Stock Lending Today - An Industry Under Siege!

Short selling bans extended

Image by tanakawho via FlickrThe year is almost over and we should now be turning our attention to the upcoming holidays.  As a final Christmas present for the securities lending industry, regulators in France, Germany, Switzerland and Belgium all announced that they will be extending their respective short selling bans.  Norway also told us that they will be looking at their restrictions early next year, having a scout around what other regulators are doing and then deciding whether they will make any changes.  I don’t know whether I am more excited to see what Santa has left for me under the tree, or to see what the Norwegian regulators will decide!  I won’t be able to sleep until I know the answer to both!

I am assuming that the regulators have essentially said they don’t want to pre-empt the IOSCO report at the end of February by putting in changes that may not to be amended again subsequently.  I’m not happy about any of this, but you could kind of guess something like this would be happen.

Well, you could guess that everywhere except the UK.  The Telegraph reported last week that the FSA was looking at removing the short selling ban on schedule, but announcing a disclosure based system to replace it.  Gordo (CC) Brown let everyone know that the government would be brining in new short selling rules before the ban, and so of course they will be doing something.  It will be “interesting” to see what they bring in this time.

Of course, all of this is against the background of even more academic research on the short selling bans.  There are two recent reports, SHACKLING SHORT SELLERS: THE 2008 SHORTING BAN and The Impact of Short Sales Restrictions. The findings show that the share prices of the restricted stocks continued to fall and more importantly the liquidity of the stocks as measured by wider bid-ask spreads was negatively impacted by the restrictions.  Further, investors already suffering from wider spreads are inevitably impacted by not having the whistle-blowing effect of short sellers on poorly forming companies.

I spend a lot of time making comments on the net commenting on articles that slam research reports on the impact of short selling.  These articles inevitably denounce these reports as industry-funded self-interested and self-serving documents that would of course extol the virtues of short selling.  What I keep asking them is where is the research from the anti-short selling lobby?  Other than anecdotal accounts, there is nothing I have ever seen that proves their case.  Have you seen any?  If so, please send it to me so I can see some informed dissent.

Anyway enough of my ranting, this will probably be the last post of the year, but you never know. 

I hope you have a great Holiday Season, and I wish you and your loved ones  Health and Prosperity for the New Year!

Two Important Upcoming Events

Image via Wikipedia

As we wind down towards the end of the securities lending world’s annus horribilis we look into the future.  There are two conference events that merit serious attention.

IMN US Conference

I will first look at the IMN Beneficial Owners’ International Securities Lending & Repo Summit.  This is the 15th anniversary of the conference, to be held in Phoenix on  February 1 – 4.  I was there at the first one, in fact I have attended most, but not all of the events.   This is always one of the best conferences because of the large attendance of Beneficial Owners, however I think this event has the potential to be the best conference ever.

The turmoil of the past 18 months has brought a focus and spotlight on securities lending that has never been matched before.  The European version of this event was held in September, not long after the Lehman default.  The discussion and debate in Edinburgh, both publicly and privately was open and honest to a degree that is rarely seen.  I think that is the key to moving forward – better and more communication.  That is one of the reasons I started this blog in the first place.

As usual, the upcoming Summit will cover a spectrum of  subjects across the industry, but this year specifically looks at the most important issues:

•    Risks – Counterparty, Collateral, Indemnifications and Operational issues;
•    Revenue – Risk/reward analysis, Revenue generators;
•    Case Studies and Beneficial Owners actions

This conference is always notable as it brings together a much wider range of market participants than any other conference.  A huge number of Beneficial Owners are speaking.  These are the people that have had to answer the questions within their own organisations and decide whether changes to their lending programs were needed and if so, which steps needed to be taken.  Market participants – lenders and borrowers – both sides have been put under a microscope as to their attitudes, approaches and actions under fire.  You won’t get a better opportunity to get into the discussion and debate.

These are the key challenges facing everyone in the business for the coming year and will set the tone for the business for the future.   I hope to be there myself, and I expect the temperatures will be raised (and I am not talking about the weather).  There is a lot of emotion in the business at the moment, so take this opportunity to get in the mix! 

You can see the conference details and register here

GSL Summit

The people at GSL, the new journal focusing on securities lending, are hosting a conference on Thursday January 15th.  You might recognise that this is the day before the existing short selling restrictions are due to expire in the UK.

It seems to me to be a timely event and opportunity to examine the landscape for securities lending after the lifting of the ban. 

After an initial address from Spitalfileds Advisors that will set the scene for the state of the market, panellists and speakers will address a number of different topics in this half day session.

The broad topic of risk in all its component elements is discussed, with further sessions zeroing in on technology, followed by an examination of practical issues and answers.  The session will be wrapped up with a discussion entitled “What’s Next?”  You can see the full agenda details here: Download GSL Summit VIP Invite .

I’m impressed by a few aspects of the Summit.  First, it has been put together quickly and is well timed – it’s a great idea to start the year with some solid interaction.  Second, the speaker list is impressive.  Many leading industry participants will be speaking, and no doubt more will be in the audience.  (Don’t know how I managed to slip in as a speaker on the Risk Panel, but I am looking forward to it!).  Finally, the event is FREE of charge, but subject to invitation only!  What an excellent way to get started for 2009. 

If you are interested in attending, please email vipdelegate@2ipartners.com.  I hope to see you there!

A Vision of the Future

Two events yesterday were important indicators of the coming year in securities lending.  They set the scene for the current issues and give us some insight as to the future.

Securities Services to the Rescue!

Goldman Sachs reported earning yesterday and announced its first quarterly loss since going public.  Despite a fourth quarter net loss of $2.12 billion, they still managed to post a profit of $2.32 billion for he year ending November 28.  An astounding result in this most “interesting” year.  Read more about the results here.

A special highlight was given to the Securities Services business which had net revenues of $3.42 billion for the year, 26% higher than 2007, which set the previous record.  Securities services includes the prime brokerage business.

On a call with analysts yesterday, Chief Financial Officer David Viniar gave some additional colour to the results.  He stated that  although customer balances declined from the third quarter - as did net revenue, which dropped 13% - but the type of services provided to its hedge fund customers were higher-margin.

All good so far.  Unfortunately Viniar is expecting less from 2009.  He points to investor redemptions in hedge funds driven by poor performance (and in my view unrealistic expectations), and indicates that assets under management at hedge funds will continue to fall next year.  While acknowledging that the higher-margin activity will insulate the division, he thinks that will only “somewhat offset” the impact of the reduced asset balances.

I also think that there has to be some impact from the more competitive landscape that now exists in the prime brokerage world of today.

AIG

Last week I read a story in SmartBrief.com which quoted the New York insurance superintendent as saying that insurance company securities lending programs needed to be reviewed.  He described the business as a "wonderfully smart use of assets but also [can leave companies] vulnerable to extreme stress"

Yesterday we read that AIG has sold $39.3 billion of mortgage backed assets to a new fund that has been established by the Fed – Maiden Lane II LLC.  The objective of the fund is to hold the assets that have caused significant losses to AIG in the past year.  There have been questions raised as to the price paid for the assets and whether they represent fair value.  I am not privy to any information at all as to the assets and how much has been paid, but major shareholder and former AIG CEO Hank Greenburg has questioned whether the assets have been sold to the fund at a fair price.  He alleges that the assets had been marked on AIG’s books at a much lower level than the price at which they were sold to the fund.  As a shareholder, why complain? 

In theory I think this is the perfect microcosm of the challenge facing the securities lending reinvestment market at the moment.  Doing asset marks-to-market often show values that don’t represent their true value.  In a fire-sale they wouldn’t represent the likely value at maturity or reflect the true potential for default.  However, a buyer that can fund and sit on the assets until maturity should be fine in the vast majority of cases.  That is the challenge faced by many lending programs at the moment.  Dealers want to borrow against non-cash collateral as it is more balance sheet friendly and doesn’t use up liquidity.  Lenders however need to keep cash pools liquid and deep in order to hold investments until maturity and generate the returns that almost surely will generate.  It will continue to be an uncomfortable road ahead …

P.S.  Many years ago, when one of my previous employers was making people redundant (when that was still unusual), they sent them to a separate location – on Maiden Lane.  At least this time around it will have a better ending.

Plus ca change ...

As I have been saying for some time now, I expect next year to be more like 1996 than 2006.  This theme is explained in more detail in a Bloomberg story today quoting people who really know what they are talking about:

Paul Tudor Jones:   “Those of you who have visited recently have heard me refer to this return to our roots as back to the future,”
Brad Balter: “The industry lost its way, and this is a reset.”
Louis Bacon:  Bloomberg describes how he has concentrated his equity investments among a smaller number of in-house stock-pickers with proven records of generating a return when prices fall or rise.

The article also makes reference to new funds that are launching to take advantage of heavily price-distressed assets.  This reminds me of a former colleague in the early/mid  1990s who had experienced a great year with convertible bonds, only to be followed by a terrible year and he was sacked.  The negative price movement was a function of the markets, not his choices.  He was quickly picked up by a hedge fund, and his first action was to buy the really cheap CB’s from his former employer at knock-down prices.  Not surprisingly, his first year at the new firm was a very good one as well. 

The more things change, the more they stay the same.

The big news across all the markets today is the failure of the US Senate to agree a $14 billion short-term rescue plan for the big 3 American automakers.  I won’t go into it as you can read more on the story elsewhere.  However, it has set off another day of markets tumbling around the world.  Will the car companies go bankrupt?  Who knows, but we can see the doom and gloom that has returned to the markets today. 

I have been relatively sanguine about the IOSCO Task Force on short selling that is due to report in a couple of months.  However, there is also a regime change coming in the US when President-elect Obama and his team fully take over.   Roel Campos, a member  of the Obama transition team made a few comments earlier in the week that I find confusing and disturbing.   The article is from MarketWatch, and since I wasn’t there when Mr Campos made the remarks I can’t judge for myself what his intentions really are.

First he is quoted as saying: 

"We're looking for disclosure of positions, with a small delay, after a short sale is made,"

Then the article goes on to say:

“Campos is seeking to have the next SEC chairman introduce new rules requiring short sellers to publicly disclose their positions in a manner that is similar to how equity investors are required to reveal their equity stakes. "

The story reminds us that:

“For example, to comply with the SEC's 13F rule, investors with $100 million in capital or more are required to publicly disclose their positions 45 days after every calendar quarter.”

Then having said the rules should be similar, it carries on with: 

“But Campos argues that four-times-a-year public disclosure of short sell positions isn't enough.”

And closes with comments from Obama’s advisor as follows:  

“Campos said the delay in public disclosure is intended to protect some proprietary strategies, but that there should be some parity with equity disclosure requirements.”

Are the politicos looking for similarity, parity or different standards?  Your guess is as good as mine.  What did I say above about the more things change … ?

Have a great weekend!

Milestone - 100th Post!

Today marks the 100th post on Stock Lending Today.   I started the blog in order to share my thoughts and views on the securities lending industry and related subjects.  My feeling was that there was a need for the community to be able to communicate on relevant issues without having to wait for industry events, trade organisation communications, or the trade journals.  Little did I know that stock lending would become so famous - or should I say "infamous" - in the months following launch. 

Until the turmoil that started with sub-prime last year, the only other time the words "stock lending" appeared on the BBC was in connection with the Maxwell pension fraud whereby undocumented, uncollateralised stock lending was used to pilfer assets.  Not a great issue to be associated with, and again the news regarding short selling is also unfavourable company.  Never mind that all the academic evidence points towards short selling being a valuable part of the financial markets.  Forget even the regulators who have reluctantly acknowledged the importance of the securities lending business.  The need for a scapegoat is a basic human need, right after food, shelter and sex.  Hopefully the IOSCO Task Forces will add some meaningful discussion and debate.

Stock Lending Today now has 76 subscribers around the world - thank you!  Also, tomorrow the site should reach the 10,000th page hit.  I'm really happy with that, and as you can see from the chart below the trend is increasing.  The regular dips reflect weekend hit levels.

The other development that I think shows securities financing people want to improve their connections is the growth of the Securities Lending Traders Network.  This group on LinkedIn now boasts over 500 members from over 100 different companies and located in 26 countries around the world.  Most satisfying for me is that I often see the first person from a company join, and then a few days or a week later, their colleagues joining up.  The range of discussion and debate and the number of participants continues to grow.

The blog will only be successful if it reflects what you want me to write about.  So let me know what subjects you would like to see me cover. Also, I get a lot of emails sent directly to me which I appreciate.  But why limit your interesting and often witty comments to just me?  You can post your comments on the screen and do so anonymously.  Give it a shot - people will be interested in reading what you have to say.

Thanks very much for all your support and kind words since launching and keep contributing.  If you like it, why not tell others about it?  Finally - I recommend you join SLTN.  It's free and you can connect to people globally.   As the title suggests, this industry is still under siege, and better, more open communication can only be a good thing!