Category Archives: Derivatives

Jury Told, Madoff Planned Everything, Cried Before Arrest

According to Bloomberg,

Bernard Madoff planned every detail of his firm’s demise in the days before he was arrested five years ago today to avoid being marched past his 200 employees in handcuffs, the con man’s former finance chief told a jury.

Madoff, in papers spread across his desk, wrote a series of names and dates in a schedule of events leading up to the exact day his $17 billion Ponzi scheme would finally come to light, Frank DiPascali, the former executive, testified yesterday in Manhattan federal court in the trial of five ex-colleagues.

DiPascali, who joined Madoff’s company as a researcher in 1975, when he was 19 years old, said he learned of the plan during a private meeting in his office on Dec. 3, 2008, about a week before his arrest, after Madoff had been “staring out the window all day.”

“He turned to me and said, crying, ‘I’m at the end of my rope,’” DiPascali told a jury. When DiPascali expressed confusion, Madoff shouted, “I don’t have any more goddamned money — don’t you get it? The whole goddamn thing is a fraud!”

DiPascali is the highest-ranking former Madoff executive to testify in the first criminal trial stemming from the scheme, which was exposed after Madoff’s arrest by federal authorities at his Manhattan apartment on Dec. 11, 2008. Five of his former employees are on trial in federal court in Manhattan, accused of aiding his fraud for decades and getting rich in the process.

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U.S. Stocks Drop as Budget Deal Spurs Bets on Fed Cuts

According to Bloomberg,

U.S. stocks fell a second day, after an all-time high for the Standard & Poor’s 500 Index, as a Congressional budget accord fueled speculation that the Federal Reserve could trim stimulus next week.

Cisco Systems Inc. dropped 2.2 percent after losing a European Union court bid to overturn approval of Microsoft Corp.’s 2011 takeover of Skype Technologies SA. Laboratory Corp. of America Holdings plunged 10 percent after issuing a profit forecast below analysts’s estimates. MasterCard Inc. (MA) climbed 3.8 percent after saying its board of directors approved an 83 percent dividend increase and a 10-for-1 stock split.

The S&P 500 fell 0.7 percent to 1,790.90 at 11:58 a.m. in New York. The Dow Jones Industrial Average dropped 75.48 points, or 0.5 percent, to 15,897.65. Trading in S&P 500 stocks was in line with the 30-day average at this time of day.

“We’ve moved much closer for the Fed to taper in December,” Jeffrey Kleintop, chief market strategist at LPL Financial LLC in Boston, said in a telephone interview. “Markets are increasing their views that we are a week or so away from tapering because of improving economic data and clearing the hurdle for a budget deal. This deal is great, it’s a positive, but also a negative because it could prompt the Fed to taper sooner.”

The S&P 500 (SPX) fell 0.3 percent yesterday after reaching a record 1,808.37 the day before. Fed stimulus has helped propel the benchmark gauge higher by as much as 167 percent from its bear-market low in 2009. The index has rallied 26 percent this year and is challenging 2003 for the biggest annual jump since 1998.

Budget Deal

Investors are considering when the central bank, which meets next week, may reduce the pace of its monthly bond buying. Fed officials cited the drag from fiscal policy in their Oct. 30 statement and Jeffrey Lacker, president of the Richmond Fed, said in a speech Dec. 9 that budget uncertainty is weighing on business investment decisions.

Congressional negotiators yesterday agreed to a budget deal that would ease automatic spending cuts by about $60 billion over two years and will reduce the deficit by $20 billion to $23 billion. The budget compromise, which needs to pass both chambers of Congress, doesn’t raise the U.S. debt limit, setting up another potential fiscal showdown after February.

“The budget deal itself is at best a signal that we won’t shut the government down at the start of the new year,” Alexander Friedman, chief investment officer at UBS AG’s wealth-management unit, told Anna Edwards on Bloomberg Television. “It’s a low base that we’re declaring victory from. The key message for 2014 is the real economy is getting better. For investors however, it’s probably not going to be the same sugar high we’ve seen for the last five years.”

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U.S. Retail Holiday: Sales Up 2.3%, Foot Traffic Declines

According to Bloomberg,

U.S. retailers eked out a 2.3 percent sales gain on Thanksgiving and Black Friday, in line with a prediction for the weakest holiday results since 2009.

Sales at brick-and-mortar stores on Thanksgiving and Black Friday rose to $12.3 billion, according to a report yesterday from ShopperTrak. The Chicago-based researcher reiterated its prediction that sales for the entire holiday season will gain 2.4 percent, the smallest increase since the last recession.

Black Friday Shopping (Bloomberg)

Black Friday Shopping (Bloomberg)

Retailers offered more and steeper deals on merchandise from flat-screen televisions to crockpots that, while luring shoppers, may ultimately hurt fourth-quarter earnings. Many consumers showed up prepared to zero in on their favored items while shunning the impulse buys that help retailers’ profits.

“You could get the same deals online as you could get in the store, and yet there were still a ton of people out there,” Charles O’Shea, a senior analyst at Moody’s Investors Service in New York, said in an interview. Going out to stores, “is part of the experience,” he said.

About 97 million people planned to shop online or in stores on Friday, with about 140 million intending to do so Thanksgiving through Sunday, the National Retail Federation said. That’s down from 147 million last year.

With more stores opening on Thanksgiving, sales were pulled forward from Friday, Bill Martin, ShopperTrak’s founder, said in a telephone interview. Sales on Friday fell 13.2 percent from last year, with foot traffic down 11.4 percent. Foot traffic for  the combined Thanksgiving-Black Friday period rose 2.8 percent to more than 1.07 billion store visits, ShopperTrak said.

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Do-Nothing Congress Dithers on Budget as Deadline Nears

According to Bloomberg,

Congress’s latest attempt at crafting a budget plan is on track to end up the same way as others have in the past decade: with little or no agreement.

Negotiators have little chance of breaking this string of futility, even after a 16-day government shutdown in October that cost the U.S. economy $24 billion. If they do, it’ll only be to curb automatic spending cuts, including $19 billion that hits the Pentagon starting in January.

Now budget experts, labor unions and business groups are saying enough’s enough, and questioning why lawmakers can’t live within their means the way ordinary Americans do and instead lurch from one budget standoff to the next.

“It’s a stupid way to run a country,” said Maya MacGuineas, head of the Campaign to Fix the Debt, a non-partisan advocacy group whose members include business leaders and former lawmakers. “Change comes from two possible things: a crisis or leadership.”

One of the co-chairmen of the campaign is Michael Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP and the New York City mayor.

Unlike with previous budget panels, including the failed 2011 supercommittee, there are no immediate consequences if the budget conference misses its Dec. 13 deadline — the U.S. won’t default on its debt and the federal government won’t shut down for lack of funding.

The committee’s lack of progress is frustrating outside groups, especially business executives, who say congressional lawmakers’ habit of governing by crisis and temporary spending bills is hurting the economy and costing jobs.

‘Chilling Effect’

“The uncertainty has a chilling effect on job creators, households and anybody who’s trying to see around a corner,” said MacGuineas, who is also president of the Committee for a Responsible Federal Budget, a fiscal advocacy group.

Congress in 2009 last passed a budget resolution, the equivalent of a household budget that sets spending parameters for the federal government.

In 2010, disagreement over how to handle the scheduled expiration of tax cuts enacted under former President George W. Bush prevented agreement on a budget resolution and Republicans won the House majority, creating a divided Congress.

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Hedge Funds See Repeat of Yen Slide That Paid Soros, Currencies

According to Bloomberg,

Hedge funds are betting on another run of yen weakness, a trade that made money earlier this year for billionaire George Soros, putting them in opposition to economists who see Japan’s currency little changed into 2014.

Futures traders pushed net shorts, or wagers the yen will fall versus the dollar, to the highest since July 2007, according to the Commodity Futures Trading Commission. That contrasts with the median estimate of more than 50 analysts surveyed by Bloomberg, which puts the currency at 102 per dollar at the end of the first quarter of 2014, from 101.47 today.

Japan has resorted to an unprecedented $70 billion of monthly bond purchases since April to depreciate its currency, boost growth and combat deflation. The yen has plunged 15 percent this year, on pace for the biggest drop since 1979.

“Everybody likes dollar-yen higher,” Brad Bechtel, the managing director at Faros Trading LLC in Stamford, Connecticut, said in a Nov. 22 interview. “And everyone has it on.”

The yen fell to as low as 101.92 per dollar yesterday, the weakest level since May, when it slid to a 4 1/2-year low of 103.74. While it gained for the first time in four days today, its decline this year makes it the worst performer after South Africa’s rand among 16 major currencies tracked by Bloomberg.

Soros Profits

Japanese Yen and U.S. Dollar (Bloomberg)

Japanese Yen and U.S. Dollar (Bloomberg)

Soros, 83, made almost $1 billion from November 2012 to February 2013 on bets the yen would tumble, according to a person close to the billionaire’s family office. Michael Vachon, a spokesman for Soros Fund Management LLC, declined to comment.

Soros’s former chief strategist, Stan Druckenmiller, who made $10 billion with Soros in 1992 from a wager that the Bank of England would be forced to devalue the pound, has also been selling the yen. Druckenmiller, the founder of Duquesne Capital Management LLC, said in a Bloomberg interview in September that his firm is “short some yen,” while being “long some Japanese” stocks.

Fortress Macro Fund, which is run by Michael Novogratz and Adam Levinson, made money trading the yen last year when the currency fell 13 percent. Fortress Macro Funds oversee $3.8 billion. Spokesman Gordon Runte couldn’t be reached for comment.

Signs that the Federal Reserve may reduce its $85 billion a month of bond purchases, which pump money into the economy and debase the dollar, are also driving the yen’s plunge versus the U.S. currency. Minutes of the U.S. central bank’s Oct. 29-30 policy meeting showed that Fed officials expected to reduce their stimulus program “in coming months” as the economy improves.

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‘Great Satan’ meets ‘Axis of Evil’ and strikes a deal

(Reuters) – Saturday night had turned into Sunday morning and four days of talks over Iran’s nuclear program had already gone so far over schedule that the Geneva Intercontinental Hotel had been given over to another event.

A black tie charity ball was finishing up and singers with an after party band at a bar above the lobby were crooning out the words to a Johnny Cash song – “I fell into a burning ring of fire” – while weary diplomats in nearby conference rooms were trying to polish off the last touches of an accord. Negotiators emerged complaining that the hotel lobby smelled like beer.

At around 2:00 a.m., U.S. Secretary of State John Kerry and counterparts from Britain, China, France, Germany and Russia were brought to a conference room to approve a final text of the agreement which would provide limited relief of sanctions on Iran in return for curbs to its nuclear program.

At the last minute, with the ministers already gathered in the room, an Iranian official called seeking changes. Negotiators for the global powers refused. Finally the ministers were given the all clear. The deal, a decade in the making, would be done at last.

Now that the interim deal is signed, talks are far from over as the parties work towards a final accord that would lay to rest all doubts about Iran’s nuclear program.

“Now the really hard part begins,” Kerry told reporters. “We know this.”

THAW

(L-R) Germany's Foreign Minister Guido Westerwelle, British Foreign Secretary William Hague, Chinese Foreign Minister Wang Yi, U.S. Secretary of State John Kerry, French Foreign Minister Laurent Fabius, Russia's Foreign Minister Sergei Lavrov, EU foreign policy chief Catherine Ashton and Iranian Foreign Minister Mohammad Javad Zarif gather at the United Nations Palais in Geneva November 24, 2013. REUTERS/Carolyn Kaster/Pool

The deal, which represents the most important thaw between the United States and Iran in more than three decades since Iranian revolutionaries held 52 American hostages in the U.S. embassy in Tehran, very nearly did not happen.

There was still ample ground to cover on the final day, when U.S. Secretary of State John Kerry arrived, joining foreign ministers from Britain, China, France, Germany and Russia.

Officials from several of the countries were doubtful that a deal would be reached. Resentful-sounding European diplomats said their foreign minister bosses had not wanted to come unless a final text was on the table, but had felt obliged to come anyway when Russia’s Sergei Lavrov showed up on Friday.

When the foreign ministers arrived, some junior diplomats and journalists were evicted from their hotel rooms to clear space for the VIPs.

After his trans-Atlantic flight on Saturday morning, Kerry met his Iranian opposite number Mohammad Zarif, with European Union foreign policy chief Catherine Ashton, who has led negotiations on behalf of the powers.

According to a senior U.S. State Department official, Kerry told Zarif there could be no more delay. President Barack Obama’s administration would call for even tighter sanctions on Iran unless a deal was reached now. Congress members were demanding new sanctions and the White House would join them.

Kerry made the case that “there would be no way to hold back new sanctions to give room for (a) new round and we would lead the charge for more sanctions if we did not come to agreement,” the State Department official said.

By Saturday evening, the final language was personally approved by Obama in Washington. In a sign of how big a risk the Obama administration was taking, the main U.S. ally in the Middle East, Israel, decried what it called an “historic mistake”, easing sanctions without dismantling Iran’s nuclear program.

But Obama said the deal put limits down on Iran’s nuclear program that would make it harder for Tehran to build a weapon and easier for the world to find out if it tried.

“Simply put, they cut off Iran’s most likely paths to a bomb,” Obama said in a late-night appearance at the White House after the deal was reached.

Obama was not the only one taking a risk. Iran’s new president, the relative moderate Hassan Rouhani, was elected in June and inaugurated in August promising to ease the crippling sanctions. But Iran has invested billions of dollars in a nuclear program, which its clerical and military establishment believes is a cornerstone of national pride.

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Gensler Rushes to Lock in Swap Rules as Wall Street Pushes Back

According to Bloomberg,

Gary Gensler has only weeks left as chief of the Commodity Futures Trading Commission. His message for Wall Street: I am not leaving quietly.

As the clock ticks down, Gensler has issued more than a dozen advisory opinions directed at reining in the largest financial firms and swap traders without votes by his fellow commissioners. He’s also insisting on tightening the Volcker rule ban on proprietary trading by banks, making last-minute demands that could derail a regulation that must be approved by five U.S. agencies.

Banks reeling from his final push have consulted with lawyers about whether to take the CFTC to court, according to four people briefed on the matter.

Gensler, 56, has fought a five-year battle with the industry over how to draw up a safer and more open marketplace for derivatives, the products that helped push the world economy to the precipice in 2008. Gensler is trying to cement his legacy, said Fred Hatfield, a former Democratic commissioner at the agency.

Gensler is “trying to do an awful lot in a very short amount of time,” said Hatfield, who now works at Patomak Global Partners LLC, a regulatory consulting firm in Washington. “He’s leaving as little to chance as could be possible.”

President Barack Obama has nominated Timothy Massad, 57, a Treasury Department official, to succeed Gensler, whose term has expired and must leave by the end of the year.

Chess Match

The activity in recent weeks has set up the equivalent of a high-stakes chess match between Gensler and the financial industry, which was holding off negotiating on some rules until he left, according to two people involved in the discussions. They and the others interviewed for this story spoke on condition of anonymity because their meetings were private.

The agencies that must sign off on Volcker also have been dealing with Gensler’s last-minute bargaining tactics. All five regulatory agencies don’t have to issue the rule simultaneously, and in light of Gensler’s questions some have discussed whether to press ahead and publish the rule without waiting for the CFTC to act, the Wall Street Journal reported yesterday, citing sources familiar with the process.

A former Goldman Sachs Group Inc. partner, Gensler is well-schooled in the ways of Wall Street and has emerged as one of its main adversaries in Washington. In implementing the derivatives rules mandated by the 2010 Dodd-Frank Act, he often takes an issue to the brink before striking a deal that is more amenable to the industry than what he first proposed.

 

 

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