FBI Investigates Banks After Whistleblower Exposes Traders Front-Running GSEs

Tyler Durden's picture


It would appear that the government, via its mortgage-financing subs Fannie Mae and Freddie Mac, is providing yet another $50 to $100 million fillip to banks - but this time at the expense of their ignorance. As  Reuters reports, the FBI is investigating "unsophisticated tradecraft," such as hand signals and special telephone ring tones, that some traders are conspiring to rig rates on large orders submitted by the GSEs - front running them in the interest rate swaps market. Of course, no one is surprised at yet another manipulation or malfeasance but the 'high-level-employee' whistleblower's exposure is perhaps not surprising since the size of 'hedging' orders from the mortgage-managers provides an incentive for front-running ahead of the trades - "GSEs frequently submit large interest-rate swap trades, making them easy targets for front running and lucrative targets for market manipulation."


Via Reuters,

Wall Street traders may be manipulating a key derivatives market and front running Fannie Mae and Freddie Mac, hurting the US-owned mortgage giants in the process, according to an FBI intelligence bulletin reviewed by Reuters.


Using what Federal Bureau of Investigation agents described as "unsophisticated tradecraft," such as hand signals and special telephone ring tones, some traders are conspiring to rig rates on large orders submitted by Fannie Mae and Freddie Mac , or front running them in the interest rate swaps market, the document says.


The FBI said in the bulletin that the information came from a former high-level employee at a U.S. bank and an employee at a Canadian Bank, plus interviews with other bank workers conducted in 2012 and 2013.  The former high-level employee at the U.S. bank estimated the front running had resulted in profits of $50 million to $100 million for the bank, the FBI said.




Front running occurs when someone with advance knowledge of another market participant's plan to make a sizable transaction puts an order in first, often profiting from a market move that can occur once the big trade has gone through.




According to the bulletin, one employee at the U.S. bank and the Canadian bank employee reported that senior bankers at the two banks "planned and encouraged this behavior because it led to higher revenue for their respective parent banks."




Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs), often submit large swap orders to hedge their huge holdings of home mortgages against swings in the bond market. The size of the orders provide an incentive for front running ahead of the trades.


"GSEs frequently submit large interest-rate swap trades, making them easy targets for front running and lucrative targets for market manipulation," the FBI bulletin said.




U.S. and Canadian banks encouraged traders to listen in on calls with the investors to gain transaction information "which could be used to facilitate front running or market manipulation."


They would then use hand signals to inform other traders of the details of the planned swaps, allowing these traders to also benefit, employees at the banks said, according to the bulletin.

Just add it to the list of banking malfeasance... a fine? sure... that'll do it. Or is this just standard 'flow' trading on any desk (oh apart from the collusion and lack of Chinese walls you mean?)

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Tue, 01/14/2014 - 22:57 | 4332902 SolidSnake961
SolidSnake961's picture

when will anyone ever get prosecuted?

Tue, 01/14/2014 - 23:15 | 4332955 Stackers
Tue, 01/14/2014 - 23:20 | 4332975 max2205
max2205's picture

Thanks boyzzz...we knew the whistle blower was wrong...have a nice day

Tue, 01/14/2014 - 23:31 | 4333005 Oh regional Indian
Oh regional Indian's picture

Den of thieves. Den of Vipers. low-lifes...the world of finance seems to bring out the best in people. Or perhaps th ebeast in people.




Tue, 01/14/2014 - 23:33 | 4333012 Richard Chesler
Richard Chesler's picture

When will the whistleblower be branded an "enemy of the state"?


Tue, 01/14/2014 - 23:43 | 4333041 Oh regional Indian
Oh regional Indian's picture

No, he will be branded an enemy of the street...

Wed, 01/15/2014 - 00:46 | 4333202 flacon
flacon's picture

resulted in profits of $50 million to $100 million for the bank, the FBI said


How much money is POMO tomorrow? Oh, about ONE HUNDRED TIMES BIGGER and it happens EVERY DAY...

Wed, 01/15/2014 - 07:23 | 4333529 fockewulf190
fockewulf190's picture

Wall Street Traders instructional video for signing.


Wed, 01/15/2014 - 02:05 | 4333335 Deathrips
Deathrips's picture




Wed, 01/15/2014 - 02:36 | 4333378 Kirk2NCC1701
Kirk2NCC1701's picture

Don't sweat the small stuff. The time to worry is when they front-run MREs.

Wed, 01/15/2014 - 00:07 | 4333108 Trucker Glock
Trucker Glock's picture

Covert signaling @ 0:58


Well made trailer for a classic.

Tue, 01/14/2014 - 23:16 | 4332961 bigdumbnugly
bigdumbnugly's picture

as soon as bart chilton and pals are appointed to investigate





easy now - yeah, that's sarc...

Tue, 01/14/2014 - 23:35 | 4333018 texas sandman
texas sandman's picture

"XYZ"Agency Investigating Banks....So the fuck what?  That headline has become ubiquitous in the financial press over the last few years.  However, that headline is NEVER followed up by "Bank Executives Indicted".  No, at best we may get some low level functionary who's unlucky enough to be this scandal's scapegoat.


The real question these "revelations" pose is: is there even one dollar made on Wall Street that is made honestly?  Just 1??

Wed, 01/15/2014 - 05:49 | 4333482 monkeyshine
monkeyshine's picture

Yes, by the guy working the halal foods cart.

Wed, 01/15/2014 - 00:28 | 4333168 dexter_morgan
dexter_morgan's picture

Like Corzine was.......er, wait.........

Wed, 01/15/2014 - 00:33 | 4333180 AGuy
AGuy's picture

"will anyone ever get prosecuted?"

the whistleblower of course!

Wed, 01/15/2014 - 00:37 | 4333185 kchrisc
kchrisc's picture

Criminals investigating criminals.

My interpretation is that someone 'connected' has designs on someone else's firm and wants to get it cheap.

Either that, or the FBI is between cooked-up 'terrorist' schemes for the moment and so has nothing more damaging to do.


"Guillotines like fried pol and crat."

Wed, 01/15/2014 - 01:05 | 4333251 Freddie
Freddie's picture

Salomon Brothers and Lewis Ranieri was doing this 30 years ago.  The GSE are ACORN jobs programs anyway.  Total scam.  Everything in Amerika anymore is a scam.

Wed, 01/15/2014 - 01:31 | 4333290 cornflakesdisease
cornflakesdisease's picture


Wed, 01/15/2014 - 11:12 | 4333932 USA USA
USA USA's picture

Big Deal! 50 to 100 million is chump change. Why bother?

Tue, 01/14/2014 - 22:58 | 4332905 VD
VD's picture

chinese wallz = chinese cocacola



Tue, 01/14/2014 - 22:59 | 4332907 Tijuana Donkey Show
Tijuana Donkey Show's picture
FBI Investigates Whistleblower  After Whistleblower Exposes Banks

Fixed that

Tue, 01/14/2014 - 23:01 | 4332915 DirkDiggler11
DirkDiggler11's picture

I'm shocked I tell you, just shocked that another bank is rigging yet another "free" market. Who would have ever guessed it ?
Fucking bankers, yet another reason to sit their heads atop of pikes lining the streets ... Is there a greater evil on earth, almost equal to that of a soul-less politician, the most despicable and hated of all species.

Tue, 01/14/2014 - 23:10 | 4332934 insanelysane
insanelysane's picture

Free markets are too unpredictable and have something called risk.  Risk and unpredictability are bad.  A rigged market is much better for everyone involved because it provides a safe environment.

- the gov

Wed, 01/15/2014 - 02:34 | 4333374 Theosebes Goodfellow
Theosebes Goodfellow's picture

~"I'm shocked I tell you, just shocked that another bank is rigging yet another "free" market. Who would have ever guessed it ?."~

No worries, Dirk. Eric Holder and Jimmy Comey are on the job! We can all rest in our beds tonight knowing that whoever the wrongdoers are they'll certainly go to jail for a long, long time... HAHAHAHAHAHAHAHAHAHAHAHA!!!!!!!


Sorry, I lost it there for a second.

Wed, 01/15/2014 - 07:02 | 4333519 fockewulf190
fockewulf190's picture

Somewhere in the swamps near JFK, five large cartons, filled with a jumbled mass of funny sounding office phones, are being "taken care of".

Tue, 01/14/2014 - 23:15 | 4332943 SillySalesmanQu...
SillySalesmanQuestion's picture

Can we here at ZH front run the possibility of prison sentances and the length of them....? I would say it is a definite shorting opportunity... maybe a hand signal or ring tone would suffice.

Tue, 01/14/2014 - 23:14 | 4332952 nmewn
nmewn's picture

Well, at least they're not investigating the front running BitCoin!

Man, that was close ;-)

Tue, 01/14/2014 - 23:25 | 4332988 Seasmoke
Seasmoke's picture

Yeah I have a hand signal for these fuckers.

Tue, 01/14/2014 - 23:27 | 4332998 Clowns on Acid
Clowns on Acid's picture

How do we know that the d_bags at Fannie and Freddie are not in on the scheme as well?

A fish rots from the head so if one looks at GS and JPM... what do you expect the average trader to do?

Tue, 01/14/2014 - 23:58 | 4333078 Constitutional ...
Constitutional Republic's picture

The average trader had better get his story straight before he meets Jesus, or the Judge. The noose is tightening.

Wed, 01/15/2014 - 00:24 | 4333153 frankTHE COIN
frankTHE COIN's picture

Yeah. Franklin Raines, former Head of Fanny Mae got put to the test.

Tue, 01/14/2014 - 23:45 | 4333047 Spungo
Spungo's picture

Since when is manipulation illegal? Bernanke opnely states that he was printing money to manipulate interest rates.

Tue, 01/14/2014 - 23:49 | 4333055 TaperProof
TaperProof's picture

this one was pretty obvious.. front running fed/government is good money

Tue, 01/14/2014 - 23:56 | 4333071 Constitutional ...
Constitutional Republic's picture

Another day, another brave whistleblower. Good.

There's no need to walk in shame, surrender to cheats, fraudsters etc.  Chin up, chaps. Resist, we must.

Wed, 01/15/2014 - 00:08 | 4333115 Godisanhftbot
Godisanhftbot's picture

 only bitcoin is honest

Wed, 01/15/2014 - 00:11 | 4333118 Schmuck Raker
Schmuck Raker's picture

WTF? The FBI is supposed to be protecting us from terrorists! Who told them to investigate criminals? This is just plain wrong. I blame Busch.

And who let these unpatriotic whistleblowers blow? Somebody DO something!

Wed, 01/15/2014 - 00:14 | 4333129 Seize Mars
Seize Mars's picture

Ok let's say the neighbor kid down the block keeps kicking my ass and taking my lunch money on the way to school. I am supposed to feel good that his mom is..."doing an investigation?"

Wed, 01/15/2014 - 00:25 | 4333159 Schmuck Raker
Schmuck Raker's picture

At your age? IIWY I'd be praying that no one finds out about it.

Wed, 01/15/2014 - 00:25 | 4333156 dexter_morgan
dexter_morgan's picture

Investigating what? How they can get in on it?

Wed, 01/15/2014 - 00:29 | 4333169 pitz
pitz's picture

What possible rational reason is there for the GSE's or even governments to be involved with derivatives? 

Wed, 01/15/2014 - 01:15 | 4333265 Monetative Easing
Monetative Easing's picture

The rational reason is that they use them for interest rate hedging.  It is entirely legitimate and has helped the GSEs manage the rate risk on their balance sheets successfully for years (note this is separate from the creditworthiness of their loans which is an entirely different and more toxic risk as we learned in the '00s).  


If you want to ask what possible rational reason thers are for GSE's...well then, you have a great question there.

Wed, 01/15/2014 - 00:33 | 4333177 Son of Loki
Son of Loki's picture

What a droll sense of humor to tell people they are 'investigating bankers.'

Wed, 01/15/2014 - 00:38 | 4333179 Dr. Engali
Dr. Engali's picture

How about this hand gesture for you fuckers?


........('(...´...´.... ¯~/'...')
..........''...\.......... _.·´

Wed, 01/15/2014 - 01:06 | 4333253 Monetative Easing
Monetative Easing's picture

I know you guys want blood but this story is bullshit.  I mean, its not bullshit in that virtually any meaningful customer order is subject to front running.  

However, any buy-side trader worth their salt will know who front ran the trade and make sure they punish that dealer.   The client simply has to tell the dealer that they will no longer see their business for a long, long time for such behavior and actually mean it.  Clients who make it known that they wont accept front-running don't get front-run.  


The authorities will never prove this sort of allegation but a dilligent client can protect against such actions.  

Wed, 01/15/2014 - 01:57 | 4333323 WTF_247
WTF_247's picture

Unless its an alpha whore like SAC, Caxton or a few others with high end analysts to catch this behavior, it wont happen.  Most of the trades are done by unsophisticated people.  I work in this industry.  Yes they have a title, yes they get paid a lot.  No they do not know much about trading for the most part.

A simpler answer is this - why do you think the advent of algo's has been so widespread and so popular?  I am not talking about HFT - just simple VWAP?

It removes the liability from the firm (due to "best execution" rules) and removes people from the loop (lower overhead).  If they beat the VWAP on a 100k buy order its good, right?

Exactly the opposite happens.  These idiots create the vwap with the shitty orders.  Its almost guaranteed if you put in a certain type of order you are gonna not only influence the vwap but beat it because of follow on HFT algos that join in the trend.  They only care about defensible orders and liability (most firms) and not about the fact they could have easily bought the 100k 20c cheaper at least..  

There is very little discussion about this - I have seen the migration from managed orders to unmanaged orders over the last 10 years.  Managed orders (active firm participation and monitoring) saved investors money, unmanaged (vwap bullshit algos) do not but benefit the fund in terms of costs and liability (think govt regulation here).

Wed, 01/15/2014 - 03:33 | 4333424 the0ther
the0ther's picture

Nice to read some input from an expert in the field. Though I didn't need you to tell me that those well paid frat boys don't know shit about their job.

Wed, 01/15/2014 - 08:43 | 4333597 More_sellers_th...
More_sellers_than_buyers's picture

Yea, same old story.  You would think they want the human intervention.  Shit rolls downhill.  If the guy doing the order does a great job, the upstairs guy takes all the credit.  If the trader fucks it up, he's a douche! Now its all in the "box" no one to blame but the market.  No accountability.  No one does a better job than the next guy.  All crony bs now.  I remember the good old days, when people liked risk.  One of my favorite trader quotes from the old days. A kid thought he did a good job flipping out a position for an eigth profit.  (12.5 cents) Head trader ripped the kids head off,"I'd rather lose a dollar than only make an eight!" haha where are the risk takers now??????

Wed, 01/15/2014 - 01:09 | 4333257 ReactionToClose...
ReactionToClosedMinds's picture

special telephone rings & hand signals ....

Alfred E. Neuman...what. me worry?

can we get any more obvious?  It is so pathetic it is like a bad (as in most of them) hollywood film

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