Levine on Wall Street: Disappearing Dealers

Also possible bubbles in tech stocks, junk bonds, smart beta, and FICO scores. And a man is paid to say mean things about Herbalife.

Your new bond dealer is Fidelity.

Given that the Volcker Rule has made bond market-making legally dubious for big banks, I've often wondered why big credit hedge funds haven't stepped up and started market making businesses. I'm still wondering, but Fidelity of all people sort of have:

"We're now being viewed as a liquidity provider in the marketplace," Ford O'Neil, who manages the $13.2 billion Fidelity Total Bond Fund in Boston, said in a telephone interview last week.

Dealers' reduced capacity to trade bonds is a boon to the largest investors, who can buy large chunks of bonds at attractive prices. Smaller buyers may never get those offers.

"A lot of these Wall Street dealers often don't like to have to make 20 or 30 phone calls" to sell a block of debt, so "it may make sense to make a call to one or two big money managers and offer the securities at once," said O'Neil.

There's still intermediation; Fidelity isn't getting calls directly from the sellers. But instead of a dealer buying for its own market-making book, the dealer is more or less operating as a front end for Fidelity:

Now "the dealer has to act in a pass-through" capacity, turning to larger investors when clients ask them to sell bonds, said Dan Fuss, vice chairman at Loomis Sayles & Co. in Boston, which oversees about $210 billion. "The smaller firms are starting to gripe on this."

The next step I suppose is for Fidelity to start taking direct calls from other investors -- or just do it electronically.

Bill Ackman paid a guy to complain about Herbalife .

Are you the tiniest bit surprised? The complaints seem to have been more or less true -- Herbalife had manufacturing problems, which it fixed -- though some of the whistleblower's statements were more less true than more true. 1 But the social purpose of short selling is that it creates a profit motivation for people to uncover fraud, and if you believe in that then spreading the profit motivation around just makes sense. Obviously a lot of people are paid to say nice things about Herbalife too.

Citi can pay its executives.

I mean, it could have anyway, but its shareholders gave their nonbinding approval to the executive pay package, by a vote of 84.6 percent. In other Citi-shareholder-meeting news, everyone is appropriately chastened about failing the stress tests, being hoodwinked by Mexican frauds, and holding the annual meeting in St. Louis without a webcast, so I guess they'll have to come up with a whole new set of things to be chastened about next year.

Is there a tech bubble?

If there is, I'd be the last person to tell you. David Einhorn not only thinks the answer is yes, but also thinks that "There is a clear consensus that we are witnessing our second tech bubble in 15 years." This struck me as paradoxical; a lot of people can think there is a tech bubble, but if there's a clear consensus -- that is, if everyone thinks it, and it's clear to everyone that everyone thinks it -- then there can't be a bubble. Who would buy, if everyone thinks tech stocks are overvalued and everyone knows that everyone thinks tech stocks are overvalued? You need to get to like the third derivative of the Keynesian beauty contest for this to make sense. Perhaps I am being too literal, or Einhorn was just being approximate. Gawker, obviously, agrees with him. (In the same investor letter, Einhorn says that "Flash Boys," in which he has a starring-ish role, is "based on a true story," which ... okay?)

Is there a junk bond bubble?

I dunno, but "A French cable operator is preparing what could be the largest junk-bond sale in history -- a sign of investors' ravenous appetite for risk in an era of low rates and a mark of the profound shift in bond financing on a continent that had long borrowed heavily from its banks." Numericable Group is raising 8.4 billion euros of Ba3 bonds.

Is there a smart beta bubble ?

Yes, right? At least in nomenclature. "Goldman Sachs Group Inc's asset-management business has agreed to buy Westpeak Global Advisors, a firm that aims to beat market indexes by using factors other than company size to pick stock investments," and, boy, that could describe a lot of firms.

Can stock market problems be fixed by killing dark pools ?

You can see why an exchange chairman would think yes, though it's the chairman of CME Group, a futures exchange, which doesn't really compete with dark pools. "Fix the fragmentation issue, and you'll fix the problem," he says, and I feel like a lot of people who agree with that nonetheless think that fragmentation among exchanges is the big problem, and one that dark pools are to some extent designed to address.

Things happen.

Crispin Odey is still short Manchester United even after they fired David Moyes. Goldman Sachs's head of compliance owns nice-smelling horses. Mathematicians, bankers, and sociopaths; I don't entirely agree. That guy is still probably not the Bitcoin guy. Man achieves perfection.

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  1. What is this, come on:

    In December, after extensive discussions with his attorney, Bohorquez agreed to be interviewed on camera by ABC News for a report about his experience inside the Herbalife executive offices.
    During the on-camera interview, which Ackman's public relations team helped to arrange and which Bohorquez's attorney attended, Bohorquez flatly denied he was being paid anything by Ackman or receiving any benefit other than his travel expenses and lawyers' fees and legal costs.
    "I'm not getting a benefit," he said.
    Asked last week why he did not disclose the additional arrangement with Ackman during the interview, Bohorquez said his answers were truthful because he had not invoked the provisions at the time and so had not yet collected any money.

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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