Levine on Wall Street: Fake Offices and Failed Hockey Rinks

BlackRock and Fidelity might be too big to fail; appraisal rights in M&A may not get you very much; MBAs are flocking to tech companies; and Piper Jaffray is having a rough week.

Is BlackRock too big to fail ?

The Financial Stability Oversight Council is pondering whether to designate BlackRock and Fidelity "systemically important," and thus subject to Federal Reserve oversight, which is a little bit of a brain-bender. To some approximation you can think of BlackRock and Fidelity as just pools of client money that are continually marked to market, so they don't produce the thing -- information-insensitive short-term debt -- that makes systemically important firms like JPMorgan or AIG scary. But the Treasury has found that "money managers could endanger the financial system when reaching for higher returns, herding into popular asset classes or amplifying price movements with leverage," which I guess is true, though those risks don't seem particularly related to an individual manager's bigness.

Its underwriter isn't so sure about NQ Mobile any more

NQ Mobile is sort of a Schrödinger's Chinese company; it is either a big mobile-services provider or a big fraud, depending on whom you ask. If you ask short-seller Muddy Waters, NQ has a bunch of fake offices and inflates its sales figures by selling mostly to itself; if you ask NQ Mobile, it's a totally legitimate company and Muddy Waters just doesn't understand how business is done in China. If you'd asked Piper Jaffray two weeks ago, I guess they'd have come down on NQ's side, given that they were lead underwriter on NQ's U.S. initial public offering in 2011. But yesterday Piper Jaffray "suspended" its buy rating on NQ Mobile "until we have more deeply investigated various allegations against the company made by third parties"; that investigation is called "due diligence" and is normally conducted before you underwrite the IPO. Here is a helpful quote:

"Obviously it would cause tremendous concern, especially if it's the IPO lead manager," Erik Lam, director of Asian equity sales at Auerbach Grayson & Co. in New York, said by phone. "That certainly doesn't sound positive."

It does not.

It should have been less sure about an ice rink in Wenatchee

Piper Jaffray is having a rough week, actually; yesterday it was fined by $300,000 by the Securities and Exchange Commission for underwriting a $41.8 million municipal bond deal to finance an ice rink in Wenatchee, Washington. The rink appears to have been real, so that's something, but it was not economically viable:

The SEC determined that the Greater Wenatchee Regional Events Center Public Facilities District failed to make material disclosures in the official statement for bond anticipation notes sold in 2008, including an independent consultant's questions about the economic viability of the project being financed, the SEC said.

The bonds defaulted, and the SEC also fined the Greater Wenatchee Whatsit $20,000, making it the first municipal debt issuer to be fined by the SEC for fraud. Mostly because the SEC has only recently concluded that it is allowed to police municipal issues for fraud. This seems like a good development, in that municipal bonds are sold to a lot of small conservative retail investors, but it's somewhat weird to see a government agency calling out other governments for making false statements about their finances. I mean, Treasuries are an even bigger market than munis, it would be fun if the SEC went after Congresspeople every time they said something wrong about the U.S. government's finances.

Be careful with appraisal rights

Appraisal rights are an old-timey weapon in the M&A arsenal that recently gained some notoriety when Carl Icahn threatened to use them in the Dell buyout fight. The idea is that shareholders of a merger target who don't like the price they're getting can vote against the deal and then ask a Delaware court to value the company; then they get whatever the court says their shares are worth. There is an obvious sense in which the shares are worth whatever a willing buyer will pay for them in an arm's-length transaction, and last week a Delaware court said more or less that. Specifically, the "court determined that the arms-length sale price -- exclusive of synergies -- generated by the conflict-free auction was the most relevant indicator of value." This should worry anyone seeking appraisal in future deals: Your most likely outcome might be getting the merger price, less synergies, so you might as well just take the merger price. It won't be too much of a deterrent, though, as the main argument in most deals -- including Dell -- is that the deal wasn't arms-length or conflict-free so, y'know, carry on.

Tech companies are hiring MBAs for some reason

Here is an article about how business-school graduates are increasingly taking jobs in the technology sector instead of in finance, because building iPhone apps is viewed as a "more meaningful" way to "drive innovation" than building derivatives, which, okay, whatever, MBAs. Everyone seems to think that what MBAs do with their lives is a leading indicator of a bubble, so I suppose I will declare a tech bubble, you heard it here like four hundredth. Also, finance is less fun than it used to be, with lower pay and stricter regulation, largely due to what previous crops of MBAs got up to in the last few years. Something for the tech companies hiring the current crop to consider.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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

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