Equity markets boom
For a year that saw a lot of grumbling about a recovery that no one felt, equity indexes continued their strong recovery from the financial crisis low in March 2009 despite a sharp mid-year sell-off: The Dow Jones Industrial Average was up 11.02% in 2010, the S&P 500 up 12.78% and the Nasdaq 100 was up 19.22%.
$7.2 billion recovered for Madoff victims
In December the estate of Jeffry M. Picower agreed to forfeit $7.2 billion to the United States representing all the profits Picower withdrew over the years from Bernard L. Madoff Investment Securities LLC. The funds will be distributed to Madoff victims by the Department of Justice.
After a quiet first half of the year, commodities soared, thanks to a Russian drought and continuous bull market in precious metals.
Recession officially ends
This was a tough call as it certainly did not feel like the recession was over, but on Sept. 20 the National Bureau of Economic Research (NBER) announced that the Great Recession had officially ended in June 2009.
WE are #1
NBER confirmed what most Americans already painfully understood — this was the longest recession post-WWII on record.
Disaster in the Gulf. Again!
Still reeling from hurricane Katrina, Gulf Coast residents experienced another disaster — this one man-made — as the explosion at the BP Deepwater Horizon offshore drilling unit killed 11 workers and poured billions of gallons (4.9 million barrels) of crude into the Gulf of Mexico, harming wildlife, devastating commercial fisherman and local economies and causing the Feds to put a moratorium on deep-sea drilling.
The reaction to the disaster included fits and starts of numerous attempts to cap the well along with the typical finger-pointing. The leak was officially capped in mid-July, meaning the gusher of oil was spewing mostly uninterrupted into the Gulf for three months. BP agreed to a $20 billion spill response fund, which does not cap its liabilities. Despite this, oil prices were mostly unaffected, although BP stock fell more than 50%
In the midst of a significant down day on May 6, the sell-off went viral. Equity indexes dropped approximately 5% in less than 15 minutes and numerous individual equities traded at "irrational prices" of a penny or $100,000. Some exchanges broke trades and other didn’t, but only trades that were 60% away from a pre-crash reference price were broken. Early rumors suggested a fat-fingered error in Proctor and Gamble was the cause, but that proved not to be the case. High-frequency traders also were blamed, but if they had a role it was in suspending their models once trading got weird.
A joint CFTC/SEC report on the flash crash said a lone 75,000-lot sell order was the catalyst for the crash, but many industry vets challenged those conclusions. While the report cited two liquidity crises, one in the E-mini S&Ps (ES) and the other in individual equities, volume figures in the ES did not indicate a liquidity crisis. The report cited drying up of liquidity in individual equities and the practice of stub quoting (bidding a penny or offering at 100K) by market makers for the irrational prices.
We try not to be too partisan here, but both sides of the political aisle claim to be concerned over deficits. They struck a compromise in December, though, that extended top-end tax cuts and jobless benefits, both policies that add to the deficit. If they truly were concerned, they would have ended high-end tax cuts and not have extended jobless benefits or paid for them with budget cuts.
The year began with talk of a Greek bailout, how it would be structured and coining the phrase, PIIGS (Portugal, Italy, Ireland, Greece and Spain), as there was a domino effect of European nations in fiscal peril. The question became "who was next?" and the answer was Ireland. Though political correctness has replaced the term PIIGS with peripheral European economies, the dangers and large debt remain.
Unfortunately, 2010 was one of the more politically partisan years on record and what constitutes a TOP or a BOTTOM may depend on your political persuasion:
• The Dodd-Frank Wall Street Reform and Consumer Protection Act addresses the worst financial crisis since the Great Depression and attempts to avoid repeating the same mistakes, so it is a TOP. The debate devolving into the typical Main Street vs. Wall Street sound bites is a BOTTOM. After what happened and nearly happened, this should not have been so difficult.
• Health care reform in principle is a TOP as experts agree on two things: The burgeoning deficit is the greatest threat to our Union, and runaway health care costs and our Medicare commitments are the biggest escalator to our debt.
Health care reform process is a BOTTOM. No bill should be passed without legislators having a reasonable ability to read and understand it.
SIGNS OF THE TIMES
• The image on the right is not a symbol of the millions of our dollars spent on lobbying to prevent regulation by the institutions who needed a bailout. It is a sculpture titled L.O.V.E. in front of the Milan Stock Exchange.
• Nothing to the rumor of selling naming rights to the Capitol: On Jan. 21 the Supreme Court ruled 5-4 in Citizens United v. Federal Election Commission to reverse two precedents and allow for unrestricted corporate and union spending "to support or denounce individual candidates in elections."
The ruling led to an unprecedented amount of spending in the recent mid-term election and ironically came out as the country was still reeling from a financial crisis that arguably could be attributed in part to the corporate financed deregulation over the last two decades. Justice John Paul Stevens wrote in his dissent, "While American democracy is imperfect; few outside the majority of this Court would have thought its flaws included a dearth of corporate money in politics."
• Election results: The Wall Street Journal noted in December that anonymous donors contributed $132 million to the mid-term election, mostly thanks to the Citizens United ruling.
• And you are surprised why?: Lawrence McDonald, a former Lehman Brothers bond trader and author of "A Colossal Failure of Common Sense," recalls in a Time Magazine article asking an intern at Lehman back in 2006 what he was doing for winter break ; the college intern said he was trading a $150 million derivatives book for the firm.
• Can you change a Krugerrand?: CNBC.COM reported in September that a German company plans on installing 35 gold vending machines in the United States. The price of gold will be updated every 10 minutes and the machines will dispense small gold bars and coins accepting cash or credit cards.
• Cracking safes: As another sign of the growing gold mania, JPMorgan recently reopened a gold vault in New York that had been mothballed in the 1990s. Banks again are finding gold storage a lucrative business as gold bugs clamor to take physical delivery. While this vault was reopened, many cannot be as they have been converted into restaurants. Considering the soaring cattle prices, that may not be as ludicrous as it sounds.
• Regs get tough with retail: In January the CFTC proposed a dramatic drop in leverage for retail forex trading, lowering the available leverage to 10:1 from the recent National Futures Association-mandated level of 100:1. The rule proposal generated a record number of comment letters, nearly all telling the CFTC to mind its own business. In the end the CFTC settled on 50:1, and that was the first final rule of the Dodd-Frank Act.
• Messing with the wrong...: Former Goldman Sachs programmer Sergey Aleynikov was convicted in December of stealing source codes to Goldman’s high-frequency trading technology.
• Lights, camera, banned: For only the second time, a commodity has been banned by the U.S. government from trading futures contracts. Futures on movie ticket sales didn’t even make it as far as onion futures in the 1950s as movie futures were preemptively banned after two firms considered creating a contract. I guess if "Wall Street: Money never sleeps" was going to be a flop, at least nobody was going to make money on it.
• Don’t cry for me Goldman Sachs: New Speaker of the House John Boehner (R-Ohio), during debate over Dodd-Frank, actively lobbied Wall Street executives to "help our team" oppose the "bizarre policies" coming out of the Obama administration. Eighteen months earlier a second Great Depression was a possibility and now any effort to put restrictions on the industry largely responsible for it are referred to as "bizarre."
• He said what?: CME Group does a tremendous job bringing top-flight speakers to its annual Global Financial Leadership conference, but it is fair to say most speakers share its worldview. So imagine the surprise when one of their own, legendary futures trader Paul Tudor Jones, in addressing the conference promoted bringing back daily price limits to all markets.
OFF THE CHARTS
• Dress for success: Swiss investment bank UBS AG published a 44-page dress code for its retail-client-facing employees in 2010. The code includes direction on skirt length, amount of jewelry, perfume use and the color of men’s socks. The guideline includes flesh colored underwear for female employees. Apparently there was nothing on the excessive use of leverage by the proprietary trading arm of the bank. In an unrelated story, it was revealed that UBS AG tapped the Federal Reserve’s Commercial Paper Funding Facility (CPFF) for $74.53 billion. How much would they have gotten if they’d shown a little skin?
• Bad no trade?: In December, Groupon, the group buying and online coupon phenomenon, turned down a $6 billion acquisition offer by Google. Not sure if it was the right move but we probably will find out this year.
• New field of dreams: Managed futures legend and Boston Red Sox owner John Henry is finding another field of dreams: Soccer. In October, Henry’s New England Sports Ventures (NESV) completed the purchase of the Liverpool Football Club.
• I want candy: A British hedge fund manager, Anthony Ward, took delivery of 240,100 tons of cocoa at NYSE Liffe in July. That amount of cocoa is enough to make 5.3 billion chocolate bars. While we later learned most of the order was to cover a large short position, it nonetheless painted Ward as the ultimate evil speculator. Like all good villains, the action earned him a nickname — "Chocfinger."
• Do you want that steak in a "to go" cup?: Cattle ranchers in Canada’s Okanagan wine and cattle region are feeding their Angus cattle red wine. Chefs in the region say it makes for a unique taste and Janice Ravndahl, who came up with the idea, says the wine appears to make the steers more docile.
• Lifetime appointments?: A battle between CFTC administrative law judges diverted attention from the agency’s full plate of rule-writing responsibilities. ALJ George Painter, in announcing his retirement, asked the agency to reassign his remaining cases to an outside judge because fellow CFTC ALJ Bruce Levine was biased against complainants. A 10-year old WSJ article provided some support for this claim. The story got ugly as the WSJ later reported on court records from a guardianship petition filed by Painter’s wife claiming Painter recently has struggled with mental illness and alcoholism. The CFTC assigned Painter’s cases to Levine and Levine later filed a complaint against the agency for misconduct.
• Plant a tree: Carbon News reported that a New Zealand forest owner has earned more than $20 million in carbon offsets.
• Mellow markets: Drug testing firm Sterling Infosystems reported in August that among investment professionals testing positive for drug use, positive cocaine tests are down while positive marijuana tests are up.
FIGHTS OF THE YEAR
• Banking sector vs. accountability: Bank profits and bonuses are back, which is a good thing because it costs a lot of money to fend off regulation, especially after creating the worst financial crisis since the Great Depression. The banking sector started off the year under suspicion from the administration, with congressional leaders calling for special taxes on bonuses — Dennis Kucinich (D-Ohio) introduced a bill that would impose a 75% tax on banker’ bonuses — and ended it bankrolling the defeat that could reverse regulation many analysts say has already been watered down.
• In February, JP Morgan’s CEO Jamie Dimon received $10 million in stock just before he was to be granted a pay package estimated to be between $15-$20 million for 2009.
• A French court sentenced Jerome Kerviel to five years in prison and ordered him to repay Soc Gen €4.9 billion ($6.8 billion) in unwinding his unauthorized positions. The ruling said he acted alone.
• John Boehner (R-Ohio) compared Dodd-Frank with killing an ant with a nuclear weapon. And in the summer of 2008 Hank Paulson said there was nothing to worry about.
• Health care reform debate: If legislation is the art of sausage making, then the health care bill could be characterized as blood sausage.
• Goldman Sachs vs. SEC: Any fight with Goldman seems to be a mismatch, but the SEC was able to gain a $550 million settlement, the largest on record, from the investment bank over fraud charges regarding its ABACUS 2007-AC1 Collateralized Debt Obligation.
The SEC fraud charge involved Goldman not revealing that hedge fund Paulson & Co. helped select the portfolio of subprime residential mortgage-backed securities that went into the ABACUS CDO with the express purpose of shorting it. In the settlement Goldman acknowledges that "it was a mistake for the marketing materials to state that the reference portfolio was selected by ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors."
• Tea Party vs. logic and reason?: With deficits growing exponentially and the government bailing out those parties who brought us to the edge of financial ruin, fear and anger over the direction of the country is understandable, but the end result put back those original foxes to watch the hen house.
• Shocking news: In April the CEO of Moody’s admitted to a senate panel that the company failed to anticipate the severe deterioration of the U.S. housing market. On ABACUS, to which it gave a AAA rating, he said he was not aware Paulson intended to short Abacus; "it changes the whole dynamic knowing he wanted it to blow up." REALLY!