In the depths of the Great Depression, the American government set up social and financial safety nets to prevent another treacherous economic downspiral and financial panic. The strategy seemed to work: in the years since, recessions and bear markets have been milder. There has been no depression, and panics have been fleeting. But now, a few outspoken economists fear that a depression — a prolonged downturn, accompanied by severe financial distress — is a possibility, if only remote. One reason: those safety nets are severely shredded.
The social safety nets — the entitlement programs set up in the 1930s and their later refinements — are in tatters. The Medicare trust fund will run out in 2019, and the Social Security fund’s reserves will be depleted in 2041. David Walker, former head of the U.S. Government Accountability Office, has been going around the country on Fiscal Wake-Up Tours, warning that the nation is on a financial collision course: there is not enough money to handle coming baby boomer retirements; the Medicare prescription drug benefit plan is a disaster; tax cuts have been irresponsible; the Iraq War is draining available funds; government pensions at all levels are far too generous; and Congress has no budget controls. Walker recently joined a private group trying to educate citizens on the similarities between America today and the Roman Empire in its final years.
The financial safety nets are in tatters too. They were set up to prevent market manipulation and thwart debt-based pyramids. The 1920s was a decade of wild speculation enriching a favored few but eventually wiping out almost all investors. A handful of crooks would create pools to drive a stock up, then bail out when it hit a predetermined peak. They would work similar magic in driving a stock down.
The stock pyramids, facilitated by piles of debt, were the most dangerous. The Van Sweringen brothers built a pyramid of railroad stocks; Samuel Insull had an infamous utilities pyramid. As the stocks crashed and the basic businesses foundered, the debts could not be paid. The pyramids collapsed, exacerbating the fall of the overall market. Viewing one jerry-built debt pyramid, President Franklin Delano Roosevelt called it “a 96-inch dog wagged by a 4-inch tail.”
In this environment, the United States passed rigid securities laws and set up the Securities and Exchange Commission. Its mission was to protect small investors from the depredations of corporate titans and Wall Street. Now the mission (unstated, of course) is exactly the reverse: to protect the titans and Wall Street. One way it’s done is through what San Diego attorney Gary Aguirre, a former commission investigator, calls the “rotating door.” Lawyers work for the agency for several years and then go with big law firms for $2 million or $3 million a year. When they are at the agency, they do dubious favors for the powerful firms representing stock manipulators. For example, John Moores dumped $487 million of stock in Peregrine Systems during the period in which the books were cooked. Evidence shows Moores knew about the phony accounting. Moores hired his personal lawyer, Charles La Bella, to oversee a whitewash by the law firm of Latham & Watkins. To no one’s surprise, it exonerated Moores and put the blame on his underlings. The study was ridiculous, pointed out victims. The SEC official in charge of the Peregrine case blessed the Latham & Watkins study — then went to work for Latham & Watkins.
Three years ago, the securities commission notified Bear Stearns that it intended to bring an enforcement action against the firm for overvaluing $63 million of subprime mortgage–related derivatives. Two years later, the investigation was quietly closed. Gary Aguirre suspects that backroom pressure from law firms killed the matter. If the case had proceeded, the subprime crisis might have been averted, he suggests.
“Fixing the SEC so it can protect investors will not be easy,” says Gary Aguirre, who has returned to San Diego after several years in Washington, D.C. “Powerful interests want the SEC to be just the way it is or even weaker.” Opacity, thy name is Wall Street. “Over the last decade there has developed a second financial market — unregulated, off the balance sheets. It has grown geometrically.” This second financial market has been a comfy home for subprime mortgage instruments, derivatives such as credit default swaps, hedge fund monkey business, offshore money pools, and other collusive contrivances. “The nation has two capital markets: one is semitransparent and semiregulated, the other is opaque and unregulated.” And the Securities and Exchange Commission looks the other way — deliberately.
“The investment banks sold the regulators on the theory of counterparty discipline,” says Gary Aguirre. Translated, that means “Trust us.” Trust these gamblers to be prudent when doing business — say, buying a derivatives contract — from a third party. But the collapse of Bear Stearns, and the fact that almost no firm on Wall Street detected the subprime mortgage fraud, should explode any theory of counterparty discipline. The idea was never more than “a myth sold to regulators so investment banks can operate in the shadows without regulation.”
In the Bear Stearns crisis, the Federal Reserve began loaning money to the big securities firms. In the years since the Great Depression, it had only loaned to commercial banks. So it is generally accepted that these brokerage firms will have to be regulated. Last week, Treasury Secretary Henry Paulson introduced a “regulation lite” package. Don’t expect meaningful regulation of Wall Street. For example, the Treasury only vaguely refers to possible regulatory supervision of complex derivatives, which are the villains. That would be like 1930s regulators winking at Insull and the Van Sweringen brothers, surreptitiously encouraging them to keep building their debt pyramids.
Commercial banks are supposed to be regulated. But the essence of white-collar fraud is contrived complexity. Derivatives, sated with mathematical formulae and Greek symbols, are perfect tools for that. In keeping these inscrutable derivatives off their balance sheets, the commercial banks have evaded reserve requirements, creating a shadow banking system with starkly inadequate reserves. The securities firms, too, have a shadow system; as long as they have their major weapon, complex derivatives, they can evade regulation.
“This is very much like what happened before the stock market crash of 1929,” says City Attorney Mike Aguirre, brother of Gary Aguirre. “In the 1920s, there was an escalation of speculation. But it could be measured then; it was tied to a central reference point.” Today, estimates of the notional value of derivatives run from $500 trillion to $700 trillion — beyond anyone’s comprehension. Even adjusted for the inflation that has occurred since the 1930s, “today’s numbers dwarf the numbers then. There has been a corporate takeover of the full faith and credit of the U.S.”
In short, Roosevelt’s dog would be a hundred yards long and its tail would be a fraction of a millimeter. “The situation is more dangerous than it was in 1929,” says Mike Aguirre, a securities lawyer before he became city attorney. “The numbers are larger; the nation is in worse shape because of the war in Iraq; we don’t have the manufacturing, transportation, and infrastructure [dominance] we had then.”
Ben Bernanke came in as head of the Federal Reserve promising more transparency. But the Fed-directed takeover of Bear Stearns by JPMorgan was “done completely behind closed doors,” says Mike Aguirre. Why did the Fed secretly arrange the emergency nuptials? Because if Bear Stearns had gone bankrupt, the extent of its interrelationships with other Wall Street houses, hedge funds, pension funds, and commercial banks would have become public knowledge. The people would have known that the system was on the brink of collapse and exactly which banks and brokerages were most at risk. Mike Aguirre says that in future such cases, a failing institution should be forced to go bankrupt. “There should be full disclosure of the liabilities.” The complexity-obsessed markets must be reformed and simplified: “There should be no trading under the counter. Trading should be in organized markets. This is a good time to close all the loopholes.”
That’s what reformers said in the 1930s. Then the commercial banks, securities firms, hedge funds, and offshore buccaneers created the loopholes anew. Members of Congress, with Wall Street’s money in their sticky fingers, let it happen. Now we’re back on the brink again with tattered nets below us.
Citigroup May Sell $12 Billion of Loans, Person Says
By Bradley Keoun
April 9 (Bloomberg) -- Citigroup Inc. is in talks to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank's balance sheet, a person briefed on the matter said.
A sale to the private equity firms would shield the bank from further declines in the value of the debt, said the person, who wouldn't be identified because negotiations are private. The loans are part of the $43 billion in financing that Citigroup agreed to provide for leveraged buyouts last year before credit markets froze and saddled the New York-based company with hard- to-sell assets.
Citigroup plunged 19 percent in New York trading this year, partly on concern that writedowns of leveraged loans, which currently trade at about 90 cents on the dollar, might add to $24 billion of losses the bank has taken so far on mortgages and bonds that tumbled in value. Chief Executive Officer Vikram Pandit is shedding high-risk holdings to shore up capital.
``As a Citigroup investor you won't have to worry about more mark-to-market writedowns on these loans,'' said William B. Smith, senior portfolio manager at New York-based Smith Asset Management Inc., which oversees about $80 million, including about 66,000 Citigroup shares. ``There's now a consortium of private-equity firms saying what they're worth.''
Citigroup rose 35 cents, or 1.5 percent, to $24.11 at 9:46 a.m. in New York Stock Exchange composite trading.
$200 Billion Logjam
The company's so-called Tier 1 capital, the core measure of solvency demanded by regulators, was 7.1 percent as of Dec. 31, down from 8.6 percent a year earlier. A ``well-capitalized'' bank must have a ratio of Tier 1 capital to assets of at least 6 percent, according to rules set by industry regulators. Citigroup had about $2.2 trillion of assets at the end of 2007, more than any U.S. bank.
Daniel Noonan, a Citigroup spokesman, declined to comment, as did Apollo spokesman Steven Anreder and Blackstone spokesman Peter Rose. TPG didn't return messages seeking comment.
The leveraged loan market seized up last year after losses on mortgage bonds prompted fixed-income investors to shun assets deemed risky. Leveraged loans are made to companies with credit ratings below investment grade, meaning they're considered by Moody's Investors Service and Standard & Poor's to carry a higher risk of default.
Citigroup is planning to complete the sale to Apollo, Blackstone and TPG as soon as next week, when the bank reports first-quarter results, the person briefed on the talks said. Analysts estimate the bank will report a loss of more than $4.7 billion, or 93 cents a share, according to a survey by Bloomberg.
Loan Prices
The deal may help clear the $200 billion logjam of unsold loans, said Chris Taggert, an analyst at CreditSights Inc. in New York. Money managers who have raised funds to invest in distressed debt are striking deals with Citigroup and other banks now eager to unload them, he said.
``It would definitely raise loan prices given that large- scale buyers are stepping in,'' Taggert said.
Apollo, Blackstone and TPG stand to profit if demand for the loans pushes prices above Citigroup's discounted sale price. Apollo and Blackstone, which manages the world's biggest buyout fund, are based in New York. TPG, based in Fort Worth, Texas, led a group that agreed this week to buy a $7 billion stake in Washington Mutual Inc., the largest U.S. savings and loan firm.
Poised to Dispose
The most actively traded leveraged loans, which fetched 100 cents on the dollar as recently as last June, fell to a record low of 86.28 cents in February, according to data compiled by Standard & Poor's. Prices have since rebounded to 90.14 cents as banks reduced their backlog of unsold loans.
Citigroup's planned sale to private equity firms follows similar moves by banks to get leveraged loans off their books. Lehman Brothers Holdings Inc., Deutsche Bank AG and Credit Suisse Group sold loans to investment vehicles they created called collateralized loan obligations.
Pandit is poised to dispose of more than $200 billion of the company's assets, which increased by almost $700 billion from 2005 through 2007. Since he succeeded Charles O. ``Chuck'' Prince in December, Pandit has been whittling down Citigroup's inventory of leveraged loans and high-yield bonds while balking at financing pending deals. Under U.S. accounting rules, Citigroup must record losses when the market value of the buyout loans on its balance sheet falls.
Clear Channel
Two weeks ago, Citigroup led the sale of $1.45 billion of bonds that Apollo and TPG used to finance their $17.1 billion purchase of casino operator Harrah's Entertainment Inc. The bonds priced at 84 cents on the dollar.
Citigroup and five other banks were sued last month by private-equity firms Bain Capital LLC and Thomas H. Lee Partners LP for refusing to fund their $19.5 billion acquisition of Clear Channel Communications. The bank group countersued last week.
Citigroup also tried to back out of a bankruptcy-financing package for Solutia Inc., a St. Louis-based maker of nylon and plastics, because of changes in the credit markets. The case was settled in February.
US$945b: IMF's estimate of losses from sub-prime crisis
Banks will bear roughly half of the losses, the Fund says in a report
By VIKRAM KHANNA April 10, 2008
(SINGAPORE) It's going to be an almost trillion-dollar meltdown. That's the message on the likely magnitude of the US sub-prime-related crisis from the International Monetary Fund (IMF). In its Global Financial Stability Report released in Washington yesterday, the IMF points out that the crisis is spreading beyond the US sub-prime market, to the prime residential and commercial real estate markets, consumer credit and the corporate debt markets.
The IMF loss estimates are in line with those put out by some private economists who have closely tracked the crisis, such as George Magnus of UBS, although others, such as New York University professor Nouriel Roubini, cite US$1 trillion as a minimum loss figure, with the maximum going as high as US$2.7 trillion in the worst case.
According to the IMF, of the US$945 billion of total losses, US$565 billion will be due to residential mortgage debt, US$240 billion will come from commercial real estate debt, US$120 billion from corporate debt and US$20 billion from consumer credit debt.
US$720 billion, or about 76 per cent of the total losses, will come from securitised debt - that is, debt that has been packaged into tradable securities.
Banks will bear roughly half of the sub-prime mortgage-related losses, with insurance companies, pension funds, money market funds, hedge funds and other institutional investors accounting for the rest. Globally, banks are estimated to have US$740 billion of net sub-prime exposure, 53 per cent of which is held by US banks and 41 per cent by European banks. Asian (including Japanese) banks hold about 5 per cent.
The IMF estimates potential losses of US$144 billion for US banks and US$121 billion for European banks. Losses of Asian banks are likely to be less than one-tenth of losses in Europe, it says.
It points out that most sub-prime-related losses appear to have been reported already, noting that through mid-March 2008, banks had reported US$190 billion in losses on US mortgage market exposure. However, it adds that much of that represents mark-to-market losses (losses arising from loans being valued at low prevailing market prices) and some could yet be recoverable in the future.
Still, the IMF says that US banks and government-sponsored enterprises could report a further US$49 billion in additional writedowns, while European banks could report as much as US$43 billion.
Nonbank financial institutions, including insurance companies, may yet also report sizeable additional writedowns.
However, the IMF urges that loss estimates should be treated with caution, because:
They depend on the quality of disclosure, and are sometimes based on estimates of exposures;
Aggregate losses are highly sensitive to bank exposures to different types of loans, which are again estimates. Different tranches of securities are also valued differently;
The timing of loss recognition is uncertain and the norms vary across countries; and
Loss estimates could be lowered by remedial measures such as the modification of mortgage loan terms.
On the ripple effects of the crisis, the IMF points out that emerging-market countries have been 'broadly resilient' so far. But it adds that some remain vulnerable to a credit pullback, especially where domestic credit growth has been fuelled from external funding and large current account deficits need to be financed.
However, this is not so much the case in Asia, where most countries have current account surpluses. Eastern European countries are the most exposed.
The IMF's report comes ahead of tomorrow's meetings of Group of Seven finance ministers. This will be followed by the spring meetings of the IMF and the World Bank, where the sub-prime crisis is expected to top the agenda.
With regard to policy measures, the IMF says 'the immediate challenge is to reduce the duration and severity of the crisis. Actions that focus on reducing uncertainty and strengthening confidence in mature market financial systems should be the first priority'.
Comparing the magnitude of the US sub-prime crisis to previous financial crises, the IMF points out that in absolute dollar terms, it is slightly larger than Japan's banking crisis of the 1990s.
But relative to GDP, the losses stemming from the sub-prime crisis would be around 7 per cent, which makes it much smaller than either the Japanese crisis or the Asian financial crisis of 1997/98, where the total losses came to 15 per cent and 35 per cent of GDP, respectively.
Hmmm...very interesting; now got Ang Moh '黑社会人物' involved in the Jade Saga...
Gatto on his way home empty handed
Published 5:40 AM Apr 8, 2008 Last update 5:08 AM Apr 11, 2008
Underworld identity Mick Gatto emerged from his meeting with Opes Prime's key Singapore executives last night declaring they had hidden no assets, reports The Australian.
Mr Gatto left Australia on Tuesday, vowing to trawl through Opes' overseas operations to recover $1 billion he said was hidden inside the failed stockbroker.
Mr Gatto and associates John Khoury and Matt Tomas told The Australian "these guys are just as innocent as the victims.
"Unfortunately we are not coming back with bags of money but we have certainly got a lot of information that we can use back in Melbourne," he said.
Mr Gatto told the paper "a lot of people are pointing the finger at these Singapore guys but we are pretty satisfied there is nothing in Singapore. Investors will get some money back but the administrators' estimate (of 30c in the dollar) is ... pretty accurate."
Mr Gatto said he has plenty of leads to go on and is flying back to Melbourne today.
Jay Moghe, the Singapore-based associate of Opes and the sole director and shareholder in Riqueza, had reportedly feared for his family's safety.
Meanwhile, the fallout in Australia and Singapore continues with Australian firms launching legal battles over the ownership of company shares and a Singapore takeover and privatisation bid scuttled because of the Opes collapse.
On Thursday, the Federal Court of Australia granted a fresh injunction to Opes Prime client Beconwood Securities Pty Ltd, temporarily stopping the ANZ Banking Group Ltd from selling the shares of advertising firm Q Ltd.
In Singapore, OCBC Bank says it has reported to Singapore's white collar crime unit on events surrounding a failed takeover bid for Jade Technologies after it resigned as an adviser to the deal on April 1.
Jade Technologies announced last week that its president Anthony Soh failed in his bid to acquire the engineering and commodities services firm and take it private. OCBC Bank was the financial adviser to Mr Soh.
"As the matter has been reported to the Commercial Affairs Department, we are not able to provide any further details at this juncture," OCBC head of corporate communications Koh Ching Ching told Reuters in an email.
Singapore newspapers reported that Mr Soh did not have enough funds to proceed with the bid as he had pledged his shares as collateral to Opes Prime to finance the buyout.
Singapore's Business Times newspaper on Thursday cited OCBC as saying that a series of events occurred "which caused us to question the integrity of the representations which we have received", and that this was the basis for it resigning.
"I will cooperate with the authorities and I'll do full disclosure to defend myself," the same newspaper quoted Mr Soh as saying in response.
FLAMBOYANT Sydney lawyer Chris Murphy has been thrust into the centre of the collapse of stockbroking firm Opes Prime with the revelation that unprecedented levels of credit were used to keep his failed $200 million share portfolio afloat.
Share portfolio statements obtained by The Australian show that Opes kept alive Mr Murphy's broking account with margin lending of 95 per cent after massive falls in the value of the portfolio by July last year.
The decision contaminated the rest of the broker, and may have contributed to its collapse into receivership last month amid claims of financial irregularities.
Mr Murphy, an ardent trader, has boasted in the past on the HotCopper online day traders' chat site about his successful share market exploits.
But The Australian revealed this month that Mr Murphy, reputed to have been a high-rolling gambling associate of the late Kerry Packer, was the highest-profile victim of the share market shake-out when his massive share market portfolio was wiped out with the collapse.
The portfolio statements obtained by former underworld boss Mick Gatto and associate John Khoury, and provided to The Australian, reveal Mr Murphy, through two of his companies, Sarah Brown and Cardiac Jolt, was hit with margin calls after losing almost all the equity in his $200million share portfolio even as the share market was near a peak in July.
The documents show that Mr Murphy was allowed to borrow 95per cent of the value of his share portfolio, which included blue-chip stocks, such as a $13million stake in Telstra and a $45million stake in the James Packer-backed Challenger Financial Group, as well as smaller companies such as Ebet, Heartware and Australian Pharmaceutical Industries.
The preferential treatment was also extended to other clients, including Jay Moghe, the sole director and shareholder of the mysterious British Virgin Islands company Riqueza, through which Opes director Laurie Emini conducted many of his trades. Some clients were allowed to borrow 100 per cent of the value of their share portfolio, even if they used the money to invest in second-tier stocks such as Babcock & Brown's listed spin-offs.
Such high loan-to-valuation ratios on margin loans are extremely rare; the usual level is about 65 per cent on blue-chip stocks and much less on mid-capitalised stocks. With just 5per cent equity, Mr Murphy was also exposed to falls in the portfolio, which would led to margin calls telling him to inject cash to top up the equity component of the loan.
The documents reveal that he received two margin calls between July 1 and July 13 last year - one for $950,681 and another for more than $10 million.
The Federal Court has heard that the Australian Securities and Investments Commission, which is investigating the Opes collapse, believes the stockbroker shifted shares between client accounts to shield them, and the company, from margin calls.
ANZ and investment bank Merrill Lynch, which bankrolled Opes's margin lending business, had ultimate security over clients' shares. They have begun to liquidate the $1.3 billion portfolio to recover their money in a process expected to leave clients with just 30c in the dollar.
But documents show he was receiving margin calls on a portfolio run out of Cardiac Jolt and on other shares held through Sarah Brown, a company he owned in a joint venture with Hawkswood Investment. Hawkswood is owned by three directors of Opes: Mr Emini, Julian Smith and Anthony Blumberg.
Asked last night about the content of his portfolio statements, including borrowings of 95per cent of his share market stake, Mr Murphy declined to comment.
It remains unclear why Opes made a decision to keep Mr Murphy and other similar client accounts alive, apparently by using money from other people's trading accounts to mask a massive deficit and avoid margin calls.
Opes kept Mr Murphy's account running in July, even though this was before the broker had to appear healthy as part of its plan to list on the Australian Securities Exchange with a market value of $100million. It was during this time that ANZ and Merrill Lynch were increasing their level of security in the business.
Mr Moghe, who met Mr Gatto in Singapore last night, was given similar preferential treatment to Mr Murphy with the margin loan on his $124 million share portfolio. Mr Moghe had significant holdings in small companies, including Kings Minerals.
Portfolio statements released to The Australian reveal that Mr Moghe had available margins of $106million in one account, and a margin call of $23.7 million in another account. Like Mr Murphy, he denies any knowledge of his account being topped up by Opes to avoid margin calls.
Mr Murphy made his name in the late 1980s and 90s as a criminal lawyer. While his firm still carries his name, he is now an active share trader. From the state of his trading accounts in July last year, he was having significant problems with margin calls.
Last month, he sold 15million Challenger shares through Cardiac Jolt at an average price of $1.70, well down on the company's $6.55 peak in October last year. At the time, Mr Murphy denied receiving a margin call.
On March 5, speculation started to emerge that Opes was in trouble. Some people, including Tom Karas of State Securities, acted and moved their Opes accounts into a nominee company at Opes, called Green Frog.
By March 17, Mr Emini had taken sick leave and the next day Mr Blumberg and Mr Smith met ANZ officers to ask for an emergency loan of $95 million.
Ten days later the administrators were called in, followed by receivers appointed by ANZ.
Lehman Brothers Holdings repackaged unsold debt and used the Federal Reserve's new borrowing facility to convert loans that investors mostly rejected into cash to finance its business, the Wall Street Journal reported.
According to the Journal, Lehman transferred $2.8 billion in loans that included some risky leveraged buyout debt into a new investment entity called Freedom.
Freedom then issued debt securities backed by the loans, and $2.26 billion of the securities got investment-grade credit rankings from Moody's and Standard & Poor's, according to the report.
The bank used some of those securities as collateral for a low-interest, short-term cash loan from the Federal Reserve, the Journal said, citing people familiar with the matter.
The move was meant as a test to see what the Federal Reserve would accept, and the size of the loan was not material, the Journal added, citing a person familiar with the matter.
Lehman representatives and the Federal Reserve could not be reached immediately for comment.
Ex-Shanghai boss sentenced to 18 years for graft: official media
Friday, April 11, 2008
SHANGHAI (AFP) - - Former Shanghai Communist Party boss Chen Liangyu was sentenced to 18 years in prison on Friday, state press said, the most senior Chinese official to be convicted of graft in over a decade.
Chen, 61, was sentenced by a court in the northern city of Tianjin after being convicted of taking bribes and abusing his power, Xinhua news agency said.
He was tried last month in a scandal that shook national politics when it emerged in mid-2006 that hundreds of millions of dollars from Shanghai's pension fund had been illegally siphoned off.
Last month, the State Audit Office revealed figures that put the amount of stolen cash at 33.9 billion yuan (4.8 billion dollars), 10 times more than the original estimate of 480 million dollars.
The state has already handed down tough convictions to up to 20 officials and businessmen involved in the theft of the pension funds, including one suspended death sentence and several life imprisonments.
Chen had been charged with abuse of power in connection with the pension fund scandal, as well as accepting 2.39 million yuan (342,000 dollars), some of which was given to his wife and son, earlier press reports said.
State press said that charges of dereliction of duty were dropped against him in Friday's decision.
During his one-day trial, Chen admitted he was "partially responsible" for the pilfering but did not plead guilty, according to previous state media reports.
Chen's case is the biggest corruption scandal to hit the Chinese government since former Beijing mayor Chen Xitong was removed from his post in 1995 and sentenced to 16 years in jail.
Chen was charged with corruption in 2006 when he was a member of the ruling Communist Party politburo, a grouping of about 20 or so of China's most powerful politicians.
The Tainjin court refused to comment on Chen's case when contacted by AFP on Friday.
Smarting from last summer’s huge losses, quantitative hedge funds are pressing into new realms of science in an effort to prosper during the ongoing credit crisis.
Nick Rockel 27 Mar 2008
For a man whose flagship hedge fund is running on fumes, Marek Fludzinski couldn’t be calmer. The founder and CEO of New York–based Thales Fund Management has watched his firm’s assets plummet by more than $1 billion during the past year, as Thales, like most quantitative managers, has suffered as a result of the global credit crisis that began last summer. But Fludzinski, who has a Ph.D. in theoretical physics from Princeton University and was one of the first two dozen employees at famed quant shop D.E. Shaw Group, is on a mission that means far more to him than profit and loss. He believes science is the key to unlocking the inner workings of the markets, and he intends to devote significant resources to prove it.
“I think there is a law tying everything together,” says Fludzinski, 52.
Science, however, didn’t much help Fludzinski last summer, when the onset of the credit crunch shook Thales and other quantitative hedge funds. Many of these firms specialize in a computer-powered strategy called statistical arbitrage, which uses mathematical models to profit from tiny mispricings of stocks and other assets. But in early August their models faltered after a large manager decided to liquidate its equity portfolio, most likely to meet margin calls on its credit positions. Partly because their strategies are based on many of the same academic theories, quant firms like AQR Capital Management, Renaissance Technologies Corp., D.E. Shaw and Thales held some of the same positions and began racking up huge losses. Sucker punched by the market, the quants didn’t know whether to cash out or stay in. Fludzinski and his peers came off like a bunch of propeller heads who had naively tried to bend reality to their models.
This isn’t the first time Fludzinski has run into trouble. In 2002, Thales fell about 10 percent, say investors, prompting some to flee. This go-around, in a more difficult market, Fludzinski found ways to stem the losses. “We had enough of a risk control program in place that we weren’t forced to liquidate for margin calls despite our leverage,” he says. “We had layers of option strategies on top of our stat arb strategies to protect them from this catastrophic risk.”
Yet even those risk controls didn’t save Thales from finishing 2007 down some 10 percent, according to investors, some of whom pulled their money. The fund, which despite its struggles has delivered an annualized return of 10 percent since its 1999 inception, began this year with just $400 million in assets.
This calamity wasn’t supposed to befall the quants, who are among the brightest people working in finance. During the past several years, managers and investors have flocked to their strategies, drawn by the promise of outsize returns and undersize risks. The dean of the quants is James Simons, founder of Renaissance, a publicity-shy firm based in East Setauket, New York. Renaissance’s $7.5 billion Medallion Fund has posted a 39 percent annualized return — after its hefty 5 percent management fee and 44 percent performance fee — since its 1988 inception. But even Simons, who has a Ph.D. in mathematics from the University of California, Berkeley, and once worked as a code breaker for the U.S. Department of Defense, was caught unawares by the August downdraft.
In hindsight, last summer’s series of unfortunate events should not have been completely unexpected. Nine years earlier a global credit squeeze, which began when Russia defaulted on its ruble-denominated bonds, felled hedge fund Long-Term Capital Management, whose star-studded quant team included Nobel Prize–winning economists Robert Merton and Myron Scholes. But even the smartest managers seem to have underestimated the magnitude and speed of last August’s meltdown.
“They’re all looking at their models and trying to get an understanding of which ones did worse and which ones did well,” says Andrew Lo, a finance professor at the MIT Sloan School of Management. “And they’re probably looking at various alternatives to try to forecast these kinds of dislocations in the future.” Lo is co-founder of AlphaSimplex Group, a Cambridge, Massachusetts–based quant firm with some $550 million in assets (see box).
Quant shops aren’t sitting around idly. They are pressing into new realms of computational finance, applying concepts from molecular physics, mathematical linguistics, artificial intelligence and other scientific disciplines. Thales, for example, is using computer simulations to replicate human behavior to try to predict the myriad decisions that drive trading activity. Other firms are pinning their hopes on machine learning — statistical methods that allow computers to identify relationships in financial data and make predictions from them. But regardless of the approach, managers agree that quant funds have been far too focused on equities and need to find ways to apply their strategies to a broader range of asset classes.
“It’s important to cast your net as wide as possible, because you never know what you’re going to find,” says Dimitri Sogoloff, president and CEO of New York–based quant shop Horton Point. “And if you find something, rest assured that sooner or later it’s going to stop working.”
Most quantitative strategies are designed to be market neutral — that is, to deliver positive returns irrespective of what happens to the broader market. Given the amount of borrowed capital that such strategies typically use — before August it was common for a statistical arbitrage fund to be ten times leveraged — the residual damage from last summer could have been worse. Most of the big quant firms have, in fact, bounced back. According to Chicago-based Hedge Fund Research, equity market-neutral and statistical arbitrage strategies finished 2007 up 5.8 percent and 9.1 percent, respectively. Meanwhile, the HFRI fund weighted composite index climbed 10.4 percent.
The recovery masks the fact that equity market-neutral hedge funds have suffered a decadelong decline in performance. From 1999 to 2007 they had an annualized return of 6.1 percent. That compares with 11.8 percent from 1990 to 1998, according to HFR. The drop-off for statistical arbitrage funds is worse. They were up an annualized 4.6 percent from 1999 to 2007, versus 13.5 percent from 1990 to 1998.
Too much money trying to exploit the same market inefficiencies accounts for some of the problem. HFR estimates that investors had $225 billion in quant hedge funds at the end of last year, more than the entire hedge fund industry had in early 1996. Overcrowding can be especially trying for quants, whose portfolios typically hold thousands of positions, making overlap among managers inevitable.
WHEN MAREK FLUDZINSKI was studying physics at Princeton, he liked to get together with fellow graduate students to discuss market economics. The conversation would always come back to the fact that finance has no equivalent to the law of gravity or any other unifying principle of the physical world.
After earning his Ph.D. in 1982, Fludzinski decided to apply his skills in the real world and went to work for Metron, a scientific consulting firm in suburban Washington set up to solve problems of national defense; there he helped develop satellite systems that could detect submarines under the surface of the ocean. But unanswered questions about finance nagged him. So in 1988 he joined Chicago’s Hull Trading Co., a proprietary trading firm later acquired by Goldman, Sachs & Co. He created options models at Hull before D.E. Shaw recruited him in 1990.
At the time, quantitative trading was a small corner of the investment world. D.E. Shaw had been founded two years earlier by former Columbia University computer science professor David Shaw, who came from Morgan Stanley, where he worked under renowned trader Nunzio Tartaglia. A onetime Jesuit with a Ph.D. in astrophysics, Tartaglia was an early proponent of pairs trading. He would find the stocks of two related companies — say, General Motors Corp. and Ford Motor Co. — whose prices had diverged from their historical relationship, and then buy the cheaper stock while shorting the overpriced one.
In this precursor to statistical arbitrage, Shaw — who launched his firm with $28 million from Greenwich, Connecticut–based Paloma Partners Management Co. and New York’s Tisch family — saw the potential for computerized trading on a grand scale. When Fludzinski arrived at D.E. Shaw, the now 1,300-person firm had about 20 employees. He ran one of the fledgling shop’s four quantitative strategies and began developing an options market-making system that would be able to price options on the fly. Fludzinski, who was born in Stafford, England, and grew up in Buffalo, New York, remembers D.E. Shaw as being extremely secretive.
Fludzinski quit D.E. Shaw in 1992 to build a statistical arbitrage system for Swiss Bank Corp. in New York. Two years later he opened Thales Financial Group, the predecessor of his current firm. Fludzinski named it after the ancient philosopher Thales of Miletus, who, in addition to introducing geometry to Greece, is known as one of the first people to corner a commodities market — in his case, olives, more than 2,500 years ago.
For the first four years, Fludzinski was bankrolled entirely by Paloma. In January 1999 he struck out on his own and launched the Thales Fund with $50 million. By the end of 2001, Thales had grown to $1.4 billion, mostly from funds of hedge funds, which were attracted to its market-neutral strategy. But the firm’s 10 percent drop in 2002 prompted the funds of funds to leave as quickly as they had come in, shrinking assets to $500 million. Fludzinski set about refurbishing his battered franchise: “We hired people and expanded our research department — by digging into my own retained capital — and it paid off.”
According to Fludzinski, quant shops generally fall into one of two main camps: those that strongly emphasize statistics and those that show more interest in fundamentals. He says he has always tried to find the middle ground. D.E. Shaw alumni like Fludzinski tend to be comfortable looking at such factors as price movement and volume, which may be statistically significant to performance but are not easily explainable by pure fundamental analysis.
Goldman Sachs quants have typically fallen more in the fundamentals camp, going back to the mid-1980s, when the firm hired MIT finance professor Fischer Black, known best for the options-pricing model he devised with Scholes and Merton. More-recent recruits include Clifford Asness, the University of Chicago finance Ph.D. who headed up Goldman Sachs Asset Management’s quantitative research group in the mid-1990s before leaving in 1998 to start AQR. In late 1995, Asness and his team launched Goldman’s famed market-neutral Global Alpha fund, which had an annualized return of 74 percent its first two years.
Quant investing has changed dramatically since the pairs trading of the 1980s. Today’s traders have to deal with many more potential combinations and relationships. One source of this added complexity is quick access to information, as market news spreads much faster than in the past. “Now statistical arbitrage is a much higher dimension of problem,” Fludzinski says. “It’s almost like a chess game.”
Sanford Grossman, president and CEO of Greenwich-based quantitative hedge fund firm QFS Investment Management, notes that the quant connection with academia has led to the widespread sharing of ideas. “Instead of inventing things themselves from scratch, many firms are reading academic papers, talking with academics and coming up with strategies that for some reason work in a long historical simulation,” says Grossman, who continued to teach finance at the University of Pennsylvania’s Wharton School for more than a decade after founding QFS in 1988. “And then they do it. They don’t really know why it works.”
According to Grossman, that was part of the problem last summer. He is surprised that so few hedge funds protected themselves by purchasing options when they were cheap in late 2006 and early 2007. In his opinion, investors are largely to blame because they don’t reward managers for being conservative. “They penalize them because those firms are underperforming in the period before a crisis occurs,” says Grossman, whose firm manages about $3 billion in assets. “One thing that would help the system is if investors in funds become more cognizant of risk management strategies and how they are being implemented.”
Options protection helped Thales avoid the really big losses suffered last year by several large quant funds, including Goldman’s Global Alpha, which fell more than 14 percent the week of August 7 and 28.5 percent for the month. (For the year Global Alpha was down 38 percent.) Still, many Thales investors fled. Fludzinski says the reduced capital base gives Thales an opportunity to focus on “lower capacity — but ultimately higher return — high-frequency strategies.”
Statistical arbitrage funds like Thales employ strategies that play out over different timescales, ranging from minutes to months. Fludzinski says there’s a lot of action in the middle, where holding periods can range from a few days to a few weeks. At the long end, stock movements are driven largely by fundamental macroeconomic factors like corporate earnings. At the short end, investors’ immediate need to buy or sell can move a particular stock irrespective of the fundamentals. “The real question is, can such relationships be exploited?” Fludzinski says.
Thales’s 35-person research team, which includes ten Ph.D.s, is looking for ways to forecast investor behavior on different timescales. (In total, the firm employs about 50 people.) Although Thales focuses most of its effort on improving current trading systems and strategies, Fludzinski says the firm devotes as much as 20 percent of its resources to finding a unifying theory of markets. Like physics, he says, finance lends itself to mathematical models based on observations. Through experiments that replicate what they see in the natural world, physicists have described its underlying principles.
Thales is taking a similar approach with finance, using computers to model so-called agent simulations of thousands of traders. In one experiment Thales created a simulation with 10,000 traders, each owning the same portfolio of 15 stocks. After hearing news about one of these stocks, half of the simulated traders might buy it and the other half might sell. Fludzinski says such computer models help explain why a stock typically trades higher than average for a few days after a positive earnings announcement and then trades lower before returning to normal. By modeling such herding behavior, he hopes to better understand how securities prices move in relation to one another.
“Maybe we need to build a computer simulation that has 50 million people, with complicated rules for each,” Fludzinski says. “It’s very difficult to explain why people behave irrationally.”
Fludzinski is quick to point out that Thales’s agent simulations are different from much of the work being done in behavioral finance, which applies cognitive psychology to analyzing markets by using models in which people don’t always act rationally, are prone to overconfidence and are more risk-averse when they are losing money. “This is not behavioral finance like you read about that’s kind of long term, where everyone doesn’t know their own objective function and the fear of regret is really high,” he explains. “That’s sort of macroscopic. What we’re doing is microscopic behavioral finance.”
MIT’s Lo, whose adaptive markets hypothesis views the market as an evolving biological system, says behavioral finance has only recently started to gain credibility. “For the most part, the mainstream of financial theory has rejected psychology and behavior,” he says. “Even now they’re viewed with a great deal of skepticism.”
Tanya Styblo Beder, chairwoman of New York consulting firm SBCC Group and a longtime quant, says behavioral finance is a vital aspect of any good trading operation. “I think it’s going to be huge,” says the former CEO of Tribeca Global Management, Citigroup’s now-defunct hedge fund division. “It will be one of the most critical ways for people to discover things about supply-demand flows in the marketplace. If you can figure out where the money’s going and what it’s coming out of, then you should be able to make trades and make some pretty decent dough.”
Judith Posnikoff, a managing director at Irvine, California–based fund-of-hedge-funds firm Pacific Alternative Asset Management Co., thinks that Fludzinski and his team are well positioned for the current market. “They come up with interesting things on a regular basis and then actually implement them in the portfolio,” says Posnikoff, whose firm has invested in Thales since 1999. “And if something’s not working, they stop using it.”
JOHN MOODY HAS KEPT HIS HAND in both finance and academia for more than two decades. Like Fludzinski, Moody, the founder of quantitative hedge fund firm J E Moody & Co. in Portland, Oregon, has a Ph.D. in theoretical physics from Princeton. He got into trading as a postdoctoral student at the Institute for Theoretical Physics at the University of California, Santa Barbara, in the early ’80s. From 1987 to 1992 the Portland native taught computer science at Yale University, where he was also a member of the neuroscience program. Moody then founded and directed the Computational Finance Program at Portland’s Oregon Graduate Institute. In the meantime, he had started consulting for clients ranging from New York–based J.P. Morgan Securities to the U.S. government’s Defense Advanced Research Projects Agency.
The author of some 65 academic papers, Moody was among the first scientists to think about applying machine learning to finance. Machine learning is a branch of artificial intelligence whose proponents design computer programs that can recognize patterns and learn by trial and error. In the physical world, machine learning is used to help intelligent robots — for example, it enables the Mars rover to decide which of several routes to choose when moving through rough terrain. Financial markets, Moody says, are much less predictable and can be even tougher to navigate.
“You’re trying to build programs that are able to identify relationships in data and draw inferences and make predictions from those relationships,” he explains.
In 2003, Moody left full-time academic life to concentrate on his hedge fund firm. He also resigned from OGI to join the Algorithms Group, part of the International Computer Science Institute at the University of California, Berkeley. Moody, 50, has witnessed the financial world’s appetite for computer science, mathematics, physics, engineering and statistics graduates with knowledge of machine learning. He has hired several of his former students to work as traders and researchers at his firm and says that more than half of his Ph.D. and postdoctoral students have gone into finance. “A lot of my colleagues in computer science and engineering departments have had the same experience,” he adds.
Like an increasing number of quants, including Renaissance Technologies’ Simons, Moody is applying his expertise well beyond the equity markets. The $114 million JEM Commodity Relative Value Program, which he launched in May 2006, invests solely in commodity futures. JEM stands out from other commodity hedge funds because it uses statistical arbitrage and has a diversified portfolio. The fund trades in five sectors — energy, grains, livestock, metals and soft commodities — and balances long and short positions. JEM returned 13.9 percent last year, according to the Barclay Hedge database. From inception through February, it has a compounded average annual return of 22.27 percent.
Moody, who has used machine-learning algorithms to forecast commodity price movements, says the biggest challenge with financial data is that it’s so noisy. The more flexible and complex a quantitative model is, the greater its chances of finding spurious patterns with no forecasting value. But Moody and other machine-learning researchers have found ways to build flexible models that work with a limited number of parameters. As a result, they minimize the overfitting that can come from using too many parameters while still capturing subtle relationships in the data. “The techniques that have been developed in machine learning are especially good at maximizing predictive power,” he says.
One common style of machine learning is reinforcement, whereby an algorithm makes sequential decisions — while playing a board game like backgammon or checkers, for example. In finance, Moody says, reinforcement learning can be applied to portfolio rebalancing, where calls about what stock to drop or add depend on the success or failure of past choices.
Another application is making trading decisions. Moody says he and his colleagues have created reinforcement- learning techniques that maximize the risk-adjusted returns of a trading system while taking into account transaction costs. “We’ll come up with a much different structure for a model than we would if we were to simply try to predict whether the market’s going to go up or down and then do trading and risk management as an afterthought,” he says.
Anyone can see this and other work on trading strategies in academic papers that Moody has co-authored with colleagues and students. He admits that he and others in the machine-learning community regret sharing some of their discoveries. “I think a few of us wish that we hadn’t published them,” he says.
Because markets are dynamic, machine-learning and other statistical models need constant updating. The key is feeding them the right mix of older and newer data. “You’re trying to find a sweet spot between using data that is stale, and therefore misleading, versus having enough recent data so that you can estimate a model reliably,” Moody explains.
Incorporating unprecedented events like last August into machine-learning models may be difficult, but Moody says it is possible to simulate how a model will behave under some extreme circumstances. One approach is to take, say, eight years of daily market data and do computer-based Monte Carlo simulations — which use a random sampling of numbers to create potential outcomes — to generate a hypothetical 800-year trading history. If this is done properly, the synthesized data will reflect previously observed major disruptions. Investors can use such an approach to estimate the frequency and magnitude of extreme market events, as well as the associated trading risks. Moody notes that most simulation methods can’t capture disruptions or changes in market behavior that have no historical precedent. Still, they can be used to create a model that generates trading signals — and takes fewer risks.
“By using these kinds of techniques, you’re informing the model of the possibility of extreme events,” Moody explains. “And that will give rise to a more conservative strategy.”
Moody says the advantage of a systematic method like machine learning is that it removes the emotion from trading decisions. But at the same time, it’s capable of taking market psychology into account. “A lot of market behavior is actually somewhat predictable based upon human emotion,” Moody notes. “An appropriate statistical model should be able to capture that.”
DIMITRI SOGOLOFF’S QUANT START-UP, Horton Point, has its roots in an act of generosity. In 2004, Sogoloff and Yuri Kuperin co-founded an academic program at St. Petersburg State University, in his native Russia, that trains science Ph.D.s to work in financial services. (Kuperin is head of the econophysics program there.) Sogoloff began wondering about the relationship between finance and pure science — and whether there was a systematic way to capture it without using just statistics.
According to Sogoloff, 46, the main flaw of most quant strategies is their heavy reliance on historical data. Even though no strategy works all the time, he explains, this backward-looking approach makes statistical arbitrage especially vulnerable to unforeseen market moves. “If there is an event that is not captured in the prices today, the statistical arbitrage box will completely fall apart,” he says. “It’s a fantastic tool, but that’s all it is. It’s a tool in what needs to be a larger toolbox.”
At Horton Point, Sogoloff and co-founder Vladimir Finkelstein are building that toolbox in the form of the firm’s Gallery QMS Fund. The multistrategy fund seeks to trade well in different market conditions by applying an evolving suite of strategies to many asset classes. Sogoloff and Finkelstein are currently researching four main investment areas — credit and capital-structure arbitrage, equities, fixed-income arbitrage and reinsurance.
Gallery was scheduled to launch in January, but general market risk has led to a delay. Although Horton Point has been trading with its own capital, the opening is on hold pending final talks with investors. Sogoloff says that to achieve “complete diversification,” the portfolio must have several hundred million dollars in assets. “We are finalizing an initial commitment from a strategic investor and hopefully will be able to begin trading shortly,” he adds.
Born in Kharkov, Ukraine, Sogoloff emigrated to the U.S. in 1980. After earning an engineering degree and an MBA from Columbia, he began his career as a market maker and convertible bond trader with London- and New York–based Quadrex Securities Corp. He later traded convertible bonds at the New York office of London’s Baring Securities and for Chicago-based LIT America.
In 1993, Sogoloff co-founded Alexandra Investment Management with Mikhail Filimonov. The New York hedge fund firm focused on convertible arbitrage before branching out into other strategies early this decade. Sogoloff says he left Alexandra in the fall of 2006 because he wanted to pursue something completely new. He started Horton Point that October with Finkelstein. Finkelstein, who also grew up in Kharkov, has a Ph.D. in theoretical physics from New York University and a master’s degree in the same discipline from the Moscow Institute of Physics and Technology. Before joining Horton Point as chief science officer, he was head of quantitative credit research at Citadel Investment Group in Chicago.
Most of the 12 Ph.D.s at Horton Point’s Manhattan office are researching investment strategies and ways to apply scientific principles to finance. The firm runs what Finkelstein, 54, describes as a factory of strategies, with new models coming on line all the time. “It’s not like we plan to build ten strategies and sit on them,” he says. “The challenge is to keep it going, to keep this factory functioning.”
Along with his reservations about statistical arbitrage, Sogoloff is wary of quants who believe the real world is obliged to conform to a mathematical model. He acknowledges the difficulty of applying scientific disciplines like genetics or chaos theory — which purports to find patterns in seemingly random data — to finance. “Quantitative work will be much more rewarding to the scientist if one concentrates on those theories or areas that attempt to describe nonstable relationships,” he says.
Sogoloff sees promise in disciplines that deal with causal relationships rather than historical ones — like mathematical linguistics, which uses models to analyze the structure of language. “These sciences did not exist five or ten years ago,” he says. “They became possible because of humongous computational improvements.”
However, most quant shops aren’t exploring such fields because it means throwing considerable resources at uncertain results, Sogoloff says. Horton Point has found a solution by assembling a global network of academics whose research could be useful to the firm. So far the group includes specialists in everything from psychology to data mining, at such schools as the Beijing Institute of Technology, the California Institute of Technology and Technion, the Israel Institute of Technology.
Sogoloff tells the academics that the goal is to create the Bell Labs of finance. To align both parties’ interests, Horton Point offers them a share of the profits should their work lead to an investment strategy. Scientists like collaborating with Horton Point because it combines intellectual freedom with the opportunity to test their theories using real data, Sogoloff says. “You have experiments that can be set up in a matter of seconds because it’s a live market, and you have the potential for an amazing economic benefit.”
As he seeks to right his faltering hedge fund, Thales’s Fludzinski could stand to reap such rewards sooner rather than later. But he’s not losing sight of his quest to explain why markets do what they do — a goal that may require a leap of imagination. Just as quantum mechanics and the theory of relativity shook up the world of physics, Fludzinski says, “finance needs a similar out-of-the-box insight — something that changes the way we look at things.”
Summer Solstice: How the Quants Fell Back to Earth
When quantitative hedge funds trading long-short equity strategies racked up big losses in August, Andrew Lo wasted no time weighing in. Lo, 47, is Harris & Harris Group Professor of Finance at MIT Sloan School of Management, where he directs the Laboratory for Financial Engineering. He is also co-founder of AlphaSimplex Group, a multistrategy quantitative hedge fund firm based in MIT’s hometown of Cambridge, Massachusetts, and has a long-standing research interest in the hedge fund industry’s vulnerability to systemic shocks.
A month after the blowup, Lo and his student Amir Khandani released the first draft of a paper called “What Happened to the Quants in August 2007?” Their hypothesis: Last summer’s losses resulted from the unwinding of one or more quantitative equity market-neutral portfolios. Because the price impact was so swift and dramatic, the unwinding probably began with a sudden liquidation by a large multistrategy fund or proprietary trading desk, perhaps to cut risk or meet margin calls on a credit portfolio. Most of the damage occurred from August 7 to August 9, when many funds started selling to reduce their risk. By deleveraging, these firms missed the bounce back in equities on August 10.
Lo and Khandani had no data from the quant shops themselves, so they created a simulated long-short equity strategy and then compared it against the individual and aggregate performance of hedge funds in the Lipper TASS database. Using their test strategy’s performance as a “microscope,” Lo says, they also compared August 2007 with August 1998, when Greenwich, Connecticut–based Long-Term Capital Management and other fixed-income relative-value hedge funds suffered a similar meltdown.
Like the sequence of events in 1998, which were triggered when Russia defaulted on its bond payments, last summer’s troubles were precipitated by a credit crunch. But this time around, Lo says, a shock in one area — subprime mortgages and credit portfolios — infected a completely unrelated sector of the market.
The events of August 2007 had a big impact on equity prices; those of August 1998 had none at all. (In 1998 the Standard & Poor’s 500 index was up 28.6 percent; last year the S&P was up just 5.5 percent.) “What that tells us is that the hedge fund space is very, very crowded,” Lo says. “The economy is much more sensitive to shocks in the hedge fund sector than ever before. This is proof positive that systemic risk has increased.”
In 1999, Lo launched AlphaSimplex after developing quantitative models as a consultant to institutional and private investors. The firm’s first offering was a U.S. long-short equity fund for Greenwich-based Paloma Partners Management Co. In late 2003, AlphaSimplex opened a global long-short fund to multiple investors. Last September, Paris-based Natixis Global Asset Management acquired the firm, which has 20 employees and manages $550 million in assets. Lo has stayed on as chief scientific officer and chairman.
Lo’s dual career as an academic and a hedge fund manager grew out of his pioneering research in fields as disparate as statistics and psychology. A partnership with industry, his MIT laboratory receives funding from several investment firms, including Boston’s State Street Global Advisors and Newport Beach, California–based Pacific Investment Management Co., both of which offer absolute-return strategies.
Lo says he’s not surprised that statistical arbitrage and other quant strategies got slammed last summer. “Quant funds by their nature are going to be invested in mostly liquid strategies, and so when we have massive liquidations, they’re going to be first in line to take their licks,” he explains.
To protect themselves, Lo says, quant funds must understand their exposure to future sell-offs. That means paying close attention to the relationship between liquidity and their strategies’ expected returns. “We can’t forecast with any degree of accuracy when the next LTCM is going to hit,” Lo says. “But we can tell when certain market conditions are ripe for a dislocation and gradually try to adjust our risk exposures to take that into account.”
Lo believes that forecasting such disruptions will remain a problem — at least until hedge fund firms surrender more-detailed information. “The hope is that if we can get more data for both investors and managers to use, we will be able to avoid this kind of mad rush to the exits in the future,” he says. — N.R.
Lehman US$350 million lawsuit threatens Marubeni's credibility
April 3, 2008
TOKYO (AP) -- Fake business cards, impostors at meetings and forged documents stamped with the company seal are behind what appears to be an elaborate scam that Lehman Brothers in Japan alleges bilked it of millions of dollars in vanished investment money.
The alleged fraud is at the center of a US$350 million lawsuit Lehman Brothers Holdings Inc. filed Monday in Tokyo, which has ensnared one of the biggest names in Japan's road to modernization and economic power -- trading house Marubeni Corp.
Additional victims are popping up. And analysts say the unfolding scandal is a wake-up call about imperfect corporate governance and monitoring of rogue employees while this relatively insular nation is trying to attract foreign investment.
It is also a major embarrassment for Lehman, which is struggling to assuage investor worries that it doesn't have the same problems as Bear Stearns Co., which is being bought by JP Morgan Chase & Co.
On Tuesday, Lehman said it had raised US$4 billion in new capital to shore up its liquidity position.
But if the tale of massive deceit -- as pieced together from various parties -- is true, Marubeni appears headed for an even bigger embarrassment that could raise serious questions about its credibility, internal controls and corporate governance.
According to a person familiar with the case, Lehman was approached in August last year about investing in a health care business led by a man who was then the head of Asclepius Ltd., a little-known Tokyo medical consulting company, which has since gone bankrupt.
After Lehman invested some 35 billion yen (US$350 million) in a hospital renovation project, it never got back more than a tiny part of the money it had been promised.
Lehman assumed the deal was backed by Marubeni because documents had the official company seal and meetings with Marubeni employees were at the company office, according to the person, who asked not to be identified because of the case's sensitivity.
A day after Lehman filed its suit, Medcajapan Co., a Japanese nursing care provider, said it lost 3.5 billion yen (US$35 million) lent to a project related to Asclepius that Medcajapan believed was backed by Marubeni.
FinTechGlobal Inc., a Japanese technology investor, says it may have been duped out of 2.2 billion yen (US$22 million) in a similar scheme involving Asclepius and Marubeni.
Marubeni denies it's obligated to repay Lehman. It says two Marubeni employees, who have since been dismissed, were merely victims. At least one individual who claimed to be a Marubeni official appears to have been an impostor with a fake business card, the person said.
Boston-based Aite Group senior analyst Phillip Silitschanu says the case shows Lehman needs to strengthen risk controls.
"Lehman Brothers has a legitimate claim against Marubeni, for allowing two 'rogue borrowers' within the firm to forge documents, forge seals and forge a deal -- costing a not so shabby US$352 million," he said in an e-mail.
"Once mighty firms such as Societe Generale and Lehman Brothers are now having to face that even they are not immune to the risks a nefarious employee can pose," he said, referring to the more than US$7 billion rogue-trader scandal that surfaced earlier this year at the French bank.
Koetsu Aizawa, economics professor at Saitama University, says the scandal underlines the zealousness at trading companies, which are struggling to regain their star role as brokers, increasingly on the wane as the market opens up.
During the heyday 1960s and the subsequent decades of Japan Inc.'s growth, Marubeni and other traders -- Mitsubishi Corp., Sumitomo Corp., Mitsui & Co. -- engineered government projects and foreign aid programs, and acted as consultants.
In the 1970s, Marubeni was embroiled in the Lockheed scandal that involved alleged bribery to a prime minister. Another high-profile bribery scandal surfaced in 1992.
Marubeni also has a reputation for what experts call a "silo" organization, in which sections are divided and know little about what other units are doing.
"Marubeni is inevitably going to be held responsible for oversight in managing its employees," Aizawa said, noting companies often shirk liability by claiming underlings acted on their own.
"The case involves big names like Lehman and Marubeni," he said. "It's astonishing how no one saw through such a blatantly ludicrous scheme."
Japan has had its share of large-scale white collar swindles.
In 1995, Sumitomo Corp. blamed at least US$1.8 billion in copper-trading losses on Yasuo Hamanaka, a star trader who had hidden bad trades for a decade. About the same time, bond trader Toshihide Iguchi racked up US$1.1 billion in losses at Daiwa Bank, much of it through unauthorized trades at its New York branch.
But the latest case is no less stunning for its audacity and scale.
LONDON -- One of the most important barometers of the world's financial health could be sending false signals.
In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London inter-bank offered rate, known as Libor, is becoming unreliable.
Libor plays a crucial role in the global financial system. Calculated every morning in London from information supplied by banks all over the world, it's a measure of the average interest rate at which banks make short-term loans to one another. Libor provides a key indicator of their health, rising when banks are in trouble. Its influence extends far beyond banking: The interest rates on trillions of dollars in corporate debt, home mortgages and financial contracts reset according to Libor.
In recent months, the financial crisis sparked by subprime-mortgage problems has jolted banks and sent Libor sharply upward. The growing suspicions about Libor's veracity suggest that banks' troubles could be worse than they're willing to admit.
The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That's good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.
True Borrowing Costs
No specific evidence has emerged that banks have provided false information about borrowing rates, and it's possible that declines in lending volumes are making some Libor averages less reliable. But bankers and other market participants have quietly expressed concerns to the British Bankers' Association, which oversees Libor, about whether banks are reporting rates that reflect their true borrowing costs, according to a person familiar with the matter and to government documents. The BBA is now investigating to identify potential problems, the person says.
Questions about Libor were raised as far back as November, at a Bank of England meeting in which United Kingdom banks, the firms that process bank trades and central bank officials discussed the recent financial turmoil. According to minutes of the meeting, "several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress." In a recent report, two economists at the Bank for International Settlements, a sort of central bank for central bankers, also expressed concerns that banks might report inaccurate rate quotes.
On the Agenda
A spokesman for the BBA, John Ewan, said the trade group is monitoring the situation. "We want to ensure that our rates are as accurate as possible, so we are closely watching the rates banks contribute," Mr. Ewan said. "If it is deemed necessary, we will take action to preserve the reputation and standing in the market of our rates." Libor is expected to be on the agenda of a bankers' association board meeting on Wednesday.
In a recent research report on potential problems with Libor, Scott Peng, an interest-rate strategist at Citigroup Inc. in New York, wrote that "the long-term psychological and economic impacts this could have on the financial market are incalculable." Mr. Peng estimates that if banks provided accurate data about their borrowing costs, three-month Libor would be higher by as much as 0.3 percentage points.
A small increase in Libor can make a big difference for borrowers. For example, an extra 0.3 percentage points would add about $100 to the monthly payment on a $500,000 adjustable-rate mortgage, or $300,000 in annual interest costs for a company with $100 million in floating-rate debt. On Tuesday, the Libor rate for three-month dollar loans stood at 2.716%.
Libor has become such a fixture in credit markets that many people trust it implicitly. Concerns about its reliability are "actually kind of frightening if you really sit and think about it," says Chris Freemott, a Naperville, Ill., mortgage banker who depends on Libor to tell him how much his firm, All America Mortgage Corp., owes First Tennessee bank for a credit line that he uses to make loans.
The Libor system was developed in the 1980s. Banks were looking for a benchmark that would allow them to set rates on syndicated debt -- corporate loans that typically carry interest rates that adjust according to prevailing short-term rates. By pegging lending rates to Libor, which is supposed to represent the rate banks charge each other for loans, banks sought to guarantee that the interest rates their clients pay never fall too far below their own cost of borrowing.
Banks typically set their lending rates at a certain "spread" above Libor: A company with decent credit, for example, might pay an interest rate of Libor plus one-half percentage point. A risky "subprime" mortgage loan might carry an interest rate of Libor plus more than six percentage points.
Today, Libor rates are set for 15 different loan durations -- from overnight to one year -- and in 10 currencies, including the pound, the dollar, the euro and the Swedish krona. They serve as the basis for payments on trillions of dollars in corporate loans, mortgages and student loans. Libor rates are also used to set the terms of more than $500 trillion in "derivatives" contracts such as interest-rate swaps, which companies all over the world, including U.S. mortgage guarantors Fannie Mae and Freddie Mac, use to protect themselves against sudden shifts in the difference between long-term and short-term interest rates.
When banks want to borrow money, they contact banks directly or phone a loan broker, such as ICAP PLC in London. Much of the interbank lending takes place between 7 a.m. and 11 a.m. London time. In broker speak, a bank might ask for a "yard" -- one billion in a designated currency. Brokers communicate with bank clients by phone or through desktop voice boxes, which are faster. At ICAP, brokers track bids and offers by looking up at a big whiteboard above the trading floor, where a "board boy" posts information. The actual rates at which banks borrow from each other are known only to the lenders and borrowers, and possibly to their brokers.
Every morning by 11:10 London time, "panels" of banks send data to Reuters Group PLC, a London-based business-data and news company, on what it would cost them to borrow a "reasonable amount" in a designated currency. The dollar Libor panel, for example, consists of 16 banks, including U.S. banks Bank of America Corp. and J.P. Morgan Chase & Co. and U.K. banks HBOS PLC and HSBC Holdings PLC. Reuters uses the reported borrowing rates to calculate Libor "fixings." To reduce the possibility that any bank could manipulate an average by reporting a false number, Reuters throws out the highest and lowest groups of quotes before calculating averages.
Justin Abel, global head of data operations for Reuters, said in a statement that his company's role is solely to calculate fixings based on the information provided by banks. "It is their data alone we distribute. Reuters is purely the facilitator," he said.
Wary of Lending
The global financial crisis that began last summer has made it more difficult for banks to package and sell all kinds of loans as securities, as well as to issue bonds and short-term IOUs to investors. Increasingly, banks have turned to the interbank market to borrow cash. But their mounting losses on mortgage securities and other investments have raised fears that a major institution could go bust. That's made banks increasingly wary of lending to one another.
Such jitters have made many banks unwilling to extend loans to each other for more than one week. As a result, the rates they quote for loans of three months or more are often speculative, because there's little to no actual lending for that time period, brokers say. "It amounts to an average best guess," says Don Smith, an economist at ICAP, the London broker of interbank loans and derivatives.
These bank problems are proving costly to other kinds of borrowers around the world. One way to measure the rough cost is by comparing the three-month Libor rate with an interest rate that doesn't reflect worries about banks' financial health -- such as the yield on a three-month Treasury bill, which is backed by the U.S. government. The gap between the two stood at 1.58 percentage points Tuesday, and has averaged 1.39 percentage points since the crisis began in August. In the five years before the financial crisis started, it averaged only 0.28 percentage points.
Citigroup's Mr. Peng believes banks could be understating even those abnormally high Libor rates. He notes that the Federal Reserve recently auctioned off $50 billion in one-month loans to banks for an average annualized interest rate of 2.82% -- 0.1 percentage point higher than the comparable Libor rate. Because banks put up securities as collateral for the Fed loans, they should get them for a lower rate than Libor, which is riskier because it involves no collateral. By comparing Libor with that indicator and others -- such as the rate on three-month bank deposits known as the Eurodollar rate -- Mr. Peng estimates Libor may be understated by 0.2 to 0.3 percentage points.
Other Benchmarks
In one sign of increasing concern about Libor, traders and banks are considering using other benchmarks to calculate interest rates, according to several traders. Among the candidates: rates set by central banks for loans, and rates on so-called repurchase agreements, under which borrowers provide banks with securities as collateral for short-term loans.
In a report published in March by the Bank for International Settlements, economists Jacob Gyntelberg and Philip Wooldridge raised concerns that banks might report incorrect rate information. The report said that banks might have an incentive to provide false rates to profit from derivatives transactions. The report said that although the practice of throwing out the lowest and highest groups of quotes is likely to curb manipulation, Libor rates can still "be manipulated if contributor banks collude or if a sufficient number change their behaviour."
WASHINGTON (CNN) -- Attorney General Michael Mukasey warned Wednesday that organized criminal networks have penetrated portions of the international energy market and tried to control energy resources.
In a speech at the Center for Strategic and International Studies in Washington, he said similar efforts have targeted the international financial system by injecting billions of illicit funds to try to corrupt financial service providers.
Mukasey then vowed to beef up U.S. efforts to fight international organized crime, which he called a growing threat to U.S. security and stability.
The attorney general and top law enforcement officials from the FBI, Immigration and Customs Enforcement and the Justice Department Criminal Division said a classified threat assessment prompted the creation of a strategy to combat the threat.
It calls for several U.S. agencies and their overseas counterparts to better prioritize their targets, to improve information sharing and to boost cooperation in law enforcement investigations and operations.
"The activities of transnational and national organized criminal enterprises are increasing in scope and magnitude as these groups continue to strengthen their networking with each other to expand their operations," said FBI Deputy Director John Pistole.
Officials declined to discuss specific cases because the information remains classified, and disclosure could jeopardize ongoing investigations.
However, the International Organized Crime Threat Assessment identified eight general strategic threats from international organized criminals:
• The penetration of the energy market and other strategic sectors of the U.S. and world economy. As U.S. energy needs continue to grow, so, too, could the power of those who control energy resources.
• Providing logistical and other support to terrorists, foreign intelligence services and foreign governments, all with interests harmful to those of U.S. national security.
• The trafficking in people and contraband goods, bringing people and products through U.S. borders to the detriment of border security, the U.S. economy, and the health and lives of those exploited.
• The exploitation of the U.S. and international financial system to move illegal profits and funds, including sending billions in illicit funds through the U.S. financial system each year. To continue this practice, they seek to corrupt financial service providers globally.
• The use of cyberspace to target U.S. victims and infrastructure, jeopardizing the security of personal information, the stability of business and government infrastructures and the security and solvency of financial investment markets.
• The manipulation of securities exchanges and engaging in sophisticated fraud schemes that rob U.S. investors, consumers and government agencies of billions of dollars.
• The successful corruption of public officials around the world, including countries of vital strategic importance to the United States, and continuing efforts to find ways to influence -- legally or illegally -- U.S. officials.
• The use of violence and the threat of violence as a basis of power.
The arrest of an employee of Nomura Securities Co. along with two acquaintances on suspicion of committing insider trading could lead not only to a loss of customers' confidence in the major securities house but also to the undermining of investor trust in Japanese stock markets. The incident points to a need to strengthen the education of employees of securities houses regarding regulations and to improve in-house systems to ensure they comply with them.
The Nomura employee, a Chinese man who studied at a Japanese university, joined the company in February 2006. He worked with the firm's corporate information division until December before being transferred to Hong Kong. The division is in charge of dealing with information on corporate mergers, acquisition and takeover bids — a growing business field.
The employee apparently took advantage of the firm's intention to let him have as much experience as possible through on-the-job training. He served as an assistant to more experienced employees, and was given access to confidential information. The Securities and Exchange Surveillance Commission suspects that he started engaging in illegal acts about four months after he joined Nomura.
He is suspected of having passed on information about planned M&A deals and tender offers to two Chinese brothers before the information was made public, enabling them to carry out lucrative stock trades using accounts opened outside Nomura — a method that made it difficult for Nomura to detect their illicit activities. The trio reportedly earned about ¥50 million.
The arrest of the trio came shortly after the government submitted to the Diet a bill to revise the Financial Products Transactions Law to roughly double the fines for insider trading. But the law revision may not be enough to prevent it. Employees working for a division handling information on M&A need to have high standards of professional conduct and morals. Nomura needs to scrutinize its education of employees and bolster its internal controls. In addition, all Japanese securities firms must strive to enhance the transparency of Japan's stock markets.
Nomura Holdings Inc. said Friday it booked a group net loss of ¥67.8 billion in the business year ended in March due to losses related to U.S. subprime mortgage loans and falling stock prices.
The loss is a far cry from the previous year, when the nation's largest brokerage took in ¥176 billion in profits.
Because of the credit crunch in the U.S., Nomura was blindsided by the deteriorating state of monoline insurers it had hired to hedge its risk.
Monoline insurers provide insurance for trillions of dollars in bonds.
One of the monoliners faltered so badly that Nomura needed to set aside about ¥132 billion in the January-March quarter, forcing the brokerage to post a net loss.
But Nomura hinted that it would not need to book big losses in the future, having already set aside a big chunk of capital in the business year that ended in March.
"We've done everything possible at this moment based on accounting regulations," said Masafumi Nakada, Nomura's chief financial officer. "We've taken a conservative stance."
Nomura's sales dropped 22.2 percent to ¥1.59 trillion while pretax profit was ¥64.6 billion, down from ¥321.8 billion the same period last year.
In addition to the ¥132 billion it set aside, Nomura said it booked a total loss of ¥130 billion in securities products related to the subprime mortgage loan in business 2007.
The falling profits dealt another blow to Nomura, which saw one of its employees arrested on Wednesday on charges of insider trading.
Nakada began the news conference by bowing deeply and apologizing for the insider trading allegation.
"We deeply apologize for causing such a situation," he said. "We will do our utmost to regain customer confidence."
Nomura set up a special committee Friday of two outside board members and a lawyer to investigate information management in the investment banking section and come up with measures to prevent a recurrence.
Liantai Gold lawyers might appeal after a court said the firm illegally traded gold before the official Shanghai futures market opened last year.
By Shen Hu and Wang Zhen April 22, 2008
Five executives from a Shanghai gold trading company will spend up to 66 months in prison and pay heavy fines after being convicted of trading in precious metal futures without regulatory approval.
Prosecutors said the executives with Shanghai Liantai Gold Products Co. Ltd. engaged in illegal “disguised futures trading” more than a year before the Shanghai Futures Exchange was officially opened to gold trading in January. The case involved about 20 billion yuan.
Liantai lawyer Liu Bing told Caijing his client may appeal the April 17 decision by a Shanghai Huangpu District court before an April 27 deadline.
Lead defendant and company co-founder Wang Hao got 5 1/2 years in prison and a 500,000 yuan fine. The court also slapped four of Wang’s colleagues with jail terms and fines, and fined the company 1 million yuan.
According to the ruling, Wang and three partners established Liantai in March 2004 with fabricated registered capital of 4 billion yuan. Two years later, through another fraudulent practice, the partners misreported the capital base by an additional 30 million yuan.
Later, without regulatory permission, Liantai launched its own gold futures trading, before regulators cleared the way for futures trading to supplement a spot commodity market that allowed Chinese investors to pay cash for gold deliveries.
Within two years of Liantai's launch, the company had 723 customers -- nearly one-third from Shanghai -- and 69 million yuan in margin accounts. Under Wang’s leadership, Liantai opened 17 trading windows across the country and publicly declared itself a qualified futures brokerage firm and member of the Shanghai Gold Futures Exchange.
Company lawyers argued that selling and buying gold through Liantai was not futures trading but spot commodity trading with delayed settlements. Liu argued the practice was “non-concentrated trading,” which means trades were not based on competitive pricing.
Authorities did not define “disguised futures trading” until April 15, 2007. A regulation said any institution that conducts contractual trading without regulatory approval could be found guilty of the illegal practice if it had provided a guarantor for seller and buyer, and a single margin account was less than 20 percent of a contract's target. Liantai's activity met the criteria.
Shanghai prosecutors first accused Liantai of operating an illegal business last July. It's unclear who blew the whistle.
Report: UK competition watchdog investigating alleged price fixing at major supermarkets
April 27, 2008
LONDON (AP) - Britain's competition watchdog is investigating allegations of price fixing at the country's largest supermarkets, a newspaper reported.
The Sunday Telegraph said Tesco PLC, Wal-Mart Inc.'s Asda, J Sainsbury PLC and Morrison Supermarkets PLC were among those targeted by Britain's Office of Fair Trading. The paper said the supermarkets' offices - and those of their suppliers - were raided by officials examining allegations that they colluded to fix the prices of groceries, health, and beauty products.
The report was carried in a preview of Sunday's paper made available late Saturday. The Sunday Telegraph did not cite a source for the information, and the Office of Fair Trading declined comment.
"We don't comment when we've got an investigation under way," a spokeswoman for the office said. She spoke anonymously in line with government policy.
Tesco denied any wrongdoing, saying in an e-mail statement that it was surprised by the allegations. A spokeswoman for Sainsbury's declined to comment, while no one picked up the phone at press offices for Asda or Morrison. The Office of Fair Trading has taken a hard line on anticompetitive practices in recent years. In the past two weeks alone the regulator accused tobacco companies and several major retailers of colluding on cigarette prices and named more than 100 construction companies in a major investigation into bid-rigging.
The office can give warnings or orders, but also has the power to take legal actions or impose financial penalties.
Last year the office fined a group of supermarkets and dairy firms, including Asda and Sainsbury's, more than 116 million pounds (US$229 million; euro147 million) after they admitted fixing prices on dairy products.
The same year, the office also fined British Airways PLC 121.5 million pounds (US$240 million; euro154 million) after the airline admitted to colluding with rival Virgin Atlantic over fuel surcharges on long-haul flights. - AP
THREAT 1: International organized criminals have penetrated the energy and other strategic sectors of the economy. International organized criminals and their associates control significant positions in the global energy and strategic materials markets that are vital to U.S. national security interests. They are now expanding their holdings in the U.S. strategic materials sector. Their activities tend to corrupt the normal workings of these markets and have a destabilizing effect on U.S. geopolitical interests.
So warns the Overview of the Law Enforcement Strategy to Combat International Organised Crime, on the back of a long and thoroughly alarmist speech to the Center for Strategic and International Studies in Washington by US attorney general Michael Mukasey.
The general theme is that Mukasey, his law enforcement colleagues, and the US population at large face a global conflux of terrorists, mobsters, east Europeans and LatAm revolutionaries that puts historical threats like the Mafia into the shade.
On the gangsters-running-commodity-markets theme, the US Department of Justice cites the example of one Semion Mogilevich who, with several members of his criminal organisation who were charged in 2003 in the Eastern District of Pennsylvania in a 45-count racketeering indictment for their involvement in a sophisticated securities fraud and money laundering scheme.
Published reports state that since that indictment and being placed on the FBI most-wanted list, Mogilevich has continued to expand his criminal empire, to the point where he is said to exert influence over large portions of the natural gas industry in parts of the former Soviet Union. Many commentators have noted the significant role that area of the world plays in global energy markets. Mogilevich was arrested by Russian police on tax charges in January 2008. Other members of his organization remain at large.
Mukasey’s other worries:
THREAT 2: International organized criminals provide logistical and other support to terrorists, foreign intelligence services and governments.
THREAT 3: International organized criminals smuggle/traffic people and contraband goods into the United States.
THREAT 4: International organized criminals exploit the U.S. and international financial system to move illicit funds.
Threat 5: International organized criminals use cyberspace to target U.S. victims and infrastructure.
THREAT 6: International organized criminals are manipulating securities exchanges and perpetrating sophisticated frauds.
THREAT 7: International organized criminals corrupt and seek to corrupt public officials in the United States and abroad.
THREAT 8: International organized criminals use violence and the threat of violence as a basis for power.
• Man causes crash after slamming brakes to insert CashCard
• Woman biker rushed to ICU, suffers memory loss
By Chong Shin Yen April 29, 2008
HE stopped his car abruptly on the fast lane of a busy highway to insert his CashCard.
And it caused an accident that left a woman seriously injured.
But to Mr Lim Huang Khim, 45, it was the 'natural thing' to do. He does not think he did anything wrong.
This, despite being fined for his inconsiderate driving that caused a motorcyclist to slam into the car behind him - which had braked in time to avoid hitting Mr Lim's car.
This, despite a judge ruling in a civil suit that Mr Lim was 50 per cent liable for the accident.
The motorcyclist, Miss Tiong Zhen Cheng, 33, was flung more than 20m and landed beside Mr Lim's car.
The sales executive was warded in the intensive care unit and spent about a week in hospital. She still suffers pain and some memory loss.
Miss Tiong ended up being sued by the driver of the second car, Mr Lye Chiew Meng, for the damage to his Toyota.
His rear windscreen was shattered and the repair bill came to $7,000.
But her insurance company felt Mr Lim should also be liable and he was named as the third party in the civil suit.
SMILED MANY TIMES IN COURT
Earlier this month, Mr Lim, who works as a driver, insisted he was not to blame and smiled several times as he recounted the accident on the stand.
He was chided by District Judge Lim Wee Meng for his cavalier attitude.
Judge Lim said: 'I don't think it's funny. Someone was seriously injured and I don't think it's funny at all.'
The accident happened around 7.50pm on 29 Nov 2006 on the Central Expressway, just before the Electronic Road Pricing (ERP) gantry near the Braddell exit.
Mr Lim was driving a rented silver Mitsubishi car and was travelling on the extreme right lane on his way home with his wife and four children.
When he saw that the gantry was activated, he switched on the car's hazard lights and stopped to slot in his CashCard.
Mr Lye, a finance manager, who was behind him, managed to stop in time. But Miss Tiong's 400cc Honda motorbike crashed into Mr Lye's car.
When cross-examined by Miss Tiong's lawyer, Mr Lim maintained that he was not at fault.
Her lawyer, Mr William Chai, asked: 'A car was damaged, a person was severely and mentally injured, are you saying you are not responsible? Not even 1 per cent?'
Mr Lim replied: 'I'm saying that I'm totally not to be blamed.'
He told the court that he had not inserted his CashCard into the in-vehicle unit (IU) earlier because he did not know that the ERP gantry was activated at that time.
When asked if seeing the activated gantry was a big surprise, Mr Lim said he had seen it from afar and was trying to insert the CashCard in time.
He also told the court that he did not see Miss Tiong's bike behind Mr Lye's car.
He admitted that following the accident, he had purposely left out in his police report the reason for stopping his car as he knew that it was an offence.
Mr Lim, who has been driving for 24 years, was fined $200 by the Traffic Police for inconsiderate driving and given nine demerit points.
But in his affidavit tendered to the court, he said: 'I decided to pay the $200 out of convenience even though I do not believe that I should be responsible for the accident.
'I did not want the trouble to engage a lawyer to contest the claim because this would be time-consuming and the legal fees would definitely exceed $200.'
In contrast, Mr Lye was apologetic about what happened to Miss Tiong. His lawyer, Miss Bonnie Kwok, told the court: 'My client would like to extend his sympathies to Miss Tiong.'
She also said that while Mr Lye could clearly see the traffic conditions in front of him, Miss Tiong could not.
Said Miss Kwok: 'It's not a situation whereby the vehicles were approaching a traffic light junction, so there's no reason for Miss Tiong to anticipate a sudden stopping.
'Mr Lim had created a dangerous situation. I found it rather distasteful that Mr Lim's demeanour in court showed that he couldn't be bothered that Miss Tiong had suffered severe injuries and trauma.'
Before giving his verdict, the judge pointed out that Mr Lim could have gone through the ERP gantry and paid an administrative fee of $10 for not having a CashCard.
LIABLE FOR DAMAGE
He ruled that Mr Lim and Miss Tiong were each 50 per cent liable for the damage caused to Mr Lye's car.
When contacted by The New Paper, Mr Lim insisted that he was not in the wrong.
He said in Mandarin: 'Are you a driver? Have you driven a car before?
'If you have, you should know that it's a driver's natural reaction (when you see an activated gantry).
'You can't say it's right or wrong because there's no right or wrong in such situations. I did switch on the hazard lights to warn the vehicles behind me.'
Mr Lim said that he felt sorry for the injured Miss Tiong, though he did not speak to her in court.
'She might think that I have an ulterior motive if I went up to her and apologised,' he said.
Just two days before the accident involving Miss Tiong, Mr Lim said he was involved in a similar accident along the East Coast Parkway.
Mr Lim told The New Paper that the car in front of his had slowed down suddenly.
'So I also braked and stopped my car to take a closer look at what the driver was up to and to take down his licence plate number,' he said.
'But the car behind me couldn't stop in time and ended up crashing into the rear of my car.'
Mr Lim said the first car then drove off. His car, a Honda Stream, ended up at the workshop for five days.
That was why he was driving a rented car, which did not have a CashCard in the IU.
Mr Lim added: 'If I was driving my car, this wouldn't have happened because I always have the CashCard inside the IU.'
The EEOC closes an investigation into the sexual assault case involving a trader allegedly forced to take female hormones, with CNBC's Charlie Gasparino
17 comments:
Tattered Safety Nets
By Don Bauder
April 9, 2008
In the depths of the Great Depression, the American government set up social and financial safety nets to prevent another treacherous economic downspiral and financial panic. The strategy seemed to work: in the years since, recessions and bear markets have been milder. There has been no depression, and panics have been fleeting. But now, a few outspoken economists fear that a depression — a prolonged downturn, accompanied by severe financial distress — is a possibility, if only remote. One reason: those safety nets are severely shredded.
The social safety nets — the entitlement programs set up in the 1930s and their later refinements — are in tatters. The Medicare trust fund will run out in 2019, and the Social Security fund’s reserves will be depleted in 2041. David Walker, former head of the U.S. Government Accountability Office, has been going around the country on Fiscal Wake-Up Tours, warning that the nation is on a financial collision course: there is not enough money to handle coming baby boomer retirements; the Medicare prescription drug benefit plan is a disaster; tax cuts have been irresponsible; the Iraq War is draining available funds; government pensions at all levels are far too generous; and Congress has no budget controls. Walker recently joined a private group trying to educate citizens on the similarities between America today and the Roman Empire in its final years.
The financial safety nets are in tatters too. They were set up to prevent market manipulation and thwart debt-based pyramids. The 1920s was a decade of wild speculation enriching a favored few but eventually wiping out almost all investors. A handful of crooks would create pools to drive a stock up, then bail out when it hit a predetermined peak. They would work similar magic in driving a stock down.
The stock pyramids, facilitated by piles of debt, were the most dangerous. The Van Sweringen brothers built a pyramid of railroad stocks; Samuel Insull had an infamous utilities pyramid. As the stocks crashed and the basic businesses foundered, the debts could not be paid. The pyramids collapsed, exacerbating the fall of the overall market. Viewing one jerry-built debt pyramid, President Franklin Delano Roosevelt called it “a 96-inch dog wagged by a 4-inch tail.”
In this environment, the United States passed rigid securities laws and set up the Securities and Exchange Commission. Its mission was to protect small investors from the depredations of corporate titans and Wall Street. Now the mission (unstated, of course) is exactly the reverse: to protect the titans and Wall Street. One way it’s done is through what San Diego attorney Gary Aguirre, a former commission investigator, calls the “rotating door.” Lawyers work for the agency for several years and then go with big law firms for $2 million or $3 million a year. When they are at the agency, they do dubious favors for the powerful firms representing stock manipulators. For example, John Moores dumped $487 million of stock in Peregrine Systems during the period in which the books were cooked. Evidence shows Moores knew about the phony accounting. Moores hired his personal lawyer, Charles La Bella, to oversee a whitewash by the law firm of Latham & Watkins. To no one’s surprise, it exonerated Moores and put the blame on his underlings. The study was ridiculous, pointed out victims. The SEC official in charge of the Peregrine case blessed the Latham & Watkins study — then went to work for Latham & Watkins.
Three years ago, the securities commission notified Bear Stearns that it intended to bring an enforcement action against the firm for overvaluing $63 million of subprime mortgage–related derivatives. Two years later, the investigation was quietly closed. Gary Aguirre suspects that backroom pressure from law firms killed the matter. If the case had proceeded, the subprime crisis might have been averted, he suggests.
“Fixing the SEC so it can protect investors will not be easy,” says Gary Aguirre, who has returned to San Diego after several years in Washington, D.C. “Powerful interests want the SEC to be just the way it is or even weaker.” Opacity, thy name is Wall Street. “Over the last decade there has developed a second financial market — unregulated, off the balance sheets. It has grown geometrically.” This second financial market has been a comfy home for subprime mortgage instruments, derivatives such as credit default swaps, hedge fund monkey business, offshore money pools, and other collusive contrivances. “The nation has two capital markets: one is semitransparent and semiregulated, the other is opaque and unregulated.” And the Securities and Exchange Commission looks the other way — deliberately.
“The investment banks sold the regulators on the theory of counterparty discipline,” says Gary Aguirre. Translated, that means “Trust us.” Trust these gamblers to be prudent when doing business — say, buying a derivatives contract — from a third party. But the collapse of Bear Stearns, and the fact that almost no firm on Wall Street detected the subprime mortgage fraud, should explode any theory of counterparty discipline. The idea was never more than “a myth sold to regulators so investment banks can operate in the shadows without regulation.”
In the Bear Stearns crisis, the Federal Reserve began loaning money to the big securities firms. In the years since the Great Depression, it had only loaned to commercial banks. So it is generally accepted that these brokerage firms will have to be regulated. Last week, Treasury Secretary Henry Paulson introduced a “regulation lite” package. Don’t expect meaningful regulation of Wall Street. For example, the Treasury only vaguely refers to possible regulatory supervision of complex derivatives, which are the villains. That would be like 1930s regulators winking at Insull and the Van Sweringen brothers, surreptitiously encouraging them to keep building their debt pyramids.
Commercial banks are supposed to be regulated. But the essence of white-collar fraud is contrived complexity. Derivatives, sated with mathematical formulae and Greek symbols, are perfect tools for that. In keeping these inscrutable derivatives off their balance sheets, the commercial banks have evaded reserve requirements, creating a shadow banking system with starkly inadequate reserves. The securities firms, too, have a shadow system; as long as they have their major weapon, complex derivatives, they can evade regulation.
“This is very much like what happened before the stock market crash of 1929,” says City Attorney Mike Aguirre, brother of Gary Aguirre. “In the 1920s, there was an escalation of speculation. But it could be measured then; it was tied to a central reference point.” Today, estimates of the notional value of derivatives run from $500 trillion to $700 trillion — beyond anyone’s comprehension. Even adjusted for the inflation that has occurred since the 1930s, “today’s numbers dwarf the numbers then. There has been a corporate takeover of the full faith and credit of the U.S.”
In short, Roosevelt’s dog would be a hundred yards long and its tail would be a fraction of a millimeter. “The situation is more dangerous than it was in 1929,” says Mike Aguirre, a securities lawyer before he became city attorney. “The numbers are larger; the nation is in worse shape because of the war in Iraq; we don’t have the manufacturing, transportation, and infrastructure [dominance] we had then.”
Ben Bernanke came in as head of the Federal Reserve promising more transparency. But the Fed-directed takeover of Bear Stearns by JPMorgan was “done completely behind closed doors,” says Mike Aguirre. Why did the Fed secretly arrange the emergency nuptials? Because if Bear Stearns had gone bankrupt, the extent of its interrelationships with other Wall Street houses, hedge funds, pension funds, and commercial banks would have become public knowledge. The people would have known that the system was on the brink of collapse and exactly which banks and brokerages were most at risk. Mike Aguirre says that in future such cases, a failing institution should be forced to go bankrupt. “There should be full disclosure of the liabilities.” The complexity-obsessed markets must be reformed and simplified: “There should be no trading under the counter. Trading should be in organized markets. This is a good time to close all the loopholes.”
That’s what reformers said in the 1930s. Then the commercial banks, securities firms, hedge funds, and offshore buccaneers created the loopholes anew. Members of Congress, with Wall Street’s money in their sticky fingers, let it happen. Now we’re back on the brink again with tattered nets below us.
Posted Thursday, April 10, 2008
Citigroup May Sell $12 Billion of Loans, Person Says
By Bradley Keoun
April 9 (Bloomberg) -- Citigroup Inc. is in talks to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank's balance sheet, a person briefed on the matter said.
A sale to the private equity firms would shield the bank from further declines in the value of the debt, said the person, who wouldn't be identified because negotiations are private. The loans are part of the $43 billion in financing that Citigroup agreed to provide for leveraged buyouts last year before credit markets froze and saddled the New York-based company with hard- to-sell assets.
Citigroup plunged 19 percent in New York trading this year, partly on concern that writedowns of leveraged loans, which currently trade at about 90 cents on the dollar, might add to $24 billion of losses the bank has taken so far on mortgages and bonds that tumbled in value. Chief Executive Officer Vikram Pandit is shedding high-risk holdings to shore up capital.
``As a Citigroup investor you won't have to worry about more mark-to-market writedowns on these loans,'' said William B. Smith, senior portfolio manager at New York-based Smith Asset Management Inc., which oversees about $80 million, including about 66,000 Citigroup shares. ``There's now a consortium of private-equity firms saying what they're worth.''
Citigroup rose 35 cents, or 1.5 percent, to $24.11 at 9:46 a.m. in New York Stock Exchange composite trading.
$200 Billion Logjam
The company's so-called Tier 1 capital, the core measure of solvency demanded by regulators, was 7.1 percent as of Dec. 31, down from 8.6 percent a year earlier. A ``well-capitalized'' bank must have a ratio of Tier 1 capital to assets of at least 6 percent, according to rules set by industry regulators. Citigroup had about $2.2 trillion of assets at the end of 2007, more than any U.S. bank.
Daniel Noonan, a Citigroup spokesman, declined to comment, as did Apollo spokesman Steven Anreder and Blackstone spokesman Peter Rose. TPG didn't return messages seeking comment.
The leveraged loan market seized up last year after losses on mortgage bonds prompted fixed-income investors to shun assets deemed risky. Leveraged loans are made to companies with credit ratings below investment grade, meaning they're considered by Moody's Investors Service and Standard & Poor's to carry a higher risk of default.
Citigroup is planning to complete the sale to Apollo, Blackstone and TPG as soon as next week, when the bank reports first-quarter results, the person briefed on the talks said. Analysts estimate the bank will report a loss of more than $4.7 billion, or 93 cents a share, according to a survey by Bloomberg.
Loan Prices
The deal may help clear the $200 billion logjam of unsold loans, said Chris Taggert, an analyst at CreditSights Inc. in New York. Money managers who have raised funds to invest in distressed debt are striking deals with Citigroup and other banks now eager to unload them, he said.
``It would definitely raise loan prices given that large- scale buyers are stepping in,'' Taggert said.
Apollo, Blackstone and TPG stand to profit if demand for the loans pushes prices above Citigroup's discounted sale price. Apollo and Blackstone, which manages the world's biggest buyout fund, are based in New York. TPG, based in Fort Worth, Texas, led a group that agreed this week to buy a $7 billion stake in Washington Mutual Inc., the largest U.S. savings and loan firm.
Poised to Dispose
The most actively traded leveraged loans, which fetched 100 cents on the dollar as recently as last June, fell to a record low of 86.28 cents in February, according to data compiled by Standard & Poor's. Prices have since rebounded to 90.14 cents as banks reduced their backlog of unsold loans.
Citigroup's planned sale to private equity firms follows similar moves by banks to get leveraged loans off their books. Lehman Brothers Holdings Inc., Deutsche Bank AG and Credit Suisse Group sold loans to investment vehicles they created called collateralized loan obligations.
Pandit is poised to dispose of more than $200 billion of the company's assets, which increased by almost $700 billion from 2005 through 2007. Since he succeeded Charles O. ``Chuck'' Prince in December, Pandit has been whittling down Citigroup's inventory of leveraged loans and high-yield bonds while balking at financing pending deals. Under U.S. accounting rules, Citigroup must record losses when the market value of the buyout loans on its balance sheet falls.
Clear Channel
Two weeks ago, Citigroup led the sale of $1.45 billion of bonds that Apollo and TPG used to finance their $17.1 billion purchase of casino operator Harrah's Entertainment Inc. The bonds priced at 84 cents on the dollar.
Citigroup and five other banks were sued last month by private-equity firms Bain Capital LLC and Thomas H. Lee Partners LP for refusing to fund their $19.5 billion acquisition of Clear Channel Communications. The bank group countersued last week.
Citigroup also tried to back out of a bankruptcy-financing package for Solutia Inc., a St. Louis-based maker of nylon and plastics, because of changes in the credit markets. The case was settled in February.
Posted Thursday, April 10, 2008
US$945b: IMF's estimate of losses from sub-prime crisis
Banks will bear roughly half of the losses, the Fund says in a report
By VIKRAM KHANNA
April 10, 2008
(SINGAPORE) It's going to be an almost trillion-dollar meltdown. That's the message on the likely magnitude of the US sub-prime-related crisis from the International Monetary Fund (IMF). In its Global Financial Stability Report released in Washington yesterday, the IMF points out that the crisis is spreading beyond the US sub-prime market, to the prime residential and commercial real estate markets, consumer credit and the corporate debt markets.
The IMF loss estimates are in line with those put out by some private economists who have closely tracked the crisis, such as George Magnus of UBS, although others, such as New York University professor Nouriel Roubini, cite US$1 trillion as a minimum loss figure, with the maximum going as high as US$2.7 trillion in the worst case.
According to the IMF, of the US$945 billion of total losses, US$565 billion will be due to residential mortgage debt, US$240 billion will come from commercial real estate debt, US$120 billion from corporate debt and US$20 billion from consumer credit debt.
US$720 billion, or about 76 per cent of the total losses, will come from securitised debt - that is, debt that has been packaged into tradable securities.
Banks will bear roughly half of the sub-prime mortgage-related losses, with insurance companies, pension funds, money market funds, hedge funds and other institutional investors accounting for the rest. Globally, banks are estimated to have US$740 billion of net sub-prime exposure, 53 per cent of which is held by US banks and 41 per cent by European banks. Asian (including Japanese) banks hold about 5 per cent.
The IMF estimates potential losses of US$144 billion for US banks and US$121 billion for European banks. Losses of Asian banks are likely to be less than one-tenth of losses in Europe, it says.
It points out that most sub-prime-related losses appear to have been reported already, noting that through mid-March 2008, banks had reported US$190 billion in losses on US mortgage market exposure. However, it adds that much of that represents mark-to-market losses (losses arising from loans being valued at low prevailing market prices) and some could yet be recoverable in the future.
Still, the IMF says that US banks and government-sponsored enterprises could report a further US$49 billion in additional writedowns, while European banks could report as much as US$43 billion.
Nonbank financial institutions, including insurance companies, may yet also report sizeable additional writedowns.
However, the IMF urges that loss estimates should be treated with caution, because:
They depend on the quality of disclosure, and are sometimes based on estimates of exposures;
Aggregate losses are highly sensitive to bank exposures to different types of loans, which are again estimates. Different tranches of securities are also valued differently;
The timing of loss recognition is uncertain and the norms vary across countries; and
Loss estimates could be lowered by remedial measures such as the modification of mortgage loan terms.
On the ripple effects of the crisis, the IMF points out that emerging-market countries have been 'broadly resilient' so far. But it adds that some remain vulnerable to a credit pullback, especially where domestic credit growth has been fuelled from external funding and large current account deficits need to be financed.
However, this is not so much the case in Asia, where most countries have current account surpluses. Eastern European countries are the most exposed.
The IMF's report comes ahead of tomorrow's meetings of Group of Seven finance ministers. This will be followed by the spring meetings of the IMF and the World Bank, where the sub-prime crisis is expected to top the agenda.
With regard to policy measures, the IMF says 'the immediate challenge is to reduce the duration and severity of the crisis. Actions that focus on reducing uncertainty and strengthening confidence in mature market financial systems should be the first priority'.
Comparing the magnitude of the US sub-prime crisis to previous financial crises, the IMF points out that in absolute dollar terms, it is slightly larger than Japan's banking crisis of the 1990s.
But relative to GDP, the losses stemming from the sub-prime crisis would be around 7 per cent, which makes it much smaller than either the Japanese crisis or the Asian financial crisis of 1997/98, where the total losses came to 15 per cent and 35 per cent of GDP, respectively.
Posted Thursday, April 10, 2008
Hmmm...very interesting; now got Ang Moh '黑社会人物' involved in the Jade Saga...
Gatto on his way home empty handed
Published 5:40 AM Apr 8, 2008
Last update 5:08 AM Apr 11, 2008
Underworld identity Mick Gatto emerged from his meeting with Opes Prime's key Singapore executives last night declaring they had hidden no assets, reports The Australian.
Mr Gatto left Australia on Tuesday, vowing to trawl through Opes' overseas operations to recover $1 billion he said was hidden inside the failed stockbroker.
Mr Gatto and associates John Khoury and Matt Tomas told The Australian "these guys are just as innocent as the victims.
"Unfortunately we are not coming back with bags of money but we have certainly got a lot of information that we can use back in Melbourne," he said.
Mr Gatto told the paper "a lot of people are pointing the finger at these Singapore guys but we are pretty satisfied there is nothing in Singapore. Investors will get some money back but the administrators' estimate (of 30c in the dollar) is ... pretty accurate."
Mr Gatto said he has plenty of leads to go on and is flying back to Melbourne today.
Jay Moghe, the Singapore-based associate of Opes and the sole director and shareholder in Riqueza, had reportedly feared for his family's safety.
Meanwhile, the fallout in Australia and Singapore continues with Australian firms launching legal battles over the ownership of company shares and a Singapore takeover and privatisation bid scuttled because of the Opes collapse.
On Thursday, the Federal Court of Australia granted a fresh injunction to Opes Prime client Beconwood Securities Pty Ltd, temporarily stopping the ANZ Banking Group Ltd from selling the shares of advertising firm Q Ltd.
In Singapore, OCBC Bank says it has reported to Singapore's white collar crime unit on events surrounding a failed takeover bid for Jade Technologies after it resigned as an adviser to the deal on April 1.
Jade Technologies announced last week that its president Anthony Soh failed in his bid to acquire the engineering and commodities services firm and take it private. OCBC Bank was the financial adviser to Mr Soh.
"As the matter has been reported to the Commercial Affairs Department, we are not able to provide any further details at this juncture," OCBC head of corporate communications Koh Ching Ching told Reuters in an email.
Singapore newspapers reported that Mr Soh did not have enough funds to proceed with the bid as he had pledged his shares as collateral to Opes Prime to finance the buyout.
Singapore's Business Times newspaper on Thursday cited OCBC as saying that a series of events occurred "which caused us to question the integrity of the representations which we have received", and that this was the basis for it resigning.
"I will cooperate with the authorities and I'll do full disclosure to defend myself," the same newspaper quoted Mr Soh as saying in response.
Posted Friday, April 11, 2008
Murphy punted with 5pc Opes equity
Adele Ferguson
April 11, 2008
FLAMBOYANT Sydney lawyer Chris Murphy has been thrust into the centre of the collapse of stockbroking firm Opes Prime with the revelation that unprecedented levels of credit were used to keep his failed $200 million share portfolio afloat.
Share portfolio statements obtained by The Australian show that Opes kept alive Mr Murphy's broking account with margin lending of 95 per cent after massive falls in the value of the portfolio by July last year.
The decision contaminated the rest of the broker, and may have contributed to its collapse into receivership last month amid claims of financial irregularities.
Mr Murphy, an ardent trader, has boasted in the past on the HotCopper online day traders' chat site about his successful share market exploits.
But The Australian revealed this month that Mr Murphy, reputed to have been a high-rolling gambling associate of the late Kerry Packer, was the highest-profile victim of the share market shake-out when his massive share market portfolio was wiped out with the collapse.
The portfolio statements obtained by former underworld boss Mick Gatto and associate John Khoury, and provided to The Australian, reveal Mr Murphy, through two of his companies, Sarah Brown and Cardiac Jolt, was hit with margin calls after losing almost all the equity in his $200million share portfolio even as the share market was near a peak in July.
The documents show that Mr Murphy was allowed to borrow 95per cent of the value of his share portfolio, which included blue-chip stocks, such as a $13million stake in Telstra and a $45million stake in the James Packer-backed Challenger Financial Group, as well as smaller companies such as Ebet, Heartware and Australian Pharmaceutical Industries.
The preferential treatment was also extended to other clients, including Jay Moghe, the sole director and shareholder of the mysterious British Virgin Islands company Riqueza, through which Opes director Laurie Emini conducted many of his trades. Some clients were allowed to borrow 100 per cent of the value of their share portfolio, even if they used the money to invest in second-tier stocks such as Babcock & Brown's listed spin-offs.
Such high loan-to-valuation ratios on margin loans are extremely rare; the usual level is about 65 per cent on blue-chip stocks and much less on mid-capitalised stocks. With just 5per cent equity, Mr Murphy was also exposed to falls in the portfolio, which would led to margin calls telling him to inject cash to top up the equity component of the loan.
The documents reveal that he received two margin calls between July 1 and July 13 last year - one for $950,681 and another for more than $10 million.
The Federal Court has heard that the Australian Securities and Investments Commission, which is investigating the Opes collapse, believes the stockbroker shifted shares between client accounts to shield them, and the company, from margin calls.
ANZ and investment bank Merrill Lynch, which bankrolled Opes's margin lending business, had ultimate security over clients' shares. They have begun to liquidate the $1.3 billion portfolio to recover their money in a process expected to leave clients with just 30c in the dollar.
But documents show he was receiving margin calls on a portfolio run out of Cardiac Jolt and on other shares held through Sarah Brown, a company he owned in a joint venture with Hawkswood Investment. Hawkswood is owned by three directors of Opes: Mr Emini, Julian Smith and Anthony Blumberg.
Asked last night about the content of his portfolio statements, including borrowings of 95per cent of his share market stake, Mr Murphy declined to comment.
It remains unclear why Opes made a decision to keep Mr Murphy and other similar client accounts alive, apparently by using money from other people's trading accounts to mask a massive deficit and avoid margin calls.
Opes kept Mr Murphy's account running in July, even though this was before the broker had to appear healthy as part of its plan to list on the Australian Securities Exchange with a market value of $100million. It was during this time that ANZ and Merrill Lynch were increasing their level of security in the business.
Mr Moghe, who met Mr Gatto in Singapore last night, was given similar preferential treatment to Mr Murphy with the margin loan on his $124 million share portfolio. Mr Moghe had significant holdings in small companies, including Kings Minerals.
Portfolio statements released to The Australian reveal that Mr Moghe had available margins of $106million in one account, and a margin call of $23.7 million in another account. Like Mr Murphy, he denies any knowledge of his account being topped up by Opes to avoid margin calls.
Mr Murphy made his name in the late 1980s and 90s as a criminal lawyer. While his firm still carries his name, he is now an active share trader. From the state of his trading accounts in July last year, he was having significant problems with margin calls.
Last month, he sold 15million Challenger shares through Cardiac Jolt at an average price of $1.70, well down on the company's $6.55 peak in October last year. At the time, Mr Murphy denied receiving a margin call.
On March 5, speculation started to emerge that Opes was in trouble. Some people, including Tom Karas of State Securities, acted and moved their Opes accounts into a nominee company at Opes, called Green Frog.
By March 17, Mr Emini had taken sick leave and the next day Mr Blumberg and Mr Smith met ANZ officers to ask for an emergency loan of $95 million.
Ten days later the administrators were called in, followed by receivers appointed by ANZ.
Posted Friday, April 11, 2008
Lehman Moved to Turn Unsold Debt to Cash: WSJ
By Reuters
11 Apr 2008
Lehman Brothers Holdings repackaged unsold debt and used the Federal Reserve's new borrowing facility to convert loans that investors mostly rejected into cash to finance its business, the Wall Street Journal reported.
According to the Journal, Lehman transferred $2.8 billion in loans that included some risky leveraged buyout debt into a new investment entity called Freedom.
Freedom then issued debt securities backed by the loans, and $2.26 billion of the securities got investment-grade credit rankings from Moody's and Standard & Poor's, according to the report.
The bank used some of those securities as collateral for a low-interest, short-term cash loan from the Federal Reserve, the Journal said, citing people familiar with the matter.
The move was meant as a test to see what the Federal Reserve would accept, and the size of the loan was not material, the Journal added, citing a person familiar with the matter.
Lehman representatives and the Federal Reserve could not be reached immediately for comment.
Posted Saturday, April 12, 2008
Ex-Shanghai boss sentenced to 18 years for graft: official media
Friday, April 11, 2008
SHANGHAI (AFP) - - Former Shanghai Communist Party boss Chen Liangyu was sentenced to 18 years in prison on Friday, state press said, the most senior Chinese official to be convicted of graft in over a decade.
Chen, 61, was sentenced by a court in the northern city of Tianjin after being convicted of taking bribes and abusing his power, Xinhua news agency said.
He was tried last month in a scandal that shook national politics when it emerged in mid-2006 that hundreds of millions of dollars from Shanghai's pension fund had been illegally siphoned off.
Last month, the State Audit Office revealed figures that put the amount of stolen cash at 33.9 billion yuan (4.8 billion dollars), 10 times more than the original estimate of 480 million dollars.
The state has already handed down tough convictions to up to 20 officials and businessmen involved in the theft of the pension funds, including one suspended death sentence and several life imprisonments.
Chen had been charged with abuse of power in connection with the pension fund scandal, as well as accepting 2.39 million yuan (342,000 dollars), some of which was given to his wife and son, earlier press reports said.
State press said that charges of dereliction of duty were dropped against him in Friday's decision.
During his one-day trial, Chen admitted he was "partially responsible" for the pilfering but did not plead guilty, according to previous state media reports.
Chen's case is the biggest corruption scandal to hit the Chinese government since former Beijing mayor Chen Xitong was removed from his post in 1995 and sentenced to 16 years in jail.
Chen was charged with corruption in 2006 when he was a member of the ruling Communist Party politburo, a grouping of about 20 or so of China's most powerful politicians.
The Tainjin court refused to comment on Chen's case when contacted by AFP on Friday.
Posted Saturday, April 12, 2008
The New Math
Smarting from last summer’s huge losses, quantitative hedge funds are pressing into new realms of science in an effort to prosper during the ongoing credit crisis.
Nick Rockel
27 Mar 2008
For a man whose flagship hedge fund is running on fumes, Marek Fludzinski couldn’t be calmer. The founder and CEO of New York–based Thales Fund Management has watched his firm’s assets plummet by more than $1 billion during the past year, as Thales, like most quantitative managers, has suffered as a result of the global credit crisis that began last summer. But Fludzinski, who has a Ph.D. in theoretical physics from Princeton University and was one of the first two dozen employees at famed quant shop D.E. Shaw Group, is on a mission that means far more to him than profit and loss. He believes science is the key to unlocking the inner workings of the markets, and he intends to devote significant resources to prove it.
“I think there is a law tying everything together,” says Fludzinski, 52.
Science, however, didn’t much help Fludzinski last summer, when the onset of the credit crunch shook Thales and other quantitative hedge funds. Many of these firms specialize in a computer-powered strategy called statistical arbitrage, which uses mathematical models to profit from tiny mispricings of stocks and other assets. But in early August their models faltered after a large manager decided to liquidate its equity portfolio, most likely to meet margin calls on its credit positions. Partly because their strategies are based on many of the same academic theories, quant firms like AQR Capital Management, Renaissance Technologies Corp., D.E. Shaw and Thales held some of the same positions and began racking up huge losses. Sucker punched by the market, the quants didn’t know whether to cash out or stay in. Fludzinski and his peers came off like a bunch of propeller heads who had naively tried to bend reality to their models.
This isn’t the first time Fludzinski has run into trouble. In 2002, Thales fell about 10 percent, say investors, prompting some to flee. This go-around, in a more difficult market, Fludzinski found ways to stem the losses. “We had enough of a risk control program in place that we weren’t forced to liquidate for margin calls despite our leverage,” he says. “We had layers of option strategies on top of our stat arb strategies to protect them from this catastrophic risk.”
Yet even those risk controls didn’t save Thales from finishing 2007 down some 10 percent, according to investors, some of whom pulled their money. The fund, which despite its struggles has delivered an annualized return of 10 percent since its 1999 inception, began this year with just $400 million in assets.
This calamity wasn’t supposed to befall the quants, who are among the brightest people working in finance. During the past several years, managers and investors have flocked to their strategies, drawn by the promise of outsize returns and undersize risks. The dean of the quants is James Simons, founder of Renaissance, a publicity-shy firm based in East Setauket, New York. Renaissance’s $7.5 billion Medallion Fund has posted a 39 percent annualized return — after its hefty 5 percent management fee and 44 percent performance fee — since its 1988 inception. But even Simons, who has a Ph.D. in mathematics from the University of California, Berkeley, and once worked as a code breaker for the U.S. Department of Defense, was caught unawares by the August downdraft.
In hindsight, last summer’s series of unfortunate events should not have been completely unexpected. Nine years earlier a global credit squeeze, which began when Russia defaulted on its ruble-denominated bonds, felled hedge fund Long-Term Capital Management, whose star-studded quant team included Nobel Prize–winning economists Robert Merton and Myron Scholes. But even the smartest managers seem to have underestimated the magnitude and speed of last August’s meltdown.
“They’re all looking at their models and trying to get an understanding of which ones did worse and which ones did well,” says Andrew Lo, a finance professor at the MIT Sloan School of Management. “And they’re probably looking at various alternatives to try to forecast these kinds of dislocations in the future.” Lo is co-founder of AlphaSimplex Group, a Cambridge, Massachusetts–based quant firm with some $550 million in assets (see box).
Quant shops aren’t sitting around idly. They are pressing into new realms of computational finance, applying concepts from molecular physics, mathematical linguistics, artificial intelligence and other scientific disciplines. Thales, for example, is using computer simulations to replicate human behavior to try to predict the myriad decisions that drive trading activity. Other firms are pinning their hopes on machine learning — statistical methods that allow computers to identify relationships in financial data and make predictions from them. But regardless of the approach, managers agree that quant funds have been far too focused on equities and need to find ways to apply their strategies to a broader range of asset classes.
“It’s important to cast your net as wide as possible, because you never know what you’re going to find,” says Dimitri Sogoloff, president and CEO of New York–based quant shop Horton Point. “And if you find something, rest assured that sooner or later it’s going to stop working.”
Most quantitative strategies are designed to be market neutral — that is, to deliver positive returns irrespective of what happens to the broader market. Given the amount of borrowed capital that such strategies typically use — before August it was common for a statistical arbitrage fund to be ten times leveraged — the residual damage from last summer could have been worse. Most of the big quant firms have, in fact, bounced back. According to Chicago-based Hedge Fund Research, equity market-neutral and statistical arbitrage strategies finished 2007 up 5.8 percent and 9.1 percent, respectively. Meanwhile, the HFRI fund weighted composite index climbed 10.4 percent.
The recovery masks the fact that equity market-neutral hedge funds have suffered a decadelong decline in performance. From 1999 to 2007 they had an annualized return of 6.1 percent. That compares with 11.8 percent from 1990 to 1998, according to HFR. The drop-off for statistical arbitrage funds is worse. They were up an annualized 4.6 percent from 1999 to 2007, versus 13.5 percent from 1990 to 1998.
Too much money trying to exploit the same market inefficiencies accounts for some of the problem. HFR estimates that investors had $225 billion in quant hedge funds at the end of last year, more than the entire hedge fund industry had in early 1996. Overcrowding can be especially trying for quants, whose portfolios typically hold thousands of positions, making overlap among managers inevitable.
WHEN MAREK FLUDZINSKI was studying physics at Princeton, he liked to get together with fellow graduate students to discuss market economics. The conversation would always come back to the fact that finance has no equivalent to the law of gravity or any other unifying principle of the physical world.
After earning his Ph.D. in 1982, Fludzinski decided to apply his skills in the real world and went to work for Metron, a scientific consulting firm in suburban Washington set up to solve problems of national defense; there he helped develop satellite systems that could detect submarines under the surface of the ocean. But unanswered questions about finance nagged him. So in 1988 he joined Chicago’s Hull Trading Co., a proprietary trading firm later acquired by Goldman, Sachs & Co. He created options models at Hull before D.E. Shaw recruited him in 1990.
At the time, quantitative trading was a small corner of the investment world. D.E. Shaw had been founded two years earlier by former Columbia University computer science professor David Shaw, who came from Morgan Stanley, where he worked under renowned trader Nunzio Tartaglia. A onetime Jesuit with a Ph.D. in astrophysics, Tartaglia was an early proponent of pairs trading. He would find the stocks of two related companies — say, General Motors Corp. and Ford Motor Co. — whose prices had diverged from their historical relationship, and then buy the cheaper stock while shorting the overpriced one.
In this precursor to statistical arbitrage, Shaw — who launched his firm with $28 million from Greenwich, Connecticut–based Paloma Partners Management Co. and New York’s Tisch family — saw the potential for computerized trading on a grand scale. When Fludzinski arrived at D.E. Shaw, the now 1,300-person firm had about 20 employees. He ran one of the fledgling shop’s four quantitative strategies and began developing an options market-making system that would be able to price options on the fly. Fludzinski, who was born in Stafford, England, and grew up in Buffalo, New York, remembers D.E. Shaw as being extremely secretive.
Fludzinski quit D.E. Shaw in 1992 to build a statistical arbitrage system for Swiss Bank Corp. in New York. Two years later he opened Thales Financial Group, the predecessor of his current firm. Fludzinski named it after the ancient philosopher Thales of Miletus, who, in addition to introducing geometry to Greece, is known as one of the first people to corner a commodities market — in his case, olives, more than 2,500 years ago.
For the first four years, Fludzinski was bankrolled entirely by Paloma. In January 1999 he struck out on his own and launched the Thales Fund with $50 million. By the end of 2001, Thales had grown to $1.4 billion, mostly from funds of hedge funds, which were attracted to its market-neutral strategy. But the firm’s 10 percent drop in 2002 prompted the funds of funds to leave as quickly as they had come in, shrinking assets to $500 million. Fludzinski set about refurbishing his battered franchise: “We hired people and expanded our research department — by digging into my own retained capital — and it paid off.”
According to Fludzinski, quant shops generally fall into one of two main camps: those that strongly emphasize statistics and those that show more interest in fundamentals. He says he has always tried to find the middle ground. D.E. Shaw alumni like Fludzinski tend to be comfortable looking at such factors as price movement and volume, which may be statistically significant to performance but are not easily explainable by pure fundamental analysis.
Goldman Sachs quants have typically fallen more in the fundamentals camp, going back to the mid-1980s, when the firm hired MIT finance professor Fischer Black, known best for the options-pricing model he devised with Scholes and Merton. More-recent recruits include Clifford Asness, the University of Chicago finance Ph.D. who headed up Goldman Sachs Asset Management’s quantitative research group in the mid-1990s before leaving in 1998 to start AQR. In late 1995, Asness and his team launched Goldman’s famed market-neutral Global Alpha fund, which had an annualized return of 74 percent its first two years.
Quant investing has changed dramatically since the pairs trading of the 1980s. Today’s traders have to deal with many more potential combinations and relationships. One source of this added complexity is quick access to information, as market news spreads much faster than in the past. “Now statistical arbitrage is a much higher dimension of problem,” Fludzinski says. “It’s almost like a chess game.”
Sanford Grossman, president and CEO of Greenwich-based quantitative hedge fund firm QFS Investment Management, notes that the quant connection with academia has led to the widespread sharing of ideas. “Instead of inventing things themselves from scratch, many firms are reading academic papers, talking with academics and coming up with strategies that for some reason work in a long historical simulation,” says Grossman, who continued to teach finance at the University of Pennsylvania’s Wharton School for more than a decade after founding QFS in 1988. “And then they do it. They don’t really know why it works.”
According to Grossman, that was part of the problem last summer. He is surprised that so few hedge funds protected themselves by purchasing options when they were cheap in late 2006 and early 2007. In his opinion, investors are largely to blame because they don’t reward managers for being conservative. “They penalize them because those firms are underperforming in the period before a crisis occurs,” says Grossman, whose firm manages about $3 billion in assets. “One thing that would help the system is if investors in funds become more cognizant of risk management strategies and how they are being implemented.”
Options protection helped Thales avoid the really big losses suffered last year by several large quant funds, including Goldman’s Global Alpha, which fell more than 14 percent the week of August 7 and 28.5 percent for the month. (For the year Global Alpha was down 38 percent.) Still, many Thales investors fled. Fludzinski says the reduced capital base gives Thales an opportunity to focus on “lower capacity — but ultimately higher return — high-frequency strategies.”
Statistical arbitrage funds like Thales employ strategies that play out over different timescales, ranging from minutes to months. Fludzinski says there’s a lot of action in the middle, where holding periods can range from a few days to a few weeks. At the long end, stock movements are driven largely by fundamental macroeconomic factors like corporate earnings. At the short end, investors’ immediate need to buy or sell can move a particular stock irrespective of the fundamentals. “The real question is, can such relationships be exploited?” Fludzinski says.
Thales’s 35-person research team, which includes ten Ph.D.s, is looking for ways to forecast investor behavior on different timescales. (In total, the firm employs about 50 people.) Although Thales focuses most of its effort on improving current trading systems and strategies, Fludzinski says the firm devotes as much as 20 percent of its resources to finding a unifying theory of markets. Like physics, he says, finance lends itself to mathematical models based on observations. Through experiments that replicate what they see in the natural world, physicists have described its underlying principles.
Thales is taking a similar approach with finance, using computers to model so-called agent simulations of thousands of traders. In one experiment Thales created a simulation with 10,000 traders, each owning the same portfolio of 15 stocks. After hearing news about one of these stocks, half of the simulated traders might buy it and the other half might sell. Fludzinski says such computer models help explain why a stock typically trades higher than average for a few days after a positive earnings announcement and then trades lower before returning to normal. By modeling such herding behavior, he hopes to better understand how securities prices move in relation to one another.
“Maybe we need to build a computer simulation that has 50 million people, with complicated rules for each,” Fludzinski says. “It’s very difficult to explain why people behave irrationally.”
Fludzinski is quick to point out that Thales’s agent simulations are different from much of the work being done in behavioral finance, which applies cognitive psychology to analyzing markets by using models in which people don’t always act rationally, are prone to overconfidence and are more risk-averse when they are losing money. “This is not behavioral finance like you read about that’s kind of long term, where everyone doesn’t know their own objective function and the fear of regret is really high,” he explains. “That’s sort of macroscopic. What we’re doing is microscopic behavioral finance.”
MIT’s Lo, whose adaptive markets hypothesis views the market as an evolving biological system, says behavioral finance has only recently started to gain credibility. “For the most part, the mainstream of financial theory has rejected psychology and behavior,” he says. “Even now they’re viewed with a great deal of skepticism.”
Tanya Styblo Beder, chairwoman of New York consulting firm SBCC Group and a longtime quant, says behavioral finance is a vital aspect of any good trading operation. “I think it’s going to be huge,” says the former CEO of Tribeca Global Management, Citigroup’s now-defunct hedge fund division. “It will be one of the most critical ways for people to discover things about supply-demand flows in the marketplace. If you can figure out where the money’s going and what it’s coming out of, then you should be able to make trades and make some pretty decent dough.”
Judith Posnikoff, a managing director at Irvine, California–based fund-of-hedge-funds firm Pacific Alternative Asset Management Co., thinks that Fludzinski and his team are well positioned for the current market. “They come up with interesting things on a regular basis and then actually implement them in the portfolio,” says Posnikoff, whose firm has invested in Thales since 1999. “And if something’s not working, they stop using it.”
JOHN MOODY HAS KEPT HIS HAND in both finance and academia for more than two decades. Like Fludzinski, Moody, the founder of quantitative hedge fund firm J E Moody & Co. in Portland, Oregon, has a Ph.D. in theoretical physics from Princeton. He got into trading as a postdoctoral student at the Institute for Theoretical Physics at the University of California, Santa Barbara, in the early ’80s. From 1987 to 1992 the Portland native taught computer science at Yale University, where he was also a member of the neuroscience program. Moody then founded and directed the Computational Finance Program at Portland’s Oregon Graduate Institute. In the meantime, he had started consulting for clients ranging from New York–based J.P. Morgan Securities to the U.S. government’s Defense Advanced Research Projects Agency.
The author of some 65 academic papers, Moody was among the first scientists to think about applying machine learning to finance. Machine learning is a branch of artificial intelligence whose proponents design computer programs that can recognize patterns and learn by trial and error. In the physical world, machine learning is used to help intelligent robots — for example, it enables the Mars rover to decide which of several routes to choose when moving through rough terrain. Financial markets, Moody says, are much less predictable and can be even tougher to navigate.
“You’re trying to build programs that are able to identify relationships in data and draw inferences and make predictions from those relationships,” he explains.
In 2003, Moody left full-time academic life to concentrate on his hedge fund firm. He also resigned from OGI to join the Algorithms Group, part of the International Computer Science Institute at the University of California, Berkeley. Moody, 50, has witnessed the financial world’s appetite for computer science, mathematics, physics, engineering and statistics graduates with knowledge of machine learning. He has hired several of his former students to work as traders and researchers at his firm and says that more than half of his Ph.D. and postdoctoral students have gone into finance. “A lot of my colleagues in computer science and engineering departments have had the same experience,” he adds.
Like an increasing number of quants, including Renaissance Technologies’ Simons, Moody is applying his expertise well beyond the equity markets. The $114 million JEM Commodity Relative Value Program, which he launched in May 2006, invests solely in commodity futures. JEM stands out from other commodity hedge funds because it uses statistical arbitrage and has a diversified portfolio. The fund trades in five sectors — energy, grains, livestock, metals and soft commodities — and balances long and short positions. JEM returned 13.9 percent last year, according to the Barclay Hedge database. From inception through February, it has a compounded average annual return of 22.27 percent.
Moody, who has used machine-learning algorithms to forecast commodity price movements, says the biggest challenge with financial data is that it’s so noisy. The more flexible and complex a quantitative model is, the greater its chances of finding spurious patterns with no forecasting value. But Moody and other machine-learning researchers have found ways to build flexible models that work with a limited number of parameters. As a result, they minimize the overfitting that can come from using too many parameters while still capturing subtle relationships in the data. “The techniques that have been developed in machine learning are especially good at maximizing predictive power,” he says.
One common style of machine learning is reinforcement, whereby an algorithm makes sequential decisions — while playing a board game like backgammon or checkers, for example. In finance, Moody says, reinforcement learning can be applied to portfolio rebalancing, where calls about what stock to drop or add depend on the success or failure of past choices.
Another application is making trading decisions. Moody says he and his colleagues have created reinforcement-
learning techniques that maximize the risk-adjusted returns of a trading system while taking into account transaction costs. “We’ll come up with a much different structure for a model than we would if we were to simply try to predict whether the market’s going to go up or down and then do trading and risk management as an afterthought,” he says.
Anyone can see this and other work on trading strategies in academic papers that Moody has co-authored with colleagues and students. He admits that he and others in the machine-learning community regret sharing some of their discoveries. “I think a few of us wish that we hadn’t published them,” he says.
Because markets are dynamic, machine-learning and other statistical models need constant updating. The key is feeding them the right mix of older and newer data. “You’re trying to find a sweet spot between using data that is stale, and therefore misleading, versus having enough recent data so that you can estimate a model reliably,” Moody explains.
Incorporating unprecedented events like last August into machine-learning models may be difficult, but Moody says it is possible to simulate how a model will behave under some extreme circumstances. One approach is to take, say, eight years of daily market data and do computer-based Monte Carlo simulations — which use a random sampling of numbers to create potential outcomes — to generate a hypothetical 800-year trading history. If this is done properly, the synthesized data will reflect previously observed major disruptions. Investors can use such an approach to estimate the frequency and magnitude of extreme market events, as well as the associated trading risks. Moody notes that most simulation methods can’t capture disruptions or changes in market behavior that have no historical precedent. Still, they can be used to create a model that generates trading signals — and takes fewer risks.
“By using these kinds of techniques, you’re informing the model of the possibility of extreme events,” Moody explains. “And that will give rise to a more conservative strategy.”
Moody says the advantage of a systematic method like machine learning is that it removes the emotion from trading decisions. But at the same time, it’s capable of taking market psychology into account. “A lot of market behavior is actually somewhat predictable based upon human emotion,” Moody notes. “An appropriate statistical model should be able to capture that.”
DIMITRI SOGOLOFF’S QUANT START-UP, Horton Point, has its roots in an act of generosity. In 2004, Sogoloff and Yuri Kuperin co-founded an academic program at St. Petersburg State University, in his native Russia, that trains science Ph.D.s to work in financial services. (Kuperin is head of the econophysics program there.) Sogoloff began wondering about the relationship between finance and pure science — and whether there was a systematic way to capture it without using just statistics.
According to Sogoloff, 46, the main flaw of most quant strategies is their heavy reliance on historical data. Even though no strategy works all the time, he explains, this backward-looking approach makes statistical arbitrage especially vulnerable to unforeseen market moves. “If there is an event that is not captured in the prices today, the statistical arbitrage box will completely fall apart,” he says. “It’s a fantastic tool, but that’s all it is. It’s a tool in what needs to be a larger toolbox.”
At Horton Point, Sogoloff and co-founder Vladimir Finkelstein are building that toolbox in the form of the firm’s Gallery QMS Fund. The multistrategy fund seeks to trade well in different market conditions by applying an evolving suite of strategies to many asset classes. Sogoloff and Finkelstein are currently researching four main investment areas — credit and capital-structure arbitrage, equities, fixed-income arbitrage and reinsurance.
Gallery was scheduled to launch in January, but general market risk has led to a delay. Although Horton Point has been trading with its own capital, the opening is on hold pending final talks with investors. Sogoloff says that to achieve “complete diversification,” the portfolio must have several hundred million dollars in assets. “We are finalizing an initial commitment from a strategic investor and hopefully will be able to begin trading shortly,” he adds.
Born in Kharkov, Ukraine, Sogoloff emigrated to the U.S. in 1980. After earning an engineering degree and an MBA from Columbia, he began his career as a market maker and convertible bond trader with London- and New York–based Quadrex Securities Corp. He later traded convertible bonds at the New York office of London’s Baring Securities and for Chicago-based LIT America.
In 1993, Sogoloff co-founded Alexandra Investment Management with Mikhail Filimonov. The New York hedge fund firm focused on convertible arbitrage before branching out into other strategies early this decade. Sogoloff says he left Alexandra in the fall of 2006 because he wanted to pursue something completely new. He started Horton Point that October with Finkelstein. Finkelstein, who also grew up in Kharkov, has a Ph.D. in theoretical physics from New York University and a master’s degree in the same discipline from the Moscow Institute of Physics and Technology. Before joining Horton Point as chief science officer, he was head of quantitative credit research at Citadel Investment Group in Chicago.
Most of the 12 Ph.D.s at Horton Point’s Manhattan office are researching investment strategies and ways to apply scientific principles to finance. The firm runs what Finkelstein, 54, describes as a factory of strategies, with new models coming on line all the time. “It’s not like we plan to build ten strategies and sit on them,” he says. “The challenge is to keep it going, to keep this factory functioning.”
Along with his reservations about statistical arbitrage, Sogoloff is wary of quants who believe the real world is obliged to conform to a mathematical model. He acknowledges the difficulty of applying scientific disciplines like genetics or chaos theory — which purports to find patterns in seemingly random data — to finance. “Quantitative work will be much more rewarding to the scientist if one concentrates on those theories or areas that attempt to describe nonstable relationships,” he says.
Sogoloff sees promise in disciplines that deal with causal relationships rather than historical ones — like mathematical linguistics, which uses models to analyze the structure of language. “These sciences did not exist five or ten years ago,” he says. “They became possible because of humongous computational improvements.”
However, most quant shops aren’t exploring such fields because it means throwing considerable resources at uncertain results, Sogoloff says. Horton Point has found a solution by assembling a global network of academics whose research could be useful to the firm. So far the group includes specialists in everything from psychology to data mining, at such schools as the Beijing Institute of Technology, the California Institute of Technology and Technion, the Israel Institute of Technology.
Sogoloff tells the academics that the goal is to create the Bell Labs of finance. To align both parties’ interests, Horton Point offers them a share of the profits should their work lead to an investment strategy. Scientists like collaborating with Horton Point because it combines intellectual freedom with the opportunity to test their theories using real data, Sogoloff says. “You have experiments that can be set up in a matter of seconds because it’s a live market, and you have the potential for an amazing economic benefit.”
As he seeks to right his faltering hedge fund, Thales’s Fludzinski could stand to reap such rewards sooner rather than later. But he’s not losing sight of his quest to explain why markets do what they do — a goal that may require a leap of imagination. Just as quantum mechanics and the theory of relativity shook up the world of physics, Fludzinski says, “finance needs a similar out-of-the-box insight — something that changes the way we look at things.”
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Summer Solstice: How the Quants Fell Back to Earth
When quantitative hedge funds trading long-short equity strategies racked up big losses in August, Andrew Lo wasted no time weighing in. Lo, 47, is Harris & Harris Group Professor of Finance at MIT Sloan School of Management, where he directs the Laboratory for Financial Engineering. He is also co-founder of AlphaSimplex Group, a multistrategy quantitative hedge fund firm based in MIT’s hometown of Cambridge, Massachusetts, and has a long-standing research interest in the hedge fund industry’s vulnerability to systemic shocks.
A month after the blowup, Lo and his student Amir Khandani released the first draft of a paper called “What Happened to the Quants in August 2007?” Their hypothesis: Last summer’s losses resulted from the unwinding of one or more quantitative equity market-neutral portfolios. Because the price impact was so swift and dramatic, the unwinding probably began with a sudden liquidation by a large multistrategy fund or proprietary trading desk, perhaps to cut risk or meet margin calls on a credit portfolio. Most of the damage occurred from August 7 to August 9, when many funds started selling to reduce their risk. By deleveraging, these firms missed the bounce back in equities on August 10.
Lo and Khandani had no data from the quant shops themselves, so they created a simulated long-short equity strategy and then compared it against the individual and aggregate performance of hedge funds in the Lipper TASS database. Using their test strategy’s performance as a “microscope,” Lo says, they also compared August 2007 with August 1998, when Greenwich, Connecticut–based Long-Term Capital Management and other fixed-income relative-value hedge funds suffered a similar meltdown.
Like the sequence of events in 1998, which were triggered when Russia defaulted on its bond payments, last summer’s troubles were precipitated by a credit crunch. But this time around, Lo says, a shock in one area — subprime mortgages and credit portfolios — infected a completely unrelated sector of the market.
The events of August 2007 had a big impact on equity prices; those of August 1998 had none at all. (In 1998 the Standard & Poor’s 500 index was up 28.6 percent; last year the S&P was up just 5.5 percent.) “What that tells us is that the hedge fund space is very, very crowded,” Lo says. “The economy is much more sensitive to shocks in the hedge fund sector than ever before. This is proof positive that systemic risk has increased.”
In 1999, Lo launched AlphaSimplex after developing quantitative models as a consultant to institutional and private investors. The firm’s first offering was a U.S. long-short equity fund for Greenwich-based Paloma Partners Management Co. In late 2003, AlphaSimplex opened a global long-short fund to multiple investors. Last September, Paris-based Natixis Global Asset Management acquired the firm, which has 20 employees and manages $550 million in assets. Lo has stayed on as chief scientific officer and chairman.
Lo’s dual career as an academic and a hedge fund manager grew out of his pioneering research in fields as disparate as statistics and psychology. A partnership with industry, his MIT laboratory receives funding from several investment firms, including Boston’s State Street Global Advisors and Newport Beach, California–based Pacific Investment Management Co., both of which offer absolute-return strategies.
Lo says he’s not surprised that statistical arbitrage and other quant strategies got slammed last summer. “Quant funds by their nature are going to be invested in mostly liquid strategies, and so when we have massive liquidations, they’re going to be first in line to take their licks,” he explains.
To protect themselves, Lo says, quant funds must understand their exposure to future sell-offs. That means paying close attention to the relationship between liquidity and their strategies’ expected returns. “We can’t forecast with any degree of accuracy when the next LTCM is going to hit,” Lo says. “But we can tell when certain market conditions are ripe for a dislocation and gradually try to adjust our risk exposures to take that into account.”
Lo believes that forecasting such disruptions will remain a problem — at least until hedge fund firms surrender more-detailed information. “The hope is that if we can get more data for both investors and managers to use, we will be able to avoid this kind of mad rush to the exits in the future,” he says. — N.R.
Posted Sunday, April 13, 2008
Lehman US$350 million lawsuit threatens Marubeni's credibility
April 3, 2008
TOKYO (AP) -- Fake business cards, impostors at meetings and forged documents stamped with the company seal are behind what appears to be an elaborate scam that Lehman Brothers in Japan alleges bilked it of millions of dollars in vanished investment money.
The alleged fraud is at the center of a US$350 million lawsuit Lehman Brothers Holdings Inc. filed Monday in Tokyo, which has ensnared one of the biggest names in Japan's road to modernization and economic power -- trading house Marubeni Corp.
Additional victims are popping up. And analysts say the unfolding scandal is a wake-up call about imperfect corporate governance and monitoring of rogue employees while this relatively insular nation is trying to attract foreign investment.
It is also a major embarrassment for Lehman, which is struggling to assuage investor worries that it doesn't have the same problems as Bear Stearns Co., which is being bought by JP Morgan Chase & Co.
On Tuesday, Lehman said it had raised US$4 billion in new capital to shore up its liquidity position.
But if the tale of massive deceit -- as pieced together from various parties -- is true, Marubeni appears headed for an even bigger embarrassment that could raise serious questions about its credibility, internal controls and corporate governance.
According to a person familiar with the case, Lehman was approached in August last year about investing in a health care business led by a man who was then the head of Asclepius Ltd., a little-known Tokyo medical consulting company, which has since gone bankrupt.
After Lehman invested some 35 billion yen (US$350 million) in a hospital renovation project, it never got back more than a tiny part of the money it had been promised.
Lehman assumed the deal was backed by Marubeni because documents had the official company seal and meetings with Marubeni employees were at the company office, according to the person, who asked not to be identified because of the case's sensitivity.
A day after Lehman filed its suit, Medcajapan Co., a Japanese nursing care provider, said it lost 3.5 billion yen (US$35 million) lent to a project related to Asclepius that Medcajapan believed was backed by Marubeni.
FinTechGlobal Inc., a Japanese technology investor, says it may have been duped out of 2.2 billion yen (US$22 million) in a similar scheme involving Asclepius and Marubeni.
Marubeni denies it's obligated to repay Lehman. It says two Marubeni employees, who have since been dismissed, were merely victims. At least one individual who claimed to be a Marubeni official appears to have been an impostor with a fake business card, the person said.
Boston-based Aite Group senior analyst Phillip Silitschanu says the case shows Lehman needs to strengthen risk controls.
"Lehman Brothers has a legitimate claim against Marubeni, for allowing two 'rogue borrowers' within the firm to forge documents, forge seals and forge a deal -- costing a not so shabby US$352 million," he said in an e-mail.
"Once mighty firms such as Societe Generale and Lehman Brothers are now having to face that even they are not immune to the risks a nefarious employee can pose," he said, referring to the more than US$7 billion rogue-trader scandal that surfaced earlier this year at the French bank.
Koetsu Aizawa, economics professor at Saitama University, says the scandal underlines the zealousness at trading companies, which are struggling to regain their star role as brokers, increasingly on the wane as the market opens up.
During the heyday 1960s and the subsequent decades of Japan Inc.'s growth, Marubeni and other traders -- Mitsubishi Corp., Sumitomo Corp., Mitsui & Co. -- engineered government projects and foreign aid programs, and acted as consultants.
In the 1970s, Marubeni was embroiled in the Lockheed scandal that involved alleged bribery to a prime minister. Another high-profile bribery scandal surfaced in 1992.
Marubeni also has a reputation for what experts call a "silo" organization, in which sections are divided and know little about what other units are doing.
"Marubeni is inevitably going to be held responsible for oversight in managing its employees," Aizawa said, noting companies often shirk liability by claiming underlings acted on their own.
"The case involves big names like Lehman and Marubeni," he said. "It's astonishing how no one saw through such a blatantly ludicrous scheme."
Japan has had its share of large-scale white collar swindles.
In 1995, Sumitomo Corp. blamed at least US$1.8 billion in copper-trading losses on Yasuo Hamanaka, a star trader who had hidden bad trades for a decade. About the same time, bond trader Toshihide Iguchi racked up US$1.1 billion in losses at Daiwa Bank, much of it through unauthorized trades at its New York branch.
But the latest case is no less stunning for its audacity and scale.
Posted Wednesday, April 16, 2008
LIBOR FOG
Bankers Cast Doubt
On Key Rate Amid Crisis
By CARRICK MOLLENKAMP
April 16, 2008
LONDON -- One of the most important barometers of the world's financial health could be sending false signals.
In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London inter-bank offered rate, known as Libor, is becoming unreliable.
Libor plays a crucial role in the global financial system. Calculated every morning in London from information supplied by banks all over the world, it's a measure of the average interest rate at which banks make short-term loans to one another. Libor provides a key indicator of their health, rising when banks are in trouble. Its influence extends far beyond banking: The interest rates on trillions of dollars in corporate debt, home mortgages and financial contracts reset according to Libor.
In recent months, the financial crisis sparked by subprime-mortgage problems has jolted banks and sent Libor sharply upward. The growing suspicions about Libor's veracity suggest that banks' troubles could be worse than they're willing to admit.
The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That's good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.
True Borrowing Costs
No specific evidence has emerged that banks have provided false information about borrowing rates, and it's possible that declines in lending volumes are making some Libor averages less reliable. But bankers and other market participants have quietly expressed concerns to the British Bankers' Association, which oversees Libor, about whether banks are reporting rates that reflect their true borrowing costs, according to a person familiar with the matter and to government documents. The BBA is now investigating to identify potential problems, the person says.
Questions about Libor were raised as far back as November, at a Bank of England meeting in which United Kingdom banks, the firms that process bank trades and central bank officials discussed the recent financial turmoil. According to minutes of the meeting, "several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress." In a recent report, two economists at the Bank for International Settlements, a sort of central bank for central bankers, also expressed concerns that banks might report inaccurate rate quotes.
On the Agenda
A spokesman for the BBA, John Ewan, said the trade group is monitoring the situation. "We want to ensure that our rates are as accurate as possible, so we are closely watching the rates banks contribute," Mr. Ewan said. "If it is deemed necessary, we will take action to preserve the reputation and standing in the market of our rates." Libor is expected to be on the agenda of a bankers' association board meeting on Wednesday.
In a recent research report on potential problems with Libor, Scott Peng, an interest-rate strategist at Citigroup Inc. in New York, wrote that "the long-term psychological and economic impacts this could have on the financial market are incalculable." Mr. Peng estimates that if banks provided accurate data about their borrowing costs, three-month Libor would be higher by as much as 0.3 percentage points.
A small increase in Libor can make a big difference for borrowers. For example, an extra 0.3 percentage points would add about $100 to the monthly payment on a $500,000 adjustable-rate mortgage, or $300,000 in annual interest costs for a company with $100 million in floating-rate debt. On Tuesday, the Libor rate for three-month dollar loans stood at 2.716%.
Libor has become such a fixture in credit markets that many people trust it implicitly. Concerns about its reliability are "actually kind of frightening if you really sit and think about it," says Chris Freemott, a Naperville, Ill., mortgage banker who depends on Libor to tell him how much his firm, All America Mortgage Corp., owes First Tennessee bank for a credit line that he uses to make loans.
The Libor system was developed in the 1980s. Banks were looking for a benchmark that would allow them to set rates on syndicated debt -- corporate loans that typically carry interest rates that adjust according to prevailing short-term rates. By pegging lending rates to Libor, which is supposed to represent the rate banks charge each other for loans, banks sought to guarantee that the interest rates their clients pay never fall too far below their own cost of borrowing.
Banks typically set their lending rates at a certain "spread" above Libor: A company with decent credit, for example, might pay an interest rate of Libor plus one-half percentage point. A risky "subprime" mortgage loan might carry an interest rate of Libor plus more than six percentage points.
Today, Libor rates are set for 15 different loan durations -- from overnight to one year -- and in 10 currencies, including the pound, the dollar, the euro and the Swedish krona. They serve as the basis for payments on trillions of dollars in corporate loans, mortgages and student loans. Libor rates are also used to set the terms of more than $500 trillion in "derivatives" contracts such as interest-rate swaps, which companies all over the world, including U.S. mortgage guarantors Fannie Mae and Freddie Mac, use to protect themselves against sudden shifts in the difference between long-term and short-term interest rates.
When banks want to borrow money, they contact banks directly or phone a loan broker, such as ICAP PLC in London. Much of the interbank lending takes place between 7 a.m. and 11 a.m. London time. In broker speak, a bank might ask for a "yard" -- one billion in a designated currency. Brokers communicate with bank clients by phone or through desktop voice boxes, which are faster. At ICAP, brokers track bids and offers by looking up at a big whiteboard above the trading floor, where a "board boy" posts information. The actual rates at which banks borrow from each other are known only to the lenders and borrowers, and possibly to their brokers.
Every morning by 11:10 London time, "panels" of banks send data to Reuters Group PLC, a London-based business-data and news company, on what it would cost them to borrow a "reasonable amount" in a designated currency. The dollar Libor panel, for example, consists of 16 banks, including U.S. banks Bank of America Corp. and J.P. Morgan Chase & Co. and U.K. banks HBOS PLC and HSBC Holdings PLC. Reuters uses the reported borrowing rates to calculate Libor "fixings." To reduce the possibility that any bank could manipulate an average by reporting a false number, Reuters throws out the highest and lowest groups of quotes before calculating averages.
Justin Abel, global head of data operations for Reuters, said in a statement that his company's role is solely to calculate fixings based on the information provided by banks. "It is their data alone we distribute. Reuters is purely the facilitator," he said.
Wary of Lending
The global financial crisis that began last summer has made it more difficult for banks to package and sell all kinds of loans as securities, as well as to issue bonds and short-term IOUs to investors. Increasingly, banks have turned to the interbank market to borrow cash. But their mounting losses on mortgage securities and other investments have raised fears that a major institution could go bust. That's made banks increasingly wary of lending to one another.
Such jitters have made many banks unwilling to extend loans to each other for more than one week. As a result, the rates they quote for loans of three months or more are often speculative, because there's little to no actual lending for that time period, brokers say. "It amounts to an average best guess," says Don Smith, an economist at ICAP, the London broker of interbank loans and derivatives.
These bank problems are proving costly to other kinds of borrowers around the world. One way to measure the rough cost is by comparing the three-month Libor rate with an interest rate that doesn't reflect worries about banks' financial health -- such as the yield on a three-month Treasury bill, which is backed by the U.S. government. The gap between the two stood at 1.58 percentage points Tuesday, and has averaged 1.39 percentage points since the crisis began in August. In the five years before the financial crisis started, it averaged only 0.28 percentage points.
Citigroup's Mr. Peng believes banks could be understating even those abnormally high Libor rates. He notes that the Federal Reserve recently auctioned off $50 billion in one-month loans to banks for an average annualized interest rate of 2.82% -- 0.1 percentage point higher than the comparable Libor rate. Because banks put up securities as collateral for the Fed loans, they should get them for a lower rate than Libor, which is riskier because it involves no collateral. By comparing Libor with that indicator and others -- such as the rate on three-month bank deposits known as the Eurodollar rate -- Mr. Peng estimates Libor may be understated by 0.2 to 0.3 percentage points.
Other Benchmarks
In one sign of increasing concern about Libor, traders and banks are considering using other benchmarks to calculate interest rates, according to several traders. Among the candidates: rates set by central banks for loans, and rates on so-called repurchase agreements, under which borrowers provide banks with securities as collateral for short-term loans.
In a report published in March by the Bank for International Settlements, economists Jacob Gyntelberg and Philip Wooldridge raised concerns that banks might report incorrect rate information. The report said that banks might have an incentive to provide false rates to profit from derivatives transactions. The report said that although the practice of throwing out the lowest and highest groups of quotes is likely to curb manipulation, Libor rates can still "be manipulated if contributor banks collude or if a sufficient number change their behaviour."
Posted Wednesday, April 16, 2008
Criminals target energy, financial markets, Mukasey says
Terry Frieden
April 23, 2008
WASHINGTON (CNN) -- Attorney General Michael Mukasey warned Wednesday that organized criminal networks have penetrated portions of the international energy market and tried to control energy resources.
In a speech at the Center for Strategic and International Studies in Washington, he said similar efforts have targeted the international financial system by injecting billions of illicit funds to try to corrupt financial service providers.
Mukasey then vowed to beef up U.S. efforts to fight international organized crime, which he called a growing threat to U.S. security and stability.
The attorney general and top law enforcement officials from the FBI, Immigration and Customs Enforcement and the Justice Department Criminal Division said a classified threat assessment prompted the creation of a strategy to combat the threat.
It calls for several U.S. agencies and their overseas counterparts to better prioritize their targets, to improve information sharing and to boost cooperation in law enforcement investigations and operations.
"The activities of transnational and national organized criminal enterprises are increasing in scope and magnitude as these groups continue to strengthen their networking with each other to expand their operations," said FBI Deputy Director John Pistole.
Officials declined to discuss specific cases because the information remains classified, and disclosure could jeopardize ongoing investigations.
However, the International Organized Crime Threat Assessment identified eight general strategic threats from international organized criminals:
• The penetration of the energy market and other strategic sectors of the U.S. and world economy. As U.S. energy needs continue to grow, so, too, could the power of those who control energy resources.
• Providing logistical and other support to terrorists, foreign intelligence services and foreign governments, all with interests harmful to those of U.S. national security.
• The trafficking in people and contraband goods, bringing people and products through U.S. borders to the detriment of border security, the U.S. economy, and the health and lives of those exploited.
• The exploitation of the U.S. and international financial system to move illegal profits and funds, including sending billions in illicit funds through the U.S. financial system each year. To continue this practice, they seek to corrupt financial service providers globally.
• The use of cyberspace to target U.S. victims and infrastructure, jeopardizing the security of personal information, the stability of business and government infrastructures and the security and solvency of financial investment markets.
• The manipulation of securities exchanges and engaging in sophisticated fraud schemes that rob U.S. investors, consumers and government agencies of billions of dollars.
• The successful corruption of public officials around the world, including countries of vital strategic importance to the United States, and continuing efforts to find ways to influence -- legally or illegally -- U.S. officials.
• The use of violence and the threat of violence as a basis of power.
Posted Thursday, April 24, 2008
Insider trading at Nomura
April 26, 2008
The arrest of an employee of Nomura Securities Co. along with two acquaintances on suspicion of committing insider trading could lead not only to a loss of customers' confidence in the major securities house but also to the undermining of investor trust in Japanese stock markets. The incident points to a need to strengthen the education of employees of securities houses regarding regulations and to improve in-house systems to ensure they comply with them.
The Nomura employee, a Chinese man who studied at a Japanese university, joined the company in February 2006. He worked with the firm's corporate information division until December before being transferred to Hong Kong. The division is in charge of dealing with information on corporate mergers, acquisition and takeover bids — a growing business field.
The employee apparently took advantage of the firm's intention to let him have as much experience as possible through on-the-job training. He served as an assistant to more experienced employees, and was given access to confidential information. The Securities and Exchange Surveillance Commission suspects that he started engaging in illegal acts about four months after he joined Nomura.
He is suspected of having passed on information about planned M&A deals and tender offers to two Chinese brothers before the information was made public, enabling them to carry out lucrative stock trades using accounts opened outside Nomura — a method that made it difficult for Nomura to detect their illicit activities. The trio reportedly earned about ¥50 million.
The arrest of the trio came shortly after the government submitted to the Diet a bill to revise the Financial Products Transactions Law to roughly double the fines for insider trading. But the law revision may not be enough to prevent it. Employees working for a division handling information on M&A need to have high standards of professional conduct and morals. Nomura needs to scrutinize its education of employees and bolster its internal controls. In addition, all Japanese securities firms must strive to enhance the transparency of Japan's stock markets.
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Subprime woes send Nomura to ¥67.8 billion loss
By KANAKO TAKAHARA
April 26, 2008
Nomura Holdings Inc. said Friday it booked a group net loss of ¥67.8 billion in the business year ended in March due to losses related to U.S. subprime mortgage loans and falling stock prices.
The loss is a far cry from the previous year, when the nation's largest brokerage took in ¥176 billion in profits.
Because of the credit crunch in the U.S., Nomura was blindsided by the deteriorating state of monoline insurers it had hired to hedge its risk.
Monoline insurers provide insurance for trillions of dollars in bonds.
One of the monoliners faltered so badly that Nomura needed to set aside about ¥132 billion in the January-March quarter, forcing the brokerage to post a net loss.
But Nomura hinted that it would not need to book big losses in the future, having already set aside a big chunk of capital in the business year that ended in March.
"We've done everything possible at this moment based on accounting regulations," said Masafumi Nakada, Nomura's chief financial officer. "We've taken a conservative stance."
Nomura's sales dropped 22.2 percent to ¥1.59 trillion while pretax profit was ¥64.6 billion, down from ¥321.8 billion the same period last year.
In addition to the ¥132 billion it set aside, Nomura said it booked a total loss of ¥130 billion in securities products related to the subprime mortgage loan in business 2007.
The falling profits dealt another blow to Nomura, which saw one of its employees arrested on Wednesday on charges of insider trading.
Nakada began the news conference by bowing deeply and apologizing for the insider trading allegation.
"We deeply apologize for causing such a situation," he said. "We will do our utmost to regain customer confidence."
Nomura set up a special committee Friday of two outside board members and a lawyer to investigate information management in the investment banking section and come up with measures to prevent a recurrence.
Posted Saturday, April 26, 2008
Gold 'Futures' Trader Found Guilty of Fraud
Liantai Gold lawyers might appeal after a court said the firm illegally traded gold before the official Shanghai futures market opened last year.
By Shen Hu and Wang Zhen
April 22, 2008
Five executives from a Shanghai gold trading company will spend up to 66 months in prison and pay heavy fines after being convicted of trading in precious metal futures without regulatory approval.
Prosecutors said the executives with Shanghai Liantai Gold Products Co. Ltd. engaged in illegal “disguised futures trading” more than a year before the Shanghai Futures Exchange was officially opened to gold trading in January. The case involved about 20 billion yuan.
Liantai lawyer Liu Bing told Caijing his client may appeal the April 17 decision by a Shanghai Huangpu District court before an April 27 deadline.
Lead defendant and company co-founder Wang Hao got 5 1/2 years in prison and a 500,000 yuan fine. The court also slapped four of Wang’s colleagues with jail terms and fines, and fined the company 1 million yuan.
According to the ruling, Wang and three partners established Liantai in March 2004 with fabricated registered capital of 4 billion yuan. Two years later, through another fraudulent practice, the partners misreported the capital base by an additional 30 million yuan.
Later, without regulatory permission, Liantai launched its own gold futures trading, before regulators cleared the way for futures trading to supplement a spot commodity market that allowed Chinese investors to pay cash for gold deliveries.
Within two years of Liantai's launch, the company had 723 customers -- nearly one-third from Shanghai -- and 69 million yuan in margin accounts. Under Wang’s leadership, Liantai opened 17 trading windows across the country and publicly declared itself a qualified futures brokerage firm and member of the Shanghai Gold Futures Exchange.
Company lawyers argued that selling and buying gold through Liantai was not futures trading but spot commodity trading with delayed settlements. Liu argued the practice was “non-concentrated trading,” which means trades were not based on competitive pricing.
Authorities did not define “disguised futures trading” until April 15, 2007. A regulation said any institution that conducts contractual trading without regulatory approval could be found guilty of the illegal practice if it had provided a guarantor for seller and buyer, and a single margin account was less than 20 percent of a contract's target. Liantai's activity met the criteria.
Shanghai prosecutors first accused Liantai of operating an illegal business last July. It's unclear who blew the whistle.
1 yuan = 14 U.S. cents
Posted Sunday, April 27, 2008
Report: UK competition watchdog investigating alleged price fixing at major supermarkets
April 27, 2008
LONDON (AP) - Britain's competition watchdog is investigating allegations of price fixing at the country's largest supermarkets, a newspaper reported.
The Sunday Telegraph said Tesco PLC, Wal-Mart Inc.'s Asda, J Sainsbury PLC and Morrison Supermarkets PLC were among those targeted by Britain's Office of Fair Trading. The paper said the supermarkets' offices - and those of their suppliers - were raided by officials examining allegations that they colluded to fix the prices of groceries, health, and beauty products.
The report was carried in a preview of Sunday's paper made available late Saturday. The Sunday Telegraph did not cite a source for the information, and the Office of Fair Trading declined comment.
"We don't comment when we've got an investigation under way," a spokeswoman for the office said. She spoke anonymously in line with government policy.
Tesco denied any wrongdoing, saying in an e-mail statement that it was surprised by the allegations. A spokeswoman for Sainsbury's declined to comment, while no one picked up the phone at press offices for Asda or Morrison. The Office of Fair Trading has taken a hard line on anticompetitive practices in recent years. In the past two weeks alone the regulator accused tobacco companies and several major retailers of colluding on cigarette prices and named more than 100 construction companies in a major investigation into bid-rigging.
The office can give warnings or orders, but also has the power to take legal actions or impose financial penalties.
Last year the office fined a group of supermarkets and dairy firms, including Asda and Sainsbury's, more than 116 million pounds (US$229 million; euro147 million) after they admitted fixing prices on dairy products.
The same year, the office also fined British Airways PLC 121.5 million pounds (US$240 million; euro154 million) after the airline admitted to colluding with rival Virgin Atlantic over fuel surcharges on long-haul flights. - AP
Posted Sunday, April 27, 2008
Gangsters manipulating oil price!
By Paul Murphy
April 25th, 2008
THREAT 1: International organized criminals have penetrated the energy and other strategic sectors of the economy. International organized criminals and their associates control significant positions in the global energy and strategic materials markets that are vital to U.S. national security interests. They are now expanding their holdings in the U.S. strategic materials sector. Their activities tend to corrupt the normal workings of these markets and have a destabilizing effect on U.S. geopolitical interests.
So warns the Overview of the Law Enforcement Strategy to Combat International Organised Crime, on the back of a long and thoroughly alarmist speech to the Center for Strategic and International Studies in Washington by US attorney general Michael Mukasey.
The general theme is that Mukasey, his law enforcement colleagues, and the US population at large face a global conflux of terrorists, mobsters, east Europeans and LatAm revolutionaries that puts historical threats like the Mafia into the shade.
On the gangsters-running-commodity-markets theme, the US Department of Justice cites the example of one Semion Mogilevich who, with several members of his criminal organisation who were charged in 2003 in the Eastern District of Pennsylvania in a 45-count racketeering indictment for their involvement in a sophisticated securities fraud and money laundering scheme.
Published reports state that since that indictment and being placed on the FBI most-wanted list, Mogilevich has continued to expand his criminal empire, to the point where he is said to exert influence over large portions of the natural gas industry in parts of the former Soviet Union. Many commentators have noted the significant role that area of the world plays in global energy markets. Mogilevich was arrested by Russian police on tax charges in January 2008. Other members of his organization remain at large.
Mukasey’s other worries:
THREAT 2: International organized criminals provide logistical and other support to terrorists, foreign intelligence services and governments.
THREAT 3: International organized criminals smuggle/traffic people and contraband goods into the United States.
THREAT 4: International organized criminals exploit the U.S. and international financial system to move illicit funds.
Threat 5: International organized criminals use cyberspace to target U.S. victims and infrastructure.
THREAT 6: International organized criminals are manipulating securities exchanges and perpetrating sophisticated frauds.
THREAT 7: International organized criminals corrupt and seek to corrupt public officials in the United States and abroad.
THREAT 8: International organized criminals use violence and the threat of violence as a basis for power.
Clearly, it’s a dangerous world out there.
Posted Monday, April 28, 2008
He won't say sorry
'IT'S NOT MY FAULT'
• Man causes crash after slamming brakes to insert CashCard
• Woman biker rushed to ICU, suffers memory loss
By Chong Shin Yen
April 29, 2008
HE stopped his car abruptly on the fast lane of a busy highway to insert his CashCard.
And it caused an accident that left a woman seriously injured.
But to Mr Lim Huang Khim, 45, it was the 'natural thing' to do. He does not think he did anything wrong.
This, despite being fined for his inconsiderate driving that caused a motorcyclist to slam into the car behind him - which had braked in time to avoid hitting Mr Lim's car.
This, despite a judge ruling in a civil suit that Mr Lim was 50 per cent liable for the accident.
The motorcyclist, Miss Tiong Zhen Cheng, 33, was flung more than 20m and landed beside Mr Lim's car.
The sales executive was warded in the intensive care unit and spent about a week in hospital. She still suffers pain and some memory loss.
Miss Tiong ended up being sued by the driver of the second car, Mr Lye Chiew Meng, for the damage to his Toyota.
His rear windscreen was shattered and the repair bill came to $7,000.
But her insurance company felt Mr Lim should also be liable and he was named as the third party in the civil suit.
SMILED MANY TIMES IN COURT
Earlier this month, Mr Lim, who works as a driver, insisted he was not to blame and smiled several times as he recounted the accident on the stand.
He was chided by District Judge Lim Wee Meng for his cavalier attitude.
Judge Lim said: 'I don't think it's funny. Someone was seriously injured and I don't think it's funny at all.'
The accident happened around 7.50pm on 29 Nov 2006 on the Central Expressway, just before the Electronic Road Pricing (ERP) gantry near the Braddell exit.
Mr Lim was driving a rented silver Mitsubishi car and was travelling on the extreme right lane on his way home with his wife and four children.
When he saw that the gantry was activated, he switched on the car's hazard lights and stopped to slot in his CashCard.
Mr Lye, a finance manager, who was behind him, managed to stop in time. But Miss Tiong's 400cc Honda motorbike crashed into Mr Lye's car.
When cross-examined by Miss Tiong's lawyer, Mr Lim maintained that he was not at fault.
Her lawyer, Mr William Chai, asked: 'A car was damaged, a person was severely and mentally injured, are you saying you are not responsible? Not even 1 per cent?'
Mr Lim replied: 'I'm saying that I'm totally not to be blamed.'
He told the court that he had not inserted his CashCard into the in-vehicle unit (IU) earlier because he did not know that the ERP gantry was activated at that time.
When asked if seeing the activated gantry was a big surprise, Mr Lim said he had seen it from afar and was trying to insert the CashCard in time.
He also told the court that he did not see Miss Tiong's bike behind Mr Lye's car.
He admitted that following the accident, he had purposely left out in his police report the reason for stopping his car as he knew that it was an offence.
Mr Lim, who has been driving for 24 years, was fined $200 by the Traffic Police for inconsiderate driving and given nine demerit points.
But in his affidavit tendered to the court, he said: 'I decided to pay the $200 out of convenience even though I do not believe that I should be responsible for the accident.
'I did not want the trouble to engage a lawyer to contest the claim because this would be time-consuming and the legal fees would definitely exceed $200.'
In contrast, Mr Lye was apologetic about what happened to Miss Tiong. His lawyer, Miss Bonnie Kwok, told the court: 'My client would like to extend his sympathies to Miss Tiong.'
She also said that while Mr Lye could clearly see the traffic conditions in front of him, Miss Tiong could not.
Said Miss Kwok: 'It's not a situation whereby the vehicles were approaching a traffic light junction, so there's no reason for Miss Tiong to anticipate a sudden stopping.
'Mr Lim had created a dangerous situation. I found it rather distasteful that Mr Lim's demeanour in court showed that he couldn't be bothered that Miss Tiong had suffered severe injuries and trauma.'
Before giving his verdict, the judge pointed out that Mr Lim could have gone through the ERP gantry and paid an administrative fee of $10 for not having a CashCard.
LIABLE FOR DAMAGE
He ruled that Mr Lim and Miss Tiong were each 50 per cent liable for the damage caused to Mr Lye's car.
When contacted by The New Paper, Mr Lim insisted that he was not in the wrong.
He said in Mandarin: 'Are you a driver? Have you driven a car before?
'If you have, you should know that it's a driver's natural reaction (when you see an activated gantry).
'You can't say it's right or wrong because there's no right or wrong in such situations. I did switch on the hazard lights to warn the vehicles behind me.'
Mr Lim said that he felt sorry for the injured Miss Tiong, though he did not speak to her in court.
'She might think that I have an ulterior motive if I went up to her and apologised,' he said.
Just two days before the accident involving Miss Tiong, Mr Lim said he was involved in a similar accident along the East Coast Parkway.
Mr Lim told The New Paper that the car in front of his had slowed down suddenly.
'So I also braked and stopped my car to take a closer look at what the driver was up to and to take down his licence plate number,' he said.
'But the car behind me couldn't stop in time and ended up crashing into the rear of my car.'
Mr Lim said the first car then drove off. His car, a Honda Stream, ended up at the workshop for five days.
That was why he was driving a rented car, which did not have a CashCard in the IU.
Mr Lim added: 'If I was driving my car, this wouldn't have happened because I always have the CashCard inside the IU.'
Posted Tuesday, April 29, 2008
SAC Ciptal trader Case Closed
May 01, 2008
The EEOC closes an investigation into the sexual assault case involving a trader allegedly forced to take female hormones, with CNBC's Charlie Gasparino
Posted Wednesday, May 01, 2008
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