NatWest CEO Alison Rose to Step Down Over Nigel Farage Accounts Closure
This is a very interesting development in a very worrisome event. We read about this a couple of weeks ago (here) and the gist of it is this. In the British parliament members can say pretty much anything they want without fear of civil or criminal consequences. After the Russian invasion of Ukraine, Chris Bryant, member of parliament, accused Nigel Farage of receiving £548,573 from Russia. There was no evidence to support this and Farage has loudly denied the allegations. After this came to light, his bank, with whom he had banked since the 1980s, closed all of his accounts. He tried to open accounts elsewhere and had been rejected by 7 other banks. Now the CEO of NatWest, Farage’s old bank, is stepping down.
What is worrying about this is that we are all beholden to the banking system and whatever they want to do. There was a recent case in which Canada froze the accounts of people that donated money to the truckers that were protesting covid-19 restrictions. Imagine having your account frozen for donating to a cause you support. The problem with all of this is that if we lose access to the banking system there is nothing we can do. We have also heard of stories of people under investigation which are shut out by the banks because compliance costs are too high. Even though in theory you are meant to be innocent until proven guilty…
So what can we do to not be beholden to the banking system? The sad reality is that not much as of right now. Crypto is not a solution since you still need access to the banking system to be able to spend it. Cash? Maybe but it is very cumbersome. And cash only works for small amounts but if you have hundreds of thousands or millions of dollars in the bank you cannot withdraw and then just keep it under your mattress (maybe it’s physically possible but very impractical).
JPMorgan exec sought Jeffrey Epstein’s help amid Bernie Madoff
This is interesting on two levels. The first is that Bernie Madoff (who ran the largest Ponzi scheme in history at $65 billion) was a client of JPMorgan and had his and his fund’s accounts there and JPM sold investment vehicles tied to his returns. How his main bank never figured out he wasn’t doing any trades is beyond us… Well in 2014 JPM paid a $2.6 billion fine to settle the allegations and nobody in the bank was penalized. This fine represents less than 2 weeks of revenue for the bank.
The other interesting thing is that Jeffrey Epstein was a client of JPM even after he had pled guilty to soliciting prostitution from a minor. The now CEO of JPM’s asset and wealth management business kept on asking Epstein for favors and introductions even after this came to light. In 2003 Epstein was JPM’s biggest client and remained a client until 2013 when Epstein’s cash withdrawals made the bank kick him out. This is the thing with banks, as long as you’re making money for them, they turn a blind eye. If you’re not a large enough client, then any whiff of compliance headache and you’re out (like what happened to Nigel Farage). If you want to read some other stories of banks turning blind eyes because of fees, then read this.
The other problem is that the bank just pays the fine and nobody gets reprimanded. These banks are so large that the fines they have to pay barely hurt their bottom line. the only way to stop these things from happening again is to hold the individuals responsible accountable. After all the fines are paid by the bank, what do the employees care.
The Hottest Trade in Equity Options Is Spreading to Commodities
The funds we manage are in the options space. We manage a purely options based strategy and a strategy that combines options with more traditional assets (stocks, bonds, real estate, etc.). Options have an expiration date. Buying a call option gives you the option to buy an asset at a predetermined price on or before a given date (depending if the option is American or European). Options are traded on an exchange or over the counter (OTC). Options that are exchange traded have to be standardized so that they are fungible. By this we mean that there are set expiration dates, strike prices, etc. The number of expirations has been going up as time passes. Options on the S&P 500 used to only exist for monthly expirations. Therefore, there would only be one expiration per month. As time passed, eventually the CBOE (Chicago Board Options Exchange) listed weekly expirations expiring on Fridays. Then they listed weekly expirations expiring on Mondays and Wednesday. Last year SPX options expiring on Tuesdays and Thursdays were listed. So now we have SPX options that expire every day. This has allowed shorter term strategies to increase their precision and created a whole host of new strategies. Now these options that expire the same day (0DTE) account for more than 40% of all option volume on a daily basis.
The 0DTE frenzy started in equity index options but is slowly moving into other areas of markets. Many stocks now have weekly expiries and commodity markets are starting to list more options. We would guess that eventually stocks will move to daily expiries, or at least Monday/Wednesday/Friday expiries for the most actively traded stocks. In fact it wouldn’t surprise us to see hourly expirations at some point, or options that expire at noon and at the close. More expirations benefits everybody, option exchanges make more money, market makers get to trade more, and traders have more granularity with which to implement their strategies.
Billionaire Sternlicht Sees ‘Category 5 Hurricane’ Spurred by Fed Rate Hikes
We’ve been critical of private REITs for some time. In fact, we wrote about BREIT before it was even in the news and before they restricted withdrawals. The problem with private REITs is that the valuations at which they mark their assets are not market prices (a nice way of saying that they’re made up). The commercial real estate market has seen a drop-off in activity since the Fed started raising rates last year. The chairman of Starwood Capital Group, which manages the Starwood REIT (SREIT), is warning of troubles in the market due to the rate increases. He says not only could real estate funds be impacted but also many banks which also financed the assets these funds hold. In fact, Starwood already defaulted on a $212.5 million mortgage on an Atlanta office tower. Maybe now that he sees a “category 5 hurricane” coming he will have to actually mark his portfolio to more accurate prices.
That’s the problem with private assets, everything seems like it’s going fine until something breaks and you take a huge write down. The benefit of market prices is that they give you a more accurate representation of what is going on. Yes, they may seem more volatile but that is only because there is liquidity. Private assets look like they’re not volatile because you can’t sell, not because the underlying asset’s value isn’t changing. SREIT was up 6.28% in 2022 when a broad REIT ETF was down roughly 26%. We’re 100% sure that if SREIT had to go out and liquidate its assets it would have gotten nowhere near what they said they were worth. Whereas if you had to go out and sell VNQ you could sell for exactly what the price was since the market price reflects what someone is willing to pay for your assets.
Victims want Morgan Stanley to answer for Ponzi scheme
We’re in the money management business, like we’ve written before we manage a couple of investment funds. Something that we’ve faced often is investors preferring to invest with a brand name bank just because they have the brand name. In reality you should invest with someone you trust, if you trust your brand name banker then it’s all good. But you should not invest with a brand name bank just because you are approached by an employee who works at that bank.
Our point here is that “brand name” is not a substitute for due diligence, trust, and oversight. There are employees of brand name banks that still commit crimes and use that brand name to trick their unsuspecting investors. In investment management you have to go with somebody you trust. It’s such a complicated topic that most people don’t understand the intricacies. So if you are invested with someone you don’t particularly trust but the returns are “too good to pass up” then you should get your money out ASAP.
