Too-Big-to-Fail Banks and Green-Ink Bonds

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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Banks.

Neel Kashkari, who ran the bailouts last time there was a U.S. banking crisis, I guess doesn't want to do it again, so he gave a speech yesterday about "Ending Too Big to Fail." Kashkari figures that regulators probably have the tools to respond if "an individual large bank runs into trouble, while the economy and financial system are otherwise healthy and stable," but worries that those tools won't help if "one or more large banks run into trouble while there is broader weakness and risks in the global economy":

Given the massive externalities on Main Street of large bank failures in terms of lost jobs, lost income and lost wealth, no rational policymaker would risk restructuring large firms and forcing losses on creditors and counterparties using the new tools in a risky environment, let alone in a crisis environment like we experienced in 2008. They will be forced to bail out failing institutions—as we were.

I think this is all basically right but it is kind of weird. For one thing, what is the likelihood that an individual large bank will run into trouble when everything else is fine? Like, no bad loans, no failing counterparties, no cratering securities markets, just a teller taking $1 trillion out of cash drawer and fleeing to Namibia? I feel like the odds of that scenario are low, and if that's all Dodd-Frank's single-point-of-entry resolution mechanism is supposed to address, then it was a lot of effort for not much benefit.

On the other hand, what are the precedents for broad banking crises that are resolved without government assistance and without damage to the broader economy? I don't know if it works that way. The point of a banking system is to serve as a transmission mechanism for the economy; making individual banks smaller ("smaller, less connected, less important," says Kashkari) would reduce the impact of a one-off failure but not necessarily of a widespread crisis. Also Kashkari might be right that any "rational policymaker" would bail out banks in a crisis, but what are the chances that the next crisis response will be rational? The political will against bailouts seems pretty strong, as evidenced by, for instance, the former head of TARP giving a speech against them. Anyway, Kashkari is thinking about breaking up banks, requiring more capital and taxing leverage. Next steps involve "a series of policy symposiums."

Elswhere in banks, they are hiring former spies "to deter the next market manipulator or rogue trader." I don't know. The problem that Kashkari worries about -- how to make a banking system resilient enough to survive a risky environment without bringing down the real economy -- is serious enough, and for all the attention it has gotten probably still deserves more attention. It is just possible that the problem of profit-maximizing bank employees saying unpleasant things in chat rooms has gotten too much attention.

Also: "There’s a ‘juniorization’ of the workplace underway in London as banks focus more on costs than revenues." HSBC will stay in London. The European Central Bank doesn't plan to raise capital requirements.

Hedge funds.

My favorite almost-statistic about the hedge fund industry is that, as I once put it:

  1. The number of hedge funds started in a quarter always exceeds the number of hedge funds closed, and
  2. The correlation seems to be positive.

Hedge funds have had an awful run recently, so here is an article about some new funds that are starting. The lead anecdote is about "a well-known collector of contemporary art who shuttered his hedge fund two years ago" and who is starting a new one. The new one is called Global Volatility Voyageur, and while I suppose "voyageur" is better than "touriste," I may hold out for a Global Volatility Voyeur fund. That one would also look around at all the volatility in the world, but that would be it, it would just look, rather than putting your money into it. Here is an article about how "funds that chase volatility lost a total of 1% over the past four years," although "now the trade is showing signs that it might pay off." It is kind of weird that, for all that is going on right now, the VIX is in the mid-20s. If you were hedging your market risk by being long volatility (instead of short the market), you might be a bit disappointed.

Elsewhere, here is a story about SumZero, "a social network for the investment community." The lead anecdote here is about "an obscure Houston fund called Bison Interests" that got a $20 million investment from a university endowment using SumZero, although the counterargument comes from an endowment manager who is "dubious that truly talented fund managers would use SumZero."

And not everyone is impressed by Bill Ackman's commitment to his strategy:

"Ackman is failing on the number one rule," one executive at a New York based hedge fund said. "He's getting attached to his book like he's a child with a lost toy. Be a man, let the teddy bear go, this is people's money. This is real life." 

Bonds.

How's the bond market? Well, on the one hand, "Apple Inc. sold $12 billion of bonds to return capital to shareholders"; the 10-year came at 150 basis points over Treasuries, 50 basis points wider than when Apple sold dollar bonds last May, but I guess being able to borrow $12 billion for buybacks is pretty bullish. It's not all for buybacks, though; $1.5 billion came from a seven-year "green bond":

This type of bond is paid back in the same way as other debt, but the money raised is used to finance environmentally friendly projects. The green-bond label is supposed to make it easy for environmentally focused investors to separate the bonds from the trillions of dollars of other debt instruments out there.

Here is the prospectus describing the eligible uses of proceeds for the green bond, which is listed in green ink on the cover, I suppose to distract investors from the fact that money is fungible. 

Elsewhere, Apollo Global Management has agreed to buy ADT Corp., in a move that is less synergistic than its recent deal to buy the other Apollo, but still pretty synergistic, since the acquirer is actually Protection 1, "a leading full-service business and home security company in the United States also owned by the Apollo Funds." But the deal is not particularly ambitious on the leverage front: The funding includes 40 percent equity, $750 million of preferred stock sold to an affiliate of Koch Industries, $3.75 billion of rolled-over existing ADT bonds, and a $3.14 billion second-lien term loan that Apollo is shopping to "a number of alternative investors such as hedge funds." 

Argentina.

After years of relentless bad news out of the Argentine debt fight, the news these days keeps getting sunnier. The country has reached deals with various long-time holdout creditors, and now it seems even to have softened Judge Thomas Griesa's stony heart

Griesa, 85, is now asking the bondholders who spurned the deal to explain why he shouldn’t lift the ban, a marked difference from times past when he dismissed similar requests. The move increases the chances Argentina will be able to resume debt payments and borrow the money it needs to pay its recent settlements, according to Anna Gelpern, a law professor at Georgetown University in Washington. Lifting the injunctions would significantly increase Argentina’s leverage in its negotiations with the remaining holdouts, she said.

"Argentina gets upper hand in debt battle" is the headline here, though I would quibble that Argentina got the "upper hand" by changing its offer to those holdouts from 30 cents on the dollar to at least 150 cents, and possibly much more. Caving utterly is an odd way to get the upper hand. But it seems to be working. Here is Steven Davidoff Solomon arguing that "there are no real winners in this sorry affair," but if holdout creditors who bought Argentine bonds at pennies on the dollar end up getting back par plus most of their interest (at up to 101 percent a year!), then they have ... won ... no? Here is Charles Blitzer warning "don't pop the champagne just yet." Here is Bloomberg View's editorial board calling for a sovereign debt restructuring mechanism, "ideally overseen by the International Monetary Fund." 

Meanwhile in Puerto Rico, here is an absolutely nutty story about the power authority: 

While it is clear that the authority’s financial downfall is complex and multifaceted, the question of whether it bought dirty oil while billing customers for clean oil stands out as one of the most charged issues it is facing. If true, the accusations would go beyond errors in judgment and amount to a decades-long fraud.

Should Google buy AIG?

Hush, I know the company is called Alphabet, but I'm going to keep calling it Google until normal people actually start using "Alphabet." (This Bloomberg headline calls it "Google Parent.") Anyway, some Citi analysts think that Goophabet "should buy American International Group Inc. to expand into financial services, and turn the insurer into a laboratory for innovation":

“We realize it is a very low-probability event, while maintaining that it is still a very good idea,” analysts led by Todd Bault wrote. “There is a perfect convergence of reasons why it might be exactly what AIG and the insurance industry needs. And the tech community could help solve what could well be one of the most challenging problems it could tackle.”

On the one hand, Google is working on solving the problem of human mortality, so restructuring a big insurance company may not be as meaningful a challenge for Google as it is for some financial-services analysts at an investment bank. On the other hand, there are some synergies there: If you solve human mortality, your life insurance business becomes pure profit. It messes with your annuity business though. In general, though, this feels a little like my long-term financial plan of winning the Mega Millions. If you are an analyst at a bank covering a company, odds are good that being owned by Google would be good for that company. (Hi Twitter!) But your writing a note about it won't make it come true.

Elsewhere in analysts: "Are we on a cube-shaped planet?" And the Dow will peak on March 23, "just after lunch."

Market structure.

Eventually the technology used in financial markets will spread to every place in the economy where pricing decisions are made, and then won't that be great? So much spoofing, so much latency arbitrage, so much of this:

Gas prices on one Toledo, Ohio, street dropped to a single penny when a computer glitch spurred a price war between two stations.

A clerk at the Pilot Travel Center on Hagman in Toledo told WTOL-TV the 49-cent price about 2:30 a.m. Sunday was caused by a computer glitch, and the glitch continued to drive prices down to 19 cents by 4 a.m.

The Circle K gas station across the street didn't experience a similar glitch, it simply dropped its price to 17 cents per gallon on purpose to compete with Pilot.

The glitch-spurred price war went on for about three hours, with at least one person bearing a receipt showing a price of just one penny per gallon.

Flash crash! Fat finger! Limit-down! Clearly erroneous! Speed bumps! I welcome our algorithmic overlords. 

Shkreli, Kanye, etc.

Money Stuff was off yesterday, and I haven't been paying too much attention this weekend, but I gather that both Martin Shkreli and Kanye West have been in fine, overlapping form recently. Shkreli's efforts to pretend to buy Kanye's new album backfired when he pretended to have been scammed out of $15 million of (of course) bitcoin:

On Sunday, Shkreli tweeted that he came into contact with someone named "Daquan" and sent him a payment of $15 million via bitcoin to no result. The rest of his tweets were full of profanities and frantic ideas to get his money back.

Ultimately, he concluded that he would contact Satoshi, the creator of bitcoin, to get his money back. 

None of this happened. I mean, the tweets happened, but when you spend a certain amount of time on Twitter you start to recognize the telltale signs of a joke, and these were jokes. Meanwhile, Kanye himself was tweeting about being $53 million in debt and asking Mark Zuckerberg to "invest $1 billion into Kanye West ideas." I may need to spend a few more years on Twitter before I can be sure if that was a joke. Also Jose Canseco tweeted a bit about how everyone should buy gold, which I will go ahead and declare Not a Joke. "What else is there, bitcoins? Think about it."

People are worried about unicorns.

If Mark Zuckerberg does give Kanye West $1 billion then people will probably start worrying about Kanyecorns. Until then there is a lawsuit against Jessica Alba's Honest Co., the Honest Unicorn, claiming that it is ... wait for it ... dishonest. (That is the only sort of lawsuit, really, but who can pass up cheap irony?) Also: "Unicorn hair is the latest trend to go viral with fashion experts but is it magical?"

People are worried about stock buybacks.

Here is a somewhat confusing article about how companies lose money on buybacks. "Many corporations would have been better off investing that cash in an index fund instead of their own stock," says the article, about companies including "229 companies in the Standard & Poor's 500 index." Wait, what? I suppose it is possible that the companies that do a lot of buybacks are disproportionately in the bottom half of the index by performance. Or is it just like, half of the sampled companies in the index underperformed the index, and half outperformed it? I don't know. "The companies could also have distributed that cash as dividends to shareholders, allowing them to spend what is, in the end, their money," hmm, yes. Meanwhile:

Over the past year, the S&P 500 index has fallen 11%, even though many of its constituents sport lofty dividends. Many companies also continue to buy back their stock. But that hasn’t been enough to tempt investors, who are worried about global economic growth and low oil prices.

And "Nearly one in five companies in the index have a dividend yield that beats yields of 30-year U.S. Treasury bond."

People are worried about bond market liquidity.

The latest installments in the New York Fed's liquidity series are "High-Frequency Cross-Market Trading and Market Volatility" and "The Workup, Technology, and Price Discovery in the Interdealer Market for U.S. Treasury Securities," which are maybe not at the top of anyone's bond-market-liquidity worry lists, but I guess they're on there somewhere. Elsewhere: "Credit-Default Swaps Are Back as Investor Fear Grows."

Things happen.

Frances Coppola: "Negative rates and bank profitability." Izabella Kaminska: "Yup, negative rates were a really bad idea." Will the Public React to Negative Rates With Safes, Mattresses? Saudi Arabia, Russia, Qatar, Venezuela Agree to Freeze Oil Output. The Glaring Problem With Oil Giants' Production Freeze. Iran defends right to raise oil output. No Payout for Portuguese Bank CDS Holders Prompts Bondholder Worries. Chinese bank hit by $4.9bn loan fraud. As Marijuana Sales Grow, Start-Ups Step In for Wary Banks. Crédit Agricole to Sell Back Its Regional Bank Stakes. Congress Is Wary of Chinese Deal for Chicago Stock Exchange. The Plot to Kill the $100 Bill. Fake cheese. Dog pilots. Congrats C.J.!

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net