Matt Levine

Posts by Matt Levine

  • 21 Mar 2013 at 1:29 PM

Dell Strategically Reminding Everyone How Horrible It Is

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There’s been a lot of fun stuff in the news about Dell recently, in the run-up to tomorrow’s end of the go-shop period on its LBO by Silver Lake and CEO Michael Dell. The Journal today kind of explained why:

People working on potential challenges to the Dell offer say the revelation of information on the background of the deal before the proxy is filed could dissuade counter bids or make it tougher for another party to shore up financing.

Get it? Someone connected with Dell is anonymously flogging its terribleness to any reporter who’ll listen, in order to keep anyone from putting in a higher bid in the next 36 hours. Don’t buy Dell, they whisper. Leave this mess to us. You don’t want to get anywhere near it. Some truly terrible shit is going to come out in the proxy. Like apparently Dell forgot how to make money:

The filing is expected to focus in part on a review of corporate financial forecasts presented to the board starting last summer, the people familiar with the matter said. Dell managers said they expected $5.6 billion in adjusted, or non-GAAP, operating profit for the fiscal year that ends in early 2014, the people said.

But around that time, Dell began badly missing the targets set forth by managers, who were counting on the rollout of Microsoft Corp.’s new Windows 8 operating system and an increase in PC sales to drive Dell’s profits higher in 2014. … Now, rather than the $5.6 billion figure, Dell expects an operating profit closer to $3 billion, its lowest in years ….

To be fair, announcing “we were off by ~40-50% on our earnings estimates but we’ve got them perfect now” is not wholly convincing, and sell-side analysts at least seem to expect rather more than that. Read more »

  • 20 Mar 2013 at 7:24 PM

Fitch And Kroll Are Happy To Make Mortgage Securitization Fun Again

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Bloomberg has a delightful story today about a new JPMorgan RMBS transaction, its first non-agency deal since the crisis. Specifically about this:

The bonds are made riskier by the New York-based bank and other originators of the mortgages offering weaker promises to repurchase misrepresented loans than those on similar deals, Fitch Ratings said today in an e-mailed report. Lenders and bond sponsors have been seeking to trim potential liabilities in such deals as the market revives after suffering billions of dollars of losses from debt sold before the collapse in home prices.

The value of the so-called representations and warranties in the JPMorgan transaction is “significantly diluted by qualifying and conditional language that substantially reduces lender loan breach liability and the inclusion of sunsets for a number of provisions including fraud,” New York-based Fitch analysts including Roelof Slump wrote in the presale report.

So naturally the deal is limited to an Aa rating, as it would be at Moody’s based on those sort of rep and warranty weaknesses, right? Errr not so much:

The classes of the deal expected to receive top credit ratings carried loss buffers of 7.4 percent as Fitch said it adjusted its analysis to reflect the greater investor dangers created by the weaker contracts, according to the report.

So 92.6% of the deal will be AAA rated at Fitch and Kroll, the other rating agency on the deal. Here’s the cap structure from Kroll’s report: Read more »

  • 20 Mar 2013 at 11:51 AM

Freddie Mac Adorably Thought Banks Had Promised Not To Lie To It

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I guess we should talk about Freddie Mac suing all the banks for manipulating Libor. I know, one more Libor lawsuit, whatever. Barely even that: Freddie Mac was already suing all the banks for manipulating Libor, as part of various pending class action lawsuits; now it’s just also suing them on its own.

So, why? If you compare the City of Baltimore class action lawsuit, which Freddie had joined, with Freddie’s new lawsuit, one thing you might notice is that Freddie has eleven counts, while the class action only has two. More counts = more ways to win, sort of, I guess.

The class action makes pretty generic antitrust claims. Antitrust law is designed to (1) protect consumers from (2) evil cartels, so those claims require saying (1) we were Libor consumers and (2) you all banded together into an evil cartel to manipulate Libor, harming us as consumers. That’s fine, and Freddie’s new suit makes a similar claim. But it’s tricky, because the claim “all you banks misstated Libor to hide your crappy financial condition from each other and cheat each other on derivatives trades” doesn’t really sound like they were working together. More the opposite really. Even if all the banks were being manipulative crooks, that doesn’t create antitrust liability unless they were working together to be manipulative crooks. And the evidence there is at least mixed.

So eight of Freddie’s eleven counts are different and don’t require any working together at all: they’re just for breach of contract. Barclays and RBS and UBS and their less-admittedly-Libor-violating kin each had a contract with Freddie, and those contracts required them not to lie about Libor, and they lied about Libor, and so they breached their contracts.

So … really? Read more »

  • 19 Mar 2013 at 5:28 PM

Citi Compensates Bondholders For Pain And Suffering Of Worrying That Citi Might Default

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Back in the pre-Lehman days Citigroup owned a lot of things that, in hindsight, turned out to be awful. Everyone knows that now but various people didn’t know it then, including (1) the people who bought some of those awful things from Citi, (2) the people who bought stock in Citi while it hung on to the bulk of those awful things, (3) the people who bought bonds in Citi while it hung on to the bulk of those awful things, (4) the people who bought preferred stock in Citi … you get the idea. The world being as it is – full of lawyers1 – each of those groups of people is slowly making its separate peace with Citi. We’ve talked about some of them before, including a rather controversial $285mm SEC settlement on behalf of the awful-thing-buyers and a $590mm private settlement on behalf of the stock-buyers. Today brings the biggest settlement yet, $730mm on behalf of the bond- and preferred-stock and TRUPS-buyers, who lost billions when Citi defaulted on its bonds.

Hahahaha no I’m kidding, Citi never defaulted on its bonds. Here’s the Journal:

In the case settled Monday, plaintiffs alleged the New York company misled them about Citigroup’s possible exposure to losses on securities backed by home loans, understated its loss reserves and said some assets were of higher credit quality than they actually were. The pact covers 48 preferred-stock and bond deals between May 2006 and November 2008.

Those possible exposures became real exposures, and Citi incurred plenty of unpleasantness. But these bonds mostly didn’t. Read more »

  • 19 Mar 2013 at 1:46 PM
  • Banks

Banks Getting Less Risky And/Or More Tricksy

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It’s a good day to be wholly cynical about banks so let’s be mean to the Basel III monitoring exercise. This is a thing where periodically the BIS looks into how far away banks are from meeting their Basel III capital requirements, with about a nine-month lag. The answer is always “pretty far away,” which isn’t that big a deal since they have until 2019 to get there, but the good news today is it’s getting less far away:

On Tuesday, the Basel Committee said the average capital ratio of 101 large banks was 8.5%. In total, large banks—defined as having Tier 1 capital in excess of €3 billion ($3.89 billion)—need to raise €208.2 billion in capital to hit the ratio of 7%, which includes an extra buffer against financial shocks.

This shortfall has decreased by €175.9 billion since a similar test was conducted using data as of Dec. 31, 2011. The committee noted that these 101 large banks generated €379.6 billion of pretax profit between July 2011 and June 2012. Instead of being redistributed in pay and dividends, profit can be stored to boost capital reserves.

Yay. Here’s what that looks like as of June 2012 – again, this thing is on a nine-month delay for some reason, so that’s the latest: Read more »

Former CalPERS CEO Accused Of Fraud, Definitely Innocent Of Stealing Office Supplies

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I’m just some guy, but two entities of which I have become aware in my travels are (1) Apollo Global Management and (2) CalPERS. I don’t want to endorse 100% of what either of them does – CalPERS tend to be governance-scoldy, and I’ve seen with my own eyes the withered husks of formerly personable M&A lawyers who’ve spent too much time on Apollo due diligence – but I don’t think it’d be too controversial for me to say that they’re both acknowledged leaders in their fields, those fields being respectively (1) running private equity funds and (2) investing great gobs of pension money in, among other things, private equity funds. To the point that, (1) if Apollo came to me and asked “who should we ask to invest in our new private equity fund?,” CalPERS would probably be high on my list, and (2) if CalPERS came to me and asked “what private equity funds should we invest in?,” Apollo would probably be high on that list.

So where is my $20 million?

Today former CalPERS CEO Federico Buenrostro and former independent placement agent Alfred Villalobos were indicted for fraudulently funneling $20 million of placement-agent fees from Apollo to Villalobos. The case is bonkers for reasons well summed up by Dan Primack a year ago when the SEC brought a related civil case. The gist of it seems to be: Read more »

  • 18 Mar 2013 at 9:27 AM

Cyprus Finds Exciting New Way To Make Everyone Miserable

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Things in Cyprus: kinda bad. There are better places than here to read about it; I particularly recommend Joseph Cotterill here and here, pseudo-Paweł Morski here and here, Mohammed El-Erian here, the FT’s coverage here and here, the Journal’s round-up of analyst reaction here, etc.

The basic story is that Cyprus’s government and banks are both massively overindebted and need a bailout, and the EU and IMF will provide a €10bn bailout, but they demanded that Cyprus chip in some €7bn, which it has decided to do by means of a tax on deposits in Cypriot banks of 6.75% for up to €100,000 and 9.9% above €100,000. (Is that rate on bigger deposits marginal or absolute? No one knows!) Those numbers are being renegotiated and may end up not being approved by Cyprus’s parliament.

The various reasons to object to this boil down to its violations of absolute priority; the way things are supposed to work is more or less: Read more »

  • 15 Mar 2013 at 3:27 PM

SAC Puts Ten Days Of Insider Trading Behind It

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So Mathew Martoma: pretty bad investment for SAC, no? He “was unable to generate … winning trades or outsized returns in 2009 and 2010, and did not receive a bonus in either of those years. In a 2010 email suggesting that Martoma’s employment be terminated, an [SAC] officer stated that Martoma had been a ‘one trick pony with Elan.’” Now we know what the trick was – it was insider trading! – and it looked like a good one in 2008 anyway, making SAC some money on the way up, saving it $276 million by selling out just before Elan announced negative drug trial results, and earning Martoma $9.3 million in what turned out to be his last bonus at SAC.

The trick looks less good today: Read more »

  • 15 Mar 2013 at 11:46 AM

Senate Subcommittee Feasting On Whale Today

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When I got the Senate Permanent Subcommittee on Investigations report on the London Whale last night, I did what any sensible human would do: I ctrl-F’ed for my name and the names of my friends and enemies, gloated briefly, and then set to work rationalizing not reading the rest of it. After all, it’s ridiculous for the Senate to investigate a basically legitimate trade that, though it lost some money, did nothing to destabilize JPMorgan or the financial system as a whole. And we’ve heard all the important Whale stuff before, including in JPMorgan’s own Whale autopsy, and even then it was old news.

But then I started skimming the executive summary and after underlining every sentence in the first ten pages I figured I’d have to give it a closer look. It’s an amazing, horrifying read.

What was the Whale up to? I don’t think you’ll get a better explanation than this, from a January 2012 presentation by the Whale himself, Bruno Iksil (page 74):

Mr. Iksil’s presentation then proposed executing “the trades that make sense.” Specifically, it proposed:

“The trades that make sense: Read more »

Supercharged IPOs: Like Regular IPOs, But Slower

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Lynnley Browning has an interesting article in DealBook about “supercharged IPOs” today. The gist is that some private equity portfolio companies go public, but keep in place agreements requiring them to pay over 85% of certain tax benefits that they receive to their former IPO owners. This, or so the argument goes, is both unfairsies – why do private equity firms get that money rather than the current shareholders? – and also, y’know, opaque secretive financial engineering etc. Viz.:

Now, buyout specialists are increasingly collecting continuing payouts from their former portfolio companies. The strategy, known as an income tax receivable agreement, has been quietly employed in dozens of recent offerings backed by private equity …

While relatively rare, the strategy, referred to as a supercharged I.P.O., has proved to be controversial. To some tax experts, the technique amounts to financial engineering, depriving the companies of cash. Berry Plastics, for example, has to make payments to its one-time private equity owners, Apollo Global Management and Graham Partners, through 2016.

“It drains money out of the company that could be used for purposes that benefit all the shareholders,” said Robert Willens, a corporate tax and accounting expert in New York who coined the term “supercharged I.P.O.” …

Another potential issue is that sophisticated investors do not necessarily understand the deals, either. The agreements typically warrant just a few paragraphs in a company’s I.P.O. filings.

So that last part, meh. The prospectus for Berry Plastics – the main example DealBook cites – describes its income tax receivable agreement in several places and pretty clearly. It explains what’s going on – “we’re funneling 85% of our tax savings from current NOLs to our pre-IPO shareholders” – and even gives some numbers, estimating that the payments will total $310 to $350 million and mostly be paid by 2016.1 It’s not really all that tricky. Read more »

  • 14 Mar 2013 at 12:03 PM

Detroit And Its Banks Both Would Prefer To Forget All About Those Interest Rate Swaps

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Here’s a Bloomberg article about how banks made money by doing interest rate swaps with Detroit, and now Detroit is sad, because like a lot of municipalities Detroit swapped its floating rate bonds to fixed to hedge the risk of rates going up, and rates went down, and now the PV of Detroit’s swap liabilities is like $350mm, which is big, and that’s sort of that. I’m generally unmoved by the notion that municipalities should be able to get out of swaps that move against them for free, and while I’m sure there’s some nefarious record of mis-selling and fee-inflating in here somewhere, which would justify you getting all mad at Detroit’s banks, Bloomberg has not dug it up. The evidence so far is “rates went down,” so whatever.

Still this a pretty interesting story. The normal posture of these swaps cases is:

  • City has floating-rate bonds and swaps to fixed.
  • Rates go down but city is still effectively paying high fixed rate.
  • City says “WTF, why don’t we stop doing this?”
  • City goes to bank and says “remember that swap? never mind”

    • ?

  • Bank says “we’d be happy to tear up the swap, just pay us a $400 million termination fee.”
  • City freaks out, calls press, etc., shouts about windfalls, etc.1

But Detroit is different! Detroit, to its great credit, doesn’t want to tear up its swaps. The banks do. But they’re not exactly pushing it: Read more »

Judge Decides LBO Boom Could Have Used A Few More Bidding Wars

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The antitrust lawsuit against all the big private equity firms, accusing them of colluding with each other to drive down prices on LBOs in the 2003-2007 boom, was always a bit of a puzzler. On the one hand, there were lots of emails between private equity firms that they’d probably like back, to the effect of “hey thanks for not bidding on my last deal, hope you enjoy my not bidding on your next deal!” On the other hand, the lawsuit was sort of a mess, full of hazy accusations, unsupported conspiracy claims, and the sort of unfalsifiable tin-hattery that sees occasional fierce bidding wars between private equity firms as just a cunning cover-up of their conspiracy not to bid against each other.

I blog for a living, such as it is, so sometimes I would complain about that confusion, but Edward F. Harrington is a federal judge for a living so he gets to just fix it:

Plaintiffs persistent hesitance to narrow their claim to something cognizable and supported by the evidence has made this matter unnecessarily complex and nearly warranted its dismissal. Nevertheless, the Court shall allow the Plaintiffs to proceed solely on this more narrowly defined overarching conspiracy because the Plaintiffs included allegations that Defendants did not “jump” each other’s proprietary deals in the Fifth Amended Complaint and argued in response to the present motions that the evidence supported these allegations. Furthermore, the Court concludes that a more limited overarching conspiracy to refrain from “jumping” each other’s proprietary deals constitutes “a continuing agreement, understanding, and conspiracy in restraint of trade to allocate the market for and artificially fix, maintain, or stabilize prices of securities in club LBOs” ….

And so he ruled today on a summary judgment motion, getting rid of most of the crackpottery but letting the plaintiffs go forward on the claim that the private equity firms had an agreement not to jump each others’ deals after they’d already been signed. Read more »