Wednesday, April 30, 2008

I Lost My Firm Billions & I'm Sorry

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This article is taken from Here Is The City website. A good example on how things could go very wrong:

'I got laid off in November. Although it hurt a little at the time, I expected it - as I was one of a small number of traders at my old firm responsible for billions of dollars of asset writedowns. I was trading mortgage-backed securities, taking huge positions, and ended up the wrong side of the subprime conflagration.

I never exceeded my limits, kept on the straight-and-narrow with compliance, and made no effort to misprice my book when the markets started to move against me (or mislead anyone in anyway). During 2006 and the early part of 2007, I was a hero, as my positions were making the bank a lot of money. In all this time, I always respected the guys in Risk, was happy to answer any questions about the trades I had made (seeking pre-approval when required), and eagerly digested all the in-house research the firm pumped out about the markets in which I operated. No one at our firm saw that the subprime worm was about to turn. At no time were there voices of doom anywhere issuing dire warnings of the shape of things to come.

When my positions started to head south, and I attempted to cut and run (after consultation with Risk, Compliance and the head of the desk), there were just no takers at sensible prices. In the end, we decided to hold our positions and try to tough it out. Unfortunately this decision cost my former firm billions in writedowns, and it will suffer from our legacy for years to come. Of course, we were too exposed in too small a market, and we didn't really understand the true nature of the risks we were taking (Nobody did, or they wouldn't have done it, would they ?). But did we set out to rip off our shareholders, cause many of the employees at our firms to lose their jobs, and drive the bank itself to the edge of financial meltdown ? No, we did not.

And when we left, were we laughing all the way to the bank, having bagged huge bonuses over the last couple of years and secured lucrative exit packages on the way out ? No, although many of us will never have to work again, actually most of us were in a state of shock over what had happened - we didn't go to work for the money anyway. We went for the hell of it, the buzz, the fix that it gave us. To leave in such disgrace, knowing that the jig was up for us (what other firm in their right mind would employ us now ?) was really hard to take. And then the mud started to fly.

Before too long my boss got fired, then the head of the division went too. Then we heard all this stuff that the losses were down to a few of us traders (no acknowledgment that there was a chain of command right up to the very top, and that the firm's executives were appraised of exactly what was going on at all times). It soon became clear that we were the fall guys. Sacrificing our careers wasn't enough. No, we had to carry the can for all the firm's ills (some of which were not down to us anyway as the very top dogs took the opportunity to 'kitchen-sink' all their problems and heap all the blame on us while they had us in their sights).

At first I was incensed at the injustice of it all, but then I realised that this was just the way the game was played. I'd had my time in the sun, made my fortune, then I was simply thrown to the wolves. In time, I understood that, in the scheme of things, it didn't really matter. People were losing their homes, their jobs and a large percentage of their net worth because of the subprime crisis. I was just miffed because a few people even more culpable than me were heaping all the crap on my head. So, I decided to just take some time out (I'm technically still on gardening leave until the end of May anyway), did some travelling and got my head together.

I'm not ashamed of what I did (I was guilty only of trying to make some money for my firm - and, I admit, myself in the process). But I never tried to buck the system, or sought to be clever in any way. In a way, I was a victim too ( although I acknowledge that we got caught in a trap of our own making and that the repercussions for us were much less severe than for others). But the markets are like that. You have to take the rough with the smooth.

At the moment I've no intention of trying to get back into the market. But, if I was ever tempted back, I know that I could start a hedge fund with a few ex-colleagues. We've talked about it some, but, to be honest, I just don't know if I've got the stomach for it anymore. For me, I doubt that it can ever be the same again. I'll probably move on, and hope that the others whose lives I inadvertently affected will be able to do the same. And, although I know that any apology coming from me will probably sound hollow and not mean much anyway, I am sorry that we got ourselves into this mess. I am sorry for the consequences of our actions. And, despite the financial security it brought me, I wish I'd never got into trading mortgage-backed securities'.

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Sunday, April 27, 2008

Bond Market Weekly Commentary - 25 Apr 2008

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Trading in the bond market was largely influenced by the movement in USD/MYR which reached a 10-year low of 3.1310 on Wednesday. Offshore players were seen extending the maturities of their holdings by switching from bills to short-dated bonds, fuelling a mini rally during the first half of the week. The lower than expected March CPI also propped bond prices higher. Sentiment however turned bearish during the later part of the week. Worries about rising price pressure, increased bets that the Federal Reserve is approaching the end of its rate-cutting cycle and optimism that liquidity-pumping by global central banks has pulled credit markets away from the worst of the crisis were among the contributing factors that led to weaker market by the end of the week.

CPI edged slightly higher to 2.8% in March, up from the 2.7% in February but lower than consensus estimates of 3.0%. This was the fastest increase in 13 months. For the first 3 months of 2008, CPI averaged 2.6% versus the same period a year ago. Brewing inflationary pressures, especially from food have continued to intensify, and will likely raise headline inflation further over the next few months. However, Governor Zeti reiterated that adjustments to interest rates are not the solution to stem inflation.

Government Securities

MGS trading volume improved to RM2.1 billion against RM1.1 billion recorded last week. Week-on-week saw the benchmark curves steepened as players turned cautious towards rising global price pressure. The 3-year MN09/11 was bought to a low of 3.41%, much due to MYR appreciation before profit taking activities saw the stock closed 4bps higher to 3.49%. The 5-year MJ07/13 was the most volatile stock of the week. Aggressive short covering activities during the most part of the week saw the stock traded to its 3-months low at 3.39%. However, the sell-offs on Friday pushed the closing yield higher by 1bp to 3.52%. The 10-year MS02/18 closed 3bps higher to 3.79% in light trade. In the bills market, the buying fervor from offshore players continued as USD/MYR kept on breaking its record low. The 3-month and 6-month bills closed lower at 3.15% and 3.17% respectively.

In terms of sovereign spreads, the 3/5s narrowed by 3bps to 3bps. The 5/10s added 2bps to 27bps whilst the 10/20s fell 1bp to 46bps

The Week Ahead

The market will be focusing on the MPC meeting to be held at month end. Although BNM is expected to maintain the OPR at 3.50%, continued concern on rising global food prices could see the bearish mood to persist for the time being. Nevertheless, any upward correction in USD/MYR could be viewed as an opportunity for offshore players to re-enter and this would be positive for the bond market.

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Sunday, April 20, 2008

Bond Market Weekly Commentary - 18 Apr 2008

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The bond market was in selling pressure last week as inflationary concerns intensified in the global economy. The sell-offs in US Treasuries also provide the impetus for local market to react accordingly. Market players were also cautious on the possibility of a higher CPI data to be released on Wednesday. The short term bills market however found strong buying interest from offshore investors as USD/MYR touched a new low at 3.1410 on Thursday.

Midweek, Malaysian Economic Institute of Research (MIER) forecasted that Malaysian economy will grow by 5.4% in 2008. In addition to that, they also see the Overnight Policy Rate to remain unchanged at 3.50%.

Government Securities

Last week’s focus was on the reopening of the current 3-year benchmark MN09/11. The RM3.5 billion issue was auctioned in a range of 3.413% to 3.461% with the average seen at 3.438%. Bid to cover was quite poor at 1.47 times, signifying the lack of demand from real-money investors as well as the cautious sentiment ahead of March’s CPI data.

The average MGS trading volume improved to RM1.05 billion. Week-on-week saw the benchmark curves steepened as players were seen executing their cut loss strategies on the back of bond bearish outlook. The 3-year MN09/11 was traded to the high of 3.51% before late buying interest on Friday saw the yield retraced to 3.45%, about 3bps higher than last week. The 5-year MJ07/13 added 4bps to 3.51% while the 10-year inched 1bp higher to close at 3.76% after being sold to the high of 3.81% on Thursday. In the bills market, offshore interest was apparent in tandem with continued MYR appreciation. The 3-month and 6-month bills were aggressively bough throughout the week, pushing the closing levels lower to 3.23% and 3.30% respectively.

In terms of sovereign spreads, the 3/5s widened by 1bp to 6bps. The 5/10s and 10/20s spread narrowed by 3bps and 2bps to 25bps and 47bps respectively.

The Week Ahead

The direction of the market will be heavily influenced by March’s CPI data to be released on Wednesday. We could see further selling interest if the CPI is higher than the general market consensus of 2.80%. Perception that MYR is still undervalued shall spur additional buying interest in the bills and some short dated securities.

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Sunday, April 13, 2008

Malaysia Bond Market - Weekly Commentary

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The week started with strong paying interest as players took cue from the rally in US Treasuries resulting from the bearish employment data released on Friday. However, the market was not able to sustain the momentum as profit taking crept in during the middle of the week.

MYR ended at a new 10-year high against the US dollar on Thursday following the surprise move by the Monetary Authority of Singapore to tighten its foreign exchange policy to contain inflation. The stronger MYR has sparked a buying frenzy from the offshore parties, especially in the short-term bills and securities for the currency momentum play.

Out in the news, the Industrial Production growth unexpectedly moderated in February, gaining 6.3%yoy versus consensus estimates (+8.2%) and revised January growth figures (+7.6%). The weakening in IP growth came in contrast to February exports growth, which has continued to outperform expectations (+14.5%) in February.

Government Securities

Despite the huge move in USD/MYR last week, the MGS market continued to be thinly traded in selected buying. Total average daily volume declined to RM441million as trading focus shifted to the short-term bills market. The Central Bank announced the reopening of the current 3-year benchmark MN09/11 amounting to RM3.5 billion which will be issued on Tuesday. The When Issued was lightly traded between 3.440% - 3.415%.

Week-on-week saw the benchmarks closed lower in yield terms on the back of the buying interest from the offshore players. The 3-year MN09/11 closed 1bp lower to 3.42% whilst the 5-year MJ07/13 dropped 2 bps to 3.47%. The 10-year MS02/18 and 20-year MX05/27 were the biggest gainer of the week, closing 4 and 5 notches lower to 3.75% and 4.24% respectively.

In terms of sovereign spreads, the 3/5s narrowed by 1bp to 5bps whilst the 5/10s fell 2bps to 28bps. Some last minute buying on the 20 year saw the 10/20s spread gapped lower by 1bp to 49bps.

The Week Ahead

The market will continue to be aligned with the movement in spot MYR. With the re-opening of the 3-year MN09/11, trading volume in the MGS shall improve this week. Sentiment will also be influenced by the market expectation on March’s CPI, scheduled to be released next Wednesday.

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