Levine on Wall Street: Hedge Fund Ads, $10 Billion Banks, Paying Yourself First

After rule changes due to the JOBS Act, "Starting on Monday, hedge funds, private equity funds and other firms will be allowed to reach new investors through television, radio and the Internet." Nobody is sure what the equilibrium will be here.

Hedge fund ads are coming to a TV, website, spam email near you

After rule changes due to the JOBS Act, "Starting on Monday, hedge funds, private equity funds and other firms will be allowed to reach new investors through television, radio and the Internet." Nobody is sure what the equilibrium will be here. A lot of the biggest and most prestigious hedge funds, for instance, are somewhat secretive and closed to new investors, so advertising by hedge funds might be viewed as a sign of weakness. On the other hand small hedge funds seem to outperform bigger ones, so advertising might be a way to translate that performance into actual investors. It'll be interesting to see. In any case the most important thing remains: "No one should ever make an investment based on the advice of an unsolicited email." Soon you'll have more opportunities to put that advice into practice.

No one wants to be a $10 billion bank

Here is a lovely story about financial regulation. A bank with over $10 billion in assets is subject "to a variety of regulatory hurdles under the Dodd-Frank Act, including a cap on fees it can charge retailers for debit-card transactions." So $10.1 billion banks are rare, while $9.9 billion banks are more common. Fine. Arbitrary, but fine. But the other way to deal with the threshold is to be much, much bigger, to more efficiently absorb all the regulatory complexities. So in fact:

"Most banks either want to stay right below that $10 billion mark or if they go over it, they want to go over it aggressively," Brady Gailey, an analyst who covers mid-sized banks for Keefe Bruyette & Woods Inc. in Atlanta, said in a telephone interview. "We'll see more banks that are right on the edge elect to go over."

That's how your too big to fail sausage gets made: Regulators decide that $10 or $50 billion banks are too big and need to be subject to stricter rules; banks decide that the most efficient way to comply with those rules is to be bigger; and so you get a lot of $20 or $100 billion banks.

James Gorman wants to pay shareholders first , then employees

"Mr. Gorman said he wanted to deliver returns for the owners 'and worry about paying ourselves once we've done that.'" This does not fit classical theories in which shareholders are the residual claimants on a corporation's income. Those classical theories are controversial and in any case have long been weak in banking, where employees often think of themselves as the residual claimants and the people for whose benefit the firm is being run. Though I guess bank employees also think of themselves as senior claimants. Pay themselves first and last is I guess the idea. Anyway I'm sure Gorman was just being colloquial; he just meant like "we should probably start making money for shareholders and/or paying ourselves less." But the right way to share new, lower banking profits is not entirely obvious.

MF Global wants to redistribute some money

MF Global's bankruptcy trustee is coming after a bunch of brokers and vendors who dealt with MF Global in the days before its bankruptcy and who ended up getting more money out of the firm than other creditors did, though still less than they were owed. Bankruptcy, as a legal regime, has some behavioral-finance problems. The idea is to make sure that all creditors of a given class -- here, unsecured creditors -- get treated the same; you don't want creditors paid one day before bankruptcy to keep 100 cents on the dollar while those who wait get paid zero cents. (Except sometimes! It's complicated.) But coming after innocent, already aggrieved, creditors and demanding that they turn over money that they were really owed so that it can go into a pot for the benefit of unsecured creditors (including themselves) is confusing. And enraging. Taking $529,000 from the literal widow featured at the top of this article is going to bring her more sadness than it will bring happiness to the faceless mass of unsecured creditors who'll each get a small slice of that money.

JPMorgan is top investment bank

"JPMorgan Chase & Co retained its position as No. 1 investment bank by revenues for the first half of 2013 and took the top spot in all three categories: fixed income, equities and advisory," according to Coalition, an analytics firm. Somehow Goldman, Deutsche, Bank of America and Citi "all shared second place," making this sort of a strange league table. Though I mean the point of league tables is to allow as many banks as possible to claim that they're the best, or at least almost the best, so in that sense I suppose this one is well designed.

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    To contact the author on this story:
    Matthew S Levine at mlevine51@bloomberg.net

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