Comments on: Could Bear Stearns Fail? http://www.nakedcapitalism.com/2007/06/could-bear-stearns-fail.html Mon, 23 Nov 2009 03:10:07 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Yves Smith http://www.nakedcapitalism.com/2007/06/could-bear-stearns-fail.html#comment-124 Yves Smith Tue, 26 Jun 2007 08:05:00 +0000 http://www.nakedcapitalism.com/2007/06/could-bear-stearns-fail/#comment-124 Actually, no, The O'Connor/Swiss Bank JV that was the interim step before the takeover was a leading force in OTC derivatives, FX and equity. There were many occasions when the two firms were bidding against each other on OTC trades, and it might take a couple of days to put together a price (you needed to figure out how you'd hedge the risk in order to price it). Similarly, O'Connor provided (on a non-disclosed basis) the equity derivatives piece in retail public offerings of guaranteed return products (basically a bond plus an equity option; the present value of the reduced yield was used to buy a long-dated S&P call, longer dated than you could get on the exchanges).<br/><br/>Proctor & Gamble filed its suit against BT in 1995. The initial post clearly refers to the time period preceding that suit. Actually, no, The O’Connor/Swiss Bank JV that was the interim step before the takeover was a leading force in OTC derivatives, FX and equity. There were many occasions when the two firms were bidding against each other on OTC trades, and it might take a couple of days to put together a price (you needed to figure out how you’d hedge the risk in order to price it). Similarly, O’Connor provided (on a non-disclosed basis) the equity derivatives piece in retail public offerings of guaranteed return products (basically a bond plus an equity option; the present value of the reduced yield was used to buy a long-dated S&P call, longer dated than you could get on the exchanges).

Proctor & Gamble filed its suit against BT in 1995. The initial post clearly refers to the time period preceding that suit.

]]> By: Anonymous http://www.nakedcapitalism.com/2007/06/could-bear-stearns-fail.html#comment-123 Anonymous Tue, 26 Jun 2007 07:45:00 +0000 http://www.nakedcapitalism.com/2007/06/could-bear-stearns-fail/#comment-123 You seem to be thinking of exchange-based derivatives. There are of course OTCs...<br/><br/>But to pick out a year, let's choose 1998. You seem to be thinking of exchange-based derivatives. There are of course OTCs…

But to pick out a year, let’s choose 1998.

]]> By: Yves Smith http://www.nakedcapitalism.com/2007/06/could-bear-stearns-fail.html#comment-118 Yves Smith Mon, 25 Jun 2007 19:16:00 +0000 http://www.nakedcapitalism.com/2007/06/could-bear-stearns-fail/#comment-118 If we are talking about the early to mid 1990s, I have to beg to differ. The derivatives business grew up in Chicago around the exchanges (the Chicago Board of Trade, the Chicago Options Exchange, the Chicago Mercantile Exchange). As profit opportunities from exchange-based trading fell as the markets became more efficient, firms like O'Connor (the 25th largest securities firm in the US, which regularly accounted for 5% of NYSE trading volume to hedge its equity derivatives book, and also strong in FX derivatives. It was full of MIT types and one of its partners had been Fisher Black's research assistant) and CRT (Chicago Research and Trading, a fixed income derivatives shop) needed more capital to compete in the OTC markets. O'Connor was acquired by Swiss Bank, which was a very successful deal (Swiss Bank was able to utilize O'Connor's expertise, particularly in information technology (derivatives trading has demanding systems requirements). By contrast, CRT was purchased by Nationsbank, and the culture clash soon led to the departure of key CRT talent. BT, despite its lack of Chicago roots, targeted this business in its early days and built a very effective operation.<br/><br/>The only meaningful nexus of what might be called derivatives activity overseas was the Japanese warrant business, which was a very opaque market controlled by the Big Four Japanese securities firms (and unlike the US business, not daunting from a quant and IT perspective). <br/><br/>If you can tell me who you mean in terms of foreign players, I would be curious to know.. If we are talking about the early to mid 1990s, I have to beg to differ. The derivatives business grew up in Chicago around the exchanges (the Chicago Board of Trade, the Chicago Options Exchange, the Chicago Mercantile Exchange). As profit opportunities from exchange-based trading fell as the markets became more efficient, firms like O’Connor (the 25th largest securities firm in the US, which regularly accounted for 5% of NYSE trading volume to hedge its equity derivatives book, and also strong in FX derivatives. It was full of MIT types and one of its partners had been Fisher Black’s research assistant) and CRT (Chicago Research and Trading, a fixed income derivatives shop) needed more capital to compete in the OTC markets. O’Connor was acquired by Swiss Bank, which was a very successful deal (Swiss Bank was able to utilize O’Connor’s expertise, particularly in information technology (derivatives trading has demanding systems requirements). By contrast, CRT was purchased by Nationsbank, and the culture clash soon led to the departure of key CRT talent. BT, despite its lack of Chicago roots, targeted this business in its early days and built a very effective operation.

The only meaningful nexus of what might be called derivatives activity overseas was the Japanese warrant business, which was a very opaque market controlled by the Big Four Japanese securities firms (and unlike the US business, not daunting from a quant and IT perspective).

If you can tell me who you mean in terms of foreign players, I would be curious to know..

]]> By: Anonymous http://www.nakedcapitalism.com/2007/06/could-bear-stearns-fail.html#comment-116 Anonymous Mon, 25 Jun 2007 11:34:00 +0000 http://www.nakedcapitalism.com/2007/06/could-bear-stearns-fail/#comment-116 Bankers Trust was not "one of the top two derivatives firms." It was one of the top two *American* derivatives firms. Bankers Trust was not “one of the top two derivatives firms.” It was one of the top two *American* derivatives firms.

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