Matt Levine

Posts by Matt Levine

  • 31 Jan 2013 at 6:14 PM

When No One Else Would Invest In Barclays, Barclays May Have Just Invested In Itself Itself

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We’ve talked a lot about bank capital today but there’s still time for one quick addendum. First, though, two rough-and-ready equations:

  • Capital = cash paid in by shareholders plus retained earnings
  • Capital ratio = capital divided by assets

The first equation explains my puzzlement at the claim that Deutsche Bank “book[ed] a loss to boost its capital ratio without selling shares;” it’s arithmetically impossible to boost your capital by losing money, though you can (separately) boost your capital ratio by fiddling with the denominator.

The important thing about the second equation is that, for banks, the ratio is well under 1. So if your capital ratio is a relatively robust 10%, that means that 90% of your total assets are funded with borrowed money, and 10% are funded with cash from shareholders and retained earnings. Some people dislike this system.

Anyway there are various semi-magical ways to monkey with the denominator but there is one simple and obvious way to monkey with the numerator – the actual amount of capital that you have – and it is this:

  • Take some money,
  • dress it up in a fancy costume, and
  • issue some new shares to the the now-cleverly-disguised money.

You have magically transformed Assets (money) – which, remember, are 90%+ funded with borrowed money – into Capital. This has perpetual-motion-machine properties,1 so it’s pretty good.

Also it is, like, wildly wildly wildly illegal. Or, I mean, it’s pretty illegal as I just outlined it above, but if you put a fancy enough costume on the money maybe that makes it okay.2 Anyway draw your own conclusions about this: Read more »

  • 31 Jan 2013 at 2:04 PM
  • Banks

Deutsche Bank Improved Its Balance Sheet By Losing A Lot Of Money

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Bank earnings season is always a little surreal, I guess because there’s an inherent surrealism about banking. Deutsche Bank reported earnings today,1 and those earnings had an up-is-down quality that Bloomberg’s summary captured in this amazing sentence:2

Deutsche Bank AG, Europe’s biggest bank by assets, exceeded a goal for raising capital levels as co-Chief Executive Officer Anshu Jain focused on bolstering the firm’s finances rather than limiting losses.

So there’s one way of running a business where you bolster your finances by making money. And then there is global banking. Here is another, possibly even more astonishing line from the same article:

Deutsche Bank “took pain” in the quarter by booking a loss to boost its capital ratio without selling shares, Jain said.

Booking a loss to boost its capital ratio. Losing money, in the regular universe, should reduce your capital: capital is mostly retained earnings. Everything here is backwards.

Here is how Deutsche Bank boosted its capital ratios without (1) raising capital from the market or (2) making money: Read more »

  • 31 Jan 2013 at 10:24 AM

Banks’ Risk Measurements Rarely Off By Much More Than A Factor Of Ten

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Banks are opaque, or so I hear, and so the only way many people can stand to be around them is if they can have some sort of number to serve as a flashlight into all that opacity. One of the big numbers is Basel III risk-weighted assets, which are intended to, as the name says, measure how much stuff a bank holds, weighted by the riskiness of the stuff. RWAs are related to another popular number – they are in many cases calculated based on value-at-risk models – and they determine capital requirements: the more risky assets you have, the more long-term loss-absorbing funding you need to have, to insulate you from loss if the risks come true.

All numbers deceive, though, and many people have noted that RWAs vary wildly across banks, with some banks reporting much lower RWAs per total account assets than others without any obvious decrease in risk. And since RWAs are based in large part on internal models, there is some suggestion that banks optimize their models to reduce RWAs. So risk-weighted assets don’t have any obvious correlation with (1) risk or (2) assets.

Which seems bad, as a first cut, but maybe isn’t: not having an obvious correlation doesn’t mean there’s no correlation. RWA critics are just looking at public information, and public information is, as noted, opaque. Maybe all the banks really are consistently and conscientiously measuring the riskiness of their assets, and just happen to hold different assets. Which is why it’s nice that the confab of bank regulators at the Bank of International Settlements went and issued a report on consistency of risk-weighted assets for market risk.1 The authors of this report, between them, regulate pretty much every big bank in the world. So they could go look at each bank’s trading book, see what assets they have, see how they risk weight them, and compare that to how other banks weight them, done.2

One kind of immediate thing to notice is that that didn’t happen. They’re as confused as you are: Read more »

  • 30 Jan 2013 at 2:32 PM

Human-Whale Relations At JPMorgan Were Pretty Frosty

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Is JPMorgan too big to manage the quantity of public confusion about its operations? Maybe? This Reuters story about how JPMorgan was betting against its own Whale trades is a bit silly: the fact that JPMorgan’s investment bank dealer desk may have been long (short) some of the instruments that JPMorgan’s Chief Investment Office was short (long) is not all that noteworthy. JPMorgan contains multitudes; the dealer desk and the CIO sit in different places and do different things and generally might have similar, offsetting, or entirely unrelated positions.1 In fact if you assume that the positions at issue here were mainly the Whale’s massive CDX NA IG position – he was very very long index credit, among other trades – you could imagine that the dealer desk would sort of naturally be short the same thing. A big part of a dealer’s job is to (1) write single-name CDS to people who want to short particular names and (2) buy index CDS to hedge.2 So it would naturally be looking to buy index protection, and if a certain whale of its acquaintance was selling – why not?

Still there is a piece of news here, which is this:

Two people familiar with Iksil and his boss, Javier Martin-Artajo, said the two CIO employees complained about the investment bank’s actions in the spring of 2012, accusing its traders of deliberately trying to move the market against the CIO by leaking information on its position to hedge funds. Iksil made his complaint to a member of JPMorgan’s compliance department, one of the people said. But those same sources said they had not seen any evidence to support that claim …

So, maybe news? There’s no evidence to support it; perhaps it’s just the Whale’s (retrospectively justified?) persecution complex. Still: the Whale crew thought that the investment bank were trying to make them take losses. Imagine that it’s true! Why would it be true? Read more »

  • 29 Jan 2013 at 6:37 PM

Big Banks Do Plenty Of Lending, Though Mostly With Other People’s Money

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I’m mesmerized by this JPMorgan research chart showing that big banks shouldn’t be broken up because they lend so much more to businesses and consumers than small banks do. See:

Basically for every dollar of normalized capital, JPMorgan has extended $12 of credit between March 2010 and September 2012, according to this note by JPM’s Michael Cembalest. Whereas the small banks have loaned out only about $2. Get with the program, small banks!

The trick here – besides “normalized capital”1 – is that “credit extended” means (1) “changes in commercial and consumer loan balances” plus (2) syndicated loan, corporate bond, muni bond, etc. underwriting. That is, if you stand between a company looking for money and the market that provides it, you get, um, credit for extending credit, whether you do that standing-between in traditional banking ways (take deposit, make loans) or in traditional investment banking ways (match bond buyer with bond issuer). “See, we’re lending,” says JPMorgan. “We’re just not lending our money.”2

As a rhetorical move, I say: A+. Read more »

  • 29 Jan 2013 at 12:59 PM

RBS Isn’t Sure Its Foreign Subsidiaries Could Survive In Prison

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The Wall Street Journal story today about the next Libor domino to fall – RBS, which will be coughing up $700mm or so to regulators in the next few weeks – is full of quietly hilarious lines, perhaps none more so than the Journal‘s deadpan clarification that “the Justice Department has the power to file criminal charges without the bank’s blessing.” For sheer backwardness, though, I think it’s hard to top this:

As part of UBS’s settlement last month, the Swiss bank’s Japanese unit pleaded guilty to wire fraud, a felony. Justice Department officials were heartened by the lack of a negative reaction in the markets and among regulators around the world to UBS’s guilty plea. Before the settlement deal, some officials had worried it could destabilize the bank. That has emboldened officials to pursue similar actions against banks like RBS, according to a person familiar with the matter.

The way a lot of people – sometimes even people at the Justice Department! – think about criminal law goes something like this:

  • If you do something naughty, we will charge you with a crime.
  • If you are convicted of that crime, bad things will happen to you.
  • You don’t want bad things to happen to you.
  • So you won’t do anything naughty.

This is called “deterrence.” All of the parts of it are important: if you are convicted of a crime and bad things don’t happen to you, then the whole system is mostly pointless. When the Justice Department is “heartened by the lack of a negative reaction” to a criminal conviction – when they’re like “yay, no deterrent effect!” – then … then … gaaah. Read more »

  • 28 Jan 2013 at 5:31 PM

Federal Prosecutors Don’t Appreciate Former Jefferies Trader’s Vivid Imagination

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The Journal had an article this morning about how cash equities traders are getting used to having computers as coworkers but I say unto you: can a computer do this?1

52. On March 31, 2010, Customer A, an investment adviser to a private fund, asked Jefferies to find buyers for several MBS, including Lehman XS Trust Series 2007-15N 2A1 (LXS 2007-15N 2A1) and Harborview Mortgage Loan Trust Mortgage Loan Pass-Through Certificates, Series 2006-10 2A1A (HVMLT 2006-10 2A1A). [Jefferies trader Jesse] Litvak approached a representative at AllianceBernstein about buying the MBS.

53. Litvak told the AllianceBernstein representative that the seller had offered to sell the HVMLT MBS at 58-00 and the LXS MBS at 58-8:

Litvak:

he will sell to me 20mm orig of hvmlt 0610 @ 58-00 but he is being harder to knock back on the lxs bonds … said that he thinks that one is much cheaper yada yada yada … he told me he would sell them to me at 58-8 (30mm orig) … I would be fine working skinnier on these 2 … but think you are getting good levels on these …

Representative:

is he paying u or am I?

Litvak:

all the levels I put in this room are levels he wants to sell me … I will work for whatever you want on these …. so to recap levels he is offering to me:
hvmlt 06-10 2a1a (20mm orig) @ 58-00
lxs 40mm orig at 58-8…

Bot em

Representative:

Can u wash the hvmlt and [add] 5 ticks to lxs?…

Litvak:

thats fine.

54. Litvak misrepresented to AllianceBernstein the prices at which Jefferies had acquired the MBS for re-sale. Litvak bought the HVMLT MBS at 57-16 (not the “58-00” he told Alliance Bernstein) and he acquired the LXS MBS at 56-16 (not “58-8” he represented).

55. Litvak also misrepresented the compensation that Jefferies would receive for these trades. AllianceBernstein purchased the $20 million HVMLT MBS at 58 and $40 million of the LXS MBS at 58-13. As a result, on the HVMLT trade, Litvak made 16 ticks for Jefferies; he did not work for free (or “wash” the trade) as he had agreed. And, on the LXS MBS, Litvak made 61 ticks for Jefferies; he did not work for “5 ticks” as agreed.

56. As a result of his misconduct, Litvak made over $600,000 more for Jefferies on the LXS trade and over $50,000 more on the HVMLT trade.

That’s from the SEC’s complaint against former Jefferies trader Jesse Litvak, who apparently made a habit of this sort of thing. He would (allegedly!) tell a potential buyer (seller) of RMBS bonds that he had a seller (buyer), but he would inflate (deflate) the price that he was supposedly getting from the other side in order to inflate his spread. This worked 25 times – that the Feds caught – and allegedly made Jefferies $2.7 million in deceptive profits. This is particularly lovable: Read more »

  • 28 Jan 2013 at 11:10 AM

Worst Abuses Of Unregulated Art Market Look A Lot Like Typical Day In Financial Industry

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If you like or hate financial regulation you might take a quick look at today’s front-page New York Times article about how the art market is unregulated. Apparently this leads to terrible things like “chandelier bidding,” where auctioneers get the ball rolling by calling out a few fake bids, as well as conflicts of interest involved in third-party guarantees where someone writes the auction house a put on an artwork, is paid a variable commission for that put, and in some cases is allowed to credit that commission against his own bid for the artwork.1 One question you might ask is “why is that bad?”; the answer seems to be that some rich people who go to art auctions pay more for art than they would in the absence of these systems, and then feel vaguely uneasy about it. I think the whole thing disappears in the face of one more iteration of “well, why is that bad?,” but perhaps I am wrong.

There are places where you should think “customers should be protected from various sorts of sharp practices by dealers,” and there are places where you should not think that. I guess? Are there only the former?2 I come from a place that believes deeply in the separation between “sharp practices” and “illegal fraud” and works to keep them distinct. One thing the Times article mentions is that there is a law saying that stores have to display the price of their wares, and art dealers ignore that law, and this is bad for some reason. Try that law on derivatives dealers. One of the main driving forces behind financial innovation is finding novel places to hide fees.

The rest of the art-auctioneer tricks also seem pretty familiar. Imagine an M&A banker who couldn’t bluff, to the one serious bidder for an asset, that he had other bidders waiting in the wings. And of course the financial industry is very familiar with the creative use of options and guarantees to allocate value in ways beyond a headline purchase price. One flavor of that is “schmuck insurance.”3 Read more »

  • 25 Jan 2013 at 4:25 PM

Men Dislike Each Other, Might Also Have Opinions On A Stock

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If you have an opinion on whether Carl Icahn or Bill Ackman got the better of today’s amazing CNBC shoutfest over Herbalife, you have a number of options for expressing it. We’ve had like four posts so, y’know, comment away, but if you want something more formal both CNBC and Business Insider have polls you can vote on. Also if you listen to CNBC’s video you can hear in the background a bunch of men who, when not oohing and ahhing over cursing on television, spend their days running around pretending to trade stocks. Don’t be fooled, though: you can actually trade stocks, even Herbalife’s. If Icahn-Ackmania changed your view of Ackman’s short thesis on Herbalife, feel free to express that changed view with money.

As of 4pm-ish, BI and CNBC both give Ackman the win. Mr. Market goes the other way, though without overwhelming enthusiasm.1

This makes sense – as a former high school debate judge I’d score this one for Ackman too. On style alone: Icahn apparently did his interview in a zen garden surrounded by a team of silent and efficient researchers; Icahn prepped by going to a Queens schoolyard and getting in fights.

But on substance, too. Icahn’s main claim, that shorting a company and then saying mean things about it is “manipulation” or otherwise bad form, is sort of crazy; Ackman’s zen researchers helped him point out that Icahn did just that at Ira Sohn in 2003. More important, though: how does Icahn’s “you can be short, but you can’t tell anyone” thesis – as he says, “If you’re short, you go short and hey, if it goes down you make money” – hold up when applied to long investing? Read more »

  • 25 Jan 2013 at 11:16 AM

Basel III Liquidity Rules Already Making Banking Simpler And Safer

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Financial innovation gets kind of a bad rap, and one of my favorite parts of this job is when I get to celebrate it just for being itself. Sometimes this means breathtaking magic like the derivative on its derivatives that Credit Suisse sold to itself, or elegant executions of classic ideas like the Coke shares that SunTrust sold for regulatory purposes but not for tax purposes. Other times it’s a more prosaic combination of already-existing building blocks to allow people who were comfortably doing something to keep comfortably doing it in the face of regulations designed to make it more uncomfortable.

Yesterday a reader pointed me to a Bond Buyer article that, while perhaps neither all that scandalous nor all that beautiful, is sort of cozy. It’s about a new issue of callable commercial paper issued by a Florida municipal financing commission, and here’s the joke:

JPMorgan came up with the new product as a solution for variable-rate municipal issuers facing impending Basel III regulatory problems. The proposed regulations would require banks to have a certain higher value of highly liquid assets to be available to turn into cash to meet liquidity commitments that could be drawn within 30 days. Maintaining higher liquidity would be expensive for banks, which may try to pass on costs to its issuers, according to an analyst at Moody’s Investors Service. “What we did, starting over a year ago, is ask what we can do to change the product that will still work for all the players, including issuers, investors, and the rating agencies,” Lansing said. “And the ultimate result was this product.” The new product allows banks to continue to support variable-rate products after the regulations are implemented. The paper has a variable length of maturity, but always at least 30 days. Several days before the paper would have 30 days left to its maturity, the issuer calls the paper.

The joke isn’t that funny, though I giggled at the phrase “a solution for variable-rate municipal issuers facing impending Basel III regulatory problems.” Municipal issuers face no Basel III problems: municipalities are not subject to Basel III. Read more »

Write-Offs: 01.24.13

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$$$ Dimon: U.S. Consumer is in Better Shape [FBN]

$$$ Buffett pulls ahead in wager against hedge funds [Fortune]

$$$ Obama Throws Down The Gauntlet With New Pick To Head The SEC [ATL]

$$$ Greenhill Results a Positive Omen for M.&A. Boutiques [DealBook]

$$$ “After a thoughtmash session with the Dalston Davos co-chairs – my housemate Phill and Graham, the manager of Costcutter, a deceptively expensive grocery shop – we have decided on a theme: ‘Transcending the imperative of shared norms in a post-collaborative reality’.” [FT / John McDermott]

$$$ The Middle Manager’s Oath [McSweeney's]
Read more »

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  • 24 Jan 2013 at 6:10 PM
  • Banks

JPMorgan Sees No Need To Appoint Committee To Break Up JPMorgan

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Do you have an opinion on whether JPMorgan is too big to manage and should be broken into its constituent bits? You do? Hey, that’s great, good for you. Here’s what you can do about it, in roughly descending order of effectiveness:

  • Be Jamie Dimon, do what you want.
  • Be a board member, try to convince others to do what you want.
  • Be a big activist1 hedge fund, call up the board and management and try to make them do what you want.1
  • Be a sell-side analyst, regulator, politician, former bank CEO, pundit, blogger, or person; write down what you want JPMorgan to do and why you want them to do it; and hope that they read it.
  • Same, but with Twitter.
  • Keep it to yourself and go about your business like a human.
  • Be a troublemaking shareholder activist2 and submit a shareholder proposal asking the board to include in the proxy an advisory vote on whether JPMorgan should form a committee to look into doing the thing you want or something else like it or not like it.

This is sort of a non-thing: Read more »