Levine on Wall Street: Portugal, Ponzis and Cynk

Also: Hedge fund managers who will deliver alpha over the next 25 years. Fed Funds substitutes. Consultants scolding banks. Old Testament punishment. The Icahn put.

Banco Espirito Santo is all better.

It "sought to reassure investors by revealing its exposure to related companies after a missed payment on short-term debt by a member of the Portuguese group roiled global markets," and I guess it worked. The stock is up, the bonds are up, and it still "has a buffer of 2.1 billion euros above the regulatory minimum following a capital increase in June," though the original problem stemmed from "accounting irregularities" which I guess might make you skeptical of capital buffers. It is tempting, when following this story, to think that regulated banks shouldn't be allowed to lend money to their parent holding companies, but I suspect that that happens rather a lot. FT Alphaville has a selection of views on whether Espirito Santo is "symptomatic of a wider malaise that investors in southern Europe have been happy to gloss over as they search for yield in an era of zero rates" or a "very unusual" structure which "will be a fairly contained event as the vast majority of European banks have totally different and simpler structures."

Poised to deliver alpha.

I like Institutional Investor's boldness in picking "five hedge fund managers who are likely to deliver market-beating returns over the next 25 years." Who even manages a hedge fund for 25 years? If you deliver market-beating returns for 22 years, come on, retire, you are already fantastically rich. I guess if you made this list you don't think that way? Anyway the profiles are pretty interesting. I particularly liked the one on Josh Birnbaum, who both ran Goldman's "big short" bet on mortgages in 2007 and also bet against JPMorgan's London Whale in 2012, demonstrating an impressive ability not only to make money but also stay in touch with the big scandals in the banking industry. Elsewhere Ray Dalio has run a hedge fund for 39 years now, not all of them market-beating, but he's "having a pretty good 2014 following a challenging two-year stretch," up 11.16 percent through June versus 6.05 percent for the S&P 500.

Fed Funds or whatever.

The Federal Reserve targets the Fed Funds interest rate, which is "based on the actual rates reported by brokers for overnight loans between US banks." There's some history of interbank lending rates not being the best way to derive your risk-free rate, especially when banks aren't lending to each other. As they're not: "US banks now have huge amounts of cash and have stopped borrowing or lending Fed funds, making the market highly illiquid." So the Fed is contemplating "redefining the funds rate to include eurodollar transactions" as well as perhaps bank commercial paper and wholesale certificates of deposit and whatever else gets a reliable rate. This might be upsetting for the trillions of dollars of Fed Funds swaps outstanding, and perhaps for all the pricing models that use Fed Funds. It's sort of interesting that we started the financial crisis with two key interbank lending rates, Libor and Fed Funds; the crisis destroyed faith in one of them, and the recovery is destroying faith in the other. And here is Izzy Kaminska on reverse repo as a tool for the Fed to "reassert control over short-term rates."

There are still Ponzis.

You can't be super surprised that "despite efforts by the authorities, particularly after the unmasking of Bernard L. Madoff in 2008 in the largest Ponzi scheme in history, these frauds still surface distressingly often around the country." You'll never deter Ponzi schemers; the psychology of Ponzi'ing -- either "I am an invincible genius" or "I've lost my investors money and have no choice but to Ponzi my way back into the black" -- sort of precludes deterrence. The best bet is to try to convince people not to invest all their money in undiversified opaque get-rich-quick schemes and, come, on, this is America. Elsewhere The Economist thinks that "For adult financial education to have an impact it may therefore need to be compulsory," and I'd probably be okay with that. Or like: You don't have to take the class, but if you don't, and you get suckered by Bernie Madoff or whatever, it's a felony for you to complain about it.

McKinsey thinks banks give away too much free stuff to deadbeat clients.

This is entirely correct, but banks want to maximize upside optionality and so will chase unlikely profits with awful clients. Consultants bill by the hour. You can see why there's a culture clash.

A theory of Cynk.

If you hang out in comments sections of blog posts about Cynk Technology Corp., and wow okay that's my life now, you will see a theory that data providers have messed up Cynk's stock split:

The market cap being reported is wrong in Bloomberg so everyone is reporting it wrong. The company had a *reverse* 75:1 stock split but Bloomberg mistakenly did a normal stock split with the same ratio. So the market cap is the number you reported divided by 75^2.

This would imply that Cynk, which closed at $13.90 yesterday, has only 51,813 shares outstanding, not 291.5 million, for a market cap of $720,000, not $4.1 billion. That is wrong, and very easy to check -- the company's November 10-Q shows 291,450,000 shares of common stock issued and outstanding, describes the June 2013 stock split as "a 1:75 forward stock split," and makes clear that it was exactly that: for every old share you had, you got 75 new shares. Still psychologically perhaps this partly explains the stock's run-up: People who believe that there are secretly only 51,813 shares outstanding -- and that they know what the media has missed -- are excited to buy the stock at what they think is a sub-$1-million valuation, 1 even though according to the company's official books and records (such as they are!) it's actually a $4+ billion valuation. Anyway here is BuzzFeed on Cynk and its founder, Kenny Blaque, who says he now has nothing to do with it. [Update: And here is Cynk's inevitable trading halt.]

A theory of corporate crime and financial journalism.

I ... might have a different view? But here is Gretchen Morgenson's (from a couple of weeks ago sorry). Here she is on Tim Geithner's book "Stress Test":

I think [Geithner's] entire book is skewed by the vision [that] "These were just really good guys and gals who just lost their way." He uses a phrase that I love: "We really didn’t want to have to conduct Old Testament punishment." Well, I’m a big fan of Old Testament punishment.

The theory here seems to be that Morgenson and her audience are good people and that the people who ran troubled banks are bad people: Not that they are humans just like us who made mistakes (as Geithner would have it), or that they are humans just like us who committed crimes (a harsher alternative), but that they are a different category of people from Morgenson and her audience, less than fully deserving of human dignity and sympathetic understanding. Bad Corporations are run by Bad People, who must be mercilessly punished by the Good People who work I guess at newspapers and prosecutors' offices. Basically everyone thinks this! But they all think they're the good guys.

Prosecutors didn't want to convict Rengan Rajaratnam anyway.

After a jury acquitted Rengan Rajaratnam on Tuesday, the Wall Street Journal published this:

Two years before a jury acquitted Rengan Rajaratnam on Tuesday, dealing prosecutors their first defeat in a long-running campaign against insider trading, government lawyers had privately determined the case was weak, people familiar with the matter said.

Eventually other government lawyers changed the government's mind, though the first set of government lawyers turned out to be right. One question is: What motivated (presumably) the first set of government lawyers to talk to the Journal? I suppose the message is "sure we lost, but we're still infallible because we knew we were going to lose." Another question is: If they'd won, would they have still called the Journal to be like "oh that case was weak, we were pretty sure he was innocent, got lucky on that one"?

Things happen.

American Apparel is a lesson in how not to do a poison pill, among other things. Why is American consumer banking so backwards? The "Icahn put": The worse Family Dollar does, the more likely it will have to sell itself to Carl Icahn at a premium. Argentina is using its Vaca Muerte shale formation to tempt Russia and China to help it with its debt problems. "Dell, Hooters to make ABS debuts." Goldman Sachs "would like to dispel myth that we don’t want interns to have fun." Alison Frankel on the Federal Housing Finance Agency's lawsuit against Goldman. The Journal of Vibration and Control was jolted by a scandal involving poor controls on peer review. "When you marry for money, you work for it every day."

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
  1. Deep value! What?

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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