Matt Levine

Posts by Matt Levine

BlackRock’s paper-issuing arm issued a pretty interesting paper this week on bond standardization.1 Basically: there are a lotta bonds, and none of them trade and it’s impossible to get the size you want of the bond you want, and this could be solved by each issuer only having, like, three bonds, and re-opening them when they need to borrow more money, instead of creating new bonds all the time. Each issuer has only one stock, mostly, so why can’t they cut back on the bonds a bit?

Also all the bonds should mature at the same times, preferably like IMM dates, to make hedging easier. And to make everyone refinance at the same time. What fun those times would be. September 20, 2008, for instance, five days after Lehman filed for bankruptcy, would have been a rough time to have to refinance bonds.

The argument is pretty straightforward. Bonds don’t trade very much: Read more »

You’re only guilty of criminal insider trading, in America,1 if:

  • you trade on information that is material and nonpublic, and
  • some other stuff.

The other stuff is mostly stuff that only a lawyer could love, but man do they love it. It consists most importantly of the rule that the person who gives you the material nonpublic information needs to have done so in breach of some duty to keep the information secret and in order to get some personal benefit for himself. If a stranger just wanders up to you and says “I’m the CEO of Smerbafife and it’s a giant fraud, gotta go,” and you trade on that: you’re probably good.

This doesn’t help very often, though, since the personal benefit for the tipper doesn’t have to be an explicit bribe, or an explicit anything; just a desire to spice up your friendship with some material nonpublic information can qualify.2 (Also: usually there are bribes. You start with casual venting of frustrations and the next thing you know you’re accepting bags of cash in parking lots.)

It might help Anthony Chiasson and Todd Newman though: Read more »

  • 18 Jun 2013 at 3:58 PM

Carl Icahn Does Another Dell Thing

Carl Icahn seems to have a lot of fun. Today he wrote a crazy letter to Dell shareholders that opens this way:

We take this opportunity to respond to rumors regarding the availability of financing for our proposal for a recapitalization at Dell and to address recent statements by Dell that demean the prospects of Dell. We are amazed by these statements by the Dell Board. In what other context would the person tasked with selling a product actually spend their efforts negatively positioning the very product they are trying to sell? Is that how the supposed “go-shop” was conducted? Can you imagine a real estate broker running advertisements warning of termite danger in a house each time a prospective buyer seems interested?

We can talk about the “recent statements by Dell that demean the prospects of Dell” in the footnotes1; up here let’s talk about Icahn’s “respon[se] to rumors regarding the availability of financing for our proposal for a recapitalization at Dell.” He says later in the letter: Read more »

  • 18 Jun 2013 at 9:25 AM

All Stock Trading Should Be On Exchanges, Say Exchanges

One problem that people with a lot of time on their hands like to get worked up about is that academic economists sometimes write papers advocating positions that benefit organizations that give them money, while being coy about that relationship. On the other hand this newish paper about dark pools, which compete for stock trading orders with exchanges like NYSE and Nasdaq, has a first author whose affiliation is listed as “The NASDAQ OMX Group, Inc.,” so that’s fine then. Guess what he thinks? No, kidding, you don’t get to guess, he thinks dark pools are bad, duh.

The study, by Dr. Frank Hatheway, Nasdaq OMX Group; Dr. Hui Zheng, the University of Sydney; and Dr. Amy Kwan, the University of New South Wales, looks at US trading venues with restricted access and without displayed orders – generically referred to as “dark pools” – which increasingly segment order flow in the US. … The authors show that the effects of order segmentation by dark venues are damaging overall price discovery and market quality.

I’m a sucker for market microstructure papers because I like the Hobbesian world they imagine, where everyone is trying to rip everyone else’s face off, and keep their own face on, every nanosecond. Read more »

  • 17 Jun 2013 at 4:13 PM

Let’s Hack Google’s Share Split

How much would you pay for a share of Google Class C stock? Those are the zero-vote shares that will soon be distributed, on a one-for-one basis, to holders of Google’s low-vote Class A shares, assuming that the settlement Google announced today goes through. We previously discussed the split when it was announced last year: Google’s founders don’t want to ever lose voting control of the company, so they’re proposing that any new shares issued for acquisitions, etc., be non-voting C shares; shareholder lawsuits have held this up until now but with the settlement it should go forward.

The traditional answer is that a share without voting rights is worth less than a share with voting rights because, y’know, sometimes you want to vote, and so various studies find something like a 2 to 10% discount for non-voting shares. But with Google that’s a little silly since no one really votes anyway: the high-vote Class B shares, which are mostly owned by co-founders Larry Page and Sergey Brin, give them about 56% of the vote, so whatever you do with your piddly Class A shares doesn’t matter. So the As and the Cs are basically the same except the As come with the hassle of having to mail back your pointless proxy card.1

So if you could get a C cheaper than an A, that seems like an arbitrage and you should buy it because the prices should eventually converge. But markets can remain irrational etc. etc. etc., so absent any obvious catalyst for convergence why would you do that? So Google, and some clever plaintiffs’ lawyers, provided a catalyst: Read more »

Starboard Value’s letter to Smithfield Foods arguing that Smithfield is selling itself too cheaply to Shuanghui International makes for tough reading if you think pigs are cute. The 16-page letter does a pretty detailed sum-of-the-parts valuation of Smithfield at, like, a pig-by-pig level, and it doesn’t end well for the pigs. Sum-of-the-parts value has a disturbingly literal meaning, for them.

How did this letter come about? I imagine it as something like this:

  • Earlier this year, Starboard analyst recommends Smithfield on the basis of a long well-reasoned report about how it’d be worth 2x its current price if it were broken up.
  • Portfolio manager is persuaded and buys a chunk of shares starting in March, at an average price of around $27, planning to mount an activist campaign to break up the company.
  • Smithfield announces merger at $34 a share on May 29.
  • Starboard makes several million dollars on paper.
  • Starboard celebrates, congratulates analyst, etc.
  • Some spoilsport interrupts celebration saying, “well, but really the thesis was that Smithfield could break itself up and we’d make even more money.”
  • “Really, analyst, this counts as a loss.”
  • “Go back to your desk and repurpose your original report into a letter that we can mail to Smithfield.”1

Read more »

Would you have predicted this?

This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, economically important and highly statistically significant in panel models even after controlling for a host of domestic and global fundamental factors and investigating various functional forms, time and country groupings and dynamic structures. Dynamic panel model estimates indicate that a credit rating upgrade decreases CDS spreads by about 45 basis points, on average, for EU countries.

I would not have! Perhaps I am biased from living in a country where credit ratings are a contrary indicator of sovereign interest rates, and where municipal defaults inevitably lead to helpful comments from ratings agencies like “If the payment doesn’t get made, we would downgrade the rating.” Apparently, though, sovereign ratings matter, at least in Europe and at least at some points on the ratings scale.1 Read more »

  • 14 Jun 2013 at 4:59 PM

JPMorgan Launching Private Equity Fund

Well, not really:

JPMorgan Chase (NYSE: JPM) announced today that the partners of One Equity Partners (OEP), the firm’s private equity unit, will begin to raise their next fund from an external group of limited partners and become independent from JPMorgan Chase. One Equity Partners currently manages approximately $4.5 billion of investments for JPMorgan Chase in direct private equity transactions and has produced strong returns over the last twelve years.

OEP will continue to make direct investments for JPMorgan Chase for an interim period. OEP will still manage the existing group of portfolio companies for JPMorgan Chase to maximize value for the firm.

“Private equity unit,” at a big bank, can mean different things; sometimes those units run private equity funds with outside money (Goldman PIA), while others are pure bank-funded merchant banking (Wells Fargo’s Nor’west Equity Partners1). OEP is all JPMorgan shareholder money: “Our sole funding relationship with JPMorgan Chase & Co. enables us to be as patient as needed to achieve success.” Was all shareholder money. Now it’ll be outside money, and also outside, like, office space, though the timing on which happens first isn’t clear. Read more »