Brexit Plans and CoCo Confusion

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.

They do get paid a lot of money, but I would never want to be the chief executive officer of a big bank. There is a never-ending stream of crises, only some of them of your own making. It just seems exhausting. I would give up.Stuart Gulliver knows what I am talking about:

One issue is that the uncertainties around the vote and its implications make it hard to know what to plan for. HSBC Holdings PLC Chief Executive Stuart Gulliver was asked Monday what the bank’s contingency plans are. He replied the bank hasn’t started any in-depth analysis. “I think it’s impossible,” he said.

That question was about the possibility that Britain will vote to leave the European Union in June, but in a sense it could be about anything. (The Bernie Sanders financial transactions tax! The blockchain! Probably some regulatory investigation somewhere.) My initial reaction was, you know, you run a bank, you are supposed to plan for contingencies, or at least make soothing noises about how you are preparing for every possible outcome. But really he's right. You can't really plan for everything; low-likelihood, complicated, impossible-to-interpret political events will naturally get less attention than simpler risks that you can measure and hedge. There may be a broader lesson here, though I am tired just typing this.

In cheerier news for bank CEOs, their stock-based compensation for last year will be awarded based on trading prices from early this year, and guess what, those prices are a lot lower than they were a couple of months ago, so the executives will get more shares:

Citigroup Inc., for example, granted shares to Chief Executive Officer Mike Corbat on Feb. 16 as part of his compensation for 2015. The bank’s board had decided to award Corbat stock worth $9 million. Citigroup tracked its closing price on each day during the second week of February to derive the number of shares -- the same method it used during each of the past three years. This year, that also happened to be when Citigroup shares bottomed out.

The obvious incentive is to favor seasonal volatility: Push your stock price down early in the year when you're being awarded a fixed dollar value of shares, and then push it up later on when you want to sell. I suspect that few bank CEOs have that sort of finely calibrated power over their stock prices though.

Elsewhere, "Standard Chartered Plunges on Surprise Annual Loss, Revenue Miss." Today is JPMorgan's Investor Day, and JPMorgan "is quietly testing" using a blockchain to do some "U.S. dollar transfers between London and Tokyo." And equity analyst Richard X. Bove is skeptical about Minneapolis Fed President Neel Kashkari's plans to break up the big banks because, among other things, "in some of the areas served by the Ninth District bank, there are more buffalo than people."

CoCos.

Look, I know that the standard narrative is that regulators allowed banks to issue contingent convertible debt and treat it as loss-absorbing capital, and the coco debt ended up in the hands of naïve investors who didn't really understand its loss-absorbing characteristics, and when those investors learned that they could actually lose money they panicked, and all of this will eventually lead to banking crises (the panic) and bailouts (the poor misled investors), but I just cannot accept that narrative. It might be true, but I just reject it on principle. Here's the Wall Street Journal:

Chunky coupon payments, over 8% in some cases, were hard to resist in a world of rock-bottom interest rates. But where did these bonds land?

The answer is, like, at Pimco and BlackRock and some dedicated coco funds, though "around 10% to 15% of CoCos are held by retail investors." Here's the thing. If you are buying something with an 8 percent coupon in a world of zero interest rates, and you somehow think it's a risk-free bank deposit, I don't want to hear about it. That's not a thing. The coupon tells you the risk. If you bought it for the 8 percent coupon, you ipso facto knew it was risky, and even if you didn't -- even if you just thought you were getting a risk-free way-above-market return -- you have none of my sympathy. Even if you're a retail investor. Though odds are that you're Pimco or BlackRock.

And, by the way, the Great Coco Panic of '16 proceeded without any big banks' coco coupons being turned off. You're still getting your 8 percent or whatever. Rates are still low or negative. Your bet that the cocos would provide high yields without too much default risk still looks fine. "I'm very sanguine on the asset class," says a Pimco guy.

Valeant.

Bill Ackman has spent the last three-plus years arguing that Herbalife is bad. He has questioned its accounting and sales tactics, and predicted regulatory problems. He's had some victories in that fight, though in general it is shall we say going slower than he'd hoped. But you know what Bill Ackman (long) investment is running into problems over its sales tactics, its government relations, and now its accounting? It is not a great time to be Valeant:

Valeant said late Monday night that it believes about $58 million of revenue recognized in late 2014 should have instead been booked the following year. ​The misstatements are related to shipments of some Valeant products to a distributor, Philidor Rx Services LLC, which has been at the center of a turbulent few months for Valeant.

Valeant has found some sales to Philidor "prior to Valeant's entry into an option to acquire Philidor, that should have been recognized when product was dispensed to patients rather than on delivery to Philidor"; it "expects to delay filing its 2015 10-K pending completion of the review." The Citron Research note that started the wave of concern about Valeant back in October claimed that Valeant's Philidor relationship might have involved some booking of revenue before it was earned. I have to confess that I dismissed that claim: Valeant consolidated Philidor (after buying the option), the Citron note was full of breathless Enron references, and the other stuff (about Philidor's sales and insurance tactics) was so much more interesting and plausible. But, nope, Citron was right and I was wrong: Whatever else was going on with Philidor, it did involve Valeant booking at least a little revenue before it was earned.

Elsewhere, "CVS Health Corp. plans to restrict the use of a toenail fungus drug from Valeant Pharmaceuticals International Inc., as part of an initiative aimed at cutting spending on dermatology treatments," and there are few phrases in English that are more fun to say than "toenail fungus drug Jublia." Try it a few times. Jublia's Super Bowl ads are also a treat, because, you know, advertising toenail fungus drug Jublia during the Super Bowl. Also Valeant owns some planes.

Market structure.

Here's a good and feisty pro-IEX comment letter to the Securities and Exchange Commission from R. T. Leuchtkafer. Leuchtkafer argues among other things that the SEC's rule against "any coding of automated systems or other type of intentional device that would delay the action taken with respect to a quotation" does not prohibit IEX's speed bump, because that rule "simply prohibits discrimination favoring manual markets." And he analogizes the speed bump to Nasdaq's own router, saying that "in approving Nasdaq's routing behavior, the SEC stood on an implied principle that exchanges can use their advantages over other kinds of market centers, and certainly over ordinary broker dealers, to deter latency arbitrage or gaming." He also argues that it is "spoofing" when a market maker responds to an execution on one market by updating its quotes on another market, which seems a bit extreme to me, though it doesn't really affect his argument that IEX should be approved as an exchange.

Elsewhere here is a profile of Jane Street Capital, an electronic proprietary trading firm that trades a lot of exchange-traded funds, is staffed with "a bunch of Harvard Ph.D.s wearing flip-flops, shorts and hoodies," and has had "years of minting money in the shadows of Wall Street." There's a lot of this sort of thing:

In a word, these are not your suit-and-tie bond and stock traders of yore, riding the commuter train into Manhattan. They are, instead, the pick of the global brain crop.

The savings on ties and commuter-rail tickets really add up: "'As a trader, if you do well, you will retire before you turn 30,' said one employee on an industry message board." I have wasted my life. Let me at least get in a disclosure-brag:

Because Jane Street finds itself competing more with Facebook and Google for talent than with, say, Goldman Sachs, the firm lays on the perks. These include a catered breakfast and lunch, a substantial gym right off the trading floor, generous child care benefits and an in-house speaker series that has featured the likes of Salman Rushdie, Christopher Hitchens and Garry Kasparov.

It also featured me once.

Yahoo!?

Ooh I like this: Time Inc. may want to acquire Yahoo's core business, but with tax benefits:

Time Inc. would be competing with giants such as Verizon Communications Inc. and AT&T Inc. for Yahoo, putting itself squarely in an underdog role to merge with the business. Still, Time Inc. may see it as a worthwhile effort, because it could pursue a structure with Yahoo called a Reverse Morris Trust, a tax-free transaction in which one company merges with a spun-off subsidiary, the people said.

It would be pretty amazing if Yahoo agrees to a tax-advantaged deal with Time and then that deal, like Yahoo's previous Alibaba spinoff effort, is also blocked by the Internal Revenue Service's changing interpretations of the tax law. Elsewhere: "Yahoo’s Decision to Explore a Sale Exposes a Weak Board."

A fence.

I don't entirely know why Steve Cohen's Point72 Asset Management needs an East Hampton branch office, but I guess one perk of running your firm as a family office is that you can just put a desk and a Bloomberg anywhere you like to spend time. In any case, Point72's office "at 203 Pantigo Road in East Hampton, the former Wei Fun restaurant," has a new gate that, in the eyes of some East Hampton Town Planning Board members, "'is not friendly' to the rural character of Pantigo Road." Cohen's architect has defended the gate on the grounds that -- this is true -- "In the summer, overflow traffic from neighboring restaurants and delicatessens like Goldberg’s Famous Bagels was 'a little bit out of control.'" I gather that Showtime's "Billions" is about high-stakes financial investigations and sexual kink, but what I want is a half-hour sitcom in which a disgraced billionaire hedge-fund manager works to rehabilitate his reputation by moving his firm to a small rural town and then finds himself embroiled in parking disputes with his quirky neighbors at the bagel store. Obviously in my sitcom it would be a full-scale relocation, not a branch office, and the rural town would be more Stars Hollow than East Hampton, but the basic elements are all right here. 

People are worried about unicorns.

Here is an article on "the linguistic sex appeal of the unicorn," which touches on a potential bubble in privately held technology startups valued at $1 billion or more, but casts a wider net to include unicorns like Kristaps Porzingis, fulfilling jobs and a bird called the "horned screamer": 

Peter Sokolowski, editor-at-large for Merriam-Webster, notes that the etymology of unicorn is a factor in its success: “It seems to me that unicorn is useful in these contexts because it has become a kind of personification of unique — they both have that Latin root meaning ‘one’ that has come to mean ‘one and only’ or ‘rare and therefore valuable.’ There really isn’t a noun-for-adjective equivalent for words like excellent or expensive or attractive. This gives unicorn a powerful immediacy. And, of course, the word’s mythical past gives it resonance as a label in the hype culture of modern business.”

Elsewhere, "Zenefits Once Told Employees: No Sex in Stairwells." And the Uber driver arrested for allegedly killing six people in Kalamazoo "had a driver rating of 4.73 out of 5 before the day of the shooting."

People are worried about bond market liquidity.

Here is a Tabb Group report finding that liquidity may not be as good as statistics suggest:

Empirical data available to the trading community today suggests an abundance of liquidity. The story one gets from reading between the lines is far less encouraging, however. Dealer business models have shifted, and the established procedures of trade reporting and post-trade data are unable to capture the evolving dynamic, which in turn misleads regulators and market participants. The tools that participants have relied on in the past to assess liquidity risk and move capital – dealer relationships, real-time and post-trade data, and traditional execution models – may no longer be enough to get the job done.

Elsewhere: "Stabilisers or amplifiers: Pension funds as a source of systemic risk."

Me yesterday.

I wrote about Argentina. Meanwhile, Argentina reached settlements with five more holdout bondholders.

Things happen.

JPMorgan's 'London Whale' Surfaces to Say '12 Loss Not His Fault. Why Are Big Banks Getting Bigger? The Effects of Takeover Defenses: Evidence from Closed-End Funds. United Technologies Declines Renewed Offer From Honeywell. Fed says rate rise manoeuvre was smooth. Two Ranking Democrats to Offer Bill Aimed at Inversions. The Caribbean’s “Silent Debt Crisis.” Goldman Sachs Says 40% of Its Oil, Gas Lending to Junk FirmsDistrict Court judge rules in favor of RJR on 'reverse stock-drop' case. Whither Mortgages? Matt Buchanan on the rise of the bowlJeb Bush's campaign spent less than half a basis point of its budget on pizza. Bernie Sanders Hates Wall Street So Much That He Forgot What A Noun Is. Incredible Teen Tricked School Into Believing He Was a Senator. "My refrigerator ran the Brooklyn Half this past spring." Gorilla "perhaps matches the ideal of manhood that women seek today." Lion does not. Goat vs. helicopter.

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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:
James Greiff at jgreiff@bloomberg.net