Wednesday, March 3, 2010

You Could Now Be Arrested, In America, Just For Mentioning Europe's Problems Over Dinner

by Vincent Fernando

You know a company/country/continent is in trouble when authorities start cracking down on short bets against it.

That's why it's so disturbing how much heat European currency and sovereign debt speculators are getting these days.

Even the U.S. has climbed aboard the bandwagon now.

Reports of a U.S. Justice Department investigation into Soros Fund Management, SAC, and Greenlight Capital short positions against the euro broke last week.

Yet now the speculator clamp down is evolving into something completely terrifying. Apparently, it could now be considered collusion if you simply share economic opinions over dinner:

The Journal article disclosed that the big euro bets were emerging amid gatherings including an "idea dinner" involving a number of hedge funds including SAC, Greenlight and Soros, where a trader argued that the euro is likely to fall to "parity," or equal to, against the dollar on an exchange basis. The euro currently trades at $1.3609. One of the questions investigators are likely to examine is whether such information-sharing constitutes collusion, the people say.
At one such gathering, a dinner on Feb. 8 at a Manhattan restaurant, an SAC portfolio manager said he believed the euro could fall to a level equal to that of the dollar and urged other traders to "short," or bet against, the euro as his firm had, according to people at the dinner. The size of the bets against the euro is unclear.

In a research note issued to hundreds of hedge-fund clients shortly after the dinner, the research boutique that hosted the event summed up the SAC manager's argument without mentioning his name. [But attributing it to an unnamed third party source, 'a presenter', which is standard practice]
One of the most dangerous misconceptions used to restrict economic freedoms is that opinions have more weight than fundamentals. Should we arrest people for threatening 'economic stability' if they argue against a particular stimulus bill or government and then collectively vote against it?

Read the rest here.


  1. How can you have collusion for a legal activity? American led financial innovation allow shorting/wagering in a number of ways?

    Over dinner with friends I encouraged them to try a new restaurant in town. Will other restaurant owners encourage authorities to investigate me for collusion?

  2. Total BS. and only in Amerika.

  3. Collusion is the nature of successful speculation. Short the Euro, I've been told.

  4. Hi Robert,

    I usually agree with you. But this time, I don't..
    I doubt that it's just a matter of discussing things at dinner.
    And I doubt it's collusion between funds alone.
    Collusion in this context probably means the DOJ examining whether the funds have also been using supposedly objective journalistic outlets to propagate misleading stories. That would be fraud, not "opinion."
    Also, just as shouting fire in a crowded theater doesn't get you the protection of free speech, there are some forms of financial "opinion" that are no longer opinion but action.

    I think it's a kind of dogmatism to eliminate the context and the history of the players when examining if this is fraudulent behavior.

    Soros has a long history that's never been fully publicized. I happen to know a journalist who documented what he'd done in the the early part of his career and his book was effectively squashed and never made it through a publisher.


  5. “The big issue is whether the meeting was informational, and these various traders were simply responding in a parallel way to a common set of facts,” which would be legal, said Herbert Hovenkamp, who teaches antitrust law at the University of Iowa College of Law in Iowa City. “What’s not legal is for people to agree to trade at a particular price or against the euro to devalue it and start a stampede that devalues it further.”

  6. Hi Lila,

    What falsehood do you see this group spreading?

  7. Hi Robert -

    I haven't followed the European story closely, so I don't know what's been on the press about it. I'm simply saying that I doubt the DOJ is going after them just for discussing market conditions and decent trades.

    Collusion would always imply that the dinner was just one of many more sustained contacts and more specific actions taken in concert.
    If it's not, good for them.

    Second point. You say opinion can't change fundamentals. But that's the fallacy of the efficient market, isn't it?

    Maybe not in the longest of runs, but shorter term, markets certainly don't perform efficiently and opinions do indeed move things against fundamentals, sometimes for considerable lengths of time...

    I defer to your knowledge of economics and would like to know where I have gone off the libertarian rails on this.


  8. Actually, that is Fernando who writes on opinions versus funamentals.

    I would have worded it differently, but I think he is trying to say that a bear raid can't destroy a country, if the country is fundamnetally sound.

    As far as DOJ, every trader talks his book after he has his position. It's the way the markets work. No one went into that meeting hyping a short on PIIGS debt, if they didn't have already have a position. And no one is going to ring a bell and call the other traders in the room, if he decides to move out of the trade, until he is out.

    This is really just business as usual. Merchants hyping thier product. It just shows you how clueless the DOJ is about how Wall Street and for that matter business in general works.

  9. My last comment didn't go through. I'll repeat it.

    When public sentiment or the likelihood of default is measured by CDS prices that are set by private groups like Markit, made up of unnamed hedge funds, how can be we sure there isn't manipulation, especially when those funds stand to benefit from panics?

    CDS prices were the basis of the ABX and CMBX indices on which the mortgage industry and investors relied..

    Aren't CDS prices also involved in gaging the sentiment/risk of default in Greece and elsewhere?

    And if the same hedgefunds who make up Markit are also the ones placing the bets in concert, why shouldn't the DOJ take a look to see if it's all kosher?


  10. My point, Lila, is why is this happenning to Greece and not, say, Libya, Hong Kong, China <Saudi Arabia ?

    You can't bankrupt a country unless it has already set itself up for bankruptcy. The hedgies aren't picking these countries by random. They are the countries that have dangerous amonts of debt. No hedgie in his right mind would load up on a CDS if the country had a sound fiscal poloicy.

    Beyond that any discussion between hedgies can be called colusion by the DOJ, but it is simply their "Talking thier book." Which is what every trader has done since the days of trading under the buttonwood tree.

  11. Hi Robert -

    risk of default and sentiment is gaged by CDS prices, right? CDS prices are set by the somewhat secretive Markit Group..consisting of several dozen unnamed hedge funds.
    CDS prices go into ABX and CMBX on which mortgage industry relies. Hence, jiggle CDS prices, and you can jiggle a number of indices.
    Say a hedge fund manager and his pals are jiggling the CDS spreads to make a situation look much worse than it is, timing it to match his own investments, then you have a case of much more than talking your book.

    That's what the DOJ is looking at, I hope, but frankly, I'm not holding my breath. I fear it will be a white wash.

    It's true that short raids are usually conducted against entities which have weak fundamentals. If they are just raids, they are legal. If they are coordinated and involved manipulation of the kind I note above, that's clear cut fraud. Since many of the CDS holders also don't have an insurable interest at stake, that's also fraud of another kind. That's beside any media rumor mongering.

    Murderers and rapists often pick vulnerable victims - derelicts, the homeless, prostitutes, petty criminals. It doesn't make what they do any better.

    Same here.
    There is legal shorting.

    Doug Casey just recommended shorting the euro, nothing wrong with that. It's his opinion.

    That's entirely different from jiggling the indices, collusion to set prices, possible bribery, fraudulent contracts and subversion of the media,


  12. Actually...reviewing the notional value of cds, it looks like it isn't all that much relative to the debt; so maybe jigging the numbers didn't play a part here.

    So let me hold off on piling in the hedgies in this case until we hear more about what was going on