Wednesday, December 14, 2005

Financial Omerta

Where I grew up, several families lived at the end of the street who were reputed to be "mafiosi". They were said to launder money through the local pizzeria they were rumored to own. We would drive by and see them playing bocce on their front lawn - damning evidence for a naive eight year old. And so my innocent mind started thinking about "Fat Tony", "Big Nicky", the Godfather, honor, and their renowned code of silence, "omerta". I took comfort in the fact that while their code of Omerta made them virtually impenetrable, their honor made it a crime to harm innocent women and children.

In a related subject, most have read and commented upon Mizuho's "J-Comm error" where, upon initial listing of the shares, a now-shamed execution trader entered an incorrect order that offered to electronically sell several times more shares than were in issue, whereafter the more astute brokers/traders, with the deepest pockets scooped up the shares. In another situation, this would have been termed "a perfect corner" - the trading equivalent of "checkmate". Subsequently, Mizuho's shares themselves were violently sold off until because of the potential fear of an open-ended (or at least half billion dollar) liablity. Then they rallied as it was said to be the Exchaange's problem, and then Fujitsu's problem (who responsnible for the stock exchange's computers & software). Either way, particpants saw it in terms of black and white, winners and losers while ignoring the spirit of the rules and the intention of the game itself.

People forgot that "a corner" is against the spirit of the exchange, and illegal. And they forgot that an obvious and genuine mistake of this magnitude is...well... an obvious and genuine mistake. This was pit against honor, word and reputation, that are (or used to be) nearly everything in banking and financial markets. Commentators offered their amazement that it could happen and gawked over the potential profits of the successful bidders (more than 3 years worth of ordinary trading profits for UBS, it was reported!!) but were wholly silent upon the ethics.

But today the "omerta" was broken (at least by one), ironically by UBS the firm who got nailed by an identical error following the IPO of Japan's largest advertising agency, Dent-su. They announced that they had no intention of keep "the profits" from the transaction. Others profiting wildly, Nikko-Citigroup (the underwriter, no less!!) Morgan Stanley, Lehman Bros. and CSFB have, as of this moment, "no comment".

Why it was UBS iis uncertain. Perhaps because they profited most. Perhaps because there is residual guilt from WWII, and their illustrious record highlighted by the Volcker report. Why it took so long, I do not know. One would suspect greed or avarice, driven the same drunken euphoria that one might encounter if "a few hundred million dollars" fell at one's feet off the back of the Brinksmat truck. It might take a short while to come to one's senses that it is WRONG TO KEEP THE MONEY. That it's SOMEONE ELSE'S MONEY. That money doesn't, so to speak, grow on trees (though it seems that way following the great American debasement of the dollar over the last two decades).

A similar error (and subsequent trabsactions) in the shares of Corinthian Colleges (ticker COCO) in later 2003, that resulted in a far smaller loss, and that was far less obvious of "an error" was "busted" by the exchange in but a few hours. Is this because the US exchange has less "honor"? Or less "integrity"? In my Nov05 posting "Responsibility 101", I highlight some of the cultural aspects that suggest things are indeed different between the US and Japan, with the US distinctly erring on the side of utilitarianism and self-interest. While no one is suggesting that exchange authorities too-frequently exercise role-playing of "the Almighty", there is clearly a time and place to wield and exercise such over-riding power. And in a modernity where participants cannot apparently distinguish between right and wrong by their own volition, it is ever-more incumbent upon the authorities to take decisive action.

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