Porsche's cornering puts the skids on the market

Porsche SEImage via WikipediaA tremendous amount of glee seemed to greet the news that Porsche had "outwitted" hedge fund managers and profited enormously from squeezing short sellers in VW stock.

On October 26th Porsche announced it owned nearly 43% of VW’s shares outright, up from 35% and had derivative contracts [options] on nearly 32% more. That meant it had tied up almost all of the freely available shares (the rest are held by the state government and index funds).

The car manufacturer had executed a classic squeeze by controlling a huge portion of the free float [available] stock in the market, leaving short sellers unable to borrow stock to cover their positions and thus leaving them scrambling for stock at any price to cover their positions. In doing so, VW briefly became the most "valuable" company in the world and Porsche may have made paper gains of €30 billion-40 billion according to the Economist. Not bad considering Porsche had a market value of €4 billion.

That a symbol of Germany industry pulled off such a stunt is apparently a great thing. But consider had the same strategy been executed by a hedge fund or a bank. It is inconceivable that the reaction would have been the same. Instead there would have been outpourings of hatred for a demonstrable case of market manipulation that led to great instability in the markets and undermined indices.

Astonishingly no German laws were broken, yet the concealment of such stake building is something that only this week the FSA has been praised for tackling, albeit to only a partial degree. On Thursday, the City watchdog announced existing share and contracts for difference holdings, in the same company, should be aggregated for disclosure purposes in order to address concerns in relation to voting rights and corporate influence. The existing regulations already include provision to cover disclosure of entitlements to acquire voting rights resulting from holding financial instruments, including transferable securities and options, futures, swaps, forward rate agreements and any other derivative contract referred to in Section C of Annex 1 of the Market in Financial Instruments Directive (MiFID) ( as per Disclosure and Transparency Rules 5.3.2).

Hence in the UK, Porsche would have been required to disclose its' aggregate build up of an interest in VW, including the options component. As the FSA stresses, the purpose of such disclosure rules is to avoid perceived market failures.

The German regulator, Bafin, has confirmed it will investigate the events relating to the sharp movements in VW shares to establish whether there was any market manipulations. I believe that a failure by Bafin to take action, or at least redraw the rules to bring Germany's rules into line with London, will be viewed poorly in international capital markets.


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I haven't fallen into a dark pool [of shares]

It was an easy mistake for those kind enough to send me congratulations to make - but sadly I'm not the John Wilson that has just been appointed to be the CEO of Baikal, the London Stock Exchange venture which plans to launch a dark pool for pan-European equities trading.

The future of the Baikal project has been in doubt following the collapse of the LSE's former joint venture partner Lehman Brothers. Planned to launch in early 2009, Baikal was going to utilise Lehman Brothers technology.

Apparently my namesake had previously served on the executive committees for both equities and fixed income and as head of equity and fixed income research at Lehman Brothers.

Good luck John Wilson.


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Legg Mason undone by money funds

Legg Mason, Inc.Image via WikipediaHaving pumped $2bn into their money funds within the last 12 months, Legg Mason's share price fell 78% over the same period and in the last quarter its' assets under management have fallen by a further 9% to $842bn.

Aside from money market fund troubles, their former star equity chief Bill Miller who outperformed the market for 15 years from 1991 has seen big reversals in the last few years in his main fund, "Legg Mason Value Trust". Between Jan-Jun 2008 it fell by over 28% and its' 10 year performance to Jun 2008 was lower than the S&P500.

Legg Mason operates funds under a range of brands operated by semi-autonomous fund management subsidiaries that tend to specialise in particular asset classes e.g. Western focusses on fixed income.

The Legg Mason sales and distribution teams will have a considerable uphill struggle to maintain existing business, let alone secure new wins. Their saving grace may be their ability to push product from other brands in their stable that have performed better and which have not been "tainted" with the current problems.
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IT contractors get squeezed

Following moves by RBS, Barclays, Deutsche Bank, Merrill Lynch and Nomura in demanding their IT contractors take a 10% pay-cut or lose the possibility of a contract renewal, JP Morgan has now demanded a 15% cut or else face being given notice.

In the current market, most contractors will have little choice but to agree, given the scarcity of roles available elsewhere.
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MF Global throws skipper overboard

Well it took six weeks for the coup to be completed, but MF Global finally ditched its' CEO today. Back in mid September, I wrote here about their Global COO having been jettisoned and doubting it would be enough to save Kevin Davis his job.

Bernard Dan, who led the Chicago Board of Trade for five years replaces Kevin. He joined MF Global in June as chief operating officer for North America and was promoted to global chief operating last month in place of Chris Smith before rounding off with the top job within two months.

Kevin has to be given enormous credit for building MF up from relatively nothing to a global player, ignoring the many doubters and critics along the way. He made mistakes including his late conversion to electronic broking and passing on the opportunity to pick up Instinet from Reuters on the cheap, which has since spawned Chi-X.

He was an exuberant character but ruthless with it and could be quick to judge - his dreadful handling of the hikes in margins on CFDs following the unauthorised trader loss in February was a case in point. He was a canny deal maker and acquired both Refco and GNI relatively cheaply, albeit the former proved to be his downfall since it included the unit that clocked up the unauthorised trading loss of $141m back in Feb 2008.

Kevin gets $7.5m severance to ease his pain, but will have lost considerably more than that on his share holding in the firm since it went public last year at $30 and which closed at $2.25 on Tuesday.

MF Global have also got a new Global Treasurer, David Dunne who was previously at Bear Stearns in London for 15 yrs, but who will be based in US. It's a smaller job than it once was given that $3.5bn of client funds have been withdrawn from MF since March according to JP Morgan.

Disclosure - I was previously a board director at Man Financial [which renamed itself to MF Global when it listed in July 2007].
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Morgan Stanley injects $23bn into Money Funds

Despite the US Government underwriting US domiciled money funds, Morgan Stanley had to inject $23bn cash into its money funds in September by buying securities such as US Treasuries to cover net redemptions on the funds which totalling $46bn, which is almost a third of the $134bn in such funds.

Morgan Stanley was able to refinance the purchases through a combination of depositing the assets with the Federal Reserve and via sales in the open market.

This action was to avoid the funds "breaking the buck", given the wave of redemptions which would have required liquidation of assets held by the funds in a climate of volatile prices.

I anticipate redemption levels will have been greatly reduced in October with the introduction of the Government guarantee that offers unlimited protection to investors in funds that have subscribed to the scheme. However, I also believe firms will still top-up funds to avoid breaking the buck, despite the scheme, given the reputational harm that would result from having to call on the guarantee scheme.

Presently, the regulatory capital requirement for fund management firms tends to be relatively low. The actions of firms in topping up funds may well prompt a review of whether their capital base is adequate to meet such reputational commitments, regardless of the actual legal wording that firms have no legal obligations to funds.

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A free conference without authority or community is a vacuum

Following my post here on a free conference I attended in the City of London last week which failed to pull much of an audience, I was contacted by someone at Fix Protocol who had read the piece and shared their own experiences. They gave me their permission to republish the email, which raised some interesting matters.

I read with interest the submission you had written about city conferences in the current climate and I would like to share with you some of my thoughts.

Your submission raised some very interesting and valuable points and as a not-for-profit organisation that is heavily focused on education, the formulation of events that enable us to communicate the issues, challenges and opportunities presented by electronic trading and use of the FIX Protocol are central to the effective delivery of this information to the financial community.

Last week FPL hosted two events in London and due to recent market developments we were nervous that this would cause us to struggle from an attendance perspective, however our fears proved unfounded. On Tuesday evening we hosted the Quarterly FPL EMEA Meeting which typically attracts 50-80 representatives from the FPL membership, including buy-side, sell-side, exchange/ECN and vendor participants. The meeting included a panel session entitled ‘The European Trading Environment: Can it Meet the Challenges of Current Market Conditions’ and was followed by networking drinks. This event attracted over 100 registrants and in the end we had to turn people away who wanted to register due to the space available, and on the evening we had 71 delegates attend. Additionally, on Wednesday we hosted a FIX Beyond Equities Briefing from 9am-2:30pm which explored the support offered by the protocol within the Fixed Income, Foreign Exchange and Derivatives space and we had 107 people attend which was great, as in planning the event we were hoping to achieve delegate numbers of approximately 80!


Further to this, on October 8th FPL held the FPL Japan Electronic Trading Conference in Tokyo which successfully attracted just over 500 delegates on the day. Still to come this year we have the China FIX Conference which will take place tomorrow and the annual FPL Americas Electronic Trading Conference in November, which in 2007 sold out completely and with an agenda that really focuses on the key issues impacting this market, it looks like it will be a great event yet again.

The one pattern that we have noticed is that with events at present expected numbers are a little lower than normal up until 10-14 days before the event, but within the last few days interest soars. Hence, what we are witnessing as an organisation is that market conditions are impacting people’s ability to plan to attend events in advance but so far from an FPL perspective they have not impacted numbers on the day.

Daniella Baker, FPL Marketing and Communications Manager www.fixprotocol.org


Firstly, I was delighted to hear FPL is still attracting good sized crowds to its' events. Having been involved with the European Marketing Group for the Fix Protocol some years ago, I know how hard the volunteers in the community work to promote the use of the "open source" message protocol and to stage events to inform, educate and debate on matters relating to Fix.

Based on Daniella's comments, I gave some thought as to why these events might be more succesful than others:
- Evening events outside of work. I'd expect these to do better as people will find it easier to attend outside of work and even if they do cut into the end of the work day, you can demonstrate your giving up some of your own time as well.
- Having been on the European Marketing Group several years ago, my experience was that FPL events have greater authority than similar commercial events and are more justifiable at work.
- FPL represents a community and whilst there are many motives at play for participating in the community [as with any such organisation], people tend to relegate their personal agendas because its' socially unacceptable i.e. FPL member peer pressure tends to eliminate corporate self-promotion and plugging one's own firm. I find the reverse happens at commercial events, especially when speakers have had to pay [directly or indirectly via sponsorship] to speak.
- The community aspect tends to make events more practically focussed e.g. how you can do "X" because the agenda's are put together by members rather than by professional conference organisers with no direct experience
- Speakers tend to be better at the community events because people are often more willing to speak at such events where no one is making "a buck", because they have gotten something out of past events or recognise the benefits the community brings
- Attendance at an FPL "community" event is a less haphazard mingling occasion and a good catch up opportunity with industry peers, in contrast to one-off conferences.

I think these matters are true of many community run events e.g. Barcamps or Open Source groups and will be why they succeed when commercial rivals do less well.
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Hurrah - Gmail now supports autoresponders

Image representing Gmail as depicted in CrunchBaseImage via CrunchBaseFinally, Gmail have announced a Labs feature which enables you to create email autoresponders. Entitled "canned responses", you can create email templates that can be used manually i.e. select email template to reply, or in combination with Gmail filters to autorespond to emails e.g. out of office

Up until now, only vacation autoresponders were provided within Gmail, so this is an excellent improvement.

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DTCC buys their way into Europe

After many years of fruitless toil in Europe [read London], DTCC has evidently decided to rapidly accelerate Diana Chan's attempt to build a clearing business for DTCC in Europe and is to buy LCH.Clearnet for €739 million. The announcement is here.

EuroCCP, DTCC's European subsidiary, had won business from Turquoise but in taking over one of the major European players, DTCC has instantly vaulted up the central counterparty league table in Europe. Interestingly, the existing LCH CEO, Roger Liddell whom I briefly worked with at Goldman, will be the CEO of the new combined European entity ["LCH.Clearnet HoldCo"].

Roger was made Head of Global Operations at Goldman Sachs in 2000. He was responsible for all businesses including equities, fixed income, foreign exchange, derivatives, commodities, asset management, prime brokerage and private wealth management. He is already very well known to DTCC as a consequence.

Where this leaves Diana Chan and her experienced COO, Trevor Spanner, is presently unclear.

I suspect that the combined entity in Europe will simply adopt LCH's systems, requiring Turquoise to migrate platforms. The larger question is to what extent DTCC will embark on the ambitious project to integrate the European infrastructure with the domestic US infrastructure.

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The greatest football match ever?

West Bromwich Albion crestImage via WikipediaWest Bromwich Albion go to Man Utd tomorrow with little hope of winning, but Hull have proved that sometimes Giants can fall in the Premier League.

It's been a long time since West Brom won at Old Trafford but one such win was the game below that still lives in the memory of many - even considered one of the best games ever by the Daily Mail, when West Brom pulled off an astonishing 3-5 win in the magical era of 1978. Ron Atkinson was West Brom Manager and Cyrille Regis and Laurie Cunningham were in devastating form, with Bryan Robson just emerging as a great player.




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Former Lehman staffer tells it how it is

A heartbreaking story of a former master of the universe coping with life after Lehman - gotta love it.



Brilliant satire.

Hat tip to The Big Picture.

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Excellent interview with Jon Stewart of the Daily Show

The Daily Show with Jon StewartImage by elkit via FlickrWhilst not a regular nightly viewer of the show, I always enjoy watching episodes of the Daily Show with Jon Stewart. Despite being US centric, its' portrayal of events provides a welcome alternative take from traditional news outlets and in a manner that makes telling points via a humorous delivery. People often soften a [non-physical] blow with humour but in the case of the Daily Show, it amplifies the point.

I happened to stumble across an excellent interview conducted by Bill Moyers, a highly regarded US TV journalist, with Jon Stewart which I recommend you watch here. Thirty minutes long, I found it to be fascinating viewing and worth setting time aside for.

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Even a free City conference can't pull an audience

City of LondonImage via WikipediaFinextra has run a conference in the City of London for a number of years, which has been free to elligible City folk and funded by sponsors and exhibitors.

Expensive conferences have been an early casualty of City cutbacks, so you'd expect a free conference to attract an audience desperate to network and hear words of wisdom about the turmoil.

Evidently not - the event only attracted about 50 people, considerably down on previous years. I heard a number of reasons cited

- free event is perceived as "low quality/value" (no reason for this to be true)

- quality of speaker line-up was diminished by large number of vendor presentations (true)

- past experience of the event was poor

- topic too narrow (execution management with an equity emphasis)

Yet the most notable reason I discerned was that all firms are under considerable stress, leaving little scope for people to "wander" along to events. Equally significant was that even if they could attend, people didn't do so because they didn't want to highlight that they had time to do so in case that made them vulnerable with job losses looming.

Heads down everyone.
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Leaving the trading screens to look at Gold [Silver & Bronze too]

The GB Olympic and Paralympic teams from Beijing will be parading through London today. It sets off from outside the Mansion House [Bank tube station] at 11am and makes its' way to Trafalgar Square via the route shown on the map below.


Details of the parade timings may be found here and travel details are here. Perhaps this will cheer folks in the City up, albeit for only a hour or so.

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Fidelity's Anthony Bolton - What's a SIV?

Writing an opinion piece for Hargreaves Landsdown, the legendary UK fund manager, made the following claim

"In nearly four decades of investment, I had never come across SIVs - special investment vehicles - until the past 12 months."

Now that sort of ignorance is worrying given he was someone who was running one of the largest UK investment funds for over 10 years.

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We7 - from Butterfly to Caterpillar

Image representing we7 as depicted in CrunchBaseImage via CrunchBaseI haven't logged in We7, the music site for over 9 months but was prompted to today when I received an email from the service advising that they were dramatically changing their model.

Their initial offering worked as follows
The economics were simple - advertisers got to directly place their message at a targeted audience, assured that their ads couldn't be avoided; artists got paid; customers got free music with the minor inconvenience of hearing ads for a short time.

Evidently their dealings with the large record labels has forced a re-working of the service with the consequence that the site emphasis is now on free streaming of specific tracks you choose, with adverts appended.
Only a small proportion of tracks appear to be available for download and this seems to excludes recent releases from major artists.

This is a dramatic reversal of approach, which I think is a retrograde move, and whilst always being online to access streamed content is increasingly possible thanks to a combination of broadband and "all you can eat" mobile data plans, there remains a large proportion of the population who
Where I do see that We7 has the edge over services like Finetune, Pandora and Last.fm, which are similar streaming services, is that you actually get to select the songs that you want to listen to in full, rather than samples or "stations". Whilst We7 lacks the "discovery" element that something like Pandora offers, the ability to listen to any track for free online means that exploring new tracks and artists isn't impeded in anyway. Of course, if you live outside of the US, you are presently barred from directly listening to Pandora thanks to licensing restrictions.

If you spend much time online or have unlimited broadband access at home and enjoy listening to music, I think that We7 is definitely worth adding to your bookmarks. Meantime, I hope they will be able to find a way for their original model to re-emerge.
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City employment levels to be decimated

According to a forecast from the Centre for Economics and Business Research (CEBR), financial firms in the City of London are set to cut 62,000 by the end of next year, taking employment back to levels last seen in 1998 falling from 353,000 in 2007 to 325,000 in 2008 and 291,000 in 2009.

It suggests that
Any suggestions for a retraining course I can take?

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Are Banks commiting to unwise lending practices?

RBS, LloydsTSB and HBOS have all committed to maintain the availability of SME and mortgage lending at least at 2007 levels as part of the Government share scheme, agreed over the weekend.

This implies a considerable expansion of lending over current levels, which has to be considered precarious entering a recession. Whilst lending criteria might be tightened i.e. Loan to Value ratio is going to be less than 95% etc, it is hardly going to improve the bad debt prospects for the banks.
Moreover given that this is now an explicit lending target, lending policies and rates will have to be adjusted to ensure it is met.

Obviously the Government is keen to ensure that the economy remains primed with access to credit but does LloydsTSB+HBOS really need to add to its' existing property market exposure. It may be politically expedient, but is it really good for new shareholders i.e. Us.
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HM Treasury get Buffett-style terms from the Banks

Extract from LloydsTSB regulatory news announcement this morning

HM Treasury will subscribe for £1.0 billion of Lloyds TSB preference shares. The preference shares will carry an annual coupon of 12% (non tax deductible), and will be callable after a period of five years.

Under the terms of the preference shares, the enlarged Group will be precluded from paying a cash dividend on its ordinary shares whilst any of the preference shares remain outstanding.

Not cheap financing for a Group that only two weeks ago was insisting it was in decent shape.


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Which is worse - market crash or divorce

Great quote on Paul Kedrosky's blog today

"This is market is worse than a divorce. I've lost half my net worth, yet I still have my wife."

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Market collapse caption time

I saw the above photo on Mashable under the heading of Financial Crisis in pictures. As you'll guess, most of the pictures involvement people looking bewildered or crestfallen.

But when I saw the one above I immediately thought of the guy in the picture saying....

"Hey, who shorted my hair?"



Your turn. The prize for the best entry is 20 Dec Kaupthing Calls at a strike of £10. Closing date 17 October 2008.

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Economic war between UK and Iceland

United Kingdom Chancellor of the Exchequer Gor...Image via WikipediaFollowing the collapse of Iceland's banking sector, the impact on the UK will have come as a considerable surprise to many. Yet the Icelandic banks have been aggressive players in the market for deposit and loans, as evidenced by the large number of depositors and borrowers affected.

The £1bn of deposits placed with Icelandic banks by Local Authorities, now at risk, will widen the pain across the UK via its' impact on local services. Similarly, many Charities will find themselves constrained because of their exposures.

Gordon Brown insists that Iceland has acted illegally with regard to failing to honour its deposit protection scheme and consequently has initiated measures to seize Icelandic assets.

This marks a dramatic escalation in events which will leave a deep scar on international relations. Notably, the UK actions will give a number of international companies operating in the UK cause for thought about emerging political risks, which they have probably never had to do before.



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Share indices are crumbling tonight

After some frenetic trading in the last few minutes, the Dow ended the day at 8579 having smashed through the psychological barrier of 9000.

Spread-betting quotes right now i.e. Thursday 2230h are showing the FTSE100 down 200 to approximately 4113, levels last seen in 2003. Whilst the levels are based on on thin trading and without the enormous liquidity during market hours, they foretell of a large fall on the open tomorrow unless Far East markets find some reason to turn the tide.


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Interest rate cut - the result

In response to this blog post on why I felt calls to cut interest rates missed the point, I was contacted by someone last night via the IM widget on this blog who pointed out that a number of banks had cut their rates, contrary to my theme.

My response was that we should wait and see what happened to the interbank rates tomorrow i.e. Thursday. Well, at today's LIBOR fixing the cost of borrowing in dollars for three months in London soared to the highest level this year to 4.75%. Overnight rates were over 5% versus a Fed target of 1.5%. Meanwhile the TED spread, which difference between what banks and the Treasury pay to borrow money for three months increased to 412 basis points.

In Hong Kong, Singapore and Japan money market rates rose to their highest levels in at least nine months.

Clearly the reductions in mortgage rates will feed directly down to borrowers and should improve their lot, yet do you think the beneficiaries will be most likely to a) spend it or b) save it. If it's the latter then please explain to me how this will improve things in the economy.

Moreover, whilst the rate reductions benefit those with certain mortgages, there has been a vast contraction in the number of mortgage approvals in the last 12 months - rate cuts won't reverse this, as the problem in on the supply side.

In the same way that banning short sellers didn't stop markets falling, so dropping base rates isn't going to force banks to lend to each other.
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Government steps in to avoid bankruptcy in family game of Monopoly

MonopolyImage by DaylandS via FlickrNewsBiscuit and The Daily Mash are two sites you should definitely add to your daily reading. They always put a smile on my face and can be relied upon to provide some light relief.

Today, NewsBiscuit led with the excellent headline

Government steps in to avoid bankruptcy in family game of Monopoly

You can read the story here which is an inspired take on the current bank bailout.

My favourite excerpt is

the Prime Minister went on to reveal that as a condition of the loan, players would have to show more responsibility in future. ‘There will be no more of this paying yourself £200 just for passing Go. Players have to learn that there is no such thing as a Get Out Of Jail Free Card… Oh hang on what’s this?’
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Anti-terror laws abused again for non-terriorst purposes

After the use of terror suspect laws by the US authorities to extradite UK bankers in connection with Enron, the UK Government has followed suit by using the 2001 Anti-Terrorism, Crime and Security Act, passed after the September 11 attacks, to freeze Landsbanki’s estimated £4bn UK financial assets.

The reason for the seizure is to prevent the repatriation of assets back to Iceland and to allow the Government to recoup sums to cover the Icelandic Deposit Protection payment shortfall.

There are reportedly 300,000 Landsbanki depositors in the UK who will be hoping to get the same protection as those in Icesave.

Whilst the motives of the Government may be "pure" and their inventive use of law may have achieved the best outcome for UK plc, I am greatly concerned that laws enacted to provide Government with sweeping powers are being used for a purpose other than that which they were intended.

When passed into law, Government Ministers were undoubtedly providing assurances about why such laws were required [not including banking crisis], how they would obviously be responsible in using such laws to fight terrorism and laughing off concerns about the potential misuse of sweeping powers - much like the debate over detention without charge for 42 days has played out.


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HBOS - A day's rollercoaster ride

The HBOS share price was all over the place today with a day's low of 93.5p and a high of 155p, ending on 116p, with enormous swings throughout the day.

Trading in this market is a lottery.

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What do you really do for a job?

Always Postpone Meetings with Time-Wasting MoronsImage via WikipediaBack in July 2007, Scott Adams on The Dilbert Blog ran a post I was only pointed to today on an IM conversation. It asked people to humourously sum up in a sentence what they did for a job. There are hundreds of submissions you can find here. One submission caught my eye:

I write financial derivatives pricing software. But what I really do is.......

"Provide random odds to coked up gamblers"

Dated 9th July 2007
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Alternate guide to market terminology

More gallows humour circulating in the City. This time it's a guide to commonly used terms and jargon in markets.


CEO --Chief Embezzlement Officer.

CFO-- Corporate Fraud Officer.

BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewellery, and the husband gets no sex.

VALUE INVESTING -- The art of buying low and selling lower.

P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.

BROKER -- What my broker has made me.

STANDARD & POOR -- Your life in a nutshell.

STOCK ANALYST -- Idiot who just downgraded your stock.

STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.

FINANCIAL PLANNER -- A guy whose phone has been disconnected.

MARKET CORRECTION -- The day after you buy stocks.

CASH FLOW -- The movement your money makes as it disappears down the toilet.

YAHOO -- What you yell after selling it to some poor sucker for $240 per share.

WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.

INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a nuthouse.

PROFIT -- An archaic word no longer in use.


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Beer and Ice don't mix

Icelandic banks are urgently liquidating positions and calling in loans in an effort to prop up their country's financial position. Consequently, some of their best customers have suddenly found themselves with demands for immediate repayment of loans.

Robert Tchenguiz, via his investment vehicle R20, has been a big borrower from Iceland’s Kaupthing with whom he financed the conversion of his CFD position in M&B into a holding in underlying shares back in April - a move he took to prevent the banks with whom he held his long CFD position from lending the shares out. He evidently felt these loans assisted short sellers to undermine the share price of M&B and hence removed his 25% holding in M&B from stock available to be borrowed. Regardless of this, the stock has fallen 74% this year following a disasterous hedging exercise on the part of M&B, as well as generally bad conditions in the pub trade.

Evidently, Kaupthing decided to call this loan and thus forced Tchenguiz to sell his stake last night, which was sold at 130p versus the closing price of 163p. It is believed that Joe Lewis, the Bahama based billionaire who lost £500m on the Bear Stearns collapse, was the buyer.

Oh to have a transcript of the conversation between R20 and at Kaupthing Bank when the loan was called. It may have gone something like

R20 - You can't do this to us. This is a long term loan to finance a strategic investment
KB - Yes we can and we need the money immediately
R20 - We need a few days to get alternate financing
KB - Sorry, we don't have a few days. We need the cash now.
R20 - We don't have the money
KB - No problem, we'll sell the shares we are holding as collateral
R20 - B**tards. We will never work with you again
KB - Don't think we're going to be around to worry about that

I suspect that this raises a few issues for R20, namely
Other high profile investors that have relied heavily on leverage and banks loans may be similarly affected in the coming days.

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A moment in history

We are going through a significant period in modern history, which will become a core part of economics, business and global politics studies for many decades to come.

You may wonder why I suggest politics is affected. Simply because alliances are being sorely tested and political manoeuvring is very evident
That the US election is being fought at such a time is additionally worrying as it may prompt the US electorate to steer the candidates [or they may take the lead themselves to gather late support] towards a greater protectionist era.

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Song for our times - Tragedy and mystery by China Crisis

Cover of the China Crisis acoustic live album ...Image via Wikipedia

I went to see China Crisis & OMD last night at the Roundhouse in Camden - I prefer the former, who were the support act, and my wife likes the latter.

Both did superb sets [9 songs from China Crisis in an hour on stage and 20 songs from OMD in 2 hours]. However, one track from China Crisis stood out for me as being particularly apt for the times we are living through. From the chorus of the song "Tragegy and Mystery"

Tragedy and mystery, open your mind and you will see

Your world is changing though you cannot see
and there's no room for secrecy
your world is changing faster everyday
and there's no truth in what they say


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Enough to make you scream

UK - London - The City: Bank of England and Fi...Image by wallyg via FlickrThe growing clamour for interest rates to be cut rather misses the point.

The Bank of England can set the Bank Base Rate i.e. the rate at which it will transact with banks. However, the rate at which banks lend to each other is higher than this to reflect the additional risk (know as LIBOR rate). Presently the differential between the base rate and LIBOR is approaching several hundred basis points (100 basis points = 1%) rather than the usual handful of basis points.

Yet banks are refusing to lend to each other regardless of the "price", other than overnight, because of the perceived risks and uncertainty overshadowing counterparties - reducing rates in such circumstances doesn't remedy that.

At the same time as not lending to each other, banks are not lending to corporates or individuals because in the current climate they are hoarding cash to meet immediate and future claims on them by savers/depositors.

For savers, safety has become of paramount importance more so than the rate paid - previously savers "assumed" banks were all reasonably safe and hunted round for the highest rates e.g. depositing funds with Icesave. Now, regardless of the rate offered they are unwilling to deposit funds with institutions they consider "shaky", which in turn chokes off the supply of funds that can be lent.

A shortage of funds available to lend results in rationing and price ("rates") is the mechanism for this. A shortage pushes prices up and not down.

Unfortunately the public's understanding remains linked to a past [4 weeks ago or more] when credit was in abundance and you simply needed to reduce interest rates to stimulate the economy and turn the credit taps on. Hopefully, you are better informed.
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Icesave - UK Chancellor guarantees its' deposits

UK Chancellor of the Exchequer Alistair DarlingImage via WikipediaAlistair Darling, the UK Chancellor, has just said on the radio that
However, he refused to confirm a guarantee applied to all deposits in all UK banks repeatedly restricting his comments to saying he would do "whatever it takes" to protect.

The first £50,000 to be covered will be funded from the banking industry, with the excess to be funded by the Government. Unlike Bradford & Bingley, there aren't any assets that can be seized/nationalised by the Government to offset the cost.

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Icesave accounts have been frozen

Following the nationalisation of Iceland's second largest bank, Landsbanki, its' UK internet banking arm which has the unfortunate name of Icesave has frozen all activity on accounts.

Its' home page has the simple and concise message

We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts. We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly.

The internet bank is covered by the UK Deposit Protection Scheme, which protects each customer for up to £50,000 [changed from £35,000 today].

For the superstitious amongst you, the jinx of Newcastle appears to have struck again - Icesave's contact details indicate that it is the location of their processing centre, as well as being home to Northern Rock. Worryingly, whilst they disagree on the location of the postcode given for Icesave of NE28 5AL (Microsoft can't even find that postcode!), Google maps suggest the Bank is in the middle of a housing estate near Wallsend.

On a related note, some funny emails doing the rounds on several themes related to the crisis
Gallows humour is rampant in the City.

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Fear is more powerful than Trust

It is often said that markets are driven by greed and fear. Well, there's lots of the latter in abundance presently.

Yet in the current turmoil, I think it's more apt to think of the inverse characteristics of trust and fear, namely

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The Deal explains Modern Finance


From The Deal

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Inconsistencies in asset protection schemes may cause flights to safety

With national Governments in Europe independently determining investor protection schemes on the fly, worries are rightly being raised about regulatory arbitrage causing flights to safety e.g. money being switched to Germany or Ireland, who are reportedly offering 100% protection, from countries like the UK with capped schemes.

Oddly, yet to come into the spotlight is the differential on protection that is offered between banks and other financial institutions that are holding investor wealth such as Stockbrokers, Insurers and Independent Financial Advisers.

When the spotlight of the mainstream press turns on this, it may cause similar investor panic and force a widening of the guarantees being offered by Governments.
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CDS losses are going to sink some funds

With a number of financial institutions going under, receiving state aid or being nationalised, large payouts under credit default swaps ("CDS") are looming since these constitute credit events under any normal contract.

Payouts under CDS contracts are typically determined via an auction for the debt - the deficit between the auction price and par being the payout. This week defaulted credit derivatives linked to Fannie Mae and Freddie Mac were settled at 92 to 93 cents in the dollar. With up to $500bn of credit derivatives linked to them, this could mean pay-outs of $35-40bn by sellers of default protection.

Due to the OTC nature of CDS deals, the identity of the end holders of these losses i.e. the "insurers", are not a matter of public record. Hence, worries abound regarding who will have to absorb these losses and their ability to settle the claims. These concerns are further fuelling the panic in the markets since it could result in further collapses. Hedge funds, insurers and banks are all potential "victims".

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No wonder Citi are hacked off

Citigroup's corporate logo as of March 17, 2007Image via WikipediaIs it any wonder that Wachovia shareholders and the Federal Deposit Insurance Corporation are reportedly pleased that Wells Fargo stepped in to buy Wachovia from under Citigroup's nose - likewise is it surprising that Citi are miffed? According to reports

Citigroup said last Monday it had reached a preliminary agreement to pay $2.2bn for Wachovia’s banking assets, in a deal that included an FDIC guarantee for any losses beyond $42bn on a $312bn mortgage portfolio. But Wells Fargo said on Friday it signed an agreement with Wachovia to buy the whole of the company for $15bn without any government guarantees.

Here's the kicker - Citi now want to sue Wachovia for $60bn for breaking an exclusivity agreement on the deal. Hmmmmm. Might that suggest that they knew they were getting a steal if those are their perceived damages.

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