A little story.
So the bankers are in trouble. No surprise!
It is their job to do what their clients ask them for.
In my former incarnation I was what was/is known as a derivatives structurer at a non-US bank.
Let me explain the job. There is one main rationale to the job and it can be summed up simply as follows:
To allow your client(s) to do things that s/he is not permitted to do by regulations
The difference between what is legal and illegal is equivalent to tax evasion (legal) and tax avoidance (legal).
The products are at least 5 years ahead of any regulations from the accounting, security, or legislative bodies.
So,
If you were not allowed to short we would set up a reverse equity fund listed on an established exchange - on or offshore?.
If you could not trade commodities we would set up an SPV or open-ended equity fund whose shares were linked to the price of coffee, or would you like that swapped against 3 month commercial paper?.
In short once we knew what you could do and instruments you could trade, we would engineer tailor-made products from ones you could not, as we could trade everything.
The same holds for company financing and accounts. So you want to borrow money and do not want to break covenants, well we would structure a deep-in swap that would appear OBS (off-balance-sheet). What underlying asset do you want it to look like - fx, bonds, swap rates, oh electricity prices.
This is the beauty of derivatives. All measures that you read about the size of the markets are meaningless - believe me. The only thing that matters is how the NPV changes not the notional size, or any other meaningless measure, and the only guy that knows this is the trader sitting on what may or may not be a time-bomb.
I remember a group of US CEO/CFOs coming in (via our private bank) and wanting us to synthetically - that is what we called it sell their exposure to their own company stock and stock options that they could not do due to lockups and 10-K stuff. Now for them to come to us - a non US bank - meant that they had already tried the major US houses. We actually refused at the time, and I left a few months after.
Now the CEO/CFO of the company actually understood derivatives as he came up with a few ideas (or he had heard them from someone else).
In fact the reason we did not trade it was not based upon the legality of it as we could have side-stepped this but was based upon the size of their stakes. It was one of these "Hot" Biotech IPO's where the insiders had more shares than the float, and the hedge sizes were way too large for the daily liquidity. I think that they were not willing to "short" a sector-basket (like $BTK or BBH).
Believe me there is tonnes of this stuff out there. You, I, and in fact no-one has any idea what is really out there. Yes it is scary, and yes one day a lot of it will blow up either financially or legally. But it is just a bunch of guys and gals doing their job - and legally so.
The accountants cant find this stuff in the audits, and the shareholders (don't make me laugh). This is why the banks are full of MBAs, PHDs, and enough lawyers to rival a tobacco company.
This whole bull run has been based around financial engineering (on and off balance sheet), restricted floats of shares, and indexation mania.
We ($SPX) will return to the 94 levels before it is all over! Supply will meet demand.
-macavity |
