Tuesday, February 27, 2007

More "shocking" allegations of insider trading.

How many times must one comment on what is actually happening at 90% of the "Event Driven" hedge funds in NYC?  Why are they all clustered there, or a short drive away in Conneticutt?


"Top News February 26, 2007, 3:03PM EST
Charges Pending in UBS Payoff Case

Sources say at least one analyst at the investment firm may face charges of
selling information on ratings changes before they're made public

Here's proof some still see value in brokerage-produced stock research, even
after the research scandal of four years ago tarnished the image of Wall Street
analysts. BusinessWeek has learned federal authorities are on the verge of
busting a scheme in which at least one employee of UBS was allegedly selling
information about upcoming changes in analyst ratings on stocks to traders not
affiliated with the Swiss investment firm."


The February volatility has surfaced, but the VIX, while up nearly 18%, has not spiked as per my comments.  It is interesting to see China described as the "catalyst" for this set of circumstances. The REcaptitulator believes China is again experimenting to see just how the partial differential equation describing the sensitivity of U.S. markets to Chinese markets works.  This is a dangerous game of "chicken", and I am not sure who will blink.

Whether this redefines the nature of risk premiums in today's compressed world remains to be seen.

Monday, February 19, 2007


This is an interesting time. Volatility is historically low, and the oft-mentioned "longest time prior to a 2% decline", while flawed in the sense that structural changes in the financial sector have changed (together with Bernanke's "Great Moderation"), still looms...and that is without the Recapitulator thinking about wether or not returns are independent data points or path dependent and autocorrelated.

We are either heading for a decline or this is the largest head-fake I have ever seen in the financial markets.

Wednesday, February 07, 2007


The SEC is investigating investment banks and their equity trades. Readers of the Recapitulator know how this works. Record bonuses on wallstreet are a blessing and a curse. They are a blessing becuase they bestow status on employees, and attract the bright and ambitious. They are a curse because they attract attention from regulatory bodies. Front-running is an epidemic when information directly translates into profits (often at the expense of CLIENTS like Amaranth) The SEC will collect a few scalps, fines (that come no-where near quarterly profits) will be levied, banks will promise "greater oversight and controls", and that will be that.

SEC Opens Review of Market-Moving Stock Trading at 10 Firms

Feb. 6 (Bloomberg) -- The U.S. Securities and Exchange

Commission opened a review of how Wall Street handles
confidential information, asking 10 top securities firms for all
their stock-trading records for the last two weeks of September.

The examination is aimed at determining whether details
about trades big enough to push a stock price up or down had
been leaked to other traders, Lori Richards, director of the
SEC's office of compliance inspections and examinations, said
today in an interview.

The review appears to be the first to target a specific
period of time for a group of the biggest firms, and is focusing
on brokerages that cater to big trading customers such as hedge
funds to find evidence of insider trading, Richards said. She
declined to name the firms. The N3w Y0rk T!mes reported earlier
today that they include M3rrill Lvnch & Co., M0rgan St@nley, UBS
AG and D3utsche B@nk AG.

This is a fact-finding effort, not an examination based
on specific tips about misconduct at any particular firm,''
Richards said. The agency is acting on complaints from investors
such as mutual funds that information about their large-scale
trades may be leaking from, or exploited by, Wall Street firms
that execute the transactions, she said.

By looking at several companies at once, the SEC may be
able to detect instances in which information about a big trade
at one firm resulted in an improper trade being placed at a
separate company, Richards said. If the review uncovers evidence
of potential insider trading, it will be turned over to the
SEC's enforcement unit for possible legal action, she said.

The prime brokers provide the SEC with a window into the
trading activities of the hedge funds they serve,'' Thomsen told
a Senate panel in December. ``The enforcement division remains
optimistic about prime brokers as a source of leads regarding
unlawful insider trading.''

Saturday, February 03, 2007


Ah yes, surely Florida's governement can allocate risk far better than private actors...

Governor freezes insurance rates, bars companies from canceling policies
By Michael Peltier
Wednesday, January 31, 2007

TALLAHASSEE — Gov. Charlie Crist on Tuesday froze Florida property insurance
rates and prohibited companies from canceling policies as the state prepares
for another hurricane season and new laws take effect.

One week after state lawmakers signed off on a sweeping package of property
insurance reforms, Crist said the remedies need a chance to work and he
feared insurers may attempt to drop customers and raise premiums that don’t
reflect recent changes that backers say would reduce their risk.

“It’s fundamental that we make sure no policies are canceled and we make
sure that no rate increases are slipped under the door before this law
becomes effective,” said Crist, who bristled that his parents’ policy was
canceled last week.

The emergency rule, which remains in effect for 90 days, took the industry
and other Florida Cabinet members by surprise. The order will not affect
companies that recently have had rates approved by the Office of Insurance

Other companies such as Nationwide, which had requested a 71 percent
increase last year, will not be allowed to institute rate hikes until after
the 90-day period. Private insurers say the freeze, however temporary, may
directly affect their bottom lines.

“We think the rule will have a drastic negative impact on some of our
members,” said Guy Marvin, president of the Florida Insurance Council, an
industry group that represents the majority of private property insurers
still writing business in Florida.

Last week, Crist signed into law a bevy of fixes aimed at resuscitating the
state’s property insurance market that has been plagued by skyrocketing
rates and the exodus of private carriers.

The new laws more than double the size of the Florida state hurricane
catastrophe fund by putting policyholders on the hook for as much as $36
billion in hurricane losses that would be paid by assessing holders of
property, automobile, commercial and other lines of insurance.

full: http://tinyurl.com/2v24ho


Money $marts: Insurance fix puts everyone at risk
By Gerry Kramer
Friday, February 2, 2007

The concept of insurance is thousands of years old, first practiced by
Chinese traders in the 3rd millennia BCE. Its central elements are therefore
well understood. Risks are assessed in accordance with the likelihood of an
event happening. Premiums are charged to accumulate enough capital to pay
off claims while leaving enough for the insurance company to profit, pay
shareholders a return and retain capital for the future.

Extraordinary claims due to unanticipated events can put you out of
business. Insurance is therefore not an eleemosynary (charitable) endeavor
unless, of course, the government is involved.

Blaming “greedy” insurance companies for higher property insurance premiums
is pure political voter appeasement oration and irrational economics. Since
1990, insurance companies have paid out some $10 billion more in claims in
Florida than they received in premiums. Perhaps this is because of the
unprecedented (i.e. unpredicted) number of hurricanes hitting Florida’s
shores (duh!). If an event has a high degree of certainty to occur (e.g.
more hurricanes), insuring against it is very costly. That’s why sky divers
are basically uninsurable. Would you sell a life insurance policy to someone
on death row?

The reform bill forces insurance companies to lower their rates while
simultaneously Florida expands its role through Citizens Property Insurance
Corp. as “the insurer of last resort” to about 40 percent of the homes in
the state. Moreover, property owners are allowed to choose higher
deductibles, forego wind damage and home content coverage and spread out
premium payments. All these choices give the artificial appearance of lower
premiums, but do not mitigate risk.

The short term fix (“reform”) for property insurance in Florida is thus a
ticking financial fiasco time bomb. If a major hurricane (or two) hits
Florida again, underinsured property owners will face billions in losses and
the State of Florida will have to speedily come up with more billions to
bail out Citizens. Inland homeowners would have to pay higher premiums for

In addition, potentially every Florida resident could have to chip in
(higher taxes) to cover the losses. Of course, all this is moot if there are
no hurricanes. But that’s what we’re betting on, isn’t it?

Thursday, February 01, 2007


The Recapitulator spoke about the China problem in December. One must recall that central planning has been thoroughly discredited both in theory (predominantly by the great F.A. Hayek) and in practice (the U.S.S.R., Vietnam, and eventually Cuba).

The recent IPOs of Chinese banks illustrates this. The government cleaned up both sides of the balance sheet (by moving Non Performing Loans, or NPLs, to asset management companies, and by simply handing 45 Billion in reserves to the banks in order to shore up the asset side of the ledger). The problem is there was no structural reform accompanying these actions, and so the NPL problem will rear its head again like the Hydra of myth.

As for asset prices:

Chinese shares tumble 5% on fears bubble will burst
The Shanghai index's drop, its biggest since June, is led by blue chips as
concern grows over high stock valuations.
From the Associated Press
February 1, 2007

SHANGHAI — That loud hiss you hear is the sound of some air escaping from
China's stock markets.

For months an equity bubble had been growing in China, led by a rush of
investment after authorities instituted reforms aimed at controlling price
manipulation and other abuses that had made investors shy away from Chinese

On Wednesday, Chinese shares tumbled nearly 5% in their biggest one-day loss
in eight months amid mounting worries that the bubble was about to pop.

Analysts said the decline, led by blue chips, probably signaled a respite
after weeks of continued record highs.

The Shanghai composite index fell 4.9% to 2,786.33, its biggest one-day
decline since a 5.3% tumble June 7, 2006. The smaller Shenzhen composite
index slid 5.8% to 655.53.

"Many traders felt a push to cash out, for even blue chips, such as banks,
are trading at high valuations," said Hao Guomei, an analyst at Huatai
Securities Co.

Wednesday's decline followed warnings from the Shanghai Stock Exchange and
other regulators over rising risks from the market's recent bull run.

Before Wednesday's tumble, the Shanghai index, which tracks China's biggest
companies, was up 9.5% for the year after soaring 134% last year. Trading
volumes have been at record highs amid growing volatility.

China's markets languished for years before reviving last summer after
shareholder reforms and other measures helped bring price manipulation and
other market abuses under control. Market sentiment has been further boosted
by rebounding corporate earnings and an economy that has been growing at a
rate of more than 10% a year.