Levine on Wall Street: Practice Activists

Get your own tame activist investor

Here is an article about how companies are taking more, and more expensive, proactive steps to deal with activist investors, who are scaaaaaaaaaaaaary. Lots of people are quoted about how scary, but those people mostly work for law firms and banks who provide those expensive services to those companies, so they might have an agenda beyond a strictly accurate assessment of the threat. Delightfully "One company invited an activist investor into the boardroom to explain how he might think about undertaking an assault." I've often thought that the activism economy could be more efficient; like:

  • activists should charge companies a monthly fee for not messing with them, and/or
  • activists should charge investment banks a referral fee for creating work for them.

For instance, I hope all these bankers and lawyers quoted here are sending Carl Icahn champagne or at least grovelling Twitter DMs to thank him for all the fees he's generated for them. Also I hope the guy who played practice activist for that one company got compensated generously. (Also.)

But don't expect hedge funds investing in munis to be tame

A big category of hedge fund activity has long been distressed debt investing, in which funds buy debt of troubled companies and make money by being smarter than the average bear about restructuring those companies. With a mild recovery making corporate bankruptcies less frequent, hedge funds seem to have moved into municipal bonds as a good source of opportunity to be smart about restructuring. (Also of course sovereigns.) Here is a fascinating roundup of situations in which hedge funds have gotten involved, for good or ill but mostly for strict enforcement of contractual terms. There is complaining -- "I don't think there is any good that can come of it," says one long-time muni analyst -- but not from everyone. I like this guy, a Jefferson County commissioner involved in that Alabama county's debt restructuring: "Self-interest being the dominant interest of hedge funds, they were some of the easiest creditors to deal with."

The insider trading is coming from inside the SEC

Here is a Wall Street Journal article about how the Securities and Exchange Commission never really got around to to monitoring its employees' trading, which it said it would do after a 2009 report found that there was apparently insider trading at the SEC. The SEC was going to do industry-standard monitoring based on brokerage feeds but then staffers had privacy concerns so it just built its own, apparently not-very-useful system. Everything here is perfect. Why would you insider trade, if you were an SEC enforcement lawyer? Why would the SEC think it was a good idea to develop its own proprietary software? Why would it care that much about privacy considering that 90 percent of its work is basically reading bank and SAC Capital emails and IMs? How much of the SEC's attention is spent, not just on pursuing insider trading -- itself a socially dubious focus -- but on pursuing insider trading by the SEC?

People are still mad at S&P for that "structured by cows" email

Speaking of privacy, if you work at a ratings agency, and send a text message saying, "It could be structrued by cows and we would rate it," and then rate a deal that later blows up, you cannot be surprised if that line gets quoted in a lawsuit. Actually that line is a Zelig of mortgage-backed-securities lawsuits; basically anyone who bought anything is suing Standard & Poor's for giving it fraudulent ratings and putting the cow thing right up front. It's pretty compelling, no? Anyway, Bear Stearns had some hedge funds that bought highly rated structured credit securities, and those hedge funds blew up, and their managers were charged with criminal fraud, but they were acquitted by a jury because the awkward emails they sent weren't that awkward. So the liquidators of those funds are trying their luck with S&P, Moody's and Fitch, whose recorded-and-saved-forever electronic communications are less ambiguous..

Freddie Mac and Bank of America are still mad at each other

"Freddie Mac and Bank of America are in settlement talks to resolve disputes over more than $1.4 billion in faulty mortgages Freddie has said Bank of America should have to take back, according to people familiar with the matter. The deal would be the second such agreement between Bank of America and Freddie since 2011." *Stops reading forever.* Come on! Then there is Fannie Mae! And that Countrywide thing! And so many other things! It never ends. A good experiment would be:

  • Put together outrageous wish list of progressive reforms to big banks.
  • Offer it to Bank of America and JPMorgan in exchange for total immunity from all present and future lawsuits about mortgage-selling before, say, 2012.

Is that a deal you'd make? They'd make? Seems unlikely to be worse for anyone than, like, vague reform and endless lawsuits.

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