Levine on Wall Street: Bond Markets and Bank Fines


By Matt Levine

BlackRock wants fewer bonds.

Every year or so BlackRock complains that the bond market isn’t liquid enough, that bond trading should move from dealer-customer over-the-counter interactions to electronic platforms, and that bond issuers should standardize their issuances, resulting in fewer larger bonds that are easier to trade. Here is yesterday’s white paper, and here is the May 2013 version. There is a grass-is-always-greener aspect to market structure debates; big bond investors look at their illiquid dealer-intermediated markets and want standardized anonymous electronic markets, while big stock investors look at their standardized anonymous electronic markets and yearn for the good old days when market makers were humans rather than scary computers. Meanwhile, bond traders are bored, yet still skeptical that they’ll be computerized out of existence:

“Despite attempts to get it to be electronic, it’s still a voice market,” Mark Pibl, head of research and fixed income strategy at Canaccord Genuity, said in a telephone interview. “On the equity side, there’s just one security whereas on the bonds of an issuer there could be five or six or more, there could be different subordinated issues. To a large degree, that complexity within the capital structure doesn’t allow itself to easily be automated.”

BlackRock’s disagreement with that is subtle; its proposals are really about giant repeat issuers — the kind of most interest to BlackRock for obvious reasons — and even there it wants to reduce, say, an industrial ‘s bonds outstanding from 100 to 40. Forty bonds is still a lot of bonds!

How much should you fine banks?

A paradox of banking regulation is that there are various bad things that banks can do to make more money, and you don’t want them to do those bad things because they’re bad, but on the other hand, you do want them to have more money. Money is for these purposes synonymous with “capital,” and the more capital banks have the safer they are for the world. This paradox is endlessly productive — a variant of it is called “too big to jail” — and so there is this:

The head of a U.K. financial regulator Tuesday called for more international cooperation between authorities before inflicting large fines or penalties on banks.

“The scale of fines has gone up,” said Andrew Bailey, Chief Executive of the Prudential Regulation Authority. “There is a need for a ‘cards on the table’ discussion between authorities.”

Mr. Bailey said that regulators need to bear in mind the implications of big fines on the stability of the financial system. “The escalation of fines…requires careful thought,” Mr. Bailey said. “Increased fines does create headwinds to rebuilding the strength of the financial system.”

Doral Bank wants its taxes back.

Basically the way to commit accounting fraud is to overstate your income, and the way to commit tax fraud is to understate your income. That’s a surprisingly helpful coincidence, or anti-coincidence; it means that public companies that want to commit fraud have to choose one or the other. Or they can do the sort of double fraud that understates their tax income and overstates their accounting income, but that has a significantly higher degree of difficulty. Anyway Doral Bank, a bank in Puerto Rico, chose accounting fraud; it got caught, people went to jail, etc. Shane Ferro picks up the story:

After that happened, the bank went to the Commonwealth of Puerto Rico and said, “Look, the thing about overstating the value of your assets is that you end up paying more taxes than you actually owe. Since you proved fraud, we’d like that extra tax money back.”

That worked for a while and then didn’t, which is so often how fraud stories end, though, I dunno, don’t they have a point here? It’s a bit harsh to pay real taxes on fake income.

Totally avoiding sanctions.

Here is a story about how Total SA is “seeking nondollar financing for a gas project in Russia,” because basically any dollar financing is going to run afoul of U.S. sanctions, while yuan or ruble or — awkwardly! — euro financing is probably fine. Is it a story about how Total are sort of jerks for evading sanctions against Russia? Is it a story about how U.S. efforts to use the dollar’s global supremacy as a tool of foreign policy will end up weakening the dollar’s supremacy without actually accomplishing those foreign policy goals? Probably both!

A whistleblower got rich.

It’s the largest ever whistleblower award from the Securities and Exchange Commission! It’s $30 million, it went to an anonymous person in a foreign country, and I guess if you got $30 million from the SEC for narc’ing on a big fraud you’d probably be anonymous and in a foreign country too. And it would have been even bigger except:

We also have considered Claimant’s delay in reporting the violations, which under the circumstances we find unreasonable. Claimant delayed coming to the Commission for a period of Redacted after first learning of the violations, during which time investors continued to suffer significant monetary injury that otherwise might have been avoided. We do not agree with Claimant’s assertion that Claimant’s delay was reasonable under the circumstances because Claimant was purportedly uncertain whether the Commission would in fact take action. There is always some measure of uncertainty about how a law enforcement agency may respond to a tip, but in our view this does not excuse a lengthy reporting delay while investors continue to suffer losses. Indeed, if Claimant was concerned that the Commission would not respond to Claimant’s tip, Claimant also could have reported the violations to other appropriate U.S. authorities.

I mean, you can sympathize with the worry that the SEC wouldn’t do much with the tip, but, yes, “I was slow coming forward because I figured the SEC would be slow responding” is not an entirely logical excuse for covering up a fraud.

A private equity firm got in trouble.

Lincolnshire Management, a private equity firm, bought a company in its Fund I in 1997. Four years later, it bought another company in its Fund II. Then it combined a lot of the management of those companies, and billed each of them for their share of various joint expenses. But it overbilled the Fund I company and underbilled the Fund II company. Eventually the Securities and Exchange Commission checked up on all of this and got mad, and now Lincolnshire is paying $2.3 million of disgorgement and penalties. This is a boring story and I don’t get it. You want there to be a “because” here; like, they overbilled Fund I because they were charging higher performance fees for Fund II or more or their personal money was in Fund II or Fund II was closer to a high water mark or they were using Fund II performance to market Fund III or … something, right? The SEC order sticks to the boring facts. Perhaps it was an accident.

Greenshoe fees.

Alibaba’s bankers exercised the greenshoe on its initial public offering, buying 15 percent more shares than the base deal size. Since the fees on the base deal were about $261 million, that means that the bankers will get total fees, with the greenshoe, of more like $300 million. So the greenshoe exercise “pumped up the banks’ payday,” says the Wall Street Journal, which is technically true, but be careful. The banks would have made even more money if the stock had cracked, trading at say $60 per share, and the banks had bought in the greenshoe shares at well below what they paid for them. That actually happened with Facebook. The greenshoe, on its own, creates weird economic incentives for banks to want the deal to trade badly so they can profit on the greenshoe, though in practice this is an area where banks are resolutely long-term greedy and prefer deals that trade well so they can profit on the next deal. And here is a pretty good explanation of how greenshoes work.

The next generation of Tiger Cubs.

Here is a paragraph, via Tyler Cowen, that feels like it might have been written by Borges:

One project is Michael Marcovici’s Rat Trader. The book describes the training of laboratory rats to trade in foreign exchange and commodity futures markets. Marcovici says the rats “outperformed some of the world’s leading human fund managers.” The rats were trained to press a red or green button to give buy or sell signals, after listening to ticker tape movements represented as sounds. If they called the market right they were fed, if they called it wrong they got a small electric shock. Male and female rats performed equally well. The second generation of rattraders, cross-bred from the best performers in the first generation, appeared to have even better performance, although this is a preliminary result, according to the text. Marcovici’s plan, he writes, is to breed enough of them to set up a hedge fund.

Things happen.

If you’re my age and working in investment banking, you’re making more money than I am. There are new inversion rules. Herbalife had a rough day yesterday, but got better. Allergan/Salix rumors persist, and Allergan apparently turned down Actavis too. Amazon and the Selten chain store paradox. Jimmy Choo is going public. Here is an alumna of Goldman Sachs, Morgan Stanley, Restaurant Gordon Ramsay, and the Playboy Club. Starbucks beer latte. “ISIS Equity changing name to something less terrorist-y.” “‘Because of Alibaba, we scattered to other boats,’ said Strother Scott, an associate at H.I.G. Capital in Boston, who had planned to sail on a family boat.”

To contact the writer of this article: Matt Levine at [email protected]

To contact the editor responsible for this article: Tobin Harshaw at [email protected]



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