Levine on Wall Street: The Next Facebook Will Be Dutch
Get your inversions while you still can.
Or maybe you already can't: "In a letter to leaders of the congressional tax-writing committees, Treasury Secretary Jacob Lew said lawmakers 'should enact legislation immediately…to shut down this abuse of our tax system,'" and "endorsed making the curbs retroactive, to May 2014." (The Wall Street Journal has the letter here.) People, including me, made fun of this Andrew Ross Sorkin column yesterday, in which Mylan chief executive Heather Bresch lamented how she was being forced to invert Mylan to the Netherlands to save a few percentage points in taxes. Bresch, who managed to win a (U.S.) "Patriot of the Year" award in 2011, says "You know what makes me want to cry? I think whoever the next Facebook is, why would you ever start that company here in the United States?" And, you know, Netherlands, if you were the country that invented Facebook, you'd have invented Facebook. So all of this is ludicrous but there is some basic arithmetic underlying it, which is:
- Some countries tax only income earned in those countries.
- Other countries tax all income earned anywhere in the world.
- If you are incorporated in the second sort of country, you will pay more taxes.
- You don't want to do that.
Since nobody thinks the U.S. corporate tax system is a particularly good one, the CEO whining about how the law should be changed to reduce their taxes is ... plausibly correct? But still unseemly? Like at least you shouldn't run around talking about how much of a patriot you are for reducing your taxes by reincorporating abroad.
Anyway. Lew's letter says "The President has called for undertaking business tax reform as a way to improve the investment climate in the United States and to support the creation and retention of high-quality American jobs," but come on no one thinks that fundamental corporate tax reform is in the cards. Everyone says it, but realistically that line is about as hypocritical as the Facebook thing. You'll either get no reform and some sort of ban on inversions, or no reform and no ban on inversions. Neither is a great outcome.
Being an analyst at Bank of America will be more fun.
It's probably a good idea to be cynical about some portion of the recent junior-banker-lifestyle initiatives -- "Try not to work on Saturday! Much! Unless someone asks you to!" -- but some of them are clearly well-thought-out and meant seriously. And this seems legit: Bank of America is increasing its analyst and associate summer and full-time classes by about 40 percent, "to invest in our people in light of our growing activity levels and the need to provide more support to our junior bankers to have a better experience." You can get some lifestyle improvement by just telling junior bankers not to work in dumb ways, and by telling senior bankers not to assign them work in dumb ways, but ultimately there's some amount of work that really needs to be done and the way to avoid overwork is by getting more people to do it. Also I guess you'll have more friends to share the (reduced) misery with? I feel like a lot of bankers gripe that they'd love to work 40 percent less for 40 percent less money and soon they'll get the chance. I mean, BofA's memo doesn't seem to mention money. But you can't just have 40 percent more workers doing the same amount of work forever without cutting into someone's paycheck.
Do high-frequency traders stop supplying liquidity when markets crash?
Yes, would seem to be the answer, according to a study by Pradeep Yadav, Michael Robe and Vikas Raman:
The study’s results show that while manual traders bought and sold more during volatile periods, increasing their trading volume by over 13 percent, high-frequency firms left the market more fragile by reducing trading by more than 9 percent. The paper looked at crude oil futures contracts on the New York Mercantile Exchange in 2006, 2008 and 2011.
A while back we talked about the possible explanation for this: Electronic market makers make much lower spreads than old-school human market makers, so they're not getting paid enough to stick their necks out in bad times. Here's Craig Pirrong on the Yadav study:
The mean and median spreads in the electronic market: .01 percent. Given a roughly $100 price, this corresponds to one tick ($.01) in the crude oil market. The mean and median spreads in the floor market: .35 percent and .25 percent, respectively.
Think about that for a minute. Conservatively, spreads were 25 times higher in the floor market. Even adjusting for the fact that prices in 2011 were almost double than in 2006, we’re talking a 12-fold difference in absolute (rather than percentage) spreads. That is just huge.
So even if EMMs are more likely to run away during stressed market conditions, the electronic market wins hands down in the liquidity race on average.
The question, as it so often is in the high-frequency trading debate, is: Do you want much more efficient markets with some bad characteristics, or do you want to address those bad characteristics at the cost of efficiency?
Let's Gowex is mostly fake.
I feel comfortable saying that because its former chief executive has admitted that the whole thing -- some sort of cell-phone roaming business, I don't know, it sounds fake -- was a scam, and is cooperating with investigators. After Daniel Yu's Gotham Capital figured it out -- from things like its apparent 99 percent gross margin, stuff like that -- there was a brief period of denial:
Gotham started with the company’s auditor. Gowex paid M&A Auditores SL 68,500 euros in 2013 on a purported 182.6 million euros in revenue. Competitors iPass Inc. and Boingo Wireless Inc. (WIFI) spent between 1 percent and 1.6 percent of annual sales for auditing, Gotham found. For Gowex, it was 0.04 percent.
M&A Auditores is located in a residential apartment complex on a tree-lined street in central Madrid. Bloomberg News spoke with the auditor, Jose Antonio Diaz, by phone after Yu’s report appeared. He denied the claims and made jokes about Batman, the Caped Crusader working to save Gotham City from corruption and evil. Diaz hasn’t since responded to calls for comment.
But that unraveled fast. Once your auditor absconds the chances you're a fraud seem pretty high.
You can track activist short campaigns.
My dream is to have short disclosure that mirrors long disclosure, so if you're short more than 5 percent of a company you need to file Schedule 13Ds and whatnot. Not for any particular regulatory reason, just so we can all kibbitz about short campaigns the way we do on long activist campaigns. There's a new website to track short-seller campaigns; it doesn't have holdings but does track each major short seller's campaigns, statements, and returns. Let's Gowex is on the list with a one-week return of negative 60.2 percent.
How do you do tobacco antitrust regulation?
The proposed Lorillard/Reynolds deal means that about 85 percent of tobacco sales in the U.S. will come from two companies (Altria and Lorillard/Reynolds), which some people think will give those companies market power to raise prices. You could imagine an antitrust regulatory posture that is like, meh, consumer-unfriendly tobacco monopoly, that's fine, it just means fewer people will smoke. All of our other tobacco regulation is about making smoking more expensive, so why should antitrust regulators be working on ways to make it cheaper? But here we are. I suppose high prices that go to taxes to fund stop-smoking campaigns are better than high prices that go to corporations to fund keep-smoking campaigns, but still it seems like the negotiations would be weird.
Apple and IBM are friends.
Apple and IBM are teaming up to sell iPhones and iPads to businesses. This makes me feel old, mostly. I remember when there were Apple computers and there were IBM computers and those were the two types of computers, and they were fierce enemies. Now there are barely even computers.
"J.P. Morgan Launches First US Collateralized Loan Obligation Index." "Fed Wants Better Compliance on Leveraged Loan Guidelines, Report Says." "There are always people who say the dollar is going to be replaced, but it hasn’t happened,” says a currency strategist, and that's fair enough, even with Argentina and BNP and so forth. Nuttall and Bae will probably succeed K and R at KKR. All the people who will say that this UBS banker is totally innocent are themselves afraid to travel to the U.S. Was American Apparel gross because of arbitration clauses, or did it use arbitration clauses because it was gross? That M&A game is out. "The most powerful rainbow in U.S. history."
It's not like taxes are higher now than they were when Facebook was founded, though to be fair both Cynk and Yo are offshore.
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