Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Lars Toomre's blog

President Obama Wants Big Bank Limitations

President Obama continues to try to curb risk taking on Wall Street. Today, one year after his inauguration, he has proposed a plan to limit the size and activities of big commercial banks. "While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse," said President Barack Obama at the White House. Mr Obama continued his populist rhetoric with the statement:

My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.

According to congressional sources and administration officials, this proposal is designed to return — at least in spirit — to some of the curbs that were instituted with the Glass-Steagall act back during the Great Depression. This plan has been backed by former Federal Reserve Chairman Paul Volker and is designed to limit the amount of risk that customer deposit activities might be exposed to.

Apparently President Obama wants to prevent commercial banks and institutions that own banks from owning and investing in hedge funds and private-equity firms. Similarly he hopes to limit the amount and type of proprietary trading that they might do for their own accounts. As a result of these proposals, the common equity securities of the large banking institutions have sold off as investors are unsure about what type of business models these banks might pursue in the future and hence what "normalized" profits might be.

Toomre Capital Markets LLC ("TCM") wonders whether any of these populist proposals will eventually be enacted into law. As Ace Greenberg, the retired CEO of Bear Stearns, said on CNBC today about the possible return of Glass-Steagall: "The egg has been scrambled and I don't think they can put it back in the shell." However, they are sure to appease those on Main Street that are disappointed with the bank bailouts and the large Wall Street bonuses.

Citigroup Nears Deal to Return Billions in Bailout Funds

Ahead of President Barack Obama's meeting on December 14, 2009 with senior banking officials from institutions like Goldman Sachs, JPMorgan and Bank of America, The New York Times is reporting Citigroup Nears Deal to Return Billions in Bailout Funds. "Citigroup was close to a deal on Sunday night to be the last of the big Wall Street banks to exit the government’s bailout program, after trying to persuade regulators that it was sound enough to stand on its own. Negotiations between the bank’s executives and senior government officials went into the night and could still collapse."

Toomre Capital Markets LLC ("TCM") wonders how much of this drive to repay TARP funds is driven by executive compensation desires. Wall Street is still an incredibly "alpha" environment where most participants judge themselves by how well they are being compensated. With Goldman Sachs having a year very close to the earnings in its 2007 peak year, many "stars" are very much aware of the pay possibilities that exist at firms without the government imposed compensation restrictions. Surely Citigroup must be smarting from being the last major bank to have TARP funds outstanding and hence needing to limit what it can pay its investment banking, sales & trading and investment management employees.

Madoff Feeder Fund Manager Stanley Chais Under Crimal Investigation

Money manager Stanley Chais and "entities" associated with him are apparently under criminal investigation stemming from the Bernard Madoff affair. Toomre Capital Markets LLC ("TCM") previously wrote about Mr. Chais in the post Stanley Chais, A Fund Feeder to Bernie Madoff.

Late on Friday December 11th 2009 various news services are reporting that prosecutors from the Southern District of New York made a formal request to intervene in a civil lawsuit filed by the U.S. Securities and Exchange Commission. According to Bloomberg News, “The government’s criminal investigation seeks to determine whether Chais and others have violated various federal criminal statutes,” including conspiracy, mail fraud, wire fraud and money laundering, Assistant U.S. Attorney William Stellmach wrote in a legal brief. Prosecutors think they will decide whether to charge Chais or businesses related to him by mid-June, Stellmach wrote.

Joe Gregory At Least Sells Something

Joe Gregory, the former President of Lehman Brothers and long-time confidant to former CEO Dick Fuld, apparently had more difficult financial times since he was forced to resign from the failed investment bank in June 2008. As noted in this previous TCM post Possible Bankruptcy for Joe Gregory of Lehman Brothers, "one might surmise that Joe Gregory was as good at managing his own personal finances as he was at managing the leveraged risks of Lehman Brothers."

From the November 13th 2009 edition of The Wall Street Journal comes news that Joe Gregory has had some success in liquidating at least some of his various property holdings. The 2.5-acre oceanfront estate in Bridgehampton, N.Y., remains on the market with an asking price of $27.9 million. However, at least the property in Vermont is now sold. One wonders when and at what price the Bridgehampton house will eventually be sold.

Former Lehman Brothers Holdings Inc. president Joseph M. Gregory has gone into contract on his seven-acre Manchester, Vt., estate, which he listed for $2.48 million.

Mr. Gregory has also sold his guest house, across the street from the main house. After more than 30 years at Lehman, Mr. Gregory resigned from his post in June 2008; Lehman filed for bankruptcy-court protection from creditors in mid-September.

Mr. Gregory bought the seven-acre Vermont property for $675,000 in 1993, according to public records. A six-bedroom farm-style house sits on the property, which also has a barn with a three-bedroom guest apartment above. The guest house went for $715,000, 10% less than his asking price. He bought that two-acre property for $180,000 in 2000. Sunny Breen of Main Street Realty represented Mr. Gregory in both deals.

2009 TCM Transition

As Toomre Capital Markets LLC ("TCM") starts the fourth quarter of 2009, we are cognizant that our consulting business is once again in transition. As it is sometimes said, as one door closes, another door opens. We are just not quite sure which door (professionally at least) might be opening.

For much of the past two years during the on-going credit crunch, the TCM staff has been working extensively with a major participant in the Life Settlements sector. We have used various pieces of the MATLAB mathematical modeling language together with Microsoft SQL Server relational data bases and ActiveX technology to create the calculation code for their customized portfolio management application. The resulting code is rather advanced.

This MATLAB-compiled code enables TCM's client to quickly price various individual life insurance policies and to help identify the risk/rewards in simultaneously managing several portfolios of such investments. It has moved the client away from the risks and confusion of large complicated Excel spreadsheets and onto a modern web-based platform. Alas, though, the heavy development work for that particular project is drawing to an end and we are now in the acceptance testing phase. There is unlikely to be any further enhancement work necessary until at least the code has been used in production for some time period.

Partly as a result, TCM has wondered where we should turn our attention to next. Should we turn to focusing our efforts on developing similar types of MATLAB-based code for other financial clients? Certainly there are many financial firms that enjoy the convenience and ease of data input into Excel spreadsheets. With time, though, many of these same spreadsheets become large, many times unwieldy and often contain inaccurate cell references in some of their formulae.

Depending upon the complexity of what information the spreadsheet is attempting to model, MATLAB often is an effective tool for tying together: the ease of that spreadsheet bring to data input and manipulation; easy access to data stored elsewhere in relational data bases; mathematical calculation of arrays (including good routines for various types of optimization); integration with tried and time tested C/C++ calculation libraries; and excellent visualization opportunities for understanding the results.

TCM is quite skilled in doing this advanced MATLAB development and integration work. (The reader might note the many posting on the TCM website about the term MATLAB and then appreciate why we receive so many visitors each day looking for information on such terms as ActiveX, Excel and MATLAB together.)

As we contemplated during the last few weeks which way to turn, Mathworks (the maker of the MATLAB product) contacted TCM about possibly working with a hedge of hedge funds that needed help with integrating some of their existing MATLAB models with their client-facing website. Could we help? It now appears that very shortly we will be starting an initial project focused on foreign-exchange investments.

TCM 2009 Summer Vacation

Toomre Capital Markets LLC ("TCM") will be closed for its 2009 summer vacation from Monday August 3rd until Monday August 17th. While the staff is traveling and/or spending vacation time with friends and family, there will be limited coverage of electronic communications. Should you urgently need to contact either Aldon Hynes, Lars Toomre or another TCM associate, an e-mail message is probably best. Alternatively, leave a voice message and someone will get back to you within a few days. Less urgent matters will be addressed during the third week of August.

Mayer Brown Partner Joe Collins Found Guilty In Refco Fraud

Late on Friday July 10th 2009, Joseph Collins, a Mayer Brown law partner since 1994, was convicted of securities fraud and other criminal charges in a financial cover-up that brought down the one-time commodity trading giant Refco back in the fall of 2005. A federal jury in New York found Attorney Collins guilty on five of 14 counts, including two counts of wire fraud, two counts of securities fraud and conspiracy, according to the U.S. attorney's office in New York. A mistrial was declared on nine other counts. Collins is scheduled to be sentenced on November 3rd.

The Chicago Tribune has more information on this case here. The verdict ended a trial that lasted nearly two months and took some unexpected turns. In the middle of the trial, the judge presiding over the case became sick and had to be replaced. Apparently, "After the verdict was returned today, two jurors who declined to provide their names told Bloomberg News that the male juror pointed frequently at panel members. The two jurors said deliberations were otherwise uneventful. The jurors said the vote was 11-1 to convict on the remaining nine counts. The holdout was the juror who pointed at the others. That juror wanted a mistrial, they said."

Toomre Capital Markets LLC ("TCM") has previously written a number of blog posts about the Refco Scandal and Mayer Brown's possible involvement. Those posts can be found here and here.

Details of Sergey Aleynikov's Downloads Emerge

According to Bloomberg News, Sergey Aleynikov, the former Goldman Sachs Group Inc. computer programmer arrested last week for stealing software, told an FBI agent he uploaded proprietary code to an encrypted server he had used on “multiple occasions.” Mr. Aleynikov, 39, told the agent about 1 a.m. on July 4 that he had logged into Goldman’s computers through remote access from his home and sent encrypted files to a repository server with the URL identifier, according to a copy of his FBI statement in court files in Manhattan federal court.

The Bloomberg News story goes on to explain that is run by a London resident Roopinder Singh, who describes himself on a blog linked to the website as "a trading systems developer working in London's financial services industry". That website offers "subversion hosting." Subversion, commonly referred to by the acronym SVN, is a common version of source control software that allows users to track current and previous versions of programming code and other documents. [Toomre Capital Markets LLC ("TCM") uses two competing products known as CVS and Microsoft Visual SourceSafe to manage its programming source files that are part of either internal or client projects.]

Misha Malysev and Teza Technologies Sued By Citadel Investment Group

On July 9th 2009, another legal shoe dropped in the case of Sergey Aleynikov and his would be new employer Teza Technologies. Ken Griffin's Citadel Investment Group is now suing its former head of high-frequency trading Misha Malysev and two other former employees, Jace Kohlmeier and Matthew Hinerfeld, alleging that their formation of a new trading firm violated a non-compete agreement they had with Citadel.

As The Wall Street Journal reports, "The identity of Malyshev's new firm, Teza Technologies LLC, became very public this week, when it said it hired and subsequently suspended former Goldman Sachs computer programmer Sergey Aleynikov. Aleynikov has been charged by the U.S. with stealing computer code from Goldman's high-frequency trading business. Aleynikov and his lawyer have asserted that any violation was unintentional, and that he didn't distribute any codes obtained from Goldman."

The Citadel complaint was filed in the Chancery Division of Cook County, Illinois Circuit Court. The complaint asks the court for an expedited hearing in the case, saying that Teza could cause "irreparable" harm to Citadel. It also mentions the Aleynikov affair, stating, "Teza's decision to hire Aleynikov, an accused software thief, creates a substantial risk that they have stolen, or may be planning to steal, Citadel's proprietary code."

As part of the complaint, Citadel attached copies of the non-compete agreements and resignation acceptance letters of the former employees. Malyshev's agreement states that for nine months following his February 2009 departure, he cannot start working for a "competitive enterprise" or use "quantitative analytics which are based on information that is proprietary to Citadel and which I either utilized or developed when I was employed by Citadel." The WSJ notes that Citadel's non-compete agreements are widely considered to be among the more stringent in the hedge-fund business.

Sergey Aleynikov Charged With Stealing Goldman Sachs' Algo Trading Source Code

On Monday July 6th 2009, various news outlets are reporting on the rather brazen bank theft by one Sergey Aleynikov. Rather than brandishing a gun or cracking a vault, Sergey hacked the algorithmic trading secrets of his then-employer Goldman Sachs by downloading proprietary, "black box" computer models that Goldman uses to execute rapid-fire trades in the financial markets. The value of this intellectual property, experts say, could be incalculable.

Toomre Capital Markets LLC ("TCM") has written extensively about the topic of Algorithmic Trading. Interested readers, for instance, might want to review the white paper entitled Market Risk and Algorithmic Trading that TCM wrote on behalf of Advanced Micro Devices some months ago. As that paper starts,

In the evolving financial markets, ever-more complex quantitative analyses are performed. Some constantly assess the market risk of portfolio exposures, while others calculate the probability of reward for various strategies in the continually shifting markets.

Increasingly, algorithmic trading programs automatically execute the trade orders that result. With the growing adoption of the AMD Opteron™ processor, high performance computing for quantitative modeling and algorithmic trading in the financial markets likely will increase.

Simulation modeling techniques quantify market risk, measuring the probability and magnitude of potential loss due to change in prices. As market liquidity decreases, typically price volatility and, hence, market risk increases. With the recent introduction of decimalization, the U.S. equity market structure dramatically changed. Trading spreads shrunk, trading venues proliferated, and market liquidity fractured. As a result, a new form of trade execution emerged: algorithmic trading.

Ten-Year Treasury Yield Hits Four Percent

Treasury yields soared and prices correspondingly plunged on June 10th, 2009. The benchmark 10-year note briefly touched the four percent level after the United States Treasury sold $19 billion of 10-year notes and Russia said it would further reduce its share of U.S. debt. This was the highest yield for the benchmark since October 15, 2008 when the credit markets were in the throes of seizure.

During the past few months, Toomre Capital Markets LLC ("TCM") has been quite busy tending to other matters (like client engagements). Hence, Lars Toomre in particular has had limited time to write for this website. However, as often happens behind the scenes, a client contact called to pick Lars' brain about what might be his macro perspective on yesterday's events. That I shared with the client and I also told him a few ways that I would be positioning investment portfolios if I were responsible for the management of fixed-income or equity assets. This client also strongly urged that I also share with the readership of this website a brief write-up about my first statement, which was "It is all about convexity!"

The bond market in general is having fits because of the large amount of Treasury supply that is needed to fund the stimulus package as well as what some regard as the profligate spending of the new Obama administration and Democratic Congress. Hence, Treasury interest rates in general have backed up from the excessively low levels they reached while investors of all types fled to the relative safety of Treasuries. The reader might well remember just a few short months ago that no one wanted to own any type of risky asset.

Both the Treasury and major equity markets are back to levels roughly about where they stood as the events around the bankruptcy of Lehman Brothers and the rescue of AIG took place. Eight months have elapsed during that period. During that period, both equities and bond yields have been much lower. The United States Federal Reserve stepped in with various alphabet soup programs in attempt to maintain some amount of liquidity and to prevent an absolute seizure in the money and credit markets. Hence, the Federal Reserve balance sheet has expanded massively and quite quickly.

While this expansion has occurred, there has been a major move to get consumers with troubled mortgage debt to refinance into more traditional mortgage instruments. Much of that origination occurred at lower interest rates. The resulting securities are now held in large part by either FNMA/FHLM or the Federal Reserve under one of the purchase programs introduced in the last year. Also many of such recently originated mortgage-backed securities are now "under water" or below the origination/purchase cost.

People sometimes forget how much negative convexity there are in mortgage-backed securities, particularly when yields shift by about 150 basis points or more. What start out as securities near par with a duration slightly in excess of four, now become discount securities with durations around six years. (Remember longer durations imply that for a given amount of yield increase, there will be a bigger price drop for a longer duration bond.) The refinance option still residing with the homeowner keeps is far out of the money, and hence the effective duration of the mortgage pool is now much longer. The question is how much longer and what is the over-all consensus in the market about how long that option is going to remain out of the money.

J.G. Wentworth Enters Chapter 11 Bankruptcy Protection

For about a dozen years now, late-night TV has frequently had advertisements from a financial firm known as J.G. Wentworth. On June 1st 2009, that firm, formally known as JGW Holdco LLC, and two of its subsidiaries, J.G. Wentworth LLC and J.G. Wentworth Inc., entered Chapter 11 bankruptcy protection after the company allegedly "encountered liquidity problems amid a tightening credit market".

This relatively-small financial firm repeatedly pitched the concept that one could sell insurance contracts known as structured settlements "to raise cash now". Rather than receive a stream of payments in future years as specified in an annuity insurance contract that is part and parcel to a structured settlement, the beneficiary of that structured settlement could receive a sum of cash from J.G. Wentworth "now". In exchange, the beneficiary would give up all future claims to the annuity cash flows and the funder, J.G. Wentworth, would receive them instead.

Many individuals and firms have long avoided the structured settlement sector of the financial markets, particularly on the purchase side of the transactions. Most sellers of structured settlements are what one would call "retail" customers. Frequently, these customers are less sophisticated in one way or another. Often the customer is at least middle-aged, if not older; is in a diminished physical state; and has encountered some type of financial stress that is leading to the consideration of the sale of the structured settlement annuity contract.

In such a condition, it often is not clear to a seller whether a proposed transaction price is fair or not, especially when potentially pressured by an aggressive broker who promises to get the seller cash now. As with all retail-oriented businesses, the "downsides" (risks) of entering into the transaction are rarely well-explained. Further the total fees to be paid to the broker and/or principal are often concealed or less than completely disclosed.

Microsoft IE Browser Is So Frustrating!!

The Microsoft Internet Explorer browser in its various implementations is so frustrating to deal with, especially in its various non-standard ways of rendering XHTML elements and CSS mark-up. Working with Internet Explorer version 7 during the past few days, I am reminded well why we here at Toomre Capital Markets LLC ("TCM") fled first to Firefox and then more recently to Google's Chrome as our web browser of choice. Unfortunately, though, slightly more than sixty percent of this site's visitors still use Microsoft IE for browsing content here. Hence, website changes still need to be correctly rendered with IE as well.

Over the past few weeks, we have been doing quite a bit of working on the plumbing so to speak that enables this website to function. At its core, the public side of this website relies on the excellent Content Management System known as Drupal. The core software was upgraded to the most recent Drupal release 6.12 and all of the more than sixty or so modules were upgraded as well. We also have begun implementing a number of new features like the ability to print content in a printer friendly format, an ability to e-mail content to professional contacts and the ability to share content with various social network sites.

As part of that overhaul, we also have rewritten the core Drupal theme that will be used to display various website pages to the user. That new theme is working really well in both the Chrome and Firefox browsers. However, of course, the Microsoft IE browser has other thoughts. It appears not to recognize some CSS selectors or maybe not implement them at all. Other CSS selectors seem to have padding and/or margin issues that are throwing neat rows of graphical elements out of whack.

Hopefully, it will only take a short while to track down solutions to each of these Microsoft IE specific issues. Until then, we will hold off on putting the new theme into daily production. Thank you for bearing with us during this upgrade and redesign process. We are off to find some tools that might assist with the debugging of what is going on with the IE rendering engine.

SEC Files First Insider-Trading Case Using Credit Default Swaps

Toomre Capital Markets LLC ("TCM") first wrote about the use of credit default swaps ("CDS") as a means of insider-trading back in October 2006 in the post Possible Insider Trading Using Credit-Default Swaps?? On May 5th 2009, the Securities and Exchange Commission finally filed its first case alleging that credit-default swaps were used to facilitate illegal insider-trading activities. Hopefully, this will be just the first of many such cases filed involving the abuse of insider information and the credit default swap market.

According to this story on Bloomberg News written by David Scheer, the SEC has now alleged that a Deutsche Bank AG salesman, one Jon-Paul Rorech, 36, passed on information about a pending bond sale to a now former Millennium Partners LP money manager, one Renato Negrin, 45, who then bought credit default swaps that resulted in profits of $1.2 million once the VNU high-yield bond transaction was formally announced. The securities market regulator wants these two individuals to forfeit "unlawful trading profits" and pay unspecified fines. “Rorech and Negrin checked their integrity at the door and schemed to engage in insider trading of CDS to the detriment of investors and our markets,” Scott Friestad, the SEC’s deputy enforcement director, said in the statement announcing the lawsuit.

Ruth Madoff In Crosshairs

Toomre Capital Markets LLC ("TCM") has long suspected that Ruth Madoff was an active co-conspirator with her husband Bernie Madoff in his massive Ponzi scheme. (A reader, for instance, might want to review the TCM post Ruth Madoff: Rube or Accomplice to Bernie? ) Now Federal investigators seem to agree as they are "working around the clock" to freeze the assets of Ruth Alpern Madoff.

On Sunday March 15th 2009, The New York Post published the article Ruth In Crosshair$. This article suggests that federal authorities are working feverishly to prepare a filing asking a Federal judge to formally freeze all of Ruth Madoff's more than $93 million in assets as soon as possible. "The US attorneys will be in court in the next week or so to tell a judge that they believe Mrs. Madoff's assets are derived from ill-gotten gains and that they should be frozen for a certain period of time while the investigation is ongoing," an SEC source said.

The judge will then decide whether there is sufficient reason to believe her assets were legitimately earned or whether they were the proceeds of her husband's $65 billion Ponzi scheme. "You do not need the case to be nailed down, you just need to be able to convince the judge that there is a strong probability that the funds in question came from crime," the source said.

The article continues with additional information about a possible forthcoming criminal indictment. "Law-enforcement sources also told The Post that the asset freeze would be just the first step in a one-two punch against her as prosecutors work furiously to build a criminal case." In the past week, Mrs. Madoff has had needed to part legal counsel with Ira Sorkin who now principally is representing the legal interests of her husband. Ruth Madoff's new criminal defense lawyer, Peter Chavkin, apparently declined to comment on these developments.