Oil Loans and Cohen Cubs

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 and oil.

Evan Soltas did a neat analysis of the banking sector's exposure to bad energy loans:

What we see is that, for every 1 percentage point increase in a bank’s exposure to energy, its stock has declined 3.86 percentage points since January 2013 relative to other bank stocks, with most of the drop occurring in two waves: late 2014 and right now. (That’s tracing the two big drops in the price of oil.) Energy exposure, in fact, explains about 40 percent of the decline in bank equity prices since the beginning of the year.

From this he teases out market expectations for energy defaults: "The market thinks the discount on energy assets should be huge: 40.6 percent of their value, or 30.9 percent if you correct for financial-sector beta," implying that "the coming wave of energy defaults is going to be historically massive."

The market is ... not alone in thinking that. JPMorgan's investor day yesterday did not feature much good news on energy exposures:

Shares of big banks fell on Tuesday amid a broadly lower market after the largest U.S. bank by assets said it plans to add about $500 million to reserves for oil and gas and an additional $100 million related to metals and mining in the first quarter, according to a Tuesday presentation for investors that the bank hosts annually.

The investor day had some other bad news, including that "revenue from sales and trading has tumbled about 20 percent this year." "There is no doubt that it so far has been a very tough quarter," said Daniel Pinto, who runs JPMorgan's investment bank. "There are pretty good odds the noise will sort out and we’ll be O.K.," shrugged Jamie Dimon. Elsewhere in Jamie Dimon's strangely noncommittal optimism, he explained that he bought $26 million of JPMorgan stock near the lows on February 11 because "I had a morning where I wasn’t doing anything." As a daily morning newsletter writer, I will say: That must be nice. (Also the money.)

Elsewhere in energy exposures, here are Bloomberg Gadfly's Lisa Abramowicz and Rani Molla on the $123 billion of energy loans and commitments that big U.S. banks have to energy companies. And here is Mark Papa, the shale pioneer and former head of EOG Resources, pronouncing doom for the shale industry:

“From those ashes, you will see the companies that survive, a lot of them will be grievously wounded financially, and the management teams that come out of it will be a lot more conservative going forward,” Papa said.

Meanwhile Papa's new company, Silver Run Acquisition Corp, just "raised $450 million in an upsized offering" that is the biggest U.S. initial public offering this year. Silver Run is a blank-check company with no operations that plans to, I guess, root around in those ashes and buy energy assets cheap. When everyone is freaking out about leveraged oil companies, having a fresh, clean, brand-new capital structure is a major asset.

Elsewhere in oil, here is an amusing post from the St. Louis Fed sort of finding that TIPS-based inflation breakevens imply a future oil price of zero. Something probably went a bit wrong there.

Stock exchanges.

People in the U.S. equity markets talk a lot about market fragmentation, but globally the trend seems to be to exchange consolidation, which makes more economic sense. There are obvious network effects to a stock exchange; trading all the stocks (and derivatives and what have you, and clearing) in one place is more efficient than trading them in lots of different places. Unless you have a regulatory structure that encourages a proliferation of smaller venues. Anyway, "London Stock Exchange Group Plc said it was in merger talks with Deutsche Boerse AG, a deal that would create the dominant European exchange operator." There is a distinct Brexit flavor to the proposed deal:

“It’s probably not a coincidence that you get this announcement when the future of Britain and the E.U. is uncertain,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. “It’s a way to develop a Pan-European dimension even in the event of a Brexit.”

Meanwhile in the U.S., the saga of IEX's exchange application continues. Here is an interview with IEX's Brad Katsuyama that was previously titled "SEC Should Stand Up for Small Investors"; the title has changed, presumably because IEX seems like an unlikely platform for retail investors. And here is a story from IEX's Ronan Ryan about wire coiling and colocation:

NYSE measured the distance to the furthest cabinet, which is where people put their servers. It was 185 yards. So they gave every [high-frequency trader] a cable of 185 yards. 

Then, traders who were previously closer to the [exchange server] asked to move to the farthest end of the building. Why? Because when a cable is coiled up, there's a light dispersion that is slightly greater than when the cable is straight.

Market structure is a nerdy niche, but in some ways it is the area of modern finance that encompasses the broadest spectrum of human experience. Today's stock exchange news, for instance, implicates both the global geopolitics of the U.K.'s role in the European Union and also a fight over where to put computers within a big room.

In other mergers-and-acquisitions news, by the way, this story about how U.S. targets demand that Chinese acquirers escrow breakup fees is pretty nuts. If you don't trust an acquirer to pay you your breakup fee if the deal fails, maybe your deal has bigger problems?

Hedge funds.

Bloomberg released a list of "The Top Performing Hedge Funds of 2015"; the winner in the large ($1 billion and up) category was Perceptive Life Sciences, Joseph Edelman's $1.5 billion long/short equity fund, which returned 51.8 percent in 2015; Gabriel Plotkin's Melvin Capital was the runner-up at 47 percent. In the small category, Ping Jiang's $255 million Ping Exceptional Value fund won with a 39.2 percent return. "It was a year for stock pickers, with half of the top 50 funds focused on equity markets"; China-based funds also did surprisingly well. Also notable is the rise of SAC Capital alumni: Both large-fund runner-up Plotkin and small-fund champion Jiang used to work at Steve Cohen's former hedge fund, and are among "at least a dozen former SAC Capital Advisors traders" who have started their own fund in the last five years. "Call them Cohen cubs," suggests Bloomberg's Simone Foxman. Whatever the magic was at SAC Capital, it can't just have been insider trading.

Elsewhere, some multimanager hedge-fund firms (Millennium, Citadel, Visium) are hiring. And a lot of "hedge fund guys" don't like Donald Trump:

“I don’t have anything against the guy,” a West Coast hedge fund manager told HuffPost on background, so he could speak candidly. “I think he’s a cartoon character.” He went on to call Trump  "a complete phony -- a made-up sitcom character. He could be on 'Modern Family.'"

“The misogynist, racist, anti-environmentalist, and foreign policy and trade issues aside, he just isn't presidential," said a proprietary trader, also speaking on background. Trump's campaign, he said, is entirely about himself and not the American people. “The only thing I do like about him is that he wants to eliminate the carried interest loophole.”

What ... what does "he could be on 'Modern Family'" mean? Are people on that show bad? (That was not especially my impression, though I have never watched it.) Or is it just a general comment about the impossibility of representing real fully human characters in popular fiction? (And also in politics?)

In any case, there seems to be exactly one Goldman guy who does like Trump:

Records show just one Goldman employee, a financial adviser in the wealth management division, has donated to Mr. Trump — $534.58, to be precise.

That employee’s name is Luke Thorburn. Public records show Mr. Thorburn trademarked the phrase “Make Christianity Great Again” and is selling hats that mirror Mr. Trump’s “Make America Great Again” caps.

Consumer debt.

There is a risk of vertigo if you think too long about our modern electronic financial system. You borrow money from a bank, on a credit card or whatever. How does the bank know how much you owe it? Well, it has a database. How do you know how much you owe the bank? Well, the bank tells you. If you don't pay, and the bank sues you, how does the court know how much you owe the bank? Well, the bank tells the court, too. What if the bank is wrong? It is hard to check; the bank is, realistically, the only one keeping track. The bank's incentives are ... look, the bank's main incentive is to get the amount of debt right (it is a repeat player, regulated, etc.), but I suppose it has a secondary incentive to exaggerate the amount of the debt.

Here is a Consumer Financial Protection Bureau action against Citibank for doing various bad things with consumer debt, the most important of which that it used two debt collection law firms "that falsified court documents filed in debt collection cases in New Jersey state courts." For instance:

Respondent's law firms altered the dates of the Declarations and/or the amount of the Debt allegedly owed after the Affiants executed the Declarations. These alterations meant that the Declarations, as filed with the New Jersey courts, were not Competent and Reliable Evidence to prove the Debts Respondent collected or attempted to collect, in most cases misrepresented the date the Affiant executed the Declaration, and in certain circumstances misrepresented the amount of the Debt allegedly owed.

For this, Citi has to pay back the $11 million those firms collected, and agree to give up on another $34 million in debt that they were trying to collect. I have always been a bit puzzled by the post-financial-crisis theory that if banks do some sloppy things with their debt records, debtors should magically not have to pay back their debts. It does seem like a bit of a windfall for someone who borrowed thousands of dollars not to have to pay it back just because a bank's law firm wrote the wrong date on a court document. On the other hand, writing the wrong amount of debt on a court document is really really bad, since the whole mechanism depends on the bank's honesty, and you can understand why the CFPB would make Citi give up on those debts. It's all enough to make me yearn for the blockchain. 

Robots and e-mails.

I feel like I read an article every week or two about how banks are investing more in automated technology to find dumb trader e-mails and chats. Here's one:

Nasdaq Inc. is partnering with a company called Digital Reasoning to combine its trade-surveillance software with Digital’s system for monitoring trader chats and messages. UBS Group AG uses the technology, according to a Nasdaq statement on Tuesday. Bloomberg LP, the parent of Bloomberg News, also offers clients tools for communications surveillance.

"People like to say compliance is a growth industry," says a guy. I'm sure this is all good and nice but I can't help thinking that banks and regulators might be over-investing in stamping out dumb e-mails. Dumb e-mails probably are among the biggest problems facing banks today, just because regulators have found that fining banks for sending dumb e-mails is a very good growth industry indeed, but surely they aren't among the biggest problems facing the banking system? I can't quite believe that the foreign-exchange fixing scandal was as big a deal as the fines made it look. But addressing subtle unpredictable problems like risk appetites and corporate cultures is difficult; searching for keywords like "cartel" and "muppet" in an e-mail corpus is relatively easy. So regulators focus on punishing bad e-mails, and banks focus on preventing bad e-mails, and the goal shifts from making banks better to making e-mail blander. 

Elsewhere, "the Financial Industry Regulatory Authority has begun a formal review of cultural values at more than a dozen brokerage firms, including how executives identify rogue employees whose actions contradict company policy." (The answer is presumably with automated technology to scan those rogues' e-mails.)

Retail investing.

Wait what:

The most annoying part of zero-fee stock trading app Robinhood was that when you signed up, there was a 3-day delay before money you deposited appeared in your account.

Luckily, today the startup is solving this by embracing a slightly higher risk of fraud with the launch of Robinhood Instant. It lets users borrow up to $1000 to trade with while their deposit clears, and immediately trade with any proceeds of stock sales they’re owed but that will take a few days to transfer. 

"But I'm mad now!" The whole article goes on like that ("embracing a slightly higher risk of fraud"!), and it is tempting to quote it in full, but I will content myself with the conclusion, which is that Robinhood is "making stock trading as instantly gratifying as ordering a meal from Sprig or requesting an Uber." Here's the thing. When you order a meal from Sprig, you get food, and then you eat it. (I assume that's how Sprig works?) When you request an Uber, a car comes and drives you to a place you want to go. When you buy stock on your phone, nothing happens. Nobody feeds or transports you. You wait 40 years, then you retire, and hopefully that stock you bought has gone up and your retirement is a bit more comfortable because of the wise investing choices you made today. If you are making those investing choices for instant gratification -- and if you can't wait three days to make them -- then, you know what, never mind, you know where this is going. I'm sure Robinhood is fine. Have some folksy maxims from Warren Buffett.

People are worried about unicorns.

"Last year was the worst for IPOs in the last 20 years," and since unicorns are magical creatures that subsist on hopes for an initial public offering, that can't be good for them. And as unicorns suffer, Eurocorns do too: "That same unease has now reached Europe’s tech community, in a sign that a move away from soaring boom times in start-ups is going global." Meanwhile in lowered expectations, Foursquare's down round seems to have been a bit of a relief: "A lot of the old valuation baggage that we were carrying was tied to this idea that we have to become Facebook someday," said its co-founder. Other startup-y things to worry about include founder equity splits, "'tech bros' and their sense of entitlement," and "how to raise money at the end of YC." On the other hand: "Will a Drying Up of Tech Capital Lessen Inequality?"

People are worried about bond market liquidity.

It is quiet on the bond liquidity front, but at least "Large Banks Are Moving Out Of European Repo Markets," and smaller firms "are unlikely to step into the role being vacated by the banks that provide the liquidity that is essential to prevent large swings in security prices." Meanwhile the Treasury Market Practices Group will work "to develop industry guidelines for information handling and sharing" in the Treasury trading business. Also: "The Junk Debt Funds Threatening to Create an $88 Billion Logjam."

Things happen.

Corporate Directors’ Pay Ratchets Higher as Risks Grow. The $400 Billion Money-Fund Exodus With Banks in Its Crosshairs. Honeywell and United Technologies Disagree on Merits of Merger. Online Lender On Deck’s Stock Sinks as Growth Ebbs. As London Bickers Over 'Brexit,' History Shows a City Can Fade. Martin Wolf: Helicopter drops might not be far away. Banks vs. TLACBank capital: Sell-off sparks ‘game over’ fear for AT1. Singer's Elliott Associates Faces Disclosure Probe in Samsung Saga. How a Math Blunder Reignited Doubts About Lumber Liquidators. A short report on Wirecard AG. Justice Department Calls for Investigation of 50 Cent’s Finances. Morgan Freeman gives driving directionsSplainsplaining. Tiger preserveLion allergies.

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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