Levine on Wall Street: Revolving Doors and Splitting Stocks
What is the effect of the revolving door?
Here's a story about how Mythili Raman, until recently the head of the Justice Department's criminal division, is joining Covington & Burling as a partner in the white-collar crime and litigation practices. And good for her:
Still, the leverage belongs to the job-seeking prosecutors, whose government résumés routinely translate into seven-figure paydays. When a top prosecutor spins through the revolving door, the biggest firms are there to greet them.
That was not always the case; some big law firms once scoffed at criminal defense work as too messy for their white-shoe sensibilities. But many firms, flush with business from banks and corporations caught in one legal problem after another, are now clamoring for the former prosecutors to handle such specialized work and navigate an overlapping maze of government agencies.
What does that tell you? If your model is "former prosecutors help their bank clients get sweetheart deals," sure, I mean, maybe. But your model surely can't be "current prosecutors go easy on banks in the hopes of getting seven-figure offers later on." Quite the reverse; it seems more like "current prosecutors are incentivized to create huge complex multi-agency investigations that sweep up every bank and have no clear legal resolution, to create lots of lucrative high-billable-hour negotiation-sensitive investigative work for former prosecutors that will stretch many years into the future." In other news, does Bank of America have another 11-digit mortgage settlement today?
Why would you do a stock split?
I offered one answer on Friday, but Credit Suisse has a bunch more, as David Keohane at FT Alphaville reports. Generally speaking market quality seems to improve with share splits, e.g.:
Every one of the stocks that has effected a split in the past year has enjoyed tighter spreads thanks to the split. The most dramatic example is MasterCard's recent 10-for1 split (the largest action taken among those on the list) where spreads collapsed by 75%. The average spread improvement among all the stocks is a still-impressive 35%. Even better: not only do spreads improve, but in every case, posted size increased as well.
Deutsche Bank had good earnings.
Or at least it "reported profit that fell less than analysts estimated after trading revenue beat projections." Anyway the shares went up; the bank "avoided the huge litigation expenses that characterized the end of 2013" and "The capital situation is less of a worry than people were anticipating."
Johnson-Crapo is in trouble.
My theory of mortgage market reform is that the status quo -- in which Fannie and Freddie are arms of the government, fully supported by Treasury and paying their (large) profits back to Treasury, but everyone pays a lot of lip service to "private capital" and getting the government out of the mortgage business -- is optimal for the government and so will continue until it becomes too embarrassing for anyone to tolerate. We seem not to be there yet. It's a big procedural week for the Johnson-Crapo bill, and "support is expected to be soft":
The intense lobbying by opponents of a bill to wind down US mortgage finance companies Fannie Mae and Freddie Mac appears to be gaining traction ahead of a Senate committee meeting on the proposal on Tuesday. ... Because of the breadth of the changes, the measure has galvanised a diverse group, ranging from civil rights organisations to conservative think-tanks, which opposes the measure for differing reasons.
You don't really need to pay investment bankers that much.
Robert Pickering, who used to run Cazenove, wrote a letter to the editor of the Financial Times. He is unimpressed by Barclays's claim that it needs to pay bankers for non-performance to keep them from quitting and going elsewhere. And he has a story:
In the febrile days of 2000, my predecessor was told that the very survival of our 200-year-old firm was dependent on the continued employment of a 20-something individual who had been in the industry for about 18 months. We offered him a partnership but he left anyway. A few years later, I reminded my senior management team of this incident and none of us, myself included, could remember his name.
Ha! I hope that guy writes to the FT and lets us know what he's been up to; I'm guessing its one of those left-finance-to-start-artisanal-handcrafts-business stories.
Do's and Don'ts for Executives.
It may not be great advice for investment bankers, but otherwise I think this 1957 list holds up pretty well. Certainly "Don't travel too often or too far," "Never fly both ways on a business journey," and "Keep your week-ends completely to yourself" are rules that I try to live by.
Does Private Equity Kill Jobs? (Yes.) Do ETFs Increase Volatility? (Yes.) "We show that firms' idiosyncratic volatility obeys a strong factor structure and that shocks to the common factor in idiosyncratic volatility (CIV) are priced." New beer mile world record. Might solve a mystery, or rewrite history. Waffogato. See you at the Herbalife documentary!
To contact the author on this story:
Matthew S Levine at firstname.lastname@example.org
To contact the editor on this story:
Toby Harshaw at email@example.com