The last of the UBS Libor settlements to come out was the U.S. one and it has some of the best quotes. There’s the yen swaps trader who said “I live and die by these libors, even dream about them.” There’s … I mean, there is the life and career of Bart Chilton, in toto; here is a thing he said:
“A Conscience Isn’t Nonsense”
Statement of Commissioner Bart Chilton on UBS Settlement
December 19, 2012
Every so often, folks wonder if some in the financial sector believe that having a business conscience is nonsense. Financial sector violations are hurtling toward us like a spaceship moving through the stars. All too often, penalties have been a simple cost of doing business. That needs to change.
Particularly good are the exhibits to the criminal complaint against Tom Hayes and Roger Darin. We’ve previously met Hayes, cleverly disguised as Trader A; he was the senior yen swaps trader at UBS in Tokyo. Darin was the short-term rates trader “in Singapore, Tokyo, and Zurich,” though probably not all at once; he and his team submitted yen Libors for UBS. You can guess what happened when they got together!
But you don’t have to guess because there are lots of transcripts of their chats in the exhibits.1 Here is a problematic one: Read more »
The UBS Libor settlements are really a garden of infinite delights; there are many semi-literate, fully criminal emails and IMs and you can read them here or here or here or here or in the FSA Final Notice. It is hard to pick a favorite thing but here’s a quirky one from the FSA:
58. Certain [interdealer] Brokers also routinely disseminated their views about where LIBOR would set based on their market knowledge, including information about transactions in the relevant cash markets. These market views, commonly referred to as “run throughs”, were of assistance to market participants, including Panel Banks when determining their JPY LIBOR submissions. A number of Panel Banks relied on run throughs and on occasions some of them simply adopted them when making their submissions.
59. In addition to asking Brokers to make specific requests of Panel Banks for specific submissions, Trader A also asked Brokers to tailor their run throughs to benefit UBS’s JPY positions.
So: Trader A, the yen swaps trader who seems to have been the worst1 Libor manipulator at UBS, sometimes asked his brokers to lie when they wrote down their guesses of the rate that other people would guess those other people could borrow at. UBS in general, and Trader A in particular, seem to have been all-around horrible, granted, but it’s worth taking a step back to notice the oddity of the system they lived in:
Trader A manipulated a second derivative of borrowing rates: not a rate, not a guess of a rate, but a guess of a guess of a rate. David Enrich finds this troubling: Read more »
A thing that a bank does is take in short-term money in the form of deposits and lend out long-term money in the form of loans. Two things that you could want out of your banks are:
- for them to lend out lots of their deposits in long-term loans, and
- for them to keep lots of money in the bank to give back to depositors who want their money back at any particular time.
A thing two consider is that those two desires are (1) each perfectly sensible and (2) opposite. Another thing to consider is that everything that happens, someone can complain about.
So today we learn: Read more »
Is there a better word in the English language than “monetize”?1 When you have a thing, and you would rather have money than that thing, you have about two choices, which are:
- sell the thing, or
- monetize the thing.
Choice one is straightforward and boring; choice two has the advantage of a wholly indeterminate meaning, plus sometimes you get your money and get to keep the thing. Anyway what happened here?
Qatar has cashed in its remaining warrants in Britain’s Barclays Plc, a move that should yield a $280 million profit and still leaves the sovereign wealth fund as the bank’s top shareholder following a controversial fundraising in 2008.
Deutsche Bank AG and Goldman Sachs Group Inc said they would sell up to 303.3 million shares – worth 740 million pounds – to comply with Qatar’s request. They sold shares at 244 pence apiece, a 4 percent discount to Friday’s closing share price, but did not confirm whether all the shares had been sold.
Qatar Holding said in a separate statement late on Sunday it had monetized its remaining holding of 379 million units of Barclays warrants – instruments that convert into shares – without affecting its 6.65 percent stake.
The warrants have not yet been converted, but can do so at 198 pence per share in the next year, which would reap a 180 million pound profit at current prices.
Notice: Read more »
Was there mortgage-related misbehavior at Bank of America and its various after-acquired subsidiaries? I wasn’t there, but on public information, I mean, sure, why not. Some days it looks like there was mortgage fraud everywhere. But whereas everyone else is all “sorry about the mortgage fraud” and “here is a large settlement,” BofA is not into that. When you accuse them of mortgage fraud, they take the fight to you. They did that with Fannie Mae, refusing to sell it any new mortgages just because Fannie thinks BofA should be buying back some of the old mortgages it mmmmaybe fraudulently sold Fannie. And they’re doing it with MBIA, suing the bejesus out of them just because MBIA is suing the bejesus out of BofA over mortgage fraud.
But that’s old news; the new news is this Bloomberg article about how BofA is opening another front in the MBIA battle. You should read it because it is amazing. Here is the story so far, from BofA’s offer today:
- Bank of America1 bought $6.15 billion notional of insurance/CDS contracts against (surprisingly?) commercial mortgages from MBIA Insurance Corporation, which everyone calls “MBIA Corp.,” and which is a subsidiary of MBIA Inc., which is a public company and which everyone calls just “MBIA.” There’s a deductible, and BofA hasn’t yet eaten through it, so these policies are all outstanding and untouched though dicey-looking.
- Bank of America2 also bought a lot of insurance against home loans that it packaged, also from MBIA Corp.; those loans were terrible, MBIA Corp. has paid off some of the insurance, and now it’s suing to get it back because fraud fraud fraud fraudy fraud fraud.
- Meanwhile MBIA did some internal rejiggering, taking its nice relatively sensible municipal-insurance business, called National Public Finance Guarantee Corp. (everyone calls it “National”), out of MBIA Corp., and put it directly under MBIA, leaving MBIA Corp. with mostly terribleness like Bank of America mortgage insurance. This, one assumes, was done in preparation for casting MBIA Corp. into the fires of Mount Doom. Read more »
Why would you bail out a bank? Theories abound; perhaps you want to keep the capital markets functioning, or prevent contagion to other systemically important financial institutions, or perhaps you just like banks and bankers and would be sad if there were fewer of them or they had less money. Somewhat less likely, you could think to yourself “I want there to be more lending to small businesses, and the best way to go about that would be to buy preferred stock in a bunch of banks.” If that was your goal, and TARP was your bailout, then you failed:
A new report commissioned by the Small Business Administration confirms what a lot of business owners felt in the four years since the financial crisis: The government bailouts for banks did little to relieve the credit crunch for Main Street companies.
In fact, banks that took taxpayer money during the financial crisis of 2008-09 cut their lending to small businesses more than other banks did, according to the paper by Rebel Cole, a DePaul University economist. … TARP banks cut their lending to small businesses by 21 percent in that period, compared to a 14 percent drop at other banks, according to the paper.
Here’s the paper and here is a sad little chart from it:
Other not-quite-epiphanies abound: Read more »
One way to make a lot of money in banking is just to be really good at it. But this is not a very good way! There are lots of people who want to make a lot of money in banking, and all of them1 have at least considered the approach of “just be good at it,” so you have no real competitive edge if that’s your strategy. You need to be creative and think outside the box, as you might say, if you were not very good at banking, as the law of large numbers says you are not.
I love me some Credit Suisse; they think outside the box. Then they sell the box to themselves in a roundabout fashion that magically removes it from their balance sheet. So when I saw this
“As we continue to reduce costs, continue to optimize our capital and we continue to have momentum on the client side we think we will be able to improve our return on equity toward that 15 percent target,” Dougan said in an interview with Bloomberg Television. “That’s something that’s achievable.”
I had so much hope! I mean, “reduce costs” is boring and sad, and “momentum on the client side” is just like “be good bankers” which whatever, but “optimize our capital” could mean all sorts of devious things.
It probably does but I couldn’t find them. I mean, other than the usual devious things, which start with “Basel II.5 core tier 1 ratio increased by 2.2 percentage points to 14.7%, total capital ratio increased by 1.0 percentage point to 21.2″ and segue right along into this funding stack: Read more »
Bank of America bought Countrywide Financial in 2008 and it’s fair to say that went poorly; the Wall Street Journal totted up total Countrywide losses at about $40 billion but that was in July so they’re probably, like, $80 billion by now. If you were trying to figure out the maximum past and future losses you might start with the fact that Countrywide Financial originated about $2.2 trillion of mortgages between 2003 and 2007; ignoring anything before that you might ballpark the upper bound at $2.2 trillion. Let me draw you a Venn diagram, because this is now that kind of blog:
Eventually that yellow circle can grow to the size of the blue circle, but no bigger: the absolute highest number of fraudulent mortgages that Countrywide could have written is “all of the mortgages it wrote.” Right? No, wrong, of course: Read more »
A value-at-risk model basically works like this. You have some stuff, which is worth X today. Tomorrow it will be worth X + Y, where Y ranges from more or less negative infinity to positive infinity. Y is a function of a bunch of correlated random variables, rates and credit and stock prices and general whatnot. You look at a distribution of moves in those variables and take (usually) a 2-standard deviation daily move; if 95% of the time rates move by -10 to +10 basis points, your VaR model will assume a -10bp or +10bp move, whichever is bad for you. You take the 95%-worst-case, taking into account correlation etc., and tot up how much you’d lose in that case. Then you write that number down and feel a bit better, since you’ve sort of implicitly replaced “we have $X today and will have some number between negative and positive infinity tomorrow” with “we have $X today and will have some number between ($X – VaR) and positive infinity tomorrow,” though of course the first statement is true but unhelpful and the second is not true and also unhelpful.
But that aside! You get your VaR from a distribution of your variables, but the obvious question is what distribution. A good answer would be like “the distribution of those variables over the next three months,” say, for quarterly reporting, but of course that is only a good answer because it begs the question; if you knew what would happen over the next three months you would, one assume, always end those three months with more than $X and this VaR thing would be moot or moot-ish.1
So instead you look at things that you think will allow you to predict that future distribution as accurately as possible, which is epistemically troubling since VaR is a measure of how inaccurate your predictions might turn out to be. Anyway! You pick a distribution of variables based on the sort of stuff that you always use to estimate future distributions in your future-distribution-estimating business, which could mean distributions implied by market prices (e.g. option implied vol) but which seems to mostly mean historical distributions. You look at the last N days of data and assume that the world will be similarly distributed in the following M days, because really what else is there to do.
Picking the number of days to use is hard because, one, this is in some strict sense a nonsense endeavor, but also two, the world changes over time, so looking back one year is for instance rather different from looking back four years. Here is how different: Read more »
There’s a thing called “corporate governance” which you might think means like “the practice of running a corporation in a good way instead of a bad way” but you would be wrong. You can tell because the consensus is that Citi has displayed good corporate governance by making a chaotic demoralizing mess of firing Vikram Pandit in disgrace and/or regretfully accepting his voluntary resignation and/or other. Here’s Felix Salmon:
The CEO’s job is to run the bank, to answer to the board, and to get fired if he doesn’t perform. Which is what seems to have happened with Pandit.
Meanwhile, further downtown, the exact opposite is happening. Where Citi’s powerful board acted decisively after yet another set of weak results, Goldman’s powerless board is simply sitting back and watching their bank report a much more solid set of earnings …
[W]hile investors care about earnings first and foremost, they also want to know that they’ll ultimately receive those earnings, rather than just seeing them disappear into the pockets of management, or be wasted on silly acquisitions. Governance matters. And on that front, if on few others, Citi can credibly claim to be leagues ahead of Goldman.
I say unto you that one or the other of these statements can be true, but not both:
- “Governance matters.”
- “on that front, if on few others, Citi can credibly claim to be leagues ahead of Goldman.”
Read more »
I don’t have much insight into Citi’s earnings but I do enjoy the reporting of them. When a car or Facebook company reports earnings you basically ask questions like “how many cars or Facebooks did it sell?” and “how much money did it make on each one?” and those questions are kind of answerable and their answers give you a sense of how you should feel in your heart about the company. When a bank – like, a bank bank – reports earnings you can ask “how many mortgages did it sell?” and “how much money did it make on each one?” and those answers will be useful to you too, though there will be murky liquidity and valuation overhangs that will reduce their usefulness.
If you asked those questions of Citi, you might or might not get answers that might or might not be useful, but you’d be hard pressed to translate them into the headlines on Citi’s earnings. Big banks are not primarily engines for selling products and collecting a margin on them; they are bundles of accounting decisions, and this is never more apparent than at earnings time. This is pretty far removed from economic activity in the world:
Citigroup Inc.’s third-quarter profit fell 88% as the bank took charges tied to the value of its debt and the sale of a stake in its brokerage joint venture …
Others chose to emphasize economic activity in the world, at the cost of, y’know, GAAP: Read more »