Levine on Wall Street: Farewell Complacency
Happy Merger Monday.
Today's is Medtronic's acquisition of Covidien, which will result in an inversion where U.S.-based Medtronic will move its executive offices to Ireland and start paying taxes as an Irish company. This is the sort of thing that makes people mad but Medtronic thinks it shouldn't make them mad in this case:
“Although this is an inversion deal, it’s not about lowering tax rates,” Omar Ishrak, Medtronic’s chairman and chief executive, said in a telephone interview. “The difference is that through this combination, Medtronic can get access to the free cash flow that Covidien generates and deploy it in the U.S. There are larger technology acquisitions, innovations and R.&D. that we have not been able to do.”
The argument, as I understand it, is:
- The U.S. corporate tax system discourages U.S. companies from investing cash earned offshore in the U.S.
- But it doesn't discourage foreign companies from investing cash earned offshore in the U.S.
- Therefore it encourages U.S. companies to become foreign companies.
So much for complacency.
There's a micro-Minskyan effect where news articles about market complacency are inevitably followed a week later by market jitters, or at least news articles like "Investors Struggle to Digest Fresh Fears." Which is full of investors being like, well, I'm going on vacation, but I'm planning to enjoy it slightly less that I was when I was complacent. Culprits for the vanished equanimity include the possibility of oil price spikes driven by unrest in Iraq, and the possibility of U.S. government default driven by unrest in the 7th District of Virginia. And so the VIX is, what, a point and a half off its lows, closing at 12.18 on Friday versus 10.73 earlier this month.
There's another insider trading trial this week.
This article about the insider trading prosecution of Rengan Rajaratnam, Raj's brother, ends with this quote from a law professor:
"The defense is going to say 'look, this is what fund managers do,'" he said. "They try to get up as close to the line as possible without crossing it. The jury will decide if the line was crossed."
The rest of the article is about how prosecutors and the courts aren't sure what the line is, and how prosecutors have walked back the charges against Rajaratnam as various courts have criticized them, so it's a little rough to send someone to prison based on a jury's understanding of the line, but here we are.
How's BNP doing?
The French finance minister is bullish that BNP Paribas is in line only for "more equitable sanctions" for violating U.S., um, sanctions. BNP itself is cagey, and the world being what it is, plaintiffs' lawyers are circling, saying that it should have disclosed more earlier about how big the penalties would be. I'm with this guy though:
“One can hardly hold it against BNP Paribas that it doesn’t know what the American justice system wants it to pay given that this amount seems to be fluctuating,” Gerard Rameix, president of France’s market regulator, said June 2.
Some China capital markets news.
"China has overtaken the United States as the world’s biggest issuer of corporate debt," at $14.2 trillion of nonfinancial loans and bonds. And the "Shanghai stock exchange has approved a deal to list a securitised product backed by bank loans," shifting more of that debt from the banking system to the public markets. And Alibaba disclosed who runs it, which I guess was previously a secret.
Ratings agencies are important.
And so are plaintiffs' lawyers. Here Gretchen Morgenson goes around to the state retirement funds that are suing Moody's and S&P for fraudulently misrating mortgage-backed securities, and asks them why their investment guidelines still require ratings from Moody's and S&P. And the funds give amusing answers like:
“Our investors are conservative folks and they want ratings from the agencies they are comfortable with,” she said. “I certainly have concerns about the industry configuration that can reward the wrong moves, but we’re not in the business of being early adapters.”
But you are in the business of suing! Among other things there's a sociological lesson here, which is that in America, suing someone for hundreds of millions of dollars for fraud is a less extreme step than refusing to do business with them. It's just understood that, like, of course we're doing business with people who we think defrauded us, why wouldn't we?
Cerberus forgot to sell its gun-making business. Apparently the vanished liquidity in bonds moved into bond futures, which I do not understand. Dads leaning out. Good bachelor party. Bitcoin Jesus. Igloos. "If you have to mention the Pharaoh, you’ve lost the argument." Persieing.
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