Reposted from Bruce Krasting’s blog with his permission.
I wrote about Kashya Hildebrand’s inappropriate FX trades the other day. The story has some new legs today (Bloomberg). The wife of the president of the Swiss National Bank (SNB) has done the one thing she never should have. She talked. Any chance this affair had of falling off the radar screen was lost when she went on Swiss TV.
-8/15/11 Kashya sells CHF 400,000 short against the dollar at USDCHF .7936.
-9/9/11 the SNB devalues the CHF.
-10/4/11 Kashya covers the short and earns an FX profit of CHF 75,000 ($83,000). The return is 16.5% of the amount traded. She did this in just 50 days (120% annualized).
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-November 2011 an employee of Sarasin Bank, Basel steals the information about Kashya’s trades and leaks it to a Swiss politician, Christoph Blocher.
-There is a formal investigation. On Friday night, 12/23/11, the SNB makes a public announcement that the FX transactions have been reviewed and there is nothing improper about them. The timing of the release of information was clearly an effort to bury the story.
-1/3/2012 Kashya goes on TV in what appears to me like a snotty and inappropriate defense of her actions.
“My interest in the dollar purchase was motivated by the fact that it was at a record low and almost ridiculously cheap.”
I think this is bullshit. Yes the dollar was cheap at the time. There was a global panic occurring. To counter-trade the market at precisely the time the CHF was hitting all-time highs takes balls and an extraordinary sense of timing.
Kashya may have committed a fatal error with those words. She teed this up. Now there has to be a follow up. I’ve been trading FX for years. There is no way in hell that Kashya just happened to luck out. There is only one possible exception. If she was a regular trader of the USDCHF, she might be able to justify the impeccable results of the 8/15 trades. But if she can’t demonstrate that she was a repeat “banger” in the FX markets, then the idea that she just happened to think the CHF was “cheap” and was worthy of a spec, falls very, very flat.
It is a fact that 70 to 80 percent of the financial transactions of the Gallery are in dollars. The reason is that the artists come from many different ethnic groups, and that we participate in many art fairs around the world.
Kashya is attempting to argue that her FX trading is directly related to her art gallery business. Oh really? If that were the case, this story would never have made the headlines. If she had purchased a specific painting that was priced in dollars it could be argued that the transaction was in the normal course of her business. Importers hedge their FX exposures all the time. That’s not what happened here.
There was no painting that was being hedged. If there were, Kashya would have shown an invoice long ago. This was an outright speculation on her part. The proof is that she never took delivery of the dollars she bought. When she had a big unrealized gain, she did what any smart spec would do, take the profit.
Some personal color on this. Kashya worked for Moore Capital fifteen years ago. Guess what? During that same period, I was playing hard in the FX markets. Check my Bio. I knew Moore from back then. Louis Bacon was running the show. Moore was then (and still is) on the very top of the list of big hitters in the FX markets. They had deep pockets, great traders and they were wired.
There are no laws on the books (that I know of) regarding insider information and FX trading. Information is the key to success. Information comes in the form of expensive data systems. It also comes the old-fashioned way, word of mouth. That was true in 1995. It’s no different today. Kashya worked in a shop that understood how money was made in FX. You don’t forget these lessons. FX has always been about the money, and how to get more of it.
Here’s my suggestion to Kashya and Philipp Hildebrand, the Swiss media (who are reading this, thanks!) and Christoph Blocher:
Publish the FX trading activity for Kashya Hildebrand for the past 12 months. There are only two possible outcomes:
A) Kashya was a regular FX trader. She bought and sold CHF against other currencies on more than one occasion over the course of a year.
B) The 8/15 speculative transaction was a one-of-a-kind event.
Which one is it? If it is A, then Kashya repeatedly abused her position. She put her husband at risk for conflict of interest considerations. Philipp would have been an ass to let her do any regular trading. If scenario A is proven, then Philipp looks very bad indeed. It would have been extraordinary poor judgment on his part if this were the case.
If it is B, then Kashya is damned. She had to have a very specific reason to do an FX spec. If it’s shown that this was a unique event, then it’s compelling evidence that she acted with specific foreknowledge. She was wired, just like the firm she used to work at was famous for being.
A or B, I think that Kashya’s attempt to defuse this issue has backfired. She has put herself (and her husband) in a difficult corner. She has offered up an excuse for her actions. Now it’s time to reveal some facts. Either way, it will look bad.
The outcome of this is far from certain. If Kashya is either caught in a lie, or shown to be a regular FX trader, it could easily mean the end for Mr. Hildebrand. This affair just makes the SNB look silly. That won’t be tolerated for long.
I do wonder if there are any FX implications attached to all of this. My guess is that if we were to get a surprise new head of the SNB there would be no change to the 1.20 EURCHF peg. At least not right away. But if there is a change at the top at the SNB, I suspect the life span of the peg will be shortened.
We may well have a situation where the market is forced to ask the question:
“Now that the brainchild of the peg is gone, how much is the SNB willing to intervene at 1.20?”
If the market forces this issue, it will have broad consequences. A speculative attack on the CHF would upset all markets. Thanks in advance Kashya!