SocGen Had Been Warned About Kerviel

Yeah this is getting interesting!!!

SocGen Had Been Warned About Kerviel:

"Prosecutor Jean-Claude Marin, who announced the filing of attempted-fraud charges against Kerviel, told reporters the derivatives exchange Eurex had alerted SocGen last November about questionable trades by Kerviel. Separately, several of the bank's internal control units also had flagged some of his trades in recent months, Marin said. But in each instance, he said, Kerviel was able to produce 'fake documents' making it appear that the trades were hedged and therefore not risky.

Marin said Kerviel had admitted falsifying documents and hacking into the bank's computer system to cover up unauthorized trades he began making in 2005, when he first moved from SocGen's back office to the trading floor. His motivation, the prosecutor said, was to 'seem like an exceptional trader,' and he had been expecting a bonus of almost $450,000—far above his base salary of about $147,000—based on profitable trades he made in 2007, before he began running up huge losses in recent weeks. Kerviel also told investigators that other traders routinely made unauthorized trades, Marin said.

In its most detailed public explanation of the scandal to date, SocGen acknowledged on Jan. 27 that the trading positions taken by Kerviel had reached more than $73 billion, far exceeding the bank's roughly $50 billion market capitalization...."

More from Davos

I admit everything on this list may not be seen as traditional finance, but if you do not find at least 80% of the sessions beyond interesting, you might want to get your heart checked! ;)

It is is the video of almost every session!!! wow!!!!!

For instance, here is the private equity session mentioned a few days ago.

What’s $34 Billion on Wall Street? - New York Times

Tails I win, heads I don't lose? That seems to be the main point of the NY Times piece that looks at what has happened to some of the CEOs whose firms have most millions, err billions.

A look in:

What’s $34 Billion on Wall Street? - New York Times

UNDER the stewardship of Dow Kim and Thomas G. Maheras, Merrill Lynch and Citigroup built positions in subprime-related securities that led to $34 billion in write-downs last year. The debacle cost chief executives their jobs and brought two of the world’s premier financial institutions to their knees.

In any other industry, Mr. Kim and Mr. Maheras would be pariahs. But in the looking-glass world of Wall Street, they — and others like them — are hot properties. The two executives are well on their way to reviving their careers, even as global markets shudder at the prospect that Merrill and Citigroup may report further subprime losses in the coming months.

and later the article cites examples from history that show the current trend is not new:

"Perhaps the most notorious example of failure leading to prosperity is John Meriwether. Ousted from Salomon Brothers in 1991 for his role in a bond trading scandal, he became a co-founder of Long Term Capital Management, the hedge fund that nearly collapsed in 1998, rattling markets worldwide. He has since founded a second fund, JWM Partners, with assets of around $3 billion. More recently, Brian Hunter, the energy trader at Amaranth Advisors whose disastrous bets led to the disintegration of that $9 billion hedge fund, is now advising a private equity fund called Peak Ridge on starting a hedge fund.

Notably missing in the article is Bear Stearn's Jimmy Cayne who resigned in large part due to Bear's losses.

Study Says Private Equity Isn’t Big Job Killer - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

Study Says Private Equity Isn’t Big Job Killer - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:

"In perhaps the most extensive study conducted on the issue, the World Economic Forum plans to announce on Friday the results of yearlong examination of 5,000 private equity transactions from 1980 through 2005.

The answer? Well, the study found that private equity does not create more jobs, but the Gordon Gekko stereotype may be too harsh. Companies owned by private equity shed, on average, about 1 percent more jobs than their peers.

The study, “Economic Impact of Private Equity,” was led by Josh Lerner, professor at Harvard Business School, and Steven J. Davis, professor at the University of Chicago’s Graduate School of Business."

While I can not find the actual paper, this is something we talk about regularly in class (under the "who wins and who loses" in mergers and acquisitions section). This fits almost exactly with what we have been saying over the past few years ("close but probably a bit of job loss which is not necessarily bad), so I guess we had something right and was more convincing than this paper by the private equity industry (which may have been a bit biased) that found a 8.4% increase in jobs.

BTW if anyone can find the actual article, please send it a link. (here is the session, but no paper.)

Pot script: thanks to Yvonne Kreis who found the papers presented at the session and sent the link. Note: it has other papers linked in the section too.

Kerviel joins ranks of master rogue traders

Kerviel joins ranks of master rogue traders:

"In being identified as the lone wolf behind French investment bank Société Générale's staggering $7.1-billion loss Thursday, Jérôme Kerviel joined the ranks of a rare and elite handful of rogue traders whose audacious transactions have single-handedly brought some of the world's financial powerhouses to their knees.

This notorious company includes Nick Leeson, who brought down Britain's Barings Bank in 1995 by blowing $1.4-billion, Yasuo Hamanaka, who squandered $2.6-billion on fraudulent copper deals for Sumitomo Corp. of Japan in 1998, John Rusnak, who frittered away $750-million through unauthorized currency trading for Allied Irish Bank in 2002 and Brian Hunter of Calgary, who oversaw the loss of $6-billion on hedge fund bets at Amaranth Advisors in 2006.

Tom Brady and Efficient Capital Markets - - CFO.com

LOL...Rodney and I were interviewed for this one. Check it out.

Tom Brady and Efficient Capital Markets - - CFO.com:

"A potential injury to the seemingly unstoppable New England quarterback had odds makers reworking the Super Bowl point spread, knocking two points off of the original calculation and making the Patriots a 12-point favorite over the New York Giants.

The Brady boot incident is an example of the efficient-markets hypothesis, says James Mahar, an assistant professor of finance at St. Bonaventure University, near Buffalo, NY. An efficient market adjusts rapidly to the arrival of new information, which means that current prices (or the line on the Super Bowl, in this case) will reflect all available information"

More on this one to follow!

Societe Generale uncovers massive fraud: "

"French bank Societe Generale said Thursday it has uncovered a 4.9 billion euro ($7.14 billion) fraud -- one of history's biggest -- by a single futures trader whose scheme of fictitious transactions was discovered as stock markets began to stumble in recent days.

CEO Daniel Bouton said the trader's motivations were 'irrational,' netting the trader no personal financial gains. Still, the bank is seeking to have him prosecuted in court.

A person familiar with the case named the trader as Jerome Kerviel. Bank officials said the trader was a Frenchman in his 30s who probably acted alone. The person spoke on condition of anonymity because of the sensitivity of the case.

The bombshell destabilized a major bank already exposed to the subprime crisis."

Have class right now, but will be sure to update this later.

Importance of compounding from Jonathan Clements

I have never met Jonathan Clements, but he is definitetly one of my favorite business writers. When I was at Penn State and using a class packet, I bet over 50% of the packet was written by him. Here is tells of teh importance of compounding.

From Yahoo (and WSJ):

"People think in terms of simple interest, not compound interest. For instance, if our investments clock 8% a year for 10 years, we don't earn 80%, as many people assume.

Rather, we would notch a cumulative 116%. Remember, we earn returns not only on our original investment, but also on the investment gains earned in earlier years. Similarly, with credit-card debt, we pay interest both on our original purchases and on any monthly interest charges we didn't pay off in full.

'People use simple interest because they don't know to use anything else,' says Prof. Eisenstein, of Cornell University's Johnson Graduate School of Management. 'The higher the interest rate and the longer the time horizon, the worse the error.' He argues that this basic math mistake helps explain why people delay saving for retirement and why they postpone paying off credit-card debt."

Fed Cuts Rate 0.75% and Stocks Swing - New York Times

SURPRISE!! I confess I thought I was still asleep when I heard this news on the radio this morning. And then I thought the announcer had misspoken. But no, it was 75 basis points. Wow.

Fed Cuts Rate 0.75% and Stocks Swing - New York Times:

"The Fed’s policy-making group, known as the Federal Open Market Committee, lowered its target for the federal funds rate, which regulates overnight loans between banks, to 3.5 percent, from 4.25 percent.

The surprise move, unusual in both its scale and its timing, underscored the severity of the current strains facing the economy.

“It’s a once-in-a-generation event,” said Mark Zandi, chief economist at Moody’s Economy.com. In recent years, the Fed has rarely acted between scheduled meetings of the committee, and almost always in increments of one-quarter or one-half point. It was the biggest single cut since October 1984."

SI.com - Tennis - Ivanovic to play Venus, again, in Slam - Monday January 21, 2008 2:14AM

Possibly my new favorite woman's tennis player:

SI.com - Tennis - Ivanovic to play Venus, again, in Slam - Monday January 21, 2008 2:14AM:

"She studies finance via university correspondence courses., reads Greek mythology and is just eccentric enough to sidestep lines on the tennis court and eat every night at the same restaurant in some cities."

Learn the ABCs of ETFs - ETF - Strategy - IVV

A pretty useful (and easy to read) article on ETFs, definitely worth reading for introductory students!

Learn the ABCs of ETFs - ETF - Strategy - IVV:

"Exchange-traded funds, or ETFs, are index funds that trade like stocks on major stock exchanges. They were introduced to U.S. markets in 1994 and now have a market value of $150 billion. Although that's still a relatively small number compared with the $7.5 trillion held in open-end mutual funds, ETFs are experiencing explosive growth and are now commonly found in the portfolios of institutional and retail investors alike."

NPR : Resolving to Retire with a Nest Egg

NPR : Resolving to Retire with a Nest Egg:

"The money you save in your 20s and 30s will give you a tremendous return compared with what you scramble to save when retirement is just around the corner. Steve Mariotti, the founder and president of the National Foundation for Teaching Entrepreneurship, sees the mathematical forces at work as key — not just for retirement but for teaching people to rise out of poverty.

'I think one of the most important things that you can teach a young person is the power of compound interest,' Mariotti said. Albert Einstein agreed when he called compound interest one the greatest wonders of the universe."

You Should Worry About Ambac - Forbes.com

Global warming, bird flu, and terrorism not enough for you? Here is something else to worry about! Bond insurers may be facing downgrades. How big of worry? It is easy enough to see a downgrade, but a default is significantly less likely (albeit possible). And if it were to happen, the mere size of their positions (true they are measured in notional principles) is staggering. A look in from Forbes

You Should Worry About Ambac - Forbes.com:

"Bond insurers use their top credit ratings to insure bonds issued by municipalities and others against default. That makes it easier for the issuers to sell the bonds at an attractive rate to institutional investors, like pension funds.

In recent years, Ambac, MBIA (nyse: MBE - news - people ) and others have ventured into insuring credit derivatives and other relatively newfangled fixed-income products invented by and peddled by Wall Street. Ambac guaranteed $38 billion of debt linked to subprime mortgages and has exposure to $45 billion of other mortgage investments.....bond guru Bill Gross of Pacific Investment Management calls banks' participation in the CDS market a ponzi scheme that may trigger losses of $250 billion.

Bank disclosure is sketchy, and the market is hard to evaluate for lack of information. Credit default swaps are sold over the counter, are not traded on an exchange and are outside the close scrutiny of regulators.

'The ultimate systemic risk caused by the weakened positions of the monoline insurers is overwhelming and scary,' said CIBC World Markets analyst Meredith Whitney in a late-December research note. 'The impact will be sizable and very negative for the banks.'"

Uh great. Might be time for yoga. ;)

Shareholders vs. Bondholders

I start most of my classes off discussing the Nexus of Contracts and how the different stakeholder groups have different incentives which lead to fights and conflicts. This may be the most celar-cut example I have seen in a while.

Which Buyout Firms Were Quickest to Cash Out? - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:

"Most shareholders like dividends — just ask a Citigroup investor — but creditors generally aren’t big fans. This is especially true of the “special” dividends that private equity firms like to pay to themselves, sometimes just a few months after a leveraged buyout is complete. This sudden outflow of cash can be deeply annoying to bondholders worried about the quality of their debt, which is why Moody’s Investors Service decided to examine which private equity firms tend to be quickest on the draw when it comes to dividends.

The study, called “Private Equity: Tracking the Largest Sponsors,” offers a numerical measure of what has largely been a matter of anecdote and reputation until now."

Fascinating. Talk about a Bondholder-Shareholder conflict. This is the epitome of it. What a great example that will definitely be used in my classes!

Study: $90 wine tastes better than the same wine at $10 | Underexposed - CNET News.com

Well, score another one for behavioral finance. Classic economics would suggest that the price should not influence taste. But in a wierd twist (possibly a signaling story?) researchers now say that people sense (literally) that the tasts is better for more expensive wines eve when the wine is identical.

Study: $90 wine tastes better than the same wine at $10 | Underexposed - CNET News.com:

"...researchers found that with the higher priced wines, more blood and oxygen is sent to a part of the brain called the medial orbitofrontal cortex, whose activity reflects pleasure. Brain scanning using a method called functional magnetic resonance imaging (FMRI) showed evidence for the researchers' hypothesis that 'changes in the price of a product can influence neural computations associated with experienced pleasantness"

While touted as a marketing piece, the same logic might apply to buying stocks that so-called experts believe to be be "good".

Citis Dividend Bears Have Their Day - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

I would imagine anyone who cares probably has heard the news today that Citi cut its dividend. In line with previous research findings, Citi did fall on the news of the cut (currently down about 7.5%).

However, what is more interested (and telling) is looking back to last fall when this cut was predicted by some (example Meredith Whitney, the CIBC analyst who reportedly received death threats for suggesting it) and vehemently renounced by Citi officials.

Today's news: Citi's Dividend Bears Have Their Day - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:

"Citi announced $18 billion in write-downs in the fourth quarter related to its subprime mortgage exposure....As part of a series of moves to shore up its capital base, Citi said that, yes, it would indeed cut its dividend — by a sizable 41 percent."

Magellan Fund, Closed in ’97, Will Reopen - New York Times

Magellan Fund, Closed in ’97, Will Reopen - New York Times:

"For the first time in a decade, new investors will be able to put money into a mutual fund that helped fuel Fidelity Investments’ rapid growth in the 1980s and 1990s, but has recently lost many retirement-age investors as they withdraw cash.

Fidelity said on Monday that it would reopen its $44.8 billion Magellan Fund to new investors"

Trading in Deal Stocks Triggers Look at Banks - WSJ.com

Trading in Deal Stocks Triggers Look at Banks - WSJ.com:

"In the paper, 'The Dark Role of Investment Banks in the Market for Corporate Control,' three European finance professors examined more than 1,600 U.S. merger deals between 1984 and 2003, along with quarterly 13F filings of institutional stock ownership. They found that during the last quarter before a merger announcement, large investment banks serving as lead advisers to acquirers accumulated shares in target companies just over 19% of the time -- either by taking new stakes or significantly increasing existing stakes. That's nearly double the 10.5% rate of investment banks not serving in that role....The paper -- by Mr. Simonov, Massimo Massa of French business school Insead, and Andriy Bodnaruk of Maastricht University in the Netherlands -- was presented earlier this month at an American Finance Association conference, but hasn't yet been published. Its underlying implication is that suspect trading could be occurring in the early stages of deal talks, long before it is likely to raise red flags."

I hope no one is too surprised by this finding.

Prediction markets are not perfect

Primary results prove prediction markets flawed -- chicagotribune.com:

"Political pollsters weren't the only ones red-faced after the New Hampshire Democratic primary Tuesday.

Online prediction markets, which enable individuals to bet on the outcome of dozens of events, also had become exceedingly enthusiastic about Sen. Barack Obama after he beat Sen. Hillary Clinton in the Iowa Democratic caucuses.

Early Tuesday, the best known of the online prediction markets, Intrade, based in Ireland, gave Obama a 70.7 percent chance of winning in the Granite State and Clinton a 27 percent chance."

I am back!

I'm back from Mississippi and can start blogging again. (See BonaResponds.org for info on the trip).

If you have emailed me in the past two weeks and I did not get back to you, that is why. Give me a few days and then if I have not emailed you, just ask again :)

It promises to be a busy semester as I am teaching an overload (5 classes) and we are still trying to hire someone. I think I also have a finance club trip to Chicago, a conference, and of course BonaResponds things almost every week from local days, to trips to Buffalo, to back to the Gulf. So I cannot promise entries every day.

Happy 2008!

Happy New Year!!

Sorry I have been so bad of late updating the blog. Just too many things going on with a paper, an article to review, plus BonaResponds, and trying to put together a book. Stay tuned.

I will be gone for about 10 days to work on Hurricane some homes in Mississippi where I probably will not have much internet access, but will be back in a few weeks when classes start on the 14th.