Tuesday, July 28, 2015


Ken Griffin is among the richest guys in the country.  From friends who have worked for him, I understand he is a really nice guy.  He is obviously a really smart guy.  So with all of these things going for him, I have been trying to figure out what precipitated the article in the WSJ yesterday on the subject of liquidity in the marketplace.

In a nutshell, what Mr. Griffin in arguing is that the concern is pretty much made up by banks who having been once the Kings of the Hill in the Treasury market are now forced to compete on a newly-level playing field as a result of regulation, notably Dodd/Frank.  Level playing field?  Rubbish.  The pendulum has swung far the other way; it is now banks who have seen their competitiveness removed as a result of the new regulations.  The capital requirement for a T-Bill is the same as a loan to ME!  Deposits have cost attached!  Solution: no inventory, no loans.  Think Citadel worries about such mundane matters?

Well, so what?  If there are replacements, why not?  And as he says, non-bank participants are the majority of participants in the on-the-run Treasury market.  He points to the October crash of 2014 as proof of this fact and the liquidity that was provided.  In fact, he goes so far as to say that Banks stopped making markets whilst non-banks continued to do so with even tighter spreads as the day progressed.

Now it has been a long time since I was involved in this and I admit that my days were like those of John Henry hammerin' away knowing damn well that the steam engine of today's markets, the computer, would probably win in the end.  Mr. Griffin would probable write a program for life and have a computer run it if he could and in some cases it might do a better job.  But things have NOT changed so much that you can convince me that what the bright guys like to call a "10-Sigma Event" that took place on October 15, 2014 occurred despite a surfeit of liquidity provided by Mr. Griffin and his colleagues.  You can't do that especially when Mad Max tells me there were no damn bids and not a soul with whom I have spoken has told me much different.  And you sure can't tell me that when as we all know the boys and girls at the Fed were shaking.  Nope, not on.

So why an article like this.  Well, folks who know him say he was just having a little fun at the banks' expense.  Just a laugh among the boys.  Not quite, say I.  Unfortunately, we live in a world where a certain genius is assigned to people who have a lot of money--which Mr. Griffin certainly does--and heads are nodded sagely at every pronouncement of the Anointed Ones.  I'm not speaking out of jealousy, it's just the way things are these days.

If you can go back far enough in your memory I can tell tales of those "vast pools of liquidity" represented by the OPEC States that, when tapped, would provide unimagined benefit to the entire world.  Or the almost giddy pronouncements of the benefits of the "new sources of market liquidity" from Messrs. Greenspan and Bernanke in the late nineties and 2000-on.  Now there are a number of us who can tell you about those things and some lessons that might be learned (don't take Saudi money and "recycle it" by lending to Latin America or whence cometh the liquidity for the liquidity providers), but when Ken Griffin speaks nothing else is heard.  Nothing has changed, really it hasn't.  The oldest line in the intelligence business is "who spies on the spies?"  In the financial business it remains "who provides liquidity to the suppliers of liquidity?"   May I humbly suggest to Mr. Griffin that this is not a subject with which to have a bit of fun with the banks...certainly not on the op-ed page of the leading financial publication in the United States.  For people who didn't understand what they were doing while they were writing legislation will take it as a sign that what they did was correct...it wasn't.  They will also forget that there are firms out there with enormous exposure in not fully understood products (are you happy with trillion-dollar positions in ETFs?) who essentially have no supervisory body looking over their shoulder and as such are NOT, by definition, too big to fail...until they do.  One must ask to whom at that point does one turn.  It used to be the banks:  it no longer is.

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