Matt Levine

Posts by Matt Levine

  • 04 Apr 2012 at 6:59 PM

I Give Up: What Did RBC Do To Piss Off the CFTC?

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Okay one more from the recent CFTC trilogy: what is up with RBC? Is it the strangest of them all? I’m pretty sure I haven’t earned the right to have an opinion on that, or even a theory, but I have some questions.

One is: what was the scam here? I mean, here was the scam:
(1) RBC buys or owns stocks whose dividends are deductible for Canadian tax purposes,
(2) RBC hedges those stocks by selling single stock futures or narrow-based index futures to other bits of itself,
(3) So RBC is flat, gets the div one way and pays it the other, but gets a tax benefit from the div it gets and also presumably a deduction on the div it pays, so its net position is zero + tax benefit,
(4) EXCEPT that the bit of it that owns the stock and is short the future is flat but the bit of it that bought the future is, of course, long, so summing over all of its bits RBC is still long the stock, which is a part of this that confuses me, though not the only one,*
(5) anyway though the trades were arranged between bits of RBC rather than competitively bid,
(6) but then they memorialized them by printing them to the OneChicago exchange overseen by the CME and the CFTC,
(7) which created misleading prints because they were non-competitively-priced wash sales instead of real market trades between arms’-length counterparties,
(8) so the CFTC sued.

So, sure, I’ll go along … that sounds sort of scammy. But one thing that is weird is that OneChicago as far as I can tell is just a market for memorializing your privately negotiated trades. RBC was trading narrow-based index futures on OneChicago. Here is what OneChicago has to say about those: Continue reading »

  • 04 Apr 2012 at 3:19 PM

Don’t Worry About How JPMorgan Maybe Helped Lehman Overlever Itself By Misusing Customer Money

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Is this JPMorgan Lehman thing a big deal? I mean the thing where JPMorgan used Lehman customer segregated securities as collateral for financing Lehman, allowing Lehman to overextend itself by a bit more than it otherwise would have, in pretty clear violation of the Commodities Exchange Act, although also maybe by accident? And where the CFTC fined them $20 million in a negotiated settlement today?

I don’t know. On a monetary basis, no – the fine is pocket change to JPMorgan, though it’s pretty big for the CFTC. And the misconduct also seems to be relative pocket change; in September 2008 the relevant mis-credited account was $330mm, vs. like $639bn of assets at Lehman, so 5bps of extra leverage, tiny yaaaay.*

On the other hand, though, there are some obvious things to get worked up about here, if that makes you happy. Here are three, in roughly ascending order: Continue reading »

  • 03 Apr 2012 at 6:55 PM

There’s No Betting Here, This Is A Futures Exchange

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One of the joys of structuring financial products is that, when a regulatory door is closed, a window / chimney / possibility of sawing through a non-load-bearing wall is opened, and you get to look for it, and if you find it you get rich.* So I for one look forward to the response to this:

On Monday, the Commodity Futures Trading Commission rejected a plan for so-called political event contracts, wary that mixing politics and trading would create a dangerous cocktail. The agency ruled, in part, that such trading amounts to gambling — and that it could unduly influence election results.

“This is a very slippery slope here,” said Bart Chilton, a Democratic member of the commission. “We need to be supercareful about handing part of our electoral process over to the trading pits.”

So now you can’t go on NADEX and buy presidential futures – have I mentioned that all my money is in Rick Perry futures? I will sell them to you at cost if you’d like – but you have, I suppose, some other options. You can buy mine, of course, or whatever else is kicking around on Intrade, and if you’d like more size you could probably go to our Anonymous Sports Book Manager, if you can find him. Continue reading »

  • 03 Apr 2012 at 4:08 PM
  • Banks

JPMorgan Banker Fined For Pitching A Client’s Stock To A Potential Investor

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What is your model of what the FSA is thinking in its insider-trading crackdown? Here is this Decision Notice against JPMorgan global ECM chairman and general mining-industry macher Ian Hannam, shown here being unspeakably awesome in Afghanistan*, and he got in quite a bit of trouble for some pretty minor badness. Basically he was advising Heritage Oil and its CEO, Tony Buckingham, on a bunch of things including (1) being acquired by another company which is unnamed but let’s just call it Acme and (2) selling a stake in itself to “Mr A, a representative of an organisation with interests in Kurdistan (Organisation C),” which, there is a part of me that thinks that the organization was actually named “Organisation C” and that the guy would call Hannam and be like “Ian? Mr. A here.” No? I refer you again to that picture.

Anyway as things got serious with Acme in September ’08, Hannam sent an email to Mr. A saying:

“I thought I would update you on discussions that have been going on with a potential acquirer of Tony Buckingham’s business. Tony, advised by myself, has deferred engaging with the client until Thursday of next week although we know they are very excited about the recent drilling results of Heritage Oil … I believe that the offer will come in in the current difficult market conditions at £3.50-£4.00 per share. I am not trying to force your hand, just wanted to make you aware of what is happening.”

Later, he sent another email to Mr. A ending “PS – Tony has just found oil and it is looking good,” and bcc’ed Mr. B, “a businessman with interests in Kurdistan,” about whom we get no further information though I’m guessing pretty much everyone named or pseudonymed here could have someone killed on 24 hours’ notice if it came to that. Continue reading »

  • 02 Apr 2012 at 6:57 PM

Groupon Got So Used To Excluding Expenses In Calculating Earnings That It Went A Little Overboard

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Remember how when Groupon was going to go public it had this cute accounting category that it called “adjusted consolidated segment operating income” which is mostly a long way of saying “earnings before everything“? If not, quick recap: (1) that happened, (2) everyone made fun of their initial S-1 filing because of it, (3) the SEC told them to cut it out, (4) they did, and (5) everyone still made fun of them until oh today or so. In a shocking development, it turns out that, under the new JOBS Act, you wouldn’t have been able to make fun of Groupon about this for months before their IPO, because they would have filed in secret with the SEC and the SEC would have maybe corrected it and you wouldn’t have heard about it until 21 days before launch.*

Who cares?, you ask, and you are right. It’s hard to get all that excited about the earnings before everything measure because the thing about non-standard non-GAAP measures is (1) everyone ignores them unless (2) you convince them not to ignore them which (3) you won’t if they’re ludicrously stupid measures like “earnings before expenses.” So, problem kind of solved. The Groupon fiasco was funny because Groupon reported a total vanity measure of profitability in its S-1 and everyone, right down to the SEC, had a good laugh about it and was all “come on man,” and Groupon was all “yeah, fair, you got us, we’ll take it out.”

Possibly less funny is the whole “so we overstated [understated!] net income [loss!] by $22.6 million [53%!] for 4Q2011 because, turns out, our refund expenses are a lot higher than we’d been telling you they were and also we have no control over our accounting function but our CFO is awesome” announcement Groupon made on Friday. Oops! The thing about that is that GAAP things like, y’know, revenue and net income, tend to be more important to people than ACSOI, and when they are screwed up the reaction is less tolerant amusement and more suing. So much suing. Continue reading »

  • 02 Apr 2012 at 11:41 AM

Breaking: Employees Rush To Finish Projects Before Vacation, Have A Lot To Do When They Get Back

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The beginning of April brings with it, among other things, a new batch of NBER papers, and here is one that is mildly amusing but probably not an April Fool’s prank, although it is called “Tailspotting: How Disclosure, Stock Prices and Volatility Change When CEOs Fly to Their Vacation Homes,” so, y’know, maybe. Anyway it’s by Stern professor David Yermack and … if it is fake, it’s still probably correct:

Companies disclose favorable news just before CEOs leave for vacation and delay subsequent announcements until CEOs return, releasing news at an unusually high rate on the CEO’s first day back. When CEOs are away, companies announce less news than usual and stock prices exhibit sharply lower volatility. Volatility increases immediately when CEOs return to work. CEOs spend fewer days out of the office when their ownership is high and when the weather at their vacation homes is cold or rainy.

Except their ski chalets? I don’t know. Also this sentence should win some sort of award: “However, a bivariate probit model presented below indicates that news disclosures appear to be linked to CEOs’ vacations even after using weather variables to control for endogeneity of the vacation schedule.”*

The basic result is not that surprising; if I learned one thing from this paper it’s less “CEO activities are an important part of the short-term news relating to a stock” and more “it is possible to use vacation home property records and FAA databases to find out when CEOs visit their vacation homes, and that that is what your Stern tuition is paying for, which, okay!” Still here are two passages to maybe think about: Continue reading »

  • 30 Mar 2012 at 6:28 PM
  • Banks

Europe Will Try To Make Its Banks’ Creditors Play Nicer With Each Other

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Today the EU issued a discussion paper about how it plans to forcibly write down the debts of shaky banks if it ever comes to that, which for some reason is called a “bail-in,” I guess in the sense that the bailing is coming from creditors who are already in the bank’s credit rather than from taxpayers who aren’t. It’s pretty interesting, go read it, or read Bloomberg’s piece about various bits of squabbling over it and also somewhat counterintuitively a statement from EU guy Michel Barnier (left!) that “There’s a big international consensus on the principle.”

Actually there probably is; the principle is pretty sensible, which is that there comes a time in many companies’ lives where the best way to preserve value not only for the enterprise but also for the creditors is to write down some of the debt to allow the company to continue as a going concern that can pay off the rest of the debt. This is why we have bankruptcy, but bankruptcy seems to be too slow and scary for banks. The worry is, you have a bank and it’s got like $15 of equity and $100 of debt and its assets go from $115 to $90 and all of the debt holders start looking at their watches and being all “hey this has been fun but I’m actually late for this thing so would it be too much trouble for you to give me my money back?” and the bank has to sell a bunch of stuff to meet those demands then that looks like a fire sale and people figure it out and all of a sudden that $90 becomes, like, $60, and the debtholders get back 60 cents on the dollar instead of the 90 cents, and they’re like “crap, if I’d just said ‘I’ll take $90, and also whenever you have it is fine, no rush,’ I’d have much more money.”

Of course that’s all sort of obvious so one thing that the creditors could do is just not do that, and voluntarily and quickly write down their debt so that the bank wouldn’t have to have a fire sale to meet their claims, but, knowing creditors, that’s not what would happen, so you need some sort of resolution mechanism to protect them from themselves. Continue reading »

  • 30 Mar 2012 at 3:04 PM
  • Banks

Investors Want To Put All Their Run-Off-With-My-Money Risk In One Place

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One way I like to imagine the world is that there’s sort of a constant amount of financial risk and entropy tends to increase, so that as time goes by everyone increasingly ends up facing the same financial risks as everyone else (though quantities and leverage vary) and idiosyncratic risk is a rare and beautiful flower and so I dropped a good portion of my net worth on Mega Millions this morning because what else can you do? Entropy increasers could include index funds, or converging bank business models, and I guess you could profitably ponder the fact that the big banks are now living on DCM fees until M&A comes back and what that could mean for a model of “we need to split up the big banks to avoid too-big-to-fail risk.”*

One thing it could mean is get the hell away from banks. So for instance you could quite reasonably be worried about putting all of your money in collateral accounts with the banks who are your derivatives counterparties because hey MF Global just lost all the collateral you put with them, and so you are, reports the Journal based on the Fed’s Senior Credit Officer Opinion Survey on Dealer Financing Terms: Continue reading »