Levine on Wall Street: Too Big to Lose the Right to Process Dollar Payments?

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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BNP is still in trouble.

Here is a story about how BNP Paribas had a "secret weapon," a "single-page memo" from a respected U.S. law firm saying, approximately, "go ahead and violate U.S. sanctions against Sudan, just not from your New York office." And so they took this memo to prosecutors to be all "Aha! You can't catch us, we have lawyers!" This did not work. There is an important lesson here, which is: This does not work. Meanwhile, U.S. regulators, emboldened by their success in getting a criminal conviction against Credit Suisse without blowing it up, have acquired a taste for risk and now want to up the odds that a criminal conviction would blow up BNP Paribas. The idea is to restrict BNP's ability to transact in dollars for a while, which "could lead to unpredictable consequences." I guess this is how you ensure that criminal charges are still terrifying for big banks: You keep dialing up the consequences until eventually a conviction really does bring down a bank. After BNP Paribas, no one will really want to be the third big bank to plead guilty to crimes. Just in case, the European Central Bank wants to stress-test for, I guess, the prospect of being that third bank.

Oh, complacency.

I kind of don't get the "complacency" thing? Like, asset prices are high, or they are low. Volatility is high, or it is low. If asset prices are low and volatility is high, that seems bad. If asset prices are high and volatility is low, that seems like an indication that the Fed is doing its job well. This is obviously an insufficiently Minskyan view, and here is a lot of Fed worrying about complacency. And here is a story about PIK notes with the sentence "We call it the yield-hunger games."

Mutual funds are getting more skillful and worse at making money.

Here is a counterintuitive paper, and a Bloomberg News write-up. The conclusion is roughly that the growth of the active mutual fund industry over the last 30-odd years has made it harder for those funds to outperform their benchmarks, because skillful new entrants keep coming into the business and bidding away all the good opportunities to make money. On the plus side, this means that the average mutual fund manager now is more skilled than she was 30 years ago, though I cannot fathom why that would matter to an investor who was making more money with less skilled managers.

Will rising rates increase bank profits?

Not much, says the Chicago Fed (and John Carney at Heard on the Street), but this strikes me as a case where you care about correlation and the Fed is giving you causation. The Chicago Fed finds that a 1 percentage point increase in short-term interest rates causes only a 0.3 basis point increase in the net interest margin of large banks, and that a 1 percentage point increase in the spreads between 10-year and 3-month Treasuries adds about 0.8 basis points of NIM. But that's after controlling for a bunch of economic factors, like GDP growth rate, unemployment, and house prices, which seems to me to be controlling for the things you actually care about. People assume that higher rates will be good for banks because, as the Chicago Fed says, "Interest rates reflect the underlying fundamentals of the economy," and so higher rates are a useful proxy for improving fundamentals. You might not want to overthink that.

People keep taking each other's high-frequency trading code.

The Manhattan district attorney is investigating whether a former employee of KCG Holdings (formerly Knight Capital and Getco) stole a bunch of code on his way out the door. It is sort of puzzling that the Manhattan DA is so protective of high-frequency traders that he keeps prosecuting people for taking their code, while the New York attorney general keeps trying to find ways to put them out of business. Elsewhere, a venture capital fund has appointed an algorithm to its board.

Things happen.

You can bet on soccer corruption. You can buy Greek CDS again. ISDA is really into punning headlines. Bill Ackman's having a good year so far. But Carl Icahn may lose a secret deal over the Phil Mickelson thing. 50 Cent's friends get it. Maureen Dowd owns green corduroy jeans.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Toby Harshaw at tharshaw@bloomberg.net