Money Stuff

Rogue Trading and Gun Disclosure

Also revolving doors, IEX, Valeant, timeshares and unicorns.

What's up at Credit Suisse?

Good lord, this story of a former Credit Suisse wealth manager jailed for allegedly doing all sorts of rogue-trading nonsense suffers only a tiny bit from the fact that he "can't be identified in public" under Swiss law. Let's call him Mr. X. He is wonderful, a cartoon version of wealth management. He joined Credit Suisse at age 40 with no prior banking experience, and almost immediately got some big clients, including Georgian politician-tycoon Bidzina Ivanishvili. Those big clients came with big expectations, and when they missed out on stock rallies they complained. Mr. X did not like the complaints:

“From that moment, around April-May, I told myself that all my clients had to make profits so they would stop annoying me with their criticism about lack of performance,” he told bank investigators.

Can you imagine? Mr. X is new to banking, he's good at client relationships, he picks up some big clients, he has fun going out to dinner with them or whatever, and then one day his biggest client calls to be like "X I have enjoyed the dinners but really I came to Credit Suisse to make money on the stock market and I am not making money on the stock market." So there Mr. X is, again brand new to this, and he has to solve this problem. And the solution he comes up with -- and honestly it is brilliant in its simplicity -- is to just make money for all of his clients, so they'll stop annoying him.

And so he did! "Within weeks, he said, he was actively trading without permission, using Ivanishvili’s credit line to buy about $100 million in Russian stocks and bonds." And: "With markets around the world surging, he had soon more than made up the missed gains, with returns of as much as 180 percent, he said." He had made so much money for Ivanishvili that he had extra money to spread around to his other clients, like the "two Russian gas-industry executives" who "always expected big profits and they wouldn’t tolerate losses." Just taking money from other clients and giving it to them is, you have to admit, a very clever way to ensure them big profits without any losses. Mr. X was a client-service genius.

He was also a stock-market genius, it seems, only in the very narrow sense that he was good at putting on leveraged bets in bull markets. It ended as you'd expect: A trade lost money, there were margin calls to clients who weren't aware they were trading on margin, and the whole thing unraveled, though not quite enough to shake Mr. X's confidence in his own skills:

In the corporate security office in Geneva, he told investigators he could have prevented the margin calls with more unauthorized trading. But he was trying to enjoy the last day of his Italian vacation, he said. “I had had enough of this situation that had upset me so much.”

He's now in a prison hospital, and Ivanishvili has withdrawn his money and filed a complaint against Credit Suisse. "The clients and the bank made a lot of money and we never heard them complain," says Mr. X's lawyer, somewhat (somewhat!) reasonably.

There is other news out of Credit Suisse today:

Credit Suisse said on Wednesday that it planned to accelerate its cost cutting over the next three years and that it would further shrink its investment bank, as Tidjane Thiam, its new chief executive, seeks to turn around the lender in a difficult market.

The bank, based in Zurich, said it planned to eliminate 2,000 jobs in the trading arm of its investment bank as part of 6,000 job cuts across the company. It also said it would exit some businesses.

The cuts are part of Thiam's plan "to focus on wealth management to tap growth across Asia while shrinking the securities business," a popular approach among Swiss banks and European banks generally. One reason it's so popular is that it's relatively hard to lose a lot of money in wealth management: I mean, you can lose money, but it's your clients' money, not your own capital, so it's not that big a deal. Unless, you know. Unless Mr. X is rogue-trading with client money and you end up having to reimburse the clients. Wealth management, it turns out, is not that safe a business, if you're hiring people like Mr. X and then not keeping an eye on them.

Ah but there is still more news out of Credit Suisse:

Credit Suisse Group AG founded a venture with Silicon Valley’s Palantir Technologies Inc. that aims to catch rogue employees before they can harm the bank, employing the expertise of a firm seed-funded by the U.S. Central Intelligence Agency that’s better known for identifying terrorists.

The 50-50 joint venture, called Signac, was signed in recent weeks and will initially focus on detecting unauthorized trading, Credit Suisse said in a presentation seen by Bloomberg News. The Zurich-based lender plans to expand Signac to monitor all employee behavior, catch breaches of conduct rules, and eventually offer the service to other banks.

We've talked occasionally about Palantir, the Spy Unicorn, before, but I was not aware of all of its mysteries, which include the fact that "in April 2010, security researchers in Canada used Palantir’s software to crack a spy operation dubbed Shadow Network that had broken into the Indian Defense Ministry and infiltrated the Dalai Lama’s e-mail account," and that it "counts In-Q-Tel, the CIA’s venture capital arm, among its earliest investors." Disappointingly Signac is named after a "French neoimpressionist painter," and is not a weird acronym for like System for Information Generation and Noncompliant Access Control. When they do roll it out to other banks, they should hire Mr. X to market it. He seems like a good salesman.

Disclosure politics.

I remain fascinated by the idea that the best way to achieve substantive regulatory goals -- on gun control or climate change or public health or whatever -- might be through securities regulation. Here, for instance, is a story about Letitia James, New York City's public advocate -- not a securities regulator -- "pushing regulators to investigate the gun maker Sturm, Ruger & Company’s disclosures to investors about the risks it faces," including the reputational and liability risks of Sturm Ruger guns being used by criminals. James barely even pretends to be interested in the investor-protection angle:

“Gun manufacturers must come clean about the dangers posed by their business and the risks it represents for even their own shareholders,” Ms. James said in a statement. “As public advocate, I will continue to pursue every possible avenue to hold those gun makers and sellers accountable.”

It is reminiscent of New York Attorney General Eric Schneiderman's efforts to hold Exxon accountable for climate change via securities disclosure, or efforts to improve mine safety through Dodd-Frank disclosure requirements. Yes, sure, these issues are of arguable interest to investors, and arguably securities regulators should mandate their disclosure because investors are too uncoordinated or powerless or naive to do so themselves. But ... I mean ... that's just self-evidently not what's going on here, right? Letitia James is not up all night worrying that Sturm Ruger shareholders might lose money the next time a police officer is shot. Eric Schneiderman is not crusading for the rights of oil-company shareholders. These people are trying to do substantive regulation -- of gun distribution, of oil production -- that would be hard for them to do directly, but that is relatively easy to do through securities regulation.

The interesting institutional-design question is why it seems so much easier to accomplish, say, gun-control goals through securities regulation than through actual gun-control laws. Is it that the Securities and Exchange Commission is just a particularly effective regulator? Is it that securities regulation is mostly about disclosure, and that it's easier to justify rules that "just" require disclosure than it is to create new substantive prohibitions? Is it that securities regulation sits in a weird gap in constitutional law, so that the SEC can do by rulemaking what would otherwise require legislation, and can regulate speech in ways that would otherwise be unconstitutional? Is it not actually easier to do these things through securities regulation, but it's easier for politicians to demand that the SEC do something than it is for them to do something themselves? Is it that, in our postmodern financial economy, all regulation really is securities regulation?

That Goldman Fed guy.

The good news for Rohit Bansal, the former New York Fed employee who went to Goldman Sachs and convinced a former Fed colleague to give him confidential supervisory documents, is that he won't go to prison: He pleaded guilty to a misdemeanor and was sentenced to 300 hours of community service and a $5,000 fine, or one basis point of the $50 million fine that Goldman paid for his behavior. The bad news is that, as the sentencing judge put it, "because of the power of the Internet, his reputation is forever already besmirched." That would be a good motto for the Internet, actually: The most powerful device for forever besmirching reputations that humanity has ever created.

Helpfully for Bansal, the documents he took seem not to have actually, you know, mattered -- "Prosecutors described the documents Bansal got only as 'confidential' and didn’t provide evidence any harm resulted from the former banker receiving them" -- but that doesn't stop the New York Times from pointing out that "the episode illustrated the blurred lines between Goldman and the New York Fed and raised new questions about Wall Street’s so-called revolving door." Do those ... do those questions seem as important now as they did last year? Like, if you are going to worry about a revolving door in U.S. government, perhaps the one between electoral politics and reality television is more concerning than the one between banks and bank regulators?

Market structure.

It is hard to believe, but more people keep having opinions about IEX's application to be a public stock exchange. The comments to the Securities and Exchange Commission remain a treat; here's one from a doctor who thinks that "IDX's model will effectively make it more difficult sociopathic individuals to legally take money from other people," and who plans to "encourage my 2000+ patients and hundreds of private clients" to keep their money out of the stock market. In perhaps more newsworthy commentary, JPMorgan has also come out in favor of approving IEX's application, while market-structure expert Larry Tabb has come out against ("How can IEX claim that it is fair when only it knows the accurate price of a security? How can it claim a level playing field when only IEX can effectively price mid-point orders?"). Elsewhere on the Tabb Forum, here is a column from Sviatoslav Rosov of the CFA Institute with the amusing title "The IEX Neverendum: Is IEX's Exchange Application a Referendum on Market Structure?" It contains this amusing burn: 

CFA Institute is broadly supportive of the existing market structure, with the majority of empirical research supporting the impression that explicit trading costs are at historically low levels and displayed liquidity is at historically high levels. The arguments that these costs are unachievable and the liquidity cannot be accessed do not seem to be empirically compelling. This market structure has been achieved in large part by technological developments and marketplace competition enabled by Reg. NMS. These changes have rendered large swathes of human capital redundant and many of the victims can be found in the responses to the SEC’s consultation.

Ouch! Not fair of the doctor, though, probably.


The Valeant pile-on continues. Valeant's largest shareholder, the Sequoia Fund, which added Valeant shares in the fourth quarter before admitting in February that "our own credibility as investors has been damaged by this saga," sold 1.5 million shares last week. Sequoia is an option in a lot of retirement plans, which makes its concentrated Valeant position extra awkward. Bill Gross tweeted mean things about Valeant (and global monetary policy). Here are Bloomberg Gadfly's Max Nisen and Tara Lachapelle on the saga, Bill Ackman's involvement, and its effect on other pharmaceutical companies. 

And here is the story of how Bill Ackman has "played a central role as Valeant moved to assuage investors." Ackman has his own investors, but it turns out he doesn't need to worry too much about assuaging them:

Mr. Ackman has protection most hedge funds lack: He has been engaged on a careerlong project to build Pershing Square into a fortress that in theory gives him both time—and capital—to outlast a nasty downturn.

About half of Pershing Square's $12 billion is in permanent or semi-permanent funds (its $4 billion public vehicle, plus bonds and employee money); most of its other investors "are locked into agreements that allow them to only take an eighth of their money each quarter." The ironies here are cheap but nonetheless worth remarking. On the one hand Ackman, who styles himself a governance investor and pushes companies to be more responsive to their owners, is far more insulated from his own investors than are most hedge-fund managers. On the other hand, corporate managers who accuse Ackman of "short-termism" are perhaps a bit misguided: His own investors have a pretty long time horizon, since they're locked up much longer than most index-fund investors.


Here's a story about how the timeshare industry is suffering because "the Consumer Financial Protection Bureau is looking into the sales, marketing, and financing practices of Westgate Resorts." I realize that the CFPB was set up after the financial crisis to afflict the banks, but it seems to me that a regulator interested in consumer financial protection really ought to give at least as much attention to timeshare companies, multilevel marketing schemes, work-from-home opportunities, etc., as it does to "real" financial companies like banks and insurance companies. I mean, sure, banks mislead and exploit consumers sometimes. But timeshare companies sell timeshares. I don't know. Westgate replied to the CFPB that its investigation concerned "information and documents that go to the heart of non-financial matters in what is, in essence, a real estate development and management company," and I suppose that will be a problem for the CFPB generally: A lot of consumer financial troubles come from non-financial businesses that may be hard for the CFPB to get at. Though:

Isaac Boltansky, an analyst at Compass Point, described Westgate’s response to the regulator — which included claims that the CFPB was unconstitutional — as “both inflammatory and unsuccessful.”

People are worried about unicorns.

"Believe me, you do not want to quit your banking job for a tech unicorn" is the headline here, and it is illustrated with a drawing of a unicorn vomiting a rainbow that is different from the drawing of a unicorn vomiting a rainbow that previously graced Money Stuff. Unicorn worries are worries about the valuations and monetization plans of large private technology companies, but they are filtered through the childish fairy-tale "unicorn" terminology, which means that people like to draw them. Nobody ever draws bond market illiquidity.

Elsewhere in unicorns, corporate governance at business-data unicorn Domo seems like fun!

In fact, he says he's lied to Domo's customers, investors, and even some of its own directors about what the company has been up to, amid concerns of getting copied before what he calls the "true" Domo could come out.

"We've been lying to people, we haven't told anybody what we're doing," James says. 

James is Josh James, Domo's chief executive officer. As far as I can tell Domo's product is designed to give companies real-time total transparency into "literally every aspect of their business," though I don't know if the production version will include "lie to board and investors" functionality. 

People are worried about bond market liquidity.

I don't know, apparently there are a lot of Treasury repo fails, that's more or less a bond market liquidity worry.

Things happen.

Spotlight on Lax Security at Bangladesh’s Central Bank. Criminal Complaints Filed Against Two in Bangladesh Central Bank Heist. Puerto Rico Fights for Chapter 9 Bankruptcy in Supreme Court. Obama Visit a Boost to Argentina as It Returns to Global Markets. Women in banking. Women in tech. Monetize the debt. Is Bitcoin Really Frictionless? Peer-to-peer maturity transformation. Morgan Stanley penalized for advisor fraud, ducks huge fine. Meet The Man Who Convinced Taye Diggs to Follow You on Twitter. "There are now more U.S. breweries than at any other point in recorded American history." Chocolate bunny. Fish braces. "You’ve gotta ask yourself: Would you downvote the Yik Yak of your own life?" Happy Puppy Day!

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    Matt Levine at

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