Levine on Wall Street: 21st-Century Activists and 14th-Century Markets

Really if you have an investment strategy and it doesn't work when you backtest it over 600 years of data, you have nothing.

What's Carl Icahn up to?

Family Dollar, here's the 13D, 9.4 percent, "to seek to have conversations with members of the Issuer's senior management and board of directors to discuss the Issuer’s business and strategies to enhance shareholder value, which may include the pursuit of operating initiatives or the exploration of strategic alternatives," might go after board seats. There is a poison pill, of course there is. Obviously Carl Icahn knows how to create drama but so far this one is pretty routine. Meanwhile Bill Ackman would "love to find [Icahn] a way out of Herbalife, because I think if he could get out now he'd have a very nice profit," which is just a terrific sentence. Ackman and Icahn have a bet on Herbalife. Icahn is winning that bet, and Ackman is losing. And Ackman is gloating about it on television. Take notes, kids! This is how you do it, for pretty much any "it."

How's the housing market?

"You are all a lost generation" -- John Carney and Justin Lahart in Heard on the Street. Or something, it's about housing; the point is that people in their 20s are doomed by student debt and a bad job market, so they will never be able to buy a house. Meanwhile Adam Levitin is re-litigating cramdown -- letting bankrupt underwater homeowners out of their mortgages -- with Larry Summers; here is Levitin's view:

Cramdown risked chilling future lending. Nonsense. Everyone understood that 2008 was a 100-year storm and that the government wasn't going to be in the business of abrogating contracts willy-nilly. In any case, however sacred contracts might be, they aren't economic suicide pacts and never have been. Markets have responded very well in the past when the government acts like a grown-up and puts aside contracts that are socially detrimental, such as the case with gold indexation in the 1930s. What's more, we knew that mortgage markets functioned just fine when cramdown was allowed in the past, and we knew that other consumer finance markets function just fine all the time despite the possibility of having debts wiped out in bankruptcy.

How's the tri-party repo market?

Big banks get a lot of their funding by short-dated secured borrowing against their securities inventory. This borrowing is subject to runs, which worries people, especially the people at the New York Fed whose job it is to worry about it. They get data from all the banks about the average maturity of those banks' repo funding; longer-term funding is, obviously, less subject to runs. They can't just go publish the names of the banks with the worst repo funding, but they can -- and, yesterday, did -- publish some nameless statistical information about weighted average maturities, in the hopes of quietly shaming some banks into terming themselves out:

One-fourth of these large dealers have a WAM at or below twenty-six days (those at or below the 25th percentile). This WAM looks quite small when compared with that of the other large dealers. The median dealer-level WAM is sixty-six days and the difference between the 75th and 25th percentiles is a substantial fifty-two days. This means that the large dealers at or above the 75th percentile have secured about two extra months of funding for their risk assets relative to the group of large dealers at or below the 25th percentile.

So shape up, under-25th-percentile banks!

How's high-frequency trading doing?

There'll be a Senate hearing on it next week, which will "focus on how brokers balance the obligation to give customers best execution against services they provide for other brokers and trading venues." On the one hand, I get the sense that the obligation of "best execution" does get short shrift in a world where technical trade-through rules essentially set the limits on how much you can mess with customer orders. On the other hand I feel like the Senate lacks the restraint I admire in the Securities and Exchange Commission's approach to market structure. So this will be an amusing, unhelpful hearing, is what I'm saying. Meanwhile the SEC continues to look into dark pools and really it'll be a bit disappointing if they can't find one that is illicitly sharing order information with high-frequency traders.

Efficient 14th-century markets.

This is my kind of financial history paper -- the kind with sentences like "We then estimate the model on the Bazacle company’s dividends and prices expressed in real terms, i.e., in kilos of silver." The authors look at the dividends and prices of the shares of the Honor del Bazacle, 1 a company incorporated in Toulouse in 1372 and nationalized in 1946.

Overall, our results suggest that modern asset pricing theory, derived from the modeling of consumption risk and yielding the present-value relation, is relevant for the pricing of the Bazacle company’s shares from the Middle Ages onward. For the time period we consider, people were not instructed on how to apply asset pricing theory. Finding that this theory is consistent with the data is thus interesting because it cannot be due to investors being trained in the principles of modern finance. Instead, risk correction and rational expectations about future dividends and prices appear naturally as an economic response to uncertainty.

One takeaway here is that if you ever find a time machine and travel back to 14th-century Europe (why?), you can pretty much seamlessly apply your current investing strategies.

GoDaddy is going public.

Why not. The structure is a delightful meshugas of "Up-C," which "allows existing owners of a partnership or limited liability company to continue to realize the tax benefits associated with their ownership in an entity that is treated as a partnership for income tax purposes following an initial public offering" by letting them hold their economic interests in a partnership subsidiary of the public company, while also holding non-economic but voting "Class B shares" of the public company. Good stuff.

Facebook has a new Snapchat-clone app.

Facebook's disappearing-message app, Slingshot, is so advanced that the app itself disappears immediately. Always one step ahead. Meanwhile a shareholder is suing Facebook for waste, and honestly if you wanted to invest in a company that was responsible to shareholders why did you invest in Facebook?

Things happen.

If you want a vision of the future, imagine a Bloomberg terminal on a human face. "Sorry Dan, But It’s No Longer Necessary for a Human to Serve as CEO of This Company." Aswath Damodaran is getting increasingly troubled by tech valuations; his latest is on Uber ("The numbers seem to indicate that Uber is being overpriced by investors who have valued it at $17 billion."). And what about huge M&A premiums. Vice Time Warner. There are crazy stories about the SEC between minutes 20:50 and 23:55 of this Slate Money podcast. Henry Rollins interviewed a Fed historian for some reason? Venezuelan prostitutes also trade FX. Gen X is full of slackers. "It's like a soft cast for a sprained burrito." "NYU Students Are Mocking Goldman Sachs Interns on Yik Yak," okay.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
  1. No relation to Honoré de Balzac, I assume. Actually I have no idea, maybe they are related.

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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