Levine on Wall Street: Twitter, Verizon, Derivatives
Twitter's doing a secret IPO
Twitter announced, via tweet of course, that it filed a confidential registration statement for its initial public offering. The JOBS Act allows "emerging growth companies" with less than a billion dollars of revenue to have their initial IPO filings reviewed confidentially by the SEC before being made public, though they're still made public well before the IPO is launched: You don't have to buy Twitter's stock blind. Though you probably will! The idea is to let wee inexperienced companies get their disclosures in order while avoiding harsh public scrutiny, which hahahahahahahahahaha Twitter, there are like 10,000 articles about its IPO now. (Also its announcement got 13,120 retweets as of this morning.) Twitter seems to want to avoid the public frenzy (and ensuing trading glitches and stock-price collapse) of the Facebook IPO. But that's not really up to Twitter, and its confidential filing ensures only a slightly different flavor of frenzy.
Verizon's bond deal had its own frenzy
Pimco and BlackRock bought $8 billion and $5 billion of Verizon's giant bond deal this week, which, lotta bonds, and an understandable move for them to lock in tons and tons of highly rated debt at above-market rates. People often contrast the traditional/European financial system in which companies get funding largely from big banks who take concentrated debt positions and monitor their debtors closely, with the more American system in which companies get funding from diffuse capital markets. It's fun to think about what exactly taking $8 billion from Pimco means.
Blythe Masters: cause of the financial crisis, or not cause of the financial crisis?
Per the headline, JPMorgan's Blythe Masters is Not Sorry for her role in inventing credit derivatives. Neither am I, Blythe, neither am I. Masters invented synthetic collateralized debt obligations at JPMorgan in the late '90s, and since credit derivatives blew up the world in the late '00s people have been asking: was Masters a pure-hearted inventor of a noble product that was "corrupted" by future generations of financial engineers, or did she have a hand in that corruption? (Businessweek notes that she pitched super-senior credit derivatives to AIG, which Ended Badly.) But the initial invention was itself a regulatory arbitrage: what Masters found was a way to get rid of the capital requirements incurred by a loan without getting rid of the loan. The idea was about getting around risk rules from the beginning. It's not surprising that, when it spread to places with less impressive risk management abilities than JPMorgan, it went badly.
JPMorgan is beefing up its risk management abilities
Nobody's perfect: "J.P. Morgan Chase & Co., facing a host of regulatory and legal woes, plans to spend an additional $4 billion and commit 5,000 extra employees this year to clean up its risk and compliance problems, according to people close to the bank." Banks generally try to make positive-net-present-value investments, which suggests that JPMorgan sees the expected value of fines and Whale-style debacles without this new program as being greater than $4 billion. Which, sure.
There might be a new, teeny transaction fee on derivatives
There's been a lot of talk about imposing a transaction tax -- sometimes called a "Tobin tax" -- on derivatives trades to raise money for public programs and/or to cut down on derivatives speculation. And now President Obama's budget proposes one. Sort of. The tax -- well, "fee" -- on derivatives would be used to fund the Commodity Futures Trading Commission, the derivatives regulator, which has a proposed $315 million budget for 2014. For comparison the daily average notional trading volume of only interest rate derivatives is $683 billion, so by my math a fee of around 0.0002 percent of notional ought to amply cover the CFTC. “Imposing this new tax would also increase the cost of business for all customers, even those the administration wants to exempt, because it would reduce liquidity, increase volatility, and impair the efficient use of U.S. futures markets,” said the chairman of the CME Group, of course.