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Sunday, January 21, 2018

The game RENTEC had with Deutsche Bank on the "basket options" did several things, if the form was not pierced by the IRS to get to the substance of things.

The NY Times has a good explanatory article, here. Not only were short term trades happening, some in millisecond times, in an option account where an affiliate firm "made option basket composition decisions," and not only were the options open over 12 months so that on a close out accounting profits were offered the IRS as long term capital gains at the lower rate than for regular trading profits on short terms; but the things were indecently leveraged, that NYT article stating:

The basket options under scrutiny were structured as accounts that allowed hedge funds to bypass taxes on short-term trades. Barclays and Deutsche Bank used the options to build special accounts for their hedge fund clients in their own names and claimed they owned the assets when it was, in fact, the hedge fund clients that exercised full control of the assets, determining each trade and reaping all the profits, the Senate investigation found.

Hedge funds like Renaissance Technologies would wait just after a year to “exercise the options,” claiming the profits should be taxed at a lower income tax rate for long-term capital gains on assets.

Over the same one-year period, Renaissance Technologies would execute on average 26 million to 39 million trades in stocks and bonds, many of those positions being held for just a few seconds, according to the subcommittee’s findings.

The basket options were also structured to allow hedge funds to borrow greater amounts of money to trade, far exceeding the federal leverage limits for Wall Street firms that are broker-dealers; these limits were first enacted in the 1930s. Hedge funds, which are not regulated as broker-dealers are, borrow money to help amplify their returns.

Under the average brokerage account, investors are allowed to borrow only $1 for every $2 in the account. Within these complicated financial structures, Renaissance Technologies was able to borrow as much as $17 for every $1 in the account.

The hedge fund says that the options in question provided leverage and protection against downside loss and should be taxed at long-term rates rather than short-term rates because they were held for more than a year.

The leverage latitude was as important to the inflation of the bottom line as the "long term" hoax attempt.