Levine on Wall Street: Activists, Regulators and Alpha
Yesterday Carl Icahn hugged Bill Ackman, somewhat awkwardly. That I guess is the main thing? Here are Josh Brown's notes from the CNBC and Institutional Investor Delivering Alpha Conference (part 1, part 2, part 3); here is MoneyBeat's live blog; here are some Greek alphabet jokes on Twitter. Jack Lew talked about cyber security breaches (okay!) and inversions (comprehensive tax reform!), and I guess there's something appropriate about kicking off a 2014 conference on alpha with a government official talking about computer technology and tax strategies? Government, computers, tax arbitrage: Good 2014 sources of alpha.
Later, Ken Griffin of Citadel talked about his computers. He was asked "What is the rationale for payment for order flow?" and, strangely, did not reply "it is valuable for us to interact with uninformed retail order flow, which reduces adverse selection, and so we are willing to pay retail brokers for that flow in the form of narrower spreads ('price improvement') and payment for order flow." I mean, that is the rationale. I guess you can't say "uninformed retail order flow" at a television-sponsored conference about delivering alpha?
Josh Birnbaum of Tilden Park pitched investing in mortgage putbacks: A bunch of banks securitized mortgages badly, got sued, and agreed to buy back some of the mortgages at par. If you can figure out how those settlements flow through the waterfalls of the bonds containing those mortgages, you can make a lot of money. Birnbaum, as a former Goldman Sachs mortgage trader partly responsible for its housing-market short, can probably figure it out. I'm sure Birnbaum didn't actually design those waterfalls himself, but still this is a valuable lesson for bank originators and structurers: If you build something that is (1) complicated and (2) bad, there will be profitable opportunities for you to trade it at your hedge fund later.
And then came the activists. Nelson Peltz was the warmup act, threatening a proxy contest with Pepsi, but the headliners were of course Icahn and his mystery guest Ackman. "We're going to have morons running the companies soon, and we're almost there," is a thing that Icahn said. And "The CEO's out there playing golf ... tell him to talk to Phil Mickelson. I used to joke, the only way to get these guys off the golf course is for me to file a 13D." And "Somehow I talk and people don't like me. I feel sad about it." Does he though?
Don't buy what you know.
Speaking of uninformed retail order flow, here is the somewhat unsurprising story of how, when your local sandwich shop does an initial public offering, you are all "hey those sandwiches are pretty good, give me 100 shares," and that turns out to be a bad idea. Here is the somewhat more surprising story of how Warren Buffett does the same thing. If you follow financial news regularly, you will expect a story about Warren Buffett and retail investing to have a comical picture of Warren Buffett and an oversize retail product, and this one does not disappoint. The lesson is: Invest in stuff no one knows. I recommend all bearings and ludicrous social media companies. 1
Is BlackRock systemically important?
Jesse Eisinger says no and, sure, why not. It's actually sort of hard to know what that would mean; I recommend Tracy Alloway's column on how BlackRock's systems power risk management for $14 trillion of assets under management at other firms as one possible interpretation. I mean, there's a whole system out there, and lots of people in lots of corners of it are getting up to lots of things that you could call "systemic" if you want. But the normal interpretation is that systemic risk comes from one place, the issuance of runnable short-term money-like claims backed by long-term liabilities. There are some line-drawing issues, as this is an essentially psychological rather than financial question: If you think your claims are supposed to be money-good, then there's systemic risk; if you understand that you can lose money, then there isn't. So Eisinger says that BlackRock can lose money, but that "the investor is on the hook for the losses, not BlackRock." Now this is sort of true in money-market funds too. It's just that bond-fund investors kinda know that, and money-fund investors kinda don't.
(There's also just a pragmatic reason not to call BlackRock systemic: If a thing is systemic, the way it's treated is by being required to hold lots of capital. That is not a useful approach for BlackRock.)
Elsewhere BlackRock sold $3.7 billion of mostly subprime mortgage-backed securities to Credit Suisse on Tuesday; it had bought them from UBS in 2008, and one question you might ask is, if Volcker and capital regulation prevent banks from providing liquidity on big bond positions, should BlackRock step in to fill the void?
Don't steal code when you leave your job.
But also, if you are a bank or hedge fund, and someone steals code when they leave, just sue them. Don't have them arrested and prosecuted. It's not a good look, Two Sigma Investments LLC. (And Goldman Sachs!) People in the financial industry move jobs. You want to be an attractive place for people to move to, and that means being an attractive place to move from. Arresting people for quitting does not accomplish that.
There are new Russia sanctions.
Rosneft and Gazprombank are particularly notable additions to the sanctions list, though the sanctions on them are limited: You can't transact in "new debt of longer than 90 days maturity," but you can trade derivatives and provide dollar clearing and do other stuff. The sanctions on the Kalashnikov Concern are not so limited, but you can still buy or sell AK-47s as long as you don't buy from (sell to) the manufacturer. (Though here is a Zero Hedge post that will try to convince you otherwise.)
Man goes on television. Bill Ackman has more Herbalife plans. "[T]he decision made it a crime to be highly ranked on search engines." "Top Justice Official Tells Banks Lawsuits May Be Coming." Another Chinese corporate bond default may be coming. Bouncy houses of horror. You get the behavior you pay for. "First, the Koch team chose its mascot: a golden eagle holding a knife in its beak." Pet suites. "There are about 500 trillion calories of human in the world." Here is a story about a Princeton finance professor charged with stealing 21 lawn signs.
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Matthew S Levine at firstname.lastname@example.org
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Toby Harshaw at email@example.com