Banking shares: New Day or False Dawn?
September 9, 2008 3:39 AM   Subscribe

A bottom for banking? Buying or selling shares in a company one manages - insider trading - is legal in The United States, provided the relevant forms are filed with The SEC. This information is then made available to the general public via EDGAR, Sec Form 4, or high level aggregators. Investors scour web sites for such filings, as purchases or sales of a companies shares by insiders are public evidence of managements private opinions regarding the future prospects of the firm they are running.

Even before yesterdays relief rally insider buying in banking shares hit a two decade high. So does this surge in buying indicate the worst is over in banking? When trading its best to pay close attention to a broad range of signals, because sometimes even the insiders get it wrong.
posted by Mutant (23 comments total) 2 users marked this as a favorite
 
Does it differentiate between buyers who spontaneously buy and those who have pre-programmed "When stock X reaches price Y buy" orders?
posted by PenDevil at 4:35 AM on September 9, 2008


purchases or sales of a companies shares by insiders are public evidence of managements private opinions regarding the future prospects of the firm

Or at least public evidence of what management would like you to think are their private opinions regarding the future prospects of the firm.

(Another good tip is: Never get involved in a land war in Asia.)
posted by DU at 4:51 AM on September 9, 2008


Some of this may be smart. You have a sound bank -- you're exposure to the mortgage fiasco is limited, you have a solid capital foundation. Yet, because banks as a whole are getting slaughtered, thanks to the likes of IndyMac/WashMu/Wachoiva/AdNaseum, your stock is very cheap. What should you do?

Part of me says "Hey, make the fuckers bet on their own bank." The problem is they're not betting on the health of the bank, they're betting on the stock price rising.

I know people who bought FNM and FRE last week -- they weren't expecting much, they're betting that, in a few years, it'll be worth more than $3.
posted by eriko at 5:00 AM on September 9, 2008


Or at least public evidence of what management would like you to think are their private opinions regarding the future prospects of the firm.

Exactly. I have a story about a CFO who went to a broker and told his salesman to purchase his bonds. That salesman told another salesman who told another salesman. The CFO purposefully tried to spread the message this his bonds were good (meanwhile, a year later, they're down 20 points and hovering in restructuring zone).

Bloomberg ran a similar story about refiner managers and executives buying their stock earlier this summer, as oil was reaching its peak, because they knew that the bubble would pop, and refiners would make a killing as the price came down. As the next couple of quarters play out, we'll see if this is correct.
posted by SeizeTheDay at 5:16 AM on September 9, 2008


two issues with reading tea leafs based on form4:

- you do not know how long said management employee intends to hold these stocks. if your outlook is five months and his five years, you may very well be screwed. restricted stock can have a minimum hold period but after that all bets are off.

- folks often get very hefty discounts on employee stock programs. I have gotten between 15 and 20% just for buying stock in the companies I worked for. a regular investor does not get these benefits. if the stock falls 5%, the employee is still making a killing while an investor is not.
posted by krautland at 5:36 AM on September 9, 2008


Does it differentiate between buyers who spontaneously buy and those who have pre-programmed "When stock X reaches price Y buy" orders?

I would imagine most of those people would have the good sense to pull their orders in the middle of an economic meltdown.
posted by delmoi at 6:20 AM on September 9, 2008


This is a lot more complex than the post suggests. First, there are limited windows in which trades by officers of a public company are legal.

Second, mere trading by an insider is not what is referred to as insider trading. Basically, insider trading occurs when a trade is made based upon information the insider posesses but the general public does not.
posted by Ironmouth at 6:54 AM on September 9, 2008 [4 favorites]



1. I am regularly surprised how small is the memory and time horizon is for most traders. I don't mean the make quick trades; I mean they can't remember their own thoughts from a year ago. Example: a year ago oil was at $78. If you asked any trader, anywhere, what would happen to China's explosive growth if oil went to $130, everyone would have told you it would come to a halt, and stocks that depend on China growth (e.g. steel) would fall. So why are people surprised when it actually happens?

The same is with inflation. If you asked anyone what would happen to inflation if oil and commodities suddenly plummeted from, say, $150/bl to $90... but still people worry about inflation.

2. Banks (some of them, anyway) are a good buy now as the government put in the floor-- rates come down, banks borrow more cheaply, and their spread increases. You don't have to be an insider to figure that out. What is interesting, however, is how certain these insiders were that Fannie and Freddie were going to get taken over now. They didn't buy in January for a February take over.

I think the takeover was an obvious move (that came way late.) Fannie and Freddie were going to get taken by the government, specifically because a) the economy would/was collapse/ing otherwise; b) someone had to be "punished", and that someone was going to be the shareholders. Otherwise, you have moral hazard.

(Unfortunately many of those shareholders are regular people with pension funds, etc.)

The problem with buying Indymac-- or Bear Stearns-- was timing. If IndyMac were around today, it would also be a strong buy, but somoene had to be thrown to the dogs (moral hazard again.) I guess they weren't in on the conference calls about when the government was going to step in.

And that last sentence is absolutely not an joke.

FYI: the price of oil at the Bear Stearns bailout was the same as the price is now; the price of Bank of America is also the same; Wells Fargo is actually higher; GS is the same, etc. That's what you buy now.
posted by TheLastPsychiatrist at 7:01 AM on September 9, 2008 [3 favorites]


I just want to say that if I still held my 20 LEH puts (bought at $17) and 15 BAC calls (bought at $29) from earlier this month I would be up something like 500% on them -- enough for a two week stay in Tahiti -- this morning.

insert emotive exclamatory expression here

I see that Wamu is NOT particpating in this rally.

IYF isn't looking too healthy this AM, either. SKF is not a bad buy at these levels IMO.

Wamu going down the tubes is excellent news for its main competitors WFC and BAC, but a major system shocker, 10x the footprint of Indymac up the FDIC's ass.

I've thought, since the July lows, that BAC's range would be $25 - 35, which the market has confirmed in the two months since. $50 is my 2 year target.

I'm neutral on WFC. They've got a good retail footprint and will pull through.

Most everybody else has sinned too much 2003-2006 for me to have any confidence in their ability to recover. I put C (20%), MS (15%), GS (10%), and especially LEH (50%) in this category. The percentages are my expectation of the company not seeing 2010 in its present form.

I come to this pessimism with the expectation that the Level 3 assets on these guys' books is going to prove worthless enough to take them out when the margin calls come.

As for the macro outlook, 2008 is 80% 1990 in my opinion, but a 20% chance of being 1929. Anybody seeing blue skies ahead has several screws loose in their noggin.
posted by troy at 7:23 AM on September 9, 2008 [1 favorite]


they weren't expecting much, they're betting that, in a few years, it'll be worth more than $3

This is not a bad bet (at current prices), actually, as long as the Treasury is keeping its promise of keeping them going concerns by having the Treasury funnel tens of billions of dollars into them!

The main concern is Hank's statement that they're going to go into run-off mode starting in 2010, but I discount this possibility since the FHA alone can't pull this train.
posted by troy at 7:30 AM on September 9, 2008


Bottoms are dangerous things to call, but with the amount of our money the government is funneling into these entities, it wouldn't surprise me all that much if they got better, at least for awhile.
posted by Malor at 8:32 AM on September 9, 2008


Bottoms are dangerous things to call, but with the amount of our money the government is funneling into these entities, it wouldn't surprise me all that much if they got better, at least for awhile.

Well, not as of noon EST. (Darn housing numbers!)

Question becomes, how many other bailouts does the gummint imagine it can finance before there's no money left? Is Lehman next? Anyone care to put a wager on that? (Nice one, Troy!)
posted by IndigoJones at 9:09 AM on September 9, 2008


I had $172 in my trading account left so I bought 200 of FRE @ .81. Up 7%!
posted by troy at 10:01 AM on September 9, 2008


In terms of the banks mentioned upthread, Lehman is not looking too good at the moment, as the premium on their Credit Default Swaps widened dramatically by 125bps in one day alone yesterday.

Not sure about the others and I won't be near a Bloomberg again until tomorrow AM - unless someone else has already, I'll check and post the quotes.

Of course the CDS quote alone doesn't tell the complete story but the trend certainly is indicative of the degree of confidence the protection seller has that the entity in question will not default on its obligations. In this case, much less confidence.

Sidenote: While a Credit Default Swap spread itself is not a Probability of Default, there are ways to take a CDS spread and convert it to a fairly accurate PD, which itself can be refined further if there is publicly traded equity available.

At least one of the ratings agencies just started fielding models that do just this. I haven't seen any quantitative data on the performance of these models (typically measured using a technique known as Receiver Operating Characteristic, or ROC) compared to earlier generations of tools, but intuitively they should be better simply because they are making use of information from at least three distinct markets (i.e., Credit, Credit Default Swap and Equity) as well as structural data from the balance sheets.

In other news, CDS spreads on The United State's own debt widened out to a record today; no surprise as the market had previously warned about a Fannie & Freddie rescue when swap spreads on Treasuries widened last July to a then record on rumours alone.

As I mentioned before, a sovereign downgrade of the United States isn't out of the question and probably would be a good thing.

Hope you folks are taking notes, 'cause these are historic times.
posted by Mutant at 10:33 AM on September 9, 2008 [1 favorite]


Mutant, the people that SHOULD be taking notes generally never look at them again after the immediate trouble has passed, no?
posted by spicynuts at 11:06 AM on September 9, 2008


My appreciation of the others comes from this screendump from this Mr Mortgage post.
posted by troy at 11:26 AM on September 9, 2008


I could be wrong, but I seem to remember that Edgar's doesn't list which shares are option buyouts, or puts or calls, or any of that other stuff that happens with insider trading. For instance, sometimes sales and purchases happen not *because* of anything happening in the market, but because it's the only time the inside stockholders can buy or dump their holdings because of quiet times and other regulations.
posted by dejah420 at 12:04 PM on September 9, 2008


Also...meant to clarify: when the phrase "insider trading" is usually used, it implies that the insiders are trading on information withheld from the public. Employees who are trading options, or buying/selling based on performance, bonuses, etc., are not performing "insider trading".

My first sentence should have read ...anything that happens when employees trade on corporation stock, and not "insider trading". That was sloppy sentence construction on my part.

Also, if anyone interested in the financial markets has not yet perused Mutant's profile page, you are missing much, much good info. He's like the Blue God of Finance.
posted by dejah420 at 12:24 PM on September 9, 2008


Mr Market sez: False Dawn.
posted by troy at 1:22 PM on September 9, 2008


While a Credit Default Swap spread itself is not a Probability of Default, there are ways to take a CDS spread and convert it to a fairly accurate PD, which itself can be refined further if there is publicly traded equity available.

Heh. You still need a recovery rate, don't you? And if so, I suspect the old rule of thumb (stick a finger in the wind and call it 40%) might not apply.
posted by Kwantsar at 3:02 PM on September 9, 2008


I wonder what market effect Mutant's posts have on the market?
posted by rodgerd at 7:45 PM on September 9, 2008


Kwantsar -- "You still need a recovery rate, don't you?"

Well there is a recovery rate embedded in the price of the credit default swap, but you'd also need ratings, of both the entity as well as the any instruments referenced, a complete yield curve, data from the equity market such as volatility of the company's shares, and some structural data from the balance sheet (all related to determining the firm's leverage or general level of indebtedness).


"And if so, I suspect the old rule of thumb (stick a finger in the wind and call it 40%) might not apply."

Uhhhm - "stick a finger in the wind" is a MeFi myth - the instruments aren't priced that way at all. Deals that assume 40% default do so for solid, empirical reasons - e.g., backward looking, historical default rates.

The only free cite I can find is by Standard and Poors, and references Synthetic CDOs as of Q4 2006 - specifically, "In rated synthetic CDOs, the cumulative average recovery rate on reference obligors triggering credit events from the beginning of 2000 has been around 38%. ".

That 40% isn't pulled from the air. Nobody at the banks would allow such an assumption to go unchallenged when the model was tested, as the regulators certainly would question the figure.


rodgerd -- "I wonder what market effect Mutant's posts have on the market?"

Yeh, well if yesterday performance is any indication, not a positive effect at all. Ah well, it wasn't clear if yesterdays bounce up was sustainable anyhow. What the hell - September is generally a lousy month for stocks for lots of reasons (e.g., mutual fund managers cleaning up their books before reporting end of quarter results). Even without the credit crunch, we see lots of down days in September.


"Not sure about the others and I won't be near a Bloomberg again until tomorrow AM - unless someone else has already, I'll check and post the quotes."

I couldn't duplicate Mr Mortgage's screen but I did get some CDS spread quotes off my Bloomberg terminal this AM. Posted so folks like troy and other interested parties can see how things are being quoted in the credit markets.

I've collected indicative CDS quotes for the cost of protecting 1Y debt issued by US financial institutions here.

I've collected indicative CDS quotes for the cost of protecting 10Y debt issued by UK banks here.
posted by Mutant at 10:14 AM on September 10, 2008


^ thanks, that reminded me not to put one month of savings somewhere other than my online HSBC account.
posted by troy at 1:23 PM on September 11, 2008


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