The Volcker rule will let regulators do whatever they want, maybe
Next week regulators will finalize the Volcker rule, which will prevent banks from engaging in proprietary trading, whatever that is. Today's leak is that a "senior Treasury official" told the Financial Times that no one should worry that the rule will cut off legitimate market making because "the rule itself would be quite short, leaving room for regulators’ discretion." The over/under on the length of the rule seems to be 950 pages, so. The discretion thing is not all that reassuring because of the way the rule will (supposedly!) work. A good regime would be one in which (1) the rule doesn't say what prop trading is, but (2) you can ask your regulator if Thing X is proprietary, and (3) they can use sensible discretion to decide, and (4) then they tell you the answer. The problem is a regime where (1) the rule doesn't say what prop trading is, but (2) you do the best you can to figure it out and then certify that you're not doing it, and (3) regulators can decide whether or not they agree with you after the fact, and (4) if they don't agree with you then you go to jail or whatever. Who knows what the rule will say, but my money is on the latter approach.Read more »
The Blackstone Codere trade -- in which Blackstone Group LP bought credit-default swaps on troubled Spanish gaming company Codere SA, then agreed to roll a $100 million revolver for Codere on favorable terms in exchange for Codere agreeing to make an interest payment on some bonds two days late, thus creating a technical default and triggering the CDS, pocketing some gains for Blackstone at the expense of the CDS writers, without costing Codere anything -- is such a glorious pinnacle of financial achievement that of course someone had to make a television show about it. I would have preferred a prime-time miniseries, but what we got is a "Daily Show" segment, and that will have to do. Here it is.
The segment consists mostly of Samantha Bee going around to TV networks, newspapers and BuzzFeed and asking if they'd covered the Codere story and getting some variation on "no" for an answer. Except Bloomberg! Bloomberg News broke the story! No thanks to me of course,but I will nonetheless choose to be filled with pride because I work at a financial media organization that covered a European credit derivatives trade that even BuzzFeed missed.
Carl Icahn is an "activist shareholder." What that means is that he buys big chunks of a handful of carefully selected companies and pushes them to make big strategic or financial changes so that his shares will go up, launching proxy fights or takeover bids if necessary to get what he wants. Carl Icahn is a billionaire and The Most Important Investor In America apparently.
John Chevedden is an "activist shareholder." What that means is that he buys a few shares of a bunch of companies and submits nonbinding shareholder proposals to those companies to call attention to corporate governance issues like executive pay and director election procedures. John Chevedden rides the subway to shareholder meetings apparently.Read more »
Here is a story about how Sigeru Echigo, a Deutsche Bank "pension solutions" salesman in Tokyo, "is suspected of entertaining a client at a Mitsui & Co. unit in exchange for purchases of investment products." That is pretty much how it works! You take the client to "trips abroad, rounds of golf, and wine and meals," as Echigo did, and while lavishing attention on him you're all, hey, does your pension need some solutions? Mitsui's did: Echigo's 900,000 yen ($8,800ish) of entertainment spending yielded 1 billion yen ($9.8ish million) of financial products sales. But now Echigo, and the pension manager he wined and dined, have been arrested. That seems harsh. If you can't treat your clients to a round of golf, or hire their children, how are you going to win business?Read more »
The basic business of banking is lending money to companies and people. That business is risky but that is the job: If you are good at banking you make profitable loans, if you are bad at banking you make unprofitable loans, etc., or that is the idea anyway.
Regulators, meanwhile, are in the business of trying to prevent you from blowing up your bank, which they do largely by capital regulation: Rather than decide which loans you should make, which is your job, regulators decide how much capital you need to have as a cushion against losses on your loans.Read more »
A long time ago some big banks decided that it would be good to sell interest-rate derivatives. To do that they needed an interest rate on which to sell derivatives. Various possibilities presented themselves -- Treasury rates or whatever -- but the interest rates that the banks themselves paid on short-term borrowing had an especially obvious appeal as an index. If you're a bank, that data is readily available to you, you don't have to worry about government-market idiosyncrasies, and it's easier to be hedged if your derivatives (and the floating-rate loans you write to clients) are indexed to your own borrowing costs.
But being like, "we'll exchange you a fixed rate of 7 percent for a floating rate of 3 percent over our cost of three-month borrowing" is kind of weird. For one thing, it makes the client nervous: What if the bank has an accident and its cost of borrowing goes way up? (What if the bank lies about its cost of borrowing?) For another thing, it makes interest-rate swaps less fungible and liquid: A swap of JPMorgan-plus-300-basis-points is not easily comparable to a swap of Citi-plus-325, so you can't really close out a position in one by selling the other.Read more »
SAC Capital was an edgy place
Basically, the way hedge funds work is, you try to have some "proprietary" information or analysis that is not already incorporated into market prices -- that gives you "edge" -- and then you use your proprietary edge to trade and make money. That or you just quietly index and talk a lot about edge. SAC Capital did the former. Some proprietary edge is legal -- "legitimate research" or whatever -- and some is not. Calling your buddies at companies and asking them for information on upcoming earnings, as SAC analyst Jon Horvath did, is probably illegal, though all of the areas are gray. Anyway, Horvath is testifying against his former boss, Michael Steinberg, because Steinberg "confronted him on the trading floor and demanded that he provide 'edgy, proprietary information' that produced profitable stock trades," which he took to be code for "get illegal inside information." But yesterday Steinberg's lawyer cross-examined Horvath and pointed out that the edge thing was literally his job description; showing him " a number of SAC documents explaining research methods that used the words 'edge,' 'edgy' and 'proprietary,' including an e-mail that he said Mr. Horvath was sent on his first day of work at the firm in September of 2006." The question, of course, and it's a difficult one, is: Did those e-mails, or Steinberg's demand, contain a nudge-nudge-wink-wink at the end? Was it like "get us some edge," or was it "get us some edge IF YOU KNOW WHAT I MEAN"? Hard to tell from an e-mail.Read more »
J. Tomilson Hill is keeping busy
If business journalism consisted solely of where-are-they-now profiles of characters from "Barbarians at the Gate," that'd be fine. One such ex-barbarian is J. Tomilson Hill, credited in the book as "merger chief" at Shearson Lehman Hutton. Hill now runs the Blackstone Group's fund-of-funds business, which he calls "the largest investor in hedge funds in the world." Despite that newfangled job, Hill comes off as an old-school banker, saying that "he used 'an M.&A. approach instead of a product approach,' building the business by asking clients what they needed 'and not trying to sell them something.' " His next effort is to expand the fund-of-hedge-funds business to retail investors, perhaps because he's asked retail investors what they need and the answer is more fees.Read more »
One worry that people have about ratings agencies is that they have conflicts of interest in which they are paid by bond issuers to rate bonds, so they have incentives to give bonds -- particularly those of frequent and high-paying issuers -- high ratings. One solution to this conflict of interest is not to have the agencies paid by issuers. That happens in sovereign ratings. European countries, which pretty much hate the heck out of the ratings agencies, do not pay them for their ratings. So you'd think that would avoid the main conflict of interest.
But not if you're the European Securities and Markets Authority, which today released its report on how evil the credit ratings agencies are about downgrading European sovereigns. The backdrop is that "when compared to historical trends, sovereign ratings assigned to EU member states have experienced high levels of volatility" -- because EU member states have experienced high levels of volatility in (market perceptions of) their creditworthiness, you'd think -- and that some people "have argued that sovereign rating changes helped exacerbate the financial crisis." So ESMA was sent to sort the agencies out and find flaws in their process of downgrading European sovereigns. Which it sort of did?Read more »
The Internet has paid a lot of attention today to this National Bureau of Economic Research working paper called "Buffett's Alpha," whose principal conclusions are:
1. You could build a robot that replicates Warren Buffett's stock-picking performance.Read more »