Elliott's Paul Singer Debates Whether "Markets Are Safer Now" - Live Webcast

Tyler Durden's picture

When it comes to the opinions of financial pundits and "experts", most can be chucked into the garbage heap of groupthink and consensus. However, one person whose opinion stands out is Elliott Management's Paul Singer. One of the most successful hedge fund managers has consistently stood against the grain of conventional wisdom over the past three decades and been handsomely reward, which is why his opinion is certainly one worth noting. Singer, together with Martin Wolf and several other panelists will be speaking at 45 minutes past the hour on a panel discussing one of the most pressing topics nearly 6 years after the Bear Stearns collapse: "Are Markets Safer Now." Watch their thoughts on the matter in the session live below.

Live feed:


And here are his recent comments on financial stability, which are certainly worth perusing.


We can only assume that the reason the global financial system is still, four-and-a-half years after Lehman, overleveraged, opaque, reliant upon the implicit and explicit support of governments for its very existence, and unprotected against runs and sudden death, is that the straightforward and practical fixes advanced by us and others take too long to read – and, perhaps, that they would be too painful for powerful special interests. Since we believe the costs of the next financial crisis will be extremely high, and the nature of the fixes are quite modest, it is worth taking another crack at trying to get through to policymakers using all available venues and platforms. Our gut feeling, supported by anecdotes from the Street, is that the major financial institutions (those bailed out or implicitly supported in the last crisis) have taken important steps to reduce their trading risks since the 2008 collapse. However, it is impossible to verify such progress from public financial statements or even to assess these institutions’ true financial risks.

Unfortunately, opacity and extreme leverage still reign supreme.

Let us recount what happened to turn the relative safety (relative to their customers) of many of these institutions upside down. Financial institutions are counterparties, borrowers, lenders, traders, custodians and fee-based purveyors of advice and services.

The one essential characteristic for every one of those roles, except the last one, is that these firms need to be safe, in both perception and fact, with their financial conditions above reproach.

There is a system, developed over decades, consisting of both industry practice and federal regulation, to ensure that secured “margin” loans to the trading customers of financial institutions cannot become unsecured by the adverse movement of security prices. Customers must put up initial margin when entering a trade and have to post more if the equity in their account declines by a certain amount. A cushion is thus maintained, which protects the financial institutions and the system.

For the traditional banking side of financial institutions, in which loans are made to borrowers and relationships are maintained between bankers and customers, there is also a time-honored and sound system of industry practice and experienced and alert regulation. Under this system, institutions are monitored for acceptable levels of leverage and business practices, and reserves are booked against probable loan losses and then adjusted against actual losses. Whole loans are not marked-to-market, but reserves are applied and adjusted as necessary. “Actual” banks have occasionally failed, but they never seriously jeopardized the system as a whole.

These systems, of how customers finance securities positions, and how banks are financed and operate, enabled the world’s financial system to work without systemic collapse for more than 70 years after the Great Depression of the 1930s gave policymakers a solid to-do list of fixes which were necessary in order to avoid a repeat.

Over the last 20 years or so, however, many of the world’s financial institutions built astronomically massive books of derivatives, private equity, other illiquid assets and extensive proprietary trading positions which have dwarfed their traditional banking books and fee-for-services activities. Furthermore, to the extent they represent trading between financial institutions, these derivative books in particular have been allowed by regulators, lenders and customers to be established with little or no initial margin, thereby removing the presumptive aura and reality of safety and soundness from the entire universe of major financial institutions. It is certainly debatable whether the system, and many of the 100 largest such institutions, were “unsound” before the 2008 collapse, but it is undoubtedly the case that these firms ceased being unquestionably more sound than their customers. In addition, when things started unraveling in 2007 and 2008, there was (and still is) insufficient useful, publicly available information to enable any customer to determine whether to stay with or run from institutions in which they have assets, trading relationships, claims or securities. This point is both irrefutable and critically important.

It needs to be fixed. Contrary to what many policymakers would have us believe, no combination of regulation and edict anywhere in the world has yet to address the issue adequately.

Therefore, since there is basically no collaborative international process underway to study and fashion adjustments that would make the global financial system sound again, we submit herewith our version of the necessary fixes. It is essential that the fixes be agreed upon by all of the G-20 governments in order to prevent a “race to the bottom” by any one country aimed at picking up market share by allowing more risky behavior than the other countries allow:

  • All investors, traders, institutions and counterparties, regardless of size and regardless of whether they are customers or end-users, should put up the same initial margin. In the case of derivatives in which the initial margin is less than 30% of notional value, two-way daily mark-to-market should be required. Special rules may be needed for completely matched trades in which institutions, nominally principals, are mainly intermediaries. But such trades create a lot of counterparty risk, so this area needs to be carefully studied in light of the widespread use of “netting” agreements today.
  • The Orderly Liquidation Authority prescribed by Dodd-Frank should be repealed and replaced by an amendment to the U.S. Bankruptcy Code which would operate to prevent cross-default provisions from impacting derivatives books so long as mark-to-market payments are being made in a timely fashion. This way illiquid assets held by bankrupt entities can be handled in an orderly fashion without systemic risk, but the trading positions can keep going unless mark-to-market payments are not being made (in which case the defaulting party would trip the trigger for a termination event).
  • Governments need to be authorized to provide “open bank assistance.” The convolutions of Dodd-Frank aimed at “avoiding” this tactic are ludicrous and will prove to be extremely costly to the system.
  • Accounting rules need to change to provide investors with much more information about the sensitivity of bank holdings to various parameters, including: exposure to interest rates at different parts of the curve; exposure to moves in equity prices; currency relationships; delta and vega exposures to various underlyings; curve risk; what portion of positions is perfectly matched versus what portion is not matched.
  • Credit ratings and risk weightings must undergo a thorough process of review and revision. No security or instrument on the planet should have a zero risk weighting.
  • Regulatory regimes should be rationalized to eliminate inconsistent oversight of various instruments that represent exposure to particular assets.
  • Derivatives trading should be standardized and as much as possible moved to clearinghouses. Margin rules for bilateral contracts must be made more uniform. A rule recently proposed by regulators (based on a Dodd-Frank mandate) provides numerous exceptions to margin-posting requirements for OTC swaps trades. Each such exception leads to more fragility and less safety for individual counterparties and the system as a whole.
  • A globally-integrated study should be undertaken about how to ensure that deposit insurance does not support proprietary trading activities (as distinguished from enabling banks to make whole loans).
  • Position sizes must be significantly reduced from current levels. As a result, financial institutions would not be any more leveraged than their customers. The reduced profitability of these institutions would be a small price to pay for the dramatically increased stability of the world’s financial system.

With these fixes, financial institutions, even very large ones, would not be primary drivers of systemic risk, and metaphysical inquiries delving into the difference between proprietary trading, customer facilitation and hedging would be unnecessary. It would also be unnecessary to distinguish between “systemically important financial institutions” and everyone else, or to impose higher capital requirements on larger institutions.

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gwar5's picture

Safer for whom

The_merovingian's picture

Still safe for bankers apparently, now that they know their next loss will be paid with bail ins of their clients

madbraz's picture

Yes the markets are much safer now, they are like a CD that yields 10%+ and will never go down...


...the Russell 2000 has been above one standard deviation from it's 20 month moving average since 2012, for over a year now.  this has never happened, not even in the bubble of the nineties.

Temporalist's picture

Stop shitting on my New Normal Recovery parade.

frankTHE COIN's picture

And they keep saying there's no evidence of a Bubble.

LawsofPhysics's picture

What "markets"?  Their markets?  The "markets" that maybe 10% of the earth's population actually have a vested interest in?

Once Credibility is lost, it's only a matter of time...

Personally I am looking forward to "the great decentralization".

All eCONomies are really local at the end of the day and will become increasing more local as governments and municipalities will continue fail to deliver on their promised services.

hedge accordingly.

SKY85hawk's picture

I'm waiting for comments from more knowledgable posters.

Is it possible that Mr. Singer is beating around the bush?

His several suggestions for 'do a study' seem useless in the short term.

I want to know why he's not calling for the reinstatement of Glass/Stegall!


LawsofPhysics's picture

"I want to know why he's not calling for the reinstatement of Glass/Stegall!" - Bingo.  My guess is that it becomes much harder to manipulate or game the "market" when CBs can't use other people's money or savings to do so.

mickeyman's picture

We should ask why nature makes such robust systems, while we can only build houses of cards

LawsofPhysics's picture

Please, that's easy, Nature allows bad choices, bad behavior, and uncompetitive organisms/businesses to fail.

Obama_4_Dictator's picture

Getting real sick and tired of waiting for this collapse already......I've basically set up everything for us to thrive in the coming collapse, but the way things are going I'm going to be insolvent before we get there.  My business is doing shitty, my Wife's hours were just cut to 32 hours a week.  And I've got all savings in PM's which is taking a major beating, eventhough I started buying at $12 and $900. Rent is going up in our area as well.  Food is expensive, gas is expensive and people don't have money to spend on my business anymore, which is "resume's".  I thought that would be a good business to get into for these trying times, and it has been for over 5 years - now people are getting to broke for even that.  The good news is that we have no debt, sold our shit condo.  It's getting hard to cut other expenses, we are at bare bones the way it is.  Fuck.

fockewulf190's picture

You will be burning through your phyzz, just like the rest of us, in order to survive the Great Reset.  If the PM´s do explode in fiat price before the dollar disintegrates, you may want to enroll yourself in a trade school as a plan B move and pay the tuition 100% up front.  You can pretty much count on your resume business failing...sorry to say.  The times we are living in right now, even though they suck for most people, are going to be "the good ol´days" once the SHTF. 

One problem I wonder about is what kind of system is going to rise from the ashes of the old.  I only see the Chinese at the moment preparing for a post Great Reset world, and that is only because they are stacking like crazy.  Western governments have no plan at all other than to establish Marshall Law and ditch democracy. There is also no way of knowing just how long the transition time will take until some semblance of economic and soceital order is re-established...the Dark Ages may return for part II or a damn world war could break out.

Whatever happens, at least you have some phyzz to fall back on.  Billions of people have absolutly nothing to fall back on, including tens of millions of Americans, so desperation and dark times are ahead.  Sucks, but our leaders have failed us.  Good luck man.

Judge Crater's picture

Talking about investors, Bloomberg has an article about Warren Buffet's giving 29 year old Tracy Cool CEO jobs at three of Berkshire Hathaway companies.  This article should set off red flares.  Buffet must be senile to have give so much power to Cool, a person with a Harvard MBA and no experience.  Cool hires her Harvard friends to run companies and Warren goes along.  Her friends got jobs as CEOs where Cool fired the previous long serving CEO.  That is all Cool is good at, firing people when she is not cozying up Buffett.  When the vultures of Wall Street see Buffett acting like such a nincompoop over Cool, they have only one thought.  That thought is that Buffett is now the senile sage of Omaha and Berkshire Hathaway is a rudderless company.  In other words, time to raid Berkshire Hathaway.   

[Excerpt from article is below]


When Warren Buffett bought half of a commercial mortgage finance company in 2009, he hired a 25-year-old fresh out of business school to keep tabs on the investment.

Since then, Berkadia Commercial Mortgage LLC has earned back most of the $217 million that his Berkshire Hathaway Inc. (BRK/A) spent on the deal. The business also helped propel Tracy Britt Cool’s career.

Now 29, Cool is one of Buffett’s most-trusted advisers, traveling the country to assist a constellation of companies too small to command her boss’s direct attention. The billionaire said his confidence in Cool is one reason he agreed to buy party-supply seller Oriental Trading. In 2012, she was named chairman of that business and three other units, including paint company Benjamin Moore. The subsidiaries have combined sales exceeding $4 billion and more than 10,000 workers.

In the past two years, Cool dismissed three chief executive officers at units she oversees and presided over turnaround efforts that put other managers out of jobs. She also worked with Berkshire subsidiaries to coordinate purchasing and share expertise on employee health care.

She found all that in Buffett. The Berkshire chairman even stood in for her late father, Richard, walking her down the aisle at her September wedding to Omaha attorney Scott Cool. When Buffett’s daughter Susan has parties for Thanksgiving or the 4th of July, she invites the couple, the CEO said.

Cool became chairman in 2012 of two units deemed in need of changes: Benjamin Moore and Larson-Juhl, which sells custom picture frames. She got the same title at insulation maker Johns Manville after the unit’s new CEO, Mary Rhinehart, asked if Cool could be a “sounding board,” Buffett said.

In 2012, she delivered messages for Buffett, firing Steve McKenzie, who helped sell Larson-Juhl to Berkshire about a decade earlier and was working to stem profit declines. She also ousted Benjamin Moore’s Denis Abrams, a 17-year veteran of the paint company who had disagreed with Buffett on strategy.

The changes shocked staff, according to former employees. The new CEOs and the cuts that followed were even more startling at companies that previously had a more collegial atmosphere, these people said.

At Larson-Juhl, Cool brought in her former business school classmate, Drew Van Pelt. He soon fired three senior executives and demoted others to help turn around the business, a former employee said.

“It was an organization that had had an extended period of decline,” Van Pelt said in a phone interview. In the past two years the company has invested in new products, improved quality and won a local award for being a top workplace in the Atlanta area, a sign of “a pretty strong culture and a pretty healthy environment,” he said.

Cool enlisted restaurant executive Bob Merritt, the husband of her friend Jill DiLosa, to run Benjamin Moore. Merritt fired longtime managers, a former employee said.

Buffett, the world’s fourth-richest person, said he knew of Cool’s connections to both CEOs and that he made the final decision about whom to name. “I prefer if you have some direct experience with somebody before you hire them,” he said. “I had some experience with Tracy before I hired her.”

That approach didn’t pan out with Merritt. Cool visited late last year to tell staff that Berkshire was looking for the unit’s third CEO in less than two years, according to a person who attended. Cool declined to answer questions from staff about why the CEO left, the person said. Attempts to reach Merritt were unsuccessful.

Given Buffett’s preference for experienced executives, Cool’s role is surprising, said James Armstrong, president of Henry H. Armstrong Associates, which holds Berkshire shares.

“Berkshire usually brings on people who have a lot of time in the saddle,” he said.

pragmatic hobo's picture

waters fine ... come on in ...

SharkBit's picture

Loving Anat Admati.  Keeping it real.  Giving it to the elitist money changes.  Bring it on Anat.  Thanks for speaking up for the rest of us 99.99%.

If there was recourse for these bankers, manipulate a market, get caught, 40 lashes, castriated, your choice.  That would slow the graft.

viator's picture

Excellent. 40% of the audience, after the presentation, thought TBTF banks were not safer now than in 2007.

The_merovingian's picture

Look at the smirk the 2 bankers had on their faces at the end. Like saying we fooled those morons again.

We all know banks have not deleveraged enough. We all know their bonuses are unjustified. We all know that there is no reason for the opaque derivative markets, etc….

You will know the system will improve when they start throwing bankers in jail.