Opinion

Felix Salmon

Counterparties: ‘More foolish than wicked’ but still self-dealing

By Ben Walsh
July 18, 2012

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

The structured and synthetic credit markets just can’t seem to catch a break. Monday was the first day of the civil fraud case against former Citi banker Brian Stoker. The SEC’s case sounds a lot like Goldman’s infamous Abacus deal – Citi sold $1 billion of CDOs to clients without disclosing to investors that it put a $500 million short position on those same securities. Japan’s Mizuho may soon face similar charges.

Stoker’s attorney offered the standard “sophisticated investor” defense, with this additional flourish: ”The synthetic CDO market is high-stakes, high-level gambling… However you feel about gambling… this was legal gambling”. As a result, Stoker’s attorney argued, disclosure of conflicts to clients was moot.

As Steven Davidoff writes, the Stoker case threatens to reveal mass incompetence on Wall Street. Instead of your classic stereotype of a greedy trader, Davidoff says the Stoker case reveals something “more banal, merely showing how clueless financiers can be”. The standard sins of conflicted interest, misaligned incentives and an ecosystem of law firms and accountants to condone bad practice will be on display in the trial. Few people, save some hedge funds, thought deeply about the risks: “The likelihood is that this trial will show that many on Wall Street were more foolish than wicked”.

Stoker, a mid-level employee, may fit that bill. Citi, on the other hand, seems to have considered the risks quite specifically and decided to short the deal.

That kind of self-dealing is far from rare. Jesse Eisinger delves into the opacity of the credit default swap markets, where such “high stakes gambling” is the norm. Basic questions, Eisinger writes – like whether Greece’s EU-led bailout constituted a default under CDS documentation – are decided by a “committee [that] operates as a quasi-Star Chamber”. Ten of its 15 members are credit default dealers, and “there’s no prohibition against committee members deciding cases” where they have a financial interest. Eisinger thinks the CDS market is just another case of bad practices becoming “so routine on Wall Street as to almost be unremarkable”. – Ben Walsh

On to today’s links:

Implausible Deniability
HSBC: Banker to drug cartels and Iran – DealBook
HSBC compliance head steps down – FT

New Normal
States’ fiscal crises will last long after the economy recovers – NYT

Alpha
Peregrine CEO: Sorry, but I spent all the money I embezzled – WSJ

‘Liebor’
Geithner defends himself against King defending himself against Geithner – Reuters
The Libor scandal “doesn’t illuminate anything very flattering for anyone involved” – All About Alpha

Wonks
Measuring every inch of the fiscal cliff and its impact on the US economy – WaPo
Democrats propose a plan to sidestep the anti-tax pledge – NYT
Anti-tax crusader Grover Norquist calls Senator Tom Coburn a liar – The Hill

Seasonality
The economic downside of summer: Kids get fatter and dumber – Peter Orzag
How the US fought the summertime unemployment blues during the Depression – Bloomberg

Good News
Why the US labor market is doing a lot better than you think – Conversable Economist

Ups and Downs
Reminder: Historical stock market returns are not the same as one decade’s returns – Business Insider
Bernanke: Do we have a “sustained recovery going on in the labor market, or are we stuck in the mud?” – NYT

Niche Markets
Duane Reade, where cereal is always on sale – The Billfold

Retro
Louis Brandeis slams too big to fail…in 1913 – Pedro da Costa

Oxpeckers
Will the New Yorker “change the Borowitz Report, which is composed entirely of lies?” – Andy Borowitz

Welcome to Adulthood
Cheer up, depressed teens, you’ll make less money later – The Atlantic

Servicey
“84 Things That Aren’t On an Everything Bagel” and other suggested Buzzfeed listicles – McSweeney’s

In Case You Were Wondering
Lloyd Blankfein likes America. A lot – Politico

Stuff We’re Not Linking To
For Yahoo CEO, two new roles – WSJ

Comments
2 comments so far | RSS Comments RSS

Norquist is an absolute tool. If that man is so self-important to his cause, why doesn’t he actually perform a role that actually adds value. Go run a corporation, then I’d be impressed, perhaps.

What I know about Coburn, on the other hand, is much to admire.

Posted by McGriffen | Report as abusive
 

The revelations here -

“Implausible Deniability
HSBC: Banker to drug cartels and Iran – DealBook”

are appallingly hard to believe. This company engaged in a premeditated plan to violate the law in a flagrant and repeated manner. How can this firm be permitted to escape the corporate death penalty? The shareholders and creditors deserve to be financially destroyed along with the executives – who belong in cells.

If the bank’s General Counsel has already been disbarred, that should be first and automatic.

Posted by MrRFox | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •