Bonuses, Taxes, Weed and Gangs

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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Bonuses.

Sorry:

Wall Street’s average bonus fell 9 percent to $146,200 in 2015, the biggest drop since 2011, according to estimates by New York State Comptroller Thomas DiNapoli.

The bonus pool was $25 billion, down 6 percent from a year earlier, even as the industry added 4,500 jobs in New York City, DiNapoli said Monday in a statement.

DiNapoli's report is an annual tradition, and I never quite know what to make of it; his data set ("of bonuses paid to securities industry employees who work in New York City during the traditional bonus season") is a bit quirky, but it is convenient. For what it's worth, "The average salary (including bonuses) for securities industry employees in New York City rose 14 percent in 2014 to $404,800, setting a new record." DiNapoli also puts out historical figures for average bonus, bonus pools and profits for the New York securities industry. Here's a chart:

One half-joke that I sometimes make is that the residual claimants on a bank's cash flows are not so much its shareholders as its employees, but this chart suggests otherwise: The shareholders feast in good times and suffer in bad times, while the bonus pools are relatively -- relatively -- stable. They also tend to be significantly bigger than the profit pools.

Carried interest.

Here is a New Yorker article by Alec MacGillis that is mostly about how the carried-interest loophole is bad, but that also includes an enjoyable profile of Carlyle Group co-founder David Rubenstein:

Nobody in private equity had yet thought to choose partners chiefly on the basis of their relationships with government officials and their knowledge of regulated industries. Gary Shapiro, then a lobbyist for the consumer-electronics industry who worked alongside Shaw, Pittman in one lobbying fight against Hollywood, recalls hearing Rubenstein’s pitch when they travelled together to Japan, in the early eighties: “His vision was to combine capital with politically connected people whose phone calls are accepted around the world. We laughed at him, like, Yeah, right.”

And: "David’s evolution is really like a butterfly coming out of a cocoon." Apparently being a billionaire is a good cure for shyness.

As for carried interest, I don't know, it does seem a little odd to tax Rubenstein's labor income at a lower rate than my labor income? I am just saying? The arguments against taxing carried interest like ordinary income often seem to come down to "working in private equity is not evil." (It is entrepreneurial, and creates jobs, and one Carlyle managing director says: "The relentless media and political focus on a handful of highly successful founders of large private-equity firms ignores the fact that these individuals, like many other successful business founders, were not necessarily ‘rich’ when they started their businesses.") But that is just a clever misdirection. Working at McDonald's is not evil, but you still get taxed at ordinary-income rates. Elsewhere: "New York Legislators Plan to Introduce Measure on Carried Interest Tax."

Market structure.

Oh sure:

“It’s never easy to pioneer an industry,” says Janjic, a former foreign-exchange executive at Tullett Prebon LLC who has put $1 million into Amercanex Corp., an electronic cannabis-trading platform that handles sales of about 100 to 150 pounds of weed a week.

Figure $300 an ounce and you get up to $720,000 of turnover a week, or about as much as Apple's stock trades in three seconds.

“I look at this as an early Nymex,” says Richard Schaeffer, a former chairman of the New York Mercantile Exchange. “I look for this to become a very substantial matching engine bringing buyers and sellers together.”

What will be amazing is when Citadel and Virtu start doing algorithmic trading on Amercanex, and old-school drug dealers start complaining about being front-run by latency arbitrageurs. "Sure it looks like those high-frequency weed traders are offering tight spreads," they will complain (to the Drug Enforcement Agency?), "but when you really need to get high they vanish."

Elsewhere, here is the strange story of a man sentenced to more than 10 years in prison for biodiesel fraud:

The Energy Independence and Security Act of 2007 created or extended several federally-funded programs that created monetary incentives for the production of renewable fuels, including biodiesel and to encourage the use of such fuels in the United States.  Authorized biodiesel producers and importers could generate and attach credits—known as renewable identification numbers (RINs)—to biodiesel they produced or imported.   Because certain companies need RINs to comply with regulatory obligations, RINs have significant market value.

As admitted in the plea agreement, beginning around February of 2009, Rivkin operated and controlled several companies in the fuel and biodiesel industries, including Green Diesel LLC, Fuel Streamers Inc. and Petro Constructors LLC, all based in Houston.  Rivkin claimed to produce millions of gallons of biodiesel at the Green Diesel’s Houston facility and then generated and sold RINs based upon this claim.  In reality, no biodiesel was ever produced at the Green Diesel facility. 

Do they ... not check ... at all? 

Street gangs are worried about bond market liquidity.

Okay that is an exaggeration, but "gangs traditionally associated with drugs and violent crimes are increasingly committing financial frauds." For instance:

Last month, 11 members of the SNOW gang in Queens, N.Y., were arrested for allegedly stealing checks from mailboxes and washing the pen-written ink of the payee’s name and currency amount off the checks. They would then make the checks out to names of co-conspirators who would cash the forged checks. Queens prosecutors said the defendants cashed more than $33,500 in fake checks throughout banks in New York.

It is fun to contrast the literal-check-laundering in that story with the perennial breathless alarmism of law enforcement:

 “We think of gang members being knuckleheads, but these guys are using a sophisticated thought process and getting involved in stuff that requires technology and an understanding of the banking system,” said Wayne Caffey, a detective in the Los Angeles Police Department.

Technology like soap and water, and an understanding of the banking system that includes "if I write my name on a check the bank will give me money"? But, no, I kid, there is some sophisticated financial scamming going on. ("When street gangs in the New York area get stopped by police, they are carrying items like re-encoded credit cards so often that it has 'become the new drug,' Lt. Besson said.") The appeal is that financial crime is much safer and more lucrative than selling drugs. (Also obviously safer and more lucrative than, like, murder.) But as far as I can tell legitimate financial services are even safer and more lucrative than check fraud, and I am rooting for SNOW, the Outlaw Gangsta Crips, the Van Dyke Money Gang and the rest of their competitors to move all the way up the value chain and open boutique investment banks.

By the way, I hope it is not lost on you that, as street drug dealers are getting into financial services, financial services executives are getting into the weed dealing business. It is the circle of life.

38 Studios.

In November 2010, the state of Rhode Island issued $75 million of "moral obligation" bonds to fund a $50 million loan to a startup founded by former Red Sox pitcher Curt Schilling that was going to make fantasy role-playing video games. When you put it like that it sounds ridiculous, and it was ridiculous; the startup, 38 Studios (named after Schilling's uniform number of course), was bankrupt by June 2012, leaving Rhode Island on the hook for the bonds. "Gov. Lincoln Chafee has called the state’s backing of the company 'the worst investment that’s ever been made, I think, in the history of Rhode Island.'" This deal has been controversial forever, and yesterday the Securities and Exchange Commission got around to suing the bond's issuer (a quasi-public Rhode Island state economic development company) and underwriter (Wells Fargo) for fraud. The SEC's main concern is that Schilling's company didn't raise enough money: "Investors weren’t fully informed when deciding to purchase the bonds that 38 Studios faced a funding shortfall even with the loan proceeds and could not develop the video game without additional sources of financing," which never materialized. There is also a complaint that Wells Fargo didn't disclose "a side deal with 38 Studios that enabled the firm to receive nearly double the amount of compensation disclosed in offering documents." I don't know; neither of these issues seems to get at the heart of why it was not a good idea for the state of Rhode Island to fund Curt Schilling's fantasy video-game company? Also the SEC complaint is considerably less funny than I had hoped. The weirdest part may be that Wells Fargo hasn't settled -- "We will respond to the specific allegations in the complaint in court," it says -- which is sort of unusually feisty for a big bank in its municipal-bond dealings with the SEC.

In other SEC news, "Visium Asset Management LP said Monday it is being investigated by federal authorities over trading and valuation issues." The valuation stuff was at Visium's credit fund, which closed in 2013. The trading stuff ... well, Visium is focused on health-care equities, and "was among the hedge funds that were tipped by a Washington research firm about a coming 2013 change in government health-care policy," so this might be interesting:

The Visium letter said, "Additionally, they have requested information regarding the trading of certain securities, including the use of a consultant who stopped providing services to the firm in 2011."

Are plane tickets so expensive because of index funds?

Fuel prices are down, ticket prices are still high, the Justice Department is investigating ... could the theory that ownership of airlines by diversified mutual funds limits competition be true?

There’s another reason that airlines aren’t competing fiercely on ticket prices: There’s a good deal of overlap in their ownership. For instance, the five biggest American fund managers together own about 17 percent of each American and Delta. As an analysis by José Azar, a senior associate at the consultancy Charles River Associates, found, ownership-overlaps like this cause tickets to be about 10 percent steeper than they would be otherwise.

I remain skeptical, but intrigued.

Florida homeowners' association governance.

Andrew Ross Sorkin tells the story of a man, Harold Peerenboom, who moved into a gated community in Palm Beach, Florida, and learned that the community tennis pro "worked without a contract and had not bid for the work, which he claimed amounted to bid-rigging under Florida law." I feel like I probably would not have gone to war à outrance over a no-bid tennis pro, but then, I do not live in a gated community in Florida. I have, however, watched a lot of "Seinfeld," so I was not too surprised to learn that Peerenboom's subsequent war with his neighbor Isaac Perlmutter ("the enigmatic billionaire chief executive of the Marvel Entertainment unit of the Walt Disney Company") featured anonymous accusations that Peerenboom "'sexually assaulted' an 11-year-old 'at knife-point' and murdered a local couple," a claim that "Mr. Peerenboom’s legal team stole DNA samples from water bottles and papers that the Perlmutters used and touched during a deposition," and letters from prison including "Hebrew slang and vulgarities." There is I suppose a public-company corporate governance angle, but I wouldn't look too hard for it. This seems to me to be more of a story about Florida gated community governance, which raises its own special problems.

People are worried about unicorns.

This is like a pre-unicorn worry:

“To the extent that the current state of American entrepreneurship is facing a crisis, it is not in the rate of creation of high-growth potential startups or even in the initial funding of those firms, but instead in the potential of those firms to scale in a meaningful way over time,” the authors said.

This may be partly a matter of measurement; the study's definition of success is "an initial public offering or acquisition at a multiple of the firm’s valuation within six years," and if you can be huge and private forever that may be less of a priority.

Elsewhere, here is the story of "a subscription-based app that gives its members one cocktail every day for just $9.99 per month," whose CEO and co-founder "notes that users are currently redeeming an average of 16 drinks a month, which is pretty incredible engagement." And I don't know if Ant Financial is strictly speaking a unicorn -- it's an affiliate of Alibaba Group, plus it already has an animal name, and surely an ant can't be a unicorn? -- but it is a pre-IPO financial technology company that is "planning to raise up to 20 billion yuan ($3.1 billion) in its current funding round from a clutch of new and existing investors at a valuation of more than $50 billion."

People are worried about bond market liquidity.

Do credit lines for bond funds exacerbate the first-mover advantage and lead to greater run risk? Does "the move toward somewhat greater segmentation of liquidity, in conjunction with ongoing electronification and acceleration of trade execution," create "increased linkages across markets"? Should Asian banks and exchanges trade more credit default swaps? Is it true that post-crisis regulation "may have affected market behavior and could contribute to a new landscape for liquidity"? Is "landscape for liquidity" an obviously paradoxical thing to say, and yet do people say it all the time anyway? Why? Why not "seascape for liquidity"? These are today's bond market liquidity questions. 

Me yesterday.

I wrote about snowballs.

Things happen.

Greece’s Creditors Narrow Their Differences Over Bailout Reforms. BoE plans liquidity auctions to protect banks in event of Brexit. Carney's 'Brexit' Stance Under Fire as BOE Accused of Bias. Royal Bank of Scotland Loses Finra Arbitration Over Firing. BASF Said Working With Banks to Weigh Counter-Bid for DuPont. Trend-following hedge fund strategies lead performance in 2016. Goldman Says Commodity Rally a False Start That's Set to Fizzle. Junk-Bond Rebound Signals Easing Fear. Energy debt vs. equityDiamond and Kashyap: Liquidity Requirements, Liquidity Choice and Financial Stability. Roddy Boyd on Diamond Resorts. How Amazon Shames Warehouse Workers for Alleged Theft. The Weird Claim That the Obama Administration Is Coming After Personal Finance Gurus. Trump Tower Funded by Rich Chinese Who Invest Cash for VisasSoftcore porn actress from Cruz ad endorses Trump. Meet the Met Who Puts His Pants on Two Legs at a Time (and Inside Out). Bordeaux pyramid scheme. Coyote vest

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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