Matt Levine

Posts by Matt Levine

  • 15 Mar 2013 at 3:27 PM

SAC Puts Ten Days Of Insider Trading Behind It

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So Mathew Martoma: pretty bad investment for SAC, no? He “was unable to generate … winning trades or outsized returns in 2009 and 2010, and did not receive a bonus in either of those years. In a 2010 email suggesting that Martoma’s employment be terminated, an [SAC] officer stated that Martoma had been a ‘one trick pony with Elan.’” Now we know what the trick was – it was insider trading! – and it looked like a good one in 2008 anyway, making SAC some money on the way up, saving it $276 million by selling out just before Elan announced negative drug trial results, and earning Martoma $9.3 million in what turned out to be his last bonus at SAC.

The trick looks less good today: Read more »

  • 15 Mar 2013 at 11:46 AM

Senate Subcommittee Feasting On Whale Today

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When I got the Senate Permanent Subcommittee on Investigations report on the London Whale last night, I did what any sensible human would do: I ctrl-F’ed for my name and the names of my friends and enemies, gloated briefly, and then set to work rationalizing not reading the rest of it. After all, it’s ridiculous for the Senate to investigate a basically legitimate trade that, though it lost some money, did nothing to destabilize JPMorgan or the financial system as a whole. And we’ve heard all the important Whale stuff before, including in JPMorgan’s own Whale autopsy, and even then it was old news.

But then I started skimming the executive summary and after underlining every sentence in the first ten pages I figured I’d have to give it a closer look. It’s an amazing, horrifying read.

What was the Whale up to? I don’t think you’ll get a better explanation than this, from a January 2012 presentation by the Whale himself, Bruno Iksil (page 74):

Mr. Iksil’s presentation then proposed executing “the trades that make sense.” Specifically, it proposed:

“The trades that make sense: Read more »

Supercharged IPOs: Like Regular IPOs, But Slower

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Lynnley Browning has an interesting article in DealBook about “supercharged IPOs” today. The gist is that some private equity portfolio companies go public, but keep in place agreements requiring them to pay over 85% of certain tax benefits that they receive to their former IPO owners. This, or so the argument goes, is both unfairsies – why do private equity firms get that money rather than the current shareholders? – and also, y’know, opaque secretive financial engineering etc. Viz.:

Now, buyout specialists are increasingly collecting continuing payouts from their former portfolio companies. The strategy, known as an income tax receivable agreement, has been quietly employed in dozens of recent offerings backed by private equity …

While relatively rare, the strategy, referred to as a supercharged I.P.O., has proved to be controversial. To some tax experts, the technique amounts to financial engineering, depriving the companies of cash. Berry Plastics, for example, has to make payments to its one-time private equity owners, Apollo Global Management and Graham Partners, through 2016.

“It drains money out of the company that could be used for purposes that benefit all the shareholders,” said Robert Willens, a corporate tax and accounting expert in New York who coined the term “supercharged I.P.O.” …

Another potential issue is that sophisticated investors do not necessarily understand the deals, either. The agreements typically warrant just a few paragraphs in a company’s I.P.O. filings.

So that last part, meh. The prospectus for Berry Plastics – the main example DealBook cites – describes its income tax receivable agreement in several places and pretty clearly. It explains what’s going on – “we’re funneling 85% of our tax savings from current NOLs to our pre-IPO shareholders” – and even gives some numbers, estimating that the payments will total $310 to $350 million and mostly be paid by 2016.1 It’s not really all that tricky. Read more »

  • 14 Mar 2013 at 12:03 PM

Detroit And Its Banks Both Would Prefer To Forget All About Those Interest Rate Swaps

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Here’s a Bloomberg article about how banks made money by doing interest rate swaps with Detroit, and now Detroit is sad, because like a lot of municipalities Detroit swapped its floating rate bonds to fixed to hedge the risk of rates going up, and rates went down, and now the PV of Detroit’s swap liabilities is like $350mm, which is big, and that’s sort of that. I’m generally unmoved by the notion that municipalities should be able to get out of swaps that move against them for free, and while I’m sure there’s some nefarious record of mis-selling and fee-inflating in here somewhere, which would justify you getting all mad at Detroit’s banks, Bloomberg has not dug it up. The evidence so far is “rates went down,” so whatever.

Still this a pretty interesting story. The normal posture of these swaps cases is:

  • City has floating-rate bonds and swaps to fixed.
  • Rates go down but city is still effectively paying high fixed rate.
  • City says “WTF, why don’t we stop doing this?”
  • City goes to bank and says “remember that swap? never mind”

    • ?

  • Bank says “we’d be happy to tear up the swap, just pay us a $400 million termination fee.”
  • City freaks out, calls press, etc., shouts about windfalls, etc.1

But Detroit is different! Detroit, to its great credit, doesn’t want to tear up its swaps. The banks do. But they’re not exactly pushing it: Read more »

Judge Decides LBO Boom Could Have Used A Few More Bidding Wars

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The antitrust lawsuit against all the big private equity firms, accusing them of colluding with each other to drive down prices on LBOs in the 2003-2007 boom, was always a bit of a puzzler. On the one hand, there were lots of emails between private equity firms that they’d probably like back, to the effect of “hey thanks for not bidding on my last deal, hope you enjoy my not bidding on your next deal!” On the other hand, the lawsuit was sort of a mess, full of hazy accusations, unsupported conspiracy claims, and the sort of unfalsifiable tin-hattery that sees occasional fierce bidding wars between private equity firms as just a cunning cover-up of their conspiracy not to bid against each other.

I blog for a living, such as it is, so sometimes I would complain about that confusion, but Edward F. Harrington is a federal judge for a living so he gets to just fix it:

Plaintiffs persistent hesitance to narrow their claim to something cognizable and supported by the evidence has made this matter unnecessarily complex and nearly warranted its dismissal. Nevertheless, the Court shall allow the Plaintiffs to proceed solely on this more narrowly defined overarching conspiracy because the Plaintiffs included allegations that Defendants did not “jump” each other’s proprietary deals in the Fifth Amended Complaint and argued in response to the present motions that the evidence supported these allegations. Furthermore, the Court concludes that a more limited overarching conspiracy to refrain from “jumping” each other’s proprietary deals constitutes “a continuing agreement, understanding, and conspiracy in restraint of trade to allocate the market for and artificially fix, maintain, or stabilize prices of securities in club LBOs” ….

And so he ruled today on a summary judgment motion, getting rid of most of the crackpottery but letting the plaintiffs go forward on the claim that the private equity firms had an agreement not to jump each others’ deals after they’d already been signed. Read more »

  • 13 Mar 2013 at 3:53 PM

Guy Who’s Short Herbalife Says Guy Who’s Long Herbalife Saying Guy Who’s Short Herbalife Saying Herbalife Is A Fraud Is A Fraud Is A Fraud

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One day Herbalife will either be put out of business by consumer-protection regulators or it won’t. If it is then Bill Ackman will make a lot of money and Carl Icahn will lose a lot of money, and if it isn’t Ackman will lose a lot of money and Icahn will make a lot of money, and in the meantime everyone will shout that everybody else should be investigated.

That’s proceeding apace. Ackman yesterday:

In a statement late Tuesday, Pershing Square Capital Management’s Ackman said that he was pleased that the NCL was requesting an FTC investigation and believes it will show that the company is a pyramid scheme.

Herbalife today:

We regret that the National Consumers League has permitted itself to be the mechanism by which Pershing Square continues its attack on Herbalife. If anything, it is Pershing Square that should be investigated by appropriate authorities. Its actions are motivated by a reckless $1 billion bet against the company based on knowingly false statements about Herbalife.

Carl Icahn, whose Herbalife position keeps growing, has also been known to make some investigate-Ackman noises.

Now Herbalife may or may not be a pyramid scheme but I’ve always thought that demands to investigate short sellers are unfair and one-sided. People who say mean things about stocks they’re short are always accused of manipulation. People who say nice things about stocks they’re long – which happens all the time – are rarely accused of market manipulation.1

But not never! I assume Daniel Ravicher is a little nuts but still, I like his style: Read more »

Carlyle Will Now Manage Your Spare Change For You, Basically

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“Hedge funds and private equity funds are secretive pools of capital blah blah blah,” people always say, and there’s some truth to that. But it’s partly true partly because a certain discretion is required by law. Banging on publicly about how awesome your hedge fund is could be taken as a “general solicitation” for investors, which was (and still is!) verboten, though nobody at CNBC takes that risk particularly seriously. But now that’s changing, sort of, sometime, with the JOBS Act, which will eventually allow hedge funds and private equity funds to advertise to the many though still only sell to the few.

Carlyle Group is now selling to the slightly-more-few via a Central Park Advisers feeder fund called CPG Carlyle Private Equity Fund, with a minimum of just $50,000. In keeping with no-general-solicitation rules, the Confidential Memorandum describing the CPGCPEF “is intended solely for the use of the person to whom it has been delivered for the purpose of evaluating a possible investment by the recipient in the Units of the Fund described herein, and is not to be reproduced or distributed to any other persons,” but it is also filed with the SEC. It’s super secret! It’s only available to anyone with a computer!

The memo, and today’s Journal article about the Central Park fund, are fascinating reading. But also so, so sad. Here’s the Journal: Read more »

  • 12 Mar 2013 at 7:08 PM

Hank Greenberg Somehow Encouraged By AIG’s Decision Not To Sue The Government

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Hank Greenberg: still at it! My lord. Remember when AIG was going to sue the government along with him, and everyone freaked out, and then it didn’t, and everyone was all “whew, glad that’s over”? Hahaha yeah. Not over.

Greenberg filed his amended complaint in his lawsuit against the government today, and in addition to sort of doubling down on his damages claim,1 he makes a whole lot of hay out of the fact that when he asked AIG to join his lawsuit, people made fun of him. Also I guess some other stuff:

The Government also threatened the AIG Board with the purpose and effect of intimidating AIG and its directors into acting to halt this litigation. The United States indicated it would wage a negative public relations campaign against AIG and its directors, terminate any cooperative relationship with AIG, and heavily scrutinize AIG’s SEC, tax, and other filings from the 2008 to 2010 period when Defendant controlled AIG.

Government officials mounted a campaign, including in the days immediately preceding the Board meeting to consider Plaintiff’s demand, to intimidate the AIG Board that condemned the AIG Board for even considering, much less accepting, the demand. …

As a result of the various factors that had compromised the independence and due care of the demand process, the AIG Board did not take the several weeks it had stated to this Court it would take to make a considered decision following the presentations to it on January 9, 2013, but rather rejected the demand the same day, less than three hours after those presentations ended. The AIG Board had in fact made its decision to reject Starr’s demand even before the presentations were made.

We talked about this when it happened, and I pointed out that this stuff matters.2 Greenberg is mostly – not entirely but mostly – suing on behalf of AIG. In particular, the extra $32 billion that he found in the lawsuit’s couch cushions this time around is entirely AIG’s claim: the shareholders never had that money; the company did. Read more »

  • 12 Mar 2013 at 2:06 PM

Chesapeake Forgot To Call Some Bonds

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Chesapeake Energy has had lots of scandals over the last year or so, but now they’re embroiled in a new one that is perhaps their most damaging yet. No, I’m kidding, it’s totally trivial, but in my capital-markets-dork mind it’s kind of funny, so now I’m going to talk about it and you’re not going to listen, probably, if you know what’s good for you.

Basically: Chesapeake has some bonds that they wanted to call, and they forgot to call them, and now it’s probably but not certainly too late, and they’re suing to make sure. This is a difficulty of corporate personhood: when I do something dumb, I just get real quiet and hope no one notices, but when a company does something dumb, the particular human who did the dumb thing gets fired or yelled at or whatever, while other particular humans go around demanding a do-over.

The bonds are Chesapeake’s $1.3 billion of 6.775% notes due 2019, issued in February 2012. According to the prospectus, the bonds are:

  • Not callable from February 2012 to November 2012, then
  • callable at par from November 15, 2012 to March 15, 2013, then
  • callable at a make-whole price from March 15, 2013 until maturity on March 15, 2019.

The make-whole price is the present value of future payments discounted at T+50bps, so the call price goes sort of like this:1 Read more »

  • 11 Mar 2013 at 6:14 PM

Your Weekly Reminder Not To Talk About Investments Without A License

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1Q2013 must be I Love The ’80s Quarter at the SEC. Two weeks ago we learned that they were pestering ’80s icon and junk-bond inventor Michael Milken for maybe providing investment advice for money after agreeing not to do that, and today they announced a settlement with “New York-based private equity firm Ranieri Partners, a former senior executive, and an unregistered broker” for letting that unregistered broker solicit investors for Ranieri’s new Selene funds. Ranieri Partners is of course Lew Ranieri, the Liar’s Poker hero, mortgage-backed-security inventor, and general man-about-the-1980s.

The situation, according to the SEC’s orders, is pretty straightforward: former Ranieri senior MD Donald Phillips enlisted his buddy, William Stephens, to fly around the country pitching potential investors on Ranieri’s Selene funds, which were busy buying up non-performing mortgages. Stephens seems to have done a good job, signing up corporate pensions, university endowments, and state retirement systems. He brought in a total of $569 million in capital commitments, for which he was paid fees of $2.4 million.

The problem was that the Selene funds were a massive Ponzi scheme. No, I’m kidding, that’s not the problem at all! Ranieri and Selene were and are on the up-and-up, Selene is still buying non-performing mortgages, and as far as I can tell doing so in 2008-2010 was a good trade and made those investors happy. The problem was actually that Stephens ran into some trouble with the SEC a decade ago over some unrelated kickback allegations, and ended up losing his license to be an investment advisor. And since then “Stephens has not been registered with the Commission in any capacity, including as a broker or dealer.”

But he went and brokered and/or dealt anyway. Read more »

  • 11 Mar 2013 at 4:15 PM

CDS Market Almost Ready For Another Greek Default

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Last week ISDA, who are in charge of credit default swaps, circulated some proposed changes to CDS to account for all the Greek, Argentine, SNS, everything unpleasantness. This prompted me to try out my one journalistic technique – calling1 ISDA and asking them to send me a copy – but they declined, so we’ll just rely on this research note from JPMorgan’s Saul Doctor and Danny White. Here’s the gist:2

ISDA will publish a list of “Package Observable Bonds” (POBs) based on size, liquidity, maturity and governing law. The proposals suggest that there could be one domestic and one international law bond in each of the following silos – a) 1-3 years, b) 3-12 years, c) 12-30 years – based on a set of rules that determine the largest and most frequently traded bond in each silo. An initial POB will remain as such unless, prior to the Credit Event, it no longer meets the deliverability criteria, is called/matures, or is reduced below a threshold. New bonds would be added when a particular bucket is empty.

If a Credit Event occurs (Restructuring or other Credit Event) and a POB has been restructured into a package, then that package, in its entirety, will be deliverable into the auction. For example if a POB with a notional of $100m is written down by 50% and the remaining portion converted into 50 shares, then the 50 shares could be delivered against $100m of CDS. If there is more than one package on offer, then the one that has the highest subscribers will be chosen. All obligations meeting the deliverability criteria remain deliverable as long as they were issued prior to the Credit Event.

So lots of people have been calling for this for a long time – me least of all, but also real people like the Managed Funds Association and Darrell Duffie. But you get a sense from that summary of how it’s more complicated than dopes like me think. Read more »

  • 11 Mar 2013 at 10:29 AM
  • IPO

Bankrupt 1990s Internet Toy Company Still Thinks It Was Undervalued

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To get a sense of how old the Goldman Sachs IPO lawsuit-and-maybe-scandal that Joe Nocera and Felix Salmon wrote about this weekend is, consider this: the alleged victim was a company named eToys. With the “e,” and the “Toys,” and the weird capitalization. Also Henry Blodget was the analyst who covered them at Merrill. Different times!

Nocera gives the basic facts and there’s something a little off about them:

The eToys initial public offering [in May 1999] raised $164 million [at $20/share], a nice chunk of change for a two-year-old company. But it wasn’t even close to the $600 million-plus the company could have raised if the offering price had more realistically reflected the intense demand for eToys shares. The firm that underwrote the I.P.O. — and effectively set the $20 price — was Goldman Sachs.

After the Internet bubble burst — and eToys, starved for cash, went out of business [in March 2001] — lawyers representing eToys’ creditors’ committee sued Goldman Sachs over that I.P.O.

The theory of the lawsuit is that Goldman screwed eToys on behalf of investors, pricing the IPO at $20 per share, rather than the $78 justified by demand, as evidenced by the fact that the stock briefly traded at $78 on the first day. An alternative theory is that Goldman screwed investors on behalf of eToys, pricing the IPO at $20 per share, rather than the $0 justified by fundamental value, as evidenced by the fact that the company went out of business 22 months after the IPO. Also it was called eToys come on. Read more »