Levine on Wall Street: Volcker Countdown Continues

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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The Volcker rule will let regulators do whatever they want , maybe

Next week regulators will finalize the Volcker rule, which will prevent banks from engaging in proprietary trading, whatever that is. Today's leak is that a "senior Treasury official" told the Financial Times that no one should worry that the rule will cut off legitimate market making because "the rule itself would be quite short, leaving room for regulators' discretion." The over/under on the length of the rule seems to be 950 pages, so. The discretion thing is not all that reassuring because of the way the rule will (supposedly!) work. A good regime would be one in which (1) the rule doesn't say what prop trading is, but (2) you can ask your regulator if Thing X is proprietary, and (3) they can use sensible discretion to decide, and (4) then they tell you the answer. The problem is a regime where (1) the rule doesn't say what prop trading is, but (2) you do the best you can to figure it out and then certify that you're not doing it, and (3) regulators can decide whether or not they agree with you after the fact, and (4) if they don't agree with you then you go to jail or whatever. Who knows what the rule will say, but my money is on the latter approach.

It's not too late for your novelty Volcker rule proposal

Here is a possibly sarcastic argument in Euromoney that traders at big banks should be allowed to misappropriate client trading information to make front-running trades in their personal accounts, because that will get all the gambling out of their system and they won't have to prop trade on their banks' accounts. So there's that. The article starts: "The final version of the Volcker rule is unlikely to give posterity phrases that echo through the ages in the style of the King James Bible." It is hard to argue with that.

Investment grade bond covenant packages have weak takeover protections

Here is a story about how holders of Time Warner Cable's Baa2-rated bonds will be sad if Time Warner is taken over by Charter Communications, because Charter has a junky Ba3 rating and a takeover would add $25 billion of new debt to TWC's existing $25 billion and Charter's $14 billion. That is a thing that happens sometimes, but to it's not like investors aren't warned: TWC's bond prospectuses say "the debt securities do not contain any covenants or other provisions designed to afford Holders of debt securities protection in the event of a recapitalization or highly leveraged transaction involving our company." The risk of a takeover is a risk that investment-grade bondholders tend to take on. High-yield bondholders tend to leave that risk with the issuer. Someone should do a study of whether Baa3 companies are more likely to be taken over than Ba1 companies; the savings on change-of-control puts would be substantial.

J.C. Penney didn't need any money until it did

J.C. Penney disclosed yesterday that the Securities and Exchange Commission sent a letter "requesting information regarding the Company's liquidity, cash position, and debt and equity financing, as well as the Company's underwritten public offering of common stock announced on September 26, 2013." Bloomberg News explains why that offering was awkward:

J.C. Penney raised the ire of investors when it unveiled the offering, which diluted them by 38 percent, because earlier that day the company said it was "pleased" with the turnaround. Since then, shareholders have filed several lawsuits related to the matter. Investors also were dismayed because just a month earlier J.C. Penney had said its liquidity forecast for the end of the year didn't assume any outside financing.

It's quite hard to do a massive dilutive stock offering without running into this sort of problem. You don't want to tell people a month in advance that you're doing a massive dilutive offering, because then they'll all dump the stock, and you'll be pricing your offering off a lower starting point. But just smiling and saying everything's great, a month before you sell half your company to raise desperately needed cash, is not a good look either.

Not everyone with bitcoins is looking out for your best interests

"There is absolutely no consumer protection in any sector of the Bitcoin economy" is a funny thing to say, because the main sectors of the Bitcoin economy seem to to be illegal drugs, money laundering and Subway, and not all of those sectors are renowned for their consumer protection even away from bitcoins. The lesson here is mostly that if you spend a lot of time transacting in bitcoins your bitcoins might be stolen, or at least pump and dumped. Also that no regulators will be paying any attention. If you're planning to spend a lot of time transacting in bitcoins you'll have to decide whether that's a bad thing (no consumer protection) or a good thing (what are you doing with those bitcoins anyway?).

Saving Detroit through graffiti

Here is a BreakingViews financial analysis that notes that (1) the bankrupt city of Detroit is considering selling some $866 million worth of art from the Detroit Institute of Art collection to help pay creditors, (2) a mural by secretive/overexposed/occasionally charitable graffiti artist Banksy just sold for $1.1 million and (3) there are 78,000 abandoned buildings in Detroit, and concludes that "If Banksy could be persuaded to daub just 1 percent of Detroit's empty buildings with scenes worth that much, the total value would match the museum art assessed by Christie's." There are perhaps things to think about here re: supply and demand. Another possibility would be to sell all the DIA art and just replace it with hundreds and hundreds of Banksy murals. The Detroit Museum of Banksy, what could possibly etc.

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