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 »

This is a guest post written by SoFi’s CEO, Mike Cagney.


Recently, there’s been a lot of talk amongst leaders in Washington about how to improve the painful process of repaying student loans. At SoFi, we feel your pain and work hard to offer more flexible, more affordable options for our borrowers. One idea that’s getting a lot of attention is increasing the options for refinancing debt after graduation. The only lender currently focused on refinancing private and federal student loans is SoFi.

We recognized early on that borrowers who have made timely payments on their loans, graduated from school, and have a job should be able to refinance their student loans at a lower interest rate. This may be why, after resuming lending by invitation, the media became increasingly interested in what we are doing.

In a recent article posted on SoFi General Counsel Rob Lavet had this to say about SoFi’s ReFi products: Read more »

Now that Goldman Sachs has succeeded in its mission of helping Apple fend off David Einhorn’s demand that it raise a two hundred plus billion dollars of preferred stock, I guess it’s time for someone at Goldman to sit down with Apple and say “now, guys, really, you ought to think about raising two hundred billion dollars of preferred stock, it’s just the sensible thing to do.” Or something. This debt-financed share-buyback plan doesn’t sound like too much fun for the bankers:

On April 23, Cupertino, California-based Apple said it would return an additional $55 billion in cash to shareholders to compensate for a stock that’s dropped on signs that the company’s growth is slowing. Although it has $145 billion of cash, Apple said it will use debt to help finance a total capital reward of about $100 billion to shareholders. …

Because investment-grade debt offerings typically pay low fees, banks may offer to do the transaction for little or no charge, [Sanford Bernstein analyst Brad] Hintz said.

“This is going to be a prestige-per-share, not an earnings-per-share, deal,” said Hintz, who worked as Morgan Stanley’s treasurer and as the chief financial officer at Lehman Brothers Holdings Inc. earlier in his career. “We’re really talking about a deal that’s going to be done as close to gratis as you can get.”

The amount Apple will be raising is a little unclear but $50 billion over the next three years is … possible? Maybe?1 Read more »

Jill Kelley, the woman who alerted the FBI to the “harassing” emails she’d been receiving from All In author and possible bunny boiler* Paula Broadwell, has run into some financial trouble. Read more »

If you work in a pretty cyclical business, like bankruptcy and restructuring, it behooves you to moonlight in some other line of work since some days there are no bankruptcies. Some restructuring bankers and lawyers are golf instructors or lounge singers or cowpokes on the side, but many prefer to advise on debt issuance transactions when bankruptcies are scarce, since the skills are more overlapping.

But while some bankruptcy lawyers may enjoy the variety of litigating in bankruptcy court one year, and writing credit agreements or performing at the Tropicana the next, others tend to get sad in their off years, and pine for their true love. (That being bankruptcy.) “I’d really rather be running a bankruptcy process,” they think, “but here I am stuck writing credit agreements. If only I could change that.” And then some of them, cynically, think: “Oh wait, I can. I’ll just convince this company to lever up 10x and put a reminder in my calendar to pitch the bankruptcy business in, say, two years.”

Lots of people suspect something like this of all bankers and, to a lesser extent, lawyers.1 Which is understandable and probably not all that untrue: if you work in a transactional business, you want more transactions. Most transactions are reversible, and the more reversals you can talk a client into, the more money you can make. Transactions that contain the seed of their own reversal are the best transactions. (This is why private equity firms are good clients: every buy-side creates a sell-side, or IPO, in 3 to 7 years. Strategics sometimes just buy companies and keep them.)

Stephen Lubben knows what I’m talking about:

The debt issued today is the stuff of tomorrow’s bankruptcy cases. … With interest rates this low – the yield on 30-year single A debt is below 5 percent – investors seem to be discounting the likelihood of a future bankruptcy.

But if this is the low point for interest rates for a good long while, 30 years from now could be interesting. The “wall of maturities” that will hit then could provide for some happy times for the bankruptcy lawyers of the future. Cold comfort for those with little to do today.

Well you just need to diversify! Like some people I guess are doing, as debt issuance is going gangbusters, with $700bn in US IG issuance so far this year and high-yield at all-time highs. So perhaps this levering-up-to-blow-up theory is worth a look? Here is a look:

Read more »

When people talk about financial innovation one of the main things they mean is legal innovation. CDOs, ETFs, MERS, the poison pill – most of the ways to smooth or roughen the path of investment take the form of jamming entities and contracts together in ways they’ve never gone together before.

Sort of by definition this innovation gets you ahead of what you know works legally: in the Anglo-American legal system, you mostly know for certain that something works because it already exists and some court or regulatory body has looked at it and found it okay, and for that to happen it has to exist first, before you know it works, all exposed and risky.* (You might ponder in your cold cold heart whether this order of operations helps explain why banking is so scandal-ridden.**) So you go to lawyers and you ask them if it works and they read the tea leaves of statutes and prior court decisions and they say go with it and mostly they’re right – because if that wasn’t the case you’d get better lawyers – but sometimes they’re wrong.

Sometimes you’re sort of surprised they’re right. Once upon a time a lawyer told a company “here’s what you do: you issue rights to all your shareholders, and as soon as a hostile bidder acquires 15% of the company, that bidder’s rights will be cancelled and everyone else’s will flip into a zillionty billion shares and the hostile bidder will be diluted down to nothing and you’ll be like ‘haha, now try taking us over.'” This was before my time, but I’m pretty sure that when he said this everyone looked at him funny. And then eventually someone did it, to see what would happen, and the courts looked at it and said “yeah, that sounds good,” and now that is a thing (though not as much as it used to be), and that lawyer is pretty rich.

Other times – most times – the lawyers seem right, so you do it, and that becomes self-reinforcing. One company does a novel thing because the lawyers think it’s okay, and then another company does that thing, and pretty soon everyone’s doing that thing, and every lawyer thinks it’s okay because, hey, everyone’s doing it, and then when it gets to the courts the lawyers are all “of course this is okay, everyone does it, are you nuts?” Often the courts are persuaded by this, though not always, and again go think about banking scandals where everyone just assumed that what they were doing was okay because everyone else was doing the same thing.

Exit consents have a little of each of those paths. Read more »

Investor Carl Icahn has been buying up debt of LightSquared Inc., the wireless network backed by billionaire fund manager Philip Falcone, according to people familiar with the matter. The stake could enable him to take control of the company should it restructure or file for bankruptcy, one of the people said. Mr. Icahn snapped up LightSquared loans, which are traded on the market like securities, after prices of the debt nosedived last year. Two other distressed-debt investors, David Tepper and Andrew Beal, also bought some of the loans. [WSJ]

  • 03 Nov 2011 at 6:41 PM

BofA Wants To Make A Little More Money On DVA

Financial institutions normally prefer not to have everyone think they’re a shitty credit, because that can lead to doom, or MF Doom, or glitchy intimations of doom that quickly get sorted. But it can also sometimes lead to profit.

Sometimes that profit is fake, or fake-ish. When banks book a mark-to-market profit on their own credit spreads widening, that looks … a little fake. We don’t particularly object here, since it reflects a sort of economic reality, but it is probably temporary – your liabilities roll forward and eventually either you pay them off at par, in which case your DVA gains fritter down to zero through PnL, or you don’t, in which case the permanency of your accounting gains are not of much interest to most people.

In any case, because it looks fake, or fake-ish, banks actually don’t much abuse the privilege. Thus most of the DVA gains that banks booked last quarter were on derivatives, where US GAAP requires you to mark DVA to market, or on derivatives-looking things like structured notes where it seems more plausible than not. You don’t see a lot of banks taking a lot of DVA gains on vanilla debt.

So when you have $295bn of public debt (with, I don’t know, maybe a 2 year weighted average duration, whatever) and your CDS blows out by 300bps in a quarter, you don’t book $18 billion of gains. You book, um, $4.5 billion. You never get to taste most of that delicious credit widening.

Now, if only there were a way for a bank to (1) get a gain on its vanilla public debt and (2) make it permanent. Like, say, this, from Bank of America’s 10-Q filed today:
Read more »