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In
The News
2005
·
US Banker, December
2005
·
Bloomberg,
November 3, 2005
·
BBC Radio, October 21,
2005
·
News Analysis, October
16, 2005
·
CBS MarketWatch,
October 14, 2005
(also
in Investors Business Daily)
·
International
Herald Tribune, October 8, 2005
·
US Banker, October 2005
·
Global Finance,
September 2005
·
HoweStreet.com,
September 12, 2005
·
Bloomberg, July 12,
2005
·
The Treasurer (Association of Corporate Treasurers),
July/August, 2005
·
Bloomberg, June 24,
2005
·
New York Daily News,
May 21, 2005
·
Investment
Dealers Digest, May 16, 2005
·
Canadian Broadcasting Corporation,
May11, 2005
·
CBS MarketWatch, May 10, 2005
(also
in AFX Asia newswire, May 10 and 11)
·
Financial
Engineering News, May, 2005
·
Chicago Sun Times,
May 1, 2005
·
Bloomberg,
March 18, 2005
·
South China
Morning Post, February 26, 2005
·
BBC
radio, February 25, 2005 (no transcript)
December 2005
USBANKER
[Article
on incoming Fed Chair Ben Bernanke]
November 3, 2005
RATE
GAMBLE: Two banks decline to comment
NO
NOTICE: Meeting's agenda not publicized
Bad
bet by state cost $123 million
Posted
by the
BY
ANDREW PRATT
BLOOMBERG
NEWS SERVICE
The
state gave no public notice that board members of its Economic Development
Authority would be deciding on May 17 whether to end the interest-rate wager by
paying Lehman Bros. Holdings Inc. and Morgan Stanley enough money to wipe out
the average property tax bill of 22,000
The
penalty
"Democracy depends on
transparency," said Randall Dodd, president of the Financial Policy Forum,
a Washington-based institute that studies government borrowing. "There are
no reporting requirements, and information is hard to get on derivatives — very
hard if not impossible."
Derivatives,
which include swaps, are financial obligations derived from debt and equity securities,
currencies and commodities. Federal disclosure rules that govern municipal bond
sales don't apply to derivatives.
The
swap contracts that
Lehman
Bros. spokeswoman Kerrie Cohen and Morgan Stanley spokesman
More
swaps
The
agreements include $3.75 billion of derivatives tied to debt of the state's
Schools Construction Corp., which was set up in 2003 to oversee public school
construction.
The
majority of the swaps lock the state into debt at borrowing costs higher than
current rates. If interest rates don't rise, the state faces a choice of either
buying out the contracts and refinancing at lower rates, or locking in debt at
higher than market rates.
Cost
to cancel
The
state would have had to pay $425.7 million to cancel those swaps in September,
according to a CDR report. That figure will rise and fall with interest rates.
Kelley
Heck, a spokeswoman for acting Gov. Codey, a Democrat
who isn't running in next week's election, referred all questions about the
state's swaps to Thomas Vincz, spokesman for state
Treasurer John McCormac. Vincz
says the state uses swaps to provide certainty about its debt expense, and that
cost of canceling a swap is relevant only if the state decides to end it.
"Market
values of swaps change on a daily basis, so snapshot portfolio assessments have
no shelf life when measuring an issuer's long-term goals, history and position
with this financial tool," Vincz says. "
"Inadequate
disclosure"
Doug
Forrester, 52, the Republican candidate for governor on the Tuesday ballot,
says he wants to create an elected, independent office of state auditor that
would monitor borrowing practices, including swaps. The state auditor is now an
appointee of the Legislature.
"The
current problems are a result of inadequate disclosure requirements that have
masked the true cost of public borrowing," says Sherry Sylvester, a
spokeswoman for the Forrester campaign.
U.S.
Sen. Jon S. Corzine, 58, the Democratic candidate for
governor, says swaps are complicated, and he would hire the best people
possible to see if
"Until
I can look at it closely, I can't tell you what the state should do," says
Corzine, a former chairman and chief executive
officer of New York-based investment bank Goldman Sachs & Co.
Canceling
the pension swaps didn't raise the state's cost of borrowing, says Caren Franzini, chief executive
officer of the Economic Development Authority in
Best
way?
Using
premium bonds was the best way to cancel the swap without taking money from
other state programs, McCormac said.
Cancellation
won't bring back the opportunity to refinance the debt at the lowest possible
rates, Franzini says.
The
state could have gotten a rate of 5.7 percent to 6 percent in 2003 had it been
able to sell conventional fixed-rate debt instead of refinancing with
variable-rate debt and the swap, according to a Bloomberg index of taxable municipal
bond rates. A rate of 6 percent would have saved the state $136 million in
interest payments over the rates the state is now paying on the debt.
"It
was a risky swap because the pension bonds were issued with such a high
interest rate, and rates went down significantly after that," says
Looked
safe
The
swap agreements, known as swap options, looked like safe bets when they were
made, says James DiEleuterio, who was
The
options locked the state into a rate that was considered a low cost of debt,
says DiEleuterio, 52. The state took bids to make
sure it got the largest possible payments for the options, and netted $65.8
million from the sales, DiEleuterio says.
"When
it was presented to me based on the potential of $65.8 million in upfront cash,
we did evaluate it as a good deal," DiEleuterio
says.
Taxpayers
had little opportunity to learn about the
The
development authority is required under
One-line
notice
A
one-line notice of the meeting, held at the authority's headquarters in the
state capital of
Any
members of the public who attended the meeting couldn't get background material
explaining the swaps cancellation until after the 12-to-0 vote. The authority
posts minutes on its Web site within a few weeks of its regular gatherings.
Minutes of the May 17 special meeting weren't posted until mid-October, and
were available only by request before then.
Approval
of the cancellation was rushed because state finance officials under McCormac and the banks wanted to get the transaction
completed before interest rates rose, says Franzini. Franzini, who isn't a voting board member, heads the staff
that evaluates the proposals that go before members.
The
authority never hands out background documents until board members can review
them and make changes during the meeting, Franzini
says.
Big
borrower
The
development authority sold more than $4.5 billion in debt last year, making it
the third-largest municipal borrower in the nation, behind
Taxpayers
who want to learn about authority borrowing or the state's derivatives will
have to do extensive research.
Getting
access to reports by swap adviser CDR on the performance of the state's swaps,
contracts detailing the terms of the pension swaps and options, and memos and
meeting minutes explaining why the agreements were canceled required filing
requests under New Jersey's Open Public Records Act with both the state and the
Economic Development Authority.
Bloomberg
News filed its first request for information about the state's swaps on Aug.
22. On Oct. 17, it received the last documents it requested, including CDR's financial analysis of the decision to cancel the
pension swaps and minutes of the May 17 meeting where the authority's board
voted to cancel them.
Not
for all
James
Poole, a former state finance director who helped make the decision to sell the
swap options in 1998 and 2000, wouldn't comment on the agreement.
Roland
Machold, 69, who took over when DiEleuterio
quit as treasurer and signed the agreement authorizing the swap options, says
he doesn't recall the details of the transaction. Machold
is now retired.
David
Moore, an Orlando, Fla.-based managing director at financial advisory firm
Public Financial Management who has arranged swaps for
"Swaps
are a good financial tool that can significantly benefit our clients but must
always be entered into by clients that have been educated and understand all of
the features,"
"There
are many of my clients that at this point in time I would not encourage to
enter into swaps," he says.
With
reporting by Eddie Baeb in Chicago, Martin Z. Braun
in New York and Judith Mathewson in Washington.
October 21, 2005
This
week, we examine the latest scandal which has sent ripples through the world's
financial centres and ask, has anything changed since
the infamous frauds at Enron and Worldcom?
Phillip
Bennett, the former boss of Refco, a leading US-based
broker of commodities and futures, is facing fraud charges alleging he hid up
to 430 million dollars of debts from investors.
Refco traded in derivatives, complicated financial instruments which lay bets
on the movement of markets.
In
the past they've played a part in crises at Barings Bank and the investment
fund LongTerm Capital Management.
In
the last two weeks it's emerged that there was a discrepancy of more than 400
hundred million dollars in Refco's accounts.
Confidence
plummetted, part of the business has been sold off
and the rest has gone into bankruptcy protection. But only two months ago Refco's shares had been successfully launched on the
So
is the trading of derivatives policed well enough? And does this scandal prove
that
Joining
Lesley Curwen to discuss this are from Washington,
Randall Dodd, director of the Financial Policy Forum, and from New York,
Charles Crow, member of the Managed Funds Association representing the
derivatives industry and Jenny Anderson from the New York Times.
Link
to recording:
http://www.bbc.co.uk/worldservice/programmes/world_business_review.shtml
Refco's woes worry markets at nervous time
By
Alistair Barr
10/14/2005
8:04:54 PM
But
now the possible collapse of the largest independent commodities and futures
broker in the
Experts
said Refco's failure won't threaten global financial
markets in the way Enron's collapse did in 2001 and the demise of hedge fund
Long-Term Capital Management did in 1998. Still, the company's troubled
tentacles stretch far and wide, from pork bellies to futures on stocks and
bonds.
"Refco's big enough and it owes enough money to major
financial companies to raise doubts about markets at a time when we really
don't need it," said Randall Dodd, director of the Financial Policy Forum
in Washington D.C., a non-profit research institute that studies markets to try
to make them work better.
Market presence
Refco's (RFX) future is important because it's a leading broker in many
different markets.
In
2004, the company handled the most customer trades on the Chicago Mercantile
Exchange (CME), the largest derivatives exchange in the
Refco processed 461 million derivatives contracts in its 2004 fiscal year,
about the same amount traded on the Chicago Board of Trade and more than the
volume traded on the Chicago Board Options Exchange and the New York Mercantile
Exchange.
The
company also cleared more than $9 trillion worth of U.S. Treasury bond
repurchase, or repo, transactions and processed over $680 billion in the
foreign exchange markets for clients.
The
broker has more than 200,000 customers, including corporations, government
agencies, hedge funds, pension funds, financial institutions and retail and
professional traders.
Crisis
Refco was rocked this past week by a scandal that allegedly involves its
chief executive and at least $430 in hidden debt he may have owed the company.
Refco said on Monday it had suspended Phillip Bennett as CEO and added that
he had repaid the company $430 million.
Bennett
was arrested late Tuesday and charged on Wednesday with securities fraud
related to Refco's Aug. 22 initial public offering by
the U.S. Attorney for the Southern District of New York in
On
Thursday, Refco said it was shutting Refco Capital Markets for 15 days. Some analysts speculated
that the division, which handles foreign-exchange and fixed-income over-the-counter
transactions and offers prime brokerage, trading and stock-lending services,
was losing customers. See full story.
The
crisis accelerated on Friday when Refco announced it
was unwinding trades at its Refco Securities LLC
broker dealer, a move several observers said was a preliminary step to shutting
down its largest unit.
Refco shares lost almost two-thirds of their value in the two days before
the New York Stock Exchange halted trading indefinitely on Wednesday. On
Thursday, the NYSE warned it's considering delisting the stock. The stock last
traded at $7.90, down more than 70% from its IPO less than two months ago.
Refco's bonds slumped as agencies such as Standard & Poor's and Moody's
Investors Service chopped their credit and debt ratings on the company, with
S&P saying on Friday that a technical default by one of the company's units
was "almost certain."
Ripples
Refco's troubles may have already sent ripples through some markets.
Declines
in crude and gasoline prices on Friday "could've been exacerbated by some
traders at Refco liquidating their positions in
preparation for moving their accounts," said Phil Flynn, a senior analyst
at Alaron Trading.
Traders
said the dollar was also pressured by institutions shifting accounts away from Refco.
"The
Refco scandal is putting some pressure on the
dollar," said Michael Woolfolk, senior currency
strategist at The Bank of New York. "There has been some clearing out of
positions in the futures market."
Customers leaving
Amid
concern Refco may not be able to meet all its
financial obligations, some experts said customers are probably leaving the
broker.
Horizon
Cash Management LLC, a firm that advises investors on their cash positions, is
helping some clients who are taking money out of Refco
accounts and have yet to pick another broker and clearing firm.
The
response has been very similar to what Horizon saw when other financial firms
failed, such as Barings, Drexel Burnham and Long-Term Capital Management, Diane
Mix, president of Horizon, said.
"Clients
may just walk away from Refco," said Peter Fusaro, chairman of Global Change Associates Inc., a New
York-based energy risk advisory firm. "If they can't honor their
commitments people get nervous and go elsewhere very quickly."
Regulators rush
Refco's regulators have rushed to try to save the broker or at least soften
the impact if the company collapses.
The
Wall Street Journal reported late Friday that senior regulators at the Chicago
Mercantile Exchange and the Commodity Futures Trading Commission asked Goldman
Sachs (GS) and other banks to buy Refco to calm fears
among investors, lenders and trading partners who have become increasingly
concerned about the future of the company.
Goldman,
which was appointed as Refco's advisor this week,
isn't interested, the newspaper added, citing a person familiar with the
company's thinking. A Goldman spokesman declined to comment.
CFTC
spokesman David Gary said the regulator hasn't asked Goldman or any other firm
to intervene to save Refco.
A
spokeswoman at the CME declined to comment.
The
Securities and Exchange Commission on Friday barred the company from
withdrawing equity capital for 20 business days and restricted it from making
unsecured loans or advances to stockholders and affiliates if those loans
exceed 30% of the firm's excess net capital.
Other
regulators imposed similar restrictions on Refco
units earlier in the week.
Lenders
Beyond
Refco's market reach and large roster of clients,
what's likely perturbing regulators is that fact that the broker needs to
borrow money to process trades for clients, said Dodd of the Financial Policy
Forum.
Bank
of America (BAC) arranged a $800 million loan and a $600 million debt offering
for Refco last year, along with Credit Suisse (CSR)
and Deutsche Bank (DB).
The
banks met on Friday to discuss whether to send Refco
a letter of default, according to Wall Street Journal Online.
Because
the scandal has caused Refco to say its financial
statements can't be relied upon, the banks could claim the company has broken
its loan agreements and debt covenants "by virtue of material
misrepresentation," Kevin Starke, senior equity analyst at Weeden & Co., said in a note to clients on Thursday.
If
Refco files for bankruptcy, it could take years for
the company's lenders to get their money back, Dodd said.
"This
may make these banks look like less financially sound counterparties to trade
with," Dodd explained. "If fewer people want to trade with them, that
could have a knock-on effect throughout markets."
That
worst-case scenario happened after Long-Term Capital collapsed, Dodd added.
"Everyone
knew LTCM had big exposures with the major derivatives dealers, but no one knew
who was safe to trade with, so the markets froze up," he said.
"That's also what happened in the energy markets after Enron."
Not like Enron
Still,
Dodd and other experts said Refco's demise wouldn't
spark so-called systemic problems that plagued global markets after the LTCM
and Enron debacles.
Refco doesn't act as a principal on major transactions, unlike Enron and
LTCM, said Brett Friedman, a partner at Risk Capital Management, a New York
firm that advises energy companies and banks on credit and counterparty risks.
"Refco's a broker, so this isn't like the Enron crisis when
a major counterparty on lots of trades suddenly disappeared," Friedman
explained. "Their demise wouldn't pose a systemic threat."
Refco also wasn't a broker to a lot of major financial institutions, but instead
focused on individual traders and smaller, institutional investors, he added.
That should limit the impact on broader markets.
Refco's
future
Still,
the future of Refco remains in doubt.
If
a lot of Refco's clients move their accounts to
competitors, the company's lenders may decide it's not worth pumping money back
into the broker, said Thomas Lord, president of Volatility Managers LLC, which
advises companies on risk management in commodity markets.
Selling
a brokerage business without clients would also be difficult, he added.
"If
the clients have gone, what have they got to sell?" Lord said.
"They'd be selling an empty Rolodex."
Aug. 16, 2005
News Analysis -- Neither a
Dealer Nor a Lender Be, Part 2: Hedge Fund Lending
by
Lee A. Sheppard
In news analysis, Lee A. Sheppard dissects
hedge funds and says that the rules hedge funds rely on to avoid U.S
taxation on their other activities will not
protect their lending
A
majority interest in the Manchester United Football Club was recently sold to
American investor Malcolm Glazer, who also owns the Tampa Bay Buccaneers. For
all the gnashing of teeth and rending of garments that occurred in Blighty, one would think that the company being sold was a
piece of the national patrimony rather than a profitable, publicly traded
entertainment enterprise
Man
U's fans, who own 17 percent of the shares, are still protesting outside Old
Trafford, and more importantly, boycotting ticket sales. Glazer, who during the
acquisition process had been burned in effigy, had to promise up and down that
nothing would change, including the manager, who gratefully explained to fans
in program notes that the team is a publicly traded company
Man
U is changing, as it must, as the two Irishmen who controlled the majority of
the shares appear to have recognized. Amid all the bleating, very little
attention was paid to why the pair might be motivated to sell. Our theory is
that the Irishmen didn't want to have to fire manager Sir Alex Ferguson, who is
their buddy. The next owner will have to. Why? Because the team has gone as far
as it's going to go under
The
Man U team that racked up a decade's worth of trophies was a homegrown, mostly
English team that played English long-ball football better than the bottom 15
teams in
Mostly
French Arsenal, managed by a cool-headed French intellectual, started playing
consistently and won the domestic league twice. Then a Russian billionaire
poured money into
There
has also been much bleating about the fact that Glazer borrowed the money to
make the purchase. Now, we like to think of bankers as sober types who don't
throw money at uncertain propositions like entertainment enterprises in which
the talent competes with the owners for the profits. Nonetheless, some banks
did lend money to Glazer. Who else lent money to Glazer? Three American hedge funds, Citadel
Investment Group, Perry Capital, and Och-Ziff Capital
Management, lent 275 million pounds of the 790 million pounds that Glazer paid
for the team
By
so aggressively jumping into lending, hedge funds, which are running short of
new investment and arbitrage opportunities, maybe making a tactical mistake
that would be highly detrimental to their goal of escaping U.S. taxation as
nonresident investors
They
should not be indulged as nonresidents, and
Hedge
funds may be lending too much, and taking the risks of loans too much, putting
themselves in the active trade or business of lending in the