Levine on Wall Street: All Sorts of FX Problems

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Probably don't trade FX from your house after dinner.

Did you hear, the banks are manipulating the foreign exchange fixes, sometimes costing investors as much as two or three hunredths of a percent? Hahaha no don't worry about that, you have bigger things to worry about. Worry about these guys:

“How many people would like to learn a skill where, within two days, they could make a thousand dollars?” Martinez asks that afternoon. “I’m here to tell you I can teach you how to trade consistently.” ...

“It is the easiest, most predictable and safest way to invest,” Tormos says. “Many of you are missing out on opportunities to build a retirement nest egg.”

Cool, cool. And what do the customers think?

“Probably the most consistent thing is losing,” Gratton says.

Oh. Really?

Most retail currency investors lose money most of the time, according to the industry’s own data. Reports to clients by the two biggest publicly traded over-the-counter forex companies -- FXCM Inc. and Gain Capital Holdings Inc. -- show that, on average, 68 percent of investors had a net loss from trading in each of the past four quarters.

Huh. At least it's money they can afford to lose, right?

“Retail forex customers overwhelmingly fund their trading accounts using a credit card,” the NFA wrote in a June letter to the CFTC.

What do the regulators think about all this?

Former CFTC official Greenberger says the only way to fix the market is to shut it down.

“There’s no good reason to allow it,” he says. “The way to get at it is to ban it.”

Back in the other FX scandal.

Did the Bank of England participate in currency market manipulation? Trick question, all central banks participate in currency market manipulation, that's what they do. (Also: interest rate manipulation!) But, no, the specific question is whether BOE "officials condoned or knew about manipulation in the foreign exchange market." And the answer is yes, but it wasn't that bad: The BOE's report found that the BOE's chief foreign exchange dealer "did not break any laws, but it was critical of him for failing to pass on concerns he had about activity in the market, including potential collusion among traders around 'the fix.'" He was fired on Tuesday, supposedly "for reasons unrelated to the report." Elsewhere, here is more on Barclays' non-settlement yesterday, and on Benjamin Lawsky's continuing investigations. So look forward to more FX settlements, I guess, yay. And here is Dan Davies with a characteristically excellent explanation of the FX scandal.

Trouble in Profits Paradise.

I feel like the Securities and Exchange Commission starts a lot of paragraphs with "The SEC’s Enforcement Division alleges that the guaranteed returns were false." The latest false guarantees of "huge," "lucrative," and "handsome" profits is a "purported investment management company called Profits Paradise," which supposedly offered some sort of foreign exchange (of course!) and commodities investments over Facebook, YouTube, Twitter, and -- I am not making this up -- Google Plus. "By December 2013, the Profits Paradise Facebook page had more than 3,000 'Likes,'" says the SEC, but there is no word on how popular the Google Plus page was. Nor is there much word on what Profits Paradise even did with the money; the SEC seems to take the view that unregistered offerings of securities are bad enough that it doesn't need to prove that the unregistered offerors were also stealing the money they raised.

More on Fair Funds.

This time yesterday, I mentioned a Wall Street Journal op-ed by two Securities and Exchange Commission commissioners arguing that the SEC should not distribute its SAC Capital insider trading fines to investors, because that would just be a windfall for plaintiffs' lawyers. Then I heard from one of the lead plaintiffs seeking recovery from the fair fund, David Kaplan, who disagrees strongly with that assessment:

All of the authors' claims are incorrect. First, any payment to "class-action lawyers" from the SEC's funds is barred by a specific provision of the Securities Exchange Act. In addition, the class counsel I retained confirmed last year to the SEC that they would not seek compensation from the Fair Fund.

So there you go. SAC paid a lot of money for insider trading. Insider trading harms innocent investors, or so the theory goes. So why not give the money to the innocent investors, if it's not going to be sucked up by opportunistic lawyers?

Mathew Martoma is going to prison.

He got a brief delay to make his case for bail on appeal, but that case got shot down:

The U.S. Court of Appeals in New York today said Martoma’s appeal lacks a “substantial question” likely to result in a reversal. The panel didn’t rule on the merits of the claim, which will be decided later.

Hmm yes but that's not, you know, a good sign about how the ruling on the merits will go. Martoma's appeal -- which, I assume, is being paid for by SAC Capital/Point72, like the rest ofhis legal defense -- is being argued by Paul Clement, a former solicitor general of the United States, and that is a lot of money to spend on an appeal that a court has hinted will be hopeless. Especially since the main argument is that the jury should have gotten to see a deposition that Steve Cohen did with the SEC.

Happy Goldman partner day (observed).

Here's the list. Seems reasonable. I've realized that I like MD day more than partner day; it preserves more of a raffish indie charm. And now it's only every other year. Elsewhere, Morgan Stanley's pay is fine, says James Gorman. And the Palm in Hollywood took down all its caricatures, outraging some celebrities, though the caricatures of Goldman bankers at the Palm on West Street are still safe for now.

How's Monte dei Paschi di Siena doing?

Sheesh, it "reported a loss of 797 million euros, or $991 million," after a particularly grim stress test failure and a plan to sell a bunch of new shares to repair its capital position. Imagine writing the investor presentation for that offering. Monte dei Paschi does not sound like a fun place to be a shareholder, though I guess the prestige of owning the oldest bank in Europe counts for something.

Things happen.

Large bonuses cause large trading profits though they sometimes have poor Sharpe ratios. "Using a unique dataset derived from security-level data on U.S. portfolio holdings of foreign securities, we show that since the crisis, it is mostly the foreign financial sector that appears to have met U.S. demand for safe and liquid investment assets by expanding its supply of debt securities." The publisher of the Paris Review is getting a new job. Michael Lewis doesn't like billionaires. Virgin Money priced its IPO. One third of boards have met with activist shareholders in the last year. Google is "the world's most powerful ad blocker." Twitter has a terrible new strategy that involves making money. "Perhaps we should subsidize people who end up looking foolish, rather than taxing them." "Man whose epic slap went viral: I’ve never slapped anyone before."

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net