Matt Levine

Posts by Matt Levine

  • 09 May 2013 at 10:00 AM
  • Banks

Non-Binding Vote On Wording Of Jamie Dimon’s Business Cards Should Fix All Of JPMorgan’s Problems

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Is Jamie Dimon too powerful at JPMorgan? I have a wonderful, simple test in mind, though it may be impracticable; anyway here it is:

  • if a majority of shareholders vote in favor of the nonbinding proposal to strip him of his role as chairman of the board, and
  • he remains chairman of the board, then
  • he’s probably too powerful!

Let’s find out!

Honestly, who cares who cares who cares who cares if JPMorgan’s board has an independent Chairman or just an independent Presiding Director? The board’s job is to keep an eye on Jamie; if it failed to do that then giving it a fancy new title doesn’t seem likely to improve performance. Is it your impression that Jamie Dimon, who apparently rides roughshod over pissant Presiding Directors,1 will nonetheless be meek and subservient when faced with a Chairman?

Discussion about this proposal is confused because some people think that having an independent chairman is a good thing in all circumstances, or at least say they do; CalPERs’s governance czar, for instance, believes that “There’s a fundamental conflict in combining the roles of chairman and C.E.O.” and so CalPERS will vote to split the roles at JPMorgan just as they did last year. Others think that, y’know, it depends on the people. The people here would presumably remain the same though there’s some rumbling that Dimon would take his toys and go home if he couldn’t be chairman too.

Outside of CalPERS, though, the universal-good-governance theory doesn’t seem to move anyone much. Here, if you’re interested, are JPMorgan’s top 20 shareholders: Read more »

  • 08 May 2013 at 2:54 PM

It’s Okay That Chesapeake Forgot To Call Some Bonds

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Well this isn’t great:

The story behind that – more fully described here – is that Chesapeake issued $1.3 billion of seven-year bonds in February 2012, and those bonds were freely callable from November 2012 to March 2013, and thereafter not callable (except with a T+50 makewhole) until maturity. And in March Chesapeake tried to call them, and their trustee – BoNY Mellon – said, well, no, you needed to give notice of a call a month in advance, everyone knows that, so you’re outta luck and can’t call them except at the makewhole price (~129). And Chesapeake disagreed and so they sued. The dispute turned on some ambiguous language – some places the bond documents said you need to provide notice a month before you call, other places they say that the early call works as long as you provide notice before March 2013 – but I wasn’t particularly sympathetic to Chesapeake, based mostly on market-practice-y reasons, and gave them about 25% odds of winning.

I was wrong!1 Today Chesapeake won its lawsuit and so will be redeeming those bonds at par. To be fair The Market was wrong too, as the bonds were trading at 108ish (5.25%-ish), wider than Chesapeake’s non-callable bonds but still well north of the 100 that you’re now going to get for them. Read more »

  • 07 May 2013 at 5:16 PM
  • Banks

Citi Didn’t Stress Too Much About That Whole Lehman Bankruptcy Thing

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Yesterday Citi sued Barclays over an indemnity that Barclays gave Citi during the collapse of Lehman Brothers, and while, yes, the lawsuit is boring in the way that only lawsuits over indemnities can be, I’m nonetheless going to tell you about it under the heading “laugh at Citi doing stupid stuff.” The stupid stuff here is roughly:

  • Citi was the clearing bank for Lehman Brothers FX trades, with gross exposures in the tens of billions of dollars.1
  • Lehman ran into some trouble in September 2008, as you may have heard.
  • On September 9, 2008, one week before Lehman’s bankruptcy filing, Citi decided it might be a good idea to get some security for its Lehman FX clearing exposure, in the form of getting set-off rights against $2 billion that Lehman Brothers Holdings (the public parent company) had on deposit at Citi.
  • On September 15, 2008, after Lehman Brothers Holdings had filed for bankruptcy, Citi decided that it might not be a good idea to continue extending credit to Lehman Brothers Inc. (the non-bankrupt broker-dealer subsidiary) and so terminated its FX clearing arrangement.
  • Lehman Brothers Inc. begged Citi to reconsider, and Citi agreed to provide basically two more days of clearing (through September 17) in exchange for $1 billion of new collateral posted by Lehman.
  • Lehman Brothers Inc. continued to not pay Citi amounts that it owed.
  • So Citi again stopped clearing for Lehman.
  • This time Barclays, which had agreed to purchase the Lehman U.S. broker-dealer operations, begged Citi to reconsider, and Citi agreed to provide basically two more days of clearing (through September 19) in exchange for $700mm in new collateral posted by Barclays.
  • Lehman Brothers Inc. again continued to not pay Citi amounts that it owed, and was placed into SIPC liquidation on September 19.
  • Citi again stopped clearing for Lehman, for real this time, and closed out its positions at a loss of something like $1,260mm.
  • It set off $1bn of these losses against the collateral posted by Lehman.
  • Then Barclays called Citi, in October 2008, and asked if it could have its $700mm of collateral back.
  • Citi said yes!2 Read more »
  • 07 May 2013 at 12:11 PM
  • Banks

Who Would You Rather Trust: Bankers Or Regulators?

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A simple model of banking regulation and, like, counter-regulation goes something like this:

  • Regulators are conservative and dumb, and want to safeguard banks from bad risks even at the cost of preventing good risks,
  • Bankers are aggressive and smart, and want to take lots of good risks even at the cost of taking some bad risks, and
  • Sometimes bankers can find people to put up with their shit and sometimes they can’t.

“Put up with their shit” is meant in the broadest sense – Can banks defeat Dodd-Frank? Brown-Vitter? Is Lloyd Blankfein a hero or a villain? Jamie Dimon? Etc. – but one particularly interesting question is, if you’re trying to do trades that evade or bend or optimize or whatever regulation, will someone do those trades with you? You could write a history of recent finance with the answer to that question: in 2007 you could chuck all of your mortgage risk off-balance sheet via securitizations, in 2008 you … could not, and in 2013 if you’re looking for someone to provide regulatory capital relief all you have to do is call a Regulatory Capital Relief Fund. Six years peak-to-peak, same as the S&P.

You could probably use words like “bubble” in characterizing that cycle but I prefer the approach taken in this new NBER paper by Guillermo Ordoñez of Penn (free version here), both because it mathematically formalizes that basic model of regulation and counter-regulation in an interesting way, and because it is congenially cynical. As he puts it, “banks can always find ways around regulation when self-regulation becomes feasible, and it is indeed efficient for them to do so.” Bankers, of course, always think that it would be efficient for them to find ways around regulation. They only do so when they can find someone to trade with them. Read more »

  • 06 May 2013 at 5:51 PM

BofA And MBIA Can’t Get Enough Of Each Other

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The best and worst part of the long-running feud between MBIA and Bank of America is how it intricately intertwines many strands of lawsuits and stratagems and insurance disputes and market sniping into a single complex tapestry of orneriness. BofA and MBIA are suing each other about everything everywhere, and each case is not really about the thing it’s about – it’s about getting some leverage in some other case that is in turn itself probably about something else. As far as I can tell, though, the core is mostly:

  • MBIA insured some pre-crisis RMBS securitizations issued by Countrywide (now owned by BofA), and MBIA thinks those were pretty fraudy, which is a pretty widespread view, and so is suing Countrywide/BofA for a $3+ billion dollars in rep and warranty damages;1 and
  • MBIA also wrote Merrill Lynch (now also Bank of America!) some $6 billion in credit insurance/CDS on CMBS, which seems not to have been fraudy, but which MBIA wanted to get out of anyway because the exposures here were weighing down its otherwise potentially viable municipal bond insurance business;2 so
  • MBIA tried to essentially get rid of that CDS exposure by restructuring it into a subsidiary and casting that subsidiary into the fires of Mount Doom.

But that core expands out everywhere, since the only way out of this mess seems to have been deeper in. For instance, Bank of America decided to mitigate the credit risk on that CDS by getting long more MBIA credit, in the form of buying $136mm of MBIA bonds (at par!) and trying to block the restructuring of MBIA. This had the effect of strengthening the credit underlying its CDS contracts and also, one imagines, being annoying and thus scoring some points on the other, technically irrelevant, dispute. There was some suing about that too.3 Also probably some other suing, who can keep track. Lotta suing.

All that ended today, though, with a big-bang, wrap-up-everything-at-once settlement between MBIA and BofA.4 Here’s BofA’s version: Read more »

  • 06 May 2013 at 11:20 AM
  • Banks

Former Credit Suisse VP Who Spent Her Vacation At The Office Past Midnight Will Fit Right In At Goldman Sachs

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We don’t have her side of the story yet but from what her enemies say about her I like Agostina Pechi’s style. Pechi is the former Credit Suisse emerging markets sales VP who quit to go to Goldman and whom CS is now suing because she (allegedly) took a bunch of secret stuff with her when she left. Also because she (allegedly) did this:

[B]eginning in February 2013, Pechi represented to her manager as well as other senior group management that [a certain] client’s interest in this and other private transactions was flagging. Credit Suisse scheduled in-person meetings with the client in an effort to revive interest in the deals.

Pechi was deliberately evasive with management regarding the status of those meetings and whether high-level decision-makers on behalf of the client would attend. Based upon Pechi’s representations, senior Credit Suisse employees did not meet with the client.

However, as Credit Suisse later discovered, Pechi attended two meetings with representatives of the client, at least one of which was attended by high-level decision-makers on behalf of the client, as part of the above-referenced private transactions.

Upon information and belief, Pechi held these in-person meetings in an effort to shore up her relationship with the client in preparation for her departure and to explicitly discuss moving its business to Pechi’s new firm.

Except for those last two paragraphs, that sounds like something I would do!1 Speaking of misplaced diligence here’s how Pechi spent her last vacation at CS: Read more »

  • 03 May 2013 at 5:58 PM

Ringleader Of Insider-Trading “Fight Club” Didn’t Want Any Sarcastic Comments With His Inside Information

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I suppose in like 1985 there were people who worked on Wall Street and un-self-consciously ate cheeseburgers for breakfast, got shoeshines at their desks, went to strip clubs every night, and slammed down their phones hard enough to break them, but my assumption is that in 2013 any remaining “stereotypical Wall Street behavior” is mediated through popular culture. Some people go into finance with the goal of having a memoir that reads exactly like Liar’s Poker,1 and no one wears contrast-collar shirts because they look good. You wear them – if you do (do you?) – because you saw them in that movie.

Former Diamondback Capital analyst and insider trader Jesse Tortora actually wrote this:

In 2009, Tortora e-mailed a group that included Abbasi and Adondakis: “Rule number one about email list, there is no email list, fight club reference. Rule number two, only data points can be sent, no sarcastic comments. Enjoy. Your performance will now go up by 100 percent in 09 and your boss will love you. Game theory, look it up.”

Look it up, yo. That’s also from Bryan Burrough and Bethany McLean’s amazing Vanity Fair article on the endless pursuit of Steve Cohen, and while the fact that Tortora and his crew of cheeseballs called themselves “Fight Club” has been reported before, the fact that Tortora had to remind them of it BY SAYING “FIGHT CLUB REFERENCE” AFTER HIS FIGHT CLUB REFERENCES is new to me and makes me ashamed to be a human.

Why did these tools insider trade? Read more »

  • 03 May 2013 at 3:23 PM

Fed Governor Wants Everyone To Remember That It’s Not Just Banks That Are Too Big To Fail

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One reason that a lot of people are enamored with the Brown-Vitter approach to bank regulation is that it’s very simple, and everyone deep down sort of thinks that the simple answer has to be better than the complicated one. “You don’t need risk-based capital or stress tests or liquidity coverage ratios or VaR models or multiple tiers of capital or bail-in debt,” Brown and Vitter promise. “You just need to make sure that big banks don’t have assets of more than ~6x their common equity.”

Some people disagree1 and by all means feel free to question those people’s motives. Certainly some people benefit from complexity, bankers above all but also banking regulators, former regulators, and I suppose me too. Simple banking seems really boring, though maybe Brown-Vitter simple banking wouldn’t be.

Anyway that seems like the background to this interesting speech by Fed governor Daniel Tarullo about financial stability, which you could if you like read as sort of the Fed’s initial response to Brown-Vitter. And it’s not not that; the speech engages with Brown-Vitter on the capital stuff, basically defending the status quo of risk-based regulatory capital while conceding a little to Brown-Vitter’s call for higher capital.2

But he seems at least as focused on another source of systemic risk: not banks but wholesale funding markets, not capital but liquidity. You could see why the Fed might be focused there. Read more »

  • 02 May 2013 at 5:54 PM
  • M&A

Dell Wants Shareholders To Know That Southeastern Wasn’t Looking Out For Them

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Man, the resistance to this Dell deal is crumbling pretty fast isn’t it? Blackstone dropped its bid two weeks ago, Icahn and Southeastern have been relatively quiet since Icahn defended his right to a free exchange of ideas just before Blackstone dropped out, and the stock is at $13.33, ~2% below the $13.65 deal price, after being as high as $14.51 in the hopes of a better deal.

Dell filed its revised merger proxy today, with revisions presumably mostly driven by the SEC’s comments on its first draft from March. It doesn’t look like the SEC put up much resistance either; here’s a crappy redline and the changes are smallish. Here’s my favorite piece of SEC nitpicking:

Get it? That’s: Read more »

  • 02 May 2013 at 12:09 PM

Lehman’s Bankruptcy Worked Out Well For Intel, Anyway

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One possible reaction to Apple’s gigantic tax-optimized share repurchase program is to think that spending a lot of time fiddling with how to optimize your share repurchase program might mean you’re out of better ideas. You can ponder whether this Intel share repurchase trade described in a Lehman Brothers bankruptcy lawsuit filed yesterday supplies any evidence on that question. Intel decided to buy back $1bn of its stock in August and September of 2008, and rather than just buy it in the market it entered into a pretty fiddly forward contract with Lehman like so:1

  • Intel gives Lehman $1bn on August 29.
  • Lehman hands the $1bn back to Intel for safekeeping – it’s Lehman’s money, but Intel keeps it as collateral.
  • On September 29, Lehman gives Intel some shares, based on the average price of Intel stock from August 29 to September 26.2
  • The dollar amount of shares Intel buys is $1bn, if the average price is $21 or below, or $250mm, if the average price is $25 or above, or some amount linearly in between if the average price is between $21 and $25:

  • If the dollar amount Intel buys is less than $1 billion, Lehman gives back the extra money.
  • So in other words as the stock price goes up Intel buys fewer shares, and vice versa, which is kind of wrong-way for them3 but right-way for Lehman.
  • In exchange for that risk Lehman agrees to give them a discount of 10.6 cents per share.4
  • The number of shares Intel buys is equal to the dollar amount divided by the average price minus 10.6 cents:

Read more »

  • 01 May 2013 at 5:22 PM

Bill To Make Banking Boring Actually Might Be Kind Of Fun

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There are a lot of things you can read about the Brown-Vitter bill recently, though it’s a really nice day out and you probably shouldn’t. It’s not … it’s not like a real thing is it? When the text of the bill, which would raise the equity capital requirements on big banks to ~15% on a non-risk-weighted basis and forbid U.S. regulators from implementing Basel rules, first leaked, I sort of assumed it was a temper tantrum not intended to become law, and the fact that its official title is the “Terminating Bailouts for Taxpayer Fairness (TBTF) (Get It?) (GET IT?) Act of 2013″ doesn’t exactly change my mind.1

I seem to have company in that view. Here you can read Jesse Eisinger (pro-Brown-Vitter) saying it’s a “barbaric yawp” that “probably won’t get passed.” Here you can read Davis Polk (anti) agreeing. Here you can read Matt Taibbi (very pro) saying that it might.2 So you figure it out.

Here’s one thing though, which is:

  • Here you are with $100 in Pretty Safe Assets funded with like $5 of Capital and $95 of Debt.
  • Suddenly you need $15 in Capital.
  • You’re not going to take that lying down.
  • You sell the Pretty Safe Assets to Quintilian Regulatory Fucking-About Partners, a hedge fund, for $100.3
  • You buy a call option on the Pretty Safe Assets from QRFAP, struck at say $70, which has a fair value of about $30 since it’s way way way in the money and the Pretty Safe Assets are, by hypothesis, not that volatile.
  • Your sources and uses are: Read more »
  • 30 Apr 2013 at 5:58 PM

Apple Sold Some Bonds

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Well someone today did an entirely non-imaginary debt offering to fund a stock buyback so bully for them. Should we look at some things Apple’s debt deal is bigger than (most of them!) and other things its yield is smaller than (also most of them!)? I guess that’s a thing, I don’t know. It’s a big bond deal, but still, one should keep it in perspective. Apple sold more bonds than iPods, yes, but fewer bonds than iPads. This is not the category killer that iPrefs could have been.

I assume a termsheet will hit Edgar momentarily and I’ll have wasted my time and be slightly wrong but in the interim I made this list of what seems to have been on offer:1

That’s 5-10bps outside of where Microsoft priced last week. The deal seems to have been multiple times oversubscribed; presumably some buyers whose orders don’t get filled will console themselves buying Facebook shares or something. Read more »