Friday, December 23, 2011

Future Joseph Jett traders get a Christmas card from Mario Draghi

Well the Euro fix is in. Whether it works - that is another question. But the fix is this: European banks can borrow unlimited amounts for three years to buy Euro government debt. The debt often yields 5 percent. The money costs 1 percent.

The Government debt has - at least for the moment - a very low (mostly zero) risk weighting for capital adequacy purposes so the return on regulatory equity is more than adequate.

Now of all the things you want to be - top of the list these days has got to be a trader at a dumb bank paid a percentage of income earned at bonus time. Massive return on equity. Unlimited funds to employ. Christmas. Indeed a lifetime of silly-seasons all at once courtesy Super Mario.

Of course your bank is not just going to sign over the 20 million check. You are going to have to bamboozle them for that. After all, the European Government Bond carry trade patently risks capital and the risk management department should charge you mega-bucks for that capital. Indeed the risk management department probably should do more than that and stop you.

At Goldman Sachs (where they are quite tight) the risk management department would stop it dead. Contra: at MF Global certain senior Goldies employees demonstrated how Goldies traders without Goldies risk management behave.

But even at MF Global the risk management department knew what was going on.

So dear traders seeking large bonuses: how do you complicate it beyond the feeble minds of your local back-office? You can do complex things with government bonds - strips, interest rate swaps and all sorts of high-fallutin maths that comes from them.

You might not believe me: remember Joseph Jett who misstated profits and risks at Kidder Peabody (then part of General Electric, now buried in UBS). He reported enormous profits and took home an $8.2 million bonus. Jett operated entirely in Government bonds and their derivatives.

So what are you waiting for? The complexity of the stuff you can trade - all dependent on the above ECB provided carry - is enormous. And surely you are smart enough to run rings around the kids in the risk management department.

Wall Street has proven that complexity and cheap money are the road to riches. Now, dear European traders, is your time.

Hop to it boys. You got a Christmas card to collect.



  1. Hi John,

    since the ECB funding facility is a 3-year term repo with no margin call risk, why can't banks gear up in French & German sub 3-year debts?

    Last I check, French and German sovereigns has no risk of refusal by creditors to roll over sovereigns on maturity.

  2. John,

    I do not think that traders in banks will be given much of the money to gamble with. The FT reported that there has been some communication between large banks and the central banks. The ECB money is for bank refinancing (in case it is needed) and purchases of government bonds, thus saving the banks from going bust and reducing interest rates. Todays piece from Gillian Tett in the FT explained the thinking rather good. So top management of the banks will take care that the aim is reached and the geniuses at bank trading desks will comply and mostly refrain from gambling with the ECB money.

  3. not the best time to be short french banks...

  4. This is probably a little too long and frustrated post on one simple matter - whatever brought Wall Street down from 08' till now, Eurozone wants more of it.

    Hey, everybody loves free money!


  5. Actually, the amounts being subscribed seem to be very closely tied to next year's roll. Someone (DB?) reported that neither BBVA nor Sabadell would be buying guvvies with the loot.

    None of the above has achieved the status of fact, bit it's what's being said.

    Merry Xmas

  6. " management of the banks will take care that the aim is reached...": if the top management of banks were that competent, we wouldn't be in the fix we're in.

  7. Whatever they do with the money - they will buy assets with good-high carry and pose them as collateral at the next 3year Repo facility in February ...
    Rinse, repeat .....

  8. congrats on the SHLD short

  9. You guys read my letters too! I never put the Sears short on the blog.