Levine on Wall Street: The Value of Volcker

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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America's main creditors aren't too worried about the debt ceiling

Asia's central banks have $5 trillion in foreign exchange reserves, much of it in Treasuries, and "consider a U.S. debt default unthinkable and see the eventual tightening of U.S. monetary policy as a bigger issue." That's sensible enough, but U.S. politicians seem to be taking the other side of that bet. Really, if you were designing a world financial system from scratch and someone was like "well, here is an instrument where a bunch of people vote every year or two about whether they should pay it back," you might choose something else as the main store of value underpinning the global economy. But we're not starting from scratch, and here we are, and I guess it's good that the people who have made Treasuries the main instrument of foreign reserves haven't yet changed their minds.

The Volcker Rule: good or bad?

The way financial regulations under the Dodd-Frank Act work is that Congress tells regulators to do a thing, the regulators write a rule that does that thing, and then banks sue the regulators saying that they did not do a careful enough cost-benefit analysis of whether that thing was a good idea. Which is weird: The regulators work for Congress, so they have to do the thing, and you can't sue Congress for getting its cost-benefit analysis wrong. If you could, hoo boy, you'd be busy this week. Anyway, though these cost-benefit challenges to regulation often win, so apparently the Securities and Exchange Commission's economists are working very hard on the cost-benefit analysis of the Volcker Rule, which will ban proprietary trading by banks. Which will be a fun thing to read, if you like that sort of thing. At the very least it'll give some indication of what the SEC thinks proprietary trading is -- and what harm it does.

Mark Cuban's insider trading: legal or illegal?

The SEC has been suing Dallas Mavericks owner Mark Cuban for insider trading for nine years now, and it's finally going to trial this week. The story is that nine years ago, Cuban was for some reason a big shareholder of a struggling company called Mamma.com.The company was going to raise money by selling stock, and was hoping Cuban would invest. Instead, he hung up and dumped his existing shares before the offering was announced, avoiding $750,000 in losses. Nobody disputes any of that. A company gave him material nonpublic information, and then he traded on it. The issue in dispute is whether he agreed not to trade on it. The law is not that trading on inside information is illegal; you need some violation of a duty to keep the information to yourself. Cuban says he never agreed not to trade; the SEC thinks he did. Due in part to the Cuban case, companies are now better about getting those agreements in writing.

Luring individual investors back to the stock market with candy

Here is an amusing article about how (1) individual investors have been scared away from the stock market by the 2008 crash and subsequent volatility and craziness but (2) they'll be lured back by the initial public offerings of companies like Twitter, Chrysler, and Midasplayer International Holding Co., which makes Candy Crush Saga. Because if you hate volatility you'll love internet IPOs and auto companies. You can see why people often think of individual investor interest as a contrarian indicator.

But stay away from Universal Travel Group

John Hempton is an Australian hedge fund manager who blogs about why he shorts companies that he thinks might be frauds. This weekend he did some well-deserved gloating about Universal Travel Group, which he shorted in 2010 and which settled SEC fraud charges on Friday. His analysis of the fraud ... well, Hempton is a smart investor, but judging by his original post spotting this fraud was not rocket science. He pretty much went to Universal Travel Group's website and tried to book a plane ticket and hotel room. He couldn't. Bad sign, for an internet travel company. Then, though "this is a company where you can almost not bother looking at the accounts -- you could short it off the website," he went to their accounting statements anyway. And he found that "The air ticket business had cost of services of 2.7 million dollars -- and this is for a business that claims to have 24/7 offices all over China, delivery in over 50 cities and an IT Team of specialists across the world." Also a bad sign. There's more, but surely that was enough to determine that UTG was overstating its revenues. It was! Per the SEC: "prior to June 2011 the Commission alleges that the defendants falsely described UTG's business organization, failing to disclose that UTG had transferred certain subsidiaries to third parties pursuant to agreements designed to give UTG the economic benefits of ownership, and UTG materially overstated its revenues and profits in its quarterly reports in 2010." This company was listed on the New York Stock Exchange until 2011.

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