Do not withhold plans for messing with the global financial system from the Financial Services Authority. (Until Monday, anyway.) Read more »
We’ve talked a lot about bank capital today but there’s still time for one quick addendum. First, though, two rough-and-ready equations:
- Capital = cash paid in by shareholders plus retained earnings
- Capital ratio = capital divided by assets
The first equation explains my puzzlement at the claim that Deutsche Bank “book[ed] a loss to boost its capital ratio without selling shares;” it’s arithmetically impossible to boost your capital by losing money, though you can (separately) boost your capital ratio by fiddling with the denominator.
The important thing about the second equation is that, for banks, the ratio is well under 1. So if your capital ratio is a relatively robust 10%, that means that 90% of your total assets are funded with borrowed money, and 10% are funded with cash from shareholders and retained earnings. Some people dislike this system.
Anyway there are various semi-magical ways to monkey with the denominator but there is one simple and obvious way to monkey with the numerator – the actual amount of capital that you have – and it is this:
- Take some money,
- dress it up in a fancy costume, and
- issue some new shares to the the now-cleverly-disguised money.
You have magically transformed Assets (money) – which, remember, are 90%+ funded with borrowed money – into Capital. This has perpetual-motion-machine properties,1 so it’s pretty good.
Also it is, like, wildly wildly wildly illegal. Or, I mean, it’s pretty illegal as I just outlined it above, but if you put a fancy enough costume on the money maybe that makes it okay.2 Anyway draw your own conclusions about this: Read more »
UBS Traders Convinced Brokers To Give Other Banks Fake Estimates Of Those Other Banks’ Fake Estimates Of LiborBy Matt Levine
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:
David Einhorn’s $7.7 billion hedge fund Greenlight Capital Inc. disclosed a short position of 4.4 percent in the shares of Daily Mail and General Trust Plc, which publishes the U.K.’s second-biggest selling daily newspaper.
Greenlight’s bearish bet on London-based Daily Mail and General Trust, disclosed today on the website of the U.K.’s Financial Services Authority, was the biggest short position revealed by any hedge fund against a U.K. company under rules that took effect last week.
And yet there’s also this:
What are you doing, England? Don’t you know that when David Einhorn is short a stock, that stock goes down? There are rules here you know; today’s mild drop is not enough to comply. Read more »
Although not authorized to invest company cash in trades, Steve Perkins, a long standing, senior broker at PVM Oil Futures, had managed to spend $520 million on oil futures contracts throughout the night of June 30, 2009, the FSA said today. On the morning of the 30th, an admin clerk called Perkins to ask why he had bought 7 million barrels of crude during the night. Perkins had no recollection of the transactions, and it turned out that he had made the trades during a “drunken blackout,” according to the FSA. By the time PVM realized the transactions had not been authorized by a client, they had incurred losses of $9,763,252. Between the hours of 1:22 a.m. and 3:41 a.m., Perkins gradually bought 69 percent of the global market, while driving prices up from $71.40 to $73.05, by bidding higher each time. At 6:30 a.m., presumably sobering up and realizing what he’d done, he sent a message to his managing director claiming an unwell relative meant he would not be able to make it into work. Following an official investigation Perkins admitted to having a drink problem, had his trading license revoked for five years, and was given a fine of £72,000 ($116,878). The FSA has said that they will re-approve his license after the five-year period, if he has recovered from his drinking problem, although they warned that,“Mr Perkins poses an extreme risk to the market when drunk.” [CNBC, earlier]
The regulator didn’t specifically suspect anything re: propensity for manipulating Libor, just a general feeling it couldn’t necessarily trust the guy, which Barclays chairman Marcus Agius conceded was not entirely off base. Read more »
Good lord are these Barclays settlements juicy. Basically every day for two years one Barclays trader or another would send an email to their Libor submitter saying “hey let’s commit crimes, tons of crimes, hahahaha” and then they did. In pathetically colorful language:
Trader C requested low one month and three month US dollar LIBOR submissions … “If it’s not too late low 1m and 3m would be nice, but please feel free to say “no” … Coffees will be coming your way either way, just to say thank you for your help in the past few weeks”. A Submitter responded “Done … for you big boy”.
on 5 February 2008, Trader B (a US dollar Derivatives Trader) stated in a telephone conversation with Manager B that Barclays’ Submitter was submitting “the highest LIBOR of anybody [...] He’s like, I think this is where it should be. I’m like, dude, you’re killing us”.
Or tons more, but I found this one particularly poignant:
Submitter: “Hi All, Just as an FYI, I will be in noon’ish on Monday [...]”.
Trader B: “Noonish? Whos going to put my low fixings in? hehehe”
Submitter: “[...] [X or Y] will be here if you have any requests for the fixings”.
Like … Trader B was kidding right? I mean, in this one single case? He was making a joke about how he was constantly asking for low fixings and the submitter took him seriously? When you joke around about committing fraud and people take you seriously, that’s maybe a sign you should stop committing so much fraud. Read more »
What is your model of what the FSA is thinking in its insider-trading crackdown? Here is this Decision Notice against JPMorgan global ECM chairman and general mining-industry macher Ian Hannam, shown here being unspeakably awesome in Afghanistan*, and he got in quite a bit of trouble for some pretty minor badness. Basically he was advising Heritage Oil and its CEO, Tony Buckingham, on a bunch of things including (1) being acquired by another company which is unnamed but let’s just call it Acme and (2) selling a stake in itself to “Mr A, a representative of an organisation with interests in Kurdistan (Organisation C),” which, there is a part of me that thinks that the organization was actually named “Organisation C” and that the guy would call Hannam and be like “Ian? Mr. A here.” No? I refer you again to that picture.
Anyway as things got serious with Acme in September ’08, Hannam sent an email to Mr. A saying:
“I thought I would update you on discussions that have been going on with a potential acquirer of Tony Buckingham’s business. Tony, advised by myself, has deferred engaging with the client until Thursday of next week although we know they are very excited about the recent drilling results of Heritage Oil … I believe that the offer will come in in the current difficult market conditions at £3.50-£4.00 per share. I am not trying to force your hand, just wanted to make you aware of what is happening.”
Later, he sent another email to Mr. A ending “PS – Tony has just found oil and it is looking good,” and bcc’ed Mr. B, “a businessman with interests in Kurdistan,” about whom we get no further information though I’m guessing pretty much everyone named or pseudonymed here could have someone killed on 24 hours’ notice if it came to that. Read more »
…about all this. For starters:
- “This is as much like insider trading as soccer is like football”
- “The FSA has spent the last two years forcing square pegs into round holes”
- “This is like a traffic cop with a quota at the end of the month, with a miscalibrated radar gun”
- Greenlight has a recording of the call in question, which contains no evidence of insider trading Read more »