Daily Archives: February 1, 2008

JÈrÙme Kerviel channels Tom Cruise

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tom-cruise-acting%20crazy.jpgIn this clever Financial Times op-ed, John Gapper lucidly explains why the business world will always be dealing with risk-takers such as JÈrÙme Kerviel, the alleged ìrogue traderî at SociÈtÈ GÈnÈrale whose trades are responsible for the $7 billion plus hit that the bank took earlier this month.
According to Gapper, it’s because Kerviel went crazy like actor Tom Cruise, except there was a method to Kerviel’s madness. Although Kerviel’s trades were bizarre and risky, they had a certain crazy logic because traders have big incentives to risk everything for stardom:

In recent days we have witnessed two men taking leave of their senses. In one case, however, there was method to the madness.
The first is Tom Cruise, the Hollywood film star and devoted Scientologist. In a clip made for members of the cult-like religious movement, Mr Cruise can be seen laughing manically and claiming special powers to help the victims of road traffic accidents because of his faith. He seems utterly deluded.
The second is JÈrÙme Kerviel, the ìrogue traderî at SociÈtÈ GÈnÈrale accused of losing his bank Ä4.9bn. Mr Kerviel did not make money for himself by his trading. Instead, as Jean-Claude Marin, the Paris prosecutor, said this week: ìHe wanted to show that he was worth as much as the others around him. He truly believed that … everyone would recognize his financial genius.î
Crazy, right? That is what Mr Kervielís former bosses, most of whom are either out of a job already or soon will be, think. Rather than sticking to his assigned role as a lowly arbitrage trader, Mr Kerviel tried to become a star. ìI think that he is completely mad,î says one banker.
Well, not completely. Actually, there is a good argument that Mr Kerviel acted in a financially rational manner, although he broke both his contract and ñ allegedly ñ the law. He had as firm a grasp of superstar economics as Mr Cruise, one of the worldís best-paid film actors.
The basic principle of superstar economics, which applies to both entertainment and investment banking, is that a few people take most of the rewards. If you can establish yourself as a top talent either on screen or on a trading floor, you gain status and get rich.

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The never-ending City of Houston corruption probe

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City%2Bof%2BHouston%2BSeal.gif.pngIt’s been a couple of years since I last blogged on it, and it’s been over two and a half years since the new defendants were first mentioned as potential targets in the probe, but the feds finally got around last week to indicting Andrew Schatte and Michael Surface, the principals in the Keystone Group who have made a living over the past decade or so managing big construction projects financed by the City of Houston and other municipalities. The press release on the indictment is here and a copy of the indictment is here. For unknown reasons, the U.S. District Clerk’s office did not post the indictment publicly until yesterday, which is about as long as it took for the Chronicle’s editorial staff to comment on the indictment.
The indictment alleges that Schatte and Surface bribed former City of Houston building services director Monique McGilbra to gain favor on a couple of big City of Housotn building projects for which they were competing. The feds allege that the bribes were both direct (not so big) and indirect (much larger), the latter of which were allegedly funneled through Garland Hardeman, McGilbra’s former boyfriend who Schatte and Surface hired to work with them in obtaining the contracts. McGilbra, who copped a plea back in 2005, will be singing like a canary for the prosecution in this case.
Not enough is known about Schatte and Surface’s defense strategy at this point to know what will be the most important issues in the case. However, one has to wonder why the U.S. Attorneys’ office — which has been investigating corruption in the City of Houston administration of former Mayor Lee P. Brown now for six years — waited for over two and a half years after McGilbra had fingered Schatte and Surface to bring the charges against the two? Similarly, when did the feds notify Schatte and Surface that they were targets of a criminal probe? If it was some time ago (as it would appear), then why was Surface serving on the Harris County Sports & Convention Corp board for the past two years while being the target of a federal criminal probe?
The feds need to wrap this matter up.

Protesting the absolute priority rule while wintering in Houston

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totem%20pole%20013108.JPGThis Tom Fowler/Chronicle article reports on a retired commercial painter from Ohio is engaging in a rather novel protest of the absolute priority rule, the bankruptcy principle that prevents shareholders from receiving any value under a bankruptcy plan unless creditors either are paid in full or agree that the shareholders can receive something:

Calpine Corp.’s emergence from bankruptcy protection in the coming days will end a tough chapter in the history of Texas’ No. 3 power producer, but don’t expect applause from shareholder Robert Strouse.
The retired commercial painter from Ohio likely will continue his vigil in front of the company’s downtown Houston offices where he’s been protesting the bankruptcy plan for the past two weeks.
“They’d like me to go away, but I’m going to hang on as long as I can,” said Strouse, 62.
Strouse claims the company misled him about the price he could expect for his stock when Calpine emerges from bankruptcy ó a charge the company denies. [. . .]
Strouse said his quarrel with Calpine began last month after a phone conversation with an investor relations official. He said he was told his 5,000 shares probably would be valued at about $1.60 each under the company’s reorganization plan. That’s a far cry from the $5.12 each he paid for them in March 2004, but better than nothing, he figured, so he voted in favor of the plan.
The plan that came out of the bankruptcy court in December, however, wasn’t what he expected. It will cancel outstanding shares of common stock like his and replace them with warrants ó the right to purchase new Calpine stock ó but at a price likely higher than that at which the stock will begin trading.
“They lied to me, plain and simple,” Strouse said.

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