$$$ Jeffrey Epstein in Real Life [Daily Intel]
$$$ Adventures in Diligence II: The Paper Cut [Going Private]
$$$ Are Walruses Efficient? [LoSC]
$$$ MBIA wins through sheer force of boredom. [Portfolio]
Archive for January 2008
$$$ Jeffrey Epstein in Real Life [Daily Intel]
The inquiry into what the banks knew about the structured credit products they built from mortgages has begun to show signs of moral panic and paranoia. Already we’re seeing the typical result: really bad, radical ideas being put forth as sensible, or even obvious reforms.
Take the proposal coming from some securities industry specialists to make public the due-diligence reports provided to banks by independent diligence specialist. “We need to…improve the due-diligence process by standardizing it and by disclosing” the results to ratings agencies and investors, said Rod Dubitsky, head of asset-backed securities research at Credit Suisse Group, told the Wall Street Journal.
We now know that more information does not equal transparency—it often simply muddies things further. Even worse, knowledge that diligence reports will be seen by investors will create incentives for banks and diligence companies to conspire to produce clean reports. A public diligence report would very likely be less diligent than one that can be kept private.
This is not an abstract fear. The pressure to clean up reports already exists for fear of litigation. Everyone who has done this kind of work knows that there are certain things you save for the conference call, the contents of which are far harder to subpoena, request through discovery or conclude. One bank we worked with—in our lives before DealBreaker—regularly requested that no records be kept from diligence and all reports be delivered verbally.
Destroying due diligence won’t save it.
Something’s amiss at UBS. Though the bank was set to pass out bonuses made entirely out of craptastic stock (down 35 percent for the year) and marshmallows today, employees are acting surprisingly calm, almost…too calm. One in wealth management tells us “we’re doing alright…it’s not a bloodbath” and the word from banking and trading is “it’s not the end of the world.” Is it possible that despite blowing a ton of money on worthless (but pretty!) ice sculptures for the holiday party at the Natural History Museum and losing a few billion dollars the other day, the friends o’ the SS aren’t stiffing all on b’s? We’re skeptical. And we remain unconvinced that no one’s angry enough to pull a Merrill. Are you planning something? Let us know.
The news that the police have seized French rogue trader Jerome Kerviel’s personal computer reminds us of a important rule of criminal behavior: don’t have anything incriminating on your home computer. We’re not just talking about a spreadsheet detailing your phony hedges. Anything that is even embarrassing to you or your friends and family can—and probably will—be used against you by the authorities. Legal culpability or admissibility is no guarantee of safety. Emails about an illicit affair? That’ll end up in the papers. Awkward conversations about a drunken weekend? You’ll be hearing about that on the evening news. Huge collection of music downloads? You’re not only a rogue trader, you’re a copyright pirate. That’ll make the news. The point is to drive the accused to confess, by almost any means necessary.
We can hope that this kind of abusive prosecution might someday be stopped. By hoping isn’t a strategy. Erasing your hard-drive is.
SocGen trader’s PC seized from brother’s flat [Reuters]
The rule that all business failures become criminal matters is bearing out in the subprime mess. Yesterday we learned of an FBI probe. (Gary Weiss expertly dissects it over on Portfolio.) This morning we learned that New York Attorney General Andrew Cuomo’s office is considering employing the ancient and dreaded Martin Act against Wall Street.
What makes the state law so powerful is that its broad definition of securities fraud doesn’t require a prosecutors to prove intent. It was a favorite weapon of Loathsome Eliot Spitzer when he held the AG’s office. Now Cuomo is looking to use it to show fraud in the packaging of mortgage bonds and derivatives, according to the Wall Street Journal.
“The attorney general’s office has issued Martin Act subpoenas, which don’t spell out whether matters are civil or criminal in nature, according to people familiar with the matter. So far, the recipients include financial firms Bear Stearns Cos., Deutsche Bank AG, Morgan Stanley, Merrill Lynch & Co., and Lehman Brothers Holdings Inc., possibly among others,” the Journal said.
“When they start using the Martin Act, you don’t run, you don’t hide, you don’t fight. You settle early, and often,” a veteran of an earlier round of Martin Act subpoenas told us.
These investigations can have serious costs for the target banks. Management gets distracted, legal costs skyrocket and settlements usually involve heavy fines. What’s more, the AG office can be much more difficult to deal with than the SEC, and it is much less predictable. Perhaps even more than the SEC, federal prosecutor and FBI investigations, this could spell serious trouble for Wall Street.
State Subprime Probe Takes a New Tack [Wall Street Journal]
Those watching CNBC’s “The Call” circa 11:30 this morning know that Charlie Gasparino lost a bet to Mary Thompson over how big Lloyd Blankfein’s package would be this year, with Melissa Francis officiating. The terms of the wager stated that the loser had to buy dinner at Campagnola. Interestingly enough, No Sleeves claims that he didn’t lose anything, but was simply doing the chivalrous thing that anybody boy worth his Rego Park salt would do, and treating the ladies (his words: “It’s the gentlemanly thing to do, and I am a gentleman”). Bull shit. The fact that said dinner, which came to $412.40, was paid for with a Visa card bearing the name “Gasparino” (expiration date: 09/08) is irrefutable proof that Charlie Gasparino is a terrible judge of size. Anyway. As NS noted, we enjoy chronicling his every move, from “what deli meats [he] eats to where [he] works out,” so obviously we sent Intern Scott to pose as the pepper grinder and take copious notes, as well as the Visa number with which we bought a bunch of shit for ourselves (mostly Italian delicacies filled with nitrates so the theft would go undetected). His report:
– Charlie: Mixed green salad, Dover sole with ketchup (women registered shock and disgust over choice of condiment, and I would agree), steamed broccoli on the side. (Consumption of the salad seemed forced, as though he would’ve preferred another dish but sensed he was being watched)
– Melissa: pasta with some sort of cream sauce (recommended by maître d’ “Frankie”)
– Mary: house salad
– Melissa/Mary: Split a T-bone for 2, home fry potatoes, creamed spinach, steamed broccoli
– Sooprezat on the table, Charlie didn’t touch it (odd)
– White wine
– 1 Napoleon, split three ways
– Charlie gave shit to some Goldman guy
– Frankie mentioned that Charlie had been there the night before, and the night before that
– “A lot of pinky rings”
We also have some brief footage of the dinner, after the jump.
The Wall Street Journal has one of those paint by numbers articles today about how it’s inappropriate to dress casually in the office. It’s full of helpful information like “don’t wear ripped jeans that haven’t been washed in three weeks and smell like wet dog” and “Take off your cock ring before you come to work, unless you plan to ‘liaise’ with your secretary that morning.” So it’s not *entirely* useless.
But my issue is that it seems to be addressing idiots. People who don’t get why cargo pants might not be the best choice to roll up to an interview wearing (full disclosure: I don’t either). Toilet cleaners who are just trying to get by without getting fired. And that’s not you, the highly affluent DealBreaker audience that advertisers love. You’re moving up, or at least you’re attempting a vertical climb and since the Journal won’t belay you up there, DealBreaker will. I’m going to tell you a secret someone once told me: talent doesn’t matter. Same thing with initiative and work ethic in general. All that matters is the clothes, and remembering three words: act as if.
Are you a P&L analyst at SAC looking to impress the grand poobah by mimicking his sartorial picks? You wear a zipup sweater, cookie crumbs, no pants. Bottom feeder at Blackstone? Fine Italian suit with bib. Nobody at Merrill? unitard. Interning for Brian Hunter (unpaid, college credit only)? Shroud yourself in a cloak of failure and call it a day. You get the idea. Now, who’s ready to start dressing the part and making a name for himself?
Law Without Suits: New Hires Flout Tradition [WSJ]
Is Bank of America’s acquisition of Countrywide in trouble? You wouldn’t think so if you’re looking at the spread between where the shares of the two companies are trading. The spread between the shares and the offering price has narrowed dramatically in the last few days, from a high of nearly 25% to the current 15% gap.
But today the Monaco-based hedge fund SRM Global Fund filed a 13D complaining that the merger plan does not deliver “sufficient value” to Countrywide shareholders. SRM has acquired a 5.19% stake in Countrywide.
Most commentary on the deal has focused on whether Bank of America might back out. It has been described as a “bailout” and Bank of America’s role as that of a “White Knight.” The idea that Countrywide’s shareholders would balk at the deal comes as a surprise.
SRM seems to specialize in troubled home lenders. They also have a major stake in Northern Rock.
SRM 13D [SEC]
Countrywide merger criticized, BoA names mortgage exec [Reuters]