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.
Monday, May 17, 2010
Friday, May 7, 2010
Tipping point for high frequency trading
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.
'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.
Monday, May 3, 2010
Oil and Water
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.
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.
Tuesday, April 27, 2010
Fiddling While America Burned?
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.
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.
Sunday, April 25, 2010
Regulating OTC derivatives will take more than clearing
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.
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.
Friday, April 16, 2010
Timing is Everything
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.
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.
Friday, April 9, 2010
It Was Like That When I Got Here
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."
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."
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