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"We Are Doneski Gorgeous!" - How Bond Trading On Wall Street Really Works

Tyler Durden's picture




 

For many years one of the best jobs on Wall Street in terms of a mix of job safety and compensation, was to be a fixed income trader-cum-salesman working for a major bank with a deep balance sheet, which could hold illiquid securities on its prop account, to dispose of as the "flow" (or clients) required, and on unsupervised and unregulated terms that were simply a verbal arrangement between the bank trader and the end client, usually a counterparty trader working for a major institutional buyside shop, including mutual or hedge funds.

Since for the most part, the buyside traders operated with other people's money, they were largely indiscriminate on the fine pricing nuances of the acquisition (or disposition) of the securities at hand, and while to the "other people's money" under management whether a given bond was bought for 55 or 55.75, or a given MBS was sold for 72-6 or 72-16 meant little (after all the trade was driven by a big picture view that the security would go up or down much more and certainly enough to cover the bid/ask spread, resulting in much larger profits upon unwind), the transaction price had a huge impact for the bank traders-cum-salesmen arranging said deals. Because when one is selling a $40 million MBS block, a 1 point price swing equals a difference of $400,000. Make 15 such deals per year, and one's $1,000,000 bonus (assuming a ~15% cut on the profits) is in the bag.

It wasn't necessarily an easy job - it required an extensive rolodex, a keen ear for who held what securities in one's given space, constant schmoozing, and manning the phones constantly. More importantly, everyone knew how the game is played: everyone knew that the middlemen would usually skim a few basis points on the top or bottom of the bid-ask spread, in exchange for having the first call the next time a juicy security was being shopped around, or whenever one had to offload some debt in a hurry.

Keep in mind this type of trading of OTC (Over The Counter) instruments, which included and still includes most corporate bonds, Credit Default Swaps and all other derivatives, Mortgage Backed Securities, Bank Loans, Bankruptcy Claims, and other blocky piece of paper, was always vastly different from equity trading where every trade was electronically recorded, where the bid/ask spreads were negligible due to infinite competition for every trade, yet which ultimately led to the advent of such robotic predators as High Frequency Trading algorithms which do at the micro scale what the old equity specialist and current bond salesman/trader do at the macro level. In short: the highly lucrative and extremely profitable bid/ask skimming that every bond trader engaged in for years has been impossible in equities for the simple reason that the bid/ask spread on most equity-related securities is minute and the market is far deeper and (at least used to be) far more liquid.

It also explains why 4 years after the Great Financial Crisis, there is still no centralized, computerized trading portal for OTC trades, including corps, CDS, loans, etc. Doing so would mean that the banks would give up billions in additional commissions that they could charge if all such trades were facilitiated by the kind of sales coverage middlemen described above. Because while a salesman was incentivized to peel as much as they could of a given trade, they would at best pocket some 10-15% of the total spread. The rest went to the bank, and thus to management in the form a massive bonuses: comp at banks is not 40% of revenue for nothing, with some money left over for "retained earnings."

But back to the credit traders which for years had built up their reputations in given product verticals, and which had a coverage of fiercely guarded clients, which no other salesmen at a given firm were allowed to converse with. Now was it well-known that salesguy X would pick an additional 50 bps on top of the price being quoted? Sure. After all, someone had to pay for those weekly trips to the Hustler Club, and that's precisely what the Salesmen did. And who really cared about a little vig? Remember - it was all being down with "other people's money."

Well, the days of rampant skimming on top of the bid/ask spread, and with them record bonuses for bond traders and salesmen, may just ended with a whimper not a bang, and all bond traders hoping to make millions by misrepresenting what the true purchase or sale prices are to buysider clients, even if completely voluntary on both sides, may want to seek employment elsewhere.

They have Jesse Litvak to thank for it. 

Jesse is a former MBS trader from Jefferies, who got just a little too greedy, and proceeded to rip virtually all of his clients on seemingly every single trade he executed for the three years he was employed at Jefferies, lying to everyone in the process: both clients and in house colleagues, generating some $2.7 million in additional revenue for Jefferies for the duration of his tenure, and who knows how much in personal bonuses.

What exactly was the charge? The SEC summarizes it briefly as follows:

Jesse Litvak arranged trades for customers as part of his job as a managing director on the MBS desk at Jefferies.  Litvak would buy a MBS from one customer and sell it to another customer, but on many occasions he lied about the price at which his firm had bought the MBS so he could re-sell it to the other customer at a higher price and keep more money for the firm.  On other occasions, Litvak misled purchasers by creating a fictional seller to purport that he was arranging a MBS trade between customers when in reality he was just selling MBS out of his firm’s inventory at a higher price.  Because MBS are generally illiquid and difficult to price, it is particularly important for brokers to provide honest and accurate information.

 

The SEC alleges that Litvak generated more than $2.7 million in additional revenue for Jefferies through his deceit.  His misconduct helped him improve his own standing at the firm, as his bonuses were determined in part by the amount of revenue he generated for the firm.

A more detailed summary of what Litvak did over and over:

The MBS market operates through relationships between customers, who buy
and sell the bonds, and broker-dealers, like Jefferies, that arrange the trades. Customers seek to pay the lowest price for purchases and get the highest price on sales. It is not unusual for a customer’s view of the current market price for a security to come from the broker-dealer that is selling the security. Because of this, there is an emphasis on establishing relationships, building trust, and having a good reputation within the industry. In part because of the opacity of the market, and in part because the market relies on repeat transactions between the same parties, customers seek to avoid broker-dealers who are not honest with them. Upon learning that Litvak had lied to them about the price he paid for MBS, some customers indicated that their firms would have temporarily stopped doing business with Jefferies had they known the truth. At least one customer, upon learning that Litvak had lied, temporarily stopped doing business with Jefferies. Some customers indicated they would have sought lower prices on trades, or even tried to re-negotiate trades, had they known the truth.

 

As an intermediary, Litvak generally purchased MBS from one customer and then sold the same security to another customer. In those circumstances, Jefferies and Litvak typically re-sold the MBS on a riskless, principal basis; this meant that, while Jefferies would momentarily own the MBS in a principal account, it had minimal or no risk because it knew that it could re-sell the MBS to another customer. Litvak earned compensation for Jefferies by reselling the MBS at a higher price and collecting the spread (or difference) between the purchase price and the sale price. The customers were aware that Jefferies was compensated in this way, and the amount and source of the compensation were part of the negotiations around the purchase and sale of the MBS.

 

From 2009 to 2011, Litvak engaged in misconduct on over 25 trades. In each instance, Litvak made misrepresentations to, or otherwise misled, customers about the price at which Jefferies had purchased the MBS before re-selling it to the customer and Jefferies’ compensation for arranging the trade. In some cases, Litvak also pretended to be arranging the trade between customers when Jefferies was actually selling MBS out of its own inventory.

 

When Litvak offered customers MBS, he lied to them about how much Jefferies had paid (or was paying) for the securities. In order to negotiate a higher sale price to the customers, Litvak misled them into believing that Jefferies had paid a higher price for the MBS than it actually had.

 

By misrepresenting Jefferies’ purchase price, Litvak misled customers about the amount of compensation Jefferies would receive on the transaction. For example, if Litvak told the customer that Jefferies’ purchase price was 80 and the sale price was 80 and 4 ticks, the customer understood that Jefferies received 4 ticks in compensation. However, if Jefferies’ purchase price was actually 79 and the sale price was 80 and 4 ticks, then Jefferies received an extra point in compensation as a result of Litvak’s misrepresentation. On some occasions, Litvak and the customer explicitly agreed on the amount of Jefferies’ compensation based on the purchase price as represented by Litvak.

 

Sometimes, in addition to misrepresenting the price and Jefferies’ compensation, Litvak also misled his customers into believing that Jefferies was arranging a trade between two customers, when Jefferies actually was selling a MBS out of its own inventory. In these instances, Litvak pretended to be actively negotiating with an outside party to buy a MBS that he would then re-sell to his customer. Litvak communicated precise details to customers about the state of negotiations with the imaginary seller. But none of these negotiations were taking place; instead, Litvak fabricated the existence of the seller and every detail about active negotiations with it. In fact, as Litvak knew, Jefferies had purchased these MBS days (and even months) before and already held them in its inventory.

The above is the basis of SEC's just announced case. In reality, Litvak's biggest crime was getting too greedy. Because all of the above is well-known to everyone in the industry, and it certainly was known to Litvak's clients, most of whom were sell-side traders and salesmen before they moved to the buyside, and certainly knew how the game is played.

And what the result of today's civil charge against Litvak is that, for at least the foreseeable future, every single bank will come down like a brick house on any and all inhouse bond, loan, CDS and OTC salesmen and make sure that every single transaction is recorded, the entry and exit prices are fair and honest, and as represented, and in the process both banks and salespeople will make millions less in profits. This will continue at least for a year or so, or until the SEC finds some other major case to focus on, far away from the realities of modern day bond trading.

Another direct result is that courtesy of 31 page SEC complaint, the general public will now be aware just how much even very sophisticated traders were being abused as muppets by those who had the information about both sides of the trade. Because at the end of the day, as the old saying goes, the only true commodity on Wall Street is information.

Some excerpts:

While arranging a trade on May 28, 2009, Litvak lied to both the seller and buyer of $25 million of a MBS called IndyMac INDX Mortgage Loan Trust (“INDX”) 2007-AR7 2A1 (INDX 2007-AR7 2A1).

 

A representative of MFA Mortgage Investments, Inc. (“MFA”) told Litvak he was interested in bidding 42-00 for $25 million in the INDX MBS. After negotiating with the seller, Litvak told the MFA representative in an instant message, “I can sell to you at 42-8 . . . I Bot EM AT at 42-4.” MFA agreed to buy the MBS at 42-8.

 

Litvak lied to MFA about the acquisition price. He had bought the security at 41-4, not “42-4” as he had reported. The next day, Litvak admitted to a Jefferies colleague that he had lied to MFA, while also misrepresenting the purchase price to his colleague. Litvak wrote, “we bot at 41-12. Sold to him a[t] 42-8. He thinks we bot em @42-4 fyi.” Thus, he misrepresented the purchase price (41-4) both to MFA and to his own colleague.

 

While he was lying to the buyer, Litvak was also lying to the seller of the MBS, Third Point LLC (“Third Point”). Although he knew MFA was willing to pay 42-00 for the MBS, Litvak told a Third Point representative that the MFA representative—whom Litvak referred to as “one of my circle of trust guys”—had bid only 41-00. Litvak then reported that he had convinced MFA to raise its bid to 41-16.

 

Litvak acknowledged to a Jefferies colleague that he misled Third Point, writing, “So we bot [INDX] bonds from [the Third Point representative] at 41-4. . . . she thinks we sold at 41-16 . . . we really sold em at 42-8.”

 

Through his misconduct, Litvak generated more than $200,000 in extra profit for Jefferies on this trade.

A whole lot of lying to everyone involved to scalp a $200,000 profit.

Or this:

On December 23, 2009, Litvak approached a representative at Wellington Management LLP (“Wellington”) about purchasing a MBS called Wells Fargo Mortgage Backed Securities 2006-AR12 1a1 (WFMB 06-AR12 1a1). Litvak suggested to the representative that he was arranging a trade with an active outside party:

 

yo yo yo….if there is any color you can share on your wfmbs 06-ar10 4A1 from yest…maybe i can use that as leverage to go beat the guy up that owns the 06-ar12 1a1 bonds….as of late last nite it sounded like he was starting to warm up to the idea of coming off his level…..

 

The Wellington representative asked Litvak, “what’s the current size and offer” on the MBS, and Litvak responded, “its 3+mm current and he was offering them at 77….” About twenty minutes later, Litvak reported that the seller was not in yet: “he … usually rolls in around now…..so should know soon brotha…..” Half an hour later, Litvak told the Wellington representative that he had bought the MBS at 75-28 and provided details of the supposed negotiation:

 

winner winner chicken dinner…he is gonna sell em to me at 75-28 as I told him to not get cute and just sell the bonds so you can own them at 76….he said cool…..its 6.23mm orig….a’ight?

 

Wellington agreed to purchase $6.23 million of the MBS at 76. 42.

 

In actuality, Jefferies had purchased the MBS on December 14, 2009 at 70 (not “75-28”) and held it in its inventory at the time of the sale to Wellington. On December 23, 2009, Litvak concocted the supposed seller and  fabricated the details of a negotiation. As he had done before, Litvak lied about the purchase price, Jefferies’ compensation on the trade, and the fact that the MBS was being sold out of Jefferies’ inventory.

Through his misconduct, Litvak made over $150,000 in additional compensation for Jefferies on this trade.

Many more lies, just to add another $150,000 in the bag.

It goes on:

On January 7, 2010, Litvak communicated with a representative at York Capital Management Global Advisors, LLC (“York”) about selling $40 million of a MBS called DLSA Mortgage Loan Trust 2006-AR1 2A1A (DLSA 2006-AR1 2A1A), held by York, to another customer. Litvak told the representative that the other customer had bid 60-24. The York representative asked Litvak how much he wanted to be compensated for the trade:

 

Litvak: i am happy when I get any trades…..lol…in all seriousness….i think 8/32s is great….so maybe you sell em to me at 60-28 and i sell em to him at 61- 4….something like that..but im also happy to get you 61 and just tell him to pay me 61-8…..wanna get you the highest i can…

 

York representative: well i want best execution obv so try to get him to 61-8!

 

Litvak: we are doneski gorgeous! im selling him bonds at 61-8……will buy em from you at 61 k?. . .

 

York representative: great! . . . .

 

As a result of this back-and-forth, York agreed to sell the MBS at 61.

 

Litvak misrepresented the resale price and the compensation he would receive for Jefferies. He did not sell the MBS at “61-8,” as stated, but at 62-12. Thus, instead of the “8/32s” he represented Jefferies would make, the firm actually was compensated 44 ticks for the trade.

 

Through his misconduct, Litvak made over $220,000 more for Jefferies on this trade.

More lies, another $220,000.

And on, and on, and on.

This continues to this day, and will continue tomorrow, albeit at a more modest pace for at least a few months, at every single Wall Street firm, and such skimming off the top is precisely what ends up going into both the bank's bottom line, and the trader's bonus.

Is it any wonder that virtually all Wall Street "professionals" are habituated sociopaths who lie for a living just to skim a few pennies (metaphorically speaking: make that millions of "other people's" dollars in the real world). And is it any wonder that all banks demand their inner workings never see the light of day so they can operate in absolute secrecy, and exchanges like the above, and 22 more, are never read by the public.

Take these examples and multiply them by a thousand: only then will you have a sense of what truly goes on behind the scene of every Wall Street firm in the US and around the world on any given day: a shadowy netherworld populated by uber-wealthy sociopaths, whose ethics are dominated not by what is right or wrong, but who can lie the most, rip their clients off without their clients pulling the plug, and, of course, who has the biggest year-end bonus and shiniest and newest toys at the end of the year. Everything else is of tertiary importance.

And since everyone on the inside knows that only the most conniving, most sociopathic survive and, most importantly, make the most money, nobody complains, or else is shown the door.

That is how Wall Street truly works, for better or worse (we have omitted the inevitable bailout that happens once bank after bank loads up on too much prop risk and has to be bailed out by the government, but that is, by now, well-known).

The full complaint against Litvak can be found here.

 

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Mon, 01/28/2013 - 21:12 | 3193340 jim249
jim249's picture

Another low level worker doing what he was told. The big fish won't get fried.

Mon, 01/28/2013 - 21:30 | 3193388 flacon
flacon's picture

I misread that as: "How Bonlde Trading On Wall Street Really Works"

Jon Corzine is bald so he doesn't count as blonde. Oh Lloyd Blankfein is also bald, and so too is Kashkari, and Buffet, Henry Paulson, Bernanke, Geithner is more like a butthead, and oh I forget there's a bunch more of them. 

Mon, 01/28/2013 - 21:41 | 3193416 AlaricBalth
AlaricBalth's picture

"Litvak acknowledged to a Jefferies colleague that he misled Third Point, writing, “So we bot [INDX] bonds from [the Third Point representative] at 41-4. . . . she thinks we sold at 41-16 . . . we really sold em at 42-8.”

So Daniel Loeb's Third Point got snookered. And one TP trader probably got the boot over this. Sharks eating sharks.

Mon, 01/28/2013 - 22:07 | 3193457 Zer0head
Zer0head's picture

x

Mon, 01/28/2013 - 23:13 | 3193679 James_Cole
James_Cole's picture

To everyone saying he didn't really do anything wrong, unfortunately there are actually some laws out there around securities fraud, hard to believe!

"4. By engaging in the conduct alleged herein, Litvak violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder."

 

"The underlying purpose of the 1933 Act was to re- quire disclosure of information relevant to determining the fair value of securities issued and to provide for honest dealing in securities without unduly restraining business access to the capital markets. To achieve this objective, Congress struck a careful balance between the countervailing interests of investors and business."

Will they come after GS with this? Nope!!

"9. Litvak’s conduct involved fraud, deceit, or deliberate or reckless disregard of regulatory requirements, and resulted in substantial loss, or significant risk of substantial loss, to other persons.

10. Unless enjoined, Litvak will continue to engage in the securities law violations alleged herein, or in similar conduct that would violate the federal securities laws."

 

Mon, 01/28/2013 - 23:25 | 3193715 jeff montanye
jeff montanye's picture

your point is well taken but they have let this one go by the boards so i'm not sure they care at this point:

 

No person shall be held to answer for a capital, or other- 

wise infamous crime, unless on a presentment or indictment of 

a Grand Jury, except in cases arising in the land or naval 

forces, or in the Militia, when in actual service in time of War 

or public danger; nor shall any person be subject for the same 

offence to be twice put in jeopardy of life or limb; nor shall be 

compelled in any criminal case to be a witness against himself, 

nor be deprived of life, liberty, or property, without due process 

of law; nor shall private property be taken for public use, with- 

out just compensation.

the clause mentioning due process of law is the one that makes me hate obama the most.

 

Tue, 01/29/2013 - 01:19 | 3194036 strannick
strannick's picture

Perhaps the world would still turn without MBS, CDS, and the scumbags that trade them, and the scumbags that regulate them.

Tue, 01/29/2013 - 08:28 | 3194336 GetZeeGold
GetZeeGold's picture

 

 

So what you're telling me is that while the world burns.....our regulators are getting a promotion?

Tue, 01/29/2013 - 03:16 | 3194159 Larry Dallas
Larry Dallas's picture

Inside of 24 hours, someone will have joined ZH with Doneski Gorgeous as their handle.

Tue, 01/29/2013 - 05:22 | 3194227 Daily Bail
Tue, 01/29/2013 - 08:38 | 3194351 DavidC
DavidC's picture

I hope not.

DavidC

Tue, 01/29/2013 - 13:06 | 3195203 rotagen
rotagen's picture

I just wanna say I didn't read this, I find watching the grass grow to be more enlightening and also more relevant to my life.

Tue, 01/29/2013 - 16:07 | 3195938 larz
larz's picture

hft does this many times a second - if litvak falls hft falls.   Hft doesnt even give the reach around of wining and dining or even a conversation nothing just take take take - i myself liked getting a case of champagne for my trouble and fleecing

Mon, 01/28/2013 - 21:16 | 3193352 buzzsaw99
buzzsaw99's picture

another minnow nailed to the wall by the SEC

Mon, 01/28/2013 - 21:44 | 3193423 TheFourthStooge-ing
TheFourthStooge-ing's picture

Five hundred dollar fine and no admission of wrongdoing.

Mon, 01/28/2013 - 22:12 | 3193488 max2205
max2205's picture

What did I just read....Gawd

Tue, 01/29/2013 - 01:43 | 3194067 Raymond_K_Hessel
Raymond_K_Hessel's picture

Welcome to the USSA. With liberty and justice for some.

Tue, 01/29/2013 - 10:19 | 3194588 FrankDrakman
FrankDrakman's picture

Minnow, indeed. I mean, do the arithmetic: Let's assume the guy averaged $1 million a day in nominal trade value, which I suspect is a hugely low ball estimate.

250 working days * $1 million/day * 3 years = $750 million. On that, he over charged $2.7 million, or about 1/3 of one percent. Geezuz H! Wadda crook!

Corzine makes billions disappear, and nothing happens. It's like fishing in reverse - throw back the big ones, and fry the little ones.

Tue, 01/29/2013 - 14:22 | 3195470 Common_Cents22
Common_Cents22's picture

these customers know the skimming going on and they are putting up risk capital.  I don't feel sorry for them.

 

But corzine stole money out of customer custodial accounts.   It's like Wells Fargo raiding checking accounts to cover a bad trade.   

Mon, 01/28/2013 - 21:19 | 3193357 Bunga Bunga
Bunga Bunga's picture

Get over it, it's the new "market".

Mon, 01/28/2013 - 21:21 | 3193362 Seasmoke
Seasmoke's picture

what are we talking about here.......Jesse Lied ?????

Mon, 01/28/2013 - 22:24 | 3193539 Omen IV
Omen IV's picture

at least he wasnt fuckin the help!

Mon, 01/28/2013 - 21:21 | 3193364 random shots
random shots's picture

Do you trust your car salesmen when he says his best offer is X? No, you shop around and confirm someone else cannot do better.  If you are a client and you do not shop around you get fuck in the ass just like everything else in life.

Mon, 01/28/2013 - 21:31 | 3193390 fonzannoon
fonzannoon's picture

This is nothing that a few prime ribs and some lap dances can't make go away.

I'd like to be on their compliance call tomorrow. "Guys!!! Seriously, cut this shit out! Also make sure you make you make your numbers this month! No excuses".

Mon, 01/28/2013 - 21:50 | 3193435 knukles
knukles's picture

The gist of the compliance guy's speech is gonna be more like "document the piss out of your rape and pillaging, you dumb asses", hand the traders a 3 page form to fill in on each trade which will either hit the circular file or be handed off to some poor enormous tittied bleach blonde who can barely dress herself in the morning who will fill in a whole buncha fucking nonsense on the forms ultimately with crayons at the behest of the head muni trader (who are all really a buncha sick fucks even by bond daddy standards, which are in any case, not that high to begin with) for about a week until the head traders have heard just about enough bitching, pissing and moaning and accusing compliance of causing them to miss calls and trades that the whole thing will get thrown out and the compliance rep fired which will be then celebrated with a midget toss with a buncha little people dressed in gimp outfits with most the trading floor high as kites....

Or have you all never worked there?

Mon, 01/28/2013 - 22:15 | 3193502 fonzannoon
fonzannoon's picture

knukles I was paraphrasing. Also deep down I am kind of okay with the midget toss. I know I know, it's not right.

Tue, 01/29/2013 - 04:04 | 3194186 overbet
overbet's picture

More like, "I told you dumb fucks be careful what you say on instant messaging!"

Tue, 01/29/2013 - 05:13 | 3194222 Acet
Acet's picture

Yupes, that's pretty much how it works, except maybe the midget tossing (I do believe nowadays it's strippers and a couple of bottles of Bolinger).

Compliance and Risk have always been treated as the dog that yaps but doesn't bite.

 

Tue, 01/29/2013 - 08:24 | 3194333 Brokenarrow
Brokenarrow's picture

There is no incentive from the buy=side, especially when the bank employees sends you a few hookers, blow, gifts, envolopes of cash.......this is a fraction of what goes on.

Mon, 01/28/2013 - 21:22 | 3193366 LongSoupLine
LongSoupLine's picture

Thanks to all that's fucking sacred this is a fucking isolated case.  Can you imagine if more traders were doing this shit?

 

Great fucking job SEC!  You assholes are all over it.    CORZINE, you fucking pricks.

Mon, 01/28/2013 - 21:23 | 3193370 lizzy36
lizzy36's picture

TBTF4EVR.

Brillant concept, bailing out this sytem.

Mon, 01/28/2013 - 21:24 | 3193371 Hedgetard55
Mon, 01/28/2013 - 21:28 | 3193384 Terminus C
Terminus C's picture

Well, we'll probably get a new Tyler soon ;)

That and free John Corzine! I mean if this kind of fraud is allowed why is Corzine persecuted so?

Mon, 01/28/2013 - 21:35 | 3193403 AllWorkedUp
AllWorkedUp's picture

"And since everyone on the inside knows that only the most conniving, most sociopathic survive and, most importantly, make the most money,"

Lemme guess, another souless Khazar - absolutely shocking.

Mon, 01/28/2013 - 21:41 | 3193414 Mercury
Mercury's picture

Litvak would buy a MBS from one customer and sell it to another customer, but on many occasions he lied about the price at which his firm had bought the MBS so he could re-sell it to the other customer at a higher price and keep more money for the firm.  On other occasions, Litvak misled purchasers by creating a fictional seller to purport that he was arranging a MBS trade between customers when in reality he was just selling MBS out of his firm’s inventory at a higher price.

I think this is known as making a market.

Mon, 01/28/2013 - 22:01 | 3193456 knukles
knukles's picture

Business as normal.
And why the fuck has the trader have any responsibility not to mark up or down as he sees fit?
Well maybe not excessively as per some obtuse obscure SEC rules, but who plays by any rules any more anyhow?

Say, maybe the firm didn't scratch the right congresscritters balls the right way, enough?

Mon, 01/28/2013 - 22:16 | 3193505 Tyler Durden
Tyler Durden's picture

Which is precisely what Lloyd Blankfein told Carl Levin Goldman's role was when colluding with Paulson when selling "shitty MBS deals."

So does the SEC go after Goldman next?

No answer required.

Tue, 01/29/2013 - 00:08 | 3193686 Mercury
Mercury's picture

I think we’ve been over this before and although the Goldman/Paulson deal was sleazy I just can’t get that worked up about it. Whatever  malfeasance there may have been seems to be of an entirely self-correcting nature and not indicative of a broken market or a market overwhelmed by outside, artificial forces – which is the real problem.

Paulson’s (and a few others’) alpha derived from actually doing some homework and figuring out how crappy many of those underlying loans were at a time when no one else did or cared. If there were (at the time) a clean, arms-length, pure play way to short housing or that segment of loans I’m sure Paulson would have done that instead, but there wasn’t.  To give himself a larger margin of safety/greater profits he hand selected the securities in the basket which Goldman’s end customers apparently still couldn’t bother themselves to examine too closely. If the crap in the basket was in some sort of blind trust or was otherwise unidentifiable that might be another story but I don't think that was the case. Buyer beware - especially if it is the case that the buyer is Goldman's counterparty and Paulson is Goldman's client which means Goldman's interests are aligned with those of  the later, not the former. Oops

Also, at the time there was no guarantee that Paulson would be right or that the mechanics of the thing would actually pay off as planned no matter how much of a layup it looks like today.

 But regarding Jefferies: since when do dealers, whether in a retail corp bond offer sheet or a large, block of structured product, announce what the blended weighted cost (from inventory, subject sales, whatever) of the piece/block they’re selling is and the resulting “fair trade” price that the sales team can feel free to offer it at? (trades with mark-ups PLUS commissions may be a whole 'nuther thing though)

 The forces of disintermediation will and have been applied by interested parties to this type of thing without the help of the government.

 

Tue, 01/29/2013 - 07:28 | 3194284 Spigot
Spigot's picture

So, back in the day, the "Mafia" was invented to focus the publics attention on "organized crime" and the dangers thereof, while the "establishment" was plundering the peoples.

Now, in this day, the "terrorist threat" was invented to focus the publics attention on "national (in)security" and the dangers thereof, while "TPTB" are plundering the peoples AND the government coffers.

My, but how things have changed. not.

Tue, 01/29/2013 - 16:02 | 3195956 larz
larz's picture

the gubmint put the mafia out of biz because it didnt like the competition spigot - dont forget that half of the story

Tue, 01/29/2013 - 23:51 | 3197690 Spigot
Spigot's picture

CIA partnered with "mafia" on many items of mutual interest. Sound familiar?

Thu, 01/31/2013 - 12:05 | 3202580 ToNYC
ToNYC's picture

The sophisticated customer expects the stupid broker to lie. A gram of thinking in the playground is worth a liter of whining. winner winner, loser whining.

Mon, 01/28/2013 - 21:48 | 3193433 pasttense
pasttense's picture

I simply don't see the problem here. We are talking about sophisticated buyers here, not widows and orphans. It is irrelevant to the buyer what the seller paid, so it doesn't matter whether the seller lied about what he paid:sophisticated buyers should be shopping around for the best deals.

Mon, 01/28/2013 - 22:13 | 3193464 Mercury
Mercury's picture

I love this part of the complaint:

Jefferies’ customers owed fiduciary duties to their clients. Jefferies’ customers included funds which were established by the United States government under a program designed to help strengthen the markets for MBS during the financial crisis. Had Jefferies’ customers been aware that they could have paid less for the MBS they purchased, they would have made an effort to do so.

 

Well, for starters they might have paid less if the government hadn't been in there artificially propping up the market - duh. We should all be paying less for just about everything right now. Are we to understand here that BDs are obligated to comparison shop for their customers? And how is the buyside trader not the most guilty party here in terms of failing in his fiduciary duty?

 

Tue, 01/29/2013 - 09:29 | 3194449 Buckaroo Banzai
Buckaroo Banzai's picture

Fucking the client, fucking the counterparty, fucking the government, fucking your boss, fucking your colleagues, fucking your wife, fucking your mistress, fucking fucking fucking....

Isn't that what Wall Street is all about?

Thu, 01/31/2013 - 14:38 | 3203266 ToNYC
ToNYC's picture

Most of those unlawful financarnal acts are also performed on the broker (eight in number). Broker may be f*cKing the first two, but the rest are doing the broker as well.

Mon, 01/28/2013 - 22:19 | 3193519 edb5s
edb5s's picture

The problem is he was acting as a principal when he represented himself as acting as an agent

Tue, 01/29/2013 - 00:00 | 3193828 Mercury
Mercury's picture

Yes but is that the same thing as acting as principal and acting as agent at the same time?

The clear-cut violation of this would seem to be: acting as agent (facilitating the P/S on behalf of the client) then marking up the merchandise AND charging a commission on top of that. Maybe it doesn't matter but it doesn't look like he was actually acting as agent even if he said he was and I don't know if his declared mark-up (in addition to his hidden mark-up) amounts to an explicit commission or not. If it does the SEC should just cut the BS and charge him with the illegal double-dip.

Thu, 01/31/2013 - 14:43 | 3203281 ToNYC
ToNYC's picture

Fine point perhaps, but beyond whether Principal or Agent, is the simple fact of Mis-representing, not Representing. There is a difference worth keeping if you expect to win when the jig is exposed.

Mon, 01/28/2013 - 22:25 | 3193545 Catullus
Catullus's picture

Yeah. There's this alternate dimension that retards live in that says the price of something should be based on its "costs". As if the profit is evil, but the loses are unfortunate or "market failures". It's a fantasy world.

The price is where buyer and seller agree. It's obvious that buyers don't give a shit because they know they can offload this MBS garbage to the Fed. And the MBS originator? They imagineered the money out of thin air to begin with. Their "cost" to originate loans is the sales cost involved in selling mortgages, filling put paperwork, and hiring lawyers to draw up the terms.

It's all bullshit.

Fact is everything that everyone tells you is bullshit. Trade accordingly

Mon, 01/28/2013 - 21:50 | 3193434 tony bonn
tony bonn's picture

ok so some little piss ant got rolled under the bus as token prosecution while the bankster thugs like dimon, blankfein, whale and other criminals laugh their asses off...and the sec goes back to downloading porn

Mon, 01/28/2013 - 22:08 | 3193475 Dr. Sandi
Dr. Sandi's picture

We have another winner!

Thank Dog that the feds are keeping an eye out for nickel and dime crime at the top.

Mon, 01/28/2013 - 21:52 | 3193438 Cursive
Cursive's picture

Jesse Litvak is doneski in the biz.  He could be bendoverski in the pen, but he probably won't get any time and, if he did, it would be a fed country club.

Mon, 01/28/2013 - 22:07 | 3193471 Dr. Sandi
Dr. Sandi's picture

Oh, he's going down. They have to prove to us that they're cleaning up 'millions' of dollars of financial indiscretions inside the TBTF corps.

Millions, I tell you!

Mon, 01/28/2013 - 23:59 | 3193826 knukles
knukles's picture

Fuck it....
Say Billions, Trillions, Quadrillions.....
The whole reason we're in trouble, these Goddamned rogue traders.

Mon, 01/28/2013 - 21:59 | 3193453 House of Medici
House of Medici's picture

To be clear these wide spreads are to be found in private label MBS not so much in Agency MBS.  The time period covered by these trades was like the Wild West for PMBS.  No one really knew what the crap was worth, and if you get could a b/a inside of 10 points you would be happy.

Mon, 01/28/2013 - 22:05 | 3193463 Dr. Sandi
Dr. Sandi's picture

"Sir, we caught this shoplifter stuffing a ballpoint pen into his pocket while you were busy bludgeoning your mother to death at the checkout."

"Good work security. Take him outside and call the police.

Oh, and get somebody to mop the gore off the cash register before you leave. That's a good man."

Mon, 01/28/2013 - 22:12 | 3193487 holdbuysell
holdbuysell's picture

Dear Wall Street,

YOU'RE FIRED. I've taken my capital elsewhere.

Without regards,

The People

Mon, 01/28/2013 - 22:17 | 3193503 CrashisOptimistic
CrashisOptimistic's picture

Remember when Saloman Bros were the ones in the room who actually knew what things were worth?

Mon, 01/28/2013 - 22:48 | 3193549 NoDebt
NoDebt's picture

I am missing where Jesse had a fiduciary obligation to those he traded with (who were clearly not mom-and-pop investors).  Was it not clear that he was a salesman? 

Sorry if it's an upopular opinion, but the article seems to imply we need big brother to step in here and "fix" things (again, as always).  If he broke secuities laws, prosecute.  If you can prove management knew, prosecte them as well.  Other than that, be careful how much government oversight you wish for.  Like a mutating virus, the really nasy bugs will be the only ones that survive and multiply.

Tue, 01/29/2013 - 04:10 | 3194189 overbet
overbet's picture

I agree NODEBT, can someone arrest those car salesman for trying to get top dollar from me?

Tue, 01/29/2013 - 09:26 | 3194443 Dark Space
Dark Space's picture

I agree. Either this is going to be another low level bust for the Feds to point to, that really will have no impact on the market, or they'll use it to weasel their way even further into business.

This guy sounds like s disreputable salesperson - you just stop trading with disreputable salespeople. I'm not scared to say that this has happened to me- I had a sales guy lie to me about a level, in excess of a point. I found out within 24 hours. Didn't say a word to him, that's just how he wants to do business and I don't. I hit him up for color all the time, and make him work for that point on that one trade still 3 years later, but no more trades with him.

If you don't want to play the game, then get off the pot. These are all big boys here and if you've been in this market more than 5 minutes you've had some whippersnapper looking you up on linkedin and trying to sell you a few million bonds at the wrong price. It happens, and if you're worth your salt you don't let it happen often. This is far more embarrassing for the Black Rock and Third Point traders in my opinion.You guys should start by screening for keywords in IB such as "brotha"; I'm not your brotha you juvenile little prick, and if you say Doneski again I'm going to come down there and beat you. Who talks like this? Oh yeah, juvenile little pricks who you don't want to do business with - they're also fantasizing about your wife, hopped up on adderall or whatever the drug du jour is, and living for the weekend (I can do these things, but they're not allowed ;-). There are thousands of sales people to choose from, go with the ones you trust, build a relationship with them, and they'll be playing the game for you, not on you.

 

Mon, 01/28/2013 - 22:32 | 3193558 Downtoolong
Downtoolong's picture

all of the above is well-known to everyone in the industry, and it certainly was known to Litvak's clients.

Exactly, and it goes on everywhere. It isn’t always just one trader or broker involved in a rigged deal either. Often there are several traders on a desk colluding at any time to work the scam. Funny how it only took 50 years for the SEC to develop a case around these practices. My guess is you won’t see as much response to this from the industry as the author is suggesting. It’s a warning shot which everyone knows isn’t going to be backed up with any real forces. Once the SEC drags this case around the arena to show everyone what a great job they’re doing, we won’t see another similar case for 50 years. More grandstanding with very little intent to actually change industry practice.

Here’s something I always wondered. If the SEC really wanted to stop these unethical practices, why not position one or two employees right on the desk of every major trading operation like this one. When you think about it, there are probably only a few hundred desks doing 90% of the OTC trades at major financial institutions. You can watch porn on their computers when the market is slow too. Unless someone is deaf, blind, and mentally retarded, they can’t possibly miss these practices of fading and cuffing bids and offers, reporting phantom transactions and negotiations, front-running, etc., if they’re right there on the scene. It’s out there and you can’t hide it while you’re doing it. It’s not like rocket science to try and understand it either. These government employees would be like real-time compliance officers or cops, handing out tickets every time they witness an infraction. Mostly they would be a deterrent to such behavior. The cops could rotate in and out on 2-3 week assignments so that they didn’t get too cozy with the perps. Commit enough infractions and a trader gets penalized by losing their license, or worse, forced to do community service by giving money management advice to people who are maxed out on their credit cards. That’ll put a stop to it.  

Mon, 01/28/2013 - 22:59 | 3193626 pashley1411
pashley1411's picture

I'm sorry for all your moralists out there, but if you reduce the negotations to the point that they can be conducted by a $12/hour file clerk, then the market disappears.   Both the buyers, and sellers, will learn to manipulate the $12/hour file clerk, who has no incentive and lots of penalities should he/she get better at her job.

 

 

Tue, 01/29/2013 - 00:54 | 3193999 Notarocketscientist
Notarocketscientist's picture

Banks should be run like utility companies.  They take in deposits and pay x% and they loan out deposits and at x+%

Then we wouldn't be bailing them out endlessly - and feeding these pig bastards zirp money.

Mon, 01/28/2013 - 23:56 | 3193809 robertocarlos
robertocarlos's picture

Since when is lying illegal?

Tue, 01/29/2013 - 00:25 | 3193906 Theos
Theos's picture

pro tip:

 

DONT FUCKING BUY THINGS THAT REQUIRE THE SELLER TO TELL YOU WHAT IT'S WORTH.

 

Bitch and moan. Its toxic as shit but people still play. 

 

Have fun fuckers.

Tue, 01/29/2013 - 00:26 | 3193907 omi
omi's picture

I don't understand, why wouldn't he just keep repeating "I don't recall." or "I don't seem to remember" or the true and tried classic "I don't seem to have recollection of that, there are many deals/phone calls that go around, and I can't be expected to remember nuances about a particular deal."

Seems like going after low-hanging fruit so DOJ can get some public satisfaction.

Tue, 01/29/2013 - 00:36 | 3193940 Monetative Easing
Monetative Easing's picture

OMG!!!!  Salespeople are trying to maximize the bid/ask or P/L on making a market in a security?  The horror.  The whole story reads like Litvak pissed the wrong people off.  He clearly was slimy in his dealing but every one in institutional space transacting in illiquid instruments should assume that the salespeople are out to make the most money possible.  To do otherwise is bordering on malfeasance.

And the clients are pissed now that there is some price discovery and it turns out that their traders weren't so sharp after all?  These securities are relatively illiquid and there are no screens for their pricing.  If the clients are so concerned about getting the best price, they need better analysis and traders.

Finally, fixed income will, indeed, change as more trading goes electronic and prices are more transparent.  However, the flip side is that increased regulation, capital requirements and lower overall dealer risk tolerance will make all markets less liquid.  Not more. 

Good luck finding a bid on the illiquid spread product when the inevitable treasury market sell off happens.  As bid/ask gets squeezed out of the markets, dealers aren't going to feel so keen to make a market.   Oh, the levered guys will have a bid but it will make Litvak's prices look amazing in comparison. 

Tue, 01/29/2013 - 09:34 | 3194460 Buckaroo Banzai
Buckaroo Banzai's picture

"the whole story reads like Litvak pissed the wrong people off"

DING DING DING! WINNER WINNER CHICKEN DINNER

Tue, 01/29/2013 - 00:59 | 3194007 judejin
judejin's picture

i don't think any merchant is committin a crime or misconduct when he exaggerates the cost of his product in order to charge a higher price to the customer.

skimming the customer is part of everyday salemanship in every business.

the real problem on wall street is the paper money ponzi scheme.

the toothless regulators chase after fringes.

Tue, 01/29/2013 - 03:06 | 3194154 jballz
jballz's picture

 

who gives a fuck?

You know what you call this game?

Two duumbasses who should be flipping burgers but fell into a shitload of other people's money.

It's all broken.

Hey ralph, what's it worth?

Duh George...42

No, 42 and a half, definitely 42 and a half...time to watch wapner, 42 and  half. Raymond??

Execute every last one of these motherfuckers from the loan originator and borrower to the Rothschilds. Don't pick on the guy in the middle forced to steer retards to their own demise.

That is all.

No wait,

It's all just fucking broken.

ok that is all.

 

Tue, 01/29/2013 - 03:37 | 3194169 Sechel
Sechel's picture

Yes agree. This is  how Wall Street works and why FINRA was pressured to waterdown trace reporting.  What's shocking here is that we are to believe Jesse is unique, acted alone and that this action is worse than Abacus, MF Global or EPD mortgages. 

Tue, 01/29/2013 - 03:50 | 3194177 dunce
dunce's picture

I thought all MBS was just very nicely triple A  wrapped garbage any way full of sub prime one step from foreclosure anyway.

Tue, 01/29/2013 - 04:01 | 3194184 Never One Roach
Never One Roach's picture

Fraud used to be illegal.

Tue, 01/29/2013 - 05:59 | 3194242 Martin T
Martin T's picture

At least the US has the TRACE bond reporting system:

http://www.finra.org/Industry/Compliance/MarketTransparency/TRACE/Corpor...

TRACE has currently no equivalent in Europe...

http://www.world-exchanges.org/insight/views/expansion-trace-us-fixed-in...

First, effective March 1, 2010, FINRA will begin collecting and disseminating trade data on debt issued by federal government agencies, government corporations and government sponsored enterprises (GSEs), as well as primary market transactions in new issues. Prior to this change, FINRA’s Trade Reporting and Compliance Engine (TRACE) reported real time pricing and trade volume information only on corporate bonds trading in the secondary market.

 The second change, pending approval by the U.S. Securities and Exchange Commission, will pave the way for collection of trade data on securitized products, including asset-backed securities (ABS) and mortgage-backed securities (MBS). As with the original implementation of TRACE in 2002, FINRA would initially only collect transaction data and after detailed analysis determine whether dissemination of some or all ABS and MBS data is appropriate. TRACE reporting of ABS and MBS transactions would provide to FINRA trade prices, volume and other information. 

Looks like Jesse Litvak not only got caught red handed but is not even aware of pending changes in regulations and compliance. When one asks for trouble, one generally gets it...

 

Tue, 01/29/2013 - 08:40 | 3194354 MFLTucson
MFLTucson's picture

Why hasnt this MF been hung?

Tue, 01/29/2013 - 09:28 | 3194448 BinAround
BinAround's picture

Getting the best price is called doing business.  Lying to your customers, with whom you have day to day relationships, is unethical.  Even when it is other people's money, one does not like to be ripped off.  Every transaction has an element of trust, without which commerce would not be possible.  We need to have the occassional prosecution of this kind of crap.

That Jeffrey's condoned the practice until the SEC stepped in is damning.  Is it the trader or the Firm that acted improperly?  If I was a buy side firm, Jeffery's would be in the penalty box.  No Trade. 

Tue, 01/29/2013 - 09:35 | 3194462 Lost Wages
Lost Wages's picture

So the SEC finally figured out that salesmen lie? See you in another 5000 years.

Tue, 01/29/2013 - 10:23 | 3194607 swmnguy
swmnguy's picture

All right, so a bunch of sociopaths we all knew were sociopaths were acting like sociopaths.

The problem I have with the whole thing is that this is now the gist of our economy.  This is where people who work 40-60 hrs/wk for 40 years have their retirement money, now that it's become obvious we're all on our own.  This is where old people's bond funds are being looted.  This is why people's contractually obligated guarantees are being flippantly abrogated, on the grounds of fiscal exigency.  This (along with all the wars) is why we can't afford decent schools, bridges, health care, and all the other stuff decent people make a priority.

What pisses me off is not that these guys are a bunch of fucking thieves.  It's that we've turned over our entire economy to these bastards, and there are still people trying to tell us there is no alternative.

Tue, 01/29/2013 - 10:39 | 3194667 spanish inquisition
spanish inquisition's picture

Just waiting for the canned institutional drivel that looked the other way, encouraged and abetted it, while the money rolled in....

"We at Jeffries (MLB, Cycling owners, Penn State) have had a thorough investigation performed by an independent third party (a friend). The incident involved specific rogue individuals (scapegoats who operated with full knowlege while money rolled in) and in no way reflects the values we hold dear to our (insert industry here). The investigator found holes in our compliance office which we will correcting with this 14 point plan. "

Once the "guilty" plead out, the organization is washed clean with reputation tarnished, but intact.

Tue, 01/29/2013 - 18:25 | 3196548 bondman1
bondman1's picture

Didn't the PM's check TRACE function on Bloomberg just to make sure the saleman was truthful LOL!!! Hard to miss 25MM pieces crorssing! Or maybe they had a deal worked out and when they met for thier quarterly client dinner they...ahem! worked it out then! Remember the good old days!

Wed, 01/30/2013 - 10:43 | 3198628 lee170
lee170's picture

Private-label RMBS trades aren't reported on TRACE.  Yet.

Tue, 01/29/2013 - 19:45 | 3196838 davidmerkel
davidmerkel's picture

As a bond manager, my coverages rarely if ever told me the levels they were getting the bonds at.  To a real bond manager that's irrelevant, because you only care about getting it done at your level... if someone prices too high or low, you could try a different bond or a different dealer.

Thu, 01/31/2013 - 11:03 | 3202328 empirasign
empirasign's picture

TRACE for MBS has no teeth.

Empirasign has a valid private sector solution to this problem.

They have a free BWIC Calendar here: www.empirasign.com/bwic

updates all day, no login necessary, shows US + EU activity

Do NOT follow this link or you will be banned from the site!