The Latest

Yesterday the Federal Energy Regulatory Commission ordered Barclays and four of its traders to pay $488 million for manipulating energy prices by doing basically this:

  • (1) Buying electricity with medium-term swaps,
  • (2) Selling electricity with short-term forward contracts, and
  • (3) Buying electricity in the spot market.

And vice versa (switching buys and sells). The idea is that since the swaps in step (1) settled based on the spot price in step (3), Barclays can manipulate the value of its swaps arbitrarily high by just overpaying in the spot market. Like, buy 100 whateverowatts of swaps at $1 per WW, then buy 5 WWs physical, pushing up the price to $3/WW, and you’ve spent $15 (5 WW physical x $3/WW) to make $200 (100 WW swap x [$3 – $1]).

This is nonsensical on first principles, though that doesn’t make it wrong; lots of true things are nonsensical on first principles; that’s like a feature of first principles. When you lay it out like that, though, you can see the oddity, which is that FERC thinks step (3) (buying physical) pushed up the price, but thinks step (2) (selling like next-day electricity) did not push down the price. If this worked then you could replicate it in any market, like: Read more »

Opening Bell: 07.17.13

Wild Cards for the Fed’s Exit Strategy (WSJ)
The Federal Reserve’s plans to wind down its big bond-buying program depend on solving four economic puzzles involving the job market, the inflation rate and fiscal policy. Fed Chairman Ben Bernanke gets another chance to clarify the central bank’s thinking when he testifies before Congress on Wednesday and Thursday, after weeks of market volatility generated largely by confusion and uncertainty about the Fed’s plans. Here are four questions that Fed officials are considering as they think about when to pull back on the monetary throttle and that lawmakers might pose to Mr. Bernanke in the days ahead: Is job growth sustainable? … Is the jobless rate overstating the labor market’s health? … Will inflation return to target? … Is more fiscal chaos coming?

Bank of England puts QE differences on hold at first Carney meeting (Reuters)
Bank of England Governor Mark Carney and fellow policymakers voted unanimously against more bond purchases earlier this month, surprisingly setting aside their differences ahead of a review on giving guidance about future interest rates. British government bond prices slid and the pound rallied following release on Wednesday’s of the minutes of the bank’s July 3-4 meeting, the first under Carney and the first to show no support for more quantitative easing bond purchases since last October.

Top Witness for the S.E.C. Turns Testy on the Stand (DealBook)
Over around two hours of testimony, Mr. Pellegrini, a tall, imposing investment executive, repeatedly paused and claimed he could not remember what he previously said. At one point, he complained that his questioner, Matthew T. Martens of the Securities and Exchange Commission, was being too imprecise in his queries, making them hard to answer. “It’s a bit of a trick question, but I’ll try to answer it,” he said. … Mr. Pellegrini at one point spent about 10 minutes bickering with Mr. Martens over the definition of a “custom C.D.O.” Later, Mr. Pellegrini sighed, “I am upset about this conversation.”

Morgan Stanley is having an identity crisis (Qz)
What does Morgan Stanley stand for? It has long been known as an investment banking powerhouse, often going head to head with Goldman Sachs in several areas such as mergers and acquisitions (M&A) and initial public offerings (IPOs.) But Morgan Stanley’s investment banking operations have faded a bit from the spotlight and its trading arm had been disappointing though is staging a comeback, while its wealth management arm is getting more attention—and seeing more success. Overall, Morgan Stanley hasn’t completely adjusted to the world after the financial crisis. In Wall Street’s map of the world, the bank is in something of a no-man’s land.

Alleged Oklahoma burglar accidentally dials 911 during break-in (UPI)
“There was a 911 call made by an individual who was breaking into a residence … . We believe the 911 call was made accidentally by pocket dialing. The two burglars were discussing what they were taking from the house,” Pittsburg County, Okla., Undersheriff Richard Bedford said. Emergency dispatchers listened to the conversation, Bedford added.
Read more »

Write-Offs: 07.16.13

$$$ Barclays, Traders Fined $488 Million in Energy Probe [Bloomberg]

$$$ Dell buyout vote delay would not lead to higher offer-sources [Reuters]

$$$ Hong Kong opens civil case against Tiger Asia [FT]

$$$ Financial Regulators Cite Cyber Risks [WSJ]

$$$ Brawl erupts at Long Island Chuck E. Cheese birthday party [ABC] Read more »

Click Here

“I think the jury was lost,” John “Sean” Coffey, a lawyer for Tourre, 34, said during a break this morning in the testimony of Professor Dwight M. Jaffee, called to the stand to describe the collateralized debt obligations at the heart of the case. “It is critical that they understand how a synthetic CDO works.” Before Jaffee’s cross-examination, an SEC lawyer used a PowerPoint presentation to help him explain a CDO as a sinking cargo ship, with the equity and mezzanine investors the first to take on water. Not long after the super-senior deck flooded, the animated ship was shown sinking to the bottom. Later, Forrest tried to rephrase one of Coffey’s questions to Jaffee about a failing CDO, apparently using the wrong aquatic metaphor. “You’re talking waterfalls, I’m talking flood,” Coffey said…After Jaffee left the stand, the SEC called Sihan Shu, a Paulson managing director who testified that the firm in 2006 and 2007 was in search of investment vehicles that would allow it to make short investments on U.S. mortgages. “We wanted to express a bearish view on the U.S. housing market via subprime mortgage-backed securities,” Shu said. The jury wasn’t alone in grappling with the subject matter of today’s testimony. Paolo Pellegrini, a former top Paulson executive, testified after Shu. “What does ‘CDO’ stand for?” SEC lawyer Matthew Martens asked Pellegrini, who wasn’t in the courtroom for Jaffee’s testimony. “I’m not sure,” Pellegrini said. “It may stand for collateralized debt obligation, but I’m not sure.” [Bloomberg]

Harvey Schwartz, Goldman’s CFO, said the firm is suddenly experiencing some “recruiting tailwinds”, with more people wanting to work there…At the same time, Schwartz said Goldman’s staff are still very much in demand to work elsewhere, claiming that “Goldman Sachs people are always in high demand and our competitors are always looking to take them over to their firms.” [eFinancial]

  • 16 Jul 2013 at 1:44 PM
  • Banks

Goldman Avoided Talking About Leverage A Lot This Morning

GS had earnings today and I guess they weren’t that good but all anyone ever wants to talk about on earnings calls these days is leverage ratios. That I suppose is a sociologically interesting fact: is banking a business of selling stocks and bonds and loans and whatnot, or is it a business of optimizing yourself around regulation? You can tell what the analysts think, though I suppose that’s like a second derivative; they want to add value to whatever was already obvious to the market. The stock price dropped on, like, not selling enough stocks and bonds and whatnot. Or rather: on making too much money from owning stocks and bonds with Goldman’s own capital, and too little on doing more obviously Volcker-compliant-y things. So: still sort of a regulatory question I guess.

But, yeah, all the analysts want to talk about is leverage ratios, and you know who does not want to talk about leverage ratios is Harvey Schwartz. Delightfully someone at Reuters counted the number of times he was asked to quantify Goldman’s leverage ratio (eight1) and the number of times he did (zero). He said he was “comfortable” with it, which presumably means that GS will be above 5% by 2018 assuming some rates – possibly at, above, or below the current rates – of capital generation and capital return. But they haven’t done the math yet.

Which is curious? Read more »

From: redacted at UBS

Sent: Monday, July 15, 2013 3:07 PM

To: ML-IBD-Worldwide-All

Subject: Relationship inquiry: Francis Ford Coppola Read more »

Labaton Sucharow is a law firm whose business consists of getting disgruntled financial industry employees to sue their employees for various bits of naughtiness, and taking a cut of whatever money those disgruntled employees can get from a lawsuit or settlement. One of their clever marketing techniques is to hire a survey firm to identify financial services employees willing to talk shit about their employers on the internet,1 because those employees are a promising source of money for Labaton Sucharow. In fact only about a quarter of those employees actually have anything negative to report, and presumably not all of that is lawsuit-worthy, but marketing is hard and you shouldn’t expect a particularly high hit rate. The trick is to just get a lot of at-bats and something will eventually pan out.

Also the PR is amazing? Here is an Andrew Ross Sorkin column titled “On Wall St., a Culture of Greed Won’t Let Go” that sort of takes this survey as a fact about the world rather than a marketing document, so is all like “oh you and your greed, Wall Street!” Read more »