Matt Levine

Posts by Matt Levine

  • 04 Jun 2013 at 5:38 PM

Jes Staley Thinks That One Day Investors Will Be Able To Understand Banks

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The basic thing about investing in big banks’ unsecured debt is that once upon a time it was a pseudo-risk-free proposition because, like, it’s a bank, what could possibly go wrong,1 and now it’s like,2 hi, you are buying the mezzanine (call it 10-to-30%-loss3) tranche in an actively traded and extremely opaque CDO full of goofy stuff and, hey, put a price on that.

I don’t know who’ll be good at putting a price on that but it stands to reason that Jes Staley, the former head of JPMorgan’s investment bank who left for BlueMountain shortly after several billion dollars of JPMorgan’s money made the same voyage, would. He thinks so anyway:

On a panel at the Bloomberg Hedge Funds Summit in New York, Mr. Staley discussed what is known as resolution authority, in which regulators help wind down failing banks. The process of adapting to these new rules, he said, would give banks a “more clearly defined capital structure,” and thereby create opportunities for investors.

“There’s going to be tremendous mis-pricing between the different levels of the capital structure in these banks,” Mr. Staley, who is known as Jes, said on the panel.

One imagines that, if all goes according to plan, then at some point between now and the end of time:

  • There will be some bank debt (deposits!) that is bail-outable and more or less government guaranteed;
  • There will be some other bank debt (repo!) that is collateralized and more or less money-good, ish;
  • There will be some other other bank debt that is bail-inable and more or less clearly mezzaniney and going to be toasted in any bank failure; and
  • People will believe that.

Read more »

  • 04 Jun 2013 at 2:26 PM

S&P: Obviously No One Thought Our Ratings Were Objective Or Unbiased Or, For That Matter, True

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The Journal checked in on the government’s lawsuit against S&P today, since there’s a hearing coming up next week where S&P will ask a court to dismiss the case. You can read the arguments here, here, here, and here. My sympathies are mostly with S&P, though I’m also not holding my breath that a judge will bounce this case entirely without giving the government a chance to take some depositions and bluster a bit.

What’s fun here though is to consider S&P’s two main arguments which are:

  • When we say we have a policy of objectivity and independence and avoiding conflicts of interest, we don’t want anyone to take us seriously about that, and
  • What do you mean our ratings of RMBS CDOs in 2007 were wrong? They were fine, stop whining.

They really say these things; e.g. (page 8 of the motion to dismiss): Read more »

  • 03 Jun 2013 at 4:15 PM

Crackdown On Insider Trading Seems To Have Led To More Insider Trading

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Why does there seem to be more insider trading than there used to be? My assumption was always to the effect of “because now we look for it and have computers and stuff,” but James Surowiecki has a column today saying in part “no, actually, there’s more insider trading”:

The S.E.C.’s enforcement actions have been on the rise as well, and the past three years saw more of them than any other three-year period in its history. Andrew Ceresney, the co-director of enforcement at the S.E.C., told me, “We’ve gotten better at detecting illegal activity, and at using technology that allows us to draw connections and see patterns.” But this isn’t just a case of vigilant policing giving the impression of a rise in crime; a number of studies of market-moving events have documented a boom in “suspicious activity” (that is, more trading than usual) around those events.

I determined to commit some pseudoscience about pre-merger insider trading and the result is this:

Loosely speaking what this tells you is: Read more »

  • 31 May 2013 at 5:47 PM

CBOT Fines Trader For Losing Money

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Umm so maybe someone wants to explain to me what happened to Glenn Hadden? He’s the head of rates at Morgan Stanley, formerly at Goldman, and he was just banned from all CME trading floors for ten days, which is a little funny because, like, what, was he going to walk around on an exchange floor? Like in a tour group? But actually he can’t use computers either,1 so basically, no Treasury futures for ten days. That starts in mid-July and, god, I’d like to be banned from a computer for ten days in July, but I guess the perks of being a successful rates trader include punishments like that.

Anyway the thing he did was … well here is the Notice of Disciplinary Action, which says that the thing he did was violate CBOT Rule 560, which requires that big “positions must be initiated and liquidated in an orderly manner.” So his offense was to trade in a disorderly way when he was at Goldman five years ago. Specifically:

December 19, 2008, during the final minute prior to expiration of the December 2008 10-Year Treasury futures contract, in order to cover the tail (a standard form of risk management activity associated with holding a Treasury futures position at expiry) for the position held by Goldman, Sachs & Co.’s Treasury Desk, Hadden, then a Treasury trader for Goldman Sachs & Co., executed a 100-lot market order, and then submitted a 50-lot limit order, which was only partially filled as a result of illiquidity in the market. During the course of these orders and subsequent fills, the market traded up 27+ ticks resulting in the final price of the December 2008 10-year Treasury futures contract settling above what was indicated by the December – March calendar spread.

So: he tried to buy a lot of Treasury futures real fast, and as a result of that he ended up paying too high a price for them. I guess that’s a little “disorderly” but also sort of underwhelming.2

What is going on? Obviously there are two possibilities: Read more »

  • 31 May 2013 at 3:16 PM
  • M&A

Terra Firma Gets Second Chance To Prove It Only Bid For EMI Because It Thought Everyone Else Would Too

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Fundamentally if you’re a sell-side M&A banker your job is to find a buyer and get them to overpay for the company you’re selling. I mean, oh, you know, you’re a repeat player and reputational concerns and continued business relationships and all that militate against getting them to overpay too much. But mostly, the more they overpay the better you’ve served your client. Also, though, those reputational things etc., plus lots of fraud laws, militate against getting buyers to overpay by deceiving them about stuff relating to the company you’re selling. You can’t, like, just go forge financial statements. That’s cheating, and not in an admiring hahaha-you-got-me way. In a jail way.

So what’s left? One thing you can do is gently deceive them about the competitive dynamic. This might seem a little silly – if you’re buying a company, shouldn’t you be carefully determining its fundamental value rather than just bidding a penny more than whoever else is in the auction? – but in fact a lot of the M&A function is pretty much exactly that. You set up an auction, you demand confidentiality, you forbid bidders from talking to each other, you don’t tell them each others’ bids, you don’t announce to the world when a bidder has dropped out, all with the goal of creating the appearance of more competition than there is. When the bidders share too much information about their bidding plans with each other, you sue them. If a possibly viable but spivvy bidder comes along, you encourage them to stick around and throw out big numbers, just to keep the other bidders on their toes. “Yes, Carl Icahn, please, tell us more about your plans to buy our company,” is a sentence you might find yourself saying. You don’t outright lie, but you do your best to create the impression that your particular fertilizer-byproducts company is the prettiest girl at the dance or whatever the going metaphor is.

Or just do this: Read more »

  • 30 May 2013 at 7:17 PM

Did Jamie Dimon Almost Lose His Chairmanship Because He Dared To Criticize Obama?

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Hahaha no he didn’t almost lose his chairmanship at all, come on. Anyway here’s a thing:

Dimon has also been a fierce critic of President Obama’s economic policies, including parts of the Dodd-Frank banking reform bill. Many union pension funds as well as public officials running large pension funds have vocally supported the president’s economic and regulatory policies, and the recent shareholder vote was designed to quash Dimon’s public criticism of these policies, people inside JP Morgan say.

That’s from Charlie Gasparino’s report today that the House Financial Services Subcommittee is going to hold a hearing “into whether proxy advisory firms are pushing political agendas rather than serving shareholder interests,” which I guess is no sillier a hearing than most other hearings. More things:

Executives at many companies have complained to Congress that such battles are fraught with politics, with advisory firms often pushing the political agendas of some of their biggest shareholder clients at union and public pension funds.

There’s much to unpack there1 but the basic questions are: Read more »

  • 30 May 2013 at 3:13 PM

Europe’s Going To Get Around To Taxing One Or Two Financial Transactions Any Year Now

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If you were designing a new tax regime from scratch, I’m sure it would be great. Because you’re brilliant, of course, but also because, and this is going to sound a bit harsh but isn’t meant that way, your phone isn’t exactly ringing off the hook with powerful people calling to ask for special favors in this tax regime that you are hypothetically designing. Hypothetically. Which is to say you’re not the EU, which you’re probably pretty pleased about:

European countries plan to scale back a proposed financial transactions tax drastically, initially imposing a tiny charge on share deals only and taking much longer than originally intended to achieve a full roll-out. …

Italy and France have expressed concerns about widening the tax beyond shares to government debt as both believe it could discourage investors from buying their bonds.

It’s hard not to enjoy the story of the European financial transactions tax at least a little bit; the EU is basically growing a brand-new tax in a petri dish, and the result of the experiment might inform how you think about the prospects for other potential experiments in taxation. (I mean, at least in Europe.) In that sense it’s a counterpoint to Apple’s travails before Congress last week. Sure, the current web of international corporate taxation has been polished to its current state of extreme perfection by decades of special-interest lobbying and application of highly paid human ingenuity to discovering and building ways to avoid taxation. But modern technology has progressed to the point that you could replicate that whole structure in a few months if you put your mind to it, and Europe did: Read more »

  • 29 May 2013 at 6:14 PM

Bank Shareholders Are Selfish Jerks

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We talked last week about how shareholders are really the last people you’d want running a bank, if you’re the sort of person who doesn’t like banks. Conveniently Jesse Eisinger is that sort of person, and he’s pissed at shareholders for how they’re running banks:

Shareholders can’t be counted on.

That’s the message from the dispiriting shareholder vote on whether to leave Jamie Dimon as both the chief executive and the chairman of JPMorgan Chase, or to split the roles. Even more shareholders backed him in his dual role this year than did last year.

For some time, reformers have hoped that shareholders might ride to the rescue to solve the problem of Bank Gigantism, otherwise known as Too Big to Fail.

Big-bank critics, like the freethinking analyst Mike Mayo, analysts at Wells Fargo, and Sheila Bair, the former head of the Federal Deposit Insurance Corporation — and others, including me — have raised the possibility that shareholders might revolt over banks’ depressed stock valuations and seek breakups. Broken-up banks would be smaller and safer.

No, it’s not going to happen. Shareholders are part of the problem, not the solution.

The problem in this telling is basically the limited liability corporation, which gives shareholders an option on the corporation’s assets; option pricing theory, which informs shareholders that volatility – of earnings, of “high-risk, high-return bets” where shareholders “capture the unlimited upside and their losses are capped” – increases the value of their option; and modern corporate governance, which informs bankers that they work for the shareholders and therefore should be maximizing the value of that option. With the bets and so forth. Read more »

  • 29 May 2013 at 1:49 PM

Infinite Loop Of Facebook IPO Stories Caused By Actual Infinite Loop During Facebook IPO

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Remember when Facebook IPOed last May and it was a mess? Today the SEC released its amusing order fining Nasdaq $10 million for the mess and explaining what happened. Some computers were having a stressful day at work and so they decided to give up and hide out in the nap room, is the gist of it. I feel like I’d get along with those computers.

What started the mess is that Nasdaq opens the trading of a newly IPO’ed stock with an opening cross where it compiles quotes for a while and then crosses them in one big opening cross before continuous trading starts. And it uses the following process to do the opening cross:

  • 1 Get a bunch of orders over a ~20 minute period before trading starts
  • 2 Use a program called the IPO Cross Application to calculate the clearing price and shares crossed based on those orders, which takes a few milliseconds
  • 3 Check if any of the orders were cancelled during those milliseconds
  • 4 If they were, delete those orders and Goto 2

Did you spot the problem?1 Nasdaq’s systems engineers did not, even after the IPO Cross Application had been running on an infinite loop for twenty minutes. The SEC caught it, though, reading their order, I was worried that they’d fallen prey to it as well: Read more »

  • 28 May 2013 at 4:30 PM

If You’d Like To Put All Your Money Into An Investment Idea Without Knowing What It Is, Do We Have A Literally Named Company For You

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Here at Dealbreaker we have a strict policy of not providing investment advice but I think I can make an exception for All In Blind, Inc., the best-named blank check IPO candidate since Great Idea Corp.: Read more »

  • 28 May 2013 at 3:53 PM

SEC Turns Its Attention Back To Accounting Fraud, Literary Criticism

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A criticism of the SEC that you’ll sometimes hear is that it’s mostly a bunch of lawyers, and two things that are broadly true of lawyers as a class is that they are good at close readings of dense texts and terrified of math. This means, some might say, that the agency is ill-equipped to regulate the high-tech quantitative world of modern finance. So it’s obscurely pleasing to read that the SEC’s office of quantitative research is rolling out a new program that applies high-tech quantitative methods to, basically, close reading of dense texts:

An initial step in the SEC’s new effort [to crack down on accounting fraud] is software that analyzes the “management’s discussion and analysis” section of annual reports where executives detail a company’s performance and prospects.

Officials say certain word choices appear to reveal warning signs of earnings manipulation, and tests to determine if the analysis would have detected previous accounting frauds “look very promising,” said Harvey Westbrook, head of the SEC’s office of quantitative research.

Companies that bend or break accounting rules tend to play a “word shell game,” said Craig Lewis, the SEC’s chief economist and head of the division developing the model. Such companies try to “deflect attention from a core problem by talking a lot more about a benign” issue than their competitors, while “underreporting important risks.”

It’s also pleasing to hear that a CFO’s guilty conscience over his earnings manipulation seeps directly into his prose. Though the article is a little light on the details of the SEC’s earnings-manipulation model, which I guess makes sense, since “companies and their lawyers are expected to respond to the crackdown by trying to outsmart the agency’s computers,” which I would really like to see.1 That could be a mixed bag; the Journal hints that it might result in easier-to-read but more grandiose filings:2 Read more »

From Now On Goldman Will Only Sell A Product To Clients If Some Goldman Partners Understand It

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I can’t find the quote but I recently read someone arguing that you should never worry about anything you see on the news. By definition, the argument goes, horrible things that make the news are newsworthy, and they are newsworthy because they are rare, and so the odds of you dying in a terrorist attack, bridge collapse, Ebola outbreak, or anything else you see on TV are basically nil.

Financial news is endearing because it’s the opposite of that: it consists mostly of pointing at perfectly unexceptional market-standard practices that happen every day and saying “holy fuck, did everyone know about that? That’s messed up.” As Matthew Klein has said, “many things that are considered normal in finance look like fraud to almost everyone else,” so the vein is rich. Libor manipulation, Apple’s taxes, really take your pick. Or today’s Times article “Banks’ Lobbyists Help in Drafting Financial Bills”; my impression is that an article titled “Financial Bill Written Without Drafting Help From Banks’ Lobbyists” would, for sheer unlikeliness, be the financial-regulatory equivalent of a news report about terrorists blowing up a bridge using the Ebola virus.

Closest to my heart among these scandals of differing perceptions might be the “you built me a CDO designed to fail” cases. For starters: the fact that they come out of market-standard practices is reflected in the fact that pretty much every bank has one of them.1

But while every other bank seems to have come out of the CDO scandals with a reaction along the lines of “it’s a fair cop, here is a pile of money,” Goldman, who sort of originated the idea,2 has spent the last few years putting together increasingly convoluted committee structures and online animations to make sure it’ll never happen again, for some “it.” Here is the latest 26-page report on Goldman’s business standards improvement, and here is a genuinely delightful “lifecycle of a transaction” animation that I am tempted to replace with this: Read more »