|
PureBytes Links
Trading Reference Links
|
The Treasury bond-trading investigation has drawn in one of Wall Street's
giants.
Goldman Sachs has confirmed to authorities that it was among the companies
tipped off by an industry consultant to the surprise announcement that the
Treasury Department was about to stop selling the 30-year bond. The
information, which was released by the consultant before a
government-imposed embargo, may have helped the firm decide its trading
strategy for Treasury bonds before the news was officially announced on Oct.
31, according to people familiar with the matter.
It isn't known whether Goldman made any profit through its access to the
information. Nor is it clear that trading on such information violates any
existing securities laws.
But the fact that Goldman, one of the most prestigious securities firms on
Wall Street, had access to the leaked information and may have used it as
part of its trading strategy suggests that the unauthorized information was
more widely shared throughout the bond market than was initially known, and
could lead to the most wide-ranging investigation of the bond business in
years.
The Treasury's announcement Oct. 31 that it would kill the long bond sparked
the biggest bond-market rally in 14 years, with bond prices starting to jump
well before the news was made public at 10 a.m. The department last week
determined that Pete Davis, a longtime industry consultant, had attended a 9
a.m. briefing that day for the press in which Treasury officials outlined
their plans. Though the information was embargoed for 10 a.m., Mr. Davis
acknowledges that he tipped off some of his clients to the news before then,
though he said he informed them of the government embargo.
Mr. Davis has named only two of the clients who received the information,
neither of whom is among the top tier of Wall Street bond-trading
activities. That changes with the involvement now of Goldman, which has in
recent days disclosed to investigators that it is a client of Mr. Davis's
and that it also received a call from him on the morning of Oct. 31 with
news of the Treasury move.
Last Monday, after reading news reports about the leak, Goldman contacted
the Securities and Exchange Commission and the Treasury Department to
discuss the matter. The SEC has launched an inquiry into the firm's
activities, as well as those of other firms, and Goldman is sharing trading
and phone records with the investigators.
"When we became aware of this situation, we contacted the appropriate
authorities to inform them of Mr. Davis' call and provide them with any and
all information that might be of assistance to them in connection with any
review they wished to conduct," said a Goldman statement. "We do not believe
we have engaged in any wrongful behavior."
While Goldman is the biggest firm to acknowledge receiving the tip ahead of
the Treasury's announcement, industry experts say other firms could yet be
caught up in the fallout. The SEC has confirmed that it is in the middle of
a probe into the activities of several bond-trading firms that received news
of the Treasury's move from Mr. Davis before the official announcement. The
identities of the other firms aren't known, nor is it clear whether they
traded on the information.
A spokesman for the SEC didn't return telephone calls seeking comment.
Before Treasury announced its plans on Oct. 31, Goldman's various Treasury
trading desks held positions that were somewhat bearish on the 30-year bond
and long-term Treasurys in general, according to traders at other firms who
traded with Goldman. In effect, the firm was betting that the price of the
30-year bond would fall.
But that stance changed that morning, according to these traders, after
Goldman received a call from Mr. Davis shortly after the news conference
ended at 9:30 a.m., telling the firm that the 30-year bond would be
discontinued. According to traders in the market, Goldman stepped up its
trading after 9:30 a.m., buying 30-year bonds and adding to positions in the
futures market. The traders say the firm's transactions took place before
the Treasury Department inadvertently put the announcement on its own Web
site prematurely at around 9:49 a.m.
Goldman didn't receive its call from Mr. Davis until after 9:30 that
morning. That means the firm had no more than 19 minutes to trade on the
news before it was disclosed on the Treasury Web site, raising questions in
some quarters about how extensive the firm's trading activity could have
been. And there may be other reasons Goldman was buying bonds.
Mr. Davis has said that he informed those clients whom he called before the
official announcement that the information he was passing on was to be
embargoed until the department's official announcement at 10 a.m. If Goldman
wasn't told that the information it was receiving was embargoed, and that
the firm wasn't supposed to be trading on it, there may not have been any
insider trading committed, securities lawyers say. Regulators could argue,
however, that it was well known in the bond market that the news embargo
would last until 10 a.m. And even if the embargo was detailed by Mr. Davis,
it isn't clear if trading on embargoed information from Treasury falls under
the category of insider trading.
What is clear is that bond prices jumped well before the 10 a.m. official
announcement, and even before the Web-site posting, amid a flurry of
activity. From 9:30 a.m. -- about when the news conference ended -- to the
Web-site posting, the 30-year bond rose about one-quarter of a point, or
$2.50 for each $1,000 face value, after trading from 9 a.m. to 9:30 a.m.
within a much narrower range of about one-eighth of a point. By 10 a.m., the
price on the long bond rose by more than 1 1/2 points, or $15 for each
$1,000 face value, to 104.
Since the morning when the department's announcement was made, that spurt of
trading before the announcement has raised eyebrows on Wall Street.
The Treasury's 10 a.m. announcement came as part of its regular quarterly
statement detailing how many bonds it planned to sell in the coming quarter.
Wall Street bond traders usually do little trading for their own accounts
before such an important announcement, which sometimes affects prices. So
when activity picked up on that morning, and prices moved higher in the hour
or so before the official announcement, it raised suspicions on trading
desks.
"There was strong activity buying the bond, well before the leak on the
[Treasury's] Web site," says Bill King, a strategist at M. Ramsey King
Securities in Chicago. "No one understood what was going on."
By the end of the day, the 30-year Treasury soared, helping traders across
Wall Street make -- and lose -- hundreds of millions of dollars. The price
on the 30-year bond jumped 5 9/32 points, or $52.81 for a bond with $1,000
face value, to 107 21/32, the biggest move for the bond since 1987 and about
three times the previous biggest jump this year. The move sent the bond's
yield, which moves in the opposite direction, to 4.88% from 5.22% on
Tuesday, the lowest level in three years.
Until Goldman's acknowledgment, only two other firms had acknowledged they
received word from Mr. Davis of the Treasury news before it was announced,
Stone & McCarthy Associates, a bond-research firm, and Capra Asset
Management Inc., a hedge fund. Both firms have said they didn't do any
trading on the morning before the Treasury announcement, despite the tip
from Mr. Davis.
To unsubscribe from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxxxxxx
Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
|