1. Another SAC Capital trader gets arrested (here) for insider trading in one of longest running investigations in a while.
2, Judge lets banks off the hook for some LIBOR cases. This is interesting, banks have paid fines and acknowledged LIBOR manipulations, but some private lawsuits against them are dismissed (here). Perhaps they were frivolous.
3. El Arian (here) comes out saying the obvious (about POMO) and that it will continue. Obvious or not, he says it well, I particularly liked one of his colleagues’ notion of “assisted” growth.
4. Today appears to be my day for catching up on legal things. I generally stay away from commenting on social issues, but this story on Justice Robert’s peculiar defense of the Defense of Marriage Act and this story of Justice Scalia misrepresenting sociologists in his critique of gay adoption caught my eye.
5. Felix Salmon, who I haven’t read for a while has at least two fascinating stories that caught my eye. The first is about the Federal Helium Reserve (here). We know about the oil reserve but helium! As he concludes perhaps not facetiously, this is another market the Federal Govt has to get out of, you know like the mortgage market.
6. And the second is a legal situation involving Argentinian sovereign debt with more legal eagles Ted Olson and David Boies (here), (here) and in other places.
As the pump and dump continues, here is a partial (?) list of hedging alternatives for equity exposure. Thinking non-derivatives, your choices broadly are: a) some kind of bond fund; b) some kind of volatility ETF; c) some kind of inverse or 2x or 3x ETF; d) acurious ETN from Barclays that I came across, that does some kind of dynamic allocation between stocks, bonds and cash (here). Once you throw derivatives into the mix your choices are: a) index futures, we already saw these along with the tracking error and’ b) index options that we are beginning to explore.
And a Bloomberg update on Monte Paschi of Siena who is expected to report a € 760 million loss this week (here).
Shades of 2009 in the Cyprus proposal taking shape over the weekend. Much has been written about the good bank/bad bank idea since then, it is easier for me to redirect you to some good primers (here) and (here). Naked Capitalism sets the record straight in terms of the tax have status of Cyprus (here). A Sheila Bair interview on US banking regulation (here).
The Senate Report on the London Whale Derivatives Trades that I mentioned in class is here. It is titled “A Case History of Derivatives Risks and Abuses.”
Note that the deal was a synthetic CDO, so the cash flows that are sliced and distributed come from CDS premiums on sub-prime MBS (not directly as cash flows from mortgages). Either way it is the same bet-being long the mortgages or selling insurance on them (which is a bet that they won’t default). Who is paying these premiums? Any buyer of CDS who thinks the underlying mortgages are going south. Could that have been Paulson? Must be in the complaint somewhere.
a) GS was aware of these investigations because of a Wells Notice, sent them in December 2009. Still it looks like they made some reactive comments that may make them look bad. Its not as much the fraud that catches you as the attempt made to cover it up.
b) Bear Stearns apparently declined this deal on ethical grounds.
c) If this is all that the SEC comes up with, it is not a smoking gun, but a water pistol!
d) And a nice moralistic short story version HERE.
e) Notice how the VIX popped huge on Friday!!