Casino matters

26 May 12    JPMorgan blues: The Hunch, the Pounce and the Kill, NYT, AZAM AHMED
20 May 12    Heist of the century: Wall Street's role in the financial crisis, Guardian, Charles Ferguson
25 Aug 09   Charles Schwab Takes on Cuomo, WSJ, LIZ RAPPAPORT
19 Aug 09   Brokers Aren't Responsible for Bad Bets, WSJ, CHARLES R. SCHWAB, opinion


AUGUST 19, 2009, 8:17 A.M. ET

Brokers Aren't Responsible for Bad Bets
To take the risk out of investing you'll have to take Americans out of the market.

A blizzard of new proposed regulation and overzealous litigation is poised to jeopardize the low-cost investing model that tens of millions of investors have enjoyed for decades. In the last 30 years, individual investors have benefitted from huge innovations, including low  commissions, online investing, mutual fund supermarkets, and the advent of exchange traded funds. Individuals now have broad access to domestic and global markets at costs lower than institutions enjoyed only a few years ago. This has provided needed capital to our  economy and enabled the creation of personal wealth for average Americans.

But today's extraordinary regulatory and political environment is putting all of this at risk.

My company, Charles Schwab, was founded 35 years ago as a reaction to the high cost and inherent exclusivity of traditional Wall Street investing. Today we serve almost 10 million accounts. The majority are what we refer to as self–directed: They make their own  decisions about what to buy, sell or hold. We provide them with an efficient platform, tools, assistance, education and, of course, low costs.

We are not alone. Our direct competitors serve millions of other American investors who are looking for essentially the same thing: the freedom to inexpensively invest on their own.

We have never guaranteed individual success. Our investors understand that along with investing comes risk, as well as potential reward. Unfortunately, we are now seeing a conscious effort to limit—if not eliminate—all risks for the individual investor, whether through  consumer "protection," fiduciary liability for brokers, or the threat of litigation that attempts to make our firm, and others like us, more like an insurance company than a broker.

As an example, Schwab is currently being sued by New York Attorney General Andrew Cuomo, who alleges that we should have known beforehand that the Auction Rate Securities market would freeze. Auction Rate Securities are generally high-quality, long-term  bonds that can be bought and sold on a weekly or monthly basis through an auction process. The interest rate paid on the bonds was reset at each auction according to investor demand. The auction process has largely been frozen since February 2008, leaving investors  holding quality long-term, but illiquid bonds.

Though this market operated smoothly and reliably for over 20 years, it is a market that we had no direct involvement in establishing or maintaining. It's a market where roughly 90% of the clients who invested in these securities came to Schwab asking us to locate and  make available these investments for them. We did not create the products, actively market them, and had no involvement in the events that led to the collapse of the Auction Rate Securities market.

The implication of this lawsuit is that firms like ours should have known that the market would fail. Should we also have known that Lehman Brothers or Bear Stearns were going to go under and compensate clients who bought their equity or debt? Should we have been  able to predict which financial institutions would be the beneficiaries of government bailouts and which would not? I think it's fair to say we have all been surprised by many events this past year.

The issue at stake here is whether independent investors should be allowed the freedom to choose what they are allowed to buy, sell or hold. Or should the government try to enforce a guarantee against market risk through regulation or lawsuits like the attorney  general has brought against us?

If Schwab is going to be held responsible for guaranteeing every decision an investor makes, we'd need to severely limit what they purchase. Would we tell them they couldn't buy Google or IBM stock because regulators or politicians don't think they are smart enough to  assess the risks and could hold us accountable for any losses? The logical outcome would be that individual investors would be constrained to a small set of plain vanilla investments—Treasurys for all—or would be forced to pay us a fee to manage their account.

To be sure, we are happy to manage money for our clients. But millions of investors have decided that their needs are best served when they direct their own finances. Forcing them to pay an advisory fee would be a significant new cost to them and the fees would likely  shut many small investors out of the capital markets altogether.

I've always believed in the power of the market to drive innovation and drive down cost. I also believe in the individual and his or her ability to make reasoned decisions. I don't think our clients, or our competitors' clients, are looking for regulators or politicians to  protect them from risk by constraining their choices.

Today Schwab clients can open an account with as little as $1,000. If they invest their $1,000 in an S&P 500 Index fund, they would pay no commission and their total cost of management would be 90 cents per annum. For 90 cents a year they can access everything  Schwab has to offer including education, tools, our Web site, 24/7 live phone service, as well as support from one of our approximately 300 branches across the country. This is an incredibly powerful model that I'm proud of, and a model that I think is good for this  country and the market.

Don't let litigators and politicians jeopardize it. If they succeed, the individual investor will pay a heavy price.

Mr. Schwab is founder and chairman of the Charles Schwab Corporation.

AUGUST 25, 2009

Charles Schwab Takes on Cuomo

Charles Schwab has long touted his anti-Wall Street credentials as proof he cares about small investors. Now he has gone against Wall Street in a different way, fighting back against New York Attorney General Andrew Cuomo, who is pushing to get the major brokerage firms to cover losses for clients who invested in auction-rate securities.

Mr. Schwab, founder and chairman of Charles Schwab & Co., the San Francisco discount brokerage firm, is taking a one-man stand against Mr. Cuomo, arguing that the attorney general has gone too far in suing his firm for civil fraud after it refused to settle the case.

Charles Schwab, depicted at left, has been fighting back against New York's Andrew Cuomo (on the bag).
Scott Pollack

SMALL-INVESTOR CHAMPIONS: Charles Schwab, depicted at left, has been fighting back against New York's Andrew Cuomo (on the bag).
Charles Schwab, depicted at left, has been fighting back against New York's Andrew Cuomo (on the bag).

Nearly every major firm on Wall Street has bowed to pressure from Mr. Cuomo and agreed to pay a total of more than $60 billion to buy back the securities from investors, marking the biggest settlement for individual investors in history.

"Everyone was surprised [Mr. Schwab] stepped out that publicly on this issue," said Richard Repetto, an analyst at Sandler O'Neill, referring to an opinion piece by Mr. Schwab last week in The Wall Street Journal. "It's a sign of the times. Every executive has to be  concerned with regulators and regulatory issues, even Chuck."

Auction-rate securities are long-term debt instruments that can act like short-term debt because they are resold with new interest rates in periodic auctions. The $330 billion market collapsed when Wall Street market makers stopped stepping in as buyers early in 2008,  leaving investors without access to their cash.

For Mr. Schwab, the feud goes beyond these securities. He says Mr. Cuomo is going too far, arguing that his firm just sold the securities and didn't underwrite them. Holding brokers like his more responsible for securities it sells will make it impossible for him to offer low-cost investment options for his clients, he has said.

Representatives for Mr. Cuomo, who is considering a run for governor of New York in 2010, dispute the accusation that he is overreaching. They say that Schwab misled investors and that the case has nothing to do with the firm's low-cost business model.

Mr. Cuomo's office sued Schwab last week, alleging that the company committed civil fraud in selling auction-rate securities to its customers. The lawsuit contends that Schwab misled its clients about the market's risks. The suit also said Schwab executives knew the market was failing and didn't share that information with its brokers. The company says the allegations lack merit and disputes the idea that distributors should have the same responsibility as underwriters of auction-rate securities.

Mr. Cuomo last year settled with many of Wall Street's biggest banks that underwrote the securities, including UBS Securities, Citigroup Inc. and Goldman Sachs Group Inc. He also settled with retail brokerage firms that distributed -- or sold -- the securities to clients, including TD Ameritrade Holding Corp. and Fidelity Investments. Last year, several brokerage firms, through the Regional Bond Dealers Association, said to the Congress and to Mr. Cuomo that as firms "downstream" from the creators of the securities, they shouldn't be held liable.

At the time, Benjamin Lawsky, special assistant to the New York Attorney General, responded in a letter that his office would find fraud where it happened, and firms that feel they did no wrong should seek to be indemnified from the underwriters with whom they did business.

On its Web site, Schwab has published statements aligning itself with other victims of misinformation about the auction-rate securities market and states that Mr. Cuomo "hastily settled" with large Wall Street firms that have been let "off the hook" by not being forced to buy securities from clients of so-called downstream firms like Schwab. They also accused Mr. Cuomo of trying his cases in the media.

Mr. Schwab, however, has used the media himself. In the opinion piece in The Wall Street Journal on Wednesday, he attacked regulatory reform proposals made by the Obama administration and other Washington lawmakers for threatening investors' freedom. He also held up Mr. Cuomo's lawsuit as an example of such  a threat to the idea that investors should be accountable for their own investment decisions. He said Mr. Cuomo's lawsuit is part of an "attempt to make our firm, and others like us, more like an insurance company than a broker."

Schwab's op-ed piece "is a remarkable document that stands starkly for the proposition that Schwab should not be held responsible for repeatedly misrepresenting auction-rate securities," to avoid hurting the firm's low-cost business model, said Mr. Lawsky, the special assistant to Mr. Cuomo. "That's not an innovative business model; it's a license to lie."

Currently, investment advisers have a legal, fiduciary duty to act in their clients' best interest, as defined by the Investment Advisers Act of 1940. Brokers' rules fall under the Securities Act of 1934, which doesn't include the same standard.

Lately, regulators, lawmakers and even the main financial-industry trade group, the Securities Industry and Financial Markets Association, say brokers should be held to a higher legal standard of responsibility for the choices their clients make with their money in a more complex financial world.

Sixty years ago, the buyer understood what he was buying, said Tamar Frankel, law professor at Boston University. "You had stocks, you had bonds," she said. "Now you have things that even sophisticated investors can't understand without the help of computer models."

Mr. Schwab has voiced his opinion on causes before. A Republican who has given thousands of dollars to candidates and the party in the last election cycle, he has supported adding private accounts as an option for Social Security beneficiaries, and he backed President George W. Bush's post-Internet bubble tax cuts.

Write to Liz Rappaport at

May 26, 2012

The Hunch, the Pounce and the Kill
How Boaz Weinstein and Hedge Funds Outsmarted  JPMorgan

JPMorgan lost billions on a trade that was called a  “terrible, egregious mistake” by Jamie Dimon, the  C.E.O. BOAZ WEINSTEIN didn’t know it, but he had just  hooked the London Whale.
One beneficiary was Boaz Weinstein, a hedge fund  manager who saw a price anomaly that signaled an  opportunity. At a conference, he advised betting  against it.

It was last November, and Mr. Weinstein, a  wunderkind of the New York hedge fund world, had  spied something strange across the Atlantic. In an  obscure corner of the financial markets, prices  seemed out of whack. It didn’t make sense.

Mr. Weinstein pounced.
As the financial world now knows, what was out of  whack was JPMorgan Chase & Company. One its  traders, Bruno Iksil, the man later nicknamed the  London Whale for his outsize trades, was about to  blow a multibillion-dollar hole in the mighty House of  Morgan.

But the resulting uproar, in Washington and on Wall  Street, has largely obscured a simple truth of the  marketplace. Yes, Morgan lost big — but, as Mitt  Romney has pointed out, someone else won. And  that someone or, rather, those someones, turn out  to be Boaz Weinstein and a wolf pack of like-minded  hedge fund managers.

In the London Whale, these traders saw a rich  opportunity, and they seized it with both hands.  That, after all, is the way hedge funds roll. His cool  calculus has made Mr. Weinstein a very rich man: he  is in talks to buy the Fifth Avenue co-op of a  reclusive heiress, Huguette Clark, for $24 million.

It might seem remarkable that someone like Mr.  Weinstein, a man virtually unknown outside of  financial circles, could deal such a stinging blow to  one of the world’s largest, most respected banks.  Jamie Dimon, the chairman and chief executive of  JPMorgan and a face of the banking establishment, is  struggling to contain the damage from what he has  called a “terrible, egregious mistake.” The loss —  JPMorgan put it at $2 billion, but it may turn out to  be $3 billion or more — has renewed calls for  stronger financial regulation.

Given the secretive nature of the business, few on  Wall Street, including Mr. Weinstein, were willing to  speak publicly about how the hedge funds  harpooned the London Whale. But interviews with  more than a dozen hedge fund managers, investors  and traders pull back the curtain on the ways of this  band of traders, and on what really happened.

One thing is sure: Mr. Weinstein, 38, played a  central role in this, one of the biggest trading  blowups since the financial crisis of 2008. Mr. Iksil  and his colleagues in the chief investment office at  JPMorgan may have lighted the fire, but Mr.  Weinstein and his cohorts fanned the flames. In the  hedge fund game, a business in which ruthlessness  is prized and money is the ultimate measure, Mr.  Weinstein is what is known as a “monster” — an  aggressive trader with a preternatural appetite for  risk and a take-no-prisoners style. He is a chess  master, as well as a high-roller on the velvet-topped  tables of Las Vegas. He has been banned from the  Bellagio for counting cards.

From offices on the 58th floor of the Chrysler  Building in Midtown Manhattan, Mr. Weinstein runs a  $5.5 billion hedge fund firm called Saba Capital  Management. (“Saba” is Hebrew for “grandfatherly  wisdom,” a nod to his Israeli roots.) It was there,  last autumn, that he noticed an aberration in the  market for credit derivatives. He knew from  experience what it was like to lose a lot of money at  a big bank. Before starting Saba, he was responsible  for a team that lost nearly $2 billion, in the depths of  the financial crisis, at Deutsche Bank. Others lost  even more. Last November, however, he saw that a  certain index seemed to be trading out of line with  the market it was supposed to track. He and his  team pored through reams of data, trying to make  sense of it.

Finally, as Mr. Iksil, the London Whale, kept selling,  Mr. Weinstein began buying.
At the time, traders in London had no real idea that  JPMorgan was behind the trades that were skewing  the market in credit derivatives. In fact, they  weren’t even sure that it was a single bank or  trader. But soon the City of London, Europe’s  financial hub, was buzzing. Whoever the mysterious  trader was, he or she kept selling derivatives  intended to rise in value in the event that certain  corporate bonds became riskier. The volume of  trades was off the charts. Who could possibly sell so  much? And, what if the trade reversed, as it  inevitably would?

And so the battle lines were drawn. On one side was  JPMorgan, the American banking giant that had  weathered the financial crisis far better than so  many of its peers. On the other were hedge fund  managers, including Mr. Weinstein at Saba.

Such standoffs are not uncommon on Wall Street. An  aggressive trader makes a wrongheaded bet, then  doubles down to scare off competitors on the other  side of the trade. Market rivals often get slapped  down, unwilling to keep buying as the other side is  selling, or vice versa. For traders with the backing of  a major bank, like JPMorgan, the task is much  easier.

But not always. Sometimes, the other side sits tight,  then hits back in force. And it does so in numbers.

By January of this year, the trade against the  London Whale was not going well for the hedge  funds. The price of the index, as well as others, was  still falling, and the losses were mounting for Mr.  Weinstein and the others. But by February, it was  clear that a single, big player was behind the selling.  On trading desks in London and New York, everyone  was talking.

It had to be JPMorgan.
BOAZ WEINSTEIN has always played the wild card in  the markets. He grew up on the Upper West Side of  Manhattan, in relatively modest surroundings, the  son of an automobile insurance salesman and a  translator, both regular watchers of “Wall Street  Week.” As a student at Stuyvesant High School in  Manhattan, he entered a contest to see who could  pick the best stocks. He won — by selecting an  assortment of the fastest-growing stocks he could  find from newspaper charts. He studied philosophy  at the University of Michigan — he was partial to  Hume and Camus — but today favors behavioral  finance, particularly the work of his friend Dan  Ariely, a professor at Duke. Mr. Weinstein is married  to Tali Farhadian Weinstein, a rising lawyer in the  Justice Department.

Last February, at a conference organized by another  hedge fund manager, his friend William A. Ackman,  Mr. Weinstein was hailed as one of the savviest  credit traders in the business.

The February conference was held, ironically, in  JPMorgan’s offices on Madison Avenue. Workers at  the bank milled about as Mr. Weinstein and others  offered  investment tips.

Dressed in a sharp blue suit, Mr. Weinstein stepped  up to the microphone and opened with a joke that  only a financial wonk would appreciate. He showed a  slide comparing the cost of credit default swaps on  various government debt to the percentage of young  men in those countries who live with their parents.  The slide titled “Mamma Mia!” suggested that, by  that measure, Greece, Portugal and Italy were in  trouble.

But what really got people’s attention was his  second-to-last slide. It was his pick for the “best”  investment idea of the moment. Mr. Weinstein  recommended buying the Investment Grade Series 9  10-year Index CDS — the same index that Mr. Iksil  was shorting.

The crowd, 300 or so investment professionals,  began buzzing.
“Once he came out in that meeting and was so  specific, others jumped in,” one hedge fund manager  said.

But the London Whale was so big that, for months,  the hedge funds betting against him simply got  steamrolled. One of Mr. Weinstein’s funds at Saba  was down 20 percent heading into May.

Then the tables began to turn, as news reports  about Mr. Iksil, fed by the hedge funds, began to  surface on both sides of the Atlantic. Suddenly,  everyone was checking out the obscure index that  Mr. Weinstein and others had seized upon.

By May, when fears over Europe’s debt crisis again  came to the fore, the trade reversed. The London  Whale was losing. And Mr. Weinstein began to make  back all of his losses — and then some — in a matter  of weeks.

Other hedge funds were also big winners. Blue  Mountain Capital and BlueCrest Capital, both created  by former JPMorgan traders, were among those  winners. Lucidus Capital Partners, CQS and a fund  called III came out ahead, too.

INSIDE the hedge fund world, some joked that Mr.  Weinstein had been able to spot the London Whale  because he himself had been a whale once, too.

Mr. Weinstein was a pioneer in complex credit  derivatives, latching onto them early in his tenure at  Deutsche Bank, before they became the financial  weapons of mass destruction that worsened the  financial crisis. He was a profit machine at the bank,  notching earnings in 10 of his 11 years trading  there. At 27, he became one of the youngest  managing directors in the bank’s history. Before his  book blew up, Mr. Weinstein was reportedly pulling  down about $40 million a year. He exploited price  discrepancies and piled leverage into his trades.

Then his team at Deutsche Bank lost $1.8 billion  during the 2008 financial crisis. The trading losses  ruined bonuses throughout the bank, and ruffled  more than a few feathers.

He would later leave the bank and, along with 12 of  his colleagues, set up Saba. Mr. Weinstein started it  with $140 million — a pittance by hedge fund  standards. In the intervening years, he has  outperformed his peers and managed to vacuum up  assets at a time when most growing hedge funds  have been struggling to hold on to what they’ve got.  He now controls more than $5.5 billion.

The similarities between Mr. Weinstein and Mr. Iksil  still resonate in the market.
“It was one whale versus another whale,” one hedge  fund manager said.

Those who have traded against Mr. Weinstein  describe him as an aggressive trader who bets big  and moves fast. He values a deal more than old- fashioned etiquette. Traders tell tales of losing  money to him because of split-second price  differences he picked up faster than they did. While  that kind of behavior doesn’t win a lot of friends on  Wall Street, these traders concede that Mr.  Weinstein is too big and powerful to ignore.

At a lot of large hedge funds, the top dogs bark  orders to underlings, but Mr. Weinstein is almost  always the one doing the trading at Saba. He calls  around to the banks daily. His confidence and  willingness to take on risk, however, leave some  worried that he’s never too far away from another  Deutsche Bank trade — from, in essence, becoming  the whale.

“If you hand me a list of the top-performing guys in  the space, I’d expect to see his name on it,” said one  bank executive who works closely with hedge funds.  “If you hand me another list of hedge funds that  might blow up, I’d expect his name to be on that,  too.”

Others disagree, saying that Mr. Weinstein has a  long record as a steady performer.

LIKE many hedge fund traders, Mr. Weinstein is  comfortable with risky pursuits, particularly those  that require spot calculations and a cool head. A  gambling enthusiast, he has an affinity for blackjack  and poker. In 2005, Mr. Weinstein won a Maserati  by competing in poker in a tournament sponsored by  a unit of Warren E. Buffett’s Berkshire Hathaway.  Mr. Weinstein still drives the car. He plays with  celebrities like Matt Damon, too.

Not everyone is enthusiastic about Mr. Weinstein’s  playing style. A few years back, on a trip to Vegas,  he was banned from the opulent Bellagio casino for  counting cards while playing blackjack.

Much has also been made of his prowess as a chess  player. He earned the chess master designation at  the age of 16, and has remained a lifelong fan,  though he plays less these days. At a charity auction  in 2010, he paid $10,500 to play alongside the chess  legend Garry Kasparov and the young chess  sensation Magnus Carlsen.

Mostly, he sneaks in quick games online, sometimes  with Peter Thiel, a hedge fund manager and Silicon  Valley star who was an early investor in Facebook.

Both chess and playing the markets require a mind  that can see several steps ahead of the next man —  a fact that has not been lost on Wall Street.  Privately, Mr. Weinstein tells friends that while skill  at chess is great to have, it’s hardly a requisite for  being a good trader.

Whatever the case, chess helped him gain his first  real shot on Wall Street. At 18, after failing to land a  summer job at Goldman Sachs, Mr. Weinstein ran  into a senior partner in the bathroom on his way out.  The partner, David F. DeLucia, a chess expert, had  played Mr. Weinstein numerous times, and quickly  arranged more meetings for him.

Now Mr. Weinstein is practically a featured attraction  on Wall Street. He attends galas and charity events,  and is sought out to speak at big events. Pictures of  him clasping a drink at last night’s party appear with  regularity on business Web sites.

And, financially, the payoff has been enormous. Last  year, he earned more than $90 million and, by some  estimates, landed on the rich lists of the hedge fund  industry. Such figures aside, he is described as  someone who doesn’t flash his wealth. Before he  won his Maserati, he didn’t own a car.

At another recent investor conference, Mr. Weinstein  strolled among the crowd in Avery Fisher Hall at  Lincoln Center. Accompanying him was his mother,  Giselle, with whom he watched “Wall Street Week”  as a child.

While hedge fund managers, investors and analysts  mingled over cocktails, Mr. Weinstein appeared  buoyant. His trade against the London Whale was  finally paying off, a vindication — and a profitable  one — of his hunch months earlier. That same day,  news reports said Mr. Iksil, the London Whale, would  soon be leaving JPMorgan.

A version of this article appeared in print on May 27,  2012, on page BU1 of the New York edition with the  headline: The Hunch, The Pounce And the Kill.