There’s a lot of The Future Of Banking in the news today and we should talk about it but first a proposition. Where are you more likely to lose money on a mark-to-market basis: buying 5-year PIK-toggle holdco Petco bonds at 8.6%, or buying 30-year UPS bonds at 3.625%? I say your odds of losing on UPS are higher; if you disagree, you take Petco, and we’ll meet here in 30 years to settle up.
Here is a grab-bag of other numbers related to UPS:
Things to think here include:
- lending money to UPS is not profitable for banks2;
- underwriting UPS’s 30-year bonds isn’t exactly a bonanza either; and
- UPS would be nuts to borrow from its banks – so it doesn’t, and borrows more cheaply in the market.3
Bank lending to high-investment-grade companies is (1) a loss leader, (2) used to attract not especially profitable business, and (3) not competitively priced. I feel like other industries do loss leaders better.
While you ponder that, also ponder this IMF working paper on banks and trading. A quick takeaway is “banks shouldn’t trade, urgh, trading bad,” and Mark Gongloff and Felix Salmon take that takeaway away, but as far as I can tell the more interesting bit is this: Read more »
What motivates people to share material non-public information with a person they know will use it for profit? For some, it’s simply about greed. For others, it’s about the thrill. For yet others, it’s about pillow talk. For Rajat Gupta, the McKinsey director currently on trial for allegedly passing inside information to Raj Rajaratnam, it’s about friendship, according to prosecutors who are trying to make the case that Raj and Rajat were the best of buds and that’s what buds do. They they back each other up when they drunkenly hit on the girlfriend of the wrong guy at the bar, they stand up as best men at each others’ weddings, they pick up the phone and say “Buy GS” when they know for a fact Warren Buffett is about to do so, too. And although attorneys representing Gupta don’t deny the two were thick as thieves, they argue that while perhaps back in the day Rajat would have provided useful information to Raj, there is no way he would have done so after Big R twice violated the bonds of friendship. In the first instance, there was this:
Defense attorneys have argued that Messrs. Gupta and Rajaratnam had a falling out in fall 2008 after Mr. Gupta lost his entire $10 million investment in a fund managed by Mr. Rajaratnam and therefore wouldn’t have passed along inside information…The precise timing of their relationship’s deterioration could be crucial in proving Mr. Gupta’s guilt or raising doubts in the minds of jurors about whether he conspired to commit securities fraud…Defense attorneys have said Mr. Gupta was furious at Mr. Rajaratnam in the fall of 2008, when Mr. Gupta’s $10 million investment in a fund called Voyager Capital Partners Ltd. evaporated. According to Mr. Kumar’s testimony, Mr. Gupta felt Mr. Rajaratnam’s negligence had allowed Voyager to collapse.
And then this happened: Read more »
Someone hit F9 on the random number generator that decides how much capital European banks need and now it’s $115 billion, which I guess is more than it used to be, so that’s a thing. As you might imagine this is a problem because who in their right mind would buy equity of a European bank? Or, in diplomatic terms:
One analyst questioned [Commerzbank’s] ability to make up the deficit through shrinkage or other means. “It certainly seems hard for them to come back with another equity raise from the market, so if all else fails it looks like the government is the answer.”
But the bank insisted this was not part of its plan. Eric Strutz, finance director, said: “We stand by our intention not to make use of additional public funds.”
So that’s nice. But if you’d rather look at it in world-historical-demographic terms, it turns out you can. Because this little consulting outfit called McKinsey occasionally sends out musings to its friends and supporters, and today they’ve got a mammoth, slightly odd financial markets study, which the Journal has written about, concluding that nobody will buy stock anymore, especially from Commerzbank (though I may have just made that part up).
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According to Reuters, the only reason the SEC put its case against the former McKinsey exec/Goldman board member on hold is because federal prosecutors intervened, which “suggests continuing interest by U.S. Department of Justice prosecutors in Gupta,” who in one instance was so excited to pass inside information to Raj Rajaratnam that he rang up the Galleon founder 23 seconds after getting off with the Goldman board. [Reuters]
The most common refrain when insider trading or other such fraud occurs on Wall Street is the question of why? Why did he/she do it? Money is often times too simple an explanation (especially when there are mommy issues to be explored) but other times it’s not. Like in the example of former McKinsey partner Rajat Gupta, i.e. the guy who called Raj with information about Goldman Sachs 23 seconds after getting off the phone with Lloyd and the rest of the board. In Gupta’s case, he just 1) seriously wanted that cash and 2) he wanted is ASAP. Read more »
In addition to Galleon Group, one firm whose name has popped up a whole bunch as it relates to the Feds’ Insider Trading Fest(ivus) is McKinsey. Until they resigned, the consulting firm employed two partners, Rajat Gupta and Anil Kumar, who have both been accused to sharing material non-public information about various companies with their buddy Raj Rajaratnam (Kumar pleaded guilty last year and has been cooperating with the government, while Gupta, who was called out by the SEC in February, has vowed to fight thing thing to the death). Know who doesn’t have any senior executives on staff who may or may not have traded hot tips for money? Bain Chairwoman Orit Gadiesh can think of one. Read more »
The former McKinsey director pleaded guilty to one count of securities fraud and one count of conspiracy to commit securities fraud in Federal District Court in Manhattan.
Mr. Kumar told the court that he had leaked to Mr. Rajaratnam that Advanced Micro Devices was planning to acquire ATI Techonologies. The leak occurred in March 2006 before news reports about the deal had surfaced. He said that Mr. Rajaratnam told him, “Anil, you are a hero.”
Kumar, visibly crying, also apologized to his colleagues “for the shame they have suffered,” but did not specify if he was talking about shame as it related to insider trading, or for the rap AK wrote and recorded while at the firm.
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Survey says: yes. Obviously you’ve got Raj’s right here (“when the rally’s on, put your money on Galleon), and below, the track laid down by the McKinsey Knowledge Center, a division launched by none other than McK “rising star” and Rajaratnam buddy-boy Anil Kumar. If you’ve been escorted out of your company’s office in cuffs at some point in the last week, or think you might be soon, and have no theme song to speak of, we suggest you get in the recording studio ASAP.
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