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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Mark Adams who wrote (4190)	6/27/2001 11:36:19 PM
From: John Pitera	Respond to of 33421

Mark, there has certainly been more serious talk of Japan coming up with some Resolution Trust Corporation (RTC) type entities with some real Muscle in the past 3-5 months and that's a constructive development. speaking of Japan, Goldman really got hit with punitive actions for a trader mispricing Japanese Govt bond warrants ................. June 28, 2001 -------------------------------------------------------------------------------- Regulators Penalize Goldman For Violating Trading Rules By JASON SINGER Staff Reporter of THE WALL STREET JOURNAL TOKYO -- A data entry error by a Goldman Sachs Group Inc. trader has led to the firm being slapped with stiff penalties by Japanese regulators that will force the investment bank to temporarily bow out of a business in which it is Tokyo's biggest foreign player. The series of events that led to the penalties, which were meted out Wednesday and take effect Thursday, highlights the risks involved in selling complex derivatives over the Internet to individual investors. It also shows how Japan's regulators, who for years were accused of lax oversight, are growing more vigilant in their mission to protect retail investors from mistakes like the one Goldman made. The penalties, ordered by the Financial Services Agency, which regulates banks and brokerage firms operating in Japan, have broad consequences. The firm will have to suspend trading in warrants for two weeks in July, and stop writing new warrants for a month, starting Thursday. A side effect of that penalty, however, is that Goldman will be barred from trading Japanese government bonds for the four-week period. And Goldman is the biggest foreign buyer of Japanese government bonds from auctions by Japan's central bank. Last year, the investment bank ranked as the fourth-biggest overall buyer of Japanese government bonds at auctions, acquiring more than three trillion yen ($24.22 billion) of the bonds. The data-entry error occurred on May 24 at 8:00 a.m., when a Goldman trader keyed in a mistake on one of the 754 Japanese warrants the firm deals in through its Internet-based eWarrant business, which opened in March last year. Goldman provides as many as 300,000 electronic prices per day in Japan. The eWarrant business handles between 2,000 and 7,000 trades per day. Goldman's computer system didn't pick up the mistake. At 9:00 a.m., when the market opened, 28 orders came in from individual investors to buy the warrants -- at a price grossly in the buyers' favor. The total value of the 28 sales was about $1 million. Goldman noticed the error quickly, and 22 of the customers agreed right away to cancel their trades. Goldman voluntarily informed regulators at 9:45 a.m. what had happened. On May 28, Goldman sent a letter to the people who made the trades explaining what went wrong, and putting in writing that the trades would be canceled. But six investors held out and refused to accept the cancellations. Goldman is currently in talks with them over a settlement. Goldman says the slap from Japanese regulators carries too sharp a sting. "The error was spotted quickly, we took all the appropriate actions, including informing the regulator, and we think the penalty is extraordinarily harsh and disproportionate," said Lucas van Praag, a Goldman spokesman. Goldman didn't name the trader, who it said remains with the firm. Iichiro Yoshino, an FSA deputy director, said that if the penalty seems severe, it is because investment banks take on a special responsibility in being a market maker for the general public. He also said Goldman lacked sufficient checks, and didn't explain well enough what caused the mistake in the first place. The FSA's order requires Goldman from now on to better disclose the pricing formula for the warrants it sells, to identify who is responsible for the transactions and to "totally revise" procedures for how it will handle problems like this in the future. It also requires that Goldman "settle the troubles with the investors related to the transactions of the covered warrants as soon as possible."