Matt Levine

Posts by Matt Levine

Here’s sort of a pleasing paper on equity research analysts. The background is basically that there’s this constellation of questions that reduce to “do public markets make companies Bad?,” and one of the main mechanisms by which that might happen would be if markets make companies focus on short-term earnings and shareholder distributions rather than long-term value creation for all stakeholders through sustainable innovation. So you try to find ways to measure (1) how public a company is and (2) how innovative it is, more or less, and then see how they interact. Analyst coverage is sort of a proxy for, like, intensity of public-ness,1 while patents are sort of a proxy for innovation.2 So does more research coverage make companies more or less innovative?

In terms of economic significance, our analysis suggests that an exogenous average loss of one analyst following a firm causes it to generate 18.2% more patents over a three-year window than a similar firm without any decrease in analyst coverage.

Read more »

  • 27 Jun 2013 at 4:25 PM

MF Global Was Bad

The thing is that when you run a brokerage company and it goes and loses $1bn of customer money, the CFTC really ought to charge you with “fail[ing] to supervise diligently the activities of [your] officers, employees, and agents,” no? At least? There are various views of Jon Corzine’s role in MF Global’s efforts to misplace a billion dollars – did he intentionally misuse customer funds? was he aggressive but above-board? just confused? – but no one is going around saying “oh, yeah, Corzine was really on the ball there protecting customer money.” You’re just irreducibly not supposed to lose a billion dollars in customer money, and if you do, “failure to supervise diligently” is pretty much the kindest possible description.

Anyway here is the CFTC press release and complaint against Corzine and Edith O’Brien, the MF Global assistant treasurer and general fall guy. There have been approximately eight thousand lengthy blow-by-blows of the MF Global implosion by now, and I would understand if you didn’t want to read this one; I sure didn’t. Unlike the others, though, the CFTC complaint is enlivened by recorded telephone conversations. In which Edith O’Brien does not come off well: Read more »

Securities firms that sell bonds to customers from their own account (and buy bonds from customers from their own account) make money by charging a markup (markdown) on the price that they paid (got) for the bonds on the other side. You buy at 100, sell at 101, you make a point, etc. The metaphysics of when that markup/markdown veers into fraud are deep and wonderful. You’re not, for instance, required to disclose your markup to your customers, but if they ask and you tell them, it’s probably best if you don’t lie about it, and if you are going to lie about it, it’s best if you don’t invent whole imaginary dramas about how hard you fought to get this bond.

Similarly you’re not supposed to charge “excessive markups” but who’s to say what’s excessive? Here is FINRA’s policy on the matter, which can be summed up as:

  • determining whether or not a markup is excessive is a complex question to which “No definitive answer can be given” and in answering which one should holistically take into account a variety of factors including but certainly not limited to market availability, transaction size, your reasonable expenses, disclosures to the customer, and so forth; but
  • probably 5%.

Read more »

If you think bank regulation should be made much simpler it’s probably worth reading today’s Basel Committee document on bank leverage ratios, which the chairman of the Basel Committe described as “a relatively simple measure.” And what could be simpler than regulating leverage ratios?1 It’s just, like:

  • tot up all your assets, including all your creepy off-balance-sheet stuff and evil derivatives and so forth,
  • divide by your equity, and
  • take the reciprocal for some reason.

This is the theory behind proposals like the Brown-Vitter bill, which would do away with risk-based capital measures and focus on simple leverage. No risk-weighting, no monkeying with different kinds of equity, no problem. Just simple, impossible to manipulate, straightforward, easily comparable measures of how levered – and thus how risky – every bank is.

Hahaha no kidding it’s full of weird stuff: Read more »

Here’s a strange little SEC securities fraud case. Imaging3 is a small, now-bankrupt medical imaging device company that was developing a 3D scanner (pictured right, with CEO Dean Janes) that certain members of the medical establishment did not like, quite possibly because it didn’t work, hard to tell. Imaging3 sought FDA approval for its scanner and, in October 2010, the FDA rejected its application. On November 1 after the close, the company announced that it had received this rejection and held a conference call with investors. Janes, the CEO, was mad:

Janes informed shareholders and others on the call that the FDA’s rejection of the submission was not based on concerns regarding the device’s technology or image quality or the safety of the device. Instead, at numerous points during the call, he described the FDA’s denial as “ridiculous,” “administrative,” “not substantive,” and”nonsensical.”

During the November 1 call, Janes omitted any mention of the FDA’s specific and substantive concerns. For example, he never explained in any way that the FDA had determined that the use of certain sample images was “scientifically invalid and useless,” or that the FDA had expressed concerns about vibration hazards or overheating of the device.

So a difference of opinion then? Read more »

A question that you may or may not find interesting is: have the U.S. government’s rather strenuous recent efforts to stamp out insider trading actually reduced insider trading? How would you go about answering that, if you really wanted to know? I guess the right approach would be a survey; like, go email every hedge fund manager and ask “have you insider traded in the last 12 months? more or less than you used to?” and see what they say. That has … problems, so you look for proxies. Do stocks tend to go up, on heavy volume, before the announcement of secret good news? Then that at least suggests that someone traded on the secret good news before it was announced. It’s something.

A while back I idly committed some pseudoscience about pre-merger trading and found some indications that (1) stock prices and volumes tend to increase before mergers and (2) that increase has been more pronounced in say 2009-2013 than it was in say 2001-2008. This would seem to be weak evidence of increasing insider trading? This was a little puzzling given:

  • those strenuous efforts, lots of people going to jail for long periods, etc.; and
  • my assumption, anyway, that traders would be rational and competent judges of risk and reward who would weigh the increased odds of being caught and sent to prison in their decision to insider trade or not.1

But there my pseudoscience was. Anyway I learned today (via) about a recent study where some b-school professors committed some … I dunno, whatever b-school professors do, something between “pseudoscience” and “science” … of their own and got the opposite result, so I figured I’d pass it along. Here’s the abstract: Read more »

Over on the imaginary stock markets where Fannie Mae and Freddie Mac trade they’ve had a rough day, with FNMA and FMCC common stock each down almost 13% and the preferred … um … down surprisingly small amounts but, y’know, on light volume. The impetus is presumably this:

A bipartisan group of senators on Tuesday introduced a bill to abolish Fannie Mae and Freddie Mac and replace them with a government reinsurer of mortgage securities that would backstop private capital in a crisis. … Under the bill, which is being led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner, the two companies would be liquidated within five years.

Here you can read the announcement, summary, and text of the bill, and I suppose we should discuss it at some point. Read more »

Retail clients are not typically paragons of rationality or possessors of Black-Scholes calculators so a good way to make money is to bamboozle them with mispriced derivatives. The classic way banks do this is with structured notes, where you combine a bond worth $75 and an S&P option or whatever worth $15 and sell the combination for $100 because who has time to check your math, really. In the early years of this century life insurance companies came up with a clever variation on this idea. The variation was:

  • Combine a bond worth $75 and an S&P put option worth $15.1
  • Sell the combination for like $80.
  • Hope everyone forgets about it.

This was an amazing plan. You can see why it sold well? You can also see why it did not really work, for the insurers? It totally totally did not work, for the insurers, and yesterday Moody’s issued a report about it saying basically “a lot of life insurers are kind of fucked because of this,” which, sure, but what were they expecting?

Here’s what they were expecting: Read more »