Levine on Wall Street: How to Avoid Profits Successfully

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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Amazon as accounting gimmick.

Matt Yglesias once rather famously called Amazon "a charitable institution being run by elements of the investment community for the benefit of consumers." Here is his longer version of that theory. It's pretty interesting! Basically the claim is that other rich old successful tech giants -- think Apple and Microsoft -- are getting pressure to switch from "do great stuff" to "return cash to shareholders." So they underinvest, which is bad both for their long-term business success and for the world. Amazon doesn't get those pressures, because it has no cash (just $12-ish billion of cash and short-term investments, versus Apple's $40 billion and $106 billion of long-term investments). It's not just cash, though: There's a shareholder-value temptation not just to give cash on the balance sheet to shareholders, but also to plow profits back to shareholders rather than investing them. And, on Yglesias's theory, Amazon avoids that temptation by not having profits -- by "investing" not in things that are capitalized for accounting purposes, but in things that reduce current income:

To really understand this strategy as it applies to Amazon, you simply need to recognize that not every investment—in the sense of a future-oriented financial commitment—is an investment according to the rules of corporate accounting. If you take a bunch of money and use it to build a server farm or buy an office building, that's an accounting investment. Amazon does plenty of this kind of investment But what doesn't show up on the balance sheet in the same way is the company's most important investment: the firm commitment to ultra-low prices.

Mathew Martoma's defending himself.

I really liked this Businessweek story about Mathew Martoma's insider trading defense, which is creative insofar as it's any defense at all. My favorite of Martoma's theories -- "Steve Cohen was trading on different information, I was just decorative" -- is part of a whole web of defenses; another theory is just that Martoma never got inside information and that the doctor who says he gave him that information is confused or lying. Anyway I guess I'll say now: From all I've heard and read, Martoma's lawyers are doing a bang-up job. There's only so much you can do, but they seem to have done it.

Lloyd's getting paid .

Lloyd Blankfein's bonus for 2013 will be about $21 million, for total comp (including his $2 million base salary) of $23 million, just a bit more than Jamie Dimon's $20 million. Do you think Lloyd and the board talked about that? Oh sure. I guess it's notable that Goldman paid its chief executive officer only 15 percent more than JPMorgan paid its CEO, despite the fact that Goldman paid, I don't know, one billion percent less in fines than JPMorgan this year (and had a 2+ percentage point higher return on equity). But I guess the peace of mind of not being yelled at in the press is its own reward.

Don't oversell your mutual fund .

Here's an SEC settlement with Mark A. Grimaldi and Navigator Money Management, who ran a mutual fund along with an investment newsletter controversially endorsed by Suze Orman. The SEC didn't like some of Grimaldi's advertising -- including on Twitter, so there's your social media story -- of his fund. This sort of stuff is I guess frowned upon though I find it a little charming and not as bad as it could be:

For example, they misleadingly claimed in a December 2011 newsletter that Sector Rotation Fund was "ranked number 1 out of 375 World Allocation funds tracked by Morningstar." However, a time period of Oct. 13, 2010 to Oct. 12, 2011 was cherry-picked to broadly acclaim that ranking, and Sector Rotation Fund had a poorer relative performance during other time periods.

But they really were ranked number 1, briefly, sort of! Anyway, they're paying $100,000 and promising not to do it again.

Timberwolf is still causing trouble .

Timberwolf is a Goldman Sachs CDO deal famous mostly because Goldman trading honcho Tom Montag once said a naughty word about it, over email. He was right! An Australian hedge fund bought some of it, as well as a different CDO called Point Pleasant, which was also unpleasant, and they've been suing ever since. It's an interesting case, and yesterday it survived an appeal and continues to march forward to periodically embarrass Goldman.

Lawyers like movies .

Here is the story of the lawyers and FBI agents involved in the case of Jordan Belfort talking at a panel about The Wolf of Wall Street, the movie based on Belfort's life. Aren't they amusing:

Once they were able to indict Belfort and Porush, prosecutors threatened to indict Belfort's wife Nadine the next day to try to get him to cooperate. "I think that's outrageous behavior that no prosecutor should engage in," Cohen explained, speaking this time from his role as a securities lawyer, "but it did tend to lubricate his decision to cooperate rather quickly."

Cohen was of course the prosecutor who indicted Belfort. I'm sure he feels bad about his outrageous behavior.

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

(Matt Levine writes about Wall Street and the financial world for Bloomberg View.)

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

To contact the editor on this story:
Toby Harshaw at tharshaw@bloomberg.net