syndicate. Curiouser and curiouser...

It isn't an easy task putting the pieces together. With private companies there are no legal identifiers, and audit trails often end in - well, Delaware. I believe in privacy but this goes too far. Scary.

A Tale of Two Regulatory Regimes

2011-10-12T10:30:00.001-04:00

     One of these things is not like the other. In a tale of global regulatory disharmony, European regulators say they are going to crack down on high frequency trading, perhaps by forcing perpetrators to become de facto market makers, according to today's FT. They are concerned that HFT algorithms can remove liquidity when trading conditions go against them or are too volatile to read - as happened on the May 6th Flash Crash.
     Fair enough. But forcing HFTs and banks to be market makers in each and every instrument they trade is begging for trouble. It would require a huge amount of additional capital, an issue banks are already whining about. And it flies directly in the face of the U.S. Volcker Rule, the guidelines for which have just been laid out. Specifically, no bank should end up with a long or short position while performing market maker or hedging duties for customers.
     U.S. banks are already confused about the distinction between proprietary trading and taking the other side of a customer's trade, along with the risk exposure that it creates. If they sense that regulators will knock heads every time a client-related position is not fully hedged, they might just move their business elsewhere. This is exactly the regulatory arbitrage that Wall Street was worried about, because it could cost them a lot of business. NYC traders will be polishing up their EU passports.

When China Sneezes

2011-09-30T08:30:00.000-04:00

     The old cliche 'when America sneezes the world catches cold' still holds true. Look at the damage we did to the world with our housing and credit bubble, and subsequent crash. In the past decade or so the world has morphed into a single organism, a collection of interdependent countries thanks to cross-border trade. With countries such as the USA outsourcing it workforce to Asia, and financial markets becoming increasingly fungible across geographies, the knock-on effect of an event in one country can be devastating. The earthquake and tsunami in Japan earlier this year, for example, is still reverberating through supply chains and damaging revenues globally.
     So, when I read today in the FT that property development in China is looking shaky I got a chill. There are half-built luxury residential properties dotted throughout China's largest cities, and demand for these apartments has all but dried up. If developers are forced to reduce the prices on them in order to sell, it could have an immediate impact on sky-high real estate prices across China. The knock-on effect of this could be significant. Demand for steel, cement, copper and other building materials could hammer prices globally. For a start, China is the world's largest consumer of steel and, according to the FT, real estate construction accounts for 40% of China's steel use. And because China hoards building supplies its demand for fresh stock could languish for years.
     If a housing collapse could flatten the US economy, it could surely do the same for China. If China slides into recession - and I'm being kind, analysts think that it will have a hard landing - we could see the biggest knock-on effect yet. Global recovery would stop dead, and the worst-off economies (Greece, Italy, Spain, etc.) would teeter off the cliff. The US would sink like a stone - China is the largest investor in US treasury bonds, and further investment would likely be curtailed if it fell into recession.
     I am not an analyst, but sometimes the writing is on the wall and this is written in neon. I think my 401K is about to be converted to cash.

High Frequency Trading and Your 401K

2011-08-19T16:53:00.001-04:00

     I have had a few people asking me lately about this phenomenon called high frequency trading or HFT. They are - quite rightly - concerned about their 401K's and their stock portfolios, and have been reading some of the sensational headlines about HFT causing the market plunges.
     As a reporter, I started covering HFT and algorithmic trading about 10 years ago, so I know a little bit about it. Quite simply, it is electronic trading of stocks and other automated instruments such as oil and corn futures. What high frequency traders do is build clever computer programs, called algorithms, to dip in and out of these markets and shave off a penny here and there. If they do it enough times - and they do - they can make quite a bundle.
   What is not entirely clear at this point is whether they are ripping off the average investor. My retail brokerage has a low latency trading platform, so in theory it stands a fighting chance of getting me a good price at any given moment. Having said that, last week when Apple shares were puking I put in an 'at market' bid (I know, stupid, but I'm lazy) when Apple was at $363 - I got filled at $366.79. Quite a difference, even though it was done in seconds - seemingly instantaneously. HFT's, however, can get a deal done in less than a millisecond - some a lot less because their trading machines sit right next to the exchanges' machines.
     The jury is out whether regulators will throw their weight around and try to control HFT. The reason? That is where the money is. When the firms that own the big HFT machines trade more than 50% of the equities market volume, there is bound to be some pushback. My advice is this: if you can't watch your investments on a VERY regular basis - not daily but all day long - you are bound to get trampled when the machines take over. Once those magic stop-loss numbers are hit, they will sell all the way down. Until the computer says it is time to buy, that is. In the meantime you will be crushed.

As Kyle Reese said in the Terminator movie: "Listen, and understand. That terminator is out there. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead." Or broke.(Thanks for the line, Tim!)

Removing the Taint of News of the World

2011-07-18T07:45:00.001-04:00

     When it became public in 2007 that Rupert Murdoch's News Corp had taken over my one-time employer Dow Jones I was horrified. First because I used to work for Dow Jones. Second because I was then working for Financial News, which a year prior had been taken over by Dow Jones, which meant I was now somehow working for Murdoch's evil empire. And third, because Dow Jones and the Wall Street Journal were some of the last bastions of solid, honest financial news and I knew that Murdoch would damage that reputation. Luckily Murdoch's first move was to axe freelance budgets so I lost my Financial News gig. I was relieved not to have to watch from the inside as News Corp's culture slowly changed Dow Jones into a sensationalist stream of headlines; and the WSJ into USA Today with a fuzzy business angle.
     I was saddened but not surprised that the Bancrofts, the ruling family board of Dow Jones, would sell to such a notorious publisher as Murdoch. The original phone hacking scandal was out there in 2006, so the Bancrofts had to have known what kind of company News Corp was. But money is money, and that is what they wanted. This generation of Bancrofts had never been interested in the newspaper business, only that the share price remained stable so that their fortunes were safe. (One of my favorite tales of the Dow Jones Board came from a London sales VP who attended a meeting. She said that one Board member got so bored that she rolled up her cardigan to use as a pillow and went to sleep on the boardroom floor!)
     Some of my ex-colleagues at DJ were actually thrilled about News Corp, simply because they were hoping Murdoch would throw some money back into the company after years of the Bancrofts sucking it dry. I doubt that they are now so thrilled.The Bancrofts are now saying that they would not have sold to Murdoch if they had known about the extent of the phone hacking scandal. Murdoch's own senior executives who were in charge at the time claimed they didn't know either. This is absolute rubbish. I have never worked for an editor who was so bad as to not know where our stories came from - and I have worked for some clueless editors.
     It may be pure schadenfreude but I am pleased that News Corp's true colors are being shown. News Corp, The Sun, NOTW, and now even The Times give journalism a bad name. There may yet be hope for the WSJ, since the Bancrofts’ agreement with News Corp included a clause to preserve the integrity not just of Dow Jones, but of all the company’s “publications and newsgathering services,”says the New York Times. A special Dow Jones committee, created to assuage concerns over News Corp tainting Dow Jones and the WSJ's journalistic integrity, is reportedly keeping an eye on the evolving phone hacking situation. But the committee, which inexplicably includes Nicholas Negroponte, co-founder of the Media Lab at the Massachusetts Institute of Technology, is largely toothless. But the rest of the media world is not, and it is pissed off. I think Rupert Murdoch should be afraid, very afraid.

The Silly Season in America; No Tennis or Pimm's

2011-06-24T07:47:00.003-04:00

     The Silly Season has begun. In England this season involves regattas and tennis and Pimm's at garden parties and everyone in the City is either a little bit hungover or on holiday. The papers are full of silly headlines involving the Queen or Fergie or shenanigans at Wimbledon. Here in America the Silly Season begins with dozens of little known Republican politicians declaring their candidacy for President. They shout and whinge about the economy, about jobs and about how terrible it is for the average American to pay $4.00 a gallon for gasoline while they walkie-talkie their limo drivers to wait out front.
     Americans like cheap gasoline. They believe it is their God-given right to have cheap gasoline. They drive to the local corner market when they could walk, and they leave their engines running (even when the temperature outside is a tepid 70F as it was here last week). They buy pickup trucks and never use the back of them to carry anything but the family dog, while getting 15 miles to the gallon. They drive ATVs around and around my house in Maine, making me rethink my gun-control stance. They drive from NYC to northern Maine - an 8 hour drive - for a long weekend (they are renting said house).
     The confluence of these two things - silly politicians and average Americans whinging about gasoline prices - led to the silliest of silly things yesterday. President Obama announced he had authorized the release of oil reserves from our SPR and from the IEA's stocks. We are to receive the 'gift' of 30 million barrels of US crude from the SPR and 30 million from the IEA. Oil prices puked, despite much head-scratching. US consumption is close to 20 million barrels per day, so that's a day and a half's worth from the SPR. The IEA link is more surprising, but it could be that it to try and hammer down the unnaturally high Brent/WTI spread.
     I heard that the news of the SPR/IEA release leaked out (probably in Europe, the IEA has to notify the producing/holding nations before tapping its reserves). Some oddly anomalous spread trading was noticed about a week before the announcement. There's one for you Commissioner O'Malia....

Guest Post: The Story of the Carolina Wren

2011-06-21T06:31:00.000-04:00

     This was written by my Mum, Jeanne Wold. The bird's lessons should replace many a firm's 'mission statement'. Enjoy.
     "When Spring arrived in Tellico Village, TN my husband, Just, moved his stained glass workshop out of the sun porch and into the garage. A few days later he noticed a small, brown bird flying around the space, then leaving. A short time later the bird came back with a twig in her mouth and landed on a plastic magazine shelf above the worktable. She made several trips despite Just's attempts to shoo her outside. She was making a nest.
     Before he left the garage, Just tore out the nest and put it in the rubbish barrel. Back the little bird came the next time the garage doors were open. Again, Just destroyed the nest. This went on for several days. Every time the doors were left open the little bird was hard at work building another nest. It was evident that the persistent little Carolina Wren was building this nest where she wanted to, come hell or high water!
     By this time Just was won over. Whenever he closed the doors he left one garage door open up high enough for the little wren to walk under and then fly to her nest. Although her mate was a frequent visitor, he never came into the garage unless he could fly in or out through a wide open doorway. Instead he stood guard outside while the mom did all the work.
     One day I was surprised to see the mom-to-be land on my desk in the office upstairs, with a twig sticking out on both sides of her beak. She sat there for a moment and then retraced her flight path through the master bedroom and out of the terrace on the second floor. At the time I surmised that she must have mistakenly flown in the wrong door. However, maybe we had forgotten our agreement and had closed the garage doors tight. Could that have been? Was she reminding me? Yes, indeed. There was no opening for her to enter the garage.
     As little and cute as this bird is she has a piercing call; one day last week she let out several screeches as she sat beside her nest. We knew that she had finished laying her eggs and the next phase had begun.
     Both Just and I enjoyed this experience immensely. Our little messenger has taught us the following: She knows exactly what she wants and how to go about getting it. She shares her enthusiasm with others and invites them to participate. She makes each of us an intricate part of the plan by keeping us up to date on the progress and alerts us whenever we are forgetful. She never for a minute puts aside her goal and - happily - we make her goal our goal."

Saudi Arabia and the Price of Oil

2011-06-09T07:22:00.000-04:00

     Yesterday's OPEC meeting ended with the Saudis being outvoted on raising production. This is a double-edged sword for the Kingdom, which is pumping billions into jobs and mosques in a bid to avoid a popular uprising. The Arab Spring, which started with Facebook and ended with Egypt, Tunisia, Syria, and Yemen in tatters, won't come to Saudi as long as the money holds out. A trader told me that Saudi tried to look like the "good guys" in yesterday's OPEC meeting, cajoling and pushing to raise the production ceiling. In truth, Saudi is angry with the US for supporting all the riff-raff rebels in the Middle East and loves that the current high price of oil is hurting the US economy. According to analysts, if Saudi keeps up its social and religious investments to keep the peace, the price of oil has to reach $300 a barrel to support it. Take that, American infidels!
   And, although US demand for oil is said to be quite a bit below normal, you wouldn't know it on the road. I've been on Route 95 from MA to ME and back a bit lately and I haven't seen so many huge RVs in years. One caravan of about 10 RVs came all the way from Oregon - imagine their collective gasoline tab. And up in the North Woods of ME our peace and quiet was repeatedly interrupted by kids on ATVs going around in circles for hours. If Americans continue to believe that cheap oil is a national entitlement then the Saudis will get their wish. I'm putting a bet on at Ladbrokes that we reach $300 by the end of the decade.

Beware the Rush to Go Public

2011-05-16T16:17:00.004-04:00

     Today's rumors that Facebook is rushing to IPO are not surprising given that LinkedIn does so on Thursday. These are two of the biggest scams I have seen since the dot.com bubble pre-2001. Airware is what we used to call it when a company has little that is tangible to offer. But the public is familiar with what Facebook and LinkedIn do at least, so let the buyer beware.
     Would that this were true with prospective investors in Glencore, the company born of Marc Rich and Clarendon (anyone remember that name?).Glencore is now wrapped up in a package that has pretty pictures of mining and metals all over it, but under the gift wrap it remains a speculative commodities trading company. The deals that it makes in some of the dodgiest regimes will be - ahem - difficult to achieve when it is under the public microscope. It therefore has to be said that making money for Glencore will be more of a challenge going forward. A trader tells me that he knew Glencore was serious about floating when it suddenly had a shiny new website. Previously, Glencore's website had a couple of office addresses and generic phone numbers.
     So, what are we to make of Vitol's fancy new website? Last year when I was looking for a media relations contact there was nothing more than a phone number on the site, along with a couple of sentences describing Vitol as one of the world's largest oil trading companies. Now it has chapter and verse of what it does, along with THREE media contacts. Hmmm.

Goodbye Osama Bin Laden and Good Riddance

2011-05-02T07:22:00.003-04:00

I rarely talk about 9/11 - unlike some people who somehow can't seem to get enough of reliving the horror. Today, however, I will say goodbye and good riddance to Osama Bin Laden. I lost 17 friends and colleagues and dozens of industry contacts at the Risk Waters technology conference in Windows on the World that day. Bin Laden's death will come as a relief to Neil and Dinah and David and Simon's families, but it won't bring them back. Sick freaks who carry out attacks such as 9/11 in the name of religion or politics or whatever the cause deserve justice. Today we can feel that a little bit at least has been served.

The Lie in LIBOR; Tip of the Iceberg

2011-03-28T10:14:00.001-04:00

I love the furor over the London Interbank Overnight lending Rate, LIBOR. It seems one or more of the bulge bracket banks might have - gasp - lied about the rates they would offer their competitors.
I first heard of LIBOR when I started working at Telerate (later part of Dow Jones) in the early 1990's. I was on the energy desk and our reporting counterparts on the finance desk would take the LIBOR calls. The participating banks would call in, tell them their prices and the finance desk would average them and post them online for the British Bankers Association. That's it. Just taking the calls, averaging the prices - throwing out the top and bottom five - and posting them online. Then gazillions of dollars were priced using that figure. When I heard how important it was I said: "You are kidding." But no, they weren't.
Then I told them that in the oil business, gazillions of barrels of oil each day were priced using journalist's assessments of the market. They said: "You are kidding." But no, I wasn't. Then I said: "How do you know the banks don't lie about LIBOR rates? Everyone lies to Platt's about the prices." The finance desk was shocked. First, that banks would lie about their rates. And second, how could most of the world's oil supply be based on price assessments by journalists? And why would their sources lie?
When you think about it, it IS quite shocking that over 90% of global oil production - around 87 million barrels per day - is priced using subjective assessments. So Platt's moved to try and get away from the journalist's powerful input a few years ago by inventing something they call The Window. The Window is a Yahoo (or Reuters) instant messaging tool whereby buyers and sellers of oil enter their bids, offers and selling prices. Then the journalists take averages of these prices for each product or crude oil type and publish them. Despite all assurances, the oil traders do lie about what they would pay or offer or what they have done. It is, in fact, easier for them to lie using The Window than it was talking to journalists who made the assessments subjectively.
Why they lie is not difficult to understand. If you are loading a cargo in, say, Russia you would like to get it at the lowest price possible - then you can sell it at a profit. So you tell Platt's that the market is crap by lying on The Window. Then all of your buddies who are also loading will support you with their lies. The traders that have sold oil to end users that is being delivered at that time understandably want the oil to be priced higher. So they lie to The Window to try and get prices up. Therefore, it probably averages out in the end.
And so, probably, does LIBOR. If one bank wants to be able to borrow money cheaply, it will report lower interest rates. It seems likely that there will be another bank out there that wants to lend at higher rates, so it reports higher rates. See? Quits. So people can stop freaking out that financial markets participants lie. It is part and parcel of the markets.

Andre Dubus III and the Future of American Publishing

2011-02-27T08:08:00.000-05:00

I walked over to the Old South Church in Newburyport last night to see Andre Dubus III discuss his new book "Townie". The place was packed - over 400 people bought tickets from our wonderful local bookstore Jabberwocky - and most had already bought (and read) the book. He told us the story of his childhood in local mill towns - Haverhill, mainly, and Newburyport - and had everyone laughing. Andre is a natural performer and something of a celebrity (after House of Sand & Fog), which is part of the reason so many people pitch up for his talks. But he is also a good writer with some cracking stories to tell, and he is supremely lucky to have been published in these hard times.
American bookstores are going out of business at a record pace; hundreds of independent stores have gone under since the financial crisis bit in 2008. Borders filed for bankruptcy this month, and is closing 200 of its coffee-klatch n' books outlets. In the UK, Books Etc. - my lifeline bookstore when I worked on Fleet Street and in the City - was bought by Borders UK and then closed down.
Digital publishing expert Mike Shatzkin in The Shatzkin Files blog said: "I’m expecting that what brick-and-mortar booksellers will experience in the first six months of 2011 will be the most difficult time they’ve ever seen, with challenges escalating beyond what most of them are now imagining or budgeting for."
The reading public appears to be the reason. In 2009 U.S. book sales were $23.9 billion, down 1.8 percent from sales in 2008, according to the Association of American Publishers.Although e-book sales are often blamed for the decline, their sales - $313 million in 2009 - comprised less than 0.015% of all book sales. E-readers like Kindle are rising in popularity, but they can hardly replace the experience of shopping for, touching, buying and reading a real book. And that experience can only happen in a bookstore.
Maybe it is the American publishing industry that's to blame for declining sales rather than Kindles and e-books. When I shop for books today (particularly in a chain bookstore) I am dismayed by the rubbish that dominates the shelves. Previously-published authors with nothing left to say, but have a winning formula, are clearly a safe bet for publishing houses. Literary fiction with a clutch of meaningless awards are next; flowery prose that is so hard to plow through that when you are finished you have to go back to the start to remind yourself what the book was supposed to be about. Then there is the bandwagon stuff: vampires, zombies. It is no wonder people turn around and leave the bookstore having bought nothing.
In the UK, where I buy most of my books, the bestseller shelves run the length of the store. There are some American stalwarts there and the prize-winners, of course, but mixed in you'll find light fiction, romantic comedy, gentle satire and historical novels. Many are from authors who have never - gasp - been published before. Publishers in the UK don't adhere to the strict, infrequent publishing schedules that American ones do.There are books released for Christmas, for Easter, for Summer holidays and many in between. Unfortunately book sales have declined there as well.
I don't have the answer. All I know is that as a wannabe novelist it is depressing to think that the hardcover or paperback book will be relegated to history. Any idiot with a computer can turn out an egotistical, unedited e-book full of psychobabble and coming-of-age crap. Well-written, thoughtful books with finely drawn characters and a good plot (yes, a goddamn plot - sorry literati) are the stuff of life. And if Andre's turnout last night is any example, I am not the only one who feels this way.

The Cost of Winter

2011-02-06T07:41:00.002-05:00

The sub-Arctic, northern Canadian weather in New England this year is wreaking havoc with my life. So much snow has fallen in the Boston area (more than 70 inches and counting) that there is nowhere to put it when you go to clear the driveway. Our two car driveway is so narrow that the snowbanks are halfway up our ground floor windows and had to be cut back so that we could fit more than one car in. The leftover snow went in the back garden which now resembles the bunny slope at Sugarloaf ski area. I hate winter and New England winters were one reason I decamped at the age of 22 and moved to Europe (which is now getting its comeuppance). Now that I am back, I can't help but wonder what on earth I was thinking.
Meanwhile, on my way back from a canceled writing class in Boston last Tuesday, I calculated the cost of this winter. For me it has meant finding blokes with shovels and snowblowers and plows to take care of our various properties. At Beaver Cove, ME our plow guy had to clear the driveway 7 times between December and mid January. In Boothbay Harbor our caretaker had to shovel the walk 5 times and clear the roof once so far. In MA we have had the blokes in 6 times with some remedial work on top to cut back the snowbanks. My class in Boston has been canceled twice after I paid for and took the bus to get there and back, missing prime working hours. Several hours in mornings have been wasted shoveling and then tracking down the blokes to get it finished and mopping salty floors. I gave up on trying to fit my car into the drive (and keeping it from getting smooshed by giant falling icicles) and took it to a storage unit for the next two months. I reckon the winter has already cost me a few thousand dollars that I would really have rather spent going to the Caribbean.
But I am a small fish in the ocean. My colleagues and contacts have had to work from home more often than not. This leaves empty, heated, lit offices sucking up money and does God-knows-what to productivity. Municipalities and states are already over budget for snow removal, having to go begging for extra Federal dosh. This is on top of the serious deficits in municipal budgets already and a looming pensions crisis. (About which, BTW, Meredith Whitney is completely right. I was tipped off about the looming pensions shortfall a year ago when writing an article for CME Group Magazine, by someone who should know.)
All in all, the weather in the winter of 2010-11 could be the straw that broke the camel's back the second time. A fragile recovery may not be strong enough to withstand the costs of this winter. I know I'm not - strong enough that is. Off to Florida....

“If You See Anything Suspicious…”

2011-01-19T07:35:00.000-05:00

In today’s seemingly terrorism-filled world, people are becoming accustomed to being watched and monitored. The tolerance comes from the hope that the relevant authorities will catch would-be criminals before they do any harm. (Or, at the very least, ID them after the fact for punishment.) Closed circuit television cameras (CCTVs), phone tapping, stakeouts by police are all traditional and ways of monitoring the population for criminal activities.
In London the number of CCTVs has increased exponentially in the past few years. Ignoring cries of civil liberties violated and privacy invaded, the London Metropolitan Police have been quietly increasing the number of cameras (from 21,000 in 1999 to nearly 60,000 today) leading to more criminals caught. According to BBC News and the Met, in 2010 the number of suspects identified by the camera system went up to 2,512 in 2010 compared to 1,970 identified in 2009.
When it comes to monitoring financial markets, things get a little trickier. Few regulators are equipped with the technology or the expertise to monitor markets for abuse and/or mistakes. This is partly due to a lack of money, and it seems likely that the newly GOP-led Congress will nix any budget increases. Also, the push-back from market libertarians has been loud and consistent, with legions of anti-regulation lobbyists beating down politicians' doors in Washington.
The regulators appear resolute regardless. There are already proposals on the table as they prepare to define and enforce new rules under the Dodd-Frank Act. In the case of the Volcker Rule, the authorities are proposing a three tiered approach. First "tripwires", such as the length of time a trader holds a position, its size or riskiness, would alert banks’ compliance departments who would then (#2) quiz the trader on the nature of the position. And (#3) regulators that keep inspectors on banks’ premises would see the tripwires and monitor both traders and compliance departments.
Over at the CFTC, regulators are looking at a similar approach to monitoring and controlling position limits on products such as oil and metals with a "points" system that would give the CFTC monthly reports that it could use to red-flag traders with large positions. The tracking and red flag approach is definitely moving in the right direction. Investor confidence, already at worrying lows, is in danger of becoming pandemic if nothing is done.
A TABB Group survey revealed that 63% of respondents believe that the recent insider trading probe has put a damper on investor confidence. Because the recent insider trading arrests in the U.S. have been in prominent mutual funds and hedge funds, ordinary investors could be more wary about investing in those funds and others. TABB says that, while enforcement actions can have positive or negative influence on confidence, respondents agree the current probe is having an overwhelmingly negative impact.
Regulators have a mandate to protect investors, and the best way to do this is by using monitoring and surveillance technology to help catch insider trading, market manipulation and avoid fat fingered trading errors. Congress needs to give them the wherewithal, and naysayers need to remember that CCTVs catch criminals.
(This blog also ran on TABB Forum: www.TABBForum.com)

CSI: Influenza

2011-01-08T10:05:00.001-05:00

On Monday, January 2nd I awoke at 3:00am GMT to find my head pounding and my throat on fire. It was 5 hours before I had to take a flight back to Boston from London so going back to sleep was impossible. As I lay there fuming about being mugged by a drive-by flu virus, I began to construct a mental CIS-style investigation of where I could have picked up the offending virus. Everyone knows that colds and flu viruses (apart from Swine Flu) take 7-10 days to incubate. I totted up the requisite numbers and found myself on Xmas Eve in a bar in MA - before going to see True Grit (great film, BTW).
Possible Crime Scene (PCS) #1: We were having a beer and some lunch when a couple came in and sat down next to us. The man was coughing and hacking up a storm, so I suggested we move. My husband knowingly responded that the germs would travel up to 25 feet anyway so what was the point. (I was planning to sit BEHIND him, as it happens, but never mind.) We stayed put. Was he the offender?
PCS #2: Logan Airport. A very kindly British Airways employee upgraded us to Business Class. We giddily waved him a merry Xmas and went to the departures lounge where we sat in front of a woman with obvious laryngitis and a child (I guessed a boy and was correct) who had a broken, wet cough and was hacking up a storm. The kid had clearly not taken the slightest bit of notice of the Swine Flu posters all over the airport, as he was neither covering his mouth nor coughing into his armpit or elbow. Since he was sitting BEHIND me, could he have been the possible culprit?
PCS #3: Westfield Mall, London. We trotted off with mum-in-law in tow to hit Marks and Spencer's at the glorious new mall in Shepherd's Bush. (It has done precisely nothing to gentrify that area, BTW.) All around us swirled crowds of frantically shopping Brits and tourists, hoping to snag a bargain before VAT goes up by 2.5%. The number of people coughing and hacking was alarmingly high.
PCS #4, 5, 6: We saw three plays in crowded theatres: Yes, Prime Minister (hilarious, although the second lead was out ill...hmmm), Potted Panto (a scream) and The Rivals (disappointingly boring). In all three instances there was one or two loud coughers in the audience. Maybe too late to have been the offenders?
After spending most of the following week in bed I went to see the doctor, where the nurse told me I should have had a flu shot. Well, Duh. Then, yesterday, my husband - the knowledgeable one about how far flu germs can travel who HAS had a flu shot, of course - came down with the same virus. He is now sweating and swearing in bed about the offending mugger.
Lessons learned?
*A flu shot does NOT protect you from all types of flu, particularly if you are travelling.
*People are NOT heeding the US and UK government warnings about staying at home if they are ill and possibly contagious. Nor are they paying the slightest attention to the posters telling them how not to transmit disease.
*Net transatlantic flight I will pretend to be Muslim (although the blond hair is a bit of a giveaway) and wear a scarf over a medical mask.
* In future I will wash my hands more, if that's even possible. And not sit at bars during flu season. Or go to the theatre or shopping malls, or restaurants. I feel a Caribbean beach beckoning for Xmas 2011.

Disruptive Change Caused by Credit Crisis akin to War

2010-12-13T07:26:00.000-05:00

Two Speed World, by Gerald Ashley and Terry Lloyd. My friends and ex-Dow Jones colleagues have written a fantastic book about change, how fast it happens (or doesn't) and its impact on the world.
We live in a bewildering world of change, which splits naturally into steady progress punctuated by sudden disruptions - the two speed world. Disruptive change occurs at high speed, according to the new book Two Speed World, while incremental change happens more slowly.
Two years ago, a world that was mainlining credit like cocaine was stunned when its habit was abruptly curtailed. A few economists and bankers had been predicting that the credit binge could not last, that it was dangerous, that credit derivatives were out of control - but no one was listening. So when the credit crisis exploded it set the world on its ear and forced change; far-reaching, disruptive change with concomitant, painful withdrawal symptoms.
Incremental change, or life in the comfort zone, is a "dull advance over a long period of time that can add up to a great deal of progress," according to Gerald Ashley, co-author of Two Speed World. Disruptive change comes from exceptional events such as wars, new inventions or financial markets meltdowns.
Ashley noted that disruptive change is not to be considered as an extreme example of incremental change. "Many decision makers tend to see most issues in incremental terms and on occasion, for example a financial crisis, they fail to understand that it is disruptive change underway that demands different analyses and approaches to those that they employ in normal times."
Disruptive change is the most feared and the least understood type of change and "may receive more attention than their importance warrants relative to the incremental changes of everyday life," said Ashley.
The financial crisis, given its severity and danger to the world economy, probably deserved the attention which has led to draconian changes in regulation and processes in many countries. Though not always welcomed, new regulations are necessary to rebuild the health of financial markets and to prevent another such disruptive change.
"Disruptive change should be treated with respect, not feared, because it is disruptive change that drives progress," said Ashley, who once worked for Baring Brothers in London and Hong Kong and the Bank of International Settlements in Basel, Switzerland.
Incremental change arises from routine, doing what you have done on many occasions before. Many people may strive for more excitement and variety in their lives but in practice most of their lives and experiences tend to be within a narrow compass, said the book. In the case of financial markets, too many firms relied on mathematical models that used historical data and scenarios that were based upon short windows of time and the incremental changes that took place therein.
"Mathematical models were based on economic events in a very narrow window of time, as short as ten years. Bankers did not incorporate cross-correlations where the effect of adverse events in, say, the mortgage market, might trigger a move in others," said Ashley.
Most people live from day to day in a world of incremental change and do not expect to be much affected by disruptive changes. The financial crisis and resultant global recession proved that disruptive change can be right around the corner. "Every person and business should regularly review their situation and not assume that the future will continue as a simple extension of the present state. Even disruptions that eventually are a benefit to all, produce some short-term pain."
The book explores the development of the classical techniques for handling change that were developed in the second half of the twentieth century. Ashley and co-author Terry Lloyd worked together in the 1990s in the financial information industry, but came from different backgrounds. Llloyd, with an engineering and financial software background, has worked for Rolls Royce Aero Engines and Digital Equipment Corporation (DEC) among others. Ashley's background was international finance. The combination of technology and wholesale banking expertise gives the co-authors unique insight into changes in modern financial markets, as well as the world in general.

API Finds it's Not Easy Being Green

2010-12-08T14:18:00.001-05:00

I am working on an article about the Dodd-Frank Act and stumbled on a great piece in the LA Time s about armies of lobbyists marching into Washington to try and water it down. One paragraph caught my eye and made me laugh: "The American Petroleum Institute met with Securities and Exchange Commission officials Sept. 27 to argue that new rules forcing oil and mining firms to report payments made to foreign governments "raises significant practicality and cost-benefit concerns by vastly increasing the amount of data that must be reported.""
LOL. Is that the best they could come up with? Too much paperwork? Is the API suddenly going green? Doubtful.The reason it is using the weak excuse of 'practicality and cost-benefit concerns' is because it cannot say to the SEC: "Gee whiz, how do you expect us to get drilling or supply contracts in dodgy countries without greasing a few palms?"
The practice of bribery is ingrained in the oil business. Officials in Russia, Middle East, Africa, and Latin America have been supplementing their income with bribes since oil was discovered under their feet. Oil firms have always been creative in disguising the payments, but now - in the US at least - they will have to report them. It won't matter, they can open an office somewhere else and send some poor schmuck out with a brown bag (it used to be schmucks in London, but the UK is cracking down too). As long as there is no paperwork to file.

The Fading of Old Glory

2010-11-16T08:23:00.001-05:00

As I write predictions for 2011 in the capital markets for various clients, I am seeing a picture that I don't particularly care for. The United States' star is losing its ascendancy as hungrier, less regulated nations begin to encroach on our traditional territories. In just the past two weeks I have seen my kids - educated and trained graphic artists - lose freelance work to equally educated young (or old, who knows?) people in India, China and Korea - for a tenth of the going U.S. rate. I have seen a relative's MRI results read by a doctor in India. I read that many hospitals in the U.S. are outsourcing basic medical services, such as reading CT scans, to doctors in India and China who are doing remote diagnosis. I have heard of lawyers in India training to be able to help companies deal with new U.S. financial regulation. Indian tax accountants are taking away jobs here in the U.S. as domestic consultants outsource the production of tax returns.
The United States is all about commerce and profits. The constant emigration of jobs, manufacturing, innovation and trade to emerging countries where the talent is plentiful and cheap saves U.S. corporations billions. But what does it leave for this country? Manufacturing is all but dead apart from cars. Financial services firms propped up the economy for a while - albeit with smoke and mirrors - and are now heading for the exit as fast as possible, fearing new financial regulation will harm profit margins. Brazil, Australia, and other countries are embracing high speed and algorithmic trading and will soon not need our bulge bracket banks to help them out with it. The health care industry is top-heavy and inefficient with health insurance companies a complete rip-off which will someday be exposed. What is left? The generation that is attending and/or just graduated from university is going to pay dearly for American excesses. It is said half-jokingly that graduates today are most likely to land jobs where they will say "would you like fries with that?" It may be years before they can get into solid, growth area companies where they can make a career.
But what companies will they be? Technology? We have Apple and Microsoft and IBM and Intel, true. But they are on the downward edge of the razor blade that is the technology innovation curve. Innovation can also be outsourced, but it has been the exclusive domain of America for about 150 years. It has to remain so, otherwise what do we have left? A bit of oil, some corn and a lot of people.
New products need to be invented and fast-tracked to production before the Chinese can copy them. I remember in the 1960's when "Made in Japan" was a standard joke for crappy quality, a snide reference to how much better things made in America were. Now Japanese cars are the ones U.S. car makers have to beat in terms of quality and service.
I think this country is in more trouble than we can foresee. If there is not a dedicated effort to increase innovation and support the opening and growth of new companies we could one day see our kids moving to India or Brazil to find work.

Throwing Jerome Kerviel Under the Bus

2010-10-07T11:47:00.000-04:00

I feel sorry for Jerome Kerviel. His face was a picture of devastation. His life is in tatters, and the next three years will be spent in prison. I realize that Kerviel is not an innocent man. He lied and hid his losses using his knowledge of risk management systems gained in previous jobs. What he did was stupid and financially damaging to SocGen - he came close to ruining the bank. There is no excuse for what he did.
There is also no excuse for SocGen to have let it happen.The most cursory of glances into trading accounts would have flagged up issues. The most elementary of audits would have caught Kerviel before his mistakes were monumental. The bank repeatedly ignored warnings and red flags concerning Kerviel's positions, preferring instead to focus on the profits he appeared to be making. SocGen is guilty of extreme moral hazard, and should also be punished.
If there is a lesson to be learned from the trial of Jerome Kerviel, it is that the big banks almost always win. A big bank can gamble its clients' money, let traders take on huge positions with no risk or leverage controls, and cut corners on technology and common sense and still win the day. Government, and that includes judges, will continue to support them because they are 'systemically' important. The only answer is to force banks to take steps to prevent a Jerome Kerviel from happening again. Regulation in the form of forcing banks to employ real-time risk management, trade monitoring and surveillance might ward off another $4bn loss. And prevent what actually appears to be abject stupidity in the name of profits.

Wall Street: Proof that Money DOES Sleep

2010-10-04T07:02:00.001-04:00

All hyped up by the SEC's flash crash report, I trotted off to see Wall Street: Money Never Sleeps on Sunday. The movie was proof that, even if money itself doesn't sleep, movies about money can send you to sleep. Oliver Stone's take on the 2008 financial crisis was almost as bad as CNBC's original take. (And then we had to watch CNBC do it ALL OVER AGAIN in the movie.) Seeing non-financial types squirm over explaining credit default swaps and collateralized debt obligations does not amusing cinema make.I think whoever wrote the screenplay fell asleep trying to understand the nuances of a very complicated series of events and issues.
I loved the "A" story - Gordon Gekko gets out of prison, wants his money back so he can get back to raping and pillaging the idiots in this world. But somewhere along the line, the "B" story took over - mixed bunch of evil bankers (who the Hell was Josh Brolin supposed to be? He had John Thain's office, for sure) are....hmm. Doing what bankers do, which is not really movie material.
The "C" story - a love story between Gekko's daughter (the British Carey Mulligan was excellent as an American do-gooder) and the most-likely-to-be-killed-by-a-Disney-baddie Shia LeBeouf - took over and finished whatever promise the movie might have had. What is the point of Shia LeBeouf? He is not a great actor, his looks are odd (his nose could have been crafted for Mr. Potato Head dolls), and he is the least financial-looking type ever.
There were some good moments, however, most of which involved Michael Douglas. His Gordon Gekko character was intact, if weathered. Josh Brolin was all smooth looks and evil smiles, which could have gone a lot further. Maybe if Brolin had played hedge fund honcho John Paulson, squaring off against Gekko to see who could short the credit market the furthest without going bankrupt, we would have had more action. And I would have stayed awake.

On Regulation and Real Estate

2010-09-30T08:03:00.000-04:00

Goldman Sachs is preparing another temper tantrum over regulation, this time it is threatening to quit Europe if the region comes down too heavily, according to today's FT.
The bank has already thrown some toys out of the pram in the U.S., leaking that it wants to spin off its prop trading arm well in advance of any Volcker Rule taking effect. (Although why anyone would pay GS for the privilege is beyond me, just hire the traders away!) Now CEO Lloyd Blankfein is predicting gloomily that mismatched regulation between the U.S., EU and other regions will cause banks to move. GS already booked some extra space in Zurich, but perhaps that is too close to Basel. The last thing GS wants is to have to responsibly manage its leverage.
Zurich is the next stop for many banks on the regulation underground. Escaping to Switzerland for tax purposes started a few years back and the trend has grown exponentially in the past two years as regulation in the EU looms. The U.K. is losing hedge funds and bank trading arms in droves. Geneva, arguably the most civilized and pleasant of Swiss banking centers, is overflowing with foreigners. The International School apparently has a long waiting list for entrants. Good rental accommodation is like gold dust, my sources tell me. Many bankers are leaving their families back home while they stay in hotels and try to find reasonable houses or flats to rent. And the rental rates are going through the roof.
If real estate speculation is your game (it is mine, although not on this scale), then Zurich and perhaps Zug and Basel might be good places to buy rental property. Singapore might be next.
However, it is my opinion that no one can escape the long arm of the regulators. Having a base in a lightly regulated country may help to avoid excessive taxation and perhaps even some capital requirement constraints for now. But when you go to do business in the U.S. and the U.K. or Europe, which you will, you might have your hand bitten off. I'd stick to real estate.

SEC Tries to CONTROL High Frequency Trading KAOS

2010-09-27T09:55:00.000-04:00

In the 1960's American sitcom Get Smart there were two opposing agencies - CONTROL and KAOS. At CONTROL you had The Chief, Maxwell Smart (Agent 86) and Agent 99 as the good guys. KAOS was the bad guys of course.
In today's seemingly perplexing world of electronic trading The Chief appears to be played by U.S. Senator Charles Schumer. The well-meaning but hapless Maxwell Smart is played by U.S. Securities and Exchange Commission Chairman Mary Schapiro. (The SEC staff can take turns as Agent 99.) KAOS is represented by high frequency and algorithmic trading.
The Chief (Schumer) made a strong suggestion (order) to regulators to get a grip on KAOS, by looking into slowing down some high-speed trading at times of market stress and investigating manipulative strategies including quote stuffing.
Agent 86 (Schapiro) got on the case and the investigation is underway (http://tinyurl.com/3yk6aou). One telling statement by Schapiro this week alluded to the algos that automate execution when she said that regulators need to decide whether they "are subject to appropriate rules and controls."
"An out-of-control algorithm not only can cause serious losses to the firm that uses it, it can also cause severe trading disruptions that harm market stability and shake investor confidence," Schapiro said in the statement. She added that the SEC will review market fragmentation and the role of dark pools of liquidity that fall outside the traditional market structure.
“High-frequency trading firms are subject to very little in the way of obligations,” Schapiro said at an event held by the Security Traders Association in Washington. “We will consider carefully whether these firms should be subject to an appropriate regulatory structure governing key aspects of their market behavior, including quoting and trading strategies.”
The SEC may also need to peer a little more closely into the market structure that preceded all of these issues. A third of TabbFORUM readers polled said that the Securities and Exchange Commission had something to do with the May 6 flash crash: 31% of respondents to the poll blamed the crash on Reg NMS. (Still, 29% said it was “something else." Cue Siegfried - the Vice President in charge of Public Relations and Terror at KAOS).
All of this investigating is good news, as long as moderation is the byword for resolution. If indeed your opinion is that HFT and algos are run by a shady KAOS-style cartel on Wall Street then the more controls the better. It is my opinion that KAOS-as-HFT is a figment of non-financial industry scaremongers, and that a lighter touch is needed.
CONTROL can best come out on top if it deploys the proper tools: pre-trade risk management and controls, real-time risk management, real-time market monitoring and surveillance. All of these will help to stop KAOS in its tracks before it has the chance to throw another bomb into the room (flash crash...get it?).

Right Conspiracy Theory, Wrong Conspiracy

2010-09-23T15:19:00.002-04:00

So I was right that the timing of the SEC's announcement that it was investigating Goldman Sachs for fraud in April was too convenient. I said at the time that the case was politically motivated due to the impending financial regulation bill vote. And it seems I was right about the timing, but wrong as to the real reason. Reuters reported that an SEC inspector called the timing of the SEC's case against Goldman Sachs suspicious, suggesting that the SEC used it to divert attention from some bad PR. A report that sharply criticized its probe into accused Ponzi schemer Allen Stanford was about to be released, and the SEC seemingly hastened to get the Goldman Sachs news out. According to Reuters: "The SEC filed civil fraud charges against Goldman in mid-April, the same day it released a watchdog report accusing the agency of mishandling an investigation into Stanford's alleged $7 billion Ponzi scheme."
We all know that the SEC has been late to the market monitoring game, and that many innocent investors have suffered as a consequence. Maybe the agency really did not have the power to stop fraudulent behavior in the past. So when I read today that Chairman Mary Schapiro is taking a hard look at high frequency trading, algorithmic order execution and dark pools I have to wonder why we keep hearing that litany. And why nothing has yet been achieved.
From Bloomberg today: "Robert Khuzami, the U.S. Securities and Exchange Commission’s top enforcement official, said the agency is gearing up to use new powers from recent legislation to crack down on Wall Street after being faulted for not pursuing executives’ misconduct." Let me know how that works out for 'ya Bob?

Time to Stop the Market Structure Madness

2010-08-25T07:29:00.000-04:00

According to some increasingly loud voices, the US equities market structure is a runaway train destined for an accident that will make the May 6th flash crash look like a fender bender. High frequency trading is getting unwanted attention ranging from bloggers and mainstream press to investment firms' newsletters. All are concerned that HFT is dangerous (might cause another flash crash) and unfair to retail investors.
A quarterly newsletter sent out by Baron Funds draws attention to Reg NMS and says shareholders have been harmed by its unintended consequences. In the newsletter Ronald Baron, CEO and CIO of Baron Funds, calls for HFT firms to adhere to "affirmative obligations" such as specialists have always had to do, and to eliminate co-location of servers at exchanges and other venues. He also wants HFT to be disallowed in the first and last 30 minutes of a trading day.
Last week Themis Trading went to the extreme and called for a ban on new market venues. “Most industry professionals generally agree that something in our current market structure caused May 6th and unless we get to the bottom of it, May 6th is more than likely to happen again,” said Themis co-founders Sal Arnuk and Joseph Saluzzi.
HFT supporters keep dragging out the increasingly impotent "adds liquidity" argument, even as revealing graphics from trade database development firm Nanex show that there are some not-quite-cricket practices such quote stuffing going on. (Quote stuffing is the practice of firing so many orders into the order book - in particular ticker symbols - that the market cannot possibly respond.) This is not liquidity, just the opposite.
The SEC's recommendation to form a consolidated audit trail to - at the very least - help do forensic investigations after a flash crash event is attracting a lot of wannabe technology vendors, but little other enthusiasm. Inside Market Data reported that the estimated $4 billion industry-wide costs required to build a consolidated audit trail ( with ongoing annual costs of around $2.1 billion) are too high and the 32-month implementation period far too long.
In the meantime, another new venue - this one for futures- is popping its head above the parapet. ELX says it is time for CME Group to let go of its virtual monopoly on US futures markets and the courts agreed, signalling the next explosion in new trading destinations. In Europe new MiFID rules may not help to bring that fragmented market time-bomb together, nor will they necessarily encourage liquidity. Worries about a flash crash there surface almost daily in the press.
Maybe it is time to say 'enough already! Stop the madness!' Themis thinks so: “In our US equity market place alone, we have in excess of 12 exchanges, as well as over 40 dark pools and ATS's. These market centers all operate by their own rules and have their own fee schedules. Given that the US equity market is more fragmented than ever, which is a direct and unintended consequence of Reg NMS, we question the wisdom of allowing even further fragmentation until our regulatory bodies have a firm understanding of precisely what went wrong on May 6th, as well as their having a firm understanding of all the newer nuances of our modern market structure, including the effects of various order types, co-location, and data feeds.”
In Europe the venues are also proliferating - exchanges include Bolsa de Madrid, Deutsche Börse Eurex, the London Stock Exchange, NYSE Euronext, and SIX Swiss Exchange. MTFs include BATS Europe, Chi-X, NASDAQ OMX Europe, NYSE Arca Europe, and Turquoise. Yikes. No one knows for sure what caused the flash crash, but fragmentation from new market structure is surely one of the culprits.
As blogger Steve Wunsch, of Wunsch Auction Associates, said in TABB Forum on August 10: "The flash crash is not difficult to explain, if one is willing to honestly look at it. But that wouldn’t suit the SEC, because the picture that emerges is one of the Commission having created an electronic Frankenstein that went berserk on May 6 with a suddenness and ferocity that only the SEC could have devised."
Reg NMS and MiFID and the resulting fragmentation of each marketplace are getting a bad rap, and it may be time for the SEC and European regulators to speed up their investigations. In the US, at least, the SEC continues to approve new equities trading destinations and more are entering the approval process regularly.
Inside Market Data asks how much an orderly market is worth: "Those who believe lightning never strikes the same place twice might say the benefits aren’t worth the cost. But lightning always strikes again somewhere, and—as the saying goes—those who don’t learn from the past are doomed to repeat it."
Until there is an audit trail, along with monitoring and surveillance technology, deployed to all destination venues and controlled by the regulators, HFT and algorithmic trading will remain the skunks at the garden party. I wonder if more draconian measures are not imminent.

One Man's Meat is Another Man's Poison

2010-08-18T10:15:00.000-04:00

As algorithms in US markets chug away - cheerfully gaming each other and quote stuffing - two men in Norway have been arrested for doing something very similar. According to Zerohedge, day traders Svend Egil Larsen and Peder Veiby face up to six years in jail, for reverse engineering a stock trading algorithm used by broker Timber Hill, which is Interactive Brokers' key market maker. They found a weakness in it and took advantage of it to (allegedly) artificially inflate the share price of three companies listed on the Oslo Stock Exchange.
That Norwegian regulators have taken a hard line on this sort of activity is interesting, especially as here in the US the regulators have not even begun to drill down into high frequency trading practices. While HFT and quote-stuffing algorithms are widely believed to have caused the market meltdown of May 6th, little has been done to try and rein in dodgy practices.
A global body of regulator, the International Organization of Securities Commissions (IOSCO), is also concerned. It proposes tougher guidelines to monitor high-speed traders - particularly those with direct market access to exchanges. Calling it "direct electronic access", IOSCO says that securities markets should be monitored for risky practices both before and after their trades are made. This is not a novel idea, the SEC is also proposing that brokers deploy pre-trade risk controls for their DMA or naked access clients. Brokers, and their clients, are not impressed with this idea because it could add a latency "hop" of maybe milliseconds to their trades.
But given that almost 40$ of trades in US stock markets is via naked access, it is time someone took action. Another flash crash is lurking, and fat fingers or outright fraudulent trades can set it off far too easily. The SEC has to get off the pot.

Let's All go to the Lobby

2010-07-29T10:29:00.000-04:00

Show's over folks. Financial regulation has passed and been signed by President Obama. Basel III has had its teeth removed and its testicles cut off by the usual lobbyist-armed suspects. The (seemingly stress-free) stress tests for European banks have been and gone, with anxiety over European sovereign debt on hold until the summer holidays are over. And Tony Hayward has been banished to Siberia just as BP's gusher in the Gulf is about to be sealed. Time to head for the lobby for a snack and to wait for previews of things to come.
Summer is the silly season in Europe, when the Brits, French, Germans and Italians head for the beaches. Those who stay in the nearly-deserted cities think up fun things to do like sailing regattas, horse racing or polo matches to keep them occupied. Little gets accomplished in the business world in August, and everyone accepts that normalcy will resume in September.
But wait - in America the wheels keep on spinning. I was shocked when I moved here to see that major conferences, press briefings and cocktail parties were scheduled in August. A good PR in London knows that there if there is no one around to attend you don't throw a party. I, of course, do not attend anything in August. My mindset is stuck in summer mode and it would seem sacrilege to do 'real work' in August.
But, because the wheels of American commerce do keep spinning I have to keep up with the news. So it was that I found, buried within thinly disguised political crap-stirring, an article from Fox Business News. It said that the SEC is now allowed to withhold information about its goofs - I mean investigations. This was a little clause hidden within the new financial regulation bill, apparently. According to the New York Post: "A provision buried in the week-old law allows the Securities and Exchange Commission to deny any public request for information under the Freedom of Information Act, a time-honored tool that's exposed scores of scandals from Washington to Wall Street for the past 44 years."
Looking into it further the clause is said to strengthen an existing rule that enables the SEC to keep any information it receives from brokers and banks away from public access. Otherwise the brokers and banks wouldn't want to give the SEC anything. This makes sense. If your bank turns over confidential client trades to the regulator, Fox News (or I) should not be able to requisition those documents for a story. But we could, under the FOIA, so I wonder how many brokers and banks refused to turn over their records in the past.
After the May 6th flash crash it was obvious that the SEC and the CFTC were struggling to get the information necessary to investigate the causes. Was this because the industry participants were afraid of what would happen to them if they did? Clearly if a broker's client fat fingered a trade and the broker didn't catch it because it provides naked access then the broker would appear culpable. No broker wants the reputation of having loosey-goosey risk management practices. If a bank was 'making bets' against its clients' trading positions and it got caught by the SEC, then that bank would be very unhappy if it hit the press.
And now, with the inevitable deployment of some version of the Volcker Rule, if a broker dealer was running a book bigger than its client business required, it would be considered proprietary trading. Again, not something it wants anyone to know about.
If the SEC were staffed with highly experienced ex-traders, trading managers, risk managers and securities business lawyers I might have faith that they could sensitively handle these issues. To date, that has not been the case. Which leads me to believe that journalists probably should have the right to requisition relevant documents. I hate to agree with Fox News or the New York Post, but....

Hands Off my Mental Health

2010-07-15T07:59:00.000-04:00

The Economist Magazine reports this week that companies are no longer satisfied with coercing employees to get physically fit (mainly to save on insurance bills, not for any philanthropic reason) and are venturing into managing their mental health. Apparently this arises from "management gurus" who are discovering the "joys" of psychology. I have never held much stock in management gurus, and the idea that they might be dabbling in psychobabble scares me. Especially here in America, where you are measured by the size of your smile and the eagerness of your greeting.
Personally, I do not want to be surrounded by a bunch of perky cheerleader types at work (or at all). In my experience, they waste time with gossip and meetings and rarely achieve very much of note. In fact, the Economist's article states that "history shows that misfits have contributed far more to creativity than perky optimists". I agree. Some of the most productive sales people and traders I have worked with were also the grumpiest. They barked and growled and got on with the job, leaving the cheerful (and often overly sensitive) wannabes in the dust. On the other hand, when you got the grumpy ones on their own for a drink or a meeting they were civil, informative and good fun.
Some of the worst time wasters I have known were the friendliest, chattiest people who wanted nothing more than to bend everyone's ears at meeting after meeting. Even now as a freelancer working from home I am often interrupted by bored fellow home-workers who want to wane away hours at the local coffee house gabbing. They can never understand why I am "always working".
So next time you see a grouchy curmudgeon at work, leave them alone to do their jobs. Do not bring in a psychologist or a management guru with a 'certificate' in pop psychology to examine their mental health. Instead be grateful that they are productive, hard-working employees.

Wall Street 1, Main Street nil

2010-07-02T06:14:00.000-04:00

If ever there had been any question as to who runs the United States, it has been answered. Wall Street has once again run roughshod over Washington and Main Street by pulling the teeth out of the financial regulation bill, one by one.
The pressure from banks, hedge funds, lobbyists, CNBC, talk show hosts, and - it seems - the markets (which tend to puke conveniently whenever 'finreg' looms) wore Washington down. Although the bill made it through the House, the Senate now wants to sit on it and percolate (i.e. find a way to squirm out of more stuff) for a few extra days.
Standing up to Wall Street takes real guts. So it makes sense that the bill did not touch upon one of the biggest culprits in the financial crisis - bankers' compensation. That is a hornet's nest that even the bravest reformers dared not tackle. And it will be a miracle if the Volcker Rule makes it through unscathed.
The latest victory for the bulge bracket was to strong-arm Congress and the House to remove the $150bn bank levy, as well as the $19bn tax on large banks and hedge funds. The deciding voter, Massachusetts Senator Scott Brown, crumbled under pressure from his Republican leaders (presumably also from the not-insubstantial financial services constituency in Boston) causing him to flip-flop like a pro.
I am not saying that the levy or the tax, intended to help fund the next crisis, were great ideas. They were more of a sop to shut up protesters who didn't want another taxpayer-funded bailout. But these same protesters don't want banks to have to hold higher capital reserves to help cover their own losses, claiming this will stop them from lending to "Main Street".
Had anyone on Capitol Hill been reading the business press, they would have known ages ago that capital requirements are poised to become more stringent anyway due to Basel III. Capital reserves will be raised regardless of Wall Street's weeping and wailing and gnashing of teeth. (The Swiss are not known for bowing under pressure, especially from nosy Americans which want them to reveal their banking secrets.)
The time that passed since the crux of the crisis and the drafting of the bill dulled the urgency needed to propel the stiffer rules forward. The only fly in that ointment was the flash crash on May 6th, which threatened to derail the banks' anti-regulation rally. The violent moves brought Wall Street and high frequency trading back into the headlines and questions again arose about reckless trading practices.
Luckily for the banks the flash crash is now nearly forgotten by almost everyone except the SEC and CFTC, who are still scratching their heads as to how to do the forensics. The panacea of circuit breakers seems to have satisfied politicians enough that they can once again canoodle with their Wall Street lobbyists.
That circuit breakers were not mandated market-wide across ECNs and exchanges from the onset of Reg NMS is the mystery. Many blame the regulators for being asleep at the wheel, with the excuse that they have no money hence cannot hire the necessary expertise.
One contact at an exchange calls the new market structure "a monster created by Wall Street and Washington", who did not realize - or ignored - the repercussions. He believes that the regulators have no money and no teeth by design - to benefit a very influential constituency, i.e. Wall Street. Banks were behind the formulation of many ECNs, after all. And they pushed the exchanges to embrace automated trading and decimalization, so that their algorithms could do their work - making money and obfuscating regulators.
As Michael Lewis said in his column for Bloomberg: "The oath of the Financial Crisis Inquiry Commission, is: 'We pledge to find out, by the year 2050, what exactly happened on Wall Street in the early part of this century. We pledge to reform Wall Street. Or, failing that, to be taken seriously. Or, at a bare minimum, to attract a bit of media'."
Media attention it got. Results, not so much.

The Words "Can" and "Worms" Come to Mind

2010-06-25T13:03:00.001-04:00

The U.S. financial regulation reform bill (called 'finreg' for reasons I don't care to know) seems to be all over bar the shouting, which of course began immediately on CNBC on Friday morning. The crux of criticism appears to be that the banks will - GASP - have to retain enough capital to cover their own losses in future. (Have they not heard of Basel II or III?)
The more draconian rules that impact capital markets players - with regards to proprietary trading, hedge funds and swaps trading - were greatly watered down in order to get a deal through. The Volcker Rule was shaved to allow banks to continue to invest in private equity and hedge funds, albeit on a very limited basis. But it is far from its Glass-Steagall roots.
Vanilla over-the-counter derivatives will be required to trade on exchanges and to be cleared, with bespoke OTC having to report central repositories. There are new margin and capital requirements. And banks will only have to spin off some of their riskier derivatives into subsidiary companies, leaving interest-rate and FX swaps in-house. No major surprises.
Which begs the question, was it worth all the trouble? I think it was - and it wasn't.
I like the fact that the big banks, hedge funds and prop trading firms are now aware that they are being watched. The days of free market for all, and damn the torpedoes full speed ahead, are over. The regulators will pick up the ball once the bill is signed into law, and - in theory - will understand how to make the rules stick. (This of course depends upon whether they stop acting like government employees, i.e. not just surfing naughty websites while their pensions mature).
I don't like the fragmentation that spinning off affiliates for swaps and OTC trading will create. Risk managers will have a nightmare trying to gauge risk and maximize capital across not just asset class silos in-house, but across subsidiary companies that are taking large positions.
It could be that the new regulations open up many new cans of worms. I feel certain that the banks and big trading companies are already figuring out how to game the new rules, that is what they do after all. There are always new opportunities to be found with new regulations. At the SIFMA conference a group of analysts discussing the impact of financial regulation on technology mentioned one.
If derivatives are to be more widely traded on exchanges, they will be eligible for high frequency and algorithmic trading. This means the margins will shrink (it is already happening with energy futures, a major oil company tells me), as will profits. Transparency does not come without costs. This means players will have to create more complicated bilateral OTC deals in order to make money. Or move away from the U.S.. My bet is that both will happen.

SIFMA and the World Cup

2010-06-24T06:57:00.001-04:00

I just returned from the Securities Industry and Futures Market Association's Financial Services Technology conference and exhibition in New York City. There were a record number of registrants, a SIFMA rep told me 9,000 people signed up, which was a very good sign (last year was dire - maybe 5,000 I'd guess). The stands were busy, if still more sparse than before the financial crisis, and the parties were packed with Europeans as well as Americans. That is the good news.
The bad news is that on Wednesday, when the U.S. was playing in the World Cup against Algeria and England was playing Slovenia, there were only two or three screens airing the matches. At the Bloomberg stand, one of the sales guys had tracked down a free streaming TV service and had the U.S. match in a tiny corner of the screen. Downstairs in a 'pub' set for a vendor there was an actual TV screen and probably 50 people crammed in around it. I mentioned it to some other vendors who all said that they didn't want to pay the Hilton for internet service at the conference, it was too expensive. And too slow. Therefore nearly everyone had canned demos at their stands.
Now I realize that the SIFMA technology exhibition is mainly attended by swotty geeks (I count myself as one, so please do not take offense). And the U.S. is only just beginning to take notice of football, i.e. soccer. So the fact that not many people were interested in the World Cup is fair enough.
But the fact that the foremost technology exhibition in the world, with big name vendors from IBM to Bank of America, cannot provide even the most basic technology to its exhibitors is not understandable. It is downright ridiculous. (And, by the way, Verizon was exhibiting - hellooo...)Vendors pay a lot of money to exhibit at this conference, and if they want to display the World Cup at their stands or show their clients something live online they should be able to.
So, vendors - take a stand. Tell the Hilton and SIFMA that you are mad as Hell and are not going to take it anymore. Demand connectivity for free (or at least cheap). If SIFMA wants the industry to crawl back to normalcy, it really ought to provide it with the necessary tools.

Crisis, Drama then Reform

2010-06-16T06:47:00.000-04:00

In the 1980s, insurance company Commercial Union had a very catchy tagline: "We won't make a drama out of a crisis." This phrase could be turned around for the ongoing financial markets disaster, because much drama has been made from this crisis. And out of drama comes reform.
Change comes when big drivers - i.e. crises - force the industry to address its issues. The Enron debacle gave us the Sarbanes Oxley Act, global terrorism and 9/11 spawned Know Your Customer and anti-money laundering initiatives. Now the meltdown of 2008 is about to be rewarded with comprehensive financial regulatory reform. And BP's massive oil spill in the US Gulf is going to be the game-changer for oil drilling regulation (maybe even climate change).
As with most painful events, once the drama fades the will to punish the wrongdoers often weakens. In the run-up to the two financial regulation bills - one from the House and one from the Senate - resolve appeared to be wilting. Unrelenting pressure from an army of lobbyists for the financial services industry seemed to be making progress.
Fierce lobbying seemed to stiffen the resolve of politicians instead. Now as the bills go to a committee to find middle ground, much of what is irking Wall Street may come to pass. The Wall Street Journal reported on Tuesday that many lobbyists are now being turned away, with many being told their bank's views are already well known (imagine that!).
The Volcker Rule, once considered the most over-reaching solution possible by financial institutions, now looks certain to be included. The banks shrugged and turned their drama queen act toward Senator Blanch Lincoln's more draconian derivatives legislation. Although this one is losing momentum, with some softening indicated, it is still likely to be part of the overall package. Proposed regulation of ratings agencies (who practically minted the term 'conflict of interest') seems to be falling off the radar, however.
Whatever regulation gets through will have to be finessed and managed by the SEC and CFTC in the future. This is a task they were not up to previously. But again, perhaps lessons are being learned. According to the Washington Post, the SEC is hiring experts with specialized quantitative skills or have worked on Wall Street, thus will have a better insight of the markets they regulate.
But as regulators learn, financial institutions learn faster. They gird their loins by hiring better lawyers or even SEC executives. The secretive high frequency trading company Getco hired Elizabeth King from the SEC, she was a key associate in charge of crafting rules for the equity and option markets. Last year Goldman Sachs hired Arthur Levitt Jr., the former chairman of the SEC, to advise the bank on public policy issues. (Although this year Goldman Sachs had to hire legal gun Gregory Craig, President Obama's former legal counsel, to help fight a civil suit brought by the SEC.)
Maybe now that the last financial crisis is on its slow, bumpy way to normalcy and the drama is fading, the regulators can get on with their work and prevent the next crisis. We can only hope that the regulators will have the wherewithal to hire the right experts, buy the right monitoring technology and the power to demand the transparency needed to make sure they know what is going on. Next stop - oil drilling regulation.

A Potted History of BP Trading

2010-06-02T07:22:00.001-04:00

Joke: Why did the bumblebee fly with his legs crossed? He was looking for a bee pee station!
The first time I heard of BP was when it installed a gas station on the corner near my high school in Bath, Maine. BP was largely unknown in New England in the 1970's. Unlike today.
Fast forward from high school to my first real job in London in 1981, where I was reporting on oil prices for Platt's (a McGraw-Hill company, now under the Standard and Poor's umbrella). I would speak daily to the oil trading offshoot of BP, known as BP Amro. The traders were located in the Hague in Holland, for some reason. They soon moved to London, where the action was. (Albeit to the City - where only dusty financial types lingered. The real action was in the West End where Vitol, Vanol, Marc Rich, etc. worked and played.) From the beginning, I saw that BP traders were different from the rest. For a start they all seemed to have northern or Scottish accents. (The accent norm in the oil business in London at that time was wide-boy Essex or Kent.) I'm told that is because BP recruited engineers, who were mainly educated at Sheffield University near Manchester. They were more like barroom brawlers than oil traders. In an industry where heavy drinking was practically a requirement, the BP boys put everyone else to shame. There was a pub under their City offices to which most of the trading desk (or bench as they insisted on calling it) would decamp for the afternoon. This was before cellphones, so there were dedicated phone lines behind the bar so that they wouldn't miss a deal. Because underneath the fug of smoke and beer, there were some pretty sharp traders. Maybe it was the northern stubborn streak, but once they had a mind to do a deal they did it. Corners were cut if necessary, and lies were told. But, hey - that was part of the business. My sources tell me that BP's trading desk was and still is the most successful of any oil company. It also had a reputation for being a skinflint. Salaries were pathetic and there were no real bonuses at the time. Then after losing trader upon trader to Phibro or Vitol, BP started to pay its traders properly, and to reward them with decent bonuses. It realized that training someone from college all the way to the trading desk, only to lose them a year later, was perhaps more expensive than rewarding them in relationship to industry standards.
Besides the skinflint reputation, there also a whiff of the bully about the company. The traders often turned violent after bouts of drinking. The BP Curry, a legendary 'lunch' party at the end of the annual Institute of Petroleum Week, would usually end in fisticuffs. Sometimes these even involved journalists, and one of my old reporters got pounded a few times. (He was a stickler for the truth, so perhaps it was not the industry for him.) BP's Chicago trading office still takes 2 hour pub breaks at lunchtime, my sources tell me, something that is rather unusual in the US - even for Brits living here. But the money was piling in, and no one at BP cared too much about what the outside world thought of them.
Then, in 1987 BP's Grangemouth refinery started showing some cracks. A fire was followed days later by a hydrocracker explosion. It was so powerful that, according to a friend who worked there, a farmer on his tractor a mile away was blown into the air - with his tractor. He survived, but two BP fitters did not. Grangemouth continued to deteriorate and in 2000 suffered several incidents including a major catalytic cracker fire, despite continued warnings about possible safety violations from the Health and Safety Executive. A fire at its US Texas City refinery in 2005 killed 15 people. BP was beginning to get a bad rep for safety. Many fines later, the deepwater oil rig in the Gulf blew.
I am not trying to pass judgment on BP. It was and is a fine oil company, and I have many friends who have passed through its doors. I do wonder, though, if in the pursuit of profits perhaps too many corners were cut.

Push-me Pull-you

2010-05-17T06:43:00.002-04:00

Europe and the United States are locked in competition to see who can pass the strictest new financial regulations first. Each believes that if it is first, the other will have to harmonize their rules behind it. Both could be wrong about that, but it looks like Europe will win the blue ribbon for first place in the regulation race.
Angela Merkel and Nicolas Sarkozy are throwing their weight behind the European Commission's hedge fund regulation known as the Alternative Investment Fund Managers directive. The AIFM is causing consternation from the US and other non-resident hedge funds which, if it passes, may not be allowed to do business in Europe. Many EU leaders actually believe that hedge funds are the reason their countries have become destabilized. And it looks like AIFM will pass on Tuesday, leaving US hedge funds to swing in the wind.
Meanwhile, the US Senate is debating the finer points of (read: pretending to understand) Chris Dodd's financial regulation bill. It rejected Ben Bernanke's and Wall Street's pleas to loosen derivatives trading rules, including keeping in there Sen. Blanche Lincoln's proposal to hive off swaps and derivatives from banks altogether.
And Paul Volcker is running around Europe touting the virtues of his prop trading rule, which he is absolutely convinced will pass. (I agree that the odds for the Volcker Rule passing are pretty good. The Volcker Rule makes its presence known in almost every discussion on how to regulate the TBTF banks. His reasoning is solid, saying that when commercial banks venture into capital markets functions their risks grow too high.)
So we have a regulatory first-mover stand-off, but the focus of these regulations makes me wonder if they are missing something. None of the immediately visible rules - regulating hedge funds, separating derivatives or prop trading from banking, clearing derivatives, smacking down credit ratings agencies - will do the first thing to prevent another market structure bump like the one on May 6th.
The US market has become so terribly fragmented that no one seems to know who is doing what and where, and under which rules. Regulators are running around like lunatics trying to figure out what happened on May 6th, while exchanges are tearing up their databases trying to see who did what and when. What is lacking is market-wide oversight, monitoring and - most importantly - transparency. I hope that some of the new rules and regulations we are about to have will help to pave the way toward this. The good news is that US exchanges, ECNs and regulators are experienced at cooperation.
These are still untested waters in Europe, which can barely deal with common currency issues. Fragmentation in European exchanges, ECNs, clearing houses, and regulators is becoming a major concern. I fear a flash crash in European markets is the next shoe to drop, and it will be faster and more severe than anything we have seen in the US to date.

Tipping point for high frequency trading

2010-05-07T12:16:00.001-04:00

Although a trading error may have been to blame for the domino effect that knocked the Dow Jones Industrial Average down by almost 1,000 points on Thursday, May 6 it highlighted the damage that high frequency trading can inflict in the blink of an eye. It also proved the fragility of the post-Reg NMS market framework, and proves the need for government mandated pre-trade risk management, market surveillance and monitoring.
'Greek Thursday' - as I have dubbed it - could be the tipping point for HFT. Regulators are poised to decide upon new controls for high speed markets, and Greek Thursday might just be the clarification they needed. Here are some of the lessons that could be learned from the experience.
1. Pre-trade risk management is a necessity. Fat fingered errors are absolutely avoidable. Using pre-trade risk management tools would prevent fat fingered errors and/or breaching trade limits. That trading firms do not use them is unbelievable.
2. Smart order routing can also be stupid order routing. Many algorithms are designed to 'find and nail' liquidity, no matter where it rests or what the price. You must monitor and manage your algorithms in real-time.
3. All exchanges and ECNs should have to take a break when markets are volatile. If an exchange such as NYSE institutes a trading pause due to volatility, your order routing can go to a venue where liquidity is less than desirable, and prices are downright miserable.
4. Orders should be tagged. Whether an order comes through from an algorithm or a sales trader or broker, it should have an electronic tag so that when regulators/exchanges/ECNs see an error they know where it came from and can respond accordingly.
5. Real-time market monitoring is a necessity. Electronic trading means that crashes such as that on Greek Thursday can happen in an instant. If a trading anomaly is spotted in real-time, preventive measures could be taken.
Days like Greek Thursday could repel retail or institutional investment - the very money the industry has been trying to lure back into the stock markets. When prices started to collapse on Thursday, it became all too clear that everyone was on the same side - bearish. Algorithmic players had their pants taken down and their positions exposed to the world yesterday. This hardly builds confidence.

Oil and Water

2010-05-03T13:47:00.000-04:00

You would not think there was as much in common between the oil industry and the OTC derivatives markets; they look about as similar as oil and water. Oil is the substance upon which this country runs its cars (and trucks, SUVs, RVs, ATVs, speedboats....), heats its homes and runs its factories. Derivatives are complex instruments that are (usually) derived from underlying trading instruments or exchange-traded contracts. Yet both have made the news lately for the same reason - they proved they can be dangerous weapons when in the wrong hands.
The oil leak offshore in the Gulf of Mexico is happening because the oil lobby is one of the most powerful in the US and has spent decades bribing politicians to allow more and more exploration. The mouthpiece of the oil industry, the American Petroleum Institute, is the official pooh-pooher when it comes to subjects such as over-consumption, pollution, global climate change. It spends millions every year saying how safe it is - how good for the economy - to drill, to refine, and to use oil.
The lobbyists for the financial services industry are also extremely powerful. There are reportedly four financial industry lobbyists for each politician in the house and the senate. The U.S. Chamber of Commerce, an anti-regulation group, reported spending $30.9 million on lobbying in the last three months, much of it on financial regulation, with major industrial and other corporations weighing in too, said the Global Association of Risk Professionals in an article. These lobbyists and the line that they feed the politicians ('regulation will kill this business') have helped to keep the lid on financial regulation since Glass-Steagall was abolished in 1999.
So, when you see the oil spill headed for the Gulf coast and wonder 'how can this happen?', picture a herd of lobbyists marshalled to head for Washington, DC (beautiful image courtesy of Larry Tabb) armed with tens of millions of dollars. Picture the heads of these oil companies looking at their bottom line each year, trying to figure out how to make more for their shareholders. (There is really only one way - exploration and development, the rest is pocket change comparatively.) Remember hearing Sarah Palin screeching in her fingernails-on-a-blackboard voice that we need to 'drill, baby, drill.' Think of the pristine coastline of Norway and ask yourself whether that country would allow drilling if it did not have a disaster prevention/recovery plan in place. (It has an exhaustive plan.)
And when you hear anti-derivatives legislation voices raised from Washington (again with the 'regulation will kill this business', yeesh), remember where they are coming from. Wall Street's army of lawyers and lobbyists and even Warren Buffett. Yes, OTC derivatives regulation will cost them money. It will cost them capital. It will shrink profit margins. Boo hoo.
When you hear anti-regulation voices raised in the oil industry, much of the general public used to echo them. After all, who wants to pay $5.00 a gallon for gasoline? Why can't we drill and drill and drill until our oil is all-American, all the time (impossible, but hey why let the facts get in the way of a cause)? In the next couple of days you will see why we can't - when you turn on the TV. There will be birds and beaches and fish covered in oil, and livelihoods lost to the black gold.
Somehow in the pursuit of free markets, the interests of the few became paramount. The ones with the most lobbyists and the most money won, time and again. Because the politicians, who seemingly know nothing about anything, went along with it for their own self-interests (re-election). And now these same politicians are angry. They have been duped. They want blood. And both industries, oil and derivatives, will get their comeuppance in the form of draconian regulation. Free market proponents need to wake up and realize that free isn't always without cost.

Fiddling While America Burned?

2010-04-27T16:57:00.002-04:00

Goldman Sachs is a trading company. It was set up to be a trading company and it remains a trading company. It goes long and short to make money, takes risks and mostly manages them pretty well. When the sub-prime damages began to be tallied in 2008, GS came out OK because it had shorted the market. Bravo, everyone said. Clever boys!
Then Washington finally got around to digging into the whole mess, and lit upon GS like a duck on a Junebug. Cries of "trading against The American People" rang throughout the country. Outrage ensued. Butts were hauled in front of a senate panel yesterday to explain why they were net short the mortgage market.
For several grueling hours in front of the panel, the poor mugs from Goldman Sachs' mortgage-backed market making desk tried in vain to explain how markets work. Although it was clear that Goldman Sachs' lawyers briefed their clients well, they were no match for the irate - if often ill informed - questioners. In the end, they had to answer some of the questions. (And Fabulous Fab, cool as 'le concombre', was the most forthright.)
But, as my Mum always told me, when someone criticizes you maybe they should take a look in the mirror. The senate is bashing a trading company (turned investment bank) for packaging, selling and buying instruments that the government itself allowed - even encouraged - to exist. There were no regulators screaming about sub-prime mortgages until it was too late. "Free markets" was the term bandied about with absolute certainty during the years after Glass-Steagall's demise.
After the dot com bubble burst, the government was thrilled to have a new bubble to take people's mind off it. The housing market. The similarities are remarkable. When I started writing about dealing room technology in 1999, there were over 1,200 companies in London that were on my 'talk to' list. After the dot com bubble burst, there were about 12. Before the bubble burst, I remember hearing people say it would never end. That technology stocks would go up and up forever. They didn't, of course.
When I moved to the US in 2003, it was clear to me that the housing market was overheated. But everyone kept saying it would never go down. Look at all the Baby Boomers that have to buy retirement property or second homes, they said. Even the most sophisticated investors believed it, clearly. Five years later, the market collapsed. And the traders that were taking advantage of people's naiveté were both buying and selling instruments based on the very mortgages the government had encouraged.
GS happened to be net short at the time. Whether by design or by accident, GS was not fiddling while America burned. It was simply trading. Today Goldman Sachs must be wondering whatever possessed it to get into investment banking. And to go public with an IPO. I would be absolutely astonished if the powers-that-be at Goldman Sachs were not currently investigating the quickest path back to partnership.

Regulating OTC derivatives will take more than clearing

2010-04-25T10:38:00.000-04:00

I tend to be a pro-regulation kind of person. I agreed with President Obama when he said last week that a free market was not supposed to mean free license to take whatever you can get, however you can get it. (Clearly he has not met many traders.)
But the recent hue and cry over OTC derivatives regulation is beginning to annoy me. It appears to be a battle between clearing houses, which stand to gain a LOT if the bulk of derivs have to be cleared, and derivatives traders, which stand to have to PAY a lot (and maybe stop inventing stuff that can't be cleared).
I do believe that OTC derivatives need regulating, and not just because they have attracted a lot of unwanted attention recently. Credit default swaps were one of the culprits often blamed for the credit crisis and for bringing Greece to its knees. And CDOs made the mainstream press (for probably the first time) after one of Goldman Sachs' CDOs was fingered by the SEC last week.
Warren Buffett was right to call them "financial weapons of mass destruction" seven years ago. Not because of the instruments themselves, but because of their enormous growth rate and lack of transparency. CDS took off at light speed: when the International Swaps and Derivatives Association began surveying volumes in 2001, CDS volumes were $631.5 billion. At the end of 2007, 8 months before the credit crisis exploded, they had reached an unbelievable $62 trillion. (Can that really be 9,999% growth? Geeks, please help.)
Processing them was a tedious and mostly manual effort, and was falling so far behind that if anyone defaulted it sometimes took months to figure out who was owed what. But, while a heroic effort by ISDA and an industry working group automated the processing as best they could, the risk associated with CDS and other OTC derivatives was soaring.
Think about it. In the late 1990s/early 2000s traders were still using Black Scholes models and (mainly) individual spreadsheets to calculate their positions. Risk management was a back-of-the-envelope process for the most part, or was partially manual with clerks entering trades into one of the new-to-market risk solutions.
When the enterprise software boom took hold pre- Y2K, major investment banks had to migrate thousands upon thousands of these spreadsheets onto internal platforms. Risk management systems were asset class related therefore risk was managed in silo fashion, with little cross pollination. In the meantime, banks, traders and quants were breeding new instruments like flies. Risk was bubbling furiously under the surface and no one knew it.
Technology is catching up with OTC derivatives, but simply throwing clearing at them will not solve the problems. Complex instruments need to be automated and risk systems must make the downside more transparent, using strenuous stress testing under doomsday/Black Swan scenarios. Capital requirements should go hand-in-hand with the stress testing, i.e. if the worst should happen there is enough money in the bank to pay the bill.
Mandating that OTC derivatives go through the clearing process is a step toward transparency, true. But I worry that the clearing houses themselves are biting off more than they can chew. How many can handle trades that have the potential to double each year in volume?
Also, I know the beast (trading firms), and they will figure out ways to get around it.

Timing is Everything

2010-04-16T14:12:00.000-04:00

As the storm clouds gathered over Washington, D.C. in the run up to the battle over financial regulatory reform, a little ray of sunshine peeked out and shone on President Obama and his band of reformers. The SEC nailed the Big Kahuna, the Vampire Squid, the biggest swinging Mickey of them all for fraud - Goldman Sachs.

The beauty in this is in the timing of the announcement - a ringing endorsement for regulation and oversight on the virtual eve of the battle to get the reform bill through Congress. It is difficult to tell your constituents that you are voting against financial reform when they can read in the papers that yet another bank was involved with fraud. It also dovetails nicely with the SEC's quest for additional funding.

The charge against Goldman is, of course, serious. A GS vice president (a Frenchman - perhaps channelling Jerome Kerviel?) structured a sub-prime portfolio on hedge fund giant Paulson & Co's advice, which Paulson then promptly shorted against. The bottom line is, however, not so serious. GS will get slapped with a fine and might have to make some of the investors whole, but that is chicken feed for the bank. (If it remains a civil crime that is. If the Department of Justice gets involved, it might open a different can of worms.)

Paulson comes out of it looking less like the genius that predicted (and cashed in on) the financial crisis and more like a criminal mastermind who found a willing patsy. The hedge fund shows the world exactly how far some of them will go to make the returns their wealthy clients demand. (Which reinforces the regulation of hedge funds too.)

Goldman's Fabrice Tourre (who called himself "Fab" in an email) comes out looking like a sap. I wonder how much Goldman could have been paying him if he was that motivated to break the law. I guess keeping up with the Joneses in Tribeca is a seriously expensive endeavor.

Nabbing Goldman Sachs is a shot across the bow to those Congressmen who thought the regulations we had worked "jus' fahhhn." They did not. But Congressmen are under almost unprecedented pressure from Wall Street lobbyists. There are reportedly four financial industry lobbyists for each politician in the house and the senate. Larry Summers said in an interview that the lobbyists were spending on average $1 million per Congressman.

The crux of the matter is capitalization. Capital requirements have to be raised in order for Wall Street to be able to bail itself out next time. The trouble is, Wall Street does not want to waste good trading money by keeping it in the bank (especially if they pay themselves the same crappy savings rates the banks pay us).

So those Congressmen on the Wall Street side might have to step into the middle of the road before the upcoming vote. Their constituents may be able to see the picture a little bit more clearly now. The government gave Wall Street a bucket load of money, which was spun into golden bonuses. For Wall Street. And all the while it was smiling and nodding and "Three Bags Full"-ing, and continuing to rip the faces off investors.

Critics of the financial reform bill are already screaming that you can't legislate against fraud. That may well be. But you CAN find the fraudsters and nail them as long as the regulators have the authority and the tools to do so. The SEC is doing better all the time, but it remains seriously underfunded. It has a big hill to climb and one showcase conviction is not enough.

It Was Like That When I Got Here

2010-04-09T07:13:00.001-04:00

The headlines in the financial press lately sound like a litany of Homer Simpson's three little sentences that will get you through life:

Number 1: Cover for me. (Citigroup to - allegedly - Oliver Wyman for recommending it enter into structured finance).
Number 2: Oh, good idea, Boss! (Alan Greenspan on how Congress would not have let him put the brakes on the housing bubble.)
Number 3: It was like that when I got here. (Robert Rubin testifying to Congress about his time at Citigroup. )
I'd like to add my own little sentence to Homer's:
Number 4: "Everyone does it." (Repo 105.)

Citi entered into collateralized debt obligations for the same reason every other bank did - because everyone was making money on them. So what if a consultancy produced a study that showed that CDOs were as harmless as fluffy clouds and could make a shed-load of money? Shouldn't the bank have done a little due diligence before jumping in? Blaming (allegedly) Oliver Wyman is shooting the messenger.

Alan Greenspan - had he read the foreign press - should have known full well that the US government was creating a housing bubble to replace the burst dot-com bubble. Money had to go out of consumers' pockets one way or another in order to support the economy. Buying and fixing up houses is one very efficient way to spend a lot of money. He is right not to allow Congress to throw him under the bus, but he should have been a lot tougher with them at the time. If indeed he suspected there was an issue.

Robert Rubin, became a 'senior advisor' at Citi after he had systematically dismantled Glass-Steagall, which gave Citi and others the chance to dabble in investment banking (read: trading). After receiving over $125 million in total over 8 years to 'advise' Citi, he told Congress that he was not responsible for looking at Citi's activities with any real 'granularity'. Eek. What exactly was he looking at then? (He could also be compared to Sergeant Schultz in Hogan's Heroes: "I know nothing! Nothing!" )

The Wall Street Journal on April 8th reported that most of the major investment banks had masked their debt levels, hence risk exposure, by using repos. Shock, horror in the financial press. How could this have happened without us knowing? Hellooooo. End-of-year balancing is rife for trading companies, whether they use repos or stuff things off-balance-sheet or roll positions forward. One way or another they will boost the coffers for bonus calculation. (Haven't they ever met a trader?)

Whatever happened to accountability?

BTW, Goldman Sachs is channelling Lisa Simpson instead of Homer. Accused of 'betting against its own clients' it stood firm in its annual report by defending what it did as normal trading practices and hedging. Which is true. But a few clients might have stepped in the way when they shouldn't have and got burnt.
As Lisa said: "You can't create a monster, then whine when it stomps on a few buildings."

Parlez Vous la Regulation?

2010-04-01T11:53:00.002-04:00

You know you are doing something very wrong in the global financial arena when the French have to tell you how to fix it. France is not exactly a powerhouse in financial markets, despite its attempt to lure investment banks and funds from London to La Defense. Yet the vertically-challenged Nicolas Sarkozy came to Washington this week and let it be known that the United States is not doing its part to reform regulation. Hinting strongly that Washington cannot run the world on its own, he urged the Obama administration to work closely with France and the G20 in regulation reform.

Meanwhile a senator from that Mecca of financial markets - Tennessee - has thrown his toys out of the pram and is threatening to jeopardize reform. According to the Wall Street Journal, Republican Senator Bob Corker said Tuesday he "absolutely cannot support" a bill written by Senate Democrats to overhaul financial regulations unless changes are made. (He is clearly not a "corker" in the English slang sense - i.e. an excellent and outstanding thing or person.)

I wonder if Senator Corker ever reads the financial press. If so, he might have come across reports yesterday on the real cost of the financial crisis. Speaking at the Institute of Regulation & Risk, North Asia (IRRNA), in Hong Kong this week, Andrew Haldane - the succinctly titled executive director for financial stability at the Bank of England - called the banking industry a 'pollutant' where systemic risk is the byproduct.

Them's fightin' words to U.S Republicans, seemingly bent on supporting the banks in their quest to dominate the world - unfettered by rules and regulations. This shot across the bow was accompanied by a breakdown of the actual cost of the crisis, or "the $100 billion dollar question."

According to Haldane, the approximate outright cost to the US government (and taxpayers) of the financial crisis was about $100 billion. So far, so what? This is less than 1% of GDP. The kicker here is that, as a result of the crisis, world output in 2009 "is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis," said Haldane. To the tune of output losses of $4 trillion in the US alone. Moreover, he said that some of these GDP losses are expected to persist and may even be permanent. If this is the case then the $4 trillion will be an understatement.

Doing nothing is not an option - $4 trillion is not chicken feed and if it were to happen again I fear financial Armageddon..... Republican naysayers will have to pitch in with concrete ideas that support financial markets reform. Otherwise the French and the rest of the G20 will make the US government look weak. Like it is enslaved by its banking giants.

Using Technology to Detect Insider Trading

2010-03-26T12:39:00.001-04:00

There is a very fine line between insider trading and informed trading. A trader is supposed to gather all of the information he or she can in order to make decisions that make money - either for the company or for the investors. Often times that information comes from a seemingly innocuous comment overheard at a cocktail party, or even from a speaker at a conference. For example, in the oil business it is not unusual for a trader to hear at the weekly booze-up (oops, I mean business lunch) that his colleague's oil company has a refinery problem. If the trader goes back to work and trades on that information before it is known to the press and the outside world, is that insider or informed trading?
I once went to a conference where a software company that provides solutions to a mobile phone company told us that the mobile phone was selling like hotcakes in Europe and Asia and that the company was going to have a very good year. I bought shares in that company (although, being the worst trader in the world, by the time I bought them it had already hit its all-time highs and I ended up getting slaughtered). Was I guilty of insider trading? What about others in that room, those who maybe did go back to their offices and buy the shares (in far greater numbers than my paltry 20 shares)? Were they guilty too?
The line begins to become clearer when the activities that can be construed as insider move markets. Once those markets are moved, and it becomes clear to regulators that something funny was going on, it is a question of careful forensics to sift through whatever evidence they can find.
The SEC and FSA have been very busy of late doing just that - sifting through evidence and nailing criminals. The SEC found a high-ranking UBS investment banker was tipping off his buddies about health-care mergers over 2005-2009 using emails with code words like 'frequent flier miles' and potatoes (or something). The FSA, with the help of the police, just dug up a ring of up to 11 bankers and hedge fund traders, including Deutsche Bank, Exane and Moore Capital Management, who had been reportedly front-running block trades.Also in London a whistle-blower chastised the CFTC for not following up on his tip (in November 2009) that JPMorgan was manipulating the gold market there.
The pattern that is emerging in all of these investigations (or lack thereof) is that the crimes are being detected well after they happen. There is a reason that insider trading and front-running and market manipulation still goes on today - because people can make money from these practices. And the likelihood of getting caught is very small indeed.
Hector Sants, the outgoing CEO of the FSA, said that the regulator would be implementing an intensive supervisory model, which should make people "very frightened" of the FSA, according to the Economist. I think he was alluding to tougher cell-phone and email monitoring, which is what caught the most recent scoundrels. What would really make the wannabe inside traders tremble in their boots would be if the FSA, SEC and CFTC installed market surveillance software. Surveillance software can detect market anomalies and abuses as they happen, not after the fact. Using this kind of software, inside trades and market manipulation can be tracked down by compliance managers before the traders get to finish the deals. Position limits, such as those that were manipulated by Jerome Kerviel at Socgen in 2008 and hiding losses of nearly 5bn euros, can also be monitored real-time and alerts sent to managers to tell them when something fishy is going on. Fat fingered trades can be spotted and caught (and hopefully unwound) before they are settled and cause a firm big losses.
So the question is - why don't the regulators use this kind of software? Maybe the US Congress should think about adding a mandate to do so to the financial regulation reform bill. Then rogue traders would be afraid, very afraid.

Give the SEC the teeth to stop fraud

2010-03-19T08:28:00.002-04:00

That Lehman Brothers had hidden its dire financial situation with the aid of accounting tricks is no surprise. Banks, trading companies and even Big Oil and Big Car have been doing this for years. Lehman was special in this, however, as the size of the losses was of such a magnitude that they nearly wiped out several other banks and helped to take down the global economy. Enron looks pale in comparison (and its execs went to jail). That Merrill Lynch staffers had spotted Lehman's trickery and grassed them out to the SEC is a surprise. Most banks tend to collude, or at least ignore others' peccadilloes with a nod and a wink, when it comes to the little tricks that keep them cozy with their shareholders. That the SEC somehow failed to grasp the significance of the so-called Repo 105 accounting practice is the biggest surprise of all. After the Bernie Madoff scandal, the SEC had a lot of explaining to do to the American public, and to the government. It went hat in hand for a bigger budget in order to hire experts to help sniff out and nail financial fraudsters. And got it. The task at hand now is to figure out how to hire people who actually understand the very things the SEC is supposed to be nailing people for. One idea is to hire outside firms with the expertise.
Last year in an article for Financial News, I wrote about the possibility of regulators cracking down on hedge funds and making them more transparent. At the time I spoke to former Securities Exchange Commission chairman Harvey Pitt, who is now CEO of business consulting firm Kalorama Partners. Pitt said that what needs to be done about hedge funds had already been laid out in an SEC request for comment in 2003: Data about hedge funds' activities should be available to regulators, and the SEC's concept of examination and inspections needs to be changed. Pitt said: "It is not structured to succeed."
Further, Pitt believes that all portfolio managers should be required to allow (and to pay for) a regular independent examination by a company that it has no relationship with. These independent examiners would then give their report to the audited entity as well as the SEC.
This tactic would work well for the whole of the TBTF businesses in America. There are independent firms out there including one run by ex-FBI agent Ken Springer - Corporate Resolutions. (Inexplicably, Financial News cut this part of my story - and I think it was the most important angle.)
Springer said: "Investors need to re-claim confidence and more regulation alone will not necessarily do it. Often, things fall through the cracks and investors need to take more pro-active steps." He advises conducting independent onsite financial due diligence with comprehensive background checks, and implementing an ethics hotline where employees, accountants, prime brokers, fund administrators can anonymously report wrongdoing to an independent third party.
Springer said: "Managers can hide trades or have brokers eat fees to boost the fund's performance. Up to now fund managers have resisted this enhanced transparency. Now they may have to do this as a condition of investment. The bigger funds won't want to, but the smaller ones will jump through hoops to get investors. Investors bring us in as part of due diligence."
The answer to a Lehman- or Enron-like conspiracy to bury bad news is twofold. Give the regulators the power to hire outside experts, and the power to insist on their use. Having the staff, the money and the will to investigate and find fraud is one thing. The SEC needs to have the power and the authority to go into these companies and actually do it.

You Put Your Right Foot in, You Put Your Right foot Out....

2010-03-16T07:32:00.000-04:00

The US Congress and Senate appear to be doing the Hokie Cokie with the law these days, particular in the case of Chris Dodd's financial reform package. Put in an independent consumer protection agency - then take it out and give it to the Fed. Take out the Volcker Rule, then put it back in. I guess this is US politics at it worst. Water down the original concept so much that neither party can object to it (except the most extreme right or left-wingers), add a whole barrel of pork for each representative, and presto - instant crap. What I don't understand is how anyone can object to the consumer protection agency at all. It seems that Republicans think most people are extremely intelligent beings that completely understand if they are a day late paying their credit card bills their interest rate will go up to 124%. Democrats, on the other hand, seem to think that most people are dimwitted idiots who will use a credit card until it is maxed out then complain that they can't afford to pay it back. The Democrats are actually closer to the truth. So why are Republican politicians working so hard to knock it out of the financial reform bill? It can only be because the credit card and mortgage companies are lobbying them so hard they cannot resist the pressure.
The Volcker Rule debate confirms that Democrats think people are stupid. At first Dodd, a Democrat, took it out because it was too hard for his colleagues to understand it. Now I believe he has put it back in again precisely for that reason. His colleagues in the Senate will not be able to grasp the whole concept of separating out prop trading, despite hard lobbying from the bulge bracket, and will probably pass the bill in its entirety. Good plan.

Moral Hazard for Dummies

2010-03-10T11:30:00.000-05:00

When I read this morning that banks want to take some of their taxpayer-fueled cash piles and distribute this as dividends or share buybacks, I saw red. Luckily regulators did too and stopped them. For now. It is obvious that the same banks that led to the current recession, and the biggest financial crisis since the Wall Street Crash of 1929, are once again courting shareholders in order to line their own pockets. CEO's that took massive pay cuts (again to placate shareholders) have had enough of their $1.00 annual salaries. In order to get back on the gravy train they have to convince shareholders that all is well. And maybe this is true, but I think it would be wise to take the billions of dollars of losses and write-downs from the property market crash before distributing any cash.
It seems to me that despite all that has happened to the world's financial markets and economies, little has been done to address moral hazard. Moral hazard remains the biggest risk to stability and recovery, and continues to run unchecked. Call me a hopeless optimist, but I was hoping that the US Congress at least would grow some balls and push out sensible regulatory reform. And then I thought, maybe no one really understands just what moral hazard means. Maybe the powers-that-be believe that "the markets" can sort themselves out, and let the buyer beware. So I thought a little primer might be in order to try and educate our politicians about the beast known as "the financial markets". (As I shamelessly cadge the For Dummies style, I beg the brilliant and totally cool Wiley Publishing not to sue me.)

Moral Hazard for Dummies

Understanding Moral Hazard - Moral hazard is what happens when someone (let's say a trader) who is insulated from risk behaves differently than he would if he were fully exposed to the risk. In other words, he believes that his short-term bonus will be bigger if he takes on a larger long-term risk. He tells himself that he will probably be working for another bank by the time he is rumbled anyway (i.e. when the longer-term risk fails to pay off). He has nothing to lose personally, and everything to gain.

Making Moral Hazard Simple
Derivatives trader - I just sold an unbelievably complicated interest rate swap to some idiot in Umbria. She thinks it will save her town from having to shut down schools and turn off the power. What she doesn't understand is that in order to keep from having to pay me off when it goes wrong, she has to keep paying me off. Win/win! It looks fabo on my P&L. (Anyway, what does Umbria need with electricity? The hospitals probably have generators, right?)
Oil trader - Obama is really getting hot under the collar about Iran's nuclear program. The authorities are leaning on us to stop selling them gasoline. But the margins are terrific. John -you like the beach, right? Take the next flight to Dubai and open me a little shell office. We can use that to keep selling gasoline to Iran and no one will be the wiser! A little bizzo in the morning and the rest of the day to sun yourself!
Executive of a bank - Our share price still sucks and the Board meeting is coming up next week. I can't live on a dollar a year for much longer, I need a new carriage house. George, what can we do to make people think we have recovered from the downturn? Never mind the mortgage write-downs, those are for next year! Have corp comms leak it to the press that we are sitting on a mountain of cash and that we might institute a share buyback program.

Do's of Moral Hazard

Do regulate derivatives - beyond central clearing and making them trade on exchanges. They should NOT be a "buyer beware" product.
Do regulate banks the Volcker way - take away prop trading, hedge funds and private equity.An instant reduction in temptation and moral hazard.
Do monitor oil markets - they are getting away with murder because you can't be arsed to upset the oil lobby.

Don'ts of Moral Hazard

Don't leave the banks to make their own rules.

A Leopard and His Spots

2010-03-08T07:35:00.000-05:00

Saturday's Financial Times had an article about London's cab drivers, saying that they need to go to 'customer relationship' courses as well as learning The Knowledge. It suggests that the cab drivers are too talkative and insensitive to those passengers that prefer not to chat. Now I am as antisocial as they come, being a good New England Yankee, but I beg to differ. Even a perma-grump like me (when I lived in London that is - I blame the severe lack of Vitamin D due to almost no sunshine) likes to chat to a London cabbie. They are funny, knowledgeable about all that is London, and mostly harmless. Many a late night they would pour me out of the cab and wait on the curb while I let myself into the house. One kindly driver, when learning that I was moving to New York City, helpfully advised me never to use the "C" word when swearing in America. Most cabs today have a speaker system anyway, and you can switch it off if you don't want to chit chat. But what would London be without chatty cabbies? They should not change - nor will they.
Talking about leopards and their spots never changing leads me to today's FT. The front page tells us that oil trading companies have "quietly" stopped supplying petrol to Iran. The paper says this is a clear sign that Washington's efforts are paying off. Of course they are (sarcasm alert). The naivete of some journalists (and obviously politicians) makes me want to scream. The "small Dubai-based and Chinese" companies that are reportedly replacing the US/UK/Swiss trading companies as suppliers to Iran will be backed by the very same suppliers which are claiming to be getting out of Iran. The profit margins on supplying petrol there are simply too high to lose. This is how it has always worked, and I can't see it changing anytime soon. Ask any London cabbie, he will back me up.

The 51% Rule of Trading

2010-03-02T09:15:00.000-05:00

An oil trader friend once told me that his job was to make money 51% of the time. That way he would probably keep his job and his employer (an energy division at an investment bank) would be happy. If the 51% rule is the standard for traders then Goldman Sachs has nailed it. It made over $100m in net trading revenues on 131 out of 263 trading days in 2009. It lost money on only 19 days. Total earnings of more than $13bn came from net revenues of $45.2 bn that more than doubled the previous year's.
To make these record earnings Goldman Sachs also took on more risk. In VaR terms, the bank said it estimated the most it could lose on any given day was $218m, compared with $180m in 2008. The bank also noted in its financial statement that reputational risk (i.e. bad PR) might be a negative factor going forward. I'd say that if taking on more risk against the government's wishes and spinning it into gold while weathering some of the worst PR Goldman Sachs has ever had creates a profit of $13bn, then they are doing something right. The traders' jobs are safe - for the time being.

Florida Bound

2010-02-18T16:37:00.000-05:00

I'm off on a week's holidays tomorrow - to the Sunshine State. I never thought I would say this, but I am seriously thinking of buying a place in Florida. New England winters get harder to take all the time, and the choices of destination with sunshine, warmth (after a fashion) and cheap direct flights under 3 hours are few. The Caribs is 5-6 hours and expensive. I don't fancy Arizona. California is as far from here as Paris (and frankly Paris will always win even if it is cold). So Florida it is. The real estate market there has plunged to a level where it is beginning to look attractive. A two-bed, two bath condo in the Tampa/Clearwater area can be had for less than $100,000 US. I saw a very nice one today for $65,000 - a two bedroom, 2.5 bathroom 1,100 square foot townhouse. That is only about 40,000 pounds - 48,000 Euros. Do you know what 40,000 pounds buys in England? A garage in Chiswick - maybe. In Paris? Nothing. Really - nothing. My son's rented chambre de bonne - a studio converted from a maid's room - is worth 78,000 Euros.
And since the cold winters they have been having lately in Europe might convince them to start looking for places in Florida, I want to get ahead of the game. Florida won't be the beginning of the recovery in the property market, it will probably tag along at the end of it, but cheap is cheap. See you in a week!

Party Political Broadcast

2010-02-16T14:38:00.001-05:00

I rarely comment on American politics but a headline in today's Financial times prompted me to venture into this murky (and largely uninteresting) territory. I remember watching TV as a kid when suddenly a commercial would pop up and a man would say "The following is a party political broadcast." Screams of dismay would ensue and my siblings and I would run to the kitchen for a snack until it was over. It was invariably some party drone refuting what some other party drone said about him or her and went on for what seemed to be hours. That said, it was the only time I had to be exposed to politics unless I went looking.
Today's media, which treats national politicians like rock stars, shoves the stuff down our throats 24/7. Politicians have become stone figures cast in the form of their party's image (read 'spin') and their utterings and policies rarely vary from the PR dogma. One party's depictions of the other party is also mostly unchanging from year to year, century to century. But today when I saw the FT I had a sinking feeling that our politicians were really not paying the slightest bit of attention to the world outside their little bubble. And it now seems that they are once again going to bend to the special interest groups - this time to derail financial markets regulation.
The FT said: "Republicans are opposing a plan to impose tougher capital and liquidity requirements on companies that pose a risk to the financial system." My God, but their memories are short. Investment banks that were leveraged 30 to 1 debt to equity (some were thought to be as high as 60 to 1) nearly brought the country and the world to its financial knees.
Further: "Republicans say they are unconvinced that any regulator can even define systemic risk. They are happy to set up monitoring of possible bubbles but say the whole concept is too vague for an immediate introduction of sweeping powers." At the risk of sounding like John Cleese in Fawlty Towers - Too vague? Too VAGUE?! Was the demise of Lehman Brothers, Bear Stearns, and nearly AIG too vague a concept? Was the worldwide credit crunch and recession and loss of gazillions of jobs too vague to grasp? Call me gobsmacked. And it isn't just me. Former Treasury Secretary Henry Paulson sees it too. He writes in today's New York Times:
    "Congress must pass financial regulatory reform. Delays are creating uncertainty, undermining the ability of financial institutions to increase lending to the businesses of all sizes that want to invest and fuel our recovery. Our overriding goal in restructuring our financial architecture should be that taxpayers never again have to save a failing financial institution.
    This calls for two vital changes. First, we must create a systemic risk regulator to monitor the stability of the markets and to restrain or end any activity at any financial firm that threatens the broader market. Second, the government must have resolution authority to impose an orderly liquidation on any failing financial institution to minimize its impact on the rest of the system.
    Together, these two reforms will enable the regulatory system to better prevent the kinds of excesses that fueled our recent crisis, restore market discipline and keep the failure of a large institution from bringing down the rest of the system."
Thankfully there is a logical voice of reason shouting through the gloom that is our American political system. Henry Paulson was there when it happened. He saw how the system failed him and his colleagues, who had to do the best they could in a terrible situation with a total lack of tools at their disposal.
It is time to tell Congress and the Senate to butt out and listen to the experts. Politicians are not experts in anything apart from party dogma and good hair.
Senator Evan Bayh from Indiana said it best when he quit his job yesterday: "...I do not love Congress.....There is too much partisanship and... too much narrow ideology in Washington, even at a time of enormous national challenge, the people's business is not getting done."

Lessons Not Yet Learned

2010-02-15T14:38:00.002-05:00

As it is a holiday today in the U.S., I took the latest copy of the Economist to the gym and read it on the treadmill (as you do). I was particularly interested in the special report on financial risk. The Economist is not a usual source for articles about risk and risk management, but I have a great deal of respect for the publication. But I must say this report stunned me silent (for a minute). Warning about asset class silos and the challenges of enterprise risk management has become one of my specialty subjects (where is Chris Tarrant when you need him?). If you took every article that I have written for Financial News and Traders Magazine and Securities Industry News about moral hazard and risk and financial markets over the past three years or so and threw them together into one - this would be the Economist's article. One particular article that I wrote in Financial News in December of 2008 pointed out that financial firms had been using VaR incorrectly in the years leading up to the financial meltdown: "Failure of risk management strategies proves Murphy’s Law is alive and well". In it I said: "Valuation models such as value-at-risk were overused or not updated when market conditions changed."
According to the Economist this still holds true today. Shock, horror. Not only that, but they still have not figured out stress testing and continue to be stumped as to how to manage risk across the various asset classes. The Economist's article said: "Two-thirds of the banks surveyed said they were only partially able to aggregate their credit risks." Call me naive but they knew this ten years ago, and the whole trend toward enterprise wide risk management was in response to this issue. Technology to aggregate, analyze, display, signal and manage risk across product silos is exactly what enterprise technology is about, and it has improved by a billion gazillion percent since the first, tentative platforms.
I can only hope that in seeing an article of this granularity, dumbed-down for the masses, some simple risk manager is reading it while he is on the loo. Maybe the light bulb will be illuminated in his poor, addled head and he will say to himself, "Oy. That Economist might have something there. Maybe VaR is not enough. Maybe I should look at - uhhh - operational risk! And liquidity risk! And moral hazard risk (or not, the boss would HATE that)."
What I wrote in Financial News sums it up: "Anglo-Irish author and philosopher Edmund Burke said: “By gnawing through a dyke, even a rat may drown a nation.” By ignoring basic risk management tenets, investment banks and other financial institutions failed to manage credit risk, which turned into market risk which turned into liquidity risk and ultimately systemic risk. They took down not only themselves but global markets.

Greece: the Willful Teenager of Europe

2010-02-10T07:36:00.000-05:00

I love Greece, and I love the Greek people. They are warm and friendly and proud and intelligent. And they are as crooked as the day is long. That is part of their culture. So when Greece joined the EU and somehow squirmed in to the Eurozone, Europe should probably have known that it could cause a problem one day. Greece is like a willful teenager who is making drugs out of cough syrup in his bedroom. You ignore him and one day he is under arrest for running a meth lab. You had no idea, you say. But deep down you did.
The Greeks have known forever that their civil servants and government are crooked. But they shrug their shoulders and get on with their work. They have their families and their friends and their holidays to pay for. I worked for a Greek-nationality shipowner where I learned how easy it is to cheat the system. His office was in London, his ships were registered in Liberia, his crews were Venezuelan - paid in cash (often by me) - and only the Captains were Greek. Usually a family member.
A Greek friend once told me that there are no homeless Greeks. Someone in their family will take them in. It is a matter of pride. (All of the homeless that we saw in Athens were Albanians, according to him.) So if you have to cheat the system a little or give your brother a job that he is eminently unqualified for, that's what it takes to get by. Their motto should be 'whatever it takes'.
And now the cushiest of cushy numbers, Greek union jobs, are under threat. The government wants to - gasp! - cut wages and hours. Strikes are rampant. But inevitably some union member's brother or father or sister works for the President or the Greek Parliament or a person of power, and words will be had. And things will go back to 'normal'. Meanwhile Germany will pretend to be Ben Bernanke and bail them out. Maybe the Greeks are more like Goldman Sachs than like teenagers.........

Men Behaving Badly

2010-02-05T13:00:00.000-05:00

Nearly one and a half years have passed since unregulated credit derivatives nearly took the world's economies down. The lessons were supposedly learned, the regulators informed and armed to respond. And what happens? Most of the largest investment banks - now commercial banks (for the moment) - pay themselves massive bonuses for a year's growth fueled by TARP money. Stock markets rally by 50% or more fueled by high frequency trading and blind optimism. Regulators hem and haw about losing business to other countries and fudge reform until it is unrecognizable as such. And everyone - mostly CNBC it has to be said - is happy. Then along comes President Obama and his henchman Paul Volcker to take away the punchbowl just as the party is starting. They advocate real reform in the guise of the old Glass-Steagall Act, and the party starts to fizzle out. Is it their fault? No. The men - and they are mostly men - behaving badly are the CEOs and MDs and traders in the very banks and firms that were behaving badly a year and a half ago. And they don't seem to have got the point that the people are fed up with them. In the past two days alone there are some egregious examples of greed and bad taste to support my argument.
First, Michael Spencer, founder and CEO of ICAP, took 45 million pounds out of the business just as he prepared a profit warning. Saying it was to support City Index - a legal (in the UK) gambling business - is no excuse. (He should have quietly taken a bet at City Index that his share prices would fall and covered the whole 45 million - then replaced it.)
Second, Bank of America's senior executives were warned to disclose Merrill Lynch's mounting losses just two days before the shareholders were due to vote on the acquisition. According to NY attorney-general Andrew Cuomo's investigation, they ignored the advice.
Third, bank lobbyists are lining up to tackle their favorite Senators and Congressmen on the Hill to get them to water down, or kill, the Volcker Rule. Even as CME Group says it won't really have a negative impact on volumes.
And fourth, although this is a smaller story, the rumored sale of CEP provider Aleri to Sybase prompted a competitor to offer a sort of 'cash for clunkers' program. StreamBase sent out a press release saying that it was unlikely Sybase would maintain Aleri's products, so it very generously offered to trade them in for StreamBase’s under the an "Amnesty Program". Can you say "opportunistic"? Someone sent me this photo to illustrate:

Newspapers gone mad

2010-02-02T16:30:00.000-05:00

Much like the music industry, the newspaper industry is finding out a day late and a dollar too short that its business model sucks. But, again like the music industry, very few have a clue how to go forward. The good old days of beat reporters getting the news, setting it into type, printing and distributing it are over. The internet has destroyed its value by distributing the news online - and mostly for free. The papers are hitting back, but it may be too late. Rupert Murdoch is busting a gut to figure out how to make the Wall Street Journal purchase pay off. He is even breaking up the old Dow Jones empire, selling off golden nuggets like the Dow Jones Index service, to do it. And trying to charge for online content which - to be honest - is like trying to shoot a flying fish with a pop gun. The NY Times is also going to try. And the FT just told me I have to pay to see content online after the first 10 stories, even while I pay for my home delivery of the newspaper. I am not considered a 'subscriber' unless I pay for both. But I can find the FT articles copied onto any number of websites, so....
The papers are terrified because bloggers on Seeking Alpha and real-time websites such as Dealbreaker (which the NYT wisely bought) and Breakingviews (ditto Reuters) are the first go-to for financial markets players. Some of these can even get away with charging for content - but it can only happen when the content is not available anywhere else.

The Volcker Rule and Commodities Trading

2010-01-29T08:50:00.001-05:00

The Financial Times and Reuters both ran reports today about the possible impact of the Volcker rule on commodities trading. The FT says that commodities trading houses will "slip under" the Volcker net - this would benefit trading companies like Glencore and Vitol because the banks would cut back on physical trading. Reuters says the plan to stop banks speculating in financial markets on their own account may "spawn a host of new independent commodities houses as banks sell trading units and as dealers leave to set up on their own." They are both right. The trading houses of this world will always benefit from the banks' misfortune. It happens regularly. Commodities are a highly cyclical market, with volatile downward periods in what - as Jim Rogers claims - is an inexorable long term move upward. When the markets are on an upward romp, the banks pile in with prop trading in energy, agriculturals, metals and soft commodities. When the inevitable 'correction' happens it is almost always severe, and the banks pile out again leaving traders standing on the pavement scratching their heads. Then they call Vitol or Glencore or Trafigura for a job.
Given the current return-to-bubble feel of the commodities markets, it is likely that those getting the push from the banks will head to the established houses, or even try to start their own as the FT suggests. There is one problem with this. Credit. The trading houses have established lines of credit, of course, but many lines were pulled out from under them during the crisis. Credit remains limited for such a high-capital, high-risk type of trading business. Start-up hedge funds have been waiting in the wings for financing for over a year now, and most do not see venture capitalists or banks rushing to take on the risk. Banks have always been more willing to extend credit to oil or commodities traders if they themselves are trading. That way they have a feel for the market, and the players. They have a sense of who is solvent and who is struggling. They know each others' positions (to a degree) and can often tell when someone has made a serious loss.
Ultimately, the banks and the trading houses could be losers in the Volcker plan.

One Down - Maybe - While Another Issue Looms

2010-01-27T11:56:00.005-05:00

The mood on Capitol Hill is pretty sour towards banks and insurance companies that trade on their own account, with good cause. Tim Geithner today finally voiced something I have wondered about since I moved here - that American insurance companies have no national oversight. I imagine that is because when they started they were all in Nebraska or Connecticut and the federal government thought these states could manage them well enough. Wrong. AIG has been playing away for years, and it is unbelievable to me that it didn't get caught by someone - anyone. Some of its forays into energy trading were world renowned - and not because they made money. A national regulator would have had some idea what AIG was up to, I would hope. (Although the SEC and CFTC have not exactly been proactive before or during this crisis.) There is now a move afoot by the House and the Senate to create a national insurance office, but these bills do not go so far as to create a regulator. The National Association of Insurance Commissioners has gone further and has proposed federal legislation of its own that would establish a National Insurance Supervisory Commission (NISC), to be created by the states under federal law, to establish and enforce uniform standards across state lines, according to law firm Wiley Rein LLP. So,perhaps after years of state-by-state 'oversight' insurance companies will have to learn to toe the line.
In the meantime, financial markets players are opening a new can of worms for regulators to get their heads around. Exchanges and high frequency trading firms are lobbying hard to be allowed to trade in sub-penny increments on equities. The markets have barely absorbed the impact of penny increments, which enabled automated and high frequency trading. And the regulators have yet to get to grips with HFT and algorithmic trading. Allowing sub-penny increments is folly at this stage. Joe Saluzzi, as always, said it best and he believes it will force more order flow into dark pools (something else the regulators have yet to figure out). Themis Trading's Saluzzi said: "HFT players want sub-penny pricing, not because the extra sub-penny executions would pad their margins, but rather because the sub penny pricing will allow HFT shops more ways to step in front of traditional institutional hedge and mutual fund orders." Ouch.

Honest, Mr. President - We Won't do it Again

2010-01-25T07:26:00.000-05:00

The Financial Times says this morning that bankers are going to head to Davos to lobby regulators for 'softer reforms'. No surprise there. The thing that caused me to laugh out loud was one banker and Alistair Darling's claims that "inter-connectivity" would solve the problems. Darling says that breaking up the banks and creating separate entities, like President Obama has strongly recommended, is not the point. "The point is the connectivity between them in relation to their financial transactions." Ummm, no that is not the point Mr. Darling. Bankers saying they will use connectivity in future to prevent any further pesky risk issues between departments is akin to your teenaged son saying he promises to use a condom after he got half the Junior class pregnant. You know you can't just lop it off, but surely you would do something fairly draconian to prevent further expensive mistakes.
Preventive measures in the banking industry - the so-called 'connectivity' - have been there for a long time. When I started reporting this technology lark in 1998 there was a massive push for removing product silos using straight through processing and enterprise-wide technology. These solutions have come a long, long way and it is now possible to monitor and control risk on a sub-millisecond basis. Risk across departments can be accessed, measured, monitored. Senior management only has to look at a web page and then say - "Hey, we might be betting the farm here, let's slow down." But they won't. Because moral hazard risk - the biggest risk of all and the one that got us into all this mess - cannot be measured or monitored. Greed is stronger than prudence. Always has been, always will be. Until greed is reined in, moral hazard remains far too tempting. The only way to rein in greed is by tackling the compensation culture of trading firms. Making them stop trading on their own behalf, or at least containing it, is a start. Publicly owned and government regulated banks should not be giving away half of their profits to the traders and management. They should not be betting the farm to make sure those bonus pools stay comfortably bloated. Only when this is under control can the regulators gain control.

Prop Desks are the Tip of the Iceberg

2010-01-22T08:33:00.003-05:00

I'm already tired of hearing the bleating from financial markets pundits that 'prop trading was not to blame' for the credit crisis. Prop desks are the tip of the iceberg that was once called an investment bank. Prop traders gauge the mood of the client trading going on in their own banks (Chinese Walls don't mean a lot between the prop and client facing desks - they are usually in the same room) and in others, take the trends and run with them, using a bucketload of the bank's money. Their interest and highly visible movements create demand for the products they favor - such as buying energy or commodities or taking short positions in banks that are about to fail. The client desks then get requests from their customers for instruments that they too can trade to get on board. ETFs and derivatives are created and securitized to enable this. The prop desks now have even more to play with - they can take the arbitrage between the underlying instruments and the ETF or derivatives and scrape off profit. They can employ high frequency trading tools to take the froth off the top of the more liquid markets. They know when their own interest in something is fading - the market is oversold or something is about to crack(cue CDOs) and short them while the bank still sells them to unwitting clients. There is no law against this. But the prop desks and client desks and market makers and internal hedge funds and private equity funds feed off of each other. It wouldn't work very well otherwise. When the LIFFE floor close in London in 2005 the dealers and floor traders lost their trading mojo, trading on the screen did not allow them to 'feel' the market. Trading floors today are the same. Most of the business is now electronic, but there is a buzz and a 'feeling' that comes from being in the same busy room. That can't be hidden with Chinese Walls or technology.
The proliferation of internal prop trading and hedge funds etc. came about due to pressure from outside forces. When stacks of traders were laid off after the dot com bust they started their own firms - HFT, hedge funds that could short client money, agency brokers with high speed platforms. The banks had to compete with this, which they did by building their own versions of them. And, although, prop trading did not kill the golden goose it was almost certainly what helped take the banks to the too-big-to-fail level.
I agree with President Obama (and since when is it OK to call him 'Barack' on TV? Bush was never called 'George' by the talking heads on CNBC). It is time to unscramble the eggs that are investment/commercial banks today. This is not politics, it is common sense.

Banks to Separate 'Church' and 'State'

2010-01-21T07:22:00.002-05:00

Today's Financial Times says that President Obama is about to crack down on proprietary trading in investment banks. Let me be the first to bet that this will happen sooner rather than later. There will be much criticism of this, with bankers asking if it is really necessary to separate 'church' from 'state' as it were. The 'state' being core banking activities such as lenders and depositories. And 'church' being the lofty prop desks full of guys making bets and praying that they win (and that their bonuses are not taken away by nosy non-believers).
It has started already. The CFTC just separated out the believers (real oil companies) from the non-believers (swaps dealers and speculators), in a bid to control speculative bubbles. Oil companies that supply oil and speculate may have to divide themselves in two in order to avoid trading limits. So is it feasible for large banks to do the same? It could be a little like unscrambling eggs. The prop desks are usually linked in with activities from the sales trading desks (netting what the brokers bring in), internal hedge funds and general hedging. Some say too closely linked.
But I will make a bet that this is going to happen. The reason I say this is because I happen to know that Paul Volcker wants it to happen. Volcker, who is the former chairman of the Federal Reserve Board, is now chairman of President Obama's Economic Recover Advisory Board. And Volcker has been banging the drum about this for some months now. He told the Wall Street Journal in December that "extraneous" activities such as hedge funds, equity funds, commodities and securities trading are secondary in terms of banks' direct responsibilities as lenders and depositors. He believes that these extraneous activities should be sloughed off into separate companies outside the banks where they would have the freedom to contribute to a fluid market without creating systemic risk. He said that this idea has a lot of support.
My bet is placed. By this time next year there will be legislation that banks separate out 'risky' trading activities and focus on what they are supposed to be doing. Anyone care to take the other side?

Strengthening Regulation Must not Falter

2010-01-20T11:59:00.000-05:00

Reuters reports today that, because of Scott Brown's Massachusetts special election win, it will be more difficult than ever for Democrats to win Senate passage of their proposals to tighten bank and capital market oversight. The definitive election of Republican Scott Brown in the election yesterday has given right wing talk show hosts reason to gloat. But just because the backlash over health care reform handed them a victory does not mean the government should waver in its determination to reform the regulation of financial markets. The Financial Crisis Inquiry Commission, which included FDIC's Sheila Bair and SEC's Mary Schapiro, told Congress only Monday that regulation needed to be tightened. Schapiro fingered lax regulation of asset-backed securities, an excessive reliance on credit rating agencies, executive compensation that encouraged unhealthy risk-taking and a failure to oversee hedge funds and private equity funds as the culprits, according to the New York Times. The regulation of OTC derivatives is still high on the list of those in charge, even as the use of them is again on the increase. Derivatives pricing service SuperDerivatives expects volumes for FX, interest rates, energy, and commodity derivatives to soar this year. Unless the excesses of the past ten years or so are curtailed, the banks will head straight back to their old ways and securitize the Hell out of things that should not be securitized. Foreclosures in the US continue to skyrocket as a direct result of securitizing sub-prime mortgages. The pain in the housing market has not yet even subsided, and yet Republicans call for a return to the free-wheeling ways of the the past. It must not be allowed. Markets can and will be better monitored and controlled in ways that leave players free to innovate. Regulation should not be a political football.

They're Watching.....

2010-01-15T09:17:00.000-05:00

After a year and a bit of listening to the public wailing and gnashing its teeth over the financial crisis, regulators and governments are finally responding. The UK acted first with its 50% tax on bonuses, and now the FSA's not-so-gentle hints to banks that liquidity risk had better be under control. The Obama Administration dug deep into the pockets of both US and foreign banks with a US presence and said it will tax them to claw back 'every penny' that the taxpayers spent on TARP. A surreptitious move to tax bonuses over $100,000 by 50% is also underway by some Congressmen. The SEC banned brokers from providing naked direct market access to exchanges and ECNs (they were very lucky to have ever gotten away with this to be honest, so brokers should just suck it up and put the required risk controls in place. And keep an eye on their customers.) And on the same day, the CFTC finally came out with its proposed position limits on energy markets. Pundits and traders are calling the limits 'fair' and 'sensible', which means they won't suffer unduly from them. The limits, which are linked to the prevailing size of the market, are a little loose for my liking, but at least they are - finally - there. The CFTC never took another stand on oil market speculation - whether it happened or not - probably because it is happening again. Best not to rock the cradle. Reuters says that the CFTC made a mistake in allowing high single-month limits, that this could possibly lead to too-high of an all-month concentration. But the fact that the CFTC is looking at and monitoring these limits at all is encouraging. (The FSA should take notice.) Swaps dealers will now be limited from exemptions, which is good. This may impact large swaps/physical/hedging outfits such as Glencore, Vitol and Trafigura, but they can figure out a way around it. Separating speculative activity into a different entity is one way.
All in all, a good week for those who are pro-regulation. Everyone so far has employed a light touch, a thoughtful approach and pleased the general public. As outrage over the bonus culture grows louder, they will need to keep cool heads.

Stock Market Bulls and Treasury Bears

2010-01-13T07:49:00.002-05:00

Something doesn't smell right. The bullish stock market trend of late in the face of reality seems overheated. Trim Tabs Investment Research, a firm that tracks liquidity flows in the market, says that December was the fifth month in a row where mutual fund investors pulled more money out of domestic equity mutual funds than they put in. According to a Bloomberg survey investors are the most bearish on Treasuries that they have been in over two years. I have friends asking me if they should take their money out of stocks and put it into bonds. But 10-year Treasuries are yielding 3.7% - only slightly more than my one-year CD. (A word of caution - I am not an independent financial adviser. Not that they know what they are talking about...) So where is the money? And who is supporting this stock market rally? One possibility is that the US government is. Charles Biderman, CEO of Trim Tabs has theorized that the Federal Reserve and the Treasury, with the help of the bulge bracket Wall Street banks, are supporting the stock market. The approximately $600 billion of net new cash that is needed to lift the market's overall capitalization by $6 trillion last year could not be identified, Biderman said. The money, he said, didn't come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds. Hmmm. Not only that, the bulk of the bullish activity over the past year has come in after hours trading on the futures markets. Hmmm. The idea that there is a 'plunge protection team' out there is not new. I proposed this possibility last year. The Wall Street banks were not bailed out with gazillions of dollars in taxpayers money without promising something in return. Using algorithms and high frequency trading strategies, it is really quite simple to gently goose a market. Expecially when the goosing in in lockstep with other banks. If you look at it, the stock market movements resemble trying to sink a life preserver. Disappointing employment figures? The market dumps... then gently resurfaces. Cue sighs of relief from the 401K-crowd. Ahhh. Maybe the economy IS recovering. Maybe we ARE invincible. Maybe my house will be worth a million dollars by next year and I can retire. And this is why the theory is so plausible. What better way to keep the public happy/quiet/complacent than by supporting the stock market? As conspiracy theories go, this is a doozy. Let's just hope the money doesn't run out.

Charge of the Bubble Brigade

2010-01-08T08:10:00.001-05:00

I haven't paid much attention to the commodities markets over the past few months. The prices were high-ish but range bound for the most part, and China was slowly stockpiling all the stuff it might need to survive a nuclear holocaust. But something struck me when listening to Bloomberg on the radio last week. A pundit was talking about peak oil and said that this might be the least of our problems if the emerging nations keep growing. We could reach peak copper, peak iron, peak uranium, peak gold - all of the earth's natural resources could be tapped out. It is clear that investors think they will - at the very least - be more expensive. The buying spree of late signals another bubble, which can only be burst if another recession strikes or if China implodes. James Chanos, the prophetic hedge fund manager and president of Kynikos Associates, predicts that it will. Jim Rogers, the commodities perma-bull, scoffed at Chanos' logic and expertise, inferring that Chanos couldn't even spell China 10 years ago. Ouch. But wasn't it Chanos who shorted Enron all the way down from $90 to $1.00? I am not an analyst, but I can spell Bubble. And my spelling got a little better after hearing that the CFTC would set "generous" limits on energy speculation.
A trader friend wrote the following poem (crediting Lord Tennyson) to explain to management why prices of oil and commodities were rising after Jan.1:

Half a league, half a league,
Half a league onward,
All into the valley of oil
Rode the world's funds
Forward the fund Brigade
Load your guns ! he said.
Into the valley of oil
Theirs not to make reply,
Theirs but to buy and buy
Into the valley of oil.

He said to remind everyone that the Light Brigade got slaughtered.
_________________________________________________________

Regulating Moral Hazard

2010-01-07T10:57:00.001-05:00

The seemingly toothless SEC has called a Sunshine Act meeting next Wednesday to get feedback on high frequency trading, dark pools and sponsored access. It is unlikely that the agency wonks have done any homework on these subjects, and will merely ask the 'public' for feedback. Cue reams of 'proof' from JP Morgan, Goldman Sachs, Credit Suisse, etc. that none of these practices are damaging to the general public. Whether you agree with this or not, the fact is that many of these strategies have arisen due to the new market structure. High frequency trading, for example, has really only been prevalent for the past couple of years. (Note to Mary Schapiro: can you ask the banks if HFT works better in an up market than it does in a down market? I'd really like to know.) Dark pools have been around longer, but just recently proliferated into a virtual dark tank farm of pools. The SEC is right and justified in looking into them, if only to be able to recognize where future problems might lie. All of these activities involve layers of risk that have yet to be properly analyzed.
In the meantime, the Bank for International Settlements is growing a bigger pair, and has called some of the largest players together to discuss 'excessive risk taking'. This a deliberate slap on the hand by BIS, who bravely tried to take on the captains of the finance industry before the crisis. Had the banks maintained the BIS-recommended capital reserves, the crisis would surely have been lessened, with less taxpayer money needed. BlackRock, Citi and Wells Fargo have reportedly accepted the invitation, according to the FT. (Not surprisingly, Goldman Sachs and JP Morgan have cried off.)
But for all the posturing by the regulators, little has changed in our world of finance. Moral hazard remains the largest risk of all, and no one seems to be strong enough to address that. Only this morning, again in the FT, did I see that Citi delayed paying severance to some of its top executives last year. The bank claimed that it wanted to wait until the furor over outsized paychecks and bonuses died down. But here is how it looks to me - it looks like Citi kept those millions in its 2008 P&L to boost the bonus pool and keep shareholders sweet. I wonder of BIS or the SEC can ever have the power to stop the greed.

Terrorism and Technology

2010-01-05T09:56:00.001-05:00

I write about technology. Therefore it is in my interest to mentally solve problems using financial markets technology that I know about and (peripherally) understand. This gives me ideas for stories that I can pitch to publications, and thereby make money. This morning I was struck by an idea that has nothing to do with financial markets, but everything to do with its technology. I am not a techie. But I know that there are a few geeks who read my blog (you know who you are) who might be able to answer this question for me. Why can't governments coordinate their anti-terrorist groups and databases using algorithms? If a bank's algo can hunt down and nail liquidity and find the best price among 40-odd exchanges and ECNs, why can't governments hunt down terrorists the same way?
Here is my thought. This Umar Farouq Abdulmutallab who tried to set his pants on fire on Xmas Day was either listed by or known about at over a dozen US and foreign agencies. None of them seemed to be bothered about telling the others what they knew, so Umar slipped through the - very wide - cracks. If these agencies had to note down every known or suspected terrorist or their movements or a plot into a central database, which I believe they do, then an algorithm could be programmed to find patterns and similarities between the data in them. The TSA, CIA, FBI, MI5 and whoever else is supposed to be in charge, could therefore communicate without any egos or lobbyists getting involved. The quant brains over at Goldman Sachs and Credit Suisse could earn their 2010 bonuses by helping to design the algos. Am I wrong? Or could technology really help to control terrorism?

The Greedy Market Hypothesis

2009-12-31T09:49:00.002-05:00

The past two years have proved an unbelievable market roller-coaster ride for investors, traders and sovereign governments. The financial markets, which were rocked to their very core by scandal and crime, have become a favorite topic of conversation among the least likely people. Economists are treated like rock stars, filing auditoriums and juggling visits to CNBC, Bloomberg and MSNBC. Their opinions are sought after then dissected, and often dismissed if they don't give the right (positive) answer. The Efficient Market Hypothesis has been questioned and criticized. After all, how can markets be efficient if they tumble by 50% seemingly overnight? Was it efficiency that wiped out pensioners' savings and turned hundreds of thousands of homes into a liability to be walked away from? Market bubbles are not efficient are they? Yes and no. A theory has been proposed by Dr. Andrew Lo of MIT's Sloan School of Management, called Adaptive Market Hypothesis. He uses neuroscience and psychology to help explain why markets do what they do. Essentially his theory is that the origin of all financial bubbles and busts are fear and greed. I agree wholeheartedly. And I propose a simpler theory that one can use to explain to non-finance types how markets work. There are clever people (let's call them hedge funds and investment banks), and there are stupid people (let's call them us). Both sets of people are greedy. The clever people want to make more money for their employers so that they get a bigger bonus and buy more stuff. The stupid people just want to have more stuff and prefer not to have to work too hard for it. So the stupid people invest their money in markets that the clever people manage. The clever ones rake a fee off the top, then invest our money in things that we will never in a million years understand. Then the other clever clogs trade the same things, because if X bank is making money on it then Y bank will too! They make money (hopefully) by all trading the same things. Sometimes they trade them fast using their computers(high frequency trading). Sometimes they trade them slowly over the counter. They buy them and they sell them and then do it all over again the next day. Everyone is happy. Dr. Lo says that prosperity is like a anesthetic to the brain: “a drug-induced stupor that causes us to take risks that we know we should avoid.” Then - bang! The risks come home to roost, so to speak. The stupid people suddenly realize that they have too many loans for SUVs and ATVs and plastic crap for Xmas that they can't pay off. The clever people can't spin their way out of the trading tangle they invented. Panic sets in, markets crash. Governments get blamed. So governments dig deep and find gazillions (most overused word of 2009?) which they give to the clever people interest free. The clever people say: "Wow! Look at all this dosh. I can spin this and make gazillions more! Whooppee!" And they do. But wait. The stupid people are still living in debt, maybe have lost their homes, and don't have any jobs. How is that Adaptive or Efficient?
Again, to simplify - if the clever people get on with making money it will eventually filter down to the stupid people again. Businesses will get loans, companies will be bought out or merged. Banks will hire again. More bankers will buy more stuff and manufacturers will have to make more stuff. Then manufacturers will have to hire more people. Who will be able to buy more stuff. Do you get the picture? I call it the Greedy Market Hypothesis. Maybe 2010 won't be so bad after all.

Taxing Transactions a Terrible Idea

2009-12-21T17:06:00.000-05:00

The Wall Street Journal must be desperate for stories this week. Today it ran an article that raises the specter of a tax on financial transactions proposed by the forthright Congressman Peter Defazio. This is a terrible idea, as I said when I first wrote about this in March for Financial News. I'm not sure why it is rearing its ugly head this week, unless the WSJ has the inside track on some progress on the proposal. Led by Congressman Peter DeFazio, eight US senators submitted proposed legislation to the House Ways and Means Committee proposing a 0.25 percent transaction tax on buying or selling stocks, futures and options. The proposed bill, known as H.R. 1068 or "Let Wall Street pay for Wall Street's bailout Act of 2009", was put forth on February 13th and is seeing fierce opposition from exchanges, trade associations and electronic communications networks alike. As I said in March, the bill could increase volatility, decrease liquidity, and decrease efficiency. The proposed quarter percentage tax, or 25 basis points, would be applied to the value of every transaction. If the average stock price is $20 per share, it would add 5 cents per share to both sides of the transaction. High frequency traders would be hardest hit as they operate on very thin margins, and comprise nearly 70% of daily volume.
This could be a stealth move, designed to make Main Street happy because it will think that only Wall Street will pay, one that could lead to the demise of HFT. The truth of the matter is that Wall Street will be able to figure out how to get the 10 cents back, Main Street traders (that's you and me) will not. Once again the government is trying to interfere in something of which it has no knowledge. It is a dangerous game.

London Bankers to Have a Holly Jolly

2009-12-18T09:03:00.001-05:00

As I (and many others) have predicted, there are already moves afoot to make sure that London-based bankers have a holly jolly Christmas. According to the Financial Times, Deutsche Bank decided to 'share the pain' and spread the UK supertax among staff globally. I can just hear cries of despair coming from Frankfurt, Zurich and Singapore. Apparently some US banks are also considering this, cue howls of outrage from Wall Street. In a separate move, as reported by the Guardian, a group of top UK banks are trying to convince the UK Treasury to take a $2bn payment from them instead. Clearly there is a lot of money floating around as the result of clever traders making the most of low-interest capital supplied by our governments and us taxpayers. Well done boys, take those bonuses and spend them on expensive new cars or kitchens (feel free to support my uncle's upscale custom kitchen business, too: www.kennebeccompany.com!). But make sure you save enough to pay any niggling extras on your health insurance bills. If Obama cannot force through some kind of national insurance company regulation at the very least, then we will all continue to be rogered senseless by the rising costs. A friend just got the best quote possible for health insurance (he is freelance too) - $1,000 per month. I know people who would be thrilled to MAKE $1,000 per month, never mind spend it on lining the pockets of fat cat insurance companies. I have never understood why these companies (which, along with drug companies, make up nearly 40% of GDP in the US) have been regulated on a state-by-state basis. Robber barons, the lot of them. I hope they get a nasty surprise in their Xmas stockings - a big, ugly national regulator.

He Who Cannot be Bothered

2009-12-15T09:09:00.000-05:00

Not enough has been made of the fact that three mega-bank CEOs could not be bothered to get to a meeting called by President Obama in Washington, D.C. yesterday. Lloyd Blankfein (Goldman Sachs), John Mack (Morgan Stanley) and Richard Parsons (Citi CEO Vikram Pandit was already not bothered so he was sending the chairman) called in delayed because their commercial flight was fogged in. A frequent traveler myself, I know how frustrating this can be. But surely with all of their money and resources they could have found another way to travel? There is a train - the Acela Express. There are limos - it is only 227 miles says Wikipedia. And despite the vitriol it might have inspired in the chattering classes, there are private planes that can be chartered at a moment's notice. But wait. Why didn't they tag along with (J.P. Morgan's) Jamie Dimon on the corporate jet? Poor old Jamie had to face the music alone (OK, with 9 other CEOs).
One of the things I learned in my (mediocre state university) business college was that you have to behave responsibly in order to get and keep a job. That came as useful advice when, for example, I had an early morning meeting or conference in Madrid or Oslo. I would go there - gasp - the night before. The company paid for the hotel room to make sure that I arrived on time and fresh. Imagine that. And last time I checked there were hotels in Washington, D.C. Plus I believe despite the credit crisis Citi, Goldman's and Morgan Stanley executives still have expense accounts. In my opinion there is just no excuse for not making that meeting. It makes the three CEO's look disorganized, or arrogant. Or both.

The Millennium Starts with a Bang

2009-12-14T08:45:00.000-05:00

Almost exactly ten years ago I was sitting at my desk at Risk Waters off of Piccadilly Circus and marveling at all of the Millennium bug hype. As editor of two newsletters it was my responsibility to winkle out just what technology and market data companies were afraid might go wrong on January 1st, 2000. And to write sensational (well, for technology anyway) stories about these potential technological time bombs. Reuters was one of my best sources, it had an actual "Millennium bunker" set up inside its data center on the Thames. There its technology gurus sat and analyzed their systems, on the alert for any glitches. Product marketing staff and even corporate communications had to do shifts around D-Day. I thought it was hilarious. There were Millennium parties where bankers and techies and geeks would sit and drink and wait for their shifts at various "bunkers" around the City of London. We all know what happened on January 1st, 2000. Nothing. Zip. Nada. Now it seems that the Millennium bug was more subtle that we had thought. It wormed its way into electronic trading systems and algorithms and bankers' minds, creating the desire to trade more, make more money, invent more complex derivatives. The Dot Com boom and bust whetted the bankers' appetites for more and better technology. High frequency trading was a glint in some geek's eye by then. The speed at which the technology for lightning fast trading evolved was staggering. We went from a place where a couple of all-electronic exchanges which were considered somehow lesser beings (Nasdaq, Eurex) to a place where every exchange in the world desired to emulate them. As soon as was technologically possible the banks had dumped all of their 'vanilla' trading onto algorithms. Then ECNs came into the picture and they needed to route orders more intelligently. Cue the new smart order routing algos. Then they thought, 'hey, if I can spin a gazillion trades of XYZ company when it is being hyped, I can make a trillionth of a penny on each round turn. That adds up!' And voila - high frequency trading was invented. Then all of the new derivatives (credit default swaps), all of the bad ideas (sub-prime mortgages), and all of the greedy bankers (you know who you are) did what the Millennium bug never did. They imploded. They almost took the global economy to meltdown stage. Those bunkers might have come in handy after all.

Toothless, Toothless, Tooo-ooothless

2009-12-11T14:22:00.002-05:00

Hum along to the Neil Young song "Helpless". I'm referring to the latest version of regulation from the dingbats that call themselves our leaders in Washington, D.C. As feared (by me), so-called 'commercial' end users of derivatives will not have to toe the OTC clearing/transparency line. In theory I can agree with this, as they of course have to hedge commodities and currency exposures. In practice it is clear that none of the regulators, and in particular the CFTC, has got a clue what the difference is between 'commercial' and 'speculative trader'. If the CFTC and the government think that Cargill (one of the examples that I keep seeing) is a commercial hedger only, then they are smoking something not quite legal. Cargill is one of the biggest speculative traders out there. It is also a privately held company so much of its business is just that - private. The bill is so watered down and full of loopholes and double-talk that I find it hard to believe that even one of the politicians on Capitol Hill truly understands what he or she is reading. The bottom line is that the powers-that-be on Wall Street gave the government a good, old-fashioned rogering - probably threatening direct financial consequences if regulation was too strict. Given that anywhere from 12-14% of US GDP reputedly comes from financial services, it would take a brave politician indeed to truly stand against them.
Although some of the things that slid through, such as not requiring foreign exchange trades to be cleared, make sense. FX markets work perfectly well without getting exchanges involved. I also support limiting bank ownership of clearing platforms. I never understood how the 'fox guarding the henhouse' situation was allowed to begin with.

UK Stings Bankers with 50% Bonus Tax

2009-12-09T11:29:00.000-05:00

As if UK Prime Minister Gordon Brown wasn't unpopular enough, his government has added insult to injury by stinging UK bankers with an extra 10% tax on their bonuses. For one year only (thus far) City high rollers will have to pay 50% tax on their bonuses. The government is also adding taxation to employer pension contributions. The UK Finance Minister (unbelievably) thinks that this will deter banks from paying out-sized bonuses (and contributing to 'wealthy' people's pensions) for a year where profits were fueled by government bailout money. I can see his point, but he obviously does not know the beast. Traders will threaten to walk if their employers don't make up the difference in bonus. This has happened before. There are already teams of accountants and lawyers working with City types to try and find ways to prevent City boys from 'suffering' unduly.
If the employers cave in to traders demands, it means that the bonus pots increase and the actual amount that employees get will also increase. This erodes shareholder value, and is the exact opposite of what the much-deluded Labour government is trying to achieve. Otherwise it means that employers will simply defer bonuses until next year - paying only a small percentage this year and staggering the rest over the next couple of years.
I can see that the Labour party's ludicrous solution will appeal to the unemployed or blue collar workers in the UK. Those on the dole that sit around all day shouting at the telly will cheer. But the UK middle and upper classes will not. It took a long time for paychecks in London to equate even remotely with competitor cities such as New York or Geneva. Watch out for mass emigration.

Obama Scores with EPA Coup

2009-12-08T12:38:00.001-05:00

The timely usage of the EPA to help control carbon emissions was an absolute coup for President Obama and his team. After all, why wait for Congress and the Senate to agree on something that almost none of them understands? Plus the pressure on politicians from industry must be enormous, making it difficult for even the most environmentally correct to vote for change. Industry in the US is notoriously paranoid about having to clean up its emissions. So much so that George W. Bush actually took steps to weaken the Clean Air Act in 2005, so that coal-burning power plants (in particular) did not have to comply with lowering emissions. (He went against his own father, who had strengthened the EPA's mandate in 1990 to fight acid rain.) According to SourceWatch, in 2004 US coal-fired power plants produced 35.8% of total US CO2 emissions, and 8.0% of total world CO2 emissions. To put this in perspective, U.S. coal-fired power plants produced more CO2 in 2004 than was emitted by all sources in all of Africa, South America, and Central America combined, said SourceWatch.
The EPA option has been waiting on the sidelines since 2007 when the Supreme Court ruled that the EPA violated the Clean Air Act by not including greenhouse gas emissions. Obama's coup was to wait and take the EPA route just before the Copenhagen summit on climate change, where the US was destined to look like a giant polluting chump. I have my doubts that the EPA can effect immediate change, after all it took 23 years for it to phase out lead in gasoline due to pressure from Big Oil and Big Car. But it got there in the end. Obama's challenge now is to ensure the EPA remains a viable, well-funded and - above all - powerful organization.

What Defines Socially Useful?

2009-12-01T09:49:00.001-05:00

A bit of a bunfight has broken out in London about whether the City (read investment bankers) is socially useless or not. Lord Adair Turner, head of the FSA, said that some types of financial innovation are socially useless, according to Financial News. Michael Spencer, chairman of uber-broker ICAP begged to differ. He said he was "genuinely offended" that Lord Turner would say such a thing, then blamed the Labour party for allowing the financial crisis to happen. The City of London has not changed much under Labour, nor has the regulatory system in the UK, so that was a bit self-serving (Spencer is treasurer of the Conservative party). Spencer also spoke out against Lord Turner’s recommendation of a Tobin Tax on financial transactions. Here, I agree with him. A tax on transactions will only force more players out of London. Switzerland is already gaining the lion's share of hedge funds that are moving out.
The City has its uses, the biggest of which is that it generates huge amounts of corporate and income taxes to spread all around the country. As for financial innovation, I am going to wade in here and say that I think most financial 'innovation' comes from US banks - certainly most of the credit derivatives that helped cause the crisis were invented here. The innovation of such products cannot be called 'socially useful' unless you define it as 'money spinning'. The obfuscation and complexity that they add to the system are not in any other way useful.

Why I Hate Black Friday

2009-11-30T08:29:00.001-05:00

I hate Black Friday. Black Friday is the most ridiculous excuse for bad behavior and reckless spending I have ever heard of. But when your economy relies so heavily on consumer spending, I guess the troops have to rally the spenders. Analytics firm ComScore says Americans spent 3% more this year on Black Friday. Reuters says they spent significantly less than last year. The stock market waits with bated breath to see who was right, hoping passionately that spending was up. Because that tricky Dubai situation really dampened everyone's spirits on Black Friday. Still, it didn't stop idiots from queuing up two days before Black Friday, camping out in the rain and the cold to be first in line when the doors opened. Some people went so far as to actually miss Thanksgiving dinner because they were waiting in line at Wal-Mart. Last year a store worker was trampled to death by desperate Wal-Mart shoppers. I'm going to go out on a limb here and say that there is something seriously wrong with people who spend all of their Thanksgiving holiday queuing up for and fighting over bargains at retail stores. Yes, OK, you save 25% or 50% or 75% on flat screen TVs. Maybe you couldn't afford one without the discount. But the question is - if you have to queue up for two days to 'save' money, maybe you really shouldn't be spending it at all. One woman who was interviewed on TV on Friday said that she had lost her job and that buying food was becoming a real issue. She said this as she queued up at a store to buy crap for Xmas. She can't afford food, but she can afford to buy crap as long as it is on sale. TV stations, advertisers and retailers have teamed up to tempt shopping-addicted Americans to do the Patriotic thing and buy stuff to support the economy. Maybe it works, but it isn't pretty.

Black Thanksgiving

2009-11-27T08:40:00.000-05:00

Today, known as Black Friday in America, may go down in history as Black Thanksgiving instead. Some are already dubbing it Black Swan Friday. Yesterday, as the US sat down to turkey and interminable American football games, Dubai imploded. Dubai World, the government-run bubble machine, cannot pay its $60bn debts. It built islands in the ocean, hotels, office buildings, residential palaces - most of which are either unfinished or unoccupied. The fact that it is probably close to bankruptcy comes as no surprise to anyone pays the slightest bit of attention to part of the world. The words "well" and "duh" spring to mind.
But at least we don't have to worry about unemployed Middle Easterners jumping aboard ships and sneaking into US ports courtesy of Dubai World. Because DW also owns DP World, the marine terminal operator that bought 22 major ports in the US. British port and ferry firm P&O sold its leases to manage the ports - including New York, New Jersey, Philadelphia, Baltimore, New Orleans, and Miami - to DPW in 2006. Congress freaked when it found out, citing national security. Then President George Bush tried to veto any blocking of the deal because - well heck, Dubai is our friend. In the meantime DPW sold the ports to the less-than-saintly AIG. What a palaver, eh? But imagine if DPW was bankrupt and still owned some of the most important ports in the US.

Helping the 'Lost Generation'

2009-11-25T11:52:00.000-05:00

The young adult children of baby boomers, the so-called echo-boomers, are going to suffer the most from the current recession and will also suffer the longest. The Financial Times calls them the 'new lost generation, ' the Associated Press uses 'boomerang kids'.
Whatever they are called, young adults aged between 18 and 29 are in trouble. Jobs are scarce and older Americans are holding on to the ones they have longer. Among 16 to 24 year olds, less than half are currently employed, according to an article by the AP. The FT put unemployment among 20 to 24 year olds in the US at 15.6% last month and for 16 to 19 year-olds it hit 27.6%.
Things are so bad that after college, instead of heading to the big city and their own apartments, they are headed right back home to Mom and Dad. A study released by the Pew Research Center shows that the number of young adults living alone has declined to levels not seen since the recessions of 1982 and 2001. About 20 million people between 18 and 34 live at home with their parents - almost 30% of that age group, said the study.
So what can be done to help the 'lost generation' while it sits in its collective bedroom and applies for job after job? Further education is always an alternative, but it is expensive. And we could end up with a hugely over-educated set of echo-boomers with no actual job skills. Learning a trade is another. But most American trade schools are only offering 'degree programs' where the kids waste a disproportionate amount of time on so-called 'core' courses such as basic math, English and psychology.
Perhaps the answer lies in our business community. Businesses have cut staff to the bone since the credit crisis, and few are looking to hire anytime soon. Why not hire some of the boomerang kids to learn some real job skills? If businesses offered internships - even unpaid - they might just find that their young employees are just what they need going forward. If more young adults could go out to work every day and learn how to interact in a business setting, they would have some much-needed experience upon which to one day base a career. Perhaps the financial services industry could set aside a little bit of money from the bonus pool and start such a program. It would be ground-breaking.

All the News that Fits the Search Engine

2009-11-23T07:23:00.000-05:00

I may be one of the few people around the world(the ones that care that is)that was not surprised to see that News Corp is hooking up with Microsoft. When I was at Dow Jones Telerate in the late 1990's there was a rumor flying around that Microsoft was one of the interested buyers for the Dow Jones market data arm. As it happened Bridge Information Systems got DJT for a steal, then demolished it. But when Reuters was struggling and offering itself around the market nearly a decade later the Microsoft rumor again surfaced. But Thomson got the prize that time. After both sales the market data industry sighed with relief and smugly told itself that a technology company couldn't possibly understand the market data business, nor would a Microsoft add any value to the content world. That was then. Even when Reuters sold to Thomson Corp Microsoft did not have a viable search facility. Google was kicking it arse. Now Microsoft has spent gazillions on its Bing search engine and it needs an edge to chip away at Google's market share. Finally technology meets news content. Many have lamented the demise of the printed newspaper, knowing there is still a need for quality journalism out there. But MSFT having exclusive access to News Corp content should only be the beginning. If Bing were the only place I could search for New York times, Wall Street Journal, Financial Times, Thomson Reuters, Bloomberg and Economist articles then Bing it would be for me. MSFT could take control over searches for the financial services industry first then move on to a more generic audience. That is a business model Reuters and Telerate would have killed for.

Let the Mud Flinging Begin

2009-11-20T08:25:00.000-05:00

It is no secret that the economy is in a tailspin that is likely to last another year or so, despite what the perky-jerkies at CNBC tell us. Statistics can be tweaked and cherry-picked to highlight the good stuff easily enough (we journalists are great at that), but many people are beginning to look underneath the headlines for the truth. So when Republican senators blamed US Treasury Secretary Timothy Geithner for the mess the country is in and called for his resignation, it was clear that there was a hidden agenda. This is it: Get the American people riled up about losing their jobs and their homes and blame the current administration loudly and often. Then get Sarah Palin to write a book and go on a 'book tour' where she gets 'unfairly' criticized by the lefty loony press and praised to the heavens by Fox News. Then get the UK's Daily Mail to run an hysterical story about floating storage for oil - telling readers that it is the fault of these 'sharks' in the oil business that petrol prices are rising (thereby removing the blame from an economic recovery being the reason). Then cherry-pick all of the worst economic statistics and depress even CNBC. Then head into the 2010 elections with every center-right or right-winged person in America that uses Glenn Beck as their primary news source prepped to vote. Goodbye Democratic majority. Mr. Geithner showed yesterday that he has grown a pair. Now he has to explain to the people just how well his policies are working. Because - to be honest - it is rather difficult to see.

Recipe for a Bubble

2009-11-17T13:49:00.000-05:00

I used to hate Bubble and Squeak when it was served at my oh-so-mediocre high school cafeteria (both were mediocre in case you were wondering - the school and the cafeteria). The joke then was that inside the Bubble and Squeak was baked a mouse - hence the 'squeak' part.
Today's bubbles - the stock and commodities markets - may be showing signs of a squeak but the media (school lunch ladies)and the Fed (the school principal) are serving up the bubble regardless. Yesterday's lovely surprise squeaker was Meredith Whitney who told a stunned Maria Bartiromo on CNBC that she hadn't been so bearish in a year, then predicted a 'double dip' recession (see my blog dated 05/08/09). The CNBC talking heads spent an hour disputing Meredith and spouting spurious crap to support their uneducated (and unasked for) opinions. Then Fed chairman Ben Bernanke reassured the world that this was no bubble, duly followed by Donald Kohn (vice chairman)and Janet Yellen (San Francisco Fed). The words 'protesting' and 'too much' spring to mind. UBS' head of floor ops Art Cashin popped up on CNBC this morning and said something similar. CNBC might have to jump off of its perma-bull and smell the manure soon.

Crimbo Takes Center Stage

2009-11-16T07:58:00.000-05:00

The holidays/Christmas/Hannukkah/Kwanzaa - or Crimbo as the Brits call it - is taking center stage early this year. As the economy crumbles around us and real unemployment probably tops 20%, retailers are desperate for us to start spending. In London the Xmas lights on Oxford Street and Regent Street were already up and lit last weekend. Last Sunday Oxford Street was so full of shoppers that you had to walk in the street. Here at the Cambridge Galleria yesterday I heard Xmas music in all the stores, and saw people walking out of Best Buy with mountains of boxes. The retail spending figures will be eagerly awaited by retailers and investors alike. If they are indeed up from last year, the stock market will no doubt rally in celebration. It seems you cannot dampen those Crimbo spirits. But wait. Goldman Sachs has canceled its Xmas party - again. The embattled bank apparently thought that throwing a glitzy bash might just enrage those taxpayers that bailed it out of last year's mess. And it might also remind them that Goldman Sachs employees are girding themselves for a bumper bonus season. They will have a Holly Jolly regardless of growing unemployment lines elsewhere. At the same time in a display of utter idiocy RBS applied for a liquor license (from 7am) and a permit to hold karaoke parties in its London offices, according to the Telegraph. This came only days after the bank took another 33bn pounds in bailout money from the UK government. I can see its probable logic in holding in-house Xmas parties - so no one could see that the bank was frittering away taxpayer money. But RBS was rumbled before it could party down. Crimbo parties or not, neither bank has learned anything from the economic crisis they helped to cause. That is called wasting a good crisis.

The X Factor

2009-11-10T04:35:00.001-05:00

I leave London today just as I am getting to know it again through the local media. It takes about a week to get the hang of what each politically-oriented newspaper is trying to say. The bottom line appears to be that the UK is falling apart. Confidence in the government is very low. Binge drinking and the 'dumbing down' of young Britons remain on the rise. The Daily Mail's Quentin Lett is blaming feminist Germaine Greer for today's lager-swilling, sexually active females (never mind that the UK's drinking culture has been ingrained since before Ms. Greer left Cambridge). Some people on TV this morning blame Simon Cowell for bringing down the tone of British entertainment and sounding the death knell for television everywhere. He voted to let the public decide on who would win the X Factor, another Pop Idol/Britain's Got Talent clone. The public decided that a pair of moronic, spiky-haired twins from Ireland would win. I guess the government has taken as much blame as is possible for the mess the country is in so Simon Cowell is the next best person on the list. One wonders about the quality of education these days when the quiz on GMTV is Q) What do you pour ontop of Christmas pudding? Possible answers: Tea, brandy or milk. The prize is 25,000 pounds. And I may only be a token Brit but everyone knows you don't pour tea or milk on top of Christmas pudding. Perhaps the quiz is meant for 3 year olds so that their parents can afford to send them to university. Then they can learn to spell better than Gordon Brown, who is under fire for getting a few words spelt wrong in a letter of condolence to a fallen soldier's parents.

Property Lust Follows Bust

2009-11-07T03:42:00.000-05:00

I mentioned two days ago that I was amazed by the continuing high property prices in central London. Last night I picked up a copy of the London Lite newspaper - a tube station giveaway - and there was a small article in there confirming my suspicions. The paper says "Home prices up 1,300 (pounds) a day" in Chelsea, Kensington and Notting Hill. This is said to be due to an "extraordinary autumn revival fuelled by hopes of bumper City bonuses". Downstairs from my rented flat (in Kensington) is an estate agent - the cheapest flat in the window is a 'light-filled studio" for 425,000 pounds. Not that I was even considering a pied-a-terre in London, but Holy Cow. My son tells me that Paris prices have barely moved during the crisis - up or down. And now with Sarkozy's government cracking down on financial markets' bonuses, they are unlikely to be bidding up property there in a London-like fashion. So, while I am not a great fan of reigning in bonuses, there is a very human element to doing so. If bonuses are not on the 'too big to flinch at ridiculous prices for flats' side then people don't pay ridiculous prices. This keeps the property market accessible to others who simply want to live in a city centre near work. Commuting two hours each way has become almost the norm in London among younger people. Affordable homes are so far away and yet jobs remain in the centre. This is the opposite of urban planning.

The Cheese Stands Alone

2009-11-06T04:53:00.000-05:00

The UK has changed little since I lived here, but Euro-scepticism does seem to have solidified. The UK has never been particularly keen on being part of Europe (witness pounds, not euros) and people today seem to consider the adoption of the Lisbon treaty a stealth bomb maneuver.Wannabe UK Prime Minister David Cameron is raising some European ire with his Conservative party platform to take back power from the EU. The French have called the move "pathetic" and say that the UK is "autistic" in its obsession with taking back power. I have no real problem with Europe or the EU in principle, but I cannot imagine that the EU has a chance to be a world power rivalling the US unless Britain is a part of it.
The movement toward autonomy is not surprising given the state of the economy here. Many blame immigration (just as they do in the US). It is true that Britain's crazy asylum laws bring in far more immigrants than can be dealt with - or afforded. Others blame the Labour party for failing to reform pretty much everything. Gordon Brown is deeply unpopular. One of my friends, a peace-loving person normally, hates him so much that she mentioned performing acts of a disturbingly violent nature if he were to come into her personal space. I just watched him on TV blathering on about Afghanistan and muust admit that he is probably the most boring politician Britain has had since John Major. But I can't quite figure out why he is so hated, apart from the economy.
The City seems pretty unchanged, if a bit quieter than it used to be. The shops (including Boodles and de Beers at the Royal Exchange) and restaurants are still busy. Bonuses are said to be rising again, so I expect that central London property prices have just about bottomed out. Plus ca change, really.

Greetings from London

2009-11-05T05:07:00.001-05:00

I arrived in London yesterday for my first visit in three years (apart from an overnight stay due to a delayed flight). The sun is (uncharacteristically) shining , making it more pleasant to walk around and see how the place has weathered the recession. People are extremely cautious about spending money, or commiting to it, a PR friend tells me. She says they prefer to wait until the Labour party is sent to Coventry for another 17 years after the next election. Exactly what difference the Tory party or a coalition Tory/Lib Dem government will make to companies is unclear. Presumably they will roll back some of the proposed taxes that will make the City untenable as a place to work and do business. Like 1979, when I first moved to London, the shops are the first evidence of recession. Every third shopfront in the Kensington/Notting Hill/Chiswick route I took yesterday is boarded up. There is a lot of construction in residential areas, however. Perhaps City bonuses were not as bad as the media made them out and City boys bought in-town digs at the lows of the property market. I say 'lows' with a deal of sarcasm. A two-bed, two bath flat in Notting Hill - my old neighborhood - is still going to cost you upwards of 800,000 pounds (around $1.3 million US).
The strangest thing I saw yesterday was the one-year new Westfield shopping mall. It is the largest shopping mall in Europe and I cannot even describe how big it is. It is plunked down smack in the middle of grotty Shepherd's Bush, right behind the tube station and it looms over like a gleaming giant spaceship. Inside are all of the most exclusive British and Italian designers plus a few American shops - the Timberland shopfront looks like they transported a whole Canadian forest to build it. There are champagne bars and comfy seats with wireless connections and sparkly Xmas displays that stretch to 100 foot ceilings. De Beers has a diamond shop (imagine your significant other saying 'I want to marry you, fancy going to Shepard's Bush to pick out a ring?'), and there is the biggest Marks & Spencer's I have ever seen. The whole thing looks like a nouveau-riche Russian's dream come true. And it was busy. On a Wednesday afternoon. My friend tells me that the parking garage is full on any given weekend day. I can only imagine that it is the new gathering place for the unemployed. There were dozens of people using their laptops in the comfy seating areas - looking for jobs perhaps? The climate-controlled space means that you can escape the cold and rain (it is clouding over again right now) and do some web-surfing and people watching at the same time.Very odd indeed give the economic climate.
I'm off to the City now to see a friend and employer of my freelance services. I'm curious what I will find there.

An Exercise in Frustration

2009-10-28T11:23:00.001-04:00

I was preparing a comment on today's Congressional panel on dark pools and HFT etc. when I noticed an article on Reuters saying that Goldman Sachs had sent a memo on the subject to the SEC. The memo was "posted on the SEC website", said Reuters. As a diligent reporter I followed up and went to the SEC's website where I then tried to locate said memo. A frustrating hour later I had no more information than I would have had if I'd stood in the street and shouted "What is in the Goldman Sachs memo?" to passersby. With all the banging on the regulators are doing about transparency, the SEC's own website is the most egregious example of opacity I have ever seen. It is an impenetrable collection of officious-looking government documents and EDGAR filings (always a riveting read). To even find a press contact a journalist has to know exactly what the SEC calls the press office (Office of Public Affairs) and where to find the phone number (under contacts, not to be seen anywhere in press releases or news which is customary on websites). A phone call ensued to ask Public Affairs where to find said memo. He was not surprised that I was having trouble and kindly walked me through it. Six clicks later and still not obvious, there it was - at the bottom of another internal memo. It would have been easier to cadge the information from Reuters or Zerohedge (which had it first, I believe). So, Ms. Schapiro, when you next opine about transparency, maybe you should look inward. Information is key when trying to catch criminals and control clever bankers. And if anyone has to mine the information out of the SEC website, the criminals will be laughing all the way to the Cayman Islands before anyone knew they existed. (The memo, BTW, looks like a presentation I saw at Goldman's about a year ago - slightly doctored with its own 'recommendations' for the SEC. Surprise, surprise it favors the status quo for HFT and dark pools. But the banks is down at least on naked sponsored access (DMA), which it thinks could pose systemic risks.)

My Favorite Things

2009-10-23T09:06:00.001-04:00

The front page of today's Financial Times was so full of alliteration that it inspired me to write a song. Feel free to sing along to the tune of "My Favorite Things" from the Sound of Music:
           Benchmarks on bonuses,
                 New rules on risk-taking,
           Demolishing dark pools
                 and banning book-baking,
   Snitches and wiretaps a prison cell brings,
                  These are a few of my favorite things.
           When the Fed bites,
                  when Feebies sting,
           When you're dealing bad....
                  It pays to remember my favorite things
            And reel in the greed a tad.........

Dark Puddles

2009-10-22T08:02:00.003-04:00

The SEC has finally cracked down on dark pools, limiting the amount of trading that can be kept quiet to 0.25 percent of a company's shares, from the 5 percent previously. This is a good first step. It means that traded prices have to be made public sooner. There have been calls for greater transparency for dark pools since their beginnings. Some of the largest pools are owned by investment banks where they began as internalization engines. While this saves millions in brokerage and exchange fees for the banks and their customers, it also means that no one else can play. Some of the banks have allowed other dark pools to integrate with their own. Last year Morgan Stanley signed bilateral deals with Goldman Sachs and UBS to do just that. But access remains limited to a few chosen partners. Broker-owned dark pools and crossing engines have been struggling for years to get the banks to cooperate and allow mutual access. To add murkiness on top of opacity, volumes in dark poolshave been reported in two different ways. The sellside pools often double-count the trade, whereas the independents usually count a trade once. Some pools allow trades of any size, some insist that a client do blocks of 70,000 shares or more. The disparity between, and secrecy from, many dark pool operators has kick-started the SEC's new campaign for transparency. The new chairman of the SEC, Mary Schapiro, seems to be doing what Gary Gensler's CFTC cannot - kicking ass. The SEC is not cowering from the task because the US exchanges or banks might lose business. And they might - Europe is gearing up its post-MiFID markets with several dark pools of its own. And quality volume in a sector can already be found in European pool, satifying an investor's every desire even if it isn't in a US listing. Maybe what it takes is a woman. When a woman is confronted by whiny little boys who want to keep potentially dangerous toys, she usually tells them to shut up and find some other toy to play with. That the boys - investors, banks, etc. - may have to go overseas to find these toys is neither here nor there. She just doesn't want them doing it on her watch and in her patch.

CFTC Gets Cold Feet

2009-10-21T12:36:00.001-04:00

Just when I thought I couldn't be any more disappointed in the weak-minded, lily-livered bodies that we call US 'regulators' I saw an article in the Financial Times this morning that made me want to scream. It appears that the CFTC is going to wimp out of trying to impose position limits on commodities, particularly oil. It is afraid that the US will lose business to other centers if it does. This is probably true. the UK is ready and waiting for more traffic through ICE, and the Dubai Merc is poised to take advantage of any US outflows. But the fact remains that the huge positions taken by non-oil entities in 2008 contributed to a massive oil price bubble. CFTC Commissioner Bart Chilton said as recently as July that the CFTC was not going to "minimize the role that speculators are playing." Now he is dancing around the subject stating that the regulator would "set the bar high" regading limits. Michael Dunn recommends offering "generous" limits. Jill Sommers prefers to err on the high side as well, but I get the feeling she is really focused on OTC issues. Only chairman Gary Gensler seems to be holding firm on the limits idea. It is new commissioner and unknown quantity Scott O'Malia who holds the wild card in my opinion. O'Malia was originally nominated by big-oil, big-car GW Bush and somehow slipped by President Obama's due diligence team. O'Malia was a hard-line lobbyist against environmental measures and for electricity deregulation. Unbelievably he worked for the now-bankrupt electricity company Mirant, which contributed greatly to the spectacular electricity meltdown (also involving Enron) in California in 2000-2001. After the crisis, CA attorney general Bill Lockyer, said that Mirant was "one of the worst offenders during the Energy Crisis. They told grid operators generating units were down when they weren't. They created bogus grid congestion, then received premium payments to relieve it. To avoid in-state price caps, they created the illusion of importing energy from out of state." O'Malia said at his confirmation hearing that this experience opened his eyes to the consequences of inadequate regulation. Let us hope so. I will be watching you Mr. O'Malia.

Beware the Bad News Bears

2009-10-16T09:19:00.001-04:00

It is freaky Friday at the end of the a very strange week where bad news bears have been roaring about unemployment, foreclosures, and government debt while the Dow Jones Industrial Average touched 10,000. I say 'touched' because the DJIA has been dancing around 10,000 for a few days and when it did come near the magical number it pulled away like a finger touching a hot iron. It finally closed above 10,000 yesterday and the baseball caps trumpeting Dow 10,000 were flying around the NYSE trading floor. Icap's analyst Walter Zimmerman gave them the "Golden Pom-Pom Award" for for shameless displays of economic or financial cheerleading with no corresponding bullish technical indications.Themis' Joe Saluzzi tried to talk ebullient CNBC anchors down off of their high and failed. Meanwhile JP Morgan and Goldman Sachs are raking in the dosh thanks to interest-free credit from the Fed. Those banks with more exposure to the real world, i.e. mortgages and credit cards, are bleeding money in the third quarter. The housing market is not recovering, just the opposite. We must not forget that it was the housing market that toppled this house of cards. We went from dot com bubble to the housing bubble to the commodities bubble and now the stock market bubble. All led by a Federal government (whatever the party) who cannot bear to give the American public bad news. But the bad news bears are beginning to overwhelm even the cheerleaders at CNBC. Zimmerman warns that this rally to 10,000 is: "giving bearish RSI divergence sell signals on both daily and weekly charts". If oil prices continue their path back to $100 it may once again be the straw that breaks the bubble's back. I think I'll stick to bricks and mortar. Albeit without Chinese drywall (the next problem for the housing market).

Be back soon

2009-10-13T17:20:00.002-04:00

I am knee-deep in a project that is taking all of my time. Blog will be restored next week!

Wretched Excess Filters Through to the Dollar

2009-10-09T13:54:00.000-04:00

The weak US dollar does not come as a surprise to anyone who trades FX or watches the economic barometers that have been flagging trouble for a few years. The wretched excesses of the consumer, aided and securitized by the banks and nurtured by successive US governments are finally coming home to roost. George Soros said at the World Economic Forum that this is "basically the end of a 60-year period of continuing credit expansion based on the dollar as the world's reserve currency."
For a while there a perky (some say too perky) stock market was the placebo. But when the dollar started creeping lower again reality hit. The gigantic budget deficit, the US Treasury printing money, and a general slowdown in FX trading are all contributing to the lack of support. (Data from six of the world's FX committees showed average daily FX turnover down nearly 25% from Apr 2008 to Apr 2009, according to Profit & Loss Magazine.) Secret meetings among oil-producing and consuming nations to try and figure out a new reserve currency have been widely reported. The almighty dollar's dominance is under threat. But I have a trick that anyone is welcome to use in trading or hedging the dollar. With alarming regularity the dollar seems to hit its yearly lows when I am abroad. I had the deeply unpleasant experience of paying $1.80 for a euro in April 2008 in Paris (the print was at about $1.60 at the time). I am planning a trip to London early in November, so expect the dollar to be hammered down further at that point. Only to rebound when I am back in the USA.
BTW, I was way off on Phibro. It went to Occidental in the end, which is a good fit - E&P meets trading and speculation. Oxy only paid a bit more than 1X net earnings for Phibro, which I found odd. But as a source pointed out Phibro owns nothing but bums on seats. And brains, hopefully. Maybe Andy Hall is having the staff unpack?

The Duh Factor

2009-10-08T11:07:00.000-04:00

Call me gobsmacked. The SEC has just now called for access to real-time data for OTC swaps and derivatives. The SEC said that the absence of this data "hampered its efforts to investigate potential fraud and market manipulation in OTC derivatives markets" during last year's crisis, according to Securities Industry News. Big Duh. There has been a massive gap in coverage for OTC derivatives for quite some time. Services such as Markit and Reuters were trying to close some of the gap by offering derived or calculated prices, but so many instruments were customized and one-offs that it would be impossible to get data on them. One of the ways to get better access to OTC prices and deals would be to automate them and send them through a clearing house. This was going to be one of the major foundations of new post-crisis regulation. But wait... Barney Frank, the chairman of the U.S. House of Representatives Financial Services Committee said Wednesday he does not expect Congress will require all end-users of OTC derivatives to use central clearinghouses. He said that anyone using derivatives for 'risk management' purposes should be exempt. This means no one WON'T be exempt. CFTC Chairman Gary Gensler told reporters after Wednesday's hearing: “As just about all swaps could be defined as being used for risk management purposes, we’re concerned that unintentionally the category of ‘major swap participant’ could have been narrowed so significantly, or even to a null set." Banks 1, US Government 0. The pressure from the banks' lobbyists must have been more than Mr. Frank could handle. If anyone was in any doubt who really runs this country, doubt no more.

Prophesizing Phibro's Future

2009-10-07T07:28:00.000-04:00

The Financial Times today clinches what many industry-watchers have foreseen: that Citi is trying to sell its oil-trading unit Phibro. It is no surprise given the clamor that arose when CEO Andy Hall's pay packet was revealed. Although a $100m bonus seems ludicrous to most people, it seems Hall deserves it. Phibro has made Citi around $2bn in profits over the last five years, using little of the bank's cash for leverage. Trading and hedging physical oil is not for the faint-hearted, nor for the inexperienced - especially in the oil price climate we have witnessed over the past two years. Hall has not lost money in over 15 years, sources tell me, which is pretty good going in any business. So, after reading some of the blogs on Hall and talking to my favorite oil biz source, here are my predictions. 1.) Trafigura or Glencore will buy Phibro. They have stacks of cash, no fear of doing business in - ahem - sensitive countries, and retain the maverick spirit that Phibro had pre-Salomon Smith Barney/Citi. OR: 2.) Andy Hall is hired by one of the above or another high-roller trading company or hedge fund. Why buy the cow when you can buy just the milk supply? Fox Business News (that paragon of quality financial markets information) said in August that Hall had already told his CT household staff to pack up for London. I have doubts that Hall would move to London, however, in the midst of the FSA's crack down on executive compensation. My bet is Geneva.