Just as New Zealand’s courts are filling up with the tail-end of claims against now-disgraced financial firms – Bridgecorp and Blue Chip, for example, other jurisdictions are going through a similar process.
The big news, of course, is the US regulator’s tilt at Goldman Sachs, which has estimated its legal costs will skyrocket as the action proceeds.
The lawyers will be happy but the public may also be served with an education about how these firms actually run. I look forward to further updates.
But already there is enough happening already in our own neck of the woods. Across the Tasman, for instance, the once-mighty Gold Coast-based MFS is having its dirty laundry aired before the courts.
This chronology on the Australian Delisted website gives an almost up-to-date version of the story so far.
But the latest report on the MFS case, which is being heard in the NSW Supreme Court, includes this fascinating email from the company’s boss, Michael King, explaining in detail to his chief financial officer why he wanted to borrow another $100 million or so quickly.
“I want the money in the can asap,” King wrote, “so we can do a heap of things’.”
Which, as anyone familiar with the history of the South Seas Bubble will know, sounds eerily like the famous UK IPO promotional material circa 1720 from a company that wanted money for: “For carrying-on an undertaking of great advantage but no-one to know what it is.”
Apparently, the promoters raised about £2000 for this venture. I’m not sure what happened to the money, or the entrepreneurs who raised it – a happy retirement on the Gold Coast maybe?
Every week seems to bring far more action than the week before – in fact last week it was every day brings far more action than the week before! Thursday the 6th of May in the US markets was a case in point, where there was sufficient action in the half hour around 2.30pm to 3pm to effectively bring down the US equity markets.
Initially it was suggested the ‘flash crash’ resulted from the ‘fat finger’ problem of putting a ‘b’ where an ‘m’ should be, with a sell order of a billion ‘somethings’ when the order should have been for only a million. (This never seemed likely to me, although I have witnessed this once in the late 80’s where a keyboard operator sold 8760 Bond Futures @ 1 when they should have sold 1 @ 8760, and that really caused a rapid-fire market collapse.) On both occasions the craziest of the trades were cancelled, but many were not. Thursday showed conclusively that the market platforms can’t handle the speed of the computer firepower when the stops go off in such an unbalanced market.
I think we’re going to find that the Dow fell so precipitously not because of any human error but as a result of something I pointed out a couple of weeks ago – it’s easy to fill the majority of orders when the markets are balanced and steady, and impossible when everyone is on the same side of the trade. I’ve read all I can on this over the weekend because clearly such a massive dislocation in the largest equity market on the planet is an extremely worrying situation.
However it’s also necessary to understand what was actually happening as at least four significant external events were occurring simultaneously forcing many exposed traders to act – the live rioting in Greece was emptying the buy side of the market; the Senate debate on the Kaufman-Brown amendment to break up the big US banks was in full flow (later defeated by 33 – 61 votes); the British were getting ready to hang Parliament; and the unwinding of Yen/Euro ‘carry-trade’ contracts helped to spike the Yen. Any one of those events could have impacted a market already down by 3-4% whereas all four together would shake every trader in the market.
When I read criticism of HFT trading it generally comes from traders ‘stepped over’ by the algorithms by tiny margins so they can’t get their orders filled – for example their bid at 20.15 is overstepped by a HFT bid at 20.16 etc. and with a large number of competing HFT’s trading the same way we often see a ‘cascading’ advance or fall on almost zero volume. Such a low-volume ‘melt-up’ has been has been happening most afternoons for over a year in the Dow, as pointed out by sites such as Zero Hedge. One of the secondary impacts of this is of course is to reduce the real liquidity in the market, and when the HFT programs were turned off as it appears many were on Thursday this leaves the market short of liquidity and thus vulnerable to a near instantaneous collapse.
This almost certainly happened on Thursday – the antiquated NYSE system which handles around 25% of the market simply couldn’t keep up to the sell volume in a market already down by around 400 points and the NYSE ‘specialists’ took a 90 second halt to ascertain suitable clearing price levels. Computers then automatically re-routed trading onto electronic exchanges where the over-offering became so competitive it took out all the bids in a violent collapse in nearly 300 stocks. In other words the 30 or so electronic platforms didn’t have the buy volume to cope with the selling rush. In many cases the showing bid became zero, (which presumably couldn’t be filled); the HFT algorithms over-stepped by .01 cent, and the selling computer filled them. For instance Accenture traded $42 at about 14:40. A few minutes later it traded $32. Seven seconds later it traded .01.
Not all stocks totally emptied out but where they did this is the scenario. How far they sold down depended on the buy-side loadings and on NASDAQ anyway only the trades with a fall of greater than 60% were cancelled. How about that as a way of destroying confidence in a market place? Imagine taking a 50% loss in 7 seconds in a major stock where generally a 1-2% intraday move would be notable.
This was all summed up by Robert Reich, Former Secretary of Labor, and now Professor at Berkeley:
“Regardless of why it happened, it’s further evidence that the nation’s and the world’s capital markets have become a vast out-of-control casino in which fortunes can be made or lost in an instant — which would be fine except for the fact that most of us have put our life savings there. Pension funds, mutual funds, school endowments — the value of all of this depends on a mechanism that can lose a trillion dollars in minutes without anyone having a clear idea why.”
Europe: As I predicted in recent posts the level of violence in Europe is now ramping up, particularly in Greece and I see no easy end to this – the growing ‘cascade’ of global debt cannot be reversed and represents a far more certain danger for the survival of the global financial system.
Try this one from Simon Johnson, the ex chief economist of the IMF: “the continental European banks are a model of ….. ineptness, blind herding, and in transition from being “too big to fail” to “so big that even when you save them, you get an economic catastrophe”?
This is precisely what I have been saying for months. A friend correctly reminded me that blaming the CDS’s traders for harming the European bond markets in my last post was missing the point. Clearly if the levels of bank and sovereign debt were digestible then the CDS traders would have no targets to hit. I was really responding to the thought of all the innocent lives being harmed by the actions in the debt markets that the average soul is neither aware of, nor would understand. My two year old granddaughter doesn’t understand any of this but it won’t stop her having to pay for it!
It’s interesting to note that the Greek problem didn’t just arise in the last month; it has been in the headlights now for all of 2010 after growing for years and we still don’t have a EUR decision that lasts a week. The situation only gets worse and the numbers grow with each passing weekend, so it’s no surprise to read Sunday that the EUR is now contemplating a €600 Billion ‘bailout fund’ to help the 1000 odd European banks that are under stress. This is apparently just for banks that have a need for ‘fast cash’, and the US Fed is also rumoured to be re-opening swap-lines to help them out. This sounds very much like ‘bank-run’ protection to me.
€600 Billion sounds an awfully large amount of money until you understand the size of the problem – in my weekend meanderings I’ve re-discovered a report from Feb 2009 the headline of which says: “European banks may need massive bail-out. European banks sitting on £16.3 trillion of toxic assets may suffer massive losses, according to a confidential Brussels document”.
This article had disappeared into the ether and while I had the figure tucked away in the corner of my brain I never saw anything about it mentioned again. And note this is the size of bank ‘toxic assets’ – the present sovereign blow-outs are not even included. Whatever is the truth the sum required is going to be enormous, and is likely to only provide short-term respite because the debt lumps are only digestible in the long term, if at all.
Two other thoughts – with regards to the US$ and Treasuries – why do people run into a burning building at the first sign of smoke? And a headline from Zero Hedge this morning – “Civil and Criminal Probes Launched against JP Morgan for Silver Market Manipulation”. Wow – two of the ‘really big boys’ in trouble with the authorities in two weeks – Hmmm, as suggested in an earlier post, this is certainly blame-shifting time, but maybe it’s also down-sizing time as well.
But the last word should come from someone who has been there: “The last duty of a central banker is to tellthe public thetruth.” – Alan Blinder, former Vice Chairman of the Federal Reserve.
No mention of what the first duty is, but I’d be surprised to find it’s anything to do with the taxpayer. No wonder the authorities consider those searching for the truth to be subversive. Blinder eh – what an appropriate name!
There would be few people who could lay claim to being described in the Southland Times as “an abject figure.” I am one of them.
When working as the PR guy for Contact Energy, a reporter once caught me on the phone in a shop, and asked if Invercargill power prices were about to rise. The standard reply: “annual review blah, blah, prices must rise over the medium term, blah blah, no immediate plans to change prices in Southland.”
Wrong.
A worried Bill Boyd from the retail team came up a day or two later to tell me he’d seen the clipping and there was just such an increase coming. There was nothing for it but to ring the Southland Times and confess. In proffering this gaffe, “Pattrick Smellie makes an abject figure”, boomed the editor, Fred Tulett, an old chief reporter of mine from years before. Contact’s CEO, Steve Barrett, decided I was still useful and would not be let go. Phew.
Then there was the time in 1986 when I leaked the Budget – but why go over old ground?
There was the time in 2006, when Australia’s Origin Energy was trying to get foolishly resistant New Zealand shareholders of Contact Energy to hitch their star to Origin Energy in a merger – a deal that would have enriched them already but didn’t suit the Kiwi “top end of town” and was panned.
One day during that time, we had to make a carefully timed statement to the NZX. The clock was ticking down and all signs were that the Australians didn’t realise NZX Listing Rules are the same as ASX Listing Rules in Australia. They are obeyed, whether or not we are two to three hours ahead of them and a lot smaller.
The timing was so touch and go that a PDF version they sent us went out to media with visible “tracked changes” if you had a particular version of Adobe Acrobat. Luckily, the only reporter to receive that version was an old mate who rang me and kept it to himself.
You’d think the lessons had sunk in by now, but last week, I made a Charlie of myself again.
Thankfully, I had help.
On Thursday morning, NZX Ltd, which regulates day to day compliance with the stock exchange Listing Rules and will continue to do so under the super-regulator, pushed out seven separate PDF attachments to its own disclosure platform, http://www.nzx.com/, relating to ” Disclosure of Directors and Officers Relevant Interests” (sic).
It’s always worth keeping an eye on whether the directors are selling, especially with NZX chief executive Mark Weldon owning 6.5% of NZX. His exposure to the fortunes of the struggling local exchange is weighty, commensurate with his bold plans to revive it. If he sells a big parcel, that’s news. So you check the disclosures.
One schedule in the announcement was headed “Issue of Bonus Shares pursuant to NZX’s 2010 Profit Distribution Plan,” which allowed shareholders to take bonus shares in lieu of dividend.
In other words, “this is how many shares they got”.
It gave a total for Weldon of 6,457,837 ordinary shares in a column marked “Number, Class and Securities to which this disclosure relates”.
The second of two pages of schedules was headed “Directors Ongoing Disclosure – Sale of Bonus Shares” etc. and disclosed for Weldon a total of 6,241,220 shares.
Everyone who has looked at this page – and I’ve hawked it around this week – thinks Weldon sold 6 million-plus bonus shares. It’s lucky I’m here to put them straight, because nothing of the sort occurred.
He disposed of the difference between those two totals above, cashing in precisely $405,679.30 worth of ordinary bonus shares, being the value of 216,617 shares issued :”pursuant to NZX’s 2010 Profit Distribution Plan”.
I only know this because the NZX blew its stack when I reported it wrongly and they sent an email after midday today explaining it, and which has yet to be posted on the NZX disclosure platform.
If you were a mind-reader and weren’t expecting top notch disclosure from the holier-than-thou stock exchange operator, you might have been able to work this out.
If you were some dumb-cluck NZX shareholder in the provinces, or a journalist in Wellington relying on the numbers from the market operator, you’d get it wrong.
What NZX announced this week was disclosure, but it wasn’t information.
How anyone as sensitive as Weldon to his public image could have allowed this to happen beggars belief.
I was inspired on the way to kindy this morning when the Monty Python ‘Money song’ bizarrely came on the radio (what fabulous programming) to search out 10 songs about money.
There are hundreds, probably thousands, of songs on the subject, so to limit the universe I decreed that ‘money’ had to be in the title.
My list, I must admit, is not very adventurous but it’s 5 o’clock already, time to go. Though I am quite pleased with the Prince Charles number, whose name, I’ve just realised, explains why there is a Princess Di look-alike jumping around the stage in an apricot silk dress.
Anyway, would love to hear your nominations for best songs about money.
The suggestion that more New Zealanders will move to Australia now that its superannuation contribution rate will rise to 12% is another absurd example of the pathetic politics of envy common to this country.
Whether Australia’s superannuation contribution rate is the current 9% or 12% (which it will slowly edge up to by 2019) is neither here nor there to most people.
New Zealanders move to Australia because they can make more money; the weather’s generally better (if you don’t mind the mix of drought and floods), and; the people are alright once you get to know them.
But New Zealand’s financial services industry looks across the Tasman and salivates about Australia’s compulsory superannuation system because it knows that if compulsion were introduced here it would feed them forever.
When those who stand to gain commercially from compulsory KiwiSaver start couching their arguments in terms of the national interest, be very suspicious.
While it has undoubtedly built up a significant pool of capital, Australia’s compulsory superannuation system is not without its problems – it’s complex, prone to constant tinkering and, as Sydney Morning Herald writer, Michael West points out, needs constant attention to prevent gouging at all levels.
By contrast, KiwiSaver is administratively simple, wonderfully flexible and should impose less costs on members. With well over one million New Zealanders already signed up to KiwiSaver, it seems incentives are doing the trick.
It is true that contribution rates are low compared to Australia. Under the KiwiSaver rules, only the 2% employer contribution is tax-free (to get that employees must also contribute 2% of their gross wage or salary). However, members are free to contribute up to 8% of their income to KiwiSaver, which combined with the employer contribution quickly bumps up the savings rate to 10%.
The only problem with this strategy is that you still need to pay income tax on that 8%. Rather than compulsion, perhaps a better way to ramp up KiwiSaver accumulation rates would be to allow those extra contributions to be tax-free: more carrots, less stick.
This week’s announcements on securities law reform by Commerce Minister Simon Power are profound for New Zealand capital markets after years of serial failure by both the makers and enforcers of laws to protect the gullible from bad investments.
Bringing everything currently covered by the Securities Commission, the disciplinary tribunal at the NZX, Companies Office vetting of offer documents, and something unexpected involving the Government Actuary under the wing of a new Financial Markets Authority is probably a good idea.
The FMA will be a clean slate and will have a very clear brief to engage in “visible, proactive and timely enforcement” – the thing that seems to have been missing so far. The search has been under way for some months to find the first CEO of the FMA and it must be assumed, he or she will need to look like one mean mofo, as it were.
The politics looks activist and it allows various small town rivalries between the Securities Commission and the NZX to be set aside maturely, not to mention that improved compliance is likely.
It also allows an orderly exit for the chairwoman and CEO of the Securities Commission, Jane Diplock, whose time is up anyway in September next year. Diplock is arguably more sinned against than sinning, given that legislation did not allow the commission to police in the way you’d expect when it came to finance companies’ marketing and disclosure. But her credibility is irreparable within the timeframes of a government moving at speed to try to restore trust in local investment options outside housing.
Her missing rules have apparently been created, and a tighter regime is certainly taking shape place for Mum and Dad investors from December this year, when all financial advisers need to have registered.
Power did bend a bit this week and gave a six month extension for advisers to be trained and gain the new qualification that the law requires. A sizeable sub-group of old codgers who’ve been giving financial advice their own way for years, thanks very much, are kicking up a stink and many will leave the industry when they realise they can’t avoid sitting the professional equivalent of re-sitting their driving licence.
Meanwhile banks, in particular, are breathing a huge sigh of relief over this extension, since the regulations the Act will engender are not even finalised yet, bespeaking yet another deficiency in the legislative process that led to the Financial Advisers Act being passed in 2008 by the new government with a bunch of glaring problems.
The politics are murky, because Power and his opposite number in Labour, Lianne Dalziel, agreed on most of this stuff when Power was in Opposition and chair of the commerce select committee and Dalziel was the Minister.
That cross-party unanimity may have acted against a willingness to hear new problems arising, but Power has now listened.
A special fix-up Pre-Implementations Adjustment Bill was before the commerce select committee already because of a lot of other problems identified, there is one Supplementary Order Paper already attached, and more to come as obvious but substantial reforms are decided almost on the hoof.
Arguably Power’s biggest announcement this week was to concede that more work is needed on an area where the Financial Advisers Act threatened to derail the conduct of high finance, corporate dealings and other activity involving lawyered-up parties who should be able to look after themselves.
Tucked away in the blizzard of other changes, Power hinted at a behind-the-scenes scramble to get advice on changing the way the Act treats “wholesale clients, generic advice often issued by institutions rather than individuals, and how the regime deals with group corporate structures.”
In other words, what was a Sydney banker going to say when their New Zealand exporter client rang to organise a futures contract and was asked whether he was registered as a financial adviser in New Zealand? Apart from laugh.
It was going to get silly.
But there’s an extra worry here, and one that goes to the heart of the deeper issues for New Zealand’s thin and isolated investment markets.
It’s to do with scale.
It took New Zealand lawyers, accountants, corporates and banks a surprisingly long time to realise the deep problems with the Financial Advisers Act. It seems extraordinary that it’s only now, getting on for two years since the Act was passed, that fundamental errors are only just being acknowledged, let alone rectified.
This is a sign of how thin the specialist skills can become in an economy that has lost its head offices to Australia, Singapore, Japan, the US and Europe, as is the amateurish rather than shabby law-making on display here too.
And a sign, too, of how small and thin New Zealand’s capital markets are becoming. The best rules in then world – and we don’t have them yet – might assist liquidity, but they won’t create it the way volume will.
In that sense, the incentive to join as well as catch Australia becomes more compelling by the day.
