The Lie in LIBOR Tumbles Barclays' Diamond

   It is a shame that Barclays' Bob Diamond had to resign over the LIBOR rate-fixing scandal, but I guess it was only a matter of time before the whole LIBOR thing was rumbled. Here is what I wrote when the scandal was revealed in 2010:

March 28, 2100--"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 (about the methodology): "You are kidding." But no, they weren't."

   The LIBOR system was designed in the good old days of 'my word is my bond' where a handshake would suffice for a contract. Those days have changed into today's 'anything for a buck' and 'screw thy neighbor' mentality. I'm pretty sure LIBOR has been manipulated subtly for decades; it took the credit crisis and scrutiny of banks' behavior to "out" it. Any pricing system that relies on interested parties contributing to the end result are bound to be corruptible.
   UK politicians are already crowing about Diamond's departure. Labour leader Ed Miliband said it was "necessary and right" that Bob Diamond stepped down, according to the BBC. "But this is about much more than one individual, it's about the culture and practices of the banking industry," Miliband said.
   He is correct. Diamond as CEO of Barclays should, of course, have been aware of the banks' LIBOR practices. But I do fear that Diamond will be the sacrificial lamb for the rest of the banking CEO's. Like Homer Simpson the rest of them will be saying "It was like that when I got here." And that's not good enough.

Jamie Dimon, Rock Star

'Cause we all just wanna be big rockstars
Livin' in hilltop houses driving fifteen cars
Rockstar by Nickelback

   On the front page of the New York Times today (June 14) is a photograph of Jamie Dimon looking every bit the rock star on his way into the Congressional hearing about JPMorgan's $2bn (plus) credit derivatives losses in the UK. His testimony was described in awed superlatives by TV presenters.  One wag even said that, in PR terms, Dimon's behavior and delivery would become the template for others who find themselves in his shoes going forward.
   Jamie Dimon is not a rock star. He is the CEO of a very large financial institution which proved that regulation is not only necessary but essential.  What Dimon said in so many words was that his team did not understand the risk involved in the positions they were taking. The chief investment office did not understand the risk? That is tantamount to saying no one in the firm understands risk. One horrified trader told me: "Trading is all about a little bit of analysis, a little luck and a complete understanding of the risk you are taking and its possible repercussions."
   Call it hedging or proprietary trading, the bottom line is that JPMorgan's CIO traders did not understand the complex suite of synthetic derivatives they were playing with. They changed their value at risk (VaR) models in the meantime, inexplicably screwing themselves up further, and then changed them back again revealing the losses.
   If the CIO at JPMorgan did not understand the risk involved in its derivatives positions, can investors and regulators really believe that trading departments and CIO's at other banks understand it? I think not. The Bank of England was so shaken up that Andrew Haldane, executive director for financial stability, hinted strongly that large banks should be monitored for risk, according to Reuters.
   Dimon may look the part of a rock star, but he may have allowed his band to party too long while he was out lobbying against regulation. To paraphrase Nickelback, life hasn't turned out quite the way Dimon wanted it to be.

Jon Corzine, Chocolate and Football

   Once upon a time, MF Global's CEO Jon Corzine wanted to turn a reasonably profitable, medium-sized brokerage into a global investment bank.It didn't have a happy ending.
   Jon Corzine believed that, because he had been a trader and CEO at Goldman Sachs and the Governor of New Jersey, he was invincible. In short, he believed his own PR. My husband is fond of an expression that sums it up really well: "If he were made of chocolate he would eat himself."
   I Googled the expression and it seems to have been born in the UK with its roots in football. Now I am not a particular fan of football (English, that is. American football I loathe with a gut-twisting passion; ten seconds of incomprehensible activity and then hours of faffing about and adverts), but having spent 20 years in London knowledge of the sport has seeped into my brain surreptitiously. When you are surrounded by a primordial soup of traders and brokers and bankers who adore the sport, there is a kind of sports-osmosis that takes place.
   The first quote I found regarding eating oneself came from Scottish footballer Archie Gemmill: "If Graeme Souness was a chocolate drop, he'd eat himself."  I actually knew that Graeme Souness had played for the Glasgow Rangers and that he loved seeing himself on TV, so that made sense.
   The second quote came from Scottish football manager Tommy Docherty: "If Jose Mourinho was made of chocolate he would lick himself." When coach Mourinho joined Chelsea he said in a press conference: "Please don't call me arrogant, but I'm European champion and I think I'm a special one," which resulted in the media dubbing him "The Special One." Brilliant. 
  I digress into football to make a point. If a person takes him or herself too seriously and believes his or her own PR, that person is like a lightning bolt for criticism. Especially if he loses $1.6bn of his customers' money. MF Global trustees seem to think Mr. Corzine should have relied less on his own PR and more on common sense and accountability.

JPM: Crows' Nests and Glass Houses

   May 11, 2012-- I was listening to CNBC in my car and the smug Joe Kernen was interviewing a British woman, I do not know her identity. In a nutshell he said to her that since the British had lost their empire and had no Navy they had little right to an opinion on U.S. markets or regulatory affairs. The words which really pissed me off were something like: "The only thing Britain has left is Prince William and his wedding." While I was swearing at him via my radio, this British woman answered him coolly: "What we in the U.K. have learned is not to crow when you are on top." A brilliant answer. And one that Jamie Dimon should heed.
   When JP Morgan Chase was on top of the world, having (more or less) successfully fought off the dragons of the credit crisis and financial markets meltdown, Dimon went on a rampage to discourage any sniff of regulatory action. He sent lobbyists by the dozens to Washington, DC (all the banks did) and spoke at any and all conferences or to journalists who wanted a "balanced" opinion on regulation. He was particularly smug when savaging the Volcker Rule. His message: We don't need it. As the British woman on CNBC said, it is a good idea not to crow when you are on top.
   Today JPM sits with a $2bn loss on derivatives, which he admits they lost control of. Lost control? Losing $2bn in one month? If the market was aware that JPM had built up an untenable-looking "whale" of a position in credit default swaps over a month ago, then surely JPM's risk team must have noticed?  According to the FT, the bank had implemented some new risk modelling tools in Q1, which it has now shelved. Have they not heard of testing new applications before they go into a live environment? And where did JPM, or any other bank for that matter, get the idea that using VaR was a good idea? It was obvious after the credit crisis that over-reliance on VaR was one of the problems. (I wrote about it in Financial News in December 2008.)
   Note to Dimon: Don't go out throwing stones at regulators when you live in a glass bank.

Oil Price Reporting Agencies: There for a Reason

   Here is a little-known fact: Almost 95% of the oil in the world is priced using reporters' assessments. Amazing, no? Oil price reporting agencies (PRAs), including Platts, Argus Media and ICIS, are responsible for much of the contract pricing of crude oil, oil products and petrochemicals around the world, from the wellhead to the refinery to the pump. Regulators have had little interest in these agencies over the years until that fateful day in September 2008 when crude oil bumped up against $150 per barrel. Since then they have been trying to wrap their heads around this industry we call the oil business. The agencies have been under the microscope of International Organization of Securities Commissions since the G20 asked them to look into last year.
   Alarmed by the sudden interest, these three PRAs are trying to head off regulators by offering up a self-regulation code, according to today's Wall Street Journal. This is a knee-jerk reaction and will do little to assuage regulators, which are being beaten up by politicians trying to somehow force oil prices down.
   But regulators (and clueless politicians) should take note: there is a reason that PRAs exist. Oil is the most non-homogenous commodity on the planet. A barrel of crude oil from one North Sea platform can differ in specification enormously from one only a few nautical miles away. Every refined barrel of petroleum products and petrochemicals differs depending upon the source of the crude oil, the sophistication of the refinery, and the appetite of the consumer. There is no one way to price oil without using the human brain. Only an experienced price reporter knows how specifications differ. Only a human being can tell when a source is telling a lie (and even with experience this is difficult). I should know. I have worked as a price reporter for all three of the above agencies.All of which are dedicated to ensuring the most accurate, honest, BS-proof prices.
   Price reporting is a thankless task, no reporter gets thanked for getting prices right. But the truth is, in the long run they do. They may be wrong for a day, or even a week, but it has been proven again and again that PRAs call the market accurately over time. The regulators should leave well enough alone. The words 'can' and 'worms' spring to mind.

The Oil Business Will Never be the Same

   A new initiative known as the Extractive Industries Transparency Initiative (EITI - catchy!) caught my eye in today's Financial Times. EITI is a move to improve transparency in the trading of oil cargoes from their source, usually national oil companies, to their buyers - independent traders and oil majors. The wholly justifiable suspicion that there may be some industry shenanigans involved with doing business with producing countries such as Angola, Nigeria, Venezuela, Russia (I could go on...and on) gave me a fit of nostalgia for the good old days.
  The good old days were when a trader could take a sackful of cash on a private jet to secure the deal. He (and it was almost always a man) was a brave, resourceful McGyver-with-a-bodyguard kind of trader who often got shot at, or at least threatened with his life, in the name of getting the deal. The stories of oil trading as Wild West were what made working in the oil industry as a journalist so much fun. Not that we could ever publish them...
  EITI is mainly a good thing, no matter how much I will miss the stories. Money paid to corrupt government officials in the name of doing business was never a good thing. The money did not go to the people of these mostly poor, third world countries, it stayed in the pockets of the corrupt bureaucrats.
   There is a snag, however. Once the bribery is stopped the price of oil coming from a lot of places will rise to market levels, raising overall prices for oil. And trading companies will suffer because there will be little margin in doing such deals. If so, it is another case of 'be careful what you wish for.' On the other hand, a trader friend tells me not to worry, saying: "We'll find a way around it."

Not so Cuckoo the Swiss

   Switzerland is about to come down hard on hedge funds, which have been flooding into the country for the past few years. The combination of Switzerland's low taxes, light touch regulatory regime, and rich victims  - I mean citizens - seemed too good to be true for hedge funds escaping tougher regulatory climes. Dozens of funds and managers fled NYC and London for Geneva, Zug, Zurich and beyond, driving up property prices, filling up international schools and generally pissing off the xenophobic Swiss.
   The one thing the hedgies did not expect was that the Swiss would tighten regulations, making it into one of the most “exacting” jurisdictions in the world for money managers, according to the Financial Times. The Swiss government is claiming that it wants to be in line with new EU regulations, but that can't be it. Switzerland has never deigned to even be a part of Europe, and especially not the EU.
   So why are they doing it? Here is one clue: "Wealthy individuals would also be stripped of their automatic status as 'qualified investors' permitted to deposit money with hedge funds directly," the FT said.
   And here is another: There is anecdotal and press evidence that Swiss citizens are having to leave the country to find apartments and houses to rent or buy, because it is too expensive to live in Switzerland. The hedge fund managers, with their vastly deep pockets, are pricing the Swiss out of the market.
   My conclusion is twofold:
1.) Swiss private banking is one of the mainstays of the economy, and these banks have been losing business to hedge funds.
2.) Swiss citizens do not want to live in France or any other second-rate country outside their own borders.
   The Swiss government takes care of the Swiss first and foremost. Hedge funds better start looking for another place to hide.