There comes a time in every hedge fund manager’s life when he must admit that he made a mistake. Sometimes that mistake was borrowing money from an investor fund to pay personal taxes. Sometimes that mistake was knocking off that hooker. Sometimes that mistake was thinking investors would be happy to hear that their one dollar at the beginning of the year was now just 17 cents. The point is, they erred in judgment, and while it’s unusual for men of their stature to admit such a thing, on the record or otherwise, they decided to step up and do just that.

For Bill Ackman, yesterday was sort of that day. Read more »

A tendency in financial journalism, and journalism in general, really, is to write about the big names. The Lloyd Blankfeins. The Ben Bernankes. The Dick Fulds. The Steve Cohens. For readers, that means never learning about the true heroes. The men and women toiling behind the scenes. The ones doing the real and, quite often, extraordinary work. SAC Capital outside counsel Martin B. Klotz is one of those unsung heroes.

Although we previously flagged Klotz as one to watch based on his tremendous performance during a deposition of Cohen, in which the opposing counsel addressed the hedge fund manager as “Stevie,” and Klotz proceeded to go absolutely ape shit on the guy, today he cemented himself to us and the world as a god damn genius and a man worth every one of the many pennies he’s being paid. Read more »

Why does there seem to be more insider trading than there used to be? My assumption was always to the effect of “because now we look for it and have computers and stuff,” but James Surowiecki has a column today saying in part “no, actually, there’s more insider trading”:

The S.E.C.’s enforcement actions have been on the rise as well, and the past three years saw more of them than any other three-year period in its history. Andrew Ceresney, the co-director of enforcement at the S.E.C., told me, “We’ve gotten better at detecting illegal activity, and at using technology that allows us to draw connections and see patterns.” But this isn’t just a case of vigilant policing giving the impression of a rise in crime; a number of studies of market-moving events have documented a boom in “suspicious activity” (that is, more trading than usual) around those events.

I determined to commit some pseudoscience about pre-merger insider trading and the result is this:

Loosely speaking what this tells you is: Read more »

Aaahhh I love the Bank of England’s latest Financial Stability Report. I mean: I haven’t read it, per se. But it follows the wonderful official-sector-report layout of blandly apocalyptic text running down the right side and lovely charts running down the left, so you can close one eye and it’s a delight. The charts are a nice mix of (1) visually displaying quantitative information and (2) not:

The gist of the report is, as the Journal puts it:

U.K. banks may be misleading investors over the true state of their financial health, the Bank of England said Thursday, in its starkest warning yet to banks to restore investor confidence and get credit flowing.

“One factor which may make stated levels of capital misleading is under-recognition of expected future losses on loans,” the committee said in the BOE’s twice-yearly Financial Stability Report.Banks may be further overstating their health by making “aggressive” use of risk weights used to determine how much capital different categories of loan require, officials added.

And here’s the bottom-line recommendation: Read more »

The Financial Stability Board is … is a thing, first of all, did you know that? It’s not the Financial Stability Oversight Council, though it is as far as I can tell a global version of that with similar composition (senior regulators! in a room!) and obsessions (shadow banking! money market funds!). It’s also not the Systemic Risk Council, which is different, insofar as it’s just a thing that Sheila Bair made up. I am going to make up a thing – the “Systemic Stability Oversight Board” seems available – and if you ask me nicely I will invite you to join it and we will make beautiful, beautiful reports together.

Like the FSB did with their report about shadow banking1 released yesterday. “Shadow banking,” like “junk bonds,” is a term that sort of assumes the panic it sets out to create, and so the report dutifully provides a number that is bigger than another number:

The shadow banking industry has grown to about $67 trillion, $6 trillion bigger than previously thought, leading global regulators to seek more oversight of financial transactions that fall outside traditional oversight. … The FSB, a global financial policy group comprised of regulators and central bankers, found that shadow banking grew by $41 trillion between 2002 and 2011.

Here is that in graphical form:

Holy crap look at that purplish line go! Oh wait that purplish line is just regular banks; shadow banks are the red line. Which also goes up. Just not as fast. If it worries you that shadow banks added $41 trillion in assets in 2002-2011, you might spare a thought for non-shadow banks adding, what, $80 trillion in assets? I submit to you that non-shadow banks have shadowy places of their own; I half-seriously submit to you that the term “shadow banking” functions to make regular banking sound less shadowy, like Disneyland in Baudrillard.2 Here it is in percentage terms: Read more »

If you want to make things easy on yourself, go after an economics major, says Bloomberg TV, which cautions people to avoid philosophy, education, and earth science concentrators, who make up “the least promiscuous majors.” Just don’t get too excited about your odds, though, warns anchor Scarlet Fu, noting that “we are far from the free loving days,” during which Paul Krugman shot fish in a barrel.

  • 07 Mar 2012 at 6:06 PM
  • Banks

TARP Charts!

The Federal Reserve has this new paper out about TARP that does a bit of highly suggestive eyebrow raising about some banks that shall remain nameless. They start from the awkward fact that TARP wanted everything in one bag but didn’t want the bag to be heavy, or as they put it:

The conflicted nature of the TARP objectives reflects the tension between different approaches to the financial crisis. While recapitalization was directed at returning banks to a position of financial stability, these banks were also expected to provide macro-stabilization by converting their new cash into risky loans. TARP was a use of public tax-payer funds and some public opinion argued that the funds should be used to make loans, so that the benefit of the funds would be passed through directly to consumers and businesses.

So you might reasonably ask: were TARP funds locked in the vault to return the recipient banks to financial health, or blown on loans to risky ventures, or other? Well, here is Figure 1 (aggregate commercial and industrial loans from commercial banks in the U.S.):

So … not loaned then. But that’s not important! The authors are actually looking not primarily at aggregate amounts of loans but at riskiness of loans and here’s what they get: Read more »

The gnomes at the Bank for International Settlements have produced a particularly gnomish paper called “Collateral requirements for mandatory central clearing of over-the-counter derivatives.” Wait! It might be important! Hear them out. (There’ll be charts …)

Their goal is to measure how much more cash collateral the big dealer banks will need to encumber to make the transition to central clearing of derivatives (specifically interest rate swaps and CDS) under various forms of central counterparty regime. If you’re interested in that sort of thing, and some people are, then this provides you with much fodder for chewing ruminatively. It sort of reads like an econometrics final exam that, speaking only for myself here, I would fail, so I can’t really say how ruminatively you should chew it. You could clearly make different choices at many, many different points, and while each individual choice seems thoughtful enough you wonder whether the accumulation leaves you with a toy paper at the end.*

Now, if you’re not particularly into the constraints on cash that would be driven by central clearing of derivatives, you can still get something from this paper. Specifically, this gives you a sensible look at how much damage the Financial Weapons Of Mass DestructionTM can do at any one time. Because “margin” is a proxy for something else, specifically likelihood of a big loss. Here’s how they do their math: Read more »