Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

At first glance, you would think this would be a story Citigroup would be proud to tell.

A Ukrainian refugee who fled the Soviet Union with $90 to his name ends up scoring big on the American Dream, generating nearly $2 billion in revenue for the bank over three years with his mastery of the market for mortgage securities and collateralized debt obligations.

But neither Mark Tsesarsky nor Citigroup's senior executives are bragging about it, or even commenting at all on the trading bonanza reported on Tuesday by Dakin Campbell and Donal Griffin in Bloomberg Markets magazine.

Tight-Lipped
A group of traders quietly rebuilt Citigroup into Wall Street’s biggest for CDOs and generated almost $2 billion in revenue in the three years ended last December
Source: Bloomberg

Why the hush? It's hard to say exactly. Tsesarsky doesn't seem like a braggart -- his last interview with the press was in 1999. Though he does have one thing we've come to expect of a star trader: a cool nickname ("T-Man.") And as for the Citigroup executives who kept mum, maybe they just want to keep these valuable T-Man cards close to their vest.

Still, it's certain that this story will create a buzz among two types of people. The first will simply be those among us who enjoy a good trader-makes-a-killing story and are thusly curious about "The Alchemist Who Turned Toxic Assets Into Gold at Citigroup," as the headline puts it poetically. The second will be those among us who like a good banks-are-back-to-their-old-tricks story and are thusly curious why Citigroup was seemingly making big bets on risky illiquid securities for years after the financial crisis.

Free Fall
The drop in home prices starting in 2006 led to huge losses in collateralized debt obligations
Source: Bloomberg

Of particular intrigue is this bit about how the bank was able to pounce when an especially enticing opportunity presented itself:  

Citigroup was ready when the Federal Reserve Bank of New York auctioned a portfolio of CDOs in 2012. The team canvassed customers and collected orders, making pitch after pitch about its deep knowledge of the securities and their cheap prices, according to a person with knowledge of the strategy. In cases where the bank saw something too good to pass up but couldn’t persuade investors to bid, it used its own money to buy the debt, the person says. Of the more than $45 billion sold by the central bank, Citigroup won $6.3 billion, paying an average of 38¢ on the dollar.

Didn't Dodd-Frank forbid risky proprietary trading with the Volcker Rule? It did. But for one thing, banks did not have to comply officially until last summer, though most began preparations soon after the legislation was passed in 2010. More important, as this story highlights, there is a thin blurry line between what is considered proprietary trading by banks, which is outlawed under Volcker, and what is considered market-making to facilitate trades for clients, which isn't.

Even regulators have struggled to clearly define which trades fall on which side of the line. The Committee on the Global Financial System wrestled with the question in this report about 18 months ago, but it wasn't able to make the line much less blurry. This compare-and-contrast between prop trading and market-making in that report may make you wonder whether T-Man's team fell into the former, based on what we know about him:

Another dimension of differentiation between the two activities is informational advantages. Given their primary objective to facilitate trades rather than taking directional (ie long or short) positions, market-makers are typically considered not to trade on any specific informational advantages. Proprietary traders, by contrast, often seek to gain such advantages (eg through market research) to profit from informed trading decisions.

The simple fact that they made $700 million by trading about $6 billion of securities last year sure implies some information advantage. Yet, this next bit makes it sound as if the 2012 trades could be defensible as simple market-making:   

Less liquid markets, by contrast, often require market-makers to hold positions over extended periods of time or to progressively build up inventory in expectation of future client demand … The risk characteristics of the positions taken in the context of this type of market-making can thus strongly resemble positions that are taken for proprietary purposes … some regulatory definitions explicitly mention that market-makers may deal on their own account as well, in part (as mentioned above) because increases in warehoused assets in preparation for anticipated client demands are hard to disentangle from the build-up of long trading positions.

Citigroup spokeswoman Danielle Romero-Apsilos made it clear in the article which side of the line the bank believes it was on: “All of our activities comply with every applicable regulation, including the Volcker Rule.” 

Citigroup said as early as January 2014 that it was done with proprietary trading, but this wouldn't be the first time people questioned whether the bank interpreted the Volcker rule's exemptions for market-making more liberally than other firms. You have to wonder if reading about the killing made by T-Man is going to make other banks more willing to take a big step closer to that blurry line.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net