In this day and age, it's not shocking to see allegations of anti-competitive practices among the handful of banks in the Big Enough To Actually Matter tier of high finance. Antitrust investigations, lawsuits and settlements have arisen around municipal bonds auctions, ISDAfix, the CDS market, LIBOR. It's just part of the business now.
What these cases have tended to lack, however, is the kind of heavy-handed, bare-knuckled power plays that come to mind when hears “antitrust” and imagines the cartels of the gilded age. These days you might have a few foulmouthed traders quoted in chat sessions carrying out what might be read as “collusive” behavior, but absent are images of corporate bosses padding around a competitor's office, muttering something to the effect of “nice company ya got here, shame if something happened to it.”
On Thursday a trio of pension funds filed suit against Goldman Sachs, Morgan Stanley and four other major banks over allegations that they formed a “working cartel” to dominate the market in stock lending. In doing so, the lawsuit claims, they've captured 76 percent of the equity loan market to take on average a 60 percent cut between every stock borrower and stock lender, thanks to the “inefficient, antiquated, and opaque” system the six of them “jointly cultivated and fought to maintain.”
The lawsuit goes farther than most of these types of cases – usually vague, hand-wavey affairs – by singling out banks and even individuals who work at them, alleging shadowy pacts and conspiratorial dinners, threats “veiled” and explicit. For instance, when an upstart challenger to the banks supplicated before the Depository Trust & Clearing Corporation – which, the lawsuit says, was controlled by the banks as a “forum to collude” – the young company was told: “This sounds great, but who’s going to start your car in the morning?”
It's actually a good read! See for yourself.
The banks – Goldman, Morgan Stanley, JPMorgan, Credit Suisse, Bank of America and UBS – all gave variations of “no comment.”
To back up a little bit, the stock lending industry involves some $1.7 trillion in outstanding securities loans that exist mostly for the purposes of short selling. When a hedge fund wants to sell a stock short, it needs to borrow it from someone who has lots of shares lying around and no intention to dump them anytime soon. Pensions often fit the bill. Between these two parties stand prime brokers like our accused six banks, the top players in the space.
As it stands, the stock lending industry has no open and transparent stock lending exchanges where counterparties can view current prices and connect all-to-all. Instead everything is done over-the-counter. In the words of one trade rag, it is the “mother of all dark pools.”
And that, according to the lawsuit, is just how Goldman et al like it. In 2001 the defendants and a few other parties doled out cash and resources to help form a company called EquiLend to serve as the primary conduit for OTC stock lending. Executives from the banks named in the suit made up a majority of the seats on EquiLend's board, says the lawsuit, with Goldman's representative playing “an especially influential role.”
By 2009, the suit maintains, EquiLend was a “Potemkin village” that served as a place for the banks to powwow and “coordinate their conduct to ensure the securities lending market does not develop in ways that threaten their collective dominance.”
Here's what that looked like in action.
In the mid-2000s a company called Quadriserv built a platform called AQS, which was intended to do for OTC stock loans what electronic all-to-all exchanges had done for markets like corporate bonds – lower spreads and increase price discovery, benefiting the pensions and insurance companies lending stocks as well as the hedge funds borrowing them.
Needless to say, this would be a threat to the handful of banks that earned fat spreads on the existing stock lending markets. So the banks (allegedly) sprung into action. And evidently the plaintiffs got access to some internal EquiLend documents, because the suit goes into some detail here:
The Prime Broker Defendants’ personnel who served on the board of EquiLend expressly discussed this threat and how to respond to it numerous times in connection with multiple EquiLend board meetings. Not surprisingly, AQS soon began to receive veiled threats originating with the
Prime Broker Defendants.
One by one, the suit says, major prime brokers came to AQS with demands that (hint hint) “almost always echoed each other.” They said AQS should be a brokers-only service and that lenders and borrowers should be barred from dealing with each other directly, according to the complaint.
The allegations don't end there. According to the lawsuit, the banks in the alleged cartel then visited their hedge fund clients and told them, basically, ixnay on the atformplay. The banks “flatly refused to give their hedge fund customers access to AQS” and “threatened to deny the hedge funds access to critical prime brokerage services” if they used it, says the complaint. And, again, it names names:
For instance, Renaissance Capital Technologies — one of the world’s largest and most successful quantitative hedge funds — asked each of its multiple Prime Brokers for direct access to AQS. Every one of them not only refused, but told Renaissance Capital that if they were not happy with that, they could move their business to another firm.
The lawsuit says D.E. Shaw and SAC Capital received similar warnings, and that Goldman expressly told BNY Mellon that if it used AQS, Goldman “would never do business with BNY Mellon again.”
But we should pause here to note that for these and other detailed, specific claims alleging what appears to be very serious misdeeds, no citations are supplied. This warrants healthy skepticism, if only for the dubious suggestion that anybody would have the temerity to fuck with Steven A. Cohen.
Years passed, and whether it was the the “cartel's” doing or something else, AQS eventually withered on the vine. It remained a marginal player until 2016. The complaint tells the same basic story of a company called SL-x, which aimed to share pricing data and provide a chat system for stock borrowers and lenders, while providing centralized clearing similar to AQS. Again, the major players allegedly warned business partners against using the service and used their clout on the DTCC and the Options Clearing Corporation to throw up roadblocks.
In a meeting with two Goldman Sachs executives, the lawsuit says, SL-x found a chilly (and inexplicably folksy-sounding?) audience. “I ain’t supporting this,” one of the Manhattanite financiers is quoted saying. “You ain’t going to get this done,” says the other. (You can find their names in the text of the suit if you want.)
SL-x eventually failed and put its intellectual property up for sale. It was purchased for a little over $500,000 by a familiar face: EquiLend.
The final chapter in the saga comes with the implementation of Basel III, which requires banks to put up additional costly capital for stock loan transactions. No longer would the old OTC way of doing things fly. So the banks set about charting a new course, eventually landing, the lawsuit says, on central clearing – i.e., the services their vanquished upstarts had hoped to offer before they were stymied by the allegedly collusive groups OCC and DTCC.
Morgan Stanley, for instance, came out publicly for a central clearing platform after studying the issue. But, according to the complaint, this determination came as a surprise to the actual stock-lending business, which saw the change as a threat to its revenues. Eager to find a solution to the impasse, a Morgan Stanley exec allegedly called up his counterpart at rival Goldman Sachs and devised a plan. (Again, see the lawsuit if you want names.)
In early 2016 the two met “over a series of private calls and dinners at restaurants in New York,” the complaint states, eventually hashing out the details of what they allegedly called “Project Gateway”: EquiLend would purchase the only existing platform for clearing stock loans, a little company called AQS, and EquiLend would become the de facto clearing platform. So AQS, after having spent $100 million in investor capital building the platform, sold itself to EquiLend for $5 million.
And that's where things stand now, except for now there's a big hairy lawsuit that claims the whole stock lending industry is one big swamp of collusion with some of the biggest names in banking muscling every conceivable opponent into oblivion.
Again, the lawsuit is remarkable for the level of detail it goes into – which, one would hope, the plaintiffs can back up with pertinent documents. It's quite a thing to see a few little pension funds – public employee retirement systems in Iowa, Orange County and Sonoma County – making what appear to be the most explicit accusations of big-bank collusion in the post-crisis era. These allegations should probably be taken with a grain of salt, but they're certainly more than your garden-variety class-action.
Do you work in the stock lending biz? Is this lawsuit full of it? Has a Goldman partner come to your company's office, stamped around and made threatening grunting sounds? Are you Steven A. Cohen? Let us know: firstname.lastname@example.org.