Commentaries

Moving on

All good things must come to an end as they say. Yeah, yeah, it’s a cliche but it’s my last blog post as a columnist and I feel entitled to resort to cliches–especially where it is appropriate. And in this case, it certainly is.

I’ve had a great six-month run as a columnist with Reuters’ Commentary team, but it’s time to move on to something new. But don’t worry, I’m not moving that far–just one flight upstairs at 3 Times Square to the main newsroom at Reuters.

Starting Monday, I will join Reuters’ news operation as a Wall Street investigative reporter. It’s a new position and one I’m excited about. And there certainly are a lot of things to investigate on Wall Street.

I don’t think I’ll have any problem coming up with story ideas, but I’m always open to suggestions and tips. My contact information won’t change, including my email: matthew.goldstein@thomsonreuters.com

But before I go I’d like to give a big shout-out to my NY and DC colleagues in financial pontification: Agnes Crane, James Pethokoukis, Felix Salmon, Chris Swann and Rolfe Winkler. Please keep reading them now and in the future.

Also I want to thank Martin Langfield for his introduction into Reuters style and skill with word play. And finally, a big shout out to Jeff Cane, an editor extraordinaire.

Do Galleon’s tentacles reach to Chicago?

It appears Chicago-based Balyasny Asset Management may have been drawn into the Galleon insider trading scandal.

Hedge Fund Alert is reporting that a former Balyasny analyst is drawing scrutiny from securities regulators in connection with the fast-growing insider trading case that has led to the filing of either criminal or civil charges against 20 people. The $2 billion hedge fund reportedly notified some of its investors that the Securities and Exchange Commission has been investigating the unnamed analyst’s activities for several weeks.

Balyasny, according to Hedge Fund Alert, recently invited the SEC in to review its books and records. The hedge fund has told its investors that the SEC review is focused on the former analyst and not the firm itself. The former analyst worked in Balyasny’s New York office.

Barry Colvin, Balyasny’s vice chairman, wouldn’t say when the analyst left the hedge, nor would he discuss how the fund became aware that regulators were reviewing the analyst’s activities. 

“We did employ an outside investigative firm to review this issue and based on what we found so far, we have found no improprieties at BAM,” says Colvin, who added the fund hired the investigative firm during the summer.

That, of course, is several months before federal authorities made their big splash with the Oct. 16 arrest of Galleon co-founder Raj Rajaratnam.

The news about Balyasny could explain the reference to an unnamed Chicago hedge fund in the criminal complaint filed by federal prosecutors against former S2 Capital hedge fund manager Steven Fortuna. In the complaint, prosecutors charged Fortuna got top secrete insight about “an information technology company headquartered in Massachusetts” from an analyst with a with a Chicago-based hedge fund.

Galleon arrests

Federal authorities have arrested eight additional people in connection with the Galleon insider trading scandal. And later today prosecutors intend to announce the filing of charges against 14 new defendants–including the eight arrested today,  people familar with the case say.

In all, this means there will be 20 defendants in this fast-growing case.

On Wednesday, I wrote a column about how the Galleon insider trading case is like a jigsaw puzzle with several pieces left to be snapped into place by federal authorities. Will the latest developments reveal just how far the outer boundaries of the Galleon puzzle extend?

Stay tuned.

Galleon’s edge

The arrest of hedge fund millionaire Raj Rajaratnam on charges that he and his $7 billion Galleon Group hedge fund profited from illegal insider trading will no doubt feed suspicion in some corners about the way hedge funds generate fat profits.

But for anyone to assume that all hedge fund managers owe their success to getting information on the sly is unfair and wrong. The overwhelming majority of hedge funds are only as good as the quality of the research performed by their analysts and traders.

And the truth is the vast majority of hedge funds are rather ordinary. If the majority of hedge funds managers were so crafty, not so many funds would have gone bust last year–or lost bundles of money for their wealthy investors.

The true standouts in the industry are a real minority. Anyone can put together an offering statement, call themselves a hedge fund manager and go out and raise money. That’s one reason why wealthy people and pension funds who throw money blindly at hedge funds without doing adequate due diligence are being plain foolish.

Still, the charges against Rajaratnam and five co-defendants are disturbing. Hubris and greed are powerful motivators. And some hedge funds will stretch, even break the rules to get an edge–even if it’s to book just another $20 million for a fund with nearly $7 billion in assets.

Indeed, it’s worth noting that this isn’t the first time Galleon has been accused of skirting the rules to get an edge.

In 2005, Galleon paid an $800,000 fine to the SEC to settle a civil investigation into allegations it improperly profited from shorting 17 stocks. The SEC alleged the hedge fund violated securities rules by using shares obtained in a secondary offering to cover, or close out, a pre-existing short position on a stock. Regulators claimed that impermissible strategy called “collapsing the box” essentially was a risk-less one and generated $1 million in trading profits for Galleon.

Dendreon redux

Earlier today I posted a column about the role HFT played in the 69%/70 second plunge in shares of Dendreon on April 28. There’s plenty of statistical evidence that demonstrates this incident simply can’t be dismissed as a “bear raid” on a notoriously high-beta stock.

In the 70 seconds that shares of Dendreon were tumbling from $24 to $7.50, some 3 millions shares changed hands in about 10,000 transactions. Nasdaq reports that on an average day, Dendreon’s trading volume is about 2.5 million shares. On an average day there are 10,000 trades of Dendreon shares.

So, that 70 seconds was really a microcosm of a typical trading day for Dendreon.

If you think it’s possible for short sellers to be that organized to push a stock down, there’s a bridge in Brooklyn you may be interested in.

Sure, shorts profited from the sharp decline in Dendreon and some may even have spread negative rumors about the company’s experimental prostate cancer drug. But the evidence points to HFT trading as taking this sell-off to a new and unprecedented level.

And that’s why we need answers now from regulators as HFT continues to dominate the markets.

I’m not saying HFT trading desks intended to crash the stock. But as I said in my column, this was a perfect storm of HFT trading strategies coming together with a stock that’s ripe for the shorts.

Citi’s other prop desk

Now that Citi is unloading it’s much-hyped Phibro energy trading group maybe the media can start focusing on the part government-owned bank’s other proprietary trading desk–its Principal Strategies Group.

While everyone has been obessing over Phibro and the excessive $100 million payday for top trader Andrew Hall, Citi continues to quietly add prop traders to this little-known group that uses bank capital to trade stocks and bonds.

Back in the summer, I wrote about how Citi was committing up to $1 billion in new capital to this group of three dozen traders and analysts–even though Citi CEO Vikram Pandit said earlier this year the bank was moving out of prop trading. But the rest of the media remained focused on Phibro, in part because it’s far easier to write stories about Wall Street salaries and big bonuses.

So with much of the financial press blinded by Hall’s outsized compensation package, Pandit’s strategy of reconstituting a prop trading desk that lost a bundle last year continues to get little attention. In fact, The Wall Street Journal, seemingly oblivous to the Principal Strategies Group, didn’t bother to challenge Citi’s contention that its decision to sell Phibro “is consistent with its efforts to slim down and focus more on serving clients, instead of placing financial bets with the company’s own money.”

Excuse me, the whole intent of the Principal Strategies Group is to place “financial bets with the company’s own money.” In fact, a good number of the prop fixed-income traders in the Principal Strategies Group came from Pandit’s own failed hedge fund Old Lane that Citi acquired mainly to get Pandit as its CEO in waiting.

The Principal Strategies Group is really a collection of seven or so hedge funds that follow different trading strategies. So great, Citi is unloading Phibro. But Pandit is trying to make seven other mini-Phibros.

Do you have any confidence Pandit will have more success with these mini-hedge funds than he did with Old Lane?

Bernanke’s Hester Street home

The Federal Reserve may not want to crow about the half-empty giant shopping mall it now owns in Oklahoma City by virture of its hastily-arranged rescue of Bear Stearns. But at least one other commercial real estate deal that the Fed picked up from Bear appears to be in better shape.

One loan now in the Fed’s portfolio is a mortgage Bear made to the developer of an upscale condominium building in lower Manhattan called The Machinery Exchange. The 14-unit complex at the corner of Hester and Baxter streets is located on the edge of Chinatown and got a favorable write-up from The New York Times in 2007 because of its architectural style.

The developers bought the 94-year-old seven-story former machine warehouse in 2005 for $10 million. Real estate records indicate that Bear provided the financing for that deal. The developers also raised an additional $25 million in construction financing from other investors–although it’s not clear if Bear was part of that transaction.

Either way, it appears the project, where some units were priced at between $1 million and $5 million, is in fairly good shape. The website for renovated building says no units are availalble–usually a sign that all of the apartments were sold.

The hunt continues for the rest of Bear’s commercial real estate projects that landed in the Fed’s lap.

Calling Geithner

Good work by the AP in getting a copy of Treasury Secretary’s Tim Geithner’s phone log, which shows that he was quite busy during the first-half of the year speaking to Wall Street bankers. These stories are fun reads and I recently did one based on FDIC Chairwoman Sheila Bair’s datebook.

To me, the most interesting thing to come out of the Geithner call list is the revelation that he spoke several times with both Citigroup Chairman Dick Parsons and Citi CEO Vikram Pandit. Now, given the dicey situation Citi is in, that’s not surprising. But compare this to Bair’s dealings with Citi–in which she all but kept Pandit at arms length this summer.

Bair’s datebook reveals that she dealt exclusively this summer with Parsons or other Citi board members. There’s no indication that Bair had any private talks with Pandit.  

This notably different treatment of Pandit is further proof of the icy relationship that exists between Bair and Pandit. And this is why it may be too early for Pandit to believe his job is secure–even if an outside consultant hired by Citi reportedly gave him high-marks as a manager.

Fed knows transparency when it sees it

From the start of the financial crisis, the Federal Reserve has fought to keep secret the many measures it has taken to prop-up the banking system.

The Fed has opposed releasing information about the trillions of dollars in loans it made during the crisis or the tens of billions of dollars in troubled assets it has taken on its balance sheet. For instance, the Fed still won’t say just what it acquired, when it took on some $29 billion in troubled assets from Bear Stearns last year.

Yet the Fed has no trouble demanding transparency from others. In the bankruptcy case for Extended Stay Hotels, in which the Fed is a big creditor after assuming some of Bear’s assets, the central bank came out for the appointment of an examiner.

Why? Well, according to court papers filed in the bankrupty case, the Fed says:

Given the likelihood that the New York Fed will be called upong to publicly explain any loss, the New York Fed would be remiss if it did not acknowledge to the Court its own independent interest in obtaining transparency into the collapse of the Debtors.

Isn’t that rich? Now I have no problem with the Fed throwing its support behind the appointment of a bankruptcy examiner–something the judge in the Extended Stay case did recently approve. Examiners often bring a pair of fresh and untained eyes to the process.

But for the Fed to argue the merits of transparency, while it prevents the public from looking into its own affairs, is simply hypocritical.

Churning is out at Citi

Citi is kicking the commission habit for its remaining brokerage customers.

The big bank says it is shifting away from charging commissions on customer trades and going towards a more customer friendly, fee-only business model. The change applies to investment advisors working out of Citibank branches.

Earlier this year, Citi entered into a joint venture with Morgan Stanley, which took over the day-to-day operation of its once mighty Smith Barney wealth management business. That venture largely already operates on a fee-only business.

The move away from commissions is a welcome one. And it should avoid situations in which brokers try to drum-up needless trading activity in customer accounts–simply to generated higher revenues.

By contrast, fee-only brokers generally charge a flat fee to customers based on the dollar value of the assets they have invested.

The move to a fee-only business model is consistent with the Obama administration’s call for brokers to be held to a fiduciary duty when investing for their customers. In other words, the Obama administration, as part of its regulatory reform package, wants brokers held to a higher standard for the investment decisions they make for customers.

These days there is a lot to complain about with Citi and I’ve been more than critical of the way Citi CEO Vikram Pandit is managing the bank’s affaird. But this decision to kick the commission habit is good news and Citi should be applauded for making the switch.