There’s that old line that “hedge funds are a compensation scheme masquerading as an asset class” but the masquerade is getting harder to keep up because you can pay 2 and 20 for just about anything these days. If you wanted to you could pay – well, 1.5 and 20, with a 7% hurdle – to invest in middle-market leveraged loans via Goldman Sachs Liberty Harbor Capital, LLC,1 which is coming to a stock exchange near you as a listed closed-end fund, regulated as a business development company under the Investment Company Act of 1940.
BDCs are I guess all the rage as a way for alternative asset managers to access non-institutional permanent capital; separately, sidling up next to the Volcker Rule and taunting it is kind of all the rage at Goldman Sachs, and this seems to do that too:
Goldman is likely to invest some of its own money in the company and said in the filing that it expects the unit won’t be covered by the Volcker Rule, a part of the Dodd-Frank financial regulatory overhaul that restricts banks from making bets with their own funds.
Not sure which motive dominates here – Goldman Sachs Asset Management offers plenty of retail products, and why not have 1.5-and-20 retail products in that mix? – but the Volcker angle is intriguing. Read more »
The saddest part of this job is discovering a beautiful thing that someone has created as a way around financial regulation, and then watching philistine regulators destroy it. But the happiest part is dreaming up a come-on-that-could-never-work ploy to get around some financial regulation, and then finding out that someone’s actually doing it. Extra points if the someone is Goldman Sachs.
Two weeks ago I thought I’d concocted a way around the Volcker Rule’s porous and silly restrictions on banks running private equity funds. My solution involved (1) having a merchant banking business that took no outside investors (which the Volcker Rule does not restrict), (2) having a private equity fund that took no bank money (since the Volcker Rule limits banks to owning 3% of such funds), and (3) having your merchant bank and your private equity arm co-invest in deals. Since that doesn’t quite work,1 I later modified it a bit to have the outside investors co-invest directly, rather than through a private equity fund, and give the bank its management fee in the form of better economics to the merchant bank in each investment.
Today Reuters has this: Read more »
Reuters has a delightful story today about Wells Fargo’s merchant banking business, Norwest Equity Partners, which owns among other things the quite horribly named rifle maker Savage Sports. I can’t get too worked up about the likelihood that a fifty-year-old, smallish ($3.7bn), carefully managed, moderately gun-toting, otherwise wholesome private equity business will bring down the global financial system, but then I’m not Sheila Bair:
“Is that really what you want institutions that have safety net support doing? Is that an appropriate use for a government backstop?” she told Reuters.
I dunno, Sheila. Who is “you”? What do you want institutions doing? Something, right?
The point of the Reuters story is mainly that the Volcker Rule is expected to limit banks’ ability to invest in private equity funds, but that Norwest’s business is likely to be exempt because it runs only Wells’ own money. If you put bank money in a separate PE fund with outside investors it’s caught up in the Volcker Rule, but if you just make private-equity-type investments on your own it is not. This is no way to run a railroad: Read more »
If you’re a true believer in vulgar Volckerism – “banks shouldn’t be allowed to make bets with their own money” – then you have an inexhaustible source of things to get mad about, since the only thing banks do is make bets with their own money, for some values of “bets” and “own.” Bloomberg’s Max Abelson found one today, specifically that Goldman has a group that invests its own money in securities, and it is
a secretive Goldman Sachs group called Multi-Strategy Investing, or MSI. It wagers about $1 billion of the New York-based firm’s own funds on the stocks and bonds of companies, including a mortgage servicer and a cement producer, according to interviews with more than 20 people who worked for and with the group, some as recently as last year. The unit, headed by two 1999 Princeton University classmates, has no clients, the people said.
Multi-Strategy Investing happens to be part of a larger group called the Special Situations Group, which also invests the firm’s own money – as Abelson puts it:
That parent group, which uses the firm’s funds to profit from distressed and middle-market companies, has been a major profit center at the bank, sometimes the biggest, former executives told Bloomberg in 2011. Its holdings that year included debt of Melville, New York-based pizza chain Sbarro Inc.1
The phrase “uses the firm’s funds to profit from” is exquisite; Goldman would probably say “invests in and lends to.” Y’know, like a bank (or a merchant bank). Not that they’d disclaim profiting, but, yeah, investing in and lending to companies is a thing that Goldman does.2
Is this a scandal? The short answer is “naaah.” Who cares? What is the Volcker Rule for? Read more »
There’s a huge article by Frank Partnoy and Jesse Eisinger in the Atlantic today about how banks are so horribly complicated that even sophisticated investors, meaning basically Bill Ackman, don’t trust them any more. I suppose this provides an excuse for me to trot out a toy theory that’s been congealing in my head, which is roughly that you can have two of the following in a publicly traded financial company, but not three:
- “market making,”
Like: you could, or someone could, make some educated guesses about what goes on at a bank that takes deposits and makes mortgage and commercial loans, and decide whether or not it’s a good business that you should invest in. You could even make such guesses and decisions about what goes on at an old-school broker-dealer that trades securities for a living. (Maybe? I’m less confident of this leg.) But for universal banks I’m kind of with Ackman – and Partnoy and Eisinger – that you have to give up on making intelligent decisions, or failing that have your intelligent decision be “I’m gonna need a 50% discount to book value before I invest in this thing.”
You can attribute the opacity of modern banking to like “bankers are eeeeeeevil,” which I don’t particularly believe, or “regulators are weeeeeeeak,” which seems sort of lame. Me I tentatively like “banking + market-making = insoluble complexity.”
The heart of the Atlantic article is an attempted deep dive into Wells Fargo’s financials, which ends up splattering against the rocks that guard those financials. Here is where things start to get alarming, for some value of alarming: Read more »
I enjoyed Bloomberg’s story about how the SEC was pestering JPMorgan to better disclose its proprietary trading activities well in advance of the London Whale fiasco. If you just read the headline you’d be all “oh look how prescient the SEC was,” but if you read the actual letters, not so much. Here is my favorite exchange:
SEC: Identify the trading desks and other related business units that participate in activities you believe meet the definition of proprietary trading. Identify where these activities are located in terms of your segment breakdowns. Quantify the gross revenues and operating margin from each of these units. We note your disclosure on page 59 of your Form 10-K for the year ended December 31, 2010 that you have liquidated your positions within Principal Strategies in your former Equities operating segment. It is not clear if this was the extent of your proprietary trading business. Please clarify if there are other proprietary trading businesses. If there are, please clearly identify the extent to which such activities or business units have been terminated or disposed of as well as the steps you plan to take to terminate or dispose of the rest of these components.
JPMorgan:1 … The Firm believes that the Staff’s comment regarding the disclosure on page 59 relates to the Form 10-K filed by a registrant other than JPMorgan Chase.
Hahahahaha true, it’s Goldman Sachs. Read more »
It looks like London Whale Bruno Iksil is currently vacationing in a quantum state between fired and not-fired, which I suspect is relatively pleasant compared to, like, trading credit indices, and his immediate supervisors have all moved on to bluer oceans. But layers and layers of people above them continue to have to tug at their collars and worry about the whole why-didn’t-we-stop-his-whaling-and-what-does-it-mean-for-our-jobs thing. Jamie Dimon has done a certain amount of that, but today the regulators in charge of JPMorgan got ther chance to do some collar-tugging in front of the Senate. Let’s just assume that was enlightening.
In any case this, from the Fed’s Daniel Tarullo, must be right, right? Read more »
Wall Street banks will have two years to implement the so-called Volcker rule so long as they make a “good faith” effort to comply with the ban on proprietary trading, U.S. regulators said. Banks will get the “full two-year period” provided by the Dodd-Frank financial overhaul law to “conform” their activities and investments, the Federal Reserve and four other U.S. agencies said in a statement today. The Fed has the authority to extend the period of compliance beyond July 21, 2014, the regulators said. “A lot of sweating brows at big banks are a lot drier today,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm whose clients have included Wells Fargo [Bloomberg]
I for one am pleased that the London Whale cannot stay out of the news despite all of JPMorgan’s best efforts to say that he’s NBD. His travels through the world’s oceans are delightful and instructive, and Mr. Whale, if you’re reading this and ever come to these shores, I’d love to buy you a drink or some plankton. On that note: lo these many hours ago I said:
Whaledemort has received a lot of Volcker-related attention for reasons that are … well, that have to do with the fact that the Volcker Rule is among other things a free-floating reason to get angry at anything a bank does that you don’t like and/or understand. But it is true that JPMorgan and others really do want a very broad portfolio hedging approach to be recognized by the Volcker Rule. … I tend to be down for that – basically I’d argue that the core function of the financial system is to hedge a bunch of risks with a bunch of historically correlated but not precisely offsetting other risks – but it makes lots of people kind of nervous because when I say “portfolio hedging” you hear “just taking a bunch of crazy risks and pretending it’s a hedge.”
And when I accused you of having that particular filter on your ears, by “you” of course I meant “Congress.” Per Jesse Eisinger: Read more »
What are you planning to buy from BlackRock? They have bonds for you:
BlackRock Inc. is planning to launch a trading platform this year that would let the world’s largest money manager and its peers bypass Wall Street and trade bonds directly with one another. … The trading platform would be run by the New York-based company’s BlackRock Solutions arm and offer 46 clients—including sovereign-wealth funds, insurance companies and other money managers—the ability to trade in corporate bonds, mortgage securities and other assets, company executives say.
Under the plan, the platform would seek to match buyers and sellers of the same securities, in a process known as “crossing trades.” BlackRock Solutions would charge a small fee for the service that would be much lower than Wall Street’s trading commissions.
Some of the transactions would effectively cut out the Wall Street dealers that have long acted as middlemen in the credit markets. BlackRock’s asset business, which oversees $3.5 trillion, would also use the platform.
So why wouldn’t you use this thing, whose working title is “Aladdin Trading Network”?* It’s pretty tautological that if you can cross a bond with another investor at a price that, with BlackRock’s small fee, is inside the market that you can get from dealers, you should do that. And presumably BlackRock’s $3.5 trillion AUM, plus whatever its clients post on this platform, provides a good opportunity for crossing. And from the Journal article there seems to be plenty of low-hanging fruit, e.g. BlackRock’s own funds only cross about 3% of their trades and are aiming to move that to 6-8%, so presumably that is possible in the basic sense that 6-8% of its trades are matchable with each other, so in a perfect-information world it’s kind of weird they’re not matching those already.
Of course the answer to why you wouldn’t use this is that there are so many bonds each of which is special in its own way, and you have your little heart set on a particular bond that is green with pink polka-dots and will accept no substitutes, and BlackRock either doesn’t have the one you covet or doesn’t want to part with it and neither do the 46 other folks on the system and so you have no choice but to source it from a dealer who will charge you a big nasty spread. Actually BlackRock will facilitate that for you too, which is perhaps a clue about how robust the matching will be: Read more »
Two things always worth talking about are bank regulation and path dependency so here’s this Journal story about Deutsche Bank that is like ooh-evil-Germans but also kind of meh:
Deutsche Bank AG changed the legal structure of its huge U.S. subsidiary to shield it from new regulations that would have required the German bank to pump new capital into the U.S. arm. … Taunus [the sub] — which at the end of last year had about $354 billion of assets and 8,652 employees, making it one of the largest U.S. banking companies — won’t have to comply with a provision of the U.S.’s Dodd-Frank regulatory-overhaul law that essentially forces the local arms of non-U.S. banks to meet the same capital requirements that American banks face.
Deutsche Bank has two main U.S. units. One is a trust company that has a banking license and must adhere to stringent U.S. bank-safety rules. The other is an investment-banking arm that isn’t technically a bank. Until recently, both units were housed under Taunus, which didn’t need to meet U.S. capital requirements, thanks to a waiver provided by the Fed a decade ago.
A provision of the Dodd-Frank Act, designed to prevent a repeat of the financial crisis, repealed the law under which that waiver and others were granted. That change was going to require Deutsche Bank to infuse Taunus, which for years operated with thin capital cushions, with what executives feared could be as much as $20 billion, according to people familiar with the matter.
Deutsche Bank responded last month by moving the trust company out of Taunus, named for a mountain range near Frankfurt. That means Taunus is no longer a bank-holding company and won’t have to comply with the new, tougher capital rules, even though Taunus still houses Deutsche Bank’s U.S. investment bank.
Instead it will be SEC regulated, like … well, every other US holding company that houses only an investment bank and not a bank bank. Bank. The bank bank subsidiary, on the other hand, will be owned directly by Deutsche Bank, which as the Journal previously explained gets to follow German but not US capital regulation. The bank sub will be a US trust company, so not quite true that it won’t have to meet the same capital requirements that American banks face. It will have to meet the same capital requirements that American banks face. Its just that its holding company will not be a US bank holding company, but will rather be a German thing regulated by Germans. Read more »