• 25 Mar 2014 at 6:50 PM

The Bitcoin Bugle: Derivatives and Taxes

Those 200,000 bitcoins that Mt. Gox forgot about? Yea, well, they’re still not legal tender, according to the IRS, which will have some unpleasant consequences in about three weeks. Read more »

Paul Singer’s Guilty Pleasure

Derivatives may be imperiling global stability and undermining society, but the Elliott Management chief just can’t help himself. Read more »

UBS is selling its over-the-counter commodity derivatives portfolio to JPMorgan, prompting John Carney to say this:

Here’s a good rule of thumb. When one bank buys a business from another bank, it’s almost always a case of regulatory arbitrage. It’s never really because of synergies or managerial talent or whatever other hokum the media relations churn out to their willing dupes in the press. It’s just about one bank being better able to take advantage of the rules.

So even though the rationale for JPMorgan Chase buying the over-the-counter commodities derivatives business of UBS remains mysterious, you can safely surmise this is regulatory arbitrage. Most likely, it’s got to do with capital requirements.

Umm maybe? I don’t know, this question seems a little over-determined; the thing is that pretty much everyone thinks that (1) JPMorgan is pretty good at running an investment bank, the occasional hiccup aside, and that (2) UBS is pretty crap at doing so. So are US regulators relatively more comfortable with JPM managing this portfolio than Swiss regulators are with UBS doing so? Sure, probably, but probably so are the respective shareholders, and counterparties, and senior managements, and anyone else you might ask. Really moving any portfolio of anything from UBS to JPMorgan is probably Pareto optimal.

The light irony comes from – well here is Bloomberg’s first sentence: Read more »

Elizabeth Warren introduced a bill today to split nice old-timey banking (taking deposits, making loans to people and corporates) from investment banking and other assorted eeeeevil activities (trading, derivatives, etc.) and it comes with a poster. It also comes with a throwback name, “The 21st Century Glass-Steagall Act of 2013,” after the guys who last split commercial and investment banking from 1933 until their Act’s repeal in 1999ish. Some people are calling the new proposal the Warren-McCain bill, because John McCain is a co-sponsor of this/every bill. I will compromise and refer to it as “The Warren-McCain 21st Century Glass-Steagall Act of 1933 of 2013.”

That’s roughly all I have to say about it? It probably won’t happen, and the goal of keeping depositors safe by limiting depository institutions to boring regular banking is mostly a silly one.1 Mortgages! Mooooooooooooooooortgages! The boring, take-deposits-and-make-real-estate-loans banks in Spain and Ireland and Cyprus and Bedford Falls and 1989 managed to blow themselves up just fine without any help from investment banking.

But you knew all that, gah. This bill is not really about depositor safety in any sort of empirical way. It’s a more ancient and anthropological theory of the dangers posed by banking: there are pure activities and impure activities, and the danger comes from mingling the pure and the impure. You build two buckets and you keep them apart, not because one bucket is riskier than the other but because things just belong in their own buckets: Read more »

  • 11 Jul 2013 at 3:05 PM

Deutsche Bank Did Some Accounting Stuff

I used to work in a business that, among other things, helped clients get financing against securities. One thing that you learn quickly in that business, and then spend the rest of your career trying to forget, is that the simplest way to get financing against securities is to sell them. You’ve got $100 of stock and want to borrow $80 of cash against it? Just sell the stock, now you have $100, you’re welcome.1

This is not a perfect solution, of course, because you presumably owned the stock for a reason, and that reason was presumably that you thought it would go up.2 And if you sell it you lose the chance to participate in that upside. So one thing you could do is (1) sell your stock for $100 today and (2) enter into some sort of transaction that gives you some or all of the upside in the stock over some period of time. Like, you could buy a call option struck at $100, giving you all the upside and none of the downside, though at the cost of having to pay premium for the call option. Or you could enter into a total return swap struck at $100, giving you all of the upside and all of the downside at a zero-ish cost. Or you could enter into a forward contract to buy back the stock, which is the same as the swap, more or less. That last one – sell stock today, enter into a forward to buy it back in the future – is so common that it has a name, and the name is “repo.” Read more »

I can’t find the quote but I recently read someone arguing that you should never worry about anything you see on the news. By definition, the argument goes, horrible things that make the news are newsworthy, and they are newsworthy because they are rare, and so the odds of you dying in a terrorist attack, bridge collapse, Ebola outbreak, or anything else you see on TV are basically nil.

Financial news is endearing because it’s the opposite of that: it consists mostly of pointing at perfectly unexceptional market-standard practices that happen every day and saying “holy fuck, did everyone know about that? That’s messed up.” As Matthew Klein has said, “many things that are considered normal in finance look like fraud to almost everyone else,” so the vein is rich. Libor manipulation, Apple’s taxes, really take your pick. Or today’s Times article “Banks’ Lobbyists Help in Drafting Financial Bills”; my impression is that an article titled “Financial Bill Written Without Drafting Help From Banks’ Lobbyists” would, for sheer unlikeliness, be the financial-regulatory equivalent of a news report about terrorists blowing up a bridge using the Ebola virus.

Closest to my heart among these scandals of differing perceptions might be the “you built me a CDO designed to fail” cases. For starters: the fact that they come out of market-standard practices is reflected in the fact that pretty much every bank has one of them.1

But while every other bank seems to have come out of the CDO scandals with a reaction along the lines of “it’s a fair cop, here is a pile of money,” Goldman, who sort of originated the idea,2 has spent the last few years putting together increasingly convoluted committee structures and online animations to make sure it’ll never happen again, for some “it.” Here is the latest 26-page report on Goldman’s business standards improvement, and here is a genuinely delightful “lifecycle of a transaction” animation that I am tempted to replace with this: Read more »

Bloomberg has a fantastic article today about how Lehman’s decaying corpse is suing a bunch of former clients, many of them wee and sympathetic nonprofits, who hosed Lehman when they terminated swaps in September 2008. Some of these lawsuits turn on disputes over when those clients, or their consultants, should have valued the swaps for termination purposes, and I was looking forward to reading Bloomberg’s account of which of those customers used the SWPM <go> function on their terminals and on what dates, but for some reason that wasn’t mentioned.

The basic story is that clients had trades with Lehman that were in-the-money to Lehman, and when Lehman went bankrupt the clients terminated the trades and wired Lehman termination payments that Lehman now rather belatedly finds inadequate. You could understand why the clients would want to get out of these trades: for one thing, the trades had moved against the clients (thus being in-the-money to Lehman) and seemed likely to move further against them1; for another, if the trades did move back in the clients’ favor, what were the odds that a freshly bankrupted Lehman would pay the clients what they were owed?

Is Lehman right that the clients underpaid? Oh, I mean, of course. I don’t have the details of the trades but you can reason this out from first principles. Here:

  • It’s September 15, 2008, and Lehman has just filed for bankruptcy.
  • You owe Lehman some money.
  • How much you owe them is a somewhat subjective matter that depends on what termination date you pick, what model you use, whom you ask for a quote, etc.
  • You know, with some certainty, that everyone at Lehman who knows anything about your trade, and also everyone who doesn’t, has bigger things to worry about, like stealing office supplies on their way out the door.
  • You can basically write them a check and enclose a note saying “here’s what we think we owe you,” and see if they write back.
  • How big is the check?

Read more »