Matt Levine

Posts by Matt Levine

  • 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 »

  • 08 Mar 2013 at 6:02 PM

Rise In Merger Lawsuits Helps Shareholders By Giving Them More Stuff Not To Read

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If you own stock in a company that announces it’s being acquired, and you think the acquisition price undervalues the company, there are three things you can do about it: you can vote down the deal, you can find or propose an alternate deal, or you can sue. No I’m kidding of course you can’t do any of those things: you don’t have enough shares to vote down anything, you don’t have the money to propose something else, and you aren’t a plaintiff’s lawyer (are you?) so you aren’t in the business of suing companies, which turns out to be the sort of specialized skill you can’t just acquire in a fit of pique. Those are the tools, but they can only be wielded by specific people.

Steven Davidoff has a delightful piece in DealBook today about the state of the M&A lawsuit market and it is sobering reading:

[L]ast year, 92 percent of all transactions with a value greater than $100 million experienced litigation. The average deal brought five different lawsuits. In addition, half of all transactions experienced multi-jurisdictional litigation, typically litigation in Delaware and another state.

Left out of that description is what percentage of last year’s mergers were agreed to by lazy corrupt self-dealing boards of directors who were putting their own interests above those of shareholders. I submit that it’s strictly between 0 and 92%.

Take the recently announced buyout of Dell. There are already 21 lawsuits pending in Delaware Court of Chancery, and three more pending in Texas state court.

Meanwhile, in another part of town, someone else thinks that the Dell buyout is bullshit, and is actually doing something about it. Davidoff goes on: Read more »

  • 08 Mar 2013 at 2:42 PM

How Much Of The Stock Market’s Growth Is Caused By Its Shrinking?

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There’s a small cause-and-effect mystery in the interaction between share prices and share buybacks. On the one hand, when a company buys back stock, that should make the remaining shares more valuable, on reasoning both fundamental-ish (EPS is up!) and technical-ish (more buyers than sellers!). On the other hand, issuers seem to view their own shares as Veblen goods: the higher the price, the more they want to buy.1 So it’s a little hard to know whether the market is reaching record highs (in part) because companies are spending record amounts of money buying back their stock, or vice versa. The first explanation mostly makes sense, and the second mostly doesn’t, which is a good argument for the second being right.

The first explanation is more popular though. Today the Journal noted that “U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally,” and FT Alphaville and others have been talking about de-equitization, as well as the declining attractiveness of listed public equity. So have I, come to think of it.

One possibly relevant question you could ask is: how much is the market shrinking? That seems susceptible to various sorts of answers, as well as various possibly relevant time periods. As it happens, tomorrow marks the four-year anniversary of the market’s hitting a 15-year low, so mazel tov everyone on that. Here’s perhaps a place to start measuring U.S. equity market shrinkage over those four years:

Read more »

  • 07 Mar 2013 at 6:20 PM
  • Banks

Fed Kicks Off Awkward Week For Banks

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One of the nice things about last year’s Fed bank stress tests was that they were released, and everyone was like “OMG Citi failed!!,” and then we all calmed down and realized that all that meant was that Citi’s capital return plans had failed, so it couldn’t launch a big share buyback, but it wasn’t going to be smashed into dust as a warning to its compatriots. That turned out to be cold comfort for Vikram Pandit but was soothing for the rest of us. This year, in part to avoid the Vikram thing, the rules have changed: today the straight-up stress test results were released, while the Fed will approve or reject capital return proposals next week, and there’ll be a lot of weird disclosure gamesmanship in the interim. Early signs point to Citi being out of the doghouse, and Goldman possibly being in it.

Also Ally Bank failed, sorry! Legit failed, not failed pro forma for capital return. So, smashed into dust.

Here is a chart you may or may not find amusing:

This chart is intended to answer the question: how many a 1-in-100 terrible days would these banks need to have in order to get the Fed’s estimated trading losses?1 Read more »

  • 07 Mar 2013 at 3:29 PM
  • M&A

Carl Icahn Thinks That Whatever Company He Bought This Week Is Wildly Underpriced

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My thinking on Carl Icahn changes day to day but my current model is that he is a man who after a long and successful career in money management retired in March of 2011 to spend more time on his hobbies. And that his hobbies are irritating Bill Ackman, hijacking public company M&A deals, and threatening his foes with “years of litigation.”1 I’ve got nothing against Bill Ackman, but otherwise that sounds like my dream retirement too.

We talked about Icahn’s Dell stake a little yesterday; I predicted that today Ackman would announce that Dell is a pyramid scheme, and I will award myself partial credit insofar as today a well-known short seller did come out calling Dell a bad and plummeting-cash-flow company, though not quite a pyramid scheme. But as for Icahn’s plans I’m still a bit lost, though his letter to Dell’s board has now been made public. This is the core proposal: Read more »

  • 07 Mar 2013 at 10:21 AM

BofA Traders Criticized For Making Money

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The Journal has an article this morning with the headline “BofA Times an Options Trade Well” that is about how BofA timed an options trade well. Specifically, in June 2012, it bought $60K worth of July $20 calls on Constellation Brands (STZ), and a week later STZ announced it was buying a big beer importer and its stock went up and BofA made about a million dollars on the calls.

But it’s not really about BofA’s smart timing; rather, it’s about the fact that BofA was an advisor and lender on the M&A deal, so it’s mighty suspicious that BofA’s options traders got this timing so right at the same exact time that its bankers and lenders were chock-full of confidential information.

Is it? My strong instinctive reaction is no, because I worked at a bank on the private side and also talked to equity vol traders, and it would never have occurred to me to call the vol traders and be all “hey we have a merger coming you should buy some calls,” and if it had, it would never have occurred to them to buy the calls instead of calling compliance and having me arrested. Because it is so dumb! For like a million bucks, too – likely far less than BofA made on its financing and advisory assignments. Like the man said, a million dollars isn’t cool. You know what’s cool? Not going to prison.1

Depending on your priors you can read this as a story about how data-mining on activity in thinly traded options just before merger announcements leads to a lot of false positives and uncalled-for eyebrow-raising, or as a story about how too-big-to-prosecute banks can get away with a lot of things that random dudes in Switzerland can’t. Read more »

  • 06 Mar 2013 at 5:57 PM
  • M&A

Prediction: Tomorrow Bill Ackman Will Announce That Dell Is A Pyramid Scheme

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In a Black-Scholes world you wouldn’t have long tedious arguments about whether an LBO represents a good deal for shareholders. You think Dell is undervalued at $13.65 a share? Hey that’s super. Pay $13.66 for 51% of the shares and vote the deal down.1 The end. There’s a certain class of debates that can be reduced to just making a market and putting your money on it, and that class is probably much larger than the class of debates that actually get resolved that way.

But LBO value disputes mostly aren’t in it, because in real life the financing and friction-cost and legal and other obstacles to accumulating 51% of a big public company are daunting. Southeastern Asset Management, which thinks $13.65 is an insulting lowball offer for Dell, has awkwardly been selling shares for less. We mostly don’t live in a Black-Scholes world. But maybe Carl Icahn does? That is one hypothesis. Another is that Carl Icahn reads the paper every day and is like “oh, a situation is in the news, let me come in and fuck about with it for a while.” Tomorrow we’ll read he’s accumulated an 8% stake in the sequester.

Anyway: Read more »

  • 06 Mar 2013 at 2:43 PM

Nasdaq Developing Exciting New Way To Lose All Your Money On Tech Stocks

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As everyone knows, the well-trodden path for technology startups starts in a garage, runs through angel rounds and seed rounds and other preciously named rounds of venture capital investments, and ends up with the glorious dream of listing on Nasdaq, yaaaaay. As everyone also knows, that last thing has recently become more of a boooo. The Nasdaq listing is less necessary, as modern startups tend to traffic in ethereal goods like Likes and so don’t really need to raise capital via IPOs, and it’s less pleasant, because you gotta file public documents, and your stock can go down, and something something something high-frequency robots, and David Einhorn can buy your stock and yell at you and stuff. Somehow being public has cost Facebook like forty billion dollars of market cap which is kind of amazing when you think about it.

Nasdaq is aware of this dimming of its value proposition and has come up with a new one. What if it told you you could be listed on Nasdaq but without the public documents and the David Einhorn? Would that be of interest to you? Read more »

  • 05 Mar 2013 at 5:39 PM

Even So, Mark Cuban Is Probably Glad He Got Rid Of His Mamma.com Stock

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To get a sense of how old and long-drawn-out the SEC’s insider trading lawsuit against Mark Cuban is, consider this: the company in which he allegedly insider traded was Mamma.com. The .com was right there in the name. Future generations – hell, present generations – will indiscriminately add “.com” to the end of words to create an old-timey feel, the way we doeth with “-eth.”1

Actually it happened in 2004, and I don’t even need the “allegedly”: there’s no dispute that Cuban insider traded. Everyone agrees that:

  • Mamma.com was planning to sell some stock in a PIPE offering which would, inevitably, drive down its stock price;
  • Mamma.com’s CEO called Cuban and told him about the planned PIPE offering in advance, hoping to get Cuban to buy more stock;
  • Cuban instead sold the stock he already had, prior to the public announcement of the PIPE deal; and
  • Then the PIPE was announced and the stock dropped.

So he had material nonpublic information, and he traded on it, and he avoided losses by doing so. INSIDER TRADING. The only debate is whether he insider traded illegally, which, as I often find myself reminding people, is a separate question. The SEC’s lawsuit2 turns not on the facts above, but on whether Cuban agreed not to trade before learning the inside information. Here the evidence is less clear, but there’s enough evidence that he did for the SEC to survive summary judgment today and take the case to trial. Here is that evidence:3 Read more »

  • 05 Mar 2013 at 1:55 PM
  • M&A

Heinz Put A Lot Of Thought Into What Would Happen If Warren Buffett Ran Out Of Money

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Classically, the “Background of the Merger” section of a merger proxy is where you get the fun details of how the deal came to be, from which you can perhaps extract a sense of whether or not the deal is a good one for shareholders. But it’s written by lawyers so sometimes their idea of “fun details” differs from yours and mine. Here is a critical moment a week before Heinz agreed to be bought by 3G and Berkshire Hathaway, from Heinz’s merger proxy:

On February 8, 2013, representatives of Davis Polk and Kirkland & Ellis had a conference call to continue negotiations concerning the merger agreement. During the call, Kirkland & Ellis noted that the Investors were willing to accede to Heinz’s request that Heinz be permitted to pay regular quarterly dividends prior to closing of the Merger. Kirkland & Ellis noted that, while Heinz had reserved comment on the remedies for a debt financing failure proposed by Kirkland & Ellis in the initial draft of the merger agreement, the Investors’ willingness to enter into a transaction was conditioned on Heinz’s remedies in those circumstances being limited to receipt of a reverse termination fee. Kirkland & Ellis noted, however, that the Investors would withdraw their initial proposal that Heinz would not be entitled to any remedies if the merger were not consummated due to a failure of the debt financing that resulted from a bankruptcy of those financing sources. In addition, Kirkland & Ellis stated that they expected that the Investors would be willing by their guarantees to guarantee liabilities of Parent and Merger Sub under the merger agreement (including liabilities for breach of the merger agreement) up to a cap on liability equal to the reverse termination fee if it became payable (as the Investors had previously proposed). Kirkland & Ellis also reiterated that the Investors were unwilling to agree to a “go-shop” provision but confirmed that they were willing to accept a customary “no-shop” provision with a fiduciary out, which would allow the Heinz Board, subject to certain conditions, to accept a superior offer made following the announcement of the merger agreement. Davis Polk replied with a slanderous description of Kirkland’s mother’s sexual proclivities. Davis Polk suggested that, in lieu of a “go-shop” provision, Heinz might consider a two-tiered termination fee, with a lower fee payable by Heinz if it terminated the merger agreement to enter into an alternative transaction within a limited period of time post-signing. Kirkland & Ellis responded that, while the Investors might have some flexibility on the size of the termination fee, the Investors would not accept a two-tiered fee. Finally, Kirkland & Ellis noted that the standard for efforts to obtain antitrust approvals proposed in the most recent draft of the merger agreement was too onerous in light of the circumstances, but that the Investors would agree not to acquire other food manufacturers during the period prior to closing of the merger if doing so would interfere with obtaining antitrust approvals.

Oh so that’s what happened!1 Read more »

Don’t Worry About Goldman, They’ll Figure Out This Volcker Rule Thing

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The saddest part of this job is discovering a beautiful thing that someone has created as a way around financial regulation, and then watching philistine regulators destroy it. But the happiest part is dreaming up a come-on-that-could-never-work ploy to get around some financial regulation, and then finding out that someone’s actually doing it. Extra points if the someone is Goldman Sachs.

Two weeks ago I thought I’d concocted a way around the Volcker Rule’s porous and silly restrictions on banks running private equity funds. My solution involved (1) having a merchant banking business that took no outside investors (which the Volcker Rule does not restrict), (2) having a private equity fund that took no bank money (since the Volcker Rule limits banks to owning 3% of such funds), and (3) having your merchant bank and your private equity arm co-invest in deals. Since that doesn’t quite work,1 I later modified it a bit to have the outside investors co-invest directly, rather than through a private equity fund, and give the bank its management fee in the form of better economics to the merchant bank in each investment.

Today Reuters has this: Read more »