Matt Levine

Posts by Matt Levine

  • 15 Apr 2013 at 3:23 PM
  • Banks

Mike Corbat Gets An A- For The Quarter From Mike Corbat

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Citi announced its quarter this morning and there are various ways to tell that it was good, of which “the stock was up” is probably the main one. A possibly less objective test is that, back in March, Mike Corbat told everyone how he would grade himself, if he was grading himself. As he put it today:

Last month, I presented three targets we aim to reach by the end of 2015. First is achieving an efficiency ratio in Citicorp in the mid 50% range. Second, we want to generate a return on Citigroup’s tangible common equity of over 10%. And third is reaching a return on Citigroup’s assets of between 90 and 110 basis points in a risk-balanced manner.

Today Citi announced $4.0 billion of net income (excluding CVA/DVA), or $1.29 per share, which I work out to around 82bps of ROA, 9.86% ROTCE, and a 55.6% Citicorp efficiency ratio.1 So … pretty good, all in all?

One oddity of Corbat’s three-part plan is that two of the parts sort of collapse into each other. Read more »

  • 12 Apr 2013 at 2:48 PM
  • Banks

J.P. Morgan Isn’t Doing This For Fun You Know

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Yesterday JPMorgan research released a 328 page report arguing that global tier 1 investment banks were “un-investable,” and today JPMorgan reported record first-quarter earnings of $1.59 per share versus $1.40 consensus, so I guess it sort of looks like there’s a disconnect. But not really? Here are the analysts on banking regulation:

We believe Tier I IBs are un-investable at the moment and the right time to make a switch into Tier I IBs would be if we get more clarity on regulations providing us comfort around the ROE potential of Tier I IBs or we see IBs having to spin-off their businesses leading to capital return to shareholders. We believe Tier I IBs will continue to remain more exposed to the IB regulatory changes as they try to “defend their turf” while Tier II IBs have the option to step back more aggressively.

Jamie Dimon, meanwhile, responded to analyst questions this morning by more or less begging the analysts themselves to call their congresspeople and defend JPMorgan’s turf, arguing that banks are safer than ever, that JPMorgan’s size and scale and universality provides services that clients want and is good for the world, and that “I hope at one point we declare victory and stop eating our young.”1

The analyst report is a fascinating bit of business. The claim is that global investment banking – by which they mean of course FICC trading – will see market share move toward top-tier banks, driven mainly by the commoditization of the FICC business with clearing and greater price transparency around derivatives, as well as higher capital requirements and more complex and Balkanized regulation around trading activities. The result: Read more »

  • 11 Apr 2013 at 6:57 PM

Lehman Alum Was Going To Name His New Fund “Hidden Fraud LLC” But Thought Better Of It

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Susanne Craig had an article in DealBook today about regulatory capital relief trades and a basic thing about regulatory capital relief trades is that they always allow you to say this:

One Citigroup executive with knowledge of this trade but not authorized to speak on the record said it was structured to reduce Citigroup’s exposure to shipping loans. The fact that it reduced the amount of capital the bank had to hold was “an added bonus.”

“Bonus” is, as everyone knows, a word with different meanings in and out of the financial industry. Most people say “bonus” to mean a relatively small and unexpected gift that you’re pleased to receive but weren’t, like, counting on or organizing your life around. For bankers, the “bonus” is the whole point of what you’re doing.

The Citigroup trade that Craig refers to is a bespoke tranche trade with Blackstone on a pool of shipping loans; we discussed it a little in February. Per her numbers Blackstone has exposure to the 0-12% tranche and has an expected return of 15%, while Citi “was able to reduce by roughly 90 percent the amount of capital it needed to set aside to cover losses on the shipping portfolio.” So Citi has reduced its notional exposure by 12%, and its capital exposure by 90%. A 7.5:1 ratio of bonus to base … seems fair, I guess?1 A little 2007, maybe, but then these are bespoke synthetic CDO trades, so much about them is a little 2007.

Anyway Craig provides various other examples and you can think your thoughts about whether this should bother you. Read more »

  • 11 Apr 2013 at 4:04 PM

KPMG Partner Assured Coconspirator Who Handed Him Bags Of Cash In Parking Lots That Insider Trading Wasn’t Really Illegal

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I don’t want to give you legal advice, but on the other hand you could be getting it from a worse source. Scott London for instance:

[Insider trader Bryan] Shaw said that in approximately July 2012, he received a notice from Fidelity Brokerage Services that Fidelity was putting a hold on his investment account. Shaw said that he immediately called LONDON and expressed his concern that their insider trading had been discovered. Shaw said that LONDON reassured him that there was no reason for concern, and explained that insider trading was like counting cards at a casino in Las Vegas – if you were caught, they simply ask you to leave because they cannot prove it.

Oops! Six months later the FBI got to Shaw, inducing him to cooperate to save himself, and today they charged London with criminal insider trading.1 It’s tempting to conclude that the moral of this story is “never take legal advice from an accountant,” though realistically it’s more like “never take legal advice from your criminal co-conspirator.”

This case is very weird. I mean the actual case is pretty boring: London, as a KPMG audit partner on a bunch of West Coast accounts, got earnings information before it became public, and then he gave it to Shaw, and then Shaw bought stock and options and made money on it and then literally delivered literal bags filled with literal cash to London to thank him for the tips. After Shaw started cooperating he met with London, wearing a wire, and this happened:

In advance of the meeting, agents from the FBI provided Shaw with $5,000 in cash, which was placed into a manila envelope and then wrapped inside a black paper bag, which was consistent with how Shaw had described his concealing previous cash payments he had made to LONDON.

Oh you put the cash in an envelope inside a bag? They’ll never catch you! Read more »

  • 11 Apr 2013 at 10:45 AM

Guy Trades Dream Of Making Millions Selling Herbalife For New Dream Of Making Millions Suing Herbalife

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It’s a little surprising that it took this long for someone to sue Herbalife, isn’t it? Whether or not Bill Ackman is right about Herbalife being an illegal pyramid scheme, he did take the trouble of writing like 300 pages about it, which is usually more than enough to inspire some intrepid class action lawyer to cut and paste the most damaging claims into a complaint and see where it goes. Perhaps they were stymied by converting from PowerPoint. Anyway here you go:

California resident Dana Bostick is suing Herbalife under racketeering and corruption laws, accusing the company of being an “inherently fraudulent pyramid scheme.” …

While Herbalife has settled suits brought by former distributors in the past, Bostick is the first to go to court since Herbalife became a battleground of hedge fund titans. Ackman has faced off against Dan Loeb and Carl Icahn, who owns a 15 percent stake in Herbalife. … The suit, which also seeks class-action status, claims around 88 percent of Herbalife’s 500,000 US distributors do not make any money.

The complaint is here and it’s … mostly it’s just sad. On a first reading it’s not entirely clear how you should apportion blame for the sadness; I don’t know if this says more about Herbalife or Dana Bostick: Read more »

  • 10 Apr 2013 at 4:12 PM

Report Suggests Carl Icahn Isn’t Spending Nearly Enough Time Bothering Electric Utilities

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“Looking for a juicy [hostile] takeover candidate? A new report suggests you might find one at Fifth Third Bancorp, the utility holding company Ameren or ConAgra Foods,” which shows you how much that new report knows. Oh, you’re gonna launch a hostile takeover on a regional bank? A regulated utility holding company? Let me know how that works out for you. Over here, I’m going to focus my imaginary hostile takeover activity on industries where hostile takeovers are, y’know, possible.1

That’s from this DealBook piece about a company called RotaryGallop and a report they’ve done on corporate vulnerability to activists. The report can be yours for $4,550, and needless to say I admire their gumption for creating a measure of corporate vulnerability that seems shall we say somewhat unmoored from reality, writing it down in a report, charging companies $4,550 to read it, and getting it written up in the Times. Still:

To prepare the report, Rotary Gallop analyzed share ownership at 459 of the companies in the Standard & Poor’s 500-stock index — essentially all those without multiple share classes. It then used December 2012 share ownership data from FactSet Research to model millions of hypothetical up-or-down votes, determining which shareholders could most often tip the outcome one way or the other. …

The calculations were straightforward, but complex, [RotaryGallop CEO Travis] Dirks said. Read more »

  • 09 Apr 2013 at 5:45 PM

Judge Finds That Investors Who Bought A Security Called “Draco” Pretty Much Got What They Deserved

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One thing that a lot of crisis-era synthetic CDOs referencing residential mortgage-backed securities have in common is that they were “designed to fail,” in that the short credit (protection buying) party to the synthetic CDO (1) was short and (2) had a hand in selecting the reference property. There’s nothing particularly odd or nefarious about that: a synthetic CDO requires a short party,1 and since you can’t force John Paulson or Magnetar or whoever to short securities that they don’t want to short, you have to give them some input into selection. Someone bought the Herbalife shares that Bill Ackman’s shorting, and from Bill Ackman’s perspective that trade is designed to fail, though not perhaps from Herbalife’s.

There are various flavors of woolyheadedness about all of this, some of which, to be fair, are the fault of the banks who peddled the synthetic CDOs. Unhelpful behavior would include, for instance, saying things like “the collateral manager selected the collateral all on its own with your best interests in mind.” This is a somewhat obvious absurdity – of course the collateral manager had to select collateral that was acceptable to the short party – but you can understand why people would feel aggrieved when it turned out that the collateral manager was just an empty room into which cackling short-sellers tossed ill-begotten prospectuses. Another bad idea would be saying “ooh look John Paulson is so long the equity of this thing because it is so good” when in fact his net position was massively short the senior tranches. Outside of the eleven minutes when Paulson was the greatest investor ever, no one might care about John Paulson’s position in the security, but that’s still not a great reason for the bank to lie about it.

Stuff like that is definitely unpleasant behavior, but is it fraud? Fraud is, basically, you lie to me and I believe you so I do something about it. And the problem with the synthetic CDOs is that that link is pretty tenuous. People pretty much bought synthetic CDOs because they thought house prices were going up and therefore residential mortgages would be a good investment. The particular mechanics of the particular negotiations that led to the picking of the particular collateral was less relevant. If they had been given the truth about who chose what collateral and why, they’d probably have made the same decisions, and been just as screwed.

I think all of the above is pretty much conventional Wall Street wisdom, but not everyone sees it that way. In particular that view has had a rough time with courts and regulators. Lotta lawsuits, lotta nine-digit settlements, occasional judge rejecting a nine-digit settlement for being insufficiently harsh. Yesterday, though, UBS got a break: Read more »

  • 09 Apr 2013 at 12:05 PM

Herbalife’s Auditor Says You Can’t Rely On Its Financials, But Not In A Fun Way

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CAN YOU FEEL THE EXCITEMENT? No, right? Okay good. A senior audit partner at KPMG Los Angeles did a bad thing and “was involved in providing non-public client information to a third party, who then used that information in stock trades involving several West Coast companies.” And now KPMG has resigned as the auditor of a couple of companies, and withdrawn their 2010/2011/2012 audit reports, which, given that 10Qs are due in a couple of weeks, is a bummer for those companies. Bob’s Auditing Service & Carwash of Rancho Palos Verdes is going to be busy.

And of course one of the companies is Herbalife, which has really had more than its share of excitement. Honestly if I was insider trading I’d probably pick a company a bit further from the limelight?1 Anyway HLF was halted for most of the morning while while they puttered around thinking things over, only to eventually release a pretty bland press release that stresses that KPMG resigned “solely due to the impairment of KPMG’s independence resulting from its now former partner’s alleged unlawful activities and not for any reason related to Herbalife’s financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason.” It eventually re-opened down 2.3%.

The other company is … currently a player to be named later? Speculation is focusing on Skechers, a California-based KPMG client that was also halted, which seems plausible enough. Who knows? [Update: Yep, Skechers.]

Okay further baseless speculation! Read more »

Former Cerberus Marketer Wasn’t Really Comfortable Marketing Cerberus

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My favorite financial news story of 2013 so far might be the Reuters story last Friday about how NYSE and Nasdaq each listed more IPOs than the other during the first quarter. A normal human might find that odd: listing an IPO is the sort of thing that you tend to notice and keep a record of, so you could pretty easily just add up the IPOs you listed and compare. But to a banker, it’s obvious that everyone would claim, with some sort of semi-plausible justification, to be first in every league table. In fact the explanation is perfectly, almost paradigmatically natural: Nasdaq excludes REITs, spin-offs, and best efforts deals.1 I remember when I used to exclude REITs! Excluding REITs is, like, 20% of what a capital markets banker does.

A deep tension at the heart of the financial industry is that it attracts a lot of quantitative logical evidence-oriented people and then puts them to work in essentially sales roles, and a lot of what it sells is unsubstantiated mumbo-jumbo. You wrote your senior thesis on geometric Brownian motion in the prices of inflation-linked Peruvian bonds from 1954 to 1976? Great, go make a page telling clients why Bank X is so much better at underwriting commoditized debt deals than Bank Y. Or: your thesis took for granted the truth of the efficient markets hypothesis? Great, go market a hedge fund that charges 2 and 20 to beat the market. You have to be quantitative enough to manipulate the data to get it to say what you want (“This fee run is 0.2% higher if we exclude REITs” “Well, do that then”), but not so quantitative that you find the whole process revolting. It’s a hard line to walk, and it’s not surprising that Eric Ben-Artzi or Ajit Jain or the quant truthers at S&P end up disgruntled and either blowing whistles or writing regrettable emails.2

Does that explain Lisa Marie Vioni? I dunno, her economics degree came with a side of French, she became a hedge fund marketer, and she’s done it for over 20 years, so I’d have pegged her as pretty comfortable in the gray areas. But in January 2012 she went to work for Cerberus as an MD selling its RMBS Opportunities Fund, and in February 2013 they fired her, and now she’s suing them. She’s suing in part for gender discrimination, which is hard to evaluate from her complaint but sure, maybe.3

But she’s also suing as a Dodd-Frank whistleblower, because she complained about what she thought were misleading marketing materials and was more or less told to go pound sand. And those accusations go like this: Read more »

  • 08 Apr 2013 at 3:20 PM

Senate Bill May Solve Too-Big-To-Fail By Shrinking Banks By 70%

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The Brown-Vitter bill, which two senators plan to introduce in an effort to dramatically raise bank capital requirements, has caused a range of fairly predictable reactions, and a few strange ones. Here, for instance, is a lobbyist complaining about “raising required capital to comically high levels,” but the comedy is perhaps elusive. But one stylized fact about bank capital that I find a little funny is that it is always the same; after a certain number of drinks this chart is hilarious:

What that says – perhaps a bit unclearly – is that if a bank is going to add some assets, it will do it by taking on debt; and if it’s going to reduce its debt, it will do so by selling assets; and the one thing that it won’t ever do is change the amount of equity it has. Capital ratios change, but capital amounts basically don’t (except to grow verrrrrrry slowly and steadily over time); all the action is in the denominator.

Consider what that chart means for Brown-Vitter: on Friday I calculated that the bill would require adding, in round numbers, $1.2 trillion of capital at the top 6 banks, all at once.1 But that holds bank assets constant, which is not how it generally works. Of course it’s possible that this new law would break the pattern of banks always having the same amount of equity and just adjusting their debt, and cause them to actually increase their equity dramatically; I suspect that’s roughly speaking the intention.

Another possibility is that banks would keep doing what they’ve always done and bring up equity ratios by reducing assets; the amount of equity would remain constant, as it has in the past. On that math, the six big banks would have to reduce assets by $7 trillion. Out of a total of $9.5 trillion currently. So like a 72% reduction in bank lending and investing and what-have-you.2 Eep?

Perhaps there is comedy there though I’m not sure. That chart has been floating around various places but I swiped it just now from this paper,3 by Tobias Adrian of the NY Fed and Hyun Song Shin of Princeton, musing about why it might be. Or, rather, they just assume the constantness of bank equity, and question why amounts of bank debt change. What they come up with is that leverage moves inversely to value-at-risk, which you can sort of see in this chart: Read more »

  • 05 Apr 2013 at 5:46 PM
  • Banks

Some Senators Think Big U.S. Banks Could Use An Extra Trillion Dollars Or So Of Capital

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There’s a surprisingly large and vocal group of people who think that capital ratio requirements for large banks should be much higher than they are now (like, 15+%), and that those ratios should be based on total assets rather than any sort of regulatory risk-weighting. It’s surprising not because those are especially bad or counterintuitive ideas, but because who would have guessed a year ago that that would be a thing that people talked about? Good work, Admati & Hellwig.1

Anyway the latest is a bill that Senators Sherrod Brown and David Vitter are planning to introduce, which you can read about at Bloomberg, and read the draft of on Quartz. The gist is:

  • Every U.S. bank would have to have a minimum 10% capital ratio,
  • The biggest banks – those with over $400 billion in assets – would have to have up to 15%,
  • The ratio is just (Tangible Common Equity) ÷ (Total Assets plus some off-balance-sheet things including lending commitments); i.e. it’s not risk-weighted at all, and
  • “the [Federal Deposit Insurance] Corporation, the [Federal Reserve] Board, and the Comptroller [of the Currency] shall be prohibited from any further implementation of [Basel III].”

This feels like it may not be intended all that seriously, but whatever, let’s do the math and see what it gets us. Roughly speaking, it gets us the following:


Read more »

Everyone’s Just Gonna Wait Until The Next Crash To Buy Crash Insurance

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Will stocks go down? Sure, maybe, whatever. I mean, they have so far today, I don’t know. It’s a thing that might happen and you might want to bet on it, one way or another. If you want to bet against it – if you think stocks won’t go down, or won’t go down by that much – then broadly speaking you can do one of two things, which are:

  • Buy stocks, and get paid for taking the risk of stocks going down by getting the chance that they’ll go up, or
  • Sell puts, and get paid for taking the risk of stocks going down by getting money.

That’s basically the world: you take a risk, and you get paid for taking that risk either with a fixed payment or an uncertain upside.1 You could imagine some sort of long-run expectation in which those strategies would be equivalent and I guess you wouldn’t be entirely wrong. Here is a graph:

That’s from a Goldman Sachs Options Research note out yesterday, and compares (1) buying and holding the S&P 500 (light blue line) with (2) selling one-month at-the-money puts on the S&P 500 stocks every month (black line), as well as the somewhat less relevant (3) just buying bonds. GS is recommending that you sell puts so the rest of the report is full of ideas to make that black line go higher but I hope you’re not here for investing advice so I’ll leave that to them. Read more »