derivatives

Prop trading desks: A thing of the past?

Jim Kim — Tue, 11 Nov 2008 09:43:44 -0500

Prop trading isn't what it used to be. Traders in general are thought to be good candidates for downsizing right now. This is reflected by the fact that proprietary trading desks seem to be becoming a thing of the past. JPMorgan got rid of its desk. And Merrill Lynch is following suit, according to Financial News Online. There will still be some prop trading via specific asset class desks. You have to wonder if this is optimal. One benefit of a dedicated desk was that it could seek cross-asset opportunities, combing say derivatives and debt. But perhaps those opportunities just aren't worth it anymore for commercial banks. We're in a new world after all.

For more:
- here's the article

Is the CDS risk passing?

Jim Kim — Tue, 04 Nov 2008 16:56:53 -0500

Is the risk stemming from credit default swaps (CDSs) passing? Business Week weighs in with an article noting data from the International Swaps & Derivatives Assn. that says $25 trillion in notional value has been taken out of the CDS market since the beginning of the year. That amounts to a 25 percent decline from the $62.2 trillion peak. At the same time, progress is being made on a CDS central clearinghouse, something we've been discussing at length.

All of this bodes well, but the real worry right now centers on so-called synthetic CDOs, which invest in credit default swaps, not asset-backed securities. We've noted as of late there is real worry that a wave of corporate defaults could trigger the same reaction we've just suffered through in cash CDOs. The high-yield market is ailing, to say the least. Still, any progress on derivatives exposure is welcome. We're hardly out of the derivatives woods, but we're not completely stuck in the mud.

For more:
- here's the article

Lots of intrigue over AIG

Jim Kim — Thu, 30 Oct 2008 08:08:58 -0400

The New York Times reports that AIG is "rapidly running through" the $123 billion in emergency lending it has received from the Fed. It has drawn down $90 billion so far, which is prompting a lot of head scratching over accounting techniques. There seems to have been an internal conflict over how to value derivatives. An internal accountant hired by the company because of an earlier scandal has been sidelined on this issue and is now said to be in seclusion. But he has been in contact with government officials, who have his account of events. The company's external auditor, PricewaterhouseCoopers, warned of a material weakness before the government bailout. So the fear is that the company had racked up huge losses--that were undisclosed--before being bailed out. AIG has yet to provide information about how the funds have been used, but its first earnings report since the bailout may be released next week.

For more:
- here's the NY Times article

Credit derivatives, stock markets brace

Jim Kim — Sun, 14 Sep 2008 21:50:24 -0400

The International Swaps and Derivatives Association staged an emergency trading session on Sunday to allow dealers to prepare for the death of Lehman Brothers, a fairly large player. To unwind, or hedge, or whatever else. Many are expecting a significant credit default swaps event. This may be the first counterparty to fail. Bear Stearns technically did not default. There will be big losses on CDSs on Lehman bonds, of course, but the value of CDSs on other bonds that were underwritten by Lehman also would be affected. This is the second major event in a week, following on the heels of the Fannie and Freddie bailout. There are some jitters about stock trading today as well, as banks were not successful in their plea to revive a recently expired temporary ban on short sales of some financial stocks.

For more:
- here's the Financial Times article
- here's another article on worries about Monday
- What will the shorts do now? Article

Wachovia turnaround underway?

Jim Kim — Tue, 12 Aug 2008 08:08:23 -0400

The pressure is on for Robert Steel, the new CEO of Wachovia, who has raised the number of jobs the bank will cut. The AP reports that in a quarterly SEC filing, the bank says it expects to eliminate 11,350 positions, including 6,950 active employees and 4,400 open positions. That's about 600 more than previously planned. All will be in the mortgage area. Wachovia estimates that all cost-cutting steps will boost Tier 1 capital by more than $5 billion by the end of 2009. A lot is riding on the state of the real-estate economy. If the situation improves measurably, Wachovia would certainly benefit. To be seen as a pure play-like winner, it would need to clear up all the regulatory issues. The latest is that its municipal derivatives group is under investigation.

For more:
- here's the AP article

Now hear this: Morgan Stanley is hiring

Jim Kim — Thu, 31 Jul 2008 13:09:14 -0400

People tend to assume that getting hired on Wall Street right now is all but impossible--with all the layoffs. For John Mack, CEO of Morgan Stanley, that spells opportunity. The Financial Times reports Morgan Stanley is looking to hire top executives and upgrade its status in key markets, like derivatives, risk management and prop trading. In particular, it would like to add expertise in the Middle East and Asia. It has already snapped up a few former Bear Stearns employees. Morgan Stanley has saved $1 billion by cutting about 10 percent of its employees, mainly in investment banking, fixed income and research. Those savings are being redeployed.

For more:
- here's the FT article

Cautionary tale of a Citigroup trader sent to prison

Jim Kim — Thu, 05 Jun 2008 08:22:09 -0400

In May 2007, an ex-Citigroup energy derivative trader named Craig Gile was sentenced to a year and a day in jail after pleading guilty to one count of conspiracy. Fortune has his thought-provoking story. The magazine paints a picture of a good man, trying to please his boss in a tricky area. As the entire subprime fiasco makes clear, valuing derivatives is more art than science. Gile was charged with making changes to a computer model that resulted in artificially high valuations of some options. Some might think this is an example of out of control prosecutors. Some might disagree. But it points to the need, not so much for more regulation, but for some sort of standards that bring more clarity to derivatives valuations. It may be that prosecutors have given up on the idea. We've seen nothing of this sort regarding the subprime fiasco.

For more:
- here's the profile

Related Articles:
Rogue trader gets light sentence
Another rogue trader

Citigroup to combine debt and equities units

Fri, 16 May 2008 06:59:54 -0400

Financial News Online reports that Citigroup has plans to combine its equity and debt capital markets origination divisions into a single unit. The move follows like-minded moves by JPMorgan Chase and UBS. The point is to unlock efficiencies that might result from integrated product offerings, and to provide customers a single point of contact. Companies have increasingly diverse capital markets needs, and an integrated sell that links debts, stocks and derivatives makes a lot of sense on paper. Of course, the key here is execution, stitching together a cohesive logical pitch to customers. Some might see this as an interesting test of how well Citigroup can adapt in this new era.

For more:
- here's the Financial News Online article

More on SWFs and top banks

Tue, 13 May 2008 06:59:58 -0400

We've noted that sovereign wealth funds, despite the political controversy, represent a vast source of new business of Wall Street firms. IDD fleshes out the idea a bit. Morgan Stanley, Lehman Brothers and Barclays seem to be among the first movers. A host of law firms are also heading to the region. The pie will be large, that's for sure. Morgan Stanley figures that SWFs' assets will grow to $17.5 trillion by 2017. The issue is what product mix these funds will move toward. Most think that they will not generate an inordinate amount of merger revenue. But hedge funds, private equity funds, commodities funds and derivatives funds likely will be seen a terrific opportunities.

For more:
- here's the IDD article

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