Tabloid Edition

High frequency trading

It looks like high frequency trading is going to be banned. Which seems to be a very silly decision indeed, because people have got it confused with flash trading, which probably should be banned.

High frequency trading, or abitrage trading, is simply a form of arbitrage using high speed computers. We like arbitrage, for it makes markets more efficient. Flash trading is open to abuse like front-running: we don't like market abuse and we don't like front-running. However, to ban the former because of the latter is absurd.

This whole process is called "arbitrage". It's been around for eons: Roman emperors buying cheap grain in Egypt and selling it in high priced Italy could be said to have been involved in arbitrage. A huge amount of foreign exchange trading today is arbitrage. Buying a stock on the London Stock Exchange and selling it on the NYSE to make a profit if the prices diverge is also arbitrage. (There is also time arbitrage, buying now to sell later, but that is better described as speculation. "Pure" arbitrage involves buying and selling in two different markets simultaneously.)

 

High speed trading is simply a subset of this arbitrage: using very high speed computers to do the buying and selling, faster than any human could hope to. In fact, so fast are these trades that the speed of light becomes something of a limiting factor. No, really: those with computers closer to the main stock exchange computers do better than those with theirs further away. The speed at which the information flows over the internet becomes a factor in determining how well it all works. That will indeed privilege the bigger players, who can afford to pay for their servers to get prime position but so what?

Bernie Madoff sentencing

Well, this isn't exactly the world's greatest surprise Bernie Madoff has been sentenced to the full 150 years that the prosecutors were demanding.

It's not all that much of a surprise for Madoff had already pleaded guilty to running the world's largest ever financial scam. Some estimates put the losses at as much as $50 billion (although others point out that this entails double counting).

He was running a Ponzi scheme: promising high returns to investors but instead of paying these from profits he was simply paying old investors from new money flowing into the fund. Not a new game and not a clever one: but his was larger and longer running than any of the others.

Revolution money

This looks interesting, there's a new upstart payment processing firm called Revolution Money. And they've managed to get a fund raising away, even in the middle of this financial recession.

At a time when both consumers and merchants are looking for ways to cut costs, several major financial firms and individual investors have pumped $42 million into Revolution Money, the payment-processing company backed by AOL co-founder Steve Case.

By harnessing the Internet for its payment platform, the company slashes costs for accepting credit cards by up to 75% for merchants, who in turn pass part of those savings on to consumers to drive loyalty. With the new funding, the company will continue developing its technology as it looks to steal market share from traditional credit card companies like Visa and MasterCard, as well as popular payment service PayPal, a unit of eBay.

Ah, that's what they're doing! Using the net as a platform and thus thinking that they can cut the processing fees....and thus gain market share.

Chase Paymentech Solutions LLC has begun accepting RevolutionCard transactions for online and retail merchants. The deal is expected to boost the number of merchants who accept the card, a product of Revolution Money Inc., a St. Petersburg payments firm.

Terms of the agreement between Revolution Money and Chase were not disclosed in a release announcing the deal.

Chase Paymentech, a business unit of JPMorgan Chase (NYSE: JPM), processes about half of all Internet transactions, the company said in a release. By working with Chase Paymentech, Revolution Money’s market position and broad acceptance is solidified with both retail and online merchants, the release said.

If they've managed to get into the real payment system like this then they've got an opportunity to compete.

A recession may be in full force, but it didn’t prevent payment-processing start-up Revolution Money from raising $42 million in a new round of funding announced this morning. Revolution Money, which was founded by AOL co-founder Steve Case, managed to stay away from traditional venture capital firms, instead turning to financial giants Citigroup, Goldman Sachs and Morgan Stanley as well as a number of well-known individual investors. The attraction is an Internet payment platform that slashes costs for accepting credit cards by up to 75% for merchants, who in turn pass part of those savings on to consumers to drive loyalty. Read the story from VentureWire, which interviews Chairman Ted Leonsis, who is also an owner of the National Hockey League’s Washington Capitols.

All sounds interesting, eh?

Ponzimonium

Oh dear, the media seems to have only just discovered financial fraud. I'm sorry, but this is something that they really should be more aware of, all the time.

Hundreds of people in the United States are under investigation for financial scams, many involving Ponzi schemes, a U.S. regulator said, calling the phenomenon "rampant Ponzimonium."

While none are as mammoth as disgraced financier Bernard Madoff's $65 billion fraud, multimillion-dollar "mini Madoffs" are proliferating from New York to Hawaii, the head of the Commodity Futures Trading Commission said.

So far this year, the agency has uncovered 19 Ponzi schemes, which depend on an influx of new capital instead of investment profits to pay existing investors.

That compares with just 13 for all of 2008.

"Because of the economy, people are seeking redemptions more than they ever have and that's making a lot of these scams go belly up," Bart Chilton, commissioner of the Washington-based Commodity Futures Trading Commission, said in a telephone interview.

The thing that annoys here is that the regulator is saying that because more of them are going bust then they're finding more.  OK, I agree with Warren Buffett's point, that when the tide's going out that's when you find out who has been swimming naked.

But guys, the reason we hire regulators, the reason we put up with their burden on innovatve business, is because we want you to find and stop the fraudsters....whether the tide is in or out.

If you can only find these guys when the tide's out then what in hell are we paying you for?

Reverse stock split

Citigroup has announced that it will be doing a reverse stock split. The aim of such a reverse stock split is to raise the perceived value of the company: it dosn't really do anything much other than that.

Citi first announced the plan in late February, and said it hopes it will convert about $52.5 billion of preferred shares into common shares. The bank said it hopes to launch the exchange offer in early April, subject to regulatory approval. Citi also said it is asking for approval to execute a reverse stock split of its common stock.

I'm not going to try and explain the conversion of the preferreds to common stock but just to stick to the reverse stock split.

Citigroup Inc (C.N) on Thursday said it may conduct a reverse stock split as part of an exchange offer that could give U.S. taxpayers a 36 percent stake in the bank.

Citigroup, which took $45 billion from the government's Troubled Asset Relief Program, also defended spending $10 million to renovate executive offices at its Park Avenue headquarters, saying the project will save more than it costs.

Chief Executive Vikram Pandit is trying to restore the third-largest U.S. bank to health after $37.5 billion of losses over five quarters, largely from exposure to housing-related and complex debt.

Citigroup shares slid below $1 two weeks ago, despite three U.S. attempts to prop up the bank since October, and the bank has eliminated its common stock dividend.

The important thing explaining the reverse stock split is that fall in the stock price to below $1.

Citigroup said Thursday it plans to propose a reverse stock split for its common shares, as well as an increase in its authorized shares outstanding, as the embattled bank moves ahead with a previously announced plan to convert preferred shares to common equity.

Citi also said it filed a registration with the Securities and Exchange Commission outlining the public exchange offer for preferred stock not held by the United States government, which is part of the financial aid package it announced with federal officials in February. The bank said it had already reached definitive agreements with holders of $12.5 billion in convertible preferred securities.

So why should a fall to under $1 mean a reverse stock split, whatever a reverse stock split might be?

A reverse stock split reduces the number of a company's shares outstanding, but increases the value of its earnings per share. The market value of the shares remains the same. Companies often elect to do a reverse stock split in an effort to make their stock look more valuable if the share price is significantly low. Citigroup's shares dropped below $1 a share earlier this month on the fear that the government's efforts wouldn't be enough to save it from failing.

That's sort of right. Imagine a company with 100 shares of stock. Each is worth $10. The company is thus worth $1,000.

We could also have exactly the same company with 1,000 shares, each worth $1. Or 10 shares each worth $100. Nothing has really changed there.

However, the idea behind stock splits is that something has indeed changed. There's this idea (very similar in concept to what economists call the money illusion) that we the potential buyers of stocks look at the dollar value of the stock and make at least some of our decisions on whether it is the "right" price based on what range of prices it is in.

For example, it's generally thought to be true that when a price goes over $100 per share that people will view this as "expensive". Although there is no difference between one share at $100 and ten at $10, they will still be the same percentage of the overall company, the general opinion is that if you have a stock split then this will make the shares rise in price. Instead of having ten shares each at $10, they will be worth $11 each.

Weird, I know, but pretty much everyone believes that this is true. That by making a stock split you can make the original one $100 stock worth $110 by making it 10 $10 stocks which then will rise to $11 each.

Basically, they're saying that we're not rational in outr investments and that we've got some idea of the "right" sort of price a stock should trade in.

OK, well, a reverse stock split is just the opposite. It's taking those 10 stocks at $11 each and combining them into one stock that will be valued at $100....well, of course, we don't do that because that would be losing value. What we do think is that when stocks go over about $100 or so each then a stock split will increase the value. When they go below $10, and especially if they go below $1 (and on NASDAQ there are other reasons too, your stock must stay about $1 to remain on that market) then by combining stocks, by having that reverse stock split, you'll be adding value.

Essentially, we all believe that stocks should be in the $10 to $100 range, so splitting when they go above this and having a reverse stock split when they fall below this range adds value.

Weird, I know.

But what's even weirder is that in London, on the stock market in England, the "correct" range is £1 to £10. No, I don't know why it's different in London from New York and nor does anyone else. But then no one really knows why stock splits and reverse stock splits work either. They shouldn't do, unless we're all stupid. And the fact that reverse stock splits do work thus has to be taken as evidence that we are indeed all stupid I guess.

Retention bonus

A retention bonus is when key staff are offered a bonus in order that they stay with the company. The reason that "retention bonus" is in the news at the moment is because there are such retention bonuses being paid to the executives and traders at AIG who drove the company into the ground. There is outrage at these payments:

New York Attorney General

Andrew Cuomo

said Tuesday that

American International Group Inc.

(AIG) granted retention bonuses of

$1 million

or more to 73 people in its AIG Financial Products subsidiary, including 11 who no longer work at the company.

In a letter to House Financial Services Committee Chairman

Barney Frank

on Tuesday, Cuomo said the top 10 bonus recipients combined received

$42 million

, with the top recipient getting more than

$6.4 million

.

Cuomo has blamed the unit for the insurer's near collapse last year. The attorney general said 11 people who have left the company received retention bonuses of

$1 million

or more, with one person getting

$4.6 million

.

"Again, these payments were all made to individuals in the subsidiary whose performance led to crushing losses and the near failure of AIG," Cuomo said in the letter. "Thus, last week, AIG made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing taxpayer bailout. Something is deeply wrong with this outcome."

Well, yes, perhaps so. Perhaps retention bonuses aren't in fact what everyone wants to see happening.

New York Atty. Gen. Andrew M. Cuomo has given American International Group until 4 p.m. EDT today to tell him which employees at the company's financial products unit are getting retention bonus payments -- and which executives negotiated those contracts.

In a letter to AIG Chief Executive Edward Liddy, Cuomo says he has been investigating the insurance giant’s compensation arrangements since the company’s near-collapse last fall, and says he finds it "surprising that you have yet to provide this information."

Maybe Andrew Cuomo is correct about retention bonuses. And maybe he's a politician on the make (while that normally means that he's wrong, per se, it's not an infallible guide). Certainly there's a lot of politicians and a lot of retention bonuses being discussed:

The seven largest retention bonuses in AIG’s financial products’ unit totaled more than $28 million, and 22 people got $2 million or more, according to the letter to Representative Barney Frank, a Massachusetts Democrat and chairman of the House Committee on Financial Services.

And all of this is part of a must do something now about these retention bonuses:

AIG missed a deadline yesterday that was set by New York Attorney General Andrew Cuomo requesting a list of its executives who received part of the millions of dollars in retention bonus compensation the company just handed out. After issuing a subpoena for the information, Cuomo declined to comment on any further action against AIG's Financial Products Retention Plan until a strategy has been mapped out.

But, erm, is Cuomo simply a politician on the make over these retention bonuses? Is it simply unconscionable that taxpayers' money should be spent in such a manner? Or is there some really rather good reason why they are being paid? Can anyone come up wioth a reason why retention bonuses should be paid?

Everyone seems upset by the prospect of banks paying big bonuses. What they’re not asking is: why have banks paid them for so long?
The popular answer is that banks need to attract the best talent.
Yeah, right. Eric Falkenstein and James Kwak provide the real answer. Traders must be bribed not to plunder the firm. If you don’t pay them millions, they’ll sell the banks’ assets cheaply to rival firms for which they then go and work. They are paid fortunes not because they have skill, but because they have power.

Yes, actually, someone can.

Obama is rightly upset about the size of bonuses handed out when banks are getting a federal bailout, but not every bonus is undeserved, so it is not as easy as saying there should be zero bonuses until things are fixed. They key is how close they were to the decision making process. If someone in charge of a complex portfolio has his bonus cut back to zero, implying his future bonuses are also in peril, he has good reason to bolt and start at a new place. Worse, he has an incentive to screw up his portfolio by giving away securities to friends of his on the Street (brokers, other traders he deals with), building up a set of favors for his next position. Once there, the buddies he sold securities to at 72 when they were trading at 78 will remember him.

The biggest point about business that we all have to remember is sunk costs. In one way, it doesn't matter how we got here, we just want to stop it getting any worse. If by paying retention bonuses we stop it getting worse then we should pay those retention bonuses. Doesn't matter what the politicians say, doesn't matter what the mob has to say about those retention bonuses, pay up and save us all money in the longer term.

Where to put your savings

With interest rates as low as they are it's important to make sure that you're getting the very best return you can on your savings. So have a look here at this interesting resource about CD Rates to see where you can indeed get the best returns on your savings.

Who has AIG's money?

Or, in the way this is panning out, not so much who has AIG's money but who has the taxpayers' money that has been poured into AIG?

Where, oh where, did AIG's bailout billions go? That question may reverberate even louder through the halls of government in the week ahead now that a partial list of beneficiaries has been published.

The Wall Street Journal reported on Friday that about $50 billion of more than $173 billion that the U.S. government has poured into American International Group Inc since last fall has been paid to at least two dozen U.S. and foreign financial institutions.

It's not so much that the money has gone to other financial institutions. That was always understood to be the thing that was going to happen. Indeed, that's the very reason the bailout was done in the first place. To keep the financial system afloat.

However, in a political sense, there's going to be a kickback to the idea that some of this money will have gone to foreign institutions. And, given that AIG's CDS writing arm was based in London it's pretty apparent that a great deal of it will indeed go to foreigners.

Doesn't change the economics of the bailout but it sure does change the politics of it.

As an aside, perhaps they should have looked at a debt consolidation resource. Think it might have helped?

Payday loans

I do get angry when people say that payday loans shouldn't exist. What we're actually talking about is people who need money and need it now.  No, not tomorrow, or next week, after the loan officer at the bank has had time to consider. You know, now. The kids need feeding say. The car needs gas to get to work to keep that job. That sort of need money right now.

This isn't a service that banks offer.....and if payday loansdidn't exist then those who need that money, right now right here, would be going to loan sharks instead.

Me, I'm all in favour of this part of the financial system. I've used it myself in tough times: yes, I know I'm fortunate that my tough times have been rare but when you're entirely out of money, the ability to raise $50, $100, $200, on the strength of your next pay check (rather than offering your kneecaps as security) is a saving grace.

Fred the Shred

The Sun tracks down Fred the Shred and asks him the most important question about his pension:

 WORLD’S worst banker Sir Fred Goodwin was left stunned last night when The Sun tracked him down and demanded: �Surely you can get by on less?� The Royal Bank of Scotland fat cat has outraged Brits by raking in �693,000 a year as he starts drawing on his �25million pension. .......Sun man David Willetts read out our petition, saying: �Our readers have a message for you — ‘Dear Fred The Shred, I am in the red so I want back my bread, surely you can get by on less instead’.� We then asked �Do you have any comments to make about that?� Flummoxed Sir Fred failed to defend his bumper pension as his dogs made a din in the background. Fred The Shred — who presided over the biggest corporate cock-up in British history — said: �I don’t have any comments to make at this stage David and thank you very much for calling.�

Well, yes, but it is true that a government minister signed off on his taking early retirement and thus getting his pension now....rather than being fired. The effects of his taking early retirement were in fact spelled out and the Minister knew this back in October. He just failed to tell anyone else about it.

The Daily Mash is good on this though:

AHA ha ha ha ha ha ha, aha ha ha, aha ha ha ha ha, former Royal Bank of Scotland chief executive Sir Fred Goodwin said last night.

The disgraced banker spoke out while bent over double in an Edinburgh street, slapping his knee as his cheeks took on a deep, rosy pink colour.

Becoming light-headed, he was then forced to crouch down with his head buried in his hands while his shoulders began to jiggle uncontrollably.

Minutes later the 50 year-old pensioner stood up and attempted to compose himself before his face erupted once again and he began waving frantically as if to stay, 'no, stop, stop, I can't take it any more'.

About right you might think.