Counterparties: Winner winner prison dinner
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.
Let’s say your job is buying and selling mortgage-backed securities in a market that is generally illiquid and difficult to price. How much truth do you owe your clients, who can’t rely on any sort of public exchange to determine just how much they’re being screwed? To Jesse Litvak, the ex-Jefferies trader who’s just been charged with defrauding clients, the answer to that question would seem to be zero.
At least since the days of “Liar’s Poker”, the price of an illiquid fixed-income security has always been whatever you can sell it for. Litvak’s job was not so far from that of the Salomon bond traders of old: he would simultaneously buy and sell the same mortgage security, leaving Jefferies, per the complaint, with “minimal or no risk”.
Matt Levine describes Litvak’s thoughts on what he owed his clients: “‘Why should I tell my customers what I paid for these bonds?,’ he asked himself, like any used-car dealer would, and now he’s under arrest”. To Federal prosecutors, Litvak went too far by doing things like lying about the prices he was paying for securities, not to mention detailing nonexistent transactions with imaginary sellers:
winner winner chicken dinner…he is gonna sell em to me at 75-28 as I told him to not get cute and just sell the bonds so you can own them at 76….he said cool…..its 6.23mm orig….a’ight?
Of course, there was no seller, and Jeffries had paid a lot less for that particular security than Litvak told clients. This trade generated $150,000 of the roughly $2.7 million that Litvak improperly made for Jefferies. But misrepresenting the price of securities to clients, Peter Lattman writes, “might typically prompt the loss of a job or civil lawsuits”; it “rarely, if ever, rises to the level of a federal criminal prosecution”. As Zero Hedge writes, this is time-honored bond-trader behavior:
It wasn’t necessarily an easy job – it required an extensive rolodex, a keen ear for who held what securities in one’s given space, constant schmoozing, and manning the phones constantly. More, importantly, everyone knew how the game is played: everyone knew that the middlemen would usually skim a few basis points on the top or bottom of the bid-ask spread, in exchange for having the first call the next time a juicy security was being shopped around, or whenever one had to offload some debt in a hurry.
So why did the SEC and the Feds target Litvak? Lattman points to the “aggressive prosecutorial stance of the special inspector general for TARP,” Christy Romero. The government, which used TARP to help stabilize the mortgage securities market, was allegedly a victim of Litvak’s actions.
Alternatively, the Epicurean Dealmaker suggests, Litvak simply screwed the wrong people, including making Jefferies an extra $50,000 off George Soros and a measly $10,000 off Blackrock. — Ryan McCarthy
On to today’s links: