Levine on Wall Street: Gold Scams and Golden Leashes

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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Gold prices are a scam!

Every benchmark is being manipulated! Today it's gold, which is actually not getting manipulated; basically, five big banks get on the phone every day and negotiate a market-clearing price for big gold orders, and while they're negotiating, that price leaks out and people trade derivatives on it. Or at least so the data suggests; causality I suppose could run the other way. The thing is that big dealers of anything will use their knowledge of the order flow in that thing to make money dealing that thing; that is why they are in the dealing business. But now, after Libor and its ensuing scandals, there's going to be a lot more attention paid to every use of order flow, and some things that seemed very normal will become harder to get away with.

RBS was terrible

The Tomlinson Report on Royal Bank of Scotland's small-business practices is basically incoherent but this Felix Salmon post does a better job of explaining what RBS was up to. Basically RBS took a bunch of small businesses that owed it money, found technical covenant breaches, and threw those firms into default and limbo in order to extract maximum fees at minimum risk, destroying viable businesses in the process. Salmon's conclusion is that this was an artifact of 2009 market conditions, where lending was really risky and RBS had no incentives to try to be a good banker to maintain future business relationships by treating borrowers well. Today the problems seem to have been mitigated, because lending is a reasonable business again. Still, if I ran a small business I would be pushing back pretty hard on the covenants in my loans. You wouldn't want to hang out with RBS's Global Restructuring Group just because you missed an information deadline by a day, or just because RBS re-valued your property for no reason.

Directors don't want other directors getting extra pay

Activist hedge funds have been nominating their own candidates for the boards of companies and proposing to pay those candidates large performance-based fees if they're elected. This practice is controversial, and also apparently referred to as a "golden leash," which, really, not every payment for everything needs to be a "golden" metaphor. Anyway, Provident Financial Holdings has adopted a bylaw banning the practice, and some governance types are up in arms against Provident because they think it should be allowed, and so there will be a big vote on it. If your belief is that the highest duty of a board of directors is to maximize a company's share price, then it is hard to object to an outside party paying some directors lots of money for increasing the share price. If your belief is otherwise then it is sort of weird for a public company's directors to work explicitly for one shareholder, though not that weird I guess; lots of private equity funds, for instance, have board seats on public portfolio companies. Mostly boards just really don't like activists.

Law firm mergers are hard

Law firm mergers don't really need to go through antitrust clearance but I guess they do their own version, which is even stricter than the Justice Department. Orrick, Herrington & Sutcliffe and Pillsbury Winthrop Shaw Pittman called off merger talks because they had too many client conflicts, which can only be resolved by getting rid of clients (and sometimes not even then). Life is rough for big law firms and mergers present attractive economies of scale, but if you have to get rid of half your clients it's not really worth it.

Nanex LLC is about what you'd expect

Here is a profile of Nanex LLC, a market data company whose mission consists mostly of complaining about high frequency trading, often in animated graphical form. People get very excited about Nanex, pro and con, in part because Nanex gets very excited about market manipulation and information asymmetries. They're good at giving emotional significance to two-millisecond trading advantages, which is a skill. Not everyone agrees with everything they say. This profile is very balanced but also very entertaining, as in its description of Nanex software engineer Nate Rock:

Barefoot, wearing camouflage shorts and a black T-shirt that says "meh," Rock uses the professional title "Dogbert" in reference to the canine sidekick in the "Dilbert" comic strip. He read about Hunsader's work on the blog Zero Hedge and got a job after exchanging e-mails with Nanex programmer Jeff Donovan during a vacation day spent drinking with a buddy and watching Facebook Inc.'s initial public offering in May 2012.

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