SEC investigating structured products: Déjà Vu all over again?

Never let it be said that the denizens at the Securities and Exchange Commission are a stodgy, humorless bunch. A recent WSJ article, Complex bond faces regulators Scrutiny , almost got me. I am not sure if they meant to have an early jump on April Fools, or if some fat fingers at the WSJ was involved.  In any event, well played Schapiro!

The Complex bonds being scrutinized, also known as “reverse convertible notes” falls under the broad investment category of structured products or in the old school vernacular Derivatives, the eleven letter four letter word.

According to the complaint, apparently the bad boys of Wall Street:

“failed to disclose the risks and fees to the investors before they bought the notes.” and possibly failed to disclose “potential conflicts of interests, such as selling a note linked to the stock of a company it is advising.”

Not only have we been down this path before, but with a few well placed directorships, maybe an IPO allocation or two, whatever the legislation and if indeed there is one, it will be tepid and ineffective. I have many reasons for my opinion but I will give three. One is history, two is legislating for greed, stupidity and downright laziness is nigh on impossible and the third I will give you at the end.

A Response to Arbitrage Pricing Theory – MBA Mondays with Darwin

Initially,  I meant this response as a comment to a recent blog post, Arbitrage Pricing Theory – MBA Mondays with Darwin, however as I began to write, it has taken on a life of it’s own.

I commend Darwin in his endeavor to educate the general public, however to quote Darwin himself from a previous post :

“Not only do I disagree with his opinion, but I’m concerned that his advice is actually dangerous and gullible readers will lose money as a result.”

I realize that merger or risk arbitrage is presently alluring due to the raft of deals! coming to the fore.  In Risk Arbitrage back on?, I gave the reasons why many arbitrageurs are gearing up for what could be a banner year. I would caution, however that the subject is somewhat daunting, the scope of which cannot be covered in a single blog post.

T2 Partners’s Netflix Mea Culpa: A Study in Behavioral Finance.

T2 Partners eagerly anticipated investor letter (H/T maketfolly.com) is finally here and what a doozy it is!

Why was it eagerly anticipated?  Well in early December T2 managing Partner Whitney Tilson publicly disclosed his short trade analysis on Netflix ($NFLX).

Whether that analysis was posted as a genuine critique of the stock or as an attempt to pressure the price, no one can know for sure, but there are many arguments for and against such a post.  In any case I commend him not only for putting his analysis up for scrutiny, but also for acknowledging in his most recent January investor letter that he was wrong, albeit belatedly and significantly lighter in the wallet.

The Art of War, or: How China plans to dominate the world economy ….

“If you lay siege to a town, you will exhaust your strength and resources. Therefore, feed off your enemies and forage for their resources.”

~ Sun Tzu

With a war chest of $2.85 trillion, and a renewed swagger it was only a matter of time before China flexed its economic might by diving back into investing in western banks.  After ill-fated multi-billion dollar investments in Blackstone Group LP, Morgan Stanley and Barclays PLC, last week a Chinese bank agreed to buy a stake in the US arm of Bank of East Asia.

Industrial and Commercial Bank of China (I.C.B.C.), the largest of China’s “big 4” state owned commercial banks agreed to pay $140 million for an 80% stake in the United States subsidiary of the Bank of East Asia, which is based in Hong Kong and has 13 branches in New York and California. The rationale was: