Levine on Wall Street: Surging Mergers and Tracing Bonds

A lot of fun capital-markets arcana today. Poison pill fights, mini-tenders, revolving doors, short-sale bans. Also I guess there's a lot of M&A.

M&A is back.

After like four years of "not a lot of deals but the backlog is strong," the backlog has arrived. Highlights: $1.77 trillion of mergers and acquisitions in the first half of 2014, the most since 2007. It's driven by big deals; the number of deals announced in the first half is the lowest since 2005. Strategics, not sponsors. Lots of inversions. A surprising number of hostile deals. My former employers are #1 in the banking league table (congrats!) and #12 in the legal league table (umm?). And somehow a lawyer -- at Skadden, at the top of the legal league table -- says "it feels like we’re drinking out of a fire hose," and come on, let's retire that phrase.

144A bonds will Trace.

There are two popular ways to issue corporate bonds in the U.S.: "registered" and "144A." The latter is somewhat more pleasant for issuers and their advisers, but until recently only trades in registered bonds were required to be reported to Finra's Trade Reporting and Compliance Engine, which prints trades publicly within 15 minutes after they happen. Now 144A bonds will Trace too. So if someone offers you a 144A corporate bond for 95, you can go to your Bloomberg terminal or the Finra website and see where it's been trading. And after the trade, if your dealer prints a buy at 91 and a sell to you at 95, you can call him up and say hurtful things to him. This is a big win for bond market transparency and also it is sort of hard to see why it wasn't done years ago? If dealers can report registered bond trades it's really not much harder to report 144A trades too. One cynical view is that opaque markups on 144A bond trades is an important driver of fixed-income revenue for banks and they will be very sorry to see it go.


If you like weird capital-markets arcana, I recommend this FT Alphaville story about mini-tender offers. If you don't like weird capital-markets arcana, what is wrong with you? There's a whole delightful array of goofiness here, but the particular focus is on a guy who goes around to small shareholders in public companies and asks to buy their stock at below-market prices, just because. "Mr. Albaum said that his offer appeals to those shareholders selling under 100 shares who would face steep brokerage fee and thus are better off tendering at a discount." But wait what? It costs $9.99 to sell any amount of stock, so tendering at a $1+ discount seems like a bad deal unless you're selling fewer than 10 shares. On the other hand he's basically writing shareholders a free put on their stock for a month, which is generous of him. I don't know. The capital markets are full of wonders.

American Apparel poison pill battle!

Really a good day for capital-markets arcana. American Apparel's fired chief executive, Dov Charney, has agreed with a hedge fund to team up to buy more shares so he can vote himself back in as CEO. His public disclosure of that agreement may leave something to be desired as a securities law matter, but more importantly American Apparel's board has now adopted a poison pill that seems to require Charney to choose between (1) defaulting on his agreement with the hedge fund and (2) triggering the pill and having his shares, essentially, vanish. And since Charney really does seem to want to regain control of the company -- and since he's, you know, controversial -- the board may get a lot of sympathy from the courts.

Banks as secret keepers.

This paper has been floating around for a bit, but it's new to NBER, and it's like a fundamental organizing principle for my view of the world, so I figured I'd link to it. It's by Tri Vi Dang, Gary Gorton, Bengt Holmstrom and Guillermo Ordonez, and it's called "Banks as Secret Keepers." The idea is that banks manufacture money -- risk-free deposits -- out of risky loans and investments using secrecy:

[F]inancial intermediaries produce private money because they can keep the information that they produce about the backing assets secret, thereby preventing their money-like securities from the fluctuations due to the value of their real assets. In our model the raison d’etre of banking is secret-keeping for the production of private money. Without banks, information about investments would come out and reduce the efficiency of private money. So, banks are optimally opaque.

A very popular opinion is that secrecy is bad, banks should be more transparent, and everyone should know what is going on in banks -- that banks ought to be sort of democratic institutions. This opinion is intuitively appealing but wrong.

Don't short Banco Espírito Santo.

At least not in Portugal or Britain, where it's now illegal to short the bank "after the Portuguese lender’s stock fell more than 16 percent on Monday on fears about its corporate parent." I am torn; I'm generally with my Bloomberg View colleague Noah Smith that short selling is good, but on the other hand I just got through saying that no one should produce any information about banks, so here we are.

Theories of the revolving door.

This paper, from Wentong Zheng, focuses on my Theory 3:

This Article theorizes on yet another incentive created by the revolving door that deserves being recognized as a structural force inherent in the regulatory process: the incentive for regulators to expand the market demand for services they would be providing when they exit the government. This “market-expansion” incentive may manifest itself differently in different regulatory settings. In the enforcement setting, it may result in more enforcement actions, broadened jurisdictional reach of the enforcement actions, and higher penalties in the enforcement actions. In the rulemaking setting, it may result in agencies’ expanded rulemaking authority, the use of flexible standards rather than bright-line rules, and agencies’ preference for complex as opposed to simple rules or standards.

Bear energetic.

If I were a cybersecurity consultant, I'd pretty much always go around saying that shadowy groups of hackers backed by the Russian government were attacking big companies with potentially catastrophic but currently unobservable effects. This one is about the electric grid.

Things happen.

Here is (what a person on Twitter asserts is) the undoctored version of that silly Barclays chart. Here are some dubious claims about the value of an MBA. Here is some good news for Cannibal Cop. "[F]rustrated Wall Street workers -- emboldened by a beefed-up whistleblower program as part of Dodd-Frank financial reform -- are finding it easier and potentially more lucrative to rat out wrongdoers within their own ranks." GM has sold negative cars since 2011. U.S. Marshals failed to manipulate the price of bitcoin.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    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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