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Mafia bonds

I want to read the risk factors here:

International investors bought bonds backed by the crime proceeds of Italy’s most powerful mafia, according to financial and legal documents seen by the Financial Times.

In one case, the bonds — backed in part by front companies charged with working for the Calabrian ’Ndrangheta mafia group — were purchased by one of Europe’s largest private banks, Banca Generali, in a transaction where consulting services were provided by accountancy group EY.

An estimated €1bn of these private bonds were sold to international investors between 2015 and 2019, according to market participants. Some of the bonds were linked to assets later revealed to be created by front companies for the ’Ndrangheta.

“Nice perfected security interest you’ve got here,” the risk factors should say. “Shame if anything were to happen to it, you know what I mean?”

Apparently the story is that the ’Ndrangheta ran some corrupt businesses providing health-care-related services (ambulances, funeral services, food in refugee camps) to government health authorities in Calabria. They would bill the government for those services. This involved a mix of extortion, “widespread fraud and double billing of invoices.” Instead of just collecting money from the government, though, the ’Ndrangheta would securitize the invoices for the money that they’d extorted or embezzled:

Under EU law, overdue invoices owed by state-connected entities incur a guaranteed penalty interest rate. This makes them attractive for special purpose vehicles, which place them into a large pool of assets and issue bonds backed by the expected cash flows from the future settlement of the invoices.

For instance:

One example of how money tainted by ’Ndrangheta activity ended up in the legitimate international financial sector is a so-called ­special purpose vehicle called Chiron. In May 2017, this was one of numerous such entities established by companies specialising in healthcare financing in Italy. 

The Chiron vehicle bought up close to €50m of unpaid healthcare invoices, including bills originating from Calabria and other parts of southern Italy. … One of the companies that contributed to ­Chiron’s invoices was Croce Rosa Putrino SRL, an ambulance and funeral company servicing the hospital in Lamezia Terme. In late 2018, police arrested 28 people, after an investigation by the public prosecution office of Catanzaro alleged that various front companies for local ’Ndrangheta families, including Croce Rosa Putrino, had seized control of the hospital’s funeral, ambulance and other health services. The case is still being prosecuted.

I mean, why not. If you’ve got a good enough extortion racket, it will have stable and predictable cash flows; why shouldn’t you get non-recourse financing by assigning those cash flows to a special-purpose vehicle and then selling bonds out of the SPV? That’s the basic move of modern finance: You put cash flows in a box and sell bonds referencing the box, and the goal is always to find new things to put in boxes. If you put a thing in a box that has never been put in a box before, you give investors access to a new asset class, a new thing to bet on, a new set of cash flows that might be uncorrelated with the rest of their portfolio. “Diversify your portfolio with some extortion bonds,” an investment banker could say to a pension fund, and it is not a … terrible … pitch? I mean I guess you might get in trouble. Also the government might try to deny payment on the invoices—due to them being, you know, criminal—and then you’d lose your money. But those are uncorrelated risks, everyone’s favorite kind of risk, and the interest rate is presumably high.

The investment banks, advisers and investors all say they were trying to invest in legitimate health-care receivables and did due diligence to avoid financing crime, and it seems like Chiron wasn’t mostly mafia receivables. It is not like there is an entire sector of asset-backed securities for extortion and embezzlement. Give it time though. Here’s a quote about the people running the ’Ndrangheta now:

“A number of the younger generation, those who I grew up at the same time as, have degrees from the London School of Economics or even Harvard. Some have MBAs,” says Anna Sergi, a Calabrian-born criminologist at the University of Essex. “They live outside Calabria and appear like respectable businessmen, not directly involved in street-level illegality but there to offer technical expertise when it is needed.”

It’s like anything else; the industry starts small and scrappy, with people who really care about the work itself (extortion), but when it gets lucrative enough it starts to attract Harvard MBAs, until eventually real innovation stalls and everyone spends all their time on financial engineering and optimizing capital efficiency.

We are in the early stages of extortion-backed securities but it is a predictable path. Soon there will be mafia quants, hired to optimize the portfolios and engineer arbitrages and game the ratings agencies. “The senior tranche of this bond should be rated AAA because, while the probability of any one business refusing to pay protection money is X, the historical correlation among businesses refusing to pay is only essentially zero, so there is no real risk of eating through the credit support,” the mafia quants will argue to the ratings agencies, and the big guy behind them with a lead pipe will add some support to their mathematical arguments. I would absolutely watch—I may have to write—a movie about a mafia ABS quant.

Eventually the ’Ndrangheta will move to an entirely originate-to-distribute model, with no “skin in the game” in its extortions; it will send low-level criminals to extort promises to pay from people with no assets or income in rushed five-minute conversations, securitize those promises, and not have to worry about collecting. Its underwriting will decline, as will its collection efforts: Why bother breaking people’s legs if their payments are going to anonymous bondholders? The ’Ndrangheta securitizers will become so disillusioned with their origination practices that they will start shorting their own products, buying credit default swaps to bet on defaults in the bonds they structure. Then they’ll go to local businesspeople and threaten to break their legs if they do pay their protection money. The triumph of financial capitalism will be complete.

Steal from the etc.

There’s that old joke that the way to make a small fortune in some difficult industry is to start with a large one.[1] Options trading on Robinhood seems to work in a weird doubly opposite way, where the way to lose a large fortune trading options is by starting with a small one? I feel like I am constantly reading stories about people who lost a million dollars trading options on Robinhood, but they all started with way less than a million dollars. Here’s one:

Mr. Dobatse, now 32, said he had been charmed by Robinhood’s one-click trading, easy access to complex investment products, and features like falling confetti and emoji-filled phone notifications that made it feel like a game. After funding his account with $15,000 in credit card advances, he began spending more time on the app.

As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts. His account value shot above $1 million this year — but almost all of that recently disappeared. This week, his balance was $6,956.

In a sense he lost $68,000 trading options, since he started with $75,000 and has about $7,000 now. In another sense he lost a million dollars trading options, since he had more than $1 million at his high point and has a bit more than zero now. But he is, reasonably, focused on the $860,000 that he lost in March:

Robinhood’s website has also gone down more often than those of its rivals — 47 times since March for Robinhood and 10 times for Schwab — according to a Times analysis of data from, which tracks website reliability. In March, the site was down for almost two days, just as stock prices were gyrating because of the coronavirus pandemic. Robinhood’s customers were unable to make trades to blunt the damage to their accounts. …

Mr. Dobatse suffered his biggest losses in the March outage — $860,000, his records show. … Mr. Dobatse said he planned to take his case to financial regulators for arbitration.

Yes look on first principles if you lose some money making bad options trades, and then make a lot more money making good options trades, and then your broker’s website shuts down at the exact moment that you try to cash in on those good trades, and when it reopens all your money is gone, that does seem like something that you’d blame your broker for. That does seem like their fault.

On the other hand I feel like, in the abstract, this would be a good service for someone to provide:

  1. You invest $10,000.
  2. You push some buttons and some lights blink.
  3. I tell you that your account balance is $10 million.
  4. You feel the thrill of victory, the satisfaction of being rich, the knowledge that it is all due to your own hard work and native intuition.
  5. You push the “cash out” button.
  6. I tell you “oops, our system is down, try again later.”
  7. You push it again.
  8. I tell you “ah yes sorry during that outage a fluke market event caused you to lose $9,990,000, but you can have your $10,000 back, minus a small fee for my services.”
  9. You get your money back, minus the fee. You are sad about the lost $10 million, but then again it never felt real anyway.
  10. But you remain pleased with yourself for the enormous skill you demonstrated, not only in accumulating $10 million of trading profits but also—especially—in choosing to cash out at exactly the right time. Well, except for my software outage, which hardly reflects on your amazing skill. Your victories are due to your own innate virtue; your losses are due to my perfidy and incompetence. Aren’t you the best? Isn’t everyone else worse? What a validating experience this has been for you. Well worth my fee.

Obviously to provide these services you do not need to link them to any actual financial markets, except I suppose as a legal matter.

Anyway I don’t have a Robinhood account, and I don’t trade stocks or options, but I am definitely going to go around telling people that I made $10 million trading options on Robinhood and was about to cash out when their system crashed and I lost everything. “Yeah I’m totally going to take them to arbitration,” I will say, and people will be so impressed by my trading acumen and so sympathetic about my hard luck.

I don’t know! That article, as is apparently required by federal law, spends a lot of time talking about Robinhood’s payment-for-order-flow practices, which is such a weird distraction. If you are trading options on Robinhood here are the two things you should worry about, in descending order of how much you should worry:

  1. You will probably lose all your money buying options that go down or selling options that go up.
  2. If for some reason you instead make money by buying options that go up or selling options that go down, Robinhood’s software might freeze at the exact wrong moment and you could lose it all anyway.

If your list of worries includes “when I buy an option, Robinhood will accept a fee to route my order to a high-frequency trading firm, which will fill that option at a price that offers only minimal improvement over the best price available on a public exchange,” you have completely lost the plot. That’s not a thing! You’re not losing money on Robinhood because of high-frequency traders! 

We talk about this a lot, for some reason, and I think I should stop. My view of Robinhood has always been:

  1. Payment for order flow is fine.
  2. Encouraging people to day-trade stocks and options on their phone is not great.

These days I am not completely sure that the second part is right: There are a lot of stories like this one, about people rapidly losing money that they can’t afford to lose by using Robinhood’s too-easy, too-addictive trading platform, but there are also a lot of stories about retail investors doing really well in the recent rally. In the aggregate, maybe encouraging people to day-trade stocks on their phones has worked out well? Ehh. I still don’t think it’s great.

In any case, if it is bad, it is bad for fairly straightforward reasons: People are trading products that they don’t understand, they’re buying stocks of bankrupt companies, they are the dumb money in a competitive efficient market in which they match wits against full-time professionals to determine the value of companies. Active investing is a bet that you understand the market better than everybody else does, and if you started investing a month ago and limit your research to looking at the trending stocks list on an app, you will lose that bet.

But that is a strangely hard story to tell. We have, in the United States, a really strong culture of believing that stock-market speculation is for everyone; it seems almost treasonous to suggest that for a lot of people it’s a bad idea. And “you shouldn’t day-trade stocks on your phone because you are unlikely to be good at it, because you have no relevant knowledge or training and you’re not really putting enough effort into getting better” sounds like such a personal criticism; it implies that you’ll probably lose money and that it’ll probably be your fault. So much better to whisper darkly about payment for order flow. “You shouldn’t day-trade stocks on your phone because high-frequency traders are secretly buying your orders to do unspeakable things to them.” Obviously the problem isn’t with you, you’re perfect, the financial markets instantly yield up their secrets to your skill. It’s the nefarious forces beyond your control that prevent you from getting rich.

People are worried about liquidity

JPMorgan Chase & Co. is worried about bond, equity and FX market liquidity:

“Liquidity conditions have improved considerably, though not fully, and overall functioning has mostly been restored, but markets remain in an unstable equilibrium and vulnerable to shocks,” strategists including Joyce Chang, Nikolaos Panigirtzoglou and Marko Kolanovic wrote in a report. … “Credit and bonds seem to be closer to a full recovery in terms of liquidity, while equities and FX still seem to be some way from pre-correction levels,” the report said.

One thing that I find is that when Wall Street strategists write about liquidity they cannot avoid mixing their phase-of-matter metaphors. “Liquidity is like air,” they say, or they talk about the “ liquidity landscape.” But here’s a new one:

Liquidity in the currency market is “skating on thin ice,” according to the report, which said that even as volumes surged on recent risk aversion the market remains fragile, with low depth and stretched spreads.

The liquidity is skating on thin ice!? No, see, the way that skating on thin ice works is that the skating occurs on top, and then below the skating there is the ice, and then, below the ice, is the liquid. The liquidity doesn’t go on top of the ice, that is just chaos.

What’s Elon Musk up to?

Well, what’s Kanye West up to?

Kanye West’s Fourth of July declaration, via Tweet, that he was running for president lit the internet on fire, even as pundits were trying to discern how serious he was. Over the course of four rambling hours of interviews on Tuesday, the billionaire rapper turned sneaker mogul revealed:

That he’s running for president in 2020 under a new banner—the Birthday Party—with guidance from Elon Musk and an obscure vice presidential candidate he’s already chosen. “Like anything I’ve ever done in my life,” says West, “I’m doing to win.” … 

He has no campaign apparatus of any kind. His advisors right now, he says, are the two people who notably endorsed him on the Fourth: his wife Kim Kardashian-West, and Elon Musk, of whom he says, “We’ve been talking about this for years.” (Adds West: “I proposed to him to be the head of our space program.”)

There is something a little charming about the fact that, if you come to Elon Musk with an idea, he will cheerfully go along with it as long as it’s bad enough. Like if you say the word “flamethrower” around Elon Musk he will have a Pavlovian reaction, his trigger finger will twitch, he’ll look around for stuff to light on fire, he cannot help himself. Will Tesla Inc.’s next 10-Q include a risk factor like “our chief executive officer, Elon Musk, is an adviser to the presidential campaign of Kanye West, and if Mr. West wins the presidency we expect that Mr. Musk will leave the company to be Generalissimo of Space Force”? Yes, absolutely it will, because the function of Tesla’s public communications is to troll people and this is all a good troll.

Should you participate in a corporate parody rap video?

No! I say this a lot. “Oh but this is different,” you say, “this is a ‘Hamilton’ corporate parody rap video, nothing related to ‘Hamilton’ could possibly be embarrassing.” Look, you’re gonna do what you want, but my absolute rule against corporate parody rap videos is simple, elegant and correct. Here is Shopify Inc.’s “10 Slack Commandments.” It’s fine! It’s not bad! For a corporate ‘Hamilton’ pastiche about workplace productivity software it is quite good, if that’s what you want to be doing with your life.

Things happen

Covid-19 Is Bankrupting American Companies at a Relentless Pace. Brooks Brothers, Hurt by Casual Fridays and Coronavirus, Files for Bankruptcy.  “If the arrival of a deadly pandemic that’s pummeled the world’s economies can’t work in short-sellers’ favor, then what can?” Fed withdraws from repo market after 10 months. Fed’s $600 Billion Lending Program Will See More Interest if Economy Slumps, Official Says. Wirecard Under Criminal Scrutiny by U.S. Authorities as Part of Probe Into Alleged Bank-Fraud Conspiracy. Wirecard’s sea of buy ratings highlights analysts’ balancing act. The tiny German bank that bet big on Wirecard’s Markus Braun. JPMorgan Dropped Accounts That Became Bad News for Deutsche Bank. KKR to Buy Global Atlantic Financial Group for $4.4 Billion. Musk Says Tesla Is ‘Very Close’ to Developing Fully Autonomous Vehicles. “The popular perception is that there’s something crass about profiting off other people dying.” Florida Prisoner Ripped Off Lowe’s to Build Home—From Jail, Feds Say. Cat steals some milk during Dean of Canterbury Cathedral's morning sermon. “Please scream inside your heart.” 

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[1] A famous version is attributed to Richard Branson: “If you want to be a millionaire, start with a billion dollars and launch a new airline.” Others: restaurants, wineriesBitcoin, angel investing.

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