Chaos in Financial Markets are “Potentially Dangerous for Humanity”

You don’t say! What I find most surprising, however, is that there actually IS a Centre for the Study of Capital Market Dysfunctionality: It was founded in 2007 by British Paul Woolley, after working several years as a stock broker, and as economist and adviser at the International Monetary Fund (IMF). Guess he knows what he’s talking about. In an interview with Spiegel Online, Britain’s new found financial guru, Dr Paul Woolley says the market stress in not only dangerous for those who work there, but also for everyone else. And he has some investment advise.

“Stop paying performance fees to managers who increase the worth of funds because it encourages gambling.” 

Paul Woolley

“The developments in recent weeks have made it quite clear that the markets don’t function properly. Things are spinning out of control and are potentially dangerous for society. Only a fraternity of academic high priests connected to the finance markets is still speaking of efficient markets. Still each market participant is pursuing their own selfish interests. The market isn’t reaching equilibrium — it’s falling into chaos,” Dr. Paul Woolley says.

 

Here are some more highlights from the Spiegel interview:

“The finance sector can – and is – growing until it overwhelms the economy. In good years the US finance industry cashes in on more than 40 percent of all corporate profits.” 

“Most fund managers follow only the newest trends and strengthen them by doing so. In the short term that leads to success, but in the long term it leads to a crash. “

“The finance industry is characterized by many innovations. Because the customers hardly understand their innovative products, banks make amazing returns. “

“The big investors are in a position to force their service providers, the banks, fund managers and bankers into better behavior. “

” Big investors should also insist that trading take place on a public market. “

Paul Woolley’s career has spanned the private sector, academia and policy-orientated institutions.

After several years of practical experience in a firm of stockbrokers, latterly as a partner in his firm, he studied Economics at the University of York (UK) receiving BA (1970) and D Phil (1976).

He held the Esmée Fairbairn Lectureship in Finance at York 1970-76, also serving as Specialist Advisor to the House of Lords Committee on the EEC 1975-6.

He then moved to the International Monetary Fund 1976-83, initially as an Economist and later as Advisor and then head of the Division responsible to the Fund’s borrowing and investment activities.

Returning to the UK, he was for four years a Partner and Director on the main board of merchant bank, Baring Brothers and its various subsidiaries.

In 1987 he co-founded, and was Managing Director of, GMO Woolley, the London affiliate of GMO, the Boston-based fund management firm. He was a Partner and served on the main GMO board (1998 – 2003).

He retired as Chairman of GMO Europe in 2006.

He returned to academic life in 2007, funding the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at the London School of Economics.

He is now also Chairman of the Advisory Board for the Centre and a full-time member of the research team.

Similar centres have been set up at the University of Toulouse and at UTS in Sydney.

Mr. Woolley is an Honorary Professor of the University of York, Senior Fellow at LSE and an Adjunct Professor at UTS.

Read the full interview with Dr. Woolley at Spiegel ONLINE.

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Options: Highest Put/Call Ratio Since Lehman

The cost of three-month put options to sell the Standard & Poor’s 500 Index is almost twice the price of calls to buy, the highest ratio since July 2007, according to data compiled by Bloomberg. Investors are paying a high price to hedge against a drop in the US stock market.

“We are buying puts and protection across the board. There are many open fronts, too many question marks.”

Sergi Martin Amoros

The end of the Federal Reserve’s Treasury repurchase program is prompting options traders to pay the most in four years for protection against stock declines, a signal that proved bullish in the past, Bloomberg reports.

The cost of three-month put options to sell the Standard & Poor’s 500 Index is almost twice the price of calls to buy, the highest ratio since July 2007, according to data compiled by Bloomberg.

The last 17 times that so-called skew rose as high, the benchmark gauge for American equities climbed a median 3.9 percent over three months, data compiled by Bloomberg show.

Traders are loading up on insurance in the options market on speculation policy makers will halt their program of quantitative easing in June.

“A Major Trend”

Similar purchases preceded gains in the past because they meant professional investors who use the contracts as hedges are buying stocks, said Pam Finelli, head of European equity derivatives research at Deutsche Bank AG.

“Risk management and portfolio protection is a huge theme in the market and it’s not unusual to see people expanding their equity allocation, but doing so with a hedge in place,” Finelli says in an interview from London.

“The equity market goes up but the puts stay bid because there’s an underlying hedge that’s being put on at the same time. This has been a major trend.”

Sergi Martin Amoros, chief executive officer at Credit Andorra Asset Management in Andorra, added to equities following the March 11 earthquake in Japan, he said in a telephone interview on April 21.

He’s also buying protection on the firm’s 4 billion euros ($5.8 billion) in investments.

“Question Marks”

“We made the most of the March sell-off to add to positions as equities had weakened,” he said.

“There were good prices and we took the opportunity. We are buying puts and protection across the board. There are many open fronts, too many question marks.”

The S&P 500 fell 0.2 percent to 1,334.60 as of 9:42 a.m. in New York. It climbed 6.3 percent this year through April 21 as the US unemployment rate unexpectedly dropped to a two-year low of 8.8 percent in March as companies created more jobs than forecast, the Labor Department said earlier this month.

The economy probably expanded at a 1.9 percent annual pace in the first quarter and will grow at an average rate of 3.1 percent though 2013, according to the average of estimates in a Bloomberg survey.

Source: Bloomberg

Bloomberg’s Jeff Kearns and Whitney Kisling report the conversation between Howard Present, president and chief executive officer of F-Squared Investments Inc., and Carol Massar, Matt Miller and Adam Johnson on Bloomberg Television’s “Street Smart.”

Play Video

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Citigroup Sued by Norway's Central Bank

Norway’s central bank have sued Citigroup Inc along with Chief Executive Officer Vikram Pandit and Chairman Richard Parsons over a $835 million loss in Citigroup stock and bonds.

“The complaint is based largely on the ongoing class action lawsuit against Citigroup.”

Bunny Nooryani

Citigroup misrepresented its financial condition and failed to disclose material information, leading Norges Bank to buy Citigroup stock and bonds at inflated prices between January 2007 and January 2009, the Norwegian central bank says in the lawsuit filed at the US District Court in Manhattan.

“Citi’s near-demise had its genesis in the company’s increasing willingness to take on risk for the sake of profit, without regard for – and without disclosing  – the magnitude of the downside exposure it faced if those risks materialized,” the central bank writes in the complaint, labeled “Norges Bank v. Citigroup; 10-cv-07202”.

The Pension Fund (Again)

Through its investment arm, the Norwegian Government Pension Fund Global (NBIM), the world’s second-biggest sovereign wealth fund, posted a record 633 billion kroner ($107.6 billion) loss in 2008, wiping out gains since the fund started investing the country’s oil revenue in 1996.

The so-called oil fund had a 26 percent return last year.

The central bank’s lawsuit names 20 of Citigroup’s current and former directors and executives, including former CEO Charles “Chuck” Prince.

The Norwegian Pension Fund is about to become famous for its controversial investment strategy – being one of the largest shareholders in the ruined oil company BP, and have lately invested large sums in Greek bonds.

Best Served In Court

– We confirm that Norges Bank has filed an individual claim against Citigroup in federal court in New York. The complaint is based largely on the ongoing class action lawsuit against Citigroup,” Bunny Nooryani, communications manger at NBIM says, according to the website DN.no.

The Norwegian central bank also confirms the size of the loss.

“Norges Bank’s complaint tracks, in large part, the complaint filed in the securities class action lawsuit currently pending against Citigroup, but Norges Bank believes it will be better served by pursuing its own direct action,” she says in a telephone interview with Bloomberg.

The central bank is also a plaintiff in the class-action lawsuit, Ms.  Nooryani adds.

The lawsuit adds to a group of other pending complaints against Citigroup for losses suffered by investors.

The New York-based bank, today the fourth-largest U.S. bank by deposits, announced “significant declines” in its $55 billion of subprime holdings on November 4th, 2007, and reported a $9.8 billion loss for the last quarter of 2007, compared with a $5.1 billion net profit the previous year.

The bank had a net loss of $27.7 billion in 2008 and received a $45 billion bailout from US taxpayers.

The Securities and Exchange Commission sued Citigroup in a separate case in July, claiming that the bank, now 18 percent- owned by U.S. taxpayers, had misled investors by not disclosing over $40 billion in subprime-related holdings during 2007.

Citigroup agreed to a $75 million fine in a settlement that was approved by a federal judge Friday.

Four Small Towns Went Bankrupt

In the aftermath of the US subprime crises, four small Norwegian towns practically went bankrupt after investing in subprime-related financial instruments issued by Citygroup.

The local administrations in these Norwegian small town have already tried to sue Citygroup over their losses, but have gotten nowhere, and are now a part of the ongoing class action suit against the global giant.

Vigorous Defense

“We believe the suit has no merit and will defend ourselves vigorously,” Citigroup spokeswoman Danielle Romero- Apsilos says in a statement.

“We believe that such lawsuits are baseless and will defend ourselves intensely,” Citigroup spokesman Jeffrey French writes in an email to DN.no.

Citigroup executives repeatedly stated in conferences calls in 2007 that the bank had reduced its subprime exposure by 45 percent to $13 billion.

The figure omitted “super-senior” tranches of collateralized debt obligations and financial guarantees called liquidity puts that added more than $40 billion in subprime exposure, according to the SEC’s complaint.

Gary Crittenden, 57, the bank’s chief financial officer, agreed to pay $100,000 in a separate settlement with the SEC. Arthur Tildesley, former head of Citigroup’s investor relations, paid $88,000.

Crittenden is named as a defendant in Norges Bank’s lawsuit.

Citigroup’s shares fell 93 percent over the period during which the Norwegian central bank claimed the bank made its misleading disclosures, closing at $3.83 on Jan. 15, 2009, compared with $54.50 two years previously.

Citigroup’s 5.85 percent bonds sold in August 2006 and maturing 10 years later lost 0.8 percent during that period.

The Norwegian spokeswoman, Bunny Nooryani, declined to give further details on the amount sought in compensation or why the bank believes it will be better served pursuing its own lawsuit.

Related by the Econotwist:

Norway’s Government Pension Fund Takes $25bn Hit

Norway’s Oil Fund Among BP’s Largest Shareholders As Bankruptcy Rumors Hit Market

Norwegian Pensioners Enter Bear Market

Here’s The REAL Norwegian PIIGS Exposure

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• Citigroup Settlement on Subprime Holdings Disclosures Approved (businessweek.com)
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