Juvenile Traders – Moon of Alabama

February 14, 2005

Juvenile Traders

The international demise of the US financial industry
or
A financial lecture on moral behaviour told in four <blockquote>’s:

Citigroup eurozone bonds ploy leads to panic and clampdown on trading
Reuters(?), August 10, 2004

Trading in the eurozone government bonds market has been restricted after an unprecedented wave of selling orders by Citigroup caused panic last week.

MTS, which provides the market’s busiest electronic-trading platform, took the highly unusual step of limiting liquidity after the US bank sold a total of €11bn (£7bn) in eurozone paper on August 3, in a rapid-fire barrage of transactions stretching across about 200 debt instruments.

About half and hour later, Citigroup bought back €4bn of the paper at cheaper prices – potentially securing large profits for itself.

Citigroup memo details bond profit strategy – FT
Reuters, Jan.31, 2005

An internal Citigroup memorandum detailed how the U.S. financial services company could "very profitably" manipulate the eurozone government bond market two weeks before it made several controversial trades, Britain’s Financial Times newspaper said on Tuesday.

The Financial Times said it had obtained a document dated July 20 that said Citigroup wanted to shake up the eurozone market, where transparency and competition have shrunk trading margins.

The newspaper quoted the memo as saying Citigroup wanted to "turn the European Government bond market into one that more closely resembles" the less transparent U.S. Treasury bond market.

"Over time, this may help to kill off some of the smaller dealers," the FT quoted the memo as saying.

Joint Statement Issued Today by Tom Maheras, CEO, Global Capital Markets and William Mills, CEO, Europe, Middle East, & Africa, Citigroup Corporate and Investment Banking Group
Citigroup, Feb. 02, 2005

As we have stated previously, we regret having executed the trade because we failed to consider its potential impact on our clients and other stakeholders, including European regulators and treasuries, and because it did not meet our standards.

As one example, unfortunately, the traders involved made inappropriate, unrealistic, and in certain instances juvenile remarks about the trading strategy before it was executed. We regret these comments, which do not represent the views of the supervisors who approved the trade, nor of management.

…

Based upon the reports we have received and our own internal review, we continue to believe that this trade did not violate any applicable rules or regulations. Contrary to what has been reported in the press, our traders did not intend to sell more than the cash position of approximately €8 billion that they held.

However, they underestimated the number of bids they would hit on the MTS platform at the price parameters set for the sale, and as a result, sold €12 billion.

Sure, these boys just oversold because there was so much demand, you know. That’s why these juveniles just had to buy back €4 billion after prices had droped through their sellout, making tens of millions in profits. Go away, nothing to be seen here …

But wait, here is the lesson:

Citigroup Loses European Government Business Amid Bond Probes
Bloomberg, Feb. 14, 2005

Citigroup Inc.’s share of European government debt sales for the 12 nations that use the euro is the lowest in more than five years after the world’s biggest bank roiled markets with a barrage of August bond trades.
…
The New York-based firm’s European government bond sales dropped 98 percent in the past six months from $5.5 billion in the same period a year earlier, according to data compiled by Bloomberg.
…
“I would expect there would be some impact, although not quantifiable, from reputational issues” related to Citigroup’s August government bond trades, Chief Financial Officer Sallie Krawcheck, 40, said on a conference call with investors on Feb. 11. Earnings in the European region “were not as strong as we would have hoped,” she said. “Some part of it may have been from folks not doing as much business with us.”

Citigroup’s profit from corporate banking in Europe, the Middle East and Africa fell to $84 million in the fourth quarter of 2004 from $118 million in the same period a year earlier and from $123 million in the third quarter of 2004.

Other stories:
Parmalat Sues Citigroup for $10 Billion and Japan closes Citigroup branches

Unlike the US, some countries do fight back on white crime fraud. Can the US financial industry survive internationaly under such rules?

Posted by b on February 14, 2005 at 18:03 UTC | Permalink

Comments

Bernhard, does this represent a strain of robber baron capitalism that seems to have re-emerged in the past four years? I know the big banks, or at least the American ones, have always played somewhat fast and loose with the rules, but this seems to be yet another example of the principle that only money matters, and screw everybody and everything else. It parallels the volcanic rise in executive compensation, the massive layoffs and benefit squeezes in the US, the move to contract employees with no benefits, and legislation to keep people from sueing big companies. All in all, American capitalism is starting to look a lot like what Marx described in the mid-19th century.
I have always thought that Marx’s great failure was his failure to anticipate Henry Ford. Ford, for all his flaws, realized that his long-term success depended on the prosperity of his workers. That gave rise to a sort of “welfare capitalism” in the mid and later 20th century where companies more or less consciously provided higher salaries and greater benefits than might have been strictly necessary, as part of the compact between capital, labor, government and consumers that saved capitalism from the Great Depression. Let me repeat that — this compromise saved capitalism. Because of the prosperity of the post- World War II world, it is easy to forget how critical the status of capitalism had become during the Great Depression, and how not just leftists but common workers were questioning its viability. I have long thought that, had government and capital not worked together to share the benefits of the market economy, a quite different system might have emerged.
Now “capital” seems to have forgotten its side of the bargain. Citibank’s behavior is rational in the short-term; the bank made a lot of money very quickly. I would argue that it is irrational in the long term, as the basis of capitalism is in fact trust; you trust people to keep their agreements, you trust people to “play fair,” and you trust people not to rig the system. Not just Citibank but big American business in general seems to be perfectly willing to betray that trust.
We remember what happened the last time they acted like this. Is another Great Depression possible?

Posted by: Aigin | Feb 14 2005 18:32 utc | 1

It is back to the 1920’s were I see the parallels – maybe earlier. Short term, quarterly reports, management bonus optimization instead of the long term health of the company and economy.
This can be contained, if the regulation works at least through penalties as in the Euro bond case.
But in the US, it obviously does not work. Martha Steward was jailed for some 50,000 she didn´t care about, but Kenneth Lay is still happy and free.
The connection of politics and business interest is the very root for the regulation not working. The root of this connection is the absurdity of political donations made by companies. Those should be absolutly forbidden in my view.

Posted by: b | Feb 14 2005 18:54 utc | 2

Aigin,
I agree on the saving the capitalism part. I read Marquis book about Sweden from the 30´s (1935 I think) and after a while I realized what his perspective was: he had found “capitalism that works”. And it worked because of the regulations and an active, pragmatic and listening government combined with cooperations and strong unions. It says a lot about the time.
One can also consider that the fascist states and the Sovjetunion looked much more efficient in fighting unemployment then the liberal capitalistic democracies. Even after the New Deal unemployment remained high in america until WW2. After WW2 the elites seam to be acutely aware that poverty has to be fought if they were to remain priviligied (and not shot), a lesson that looks forgotten today.

Posted by: A swedish kind of death | Feb 14 2005 19:01 utc | 3

Aigin
The question most interesting is why welfare statism is now rejected by capitalists who benifitted so much from the externalization/socialization of production costs (pensions, disability…oasdhi act)?
A couple answers: 1) need for general ‘immiseration’ of workers to lower variable costs; 2) global mobilization of capital decreasingly wedded to regional/national labor markets thanks to international finance and investment raiding of economies.
I’m sure there are more reasons and would like to know more.

Posted by: slothrop | Feb 14 2005 19:07 utc | 4

OT
Anyone who is not following the Gannon story should read this development

Posted by: Cloned Poster | Feb 14 2005 19:18 utc | 5

Aigin: Ford developed his system way before the Great Depression, and even the New Deal and Fordism wasn’t enough to save US economy. WWII saved it, basically, with the huge war effort and all the goodies shipped to Churchill and Uncle Joe.
One will also note that the checked capitalism was partly accepted under Roosevelt then more widely accepter after WWII because it was what kept people from going bolshevik. Checked capitalism being basically the acceptance of Fordism and of New Deal principles of (still very limited) social redistribution.
It’s pretty obvious that unchecked capitalism came back with a vengeance as soon as the USSR went down. This alone is a hint big enough of why employees weren’t turned into absolute slaves between 1930s-80s. Why bother to pay your workers when the whole notion that workers should be decently paid and should unite toward this goal has been (apparently) utterly trashed and discredited.

Posted by: Clueless Joe | Feb 14 2005 19:33 utc | 6

b – I’ll claim some credit for the Citigroup stories!
You must have lost a word in your title (“headlines”?)

Posted by: Jérôme | Feb 14 2005 19:39 utc | 7

CP,
Gosh, and how many months did the media burn the Gary Condit story into the brains of America? Maybe Liberal Media means only liberals need apply for ritual sacrifice.

Posted by: anna missed | Feb 14 2005 20:10 utc | 8

CP,
Gosh, and how many months did the media burn the Gary Condit story into the brains of America? Maybe Liberal Media means only liberals need apply for ritual sacrifice.

Posted by: anna missed | Feb 14 2005 20:13 utc | 9

Yes, the new Gilded Age is upon us. Every social contract ever made will be torn down by this admin and its cronies in business or vise versa.
Citibank is getting its hands slapped, but where is the reporting on CNBC or other programs.
Visit all the sites on the web to impeach Bush. Its interesting looking through them. I believe this admin if we had a congress willing would go down. Maybe people just need to get together and have a trial. Who needs congress?

Posted by: jdp | Feb 14 2005 21:57 utc | 10

Clueless,
exactly what I was going to write re:USSR.

Posted by: A swedish kind of death | Feb 14 2005 22:03 utc | 11

the problem with capitalism, one of the many ‘isms’ afflicting humanity, is that in the core it is a cult of all things material, of accumulation of wealth. beyond all the refinements people learn at management and economy courses in university, the core of this ideology is very simple: accumulate wealth by any means.
the logical consequence of this posture is that wealth (capital) and its accumulation are placed above any other considerations like, for example, respect for life in all its forms, the right of others to be happy or to be respected in their persons, rights and posessions. thus, pursuing a life dedicated to capitalism places the capitalist outside society and squarely at odds with any responsibility which would come with belonging to society. this is reflected in the statement by margaret thatcher – one of the greater luminaries of extreme capitalism of the last times – that there is no such thing as society, but that instead there is an aggregation of individual interests. with this simple statement, thatcher opened up the logistics networks and chains of value necessary for a functional society to destructive exploitation by capitalist interests.
a capitalist, to be successful at pursuing his ideology, must of necessity antagonize a functioning society, as a funcioning society implies the existence of resources or wealth in the form of ‘commons’ or logistical networks. since commons do not ‘belong’ to any one individual or organization, they must be exploited and assimilated into the accumulation process.
the citibank events described above are but anecdotal evidence of capitalist ideology at work. to the capitalists at the bank, govt bonds do not represent wealth belonging to a commons (as skewed as interpreting a govt as ‘commons’ might look) or rather, the concept of a ‘commons’ escapes him. they are wealth to be accumulated.

Posted by: name | Feb 15 2005 4:04 utc | 12

France raps Citigroup for bad deal

France’s treasury has rebuked and penalised Citigroup Inc, saying the bank’s controversial $16 billion dollar bond trade in August tarnished European markets.
“Citigroup created havoc in European government bond markets,” said Bertrand de Mazieres, the chief executive of the French Treasury on Monday.
…
The trade prompted the French Treasury to lower Citigroup’s position in its league table of primary debt dealers.
“Citigroup isn’t at the level of the primary dealers ranking it should have been due to the August trading,” Treasury Deputy Chief Executive Benoit Coeure said.
Several European regulators are investigating Citigroup’s 2 August rapid-fire sale of $16 billion of bonds on a range of electronic trading platforms. The bank bought back $4.9 billion in bonds half an hour later.
German regulators say the bank also bought bond futures ahead of the cash trade.

If they also bought deriviatives before the trade, Citibank made many millions more on its action than is known today.
They should probably loose their license for bond trades at all – at least in Europe.

Posted by: b | Feb 15 2005 8:56 utc | 13

b:
They should probably loose their license for bond trades at all – at least in Europe.
Is there any possibility this might happen?
The futures purchase proves their intent and shows that the excuses they offered afterward were all lies. Even a legitimate threat of action might make corporate finance managers think harder the next time knowing there can be consequences to actions that intentionally harm others. I really hope the EU doesn’t let this pass without some punishment.

Posted by: lonesomeG | Feb 15 2005 14:52 utc | 14

This Citigroup issue reminds me of the Hunt brothers, of Texas I believe, cornering the silver market (years ago) and then jacking up the price for a monstrous windfall.
I remember wondering at the time how they could get away with such a move, but it was indeed a “legitimate” exercise of capitalist perrogative. Legal too as I recall. I know the Hunts didn’t go to prison or anything.
LG, I am of the mind that punishment or not, outfits like Citigroup will continue to abuse their power until the system collapses. That will be good. It is necessary IMO to go through the discomfort of scrapping the old $$ ethic – It doesn’t work any more – maybe it never did.

Posted by: rapt | Feb 15 2005 15:09 utc | 15

The neo-Capitalists are so ignorant of history, all puffed up and intolerant. I agree with the fall of the USSR, all restraints are off. In the normal course of events, with falling wages and loss of the Middle Class, a New Depression would hit in a generation or so. But, the Bush Administration in its typical bungling incompetent manner is intent on bringing it on sooner.
Corporate media will continue to blissfully report on the latest revelation at the Michael Jackson trial or Howard Dean’s scream.

Posted by: Jim S | Feb 15 2005 16:37 utc | 16

I don’t think they’re ignorant of history: they just don’t believe it applies to them. I still can’t work out if they believe that they are anointed philosopher kings who can do no wrong or Maoist secret agents trying to usher in a new Marxist age by driving capitalism onto the rocks.

Posted by: Colman | Feb 15 2005 16:44 utc | 17

@rapt:
This Citigroup issue reminds me of the Hunt brothers, of Texas I believe, cornering the silver market (years ago) and then jacking up the price for a monstrous windfall.
As I recall, a bunch of some exchange member firms went to the government to save themselves in the corner. Government regulation of markets suddenly became very important to them when their ox was getting gored.
About every attempted market corner in the 20th century has ended in much the same way.
It’s most amusing how things come to pass.
As to the post, I don’t see any particular problem with what Citicorp did–things like this are often done in our markets.
The idea that capitalists are gentlemen bound by rules, is a little entertaining to me also.
Perhaps in Europe, but I doubt it.

Posted by: FlashHarry | Feb 15 2005 16:56 utc | 18

Above post should have read:
About every attempted market corner in the 20th century in America.
The best protection against what the Wall Street cowboys did seems to me to be stronger trading controls, with more biting penalties for noncompliance.

Posted by: FlashHarry | Feb 15 2005 17:01 utc | 19

Flash, your logic is impeccable. (I didn’t expect you or anyone else to agree with me on the need for a crash.)
Lets take your acceptance of Citigroup’s underhanded tactics and lift it, transfer it and apply it to our govt, which you will probably agree is another beast sharing the forest and the game (prey) with banks, insurance companies and oil drillers. Now we have the govt ignoring int’l law and the world knows this. They (eg Russia) can’t call em on the war crimes cuz they are not so clean themselves and because USgovt has too much military power among other things. So in retaliation and in the interest of preserving its own power, Russia pulls its own strings behind a screen, as do other players.
OK here we go, lifting and transfering back to corporate behavior (with govt assistance). The law is now something one must elude for survival and the excuse is that others do it.
People like me can’t play that game; we’re too small, so we just stand there getting our nuts kicked in by the big guys. Or we join the big guys for pay, contribute to the charade and keep our complaining mouths shut.
Fortunately a lot of us are not willing to do that. When fabrication of facts becomes the norm, and it essentially has, a big collapse is certain.
^my opinion^

Posted by: rapt | Feb 15 2005 18:23 utc | 20

@Rapt:
My only point was that that’s the way the game has always been played on Wall Street. to borrow from Sweeney Tood, “Some need to be eaten, and some need to eat”.
This was the way it was post Civil War to the Crash. Then FDR puts in some controls, notably the securities and Exchange act of ’34, and the Glass-Steagall Banking act, setting up the SEC and prohibiting banks from underwriting securities. These controls exist till about ’80, when the Reagan push to abolish them begins. And i agree with most everyone here, when the Berlin wall came down, the new Gilded Age, with robber barons enough, began.
Because of lack of controls or circumvention of controls, we have the S&L mess of the 80s, which the taxpayers ate, Mr. Insull Utilities reincarnated as Enron, etc.
In short, brokers,investment and commercial bankers(Jerome will like this), and corporate directors and officers, unless closely watched, will behave like common chicken thieves.
For the functioning of the system(until we get something better), these worthies need to know that illegal acts will be punished–steal that chicken, and the righteous Sharia scimitar will lop you paw off at the wrist.
But I doubt that we will see Ken Lay, or the rest of them seriously prosecuted, by the DOJ, under this administration.

Posted by: FlashHarry | Feb 15 2005 19:41 utc | 21

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