Levine on Wall Street: A Steal at $15 Million


Deeb Salem, hero.

This guy:

“Let’s be very clear: I was one of the most sought-after investment professionals in the mortgage industry,” Salem said during the Feb. 25 hearing. “I had the opportunity throughout the course of my career and throughout -- from that day, from almost every month that I was at Goldman, to leave for other opportunities.”

But after being told "at a cocktail hour that he was a 'steal' at $15 million," and after telling his mother, "who was staying with him because her house had burned down on Christmas, that he expected at least $13 million for 2010," Salem got only an $8.25 million bonus. This was attributed to his self-evaluation, which had problems like:

  • Sounding a little like he was manipulating markets. ("[W]e began to encourage the squeeze with plans of getting very short again after the short squeeze caused capitulation of these shorts.")
  • Sounding a little like he was a crazy person. ("I am as competitive as Michael Jordan. I don't just want to win; I want to win every time and I want to steamroll the opposition.")

So obviously he's suing to get what he deserved, and I think we can all get behind that, because he's amazing. Also, on a personal note, I now know that I filled out all of my self-evaluations at Goldman entirely wrong.

Congress is being investigated.

A grand jury is looking "into whether congressional staff helped tip Wall Street traders to a change in health-care policy," and has subpoenaed staffers, which is unusual. The tip, if any, seems to have gone staffer to lobbyist to research firm to hedge funds, and the lobbyist can explain:

Mr. Hayes told congressional investigators he didn't receive a tip from a single individual. He said he made his prediction based on information he gathered partly from conversations with a Senate aide and his own analysis, the Journal reported last year, based on information from Senate investigators.

Ah yes the mosaic theory, which works so well in Wall Street insider trading trials. Maybe Congress will decide to clarify insider trading law now that it's subject to that law.

Currency markets are being investigated.

An order is a free option, so if you have an unsophisticated customer, this is what you do:

When a salesman received an order from such a customer, often by e-mail, he would execute it and wait to see if the market moved, the people said. If it did, he would charge the higher price.

The Department of Justice now seems to think this is fraudy, and I suppose it is, though there are those who blame the victim:

“It’s the obligation of the customer to have some kind of knowledge,” said Jason Leinwand, head of foreign-exchange trading at Metropolitan Life Insurance Co. “You can’t just go in blind: ‘Well, I don’t understand FX so I’ll have my broker do it.’ There are still significant-sized companies that won’t spend $500,000 to put a person in the chair who could possibly save you as much as $15 million a year.”

The nice thing about ripping off unsophisticated clients is that it creates a market for the clients to hire $500,000-a-year currency traders, pushing up the valuation of other currency traders. It's a win-win.

How much is TCI worth?

Sir Chris Hohn, who runs The Children's Investment Fund, is getting divorced, and so he and his ex-wife are arguing over asset values, as one does. One asset is the management company that runs TCI, a hedge fund with 8 billion pounds under management. She thinks it's worth 872 million pounds; he argues it's worth 64 million pounds, which seems a little light to me? Like if you charge 2 and 20 on 8 billion, your revenues will be 160 million pounds a year even with zero performance. And sure there are some expenses, but less than you might expect:

The fund distributed £20m in performance bonuses for people other than Sir Chris this year, the court heard.

Just 20 million pounds in bonuses for underlings at an 8 billion pound hedge fund! You could barely get a Deeb Salem for that!

Is the Markit IPO conflicted?

People often complain that banks who do initial public offerings have incentives to set the IPO price too low, because they would rather please their investing clients (who are repeat players and want a first-day pop) than their issuing clients (who only do one IPO and are actually fine with a first-day pop). Here is an IPO where the banks resolve that problem by being the issuing client: Markit Ltd. is using 15 underwriters for its IPO, 12 of which are selling shareholders and are getting most of the $1 billion of proceeds. And so ... people are complaining about conflicts!

“There’s a conflict of interest because they’re pricing based on making a profit on their initial investment instead of what’s a fair price for these shares,” said [James] Cox, a professor of corporate and securities law at Duke in Durham, North Carolina.

Okay whatever!

“It’s up to the buyers to take the premium away, since underwriters haven’t negotiated this thing at arm’s length,” said Bruce Foerster, president of South Beach Capital Markets and co-author of the Capital Markets Handbook, who worked in equity issuance on Wall Street from 1974 to 1994. “They have a perverse incentive to price it at the highest price, instead of the highest sustainable price.”

Sure fine! From the prospectus it looks like the banks will be selling less than half of their stakes so they still have incentives to get a sustainable price, but we'll see. If there is a big first-day pop here, though, that will be some evidence that banks don't underprice IPOs because they want to hose issuers. They underprice IPOs because that's good for issuers, and/or because they don't know how to price IPOs.

Will Argentina settle with its holdouts?

I guess?

Singer’s Elliott Management Corp. is willing to consider accepting bonds as payment from Argentina in exchange for defaulted debt, according to a person familiar with the company’s strategy. ... Argentine benchmark dollar bonds rallied after a government lawyer said that officials from the country will travel to New York next week to meet with holdout creditors for talks.

Next week! That gives them like a week to get this done before the next interest payment is due.

Whither the risk premium?

Sober Look has a sober look: Janet Yellen spoke yesterday about the Fed's concerns over high valuations on high-yield bonds and declining volatility in markets, and as she spoke ... high-yield bonds rallied and implied volatility dropped:

The Fed officials continue to be surprised and even annoyed by the diminishing risk premium in the markets. By striking a rather dovish tone however, the Fed is directly creating the issues that Janet Yellen is uneasy about. The irony is that we saw risk premium decline further today - while she was speaking about these concerns.

Things happen.

Yo. Yeshiva University was pretty bad at picking hedge funds, even outside of the whole Madoff thing. Millennials are good at avoiding financial advisers. Deutsche Bank might be beating Goldman in fixed income trading. But if Deutsche Bank had more gender diversity it might do less "objectionable stuff," says its CEO. HSBC bitcoin intern something something; I don't really know what's going on here. Spexit. Market structure data visualizations. Get ready for another goat story with a terrible ending (previously). IITYWTMWYBMAD?

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    Matthew S Levine at

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