There should probably be a "Ghosn" pun here Happy new decade! The best business story of last decade snuck in under the wire, when Carlos Ghosn, the former head of Nissan Motor Co. and Renault SA who was out on bail in Japan awaiting trial on charges of financial misconduct, popped up in Lebanon just before New Year's after being smuggled out of Japan in, apparently, a large black case used for audio equipment. I have spent much of the last week reading accounts of his escape and I am nowhere close to tired of them; Bloomberg Businessweek has a great one this morning. But this one from the Wall Street Journal on Friday has maybe my favorite detail so far, about what Ghosn has been up to since his escape: Mr. Ghosn has been spending time in a pink mansion in Beirut that Nissan bought and renovated for his use when he worked for the Japanese car maker, according to a person familiar with the matter. Nissan has been trying to evict the Ghosns from the house since shortly after the auto executive's arrest in late 2018, but so far they have been able to stay. On Friday, more than a dozen reporters stood outside the house in the rain. Security personnel dressed in black and hired by Nissan stood guard. Mr. Ghosn's lawyer, Carlos Abou Jaoude, was seen going into the house on Thursday. Cars with blacked-out windows were entering and exiting the house's garage that day. See, Ghosn jumped bail in Japan because (he says) he was falsely accused of stealing from Nissan: Prosecutors say that as Nissan's chief executive officer, he paid himself much more money than the officially approved compensation that was reported to investors, charges that he has strenuously denied. "I have not fled justice – I have escaped injustice and political persecution," he said in a statement after his escape. And to prove his innocence he escaped from Japan to Lebanon, where … he is stealing from Nissan? Where he's living in a mansion owned by Nissan, without Nissan's permission? "The nerve of them, to accuse me of taking anything from Nissan that isn't mine," he'll say, wandering around Nissan's mansion in Nissan's bathrobe, taking snacks out of Nissan's refrigerator as Nissan's guards glower at him. What? The basic … misunderstanding? … of this case seems to be that Ghosn thought that, as a powerful visionary chief executive officer, he had an absolute right to take anything from Nissan without asking permission or explaining himself (or disclosing it to shareholders), while his enemies at Nissan, and Japanese prosecutors, and the U.S. Securities and Exchange Commission, all think that he abused his authority by taking so much stuff from Nissan. There is, to be fair, something to be said for Ghosn's view. "From fiscal year 2004 through 2018, Nissan's Board of Directors delegated to Ghosn the authority to set individual director and executive compensation, including his own compensation," notes the SEC, and "in practice, Ghosn set the amount of his compensation without oversight." If for 15 years the board of directors says "hey just pay yourself whatever you want," the line between what belongs to Nissan and what belongs to you will start to blur. If you can set your own compensation, and there's a good-looking sandwich in the corporate fridge, then you can declare the sandwich, or the fridge, to be part of your compensation as you take your first bite. Still this position is not especially sympathetic. Also when you are ousted as CEO and thrown in jail, that really ought to clear up any confusion! Ghosn isn't staying in Nissan's mansion now because Nissan's board gives him carte blanche; he's staying in the mansion now because he likes mansions and doesn't like to be told no. That's presumably why he decided not to wait around for his trial, too. Anyway he's planning a press conference on Wednesday. ("A public relations professional has been dispatched from the United States to Beirut to help organize" it, reports the New York Times.) I hope it will involve a detailed reenactment. I hope that Nissan's guards—the guards hired by Nissan to stand outside his house!—will take the reenactment as an opportunity to re-abduct him and put him in a box back to Japan. I hope Ghosn will climb into the audio-equipment case to demonstrate to reporters how he escaped, and then the power will cut off momentarily, and when it comes back on the box will be empty and Ghosn will be gone. I hope this story never ends. Oh also this from the Journal story is very good: When Mr. Ghosn arrived in Beirut on Monday morning, he sent a friend a message a little before 8 a.m. saying in French simply. "Hello. Call me," according to a person familiar with the situation. The friend called him. Mr. Ghosn told him he was in Beirut. The friend hung up, washed his face and called back. They met later that day. I hope that scene in the movie (obviously there will be a movie!) takes like three minutes, lingering over the friend washing his face for no obvious reason. Manipulation is hard Last month the U.S. Commodity Futures Trading Commission brought an enforcement action against Christophe Rivoire for allegedly manipulating the prices of interest-rate swaps ahead of a big client trade. It is not an especially interesting or novel manipulation case. Sometimes these sorts of cases involve hard nuances of distinguishing evil manipulation from acceptable pre-hedging, but this one basically doesn't; it's pretty straightforward. On the other hand it is just a riveting, and terrible, description of life on the trading floor. If you want to understand what it's like to be a swaps trader at a big bank, and why you might find it unpleasant, I'm not sure you can do any better than reading the CFTC's complaint in this case. Rivoire was the head of HSBC Holdings Plc's North American interest rates business. This means, among other things, that when HSBC's bankers wanted to do a bond deal for a client, and wanted to offer the client a swap to hedge the interest-rate risk in the bond, they had to go to Rivoire to price the swap. The bankers bring in the swap business, and lead the marketing and negotiation with the client, but the trader—Rivoire—owns it; if the bank loses money on the swap then that's his problem. HSBC had a client—"an Asian public financial institution with a mission that includes promoting international economic and social development and contributing to the stability of the global financial system"—that wanted to do a five-year, $2 billion fixed-rate bond and swap its payments to a floating rate. Rivoire gave his bankers a price, but then came to regret it, to feel that his bankers or his client had tricked him: In late June 2012, Defendant Rivoire was aware of the upcoming Bond Issuance and Issuer Swap. During the earlier negotiations over the Issuer Swap, Rivoire had provided pricing levels at which the Bank and its affiliates would be willing to enter into the Issuer Swap. The Issuer took into account the pricing levels Rivoire provided when selecting the Bank as a joint lead manager of the Bond Issuance. Based on the pricing levels provided by Rivoire, the Issuer also selected the Bank and its affiliates to provide the Issuer Swap. By late June, however, Rivoire had come to believe that the prices he had provided for the Issuer Swap had failed to account for certain economic terms of the Issuer Swap, and that therefore the Bank had agreed to enter into the Issuer Swap with the Issuer at a price at which the Bank would lose money. A loss on the Issuer Swap would impact the profitability of the interest rate business that Rivoire supervised and could reflect negatively on Rivoire's management of the business or affect Rivoire's compensation. Concerned about potentially losing money on the Issuer Swap, Rivoire repeatedly pushed for the Bank to re-negotiate the terms of the Issuer Swap with the Issuer, including charging the Issuer more for the swap. Rivoire's efforts, however, were ultimately unsuccessful. Rivoire was able to get the Debt Capital Markets ("DCM") business of the Bank to pay a subsidy to the trading desks that Rivoire supervised to offset some of the potential loss on the Issuer Swap. Even with the subsidy, however, Rivoire stated that "P&L will be zero for the swap book." … Rivoire repeatedly complained about the negotiations with the Issuer over various aspects of the Issuer Swap, at one point characterizing the situation as "ridiculous." The pricing that Rivoire had given his DCM bankers (and that they had given to the issuer) was, as customary, a spread to market levels. The way the swap worked is roughly that the client would pay HSBC a floating rate of 6-month Libor, and HSBC would pay the client a fixed rate equal to (1) the five-year U.S. Treasury rate plus (2) the five-year swap spread (the difference between Treasury and market swap rates) plus (3) the five-year 6s3s basis swap rate (basically the difference between paying six-month Libor and three-month Libor for five years) plus (4) an adjustment based on the difference between the spot price of the basis swap and a one-week-forward basis swap, plus (5) a fixed spread.[1] The details don't especially matter. The point is that item (5), the spread, is what Rivoire and HSBC bid and what was agreed on in advance; items (1) to (4) were all market variables that move around constantly, and it was agreed that the final pricing of the swap would be set on a pricing call at the time the bonds were issued. Everyone would get on the call, look at broker screens reporting all those numbers, write them all down and come up with an agreed fixed rate for the swap. Having agreed to a bad deal, Rivoire allegedly decided to fix it: In a number of communications in late June and early July 2012, Rivoire articulated how the Bank and its affiliates could engage in manipulative trading to minimize the losses he anticipated on the Issuer Swap. Rivoire articulated two related ways that the Bank could do this: "push[ing]" the markets for relevant financial products and "controlling" the Pricing Call. The pricing call would get the price of the swap by applying some agreed-upon arithmetic to some market quantities that were displayed on broker screens. If you can move those quantities—by selling a lot of swaps, buying a lot of Treasuries, etc.—then the fixed rate on the swap (which HSBC pays) will go down and HSBC will make more money. Also it can help to be able to pick when you set the price: In a phone call with a DCM employee of an Asian affiliate of the Bank ("DCM Employee"), Rivoire expanded on what it would mean to control the execution of the Issuer Swap rather than allowing the Issuer to control it. In connection with quoting the U.S. treasury price, Rivoire explained that "we need to manage the execution" and "we don't want the issuer to manage it." Rivoire then continued, "Managing the execution, what does it mean?" and explained "we need to keep the flexibility to quote when we want to quote, right?" Rivoire further explained that "we need to quote it in the sense that if we quote it we can manage the timing." In response to Rivoire's expressed concerns about being able to control the execution of the Issuer Swap and the timing of the quotes provided on the Pricing Call, the DCM Employee assured Rivoire that the Bank would be able to do so. The DCM Employee explained that the Issuer "is not trying to manage this process. Issuer is just innocent, and just look[s] at [the Broker Screens], that's it." The DCM Employee further explained that the Issuer was "not a player in the market," but instead the Issuer's employees were "innocent people in [Country A]." The DCM Employee explained that that meant that "So long as [the U.S. treasury rate] shows on [Broker Screen], they agree, they never challenge you, because they are not trading in treasury. I think you misunderstood. They are not professional; they are just [Country A] government people." So Rivoire went to one of the traders who worked for him—called "Trader A" here—and allegedly told him to basically bang down the price of the relevant basis swap: Rivoire then continued "So we'll need to push the screen as much as we can before the pricing. We are not comitted [sic] to any level except the mid screen." ... In this transaction "push[ing] the screen" down would increase the rate of interest the Issuer had to pay to the Bank under the Issuer Swap and thus tend to increase the profitability of the transaction for the Bank. Trader A understood Rivoire's email to be a direction to trade in a manner that would result in a lower price for Five-Year Basis Swaps at the time the Issuer Swap was priced, and he understood that that would benefit the Bank on the Issuer Swap at the expense of the Issuer. But there is another way to move a broker's pricing screen, besides just trading a lot of swaps. These screens reflect the market price of swaps, but they are not like stock exchanges, instantly and automatically reflecting all bids and offers for the swaps. They are controlled by the brokers and have some room for subjectivity. So Trader A also called the broker who controlled the relevant screens and told him he'd need a favor in the next few days: As he had told Rivoire he would, Trader A contacted the Broker on July 9, two days before the Pricing Call. Trader A told the Broker that "we're pricing something and they're using" the USDBASIS screen. Trader A then told the Broker "I'm going to need to move that" and "I'm going to give you prices and I just need you to move it." The Broker told Trader A "I understand" and agreed to look into who at the Broker Firm or its affiliates controlled USDBASIS. With that setup, the CFTC moves on to describe the pricing call, minute by minute. "The Pricing Call began at 11:28am on July 11," 2012. It is an amazing and horrible read. Rivoire dialed into the call; the CFTC adds: "By this time, Rivoire was standing on the trading floor near Trader A." Poor Trader A, with his boss standing over him, allegedly got to work pushing down the price of the basis swaps[2]: As a result of Rivoire's direction to begin trading, Trader A told the Broker that he would sell to, or hit the bid of, the market participant who had bid to buy Five-Year Basis Swaps at a price of 15.375 basis points. Trader A told the Broker that he wished to sell $500 million worth of Five-Year Basis Swaps at the price of 15.375. And then … nothing. The price on the screen that the client saw—the price that would determine HSBC's profit, the price that Trader A was trying to manipulate—didn't move. And so: screaming, swearing. Almost immediately, Trader A repeatedly told the Broker to "get the screen down." After approximately fifteen seconds had elapsed, Trader A said "NOW [Broker]!" Trader B, who could hear the conversation between the Broker and Trader A, chatted to Trader A "fk [sic]." The Broker confirmed that Trader A had traded $500 million Five-Year Basis Swaps, and Trader A immediately demanded again that the Broker "get the screen down." The Broker told Trader A he was "doing it right now." Eventually the spot price on the screen came down. But HSBC also wanted the forward price to come down, because the swap price would be adjusted for the difference between the forward price and the spot price; a negative adjustment was good for HSBC. And the forward price was not coming down—Trader A had manipulated the spot price, but there was no activity in the forward, so it wasn't changing. He had been counting on the broker to just change it for him—to update the price on the screen without any market activity—but the broker hadn't. More swearing[3]: However, the one-week forward price for Five-Year Basis Swaps on USDBASIS did not move. At approximately 11:38am, Trader A demanded that the Broker "get the forward one down." The Broker said he would. Several times over the next two minutes, Trader A spoke angrily to the Broker about the one-week forward price, at one point stating "you really couldn't get the forward down?" The Broker repeatedly stated he was "working on it." Trader A told the Broker "that's **** terrible." Meanwhile the pricing call was happening! The forward-price manipulation hadn't succeeded, so HSBC took the unusual fallback approach of just pretending it had: On the Pricing Call, at approximately 11:40am, an employee of the Bank located on the trading floor near Trader A and Rivoire quoted the price of Five-Year Basis Swaps as 15.25 basis points based on the price displayed on 19905. The Bank employee quoted the price of Five-Year Basis Swaps on USDBASIS as 15.2 basis points, but the one-week forward price on USDBASIS remained at 15.3 basis points, leading to a Forward Rate Adjustment of positive 0.1 basis points (or a change of 0.2 basis points from where it had been during the dry run). The Bank employee tried to quote the Forward Rate Adjustment as negative 0.1 basis points rather than the positive 0.1 basis points reflected on the USDBASIS screen, … This did not work: … but someone on the Pricing Call objected that negative 0.1 basis points was not correct. The negative 0.1 basis point Forward Rate Adjustment quoted by the Bank employee would have been more profitable for the Bank than the positive 0.1 basis point level reflected on USDBASIS. So they stalled: The Bank employee stated that he needed to talk to the Bank's basis trader. Meanwhile here's what that basis trader—Trader A—was up to: At approximately 11:41am, Trader A yelled at the Broker "you're **** killing me!" The Broker replied "I know." At approximately 11:42am, Trader A threatened to stop using the Broker as his broker in the future, yelling, "I'm going to pull your **** line forever!" The Broker stated that the Broker Firm was working on it. More stalling, more screaming: At approximately 11:43am, Trader A spoke on the Pricing Call. Trader A stated that USDBASIS "has a delay on it" and "there's a problem with the screen right now." ... At approximately 11:43am, after he spoke on the Pricing Call, Trader A got back on the phone with the Broker and yelled "[Broker] I swear to god!" ... On the Pricing Call, at approximately 11:44am, participants noted that the spot price of Five-Year Basis Swaps on USDBASIS had now moved down to 15 basis points but the one-week forward price remained at 15.3 basis points. Trader A again spoke on the pricing call, stating, "there's a problem with their page, obviously." ... As Trader A stated to Trader B in a chat after the Pricing Call, "i mean, i had the head of rates standing over my shoulder going WTF IS GOING ON." Rivoire stalled some more: At approximately 11:46am, Rivoire spoke on the Pricing Call. Rivoire told representatives of the Issuer and others on the Pricing Call that there was "a latency issue" on the USDBASIS screen since "the spot has already moved significantly since we priced, and the forward didn't move." Rivoire further stated that "We need to wait for the screen to be adjusted." Rivoire also asserted that "Obviously we are not controlling the screen." The Issuer agreed to wait. Eventually they got the manipulation sorted and priced the swap: At approximately 11:51am, Trader A spoke to the Broker and asked if the Broker Firm could get the one-week forward to be "flat," or the same as the price of the Five-Year Basis Swap. The Broker replied "I pushed the ones down to 15 trying to manipulate it." The Broker then asked if it would "work" for Trader A if the Broker Firm moved the spot price to 15.3 basis points and the one-week forward to 15 basis points on USDBASIS. ... At approximately 11:53am, the Issuer agreed to use the prices displayed on USDBASIS (15.3 basis points and 15 basis points) to price the Issuer Swap. When the Issuer Swap was priced using 15.3 and 15 basis points, those values resulted in a Forward Rate Adjustment of negative 0.3 basis points. Adding that negative number to the price of the Five-Year Basis Swap quoted from 19905, 15.25 basis points, resulted in an adjusted price of 14.95 basis points. And the grunts took a modest, relieved victory lap (the CFTC says that "CR" is Rivoire): After the Pricing Call, Trader A and Trader B recounted to each other what had happened. Trader B stated "that was pretty fked up." Trader A asked "did u hear CR[?]" Trader B later commented, "that math cr did[] was lolz." Trader A responded "14.95[,] gotta hand it to him," referring to the adjusted price of Five-Year Basis Swaps used to price the Issuer Swap after the Forward Rate Adjustment was applied. Trader A also commented "i can't talk over CR[,] he needs to be the one difusing [sic] that[,] not me[.] i can't go and tell them the screen is wrong[,] they need to hear it from him[.] i did say it[.] and he smooth talked 14.95." Trader B noted that it was "easier with french accent[,] anyone else comes off as angry." The CFTC does not report how much money HSBC made on this, but my rough math is that they were able to push the spot price from 15.75 basis points to 15.25, and the forward adjustment from about negative 0.1 basis points to negative 0.3: Instead of paying 15.65 basis points, HSBC paid 14.95, saving it about 0.7 basis points per year for five years on $2 billion, or about $700,000 total. Not bad for 25 minutes of work, but it was an intense 25 minutes. When I read fraud cases like this I sometimes think about John Whitehead's famous commandments for Goldman Sachs Group Inc. bankers trying to drum up new business. One of the commandments runs, "It's just as easy to get a first-rate piece of business as a second-rate one." I don't know if that's true, but it sounds truer in the contrapositive: It's usually just as hard to get, or do, a second-rate piece of business as a first-rate one. Or a tenth-rate one, or a fraud. Imagine a counterfactual in which, instead of badgering a broker to illicitly lower rates on the screen to make this swap profitable, HSBC had gone to the client and said "actually our pricing didn't account for all of the terms of the swap and we'd like you to consider revising it to give us an extra 0.7 basis points." How would that have gone? Terribly, obviously! It would have been painful, awkward, stressful; there might have been yelling and cursing and recriminations. But that happened anyway! The work of sneaking the pricing adjustment past the client was not obviously less terrible than the work of proposing it openly would have been. There is a paradoxical efficient-markets flavor to a lot of market manipulation: If the manipulation was easy, everyone would do it, but in fact it often seems to be as hard and stressful and uncertain as making money the right way. Vision Dan Primack at Axios has a story about how the "SoftBank Vision Fund has walked away from investing in several startups, months after submitting term sheets worth hundreds of millions of dollars and promising that closing delays were only temporary." Fine, okay, that happens. But the story features this amazing comment from SoftBank: "Given we're a fiduciary and investing very large amounts of capital, our investment process is more rigorous than unregulated investors and typical VCs." Yes! That is SoftBank's thing now! In 2019 their thing was, extremely famously, making billion-dollar investments in weird unprofitable companies on the basis of Masayoshi Son's impression of a founder after a 10-minute meeting. In 2020 their thing is "our investment process is more rigorous than unregulated investors and typical VCs." Oh also their thing now is good corporate governance and a clear path to profitability. Honestly it's just weird. A lot of successful investors will have a bad year or two, and they'll make noises about how they are staying disciplined and trusting the process and still committed to their deep-value approach and blah blah blah. Traditionally investors with long track records do not have a rough year and say "hey we've decided to do the opposite of everything we've done so far." It doesn't go over well with their clients; also, it just seems like it would be hard to pull it off. But SoftBank has actually mostly done very well with an out-of-consensus approach of whimsicality, founder empowerment, and plowing cash into fast-growing companies that don't make money. And then you have one embarrassing WeWork and you're like "never mind, we're the opposite now"? I don't get it. It's a sort of meta-whimsicality: Typical VCs might not invest as casually as Old SoftBank, or as rigorously as New SoftBank, but they certainly can't pivot between the two as quickly and cheerfully. Elsewhere here's a story about Oyo: "At SoftBank's Jewel in India: 'Toxic' Culture and Troubling Incidents." Quantum finance "Wall Street banks ramp up research into quantum finance," is the promising headline here, but the story is actually about how Wall Street banks are researching the use of quantum computing in finance, and in popular usage "quantum computing" mostly seems to mean "fast computing," so the payoff is a little meh: The work has been focused on so-called Monte Carlo simulations, complex calculations that banks normally carry out daily to assess their overall risk positions. The same techniques are used in options pricing. Together, these calculations account for the bulk of the computing power currently used by JPMorgan Chase, said Ning Shen, managing director of quantum research. Besides boosting their computing resources, the banks hope quantum machines will greatly reduce the time it takes to analyse complex risk positions, making it possible to adjust on the fly rather than relying on an overnight calculation. Being able to quote prices on complex financial products to customers in real time should also make it possible to "open up bigger markets", said Mr Burchard. "In order to quote a price to a customer, we have to be able to see all the risks around a trade." Fine, yes, quoting options prices faster, that's nice. I kind of wish that the banks were ramping up research into quantum finance, though, whatever that would mean. What would it mean? If index futures prices changed in Chicago at the same time the underlying prices changed in New York, not because some arbitrageur rushed to update the old prices but because of quantum entanglement? Or, like, "we're sorry that our fund is down 10% in this universe, but in most possible universes our fund was up so we are going to charge you performance fees anyway"? Things happen Online brokers like Robinhood are hyping fractional share trading — here's why they want to get you hooked on $1 slices of stocks. Former Wells Fargo execs may face criminal charges in coming weeks. A Cautionary Tale: Argentina's Pari Passu Debt Debacle. U.K. Examines if Cyberattack Triggered London Stock Exchange Outage. Cocoa Cartel Stirs Up Global Chocolate Market. "What began as a bold experiment was eventually reduced to what other agency officials saw as simply an expensive proposal to design an open-office floor plan for CIA outposts around the world, say two former intelligence officials." Netflix Complicates Golden Globes Seating Chart: It's "Like a Giant Jigsaw Puzzle." This wearable vest grows a self-sustaining garden watered by your own urine. Colorado man robbed bank, immediately threw cash in air yelling 'Merry Christmas.' Alignment chart alignment chart. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] It's easier to describe this way, but technically the fixed leg was fixed at the coupon rate on the bond, while the floating leg is the one that was priced. So if, say, the bond coupon was 3% and the fixed rate on the swap under my simplified math was 2.1%, instead of HSBC paying the client 2.1% and the client paying Libor, HSBC would pay the client 3% and the client would pay Libor + 0.90%. The payments are netted, though, so this comes to the same thing. [2] Actually he allegedly got to work earlier that morning, starting to trade swaps to push the spot price down. But the pricing call was the real crunch time. [3] This is a family newsletter and I have altered some of the swears into asterisks. | 
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