October 01, 2009
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?
June 29, 2009
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.
April 06, 2009
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?
March 20, 2009
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.
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?
March 19, 2009
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.
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, 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.
So why should a fall to under $1 mean a reverse stock split, whatever a reverse stock split might be?
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.
March 17, 2009
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:
American International Group Inc.
(AIG) granted retention bonuses of
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 Frankon Tuesday, Cuomo said the top 10 bonus recipients combined received
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
$1 millionor more, with one person getting
"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.
March 11, 2009
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.
March 03, 2009
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.
February 28, 2009
Fred the Shred
The Sun tracks down Fred the Shred and asks him the most important question about his pension:
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:
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.
Berkshire Hathaway's results were released this morning....and it tells you something when a company of Berkshire Hathaway's size decides to release their results on a Saturday monrning.
Just about everybody else releases their results when the market is open. So that people can see the results and then trade upon them as they wish. Usually the only reason for doing something different, releasing them after the market closes, or even on a day when all the markets are shut tight as Berkshire Hathaway has done, is because you know the results aren'tgoing to be good and you don't want people to start trading upon them immediately.
As, indeed, has happened. Berkshire Hathaway's results, while a great deal better than many other financial firms, are pretty appalling:
Quite how bad can be seen from this:
To the Shareholders of Berkshire Hathaway Inc.:
Our decrease in net worth during 2008 was $11.5 billion, which reduced the per-share book value of both our Class A and Class B stock by 9.6%. Over the last 44 years (that is, since present management took over) book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.*
The table on the preceding page, recording both the 44-year performance of Berkshire's book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.
As the year progressed, a series of life-threatening problems within many of the world's great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: "In God we trust; all others pay cash
If you want to read the full letter you can get it from here.
This is some more of the Chairman's letter:
By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a
paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have
never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback
cycle. Fear led to business contraction, and that in turn led to even greater fear.
This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury
and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently
been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome
aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.
Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities
and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political
challenge. They won’t leave willingly.
Whatever the downsides may be, strong and immediate action by government was essential last year if
the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our
economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various
Side Streets of America were all in the same boat.
Amid this bad news, however, never forget that our country has faced far worse travails in the past. In
the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or
so panics and recessions; virulent inflation that led to a 211⁄2% prime rate in 1980; and the Great Depression of
the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of
Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the
real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones
Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which
humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic
system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it
will continue to do so. America’s best days lie ahead.
*All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are
1/30th of those shown for A.
Take a look again at the 44-year table on page 2. In 75% of those years, the S&P stocks recorded a
gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie
Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our
usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will
be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell
us whether the stock market will rise or fall.
In good years and bad, Charlie and I simply focus on four goals:
(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of
excess liquidity, near-term obligations that are modest, and dozens of sources of earnings
(2) widening the “moats” around our operating businesses that give them durable competitive
(3) acquiring and developing new and varied streams of earnings;
(4) expanding and nurturing the cadre of outstanding operating managers who, over the years,
have delivered Berkshire exceptional results.
Berkshire in 2008
Most of the Berkshire businesses whose results are significantly affected by the economy earned below
their potential last year, and that will be true in 2009 as well. Our retailers were hit particularly hard, as were our
operations tied to residential construction. In aggregate, however, our manufacturing, service and retail
businesses earned substantial sums and most of them – particularly the larger ones – continue to strengthen their
competitive positions. Moreover, we are fortunate that Berkshire’s two most important businesses – our
insurance and utility groups – produce earnings that are not correlated to those of the general economy. Both
businesses delivered outstanding results in 2008 and have excellent prospects.
As predicted in last year’s report, the exceptional underwriting profits that our insurance businesses
realized in 2007 were not repeated in 2008. Nevertheless, the insurance group delivered an underwriting gain for
the sixth consecutive year. This means that our $58.5 billion of insurance “float” – money that doesn’t belong to
us but that we hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to
hold our float during 2008. Charlie and I find this enjoyable.
Over time, most insurers experience a substantial underwriting loss, which makes their economics far
different from ours. Of course, we too will experience underwriting losses in some years. But we have the best
group of managers in the insurance business, and in most cases they oversee entrenched and valuable franchises.
Considering these strengths, I believe that we will earn an underwriting profit over the years and that our float
will therefore cost us nothing. Our insurance operation, the core business of Berkshire, is an economic
Charlie and I are equally enthusiastic about our utility business, which had record earnings last year
and is poised for future gains. Dave Sokol and Greg Abel, the managers of this operation, have achieved results
unmatched elsewhere in the utility industry. I love it when they come up with new projects because in this
capital-intensive business these ventures are often large. Such projects offer Berkshire the opportunity to put out
substantial sums at decent returns.
Things also went well on the capital-allocation front last year. Berkshire is always a buyer of both
businesses and securities, and the disarray in markets gave us a tailwind in our purchases. When investing,
pessimism is your friend, euphoria the enemy.
In our insurance portfolios, we made three large investments on terms that would be unavailable in
normal markets. These should add about $11⁄2 billion pre-tax to Berkshire’s annual earnings and offer
possibilities for capital gains as well. We also closed on our Marmon acquisition (we own 64% of the company
now and will purchase its remaining stock over the next six years). Additionally, certain of our subsidiaries made
“tuck-in” acquisitions that will strengthen their competitive positions and earnings.
That’s the good news. But there’s another less pleasant reality: During 2008 I did some dumb things in
investments. I made at least one major mistake of commission and several lesser ones that also hurt. I will tell
you more about these later. Furthermore, I made some errors of omission, sucking my thumb when new facts
came in that should have caused me to re-examine my thinking and promptly take action.
Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant
decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines
if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you
pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise
when it is marked down.