Levine on Wall Street: Emergency-Room Insider Trading

In Syosset, you can get your medical and financial advice in one place. Plus: Marxist capital structure, bank capital structure, market structure, private equity markets, and rocketships.

Check with compliance before following your doctor's stock tips .

I grew up in Syosset and, while I never spent a lot of time in the Syosset Hospital emergency room, I cannot say that I am entirely surprised that it is a good place to trade stock tips. Or a bad place. A place to trade stock tips, anyway, which is not usually what you expect in a hospital. "Dr. Loretta Itri, president of pharmaceutical development and chief medical officer of Genta, Inc., her longtime friend, Dr. Neil Moskowitz, an emergency room physician, and one of his patients, were named in the insider-trading action" brought by the Securities and Exchange Commission over trading in Genta stock ahead of clinical trial results. The patient, Matthew Cashin, "first met Moskowitz on Saturday, August 15, 2009, when Moskowitz treated Cashin in the emergency room at Syosset Hospital and had several conversations that day"; he was trading Genta stock by Monday. The SEC, whose use of narrative detail in insider-trading cases is usually quite effective, neglects to mention what brought Cashin into the emergency room that Saturday, so I'm just going to go ahead and assume it was a golf injury.

Disgorge the cash !

J.W. Mason is the world's leading Marxist analyst of the capital structure of the modern corporation, so you should read this, particularly though not exclusively if you are a Marxist investment banker, and why wouldn't you be? A sampling:

But in fact, by the mid-2000s the relationship between investment and borrowing had practically vanished, and the correlation between investment and cashflow was less than half as strong as in 1960. Unusually heavy borrowing was no longer correlated to high levels of investment; investment decisions seem almost unrelated to the funds flowing into corporations from operations and from credit markets. ...

Before 1980, there was no statistical relationship between borrowing and payouts in the form of dividends and share repurchases at the firm level. But since then, a clear positive relationship emerged, especially at business-cycle peaks. Firms that borrow more have significantly higher payouts to shareholders. ...

It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancing to pay for extra consumption. What nobody mentioned was that the rentier class had been playing a similar game longer and on a much larger scale. At the top of every boom in the neoliberal era, there's been a massive round of stock buybacks, which you could think of as shareholders cashing out their bubble wealth. It's a bit like the homeowners "using their houses as ATMs" during the 2000s, except that the shareholders don't get stuck with the mortgage payments. The ­businesses' workers and customers get to share the pain.

Good news, private equity markets are now efficient.

I guess that counts as bad news if you're a private equity investor, though for you there is other good news:

We confirm the previous findings that there was significant persistence in performance, using various measures, for pre-2000 funds—particularly for VC funds. Post-2000, we find that persistence of buyout fund performance has fallen considerably. When funds are sorted by the quartile of performance of their previous funds, performance of the current fund is statistically indistinguishable regardless of quartile. At the same time, however, the returns to buyout funds in all previous performance quartiles, including the bottom, have exceeded those of public markets as measured by the S&P 500.

The sample here is interesting; it's holdings reported by a group of big limited partners so perhaps those LPs have access to better funds than the wide universe of "private equity"? But, anyway, within that sample, every quartile outperforms the S&P, but past performance no longer predicts future results.

Should brokers get priority ?

This is one of those market structure things that people care a lot about; discuss amongst yourselves.

Should banks be funded entirely with equity?

The intuitive answer is "no," since banks are in the business of taking deposits and lending them out, but here is John Cochrane arguing "yes." Here are Tyler Cowen and Arnold Kling arguing "no."

How should you invest ?

David Merkel has a pleasingly sensible statement of the case:

If you want average performance, which is better than most get, buy a broad index fund with low fees and hold it. If you want better performance, tilt your portfolio to reflect factors that usually outperform. If you want still better performance, ask what factors are overvalued, and remove them from your portfolio.

Note that the last two are much harder than the first one. I am content with below-average performance, so I buy broad index funds with low fees and rebalance at the wrong times.

Have you ever been clinging onto a rocket ship, then cut the engines at full speed, and then tried to fly again?

No? Some startup guy has, and he wants to tell you about it. (Here is an even more overwrought account.) I feel like we're about six months from Silicon Valley being more vilified than Wall Street, and I for one can't wait.

The stories of business .

Do other people enjoy reading the Harvard Business Review's blog as much as I do? I enjoy it very much. This article begins:

This is it. You've aligned calendars and will have all the right decision-makers in the room. It's the moment when they either decide to give you resources to begin to turn your innovative idea into reality, or send you back to the drawing board.

WHICH WILL IT BE? It's like the sequel to "Bright Lights, Big City."

Things happen .

The Circle of Champions gets smaller. Is there a junk bond bubble? "Introduction to the Floating-Rate Note Treasury Security." It's still hard to find a bank for your pot business. "Part of the equity strategist's job is to" whine about random etiquette peeves. Campari is really happy about the renewed popularity of the Negroni. "NYC's Most Ambitious New Bagel Shop."

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

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

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