Matt Levine

Posts by Matt Levine

  • 12 Aug 2013 at 10:53 AM

Research Analysts Are Talking To Companies Again

Apparently FINRA is looking into whether sell-side research analysts are doing some naughty things, which is an evergreen topic, though you might almost imagine that the current round is being prompted by the return to public life of Eliot Spitzer, who gets a quote in the DealBook article. Eliot Spitzer: not a fan of research-analyst naughtiness.

It’s hard to tell if the analysts are doing naughty things but, probably, right? Basically the analysts are meeting with potential issuers before those issuers’ IPOs, which is fine. But at those meetings, which tend to be arranged by “so-called I.P.O. advisers” like Solebury, Rothschild or Lazard,1 they might be talking about the IPO and the analysts’ views of the issuers, which is not fine. They’re “supposed to discuss only broad industry trends at these meetings” and defer to their bankers for “specific views on a company, like earnings models or potential I.P.O. pricing,” because the idea is that the analyst meetings are not supposed to be used by the issuers to select underwriters. They’re just a chat! It’s like, hey, I’m in this industry, you cover this industry, let’s talk about broad industry trends! For my general education! Because while, yes, me and my IPO advisers sitting next to me are picking underwriters for our IPO, and while your bankers are pitching us “within hours” of this meeting, right now I’m entirely focused on a general chat about broad industry trends. That’s all this is. Read more »

A good rule of thumb is never to reason from an acronym but here’s this Bloomberg article about how Dan Loeb’s Third Point Reinsurance is making use of the JOBS Act in its IPO even though it creates no JOBS in America so hahaha irony. It’s not entirely clear what Third Point Re is doing to take advantage of the JOBS Act – it filed its initial draft prospectus confidentially, and it’s being a little coy about its plans for financial disclosure and internal-control certification. Nor is it clear who is harmed by these potential omissions, or how; the main harm seems to be a devaluation of the acronym which I guess is a thing? How will we ever be able to trust an acronym again? Next you’ll tell me the PATRIOT Act is unpatriotic.1

Of course the point of the JOBS Act was not to create jobs, which you can tell because (1) it begins with the words “An Act To increase American job creation,” which is pretty suspicious, and (2) it otherwise has nothing to do with jobs, there are no requirements for employees or hiring or anything in it, it’s just the name, not even the name, the name doesn’t mention jobs, just the acronym, honestly.2 Read more »

The city of Richmond, CA, is trying to use eminent domain to seize and refinance underwater mortgages, and yesterday the trustees of some mortgage bonds holding those mortgages sued to stop them. On its surface the lawsuit is about constitutional law but really it’s about option valuation. To stylize it a bit, the plan is for Richmond to:

  • use eminent domain to “seize” a performing mortgage with a balance of, say, $300,000, but on a house worth $200,000;
  • pay the owner of the mortgage $200,000 in compensation;
  • issue a new mortgage to the homeowner for $200,000; and
  • sell the new mortgage to an investor for $200,000, funding the costs to pay off the old mortgage lender.

The main stylization there is that actually the compensation will be more like $160,000, not $200,000, to account for the expected costs of foreclosure, and to provide a profit margin to the new investors (and fees to Richmond’s financial advisor).1 That is important for the lawsuit but not that important for our purposes so let’s ignore it.

The question is then: is a $300,000 performing mortgage on a $200,000 house worth $300,000, or $200,000, or something else? Read more »

Presumably someone is working on a book about the LightSquared saga though so far this is all that I can find on Amazon. But the twists and turns of Phil Falcone’s efforts to build a relatively non-plane-crashing wireless communications network, the dizzying highs and subsequent definitive lows of his relationship with the FCC, LightSquared’s bankruptcy, its ramifications for Falcone’s hedge fund, and the fight to gain control of its spectrum in bankruptcy, are the very definition of excitement in business dealings, which is to say that they’re a bunch of guys sitting in offices and sending emails to each other but, like, angry emails.1

The latest is that Falcone’s hedge fund Harbinger is suing Charles Ergen and Ergen’s EchoStar Corporation and Dish Network for doing naughty things to muck up LightSquared’s bankruptcy process. This is praise from the master; you might recall then-SEC enforcement director Robert Khuzami saying last year that Falcone’s own gated-fund-borrowing-and-short-squeezing shenanigans “read like the final exam in a graduate school course in how to operate a hedge fund unlawfully.” My take at the time was that those shenanigans seemed (1) definitively nasty but (2) not so definitively illegal, and I guess I’ll go with the same answer for Ergen’s manipulations? Man, Fraud Graduate School is easy.

The best thing to do is to assume that everything in Harbinger’s complaint is true, because the story is better that way. If you do, then the story goes: Read more »

  • 07 Aug 2013 at 9:40 AM

Everybody Will Always Be Suing BofA Over Mortgages

These lawsuits against Bank of America are pretty lame, aren’t they? The SEC and Department of Justice each sued BofA yesterday for fraud in a 2008 prime jumbo mortgage securitization but it doesn’t really feel like fraud. The guns are smoke-free. The DoJ gets itself all excited because someone proposed including some bad mortgages in the deal, and a Bank of America trader said of those mortgages that, “like a fat kid in dodgeball, these need to stay on the sidelines,” but they did! The trader thought some of the mortgages were crap, and they were crap, and so they weren’t included in the deal. The system worked! It’s like if Fabulous Fab emailed his girlfriend saying “I am creating monstruosities,” and she told him to stop, and he did.

The complaints put their fraudy eggs in two main baskets. The first is that Bank of America omitted to tell investors some material facts, of which the most important is that 70% of the loans in this securitization were wholesale loans (originated through brokers), and that wholesale loans were worse – for both credit and prepayment risk – than loans originated by BofA directly. Read more »

The SEC settled a little crisis-era CDO fraud case with UBS today and the fraud is pretty entertainingly shitty. Basically UBS provided the warehouse for a synthetic CDO where the notorious ACA was the collateral manager, and the disclosed deal was that, when the CDO closed, it would enter into (as protection seller) any CDS contracts that UBS had entered as part of the warehouse at (1) the market price of those CDS or (2) the price UBS had received for them as initial counterparty, whichever was more favorable to UBS.1 Now right there you’ve got some optionality and room for fuzziness, and you could imagine various unpleasant schemes where, for instance, UBS cherry-picks some contracts to transfer at market and some at historic price, or where UBS mis-marks some contracts to get a better deal when it transfers them.

But the actual scheme was simpler and dumber: Read more »

UBS is selling its over-the-counter commodity derivatives portfolio to JPMorgan, prompting John Carney to say this:

Here’s a good rule of thumb. When one bank buys a business from another bank, it’s almost always a case of regulatory arbitrage. It’s never really because of synergies or managerial talent or whatever other hokum the media relations churn out to their willing dupes in the press. It’s just about one bank being better able to take advantage of the rules.

So even though the rationale for JPMorgan Chase buying the over-the-counter commodities derivatives business of UBS remains mysterious, you can safely surmise this is regulatory arbitrage. Most likely, it’s got to do with capital requirements.

Umm maybe? I don’t know, this question seems a little over-determined; the thing is that pretty much everyone thinks that (1) JPMorgan is pretty good at running an investment bank, the occasional hiccup aside, and that (2) UBS is pretty crap at doing so. So are US regulators relatively more comfortable with JPM managing this portfolio than Swiss regulators are with UBS doing so? Sure, probably, but probably so are the respective shareholders, and counterparties, and senior managements, and anyone else you might ask. Really moving any portfolio of anything from UBS to JPMorgan is probably Pareto optimal.

The light irony comes from – well here is Bloomberg’s first sentence: Read more »

  • 06 Aug 2013 at 11:40 AM

Poker Is Gambling Again, FYI

A while back a federal judge in New York decided that poker wasn’t illegal gambling under federal law, and we discussed it here, and so I feel a certain sense of responsibility to all of the Dealbreaker readers who quit their jobs to start poker rooms. So I should tell you that that decision was reversed today on appeal, and poker is illegal again, so you’d better shut down your poker room and go back to trading derivatives ha ha ha.

Other than that I don’t have much to say about the decision. The lower court’s decision declaring poker legal was very scholarly about how poker is predominately a game of skill, not of chance, and so is not “gambling.” But it was pretty loony on the law: poker is undisputedly illegal gambling under New York law, so the question of whether it was illegal under federal law turned on whether it’s a “gambling business which is a violation of the law of” New York. The district court said, well, it’s a violation of New York’s gambling law, but it’s not a “gambling business” under my reading of the word “gambling,” because it’s a game of skill, so you’re free to go. The appeals court ignores all the chance vs. skill stuff and just says “it’s gambling under New York law, so it’s gambling under the statute, so you’re hosed.” That’s sad but also probably right.

Here you can read Floyd Norris complaining that synthetic CDOs, and by extension most derivatives trades, are just gambling, the equivalent of a bank’s “put[ting] together a betting book and taking out the bookie’s cut.” Read more »