Levine on Wall Street: Honesty Is a Risky Policy
"Banks in London Devise Way Around Europe's Bonus Rules."
You were expecting a different result? There would seem to be a bunch of ways to go with this, but everyone seems to have settled on the simplest, a thing variously called "role-based pay," "allowances," or "reviewable salary," in which the bank just pays you more each month, but a chunk of it is claw-back-able and reviewable each year and so forth. "'These are bonuses in disguise,' said Philippe Lamberts, a Belgian member of the Green Party in the European Parliament," but that seems exactly wrong; they are base salary in disguise. As DealBook puts it, "the new pay packages may undermine what bank regulators worldwide have sought to do for nearly six years: force banks to stagger the payment of bonuses over much longer periods." Now you get your bonus every month. Seems great.
Europe is getting nervous about extend and pretend.
European regulators are asking banks to provide more information about loan modifications and forbearances, because the regulators suspect that the banks are using forbearances to hide losses: "We have a current restructured loan" rather than "we have a defaulted loan." As a Standard & Poor's analyst says, "Forbearance can be a perfectly rational strategy for banks to adopt to avoid making a loss," but "it can also be used as to delay the recognition of impairments from problem loans to a time where the bank has more capital to absorb the loss." Which you might naively think is a good thing? I mean, why would you want a few bad loans to eat through a bank's capital? Just wait until there's more capital. This is sort of a core tension in banking generally; honesty may be the best policy, but it is also a pro-cyclical policy.
The SEC is sick of losing.
"The Securities and Exchange Commission, faced with a recent run of courtroom defeats, is shaking up the way it prepares for trials," after winning only 55 percent of its trials in the last three months or so. Really they should just hand all their cases to the federal prosecutors in New York; those guys win like crazy. Or of course there's another way to increase the winning percentage, hinted at by the former SEC official who complains that the trial unit doesn't get much of a say in what cases are brought, and that involving the trial unit earlier "would help the agency make the critical distinction between the suspicion of wrongdoing and evidence that will stand up in court." In other words: Stop bringing the hard cases.
There aren't enough subprime car loans.
Here is an amusing story about how subprime auto asset-backed security issuance can't keep up with demand. "There are still investors who ask us 'why doesn't the issuer upsize the deal?' The answer is because you would have to sell more cars," a banker said last year, but now there's a solution. Issuers are "pre-funding" loans, a practice in which an ABS issue raises more money than it has loans, and uses the extra cash to go buy future loans. When I read that quote about selling more cars I had a slightly different idea: In 2006, you could sell more mortgage-backed collateralized debt obligations by making them synthetic, that is, by filling them not with existing loans but with credit default swaps written on those loans. When you start seeing subprime auto ABS synthetic CDOs, it's time to sell your car I guess.
Meditate your way to riches.
There was a Wall Street-y thing on Transcendental Meditation on Tuesday night, moderated by Andrew Ross Sorkin and featuring Bridgewater's Ray Dalio, who said that meditating "makes me feel like a ninja in a fight." Jessica Pressler wrote about it for New York Magazine here, which should give you a soothing, meditative sense that the world is as it ought to be. ("Did they conceive of this event in order for [Pressler] to write about it?" asks Jesse Eisinger.) It's good, is the point.
Rap your way to riches.
Here is "The Good Ship Galleon," Turney Duff's musical tribute to the Galleon Group recorded in happier times, before Galleon's boss Raj Rajaratnam went to jail for insider trading. It's actually better than it has any right to be. It's still a rap song about a hedge fund, though.
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(Matt Levine writes about Wall Street and the financial world for Bloomberg View.)
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