Levine on Wall Street: Diet Shakes and Dodd-Frank
Are you excited for Bill Ackman's Herbalife thing?
He sure is! It's like watching the buildup to a professional wrestling match. Here's Bloomberg News:
Ackman, head of Pershing Square Capital Management LP, said on Bloomberg Television that his firm has devoted $50 million of investors’ money to prove that Herbalife is a pyramid scheme. The results of the undercover investigation, which focuses on Herbalife’s nutrition clubs, will be released at a presentation today in New York.
“Trust me, when you see the stuff we have,” Ackman said in an interview on “Market Makers” with Stephanie Ruhle and Erik Schatzker, “you will conclude the money was well spent.” He suggested that the nutrition clubs -- part of Herbalife’s direct-selling approach -- resemble the fake trading rooms set up by Enron before accounting fraud led to that company’s bankruptcy in 2001.
And the New York Post:
“You’re going to learn why Herbalife is going to collapse,” he said on CNBC, acknowledging that “I’m raising expectations, but we won’t disappoint.”
Who talks like that? If I were a betting man I'd have been buying Herbalife yesterday, though I seem to be in the minority; it was down 11 percent on the day. Because Bill Ackman said that he wouldn't disappoint. He'd better not. Here is a roundup of previous Ackman Herbalife pronouncements.
Are you excited for Year 5 of Dodd-Frank?
Okay let's get through this quickly. Here are some House Republicans who are not happy about Dodd-Frank, here is their long-winded report basically saying that too-big-to-fail still exists, and here is a story about Barney Frank coming out of retirement for One Last Fight With Republicans Over Dodd-Frank. Here and here are roundups of how much has changed since Dodd-Frank; also, it's less Dodd-Franky, but note that Credit Suisse is getting out of the commodities business. Here is the New York Fed on how much better the banks are at guessing what the Fed's stress tests will be like. Here are the Bloomberg View editors saying that Dodd-Frank has done "nothing."
One thing to think here is: Nobody is satisfied, but nobody could ever be satisfied with anything. The prospect of bailouts has been a part of banking since Bagehot. The point of banking is to conceal risk. If banks just proceeded along with no government backing, total transparency, no systemic importance, and purely market evaluation of risks, then we wouldn't need banks.
And the Volcker Rule?
According to the paper, banks have managed to maintain their risk-taking in two ways: they have reduced the hedging of their banking books and increased the speculative uses of trading assets not limited by the Volcker Rule. Those assets would include U.S. Treasurys.
I am not completely convinced by these explanations of the mechanics but there's probably some rough truth here: Speculative trading, or a commodities business, or whatever, probably does diversify a bank a little, and one result of Dodd-Frank generally has been to focus banks more on core competencies, at the cost of (risky but) diversifying activities. The benefit of that is that it's probably easier to let narrower, better capitalized, smaller banks fail than it is to let giant universal banks fail? No one seems to believe that.
Fidelity clients can buy Credit Suisse IPOs.
Fidelity and Credit Suisse struck a deal yesterday where Fidelity's retail brokerage clients can participate in initial public offerings and follow-ons run by Credit Suisse. One obvious question to ask is: Why doesn't this happen more often? Why can't all retail brokerage clients participate in all IPOs run by all banks? There are mechanical issues -- you have to divide up fees, and liabilities -- but they're obviously not insurmountable, since Fido and CS surmounted them. The answer probably has something to do with the fact that access to IPOs is one of the more valuable services that a brokerage can offer to attract customers, so most banks would prefer to compete for customers by offering them IPOs that no one else can get. Rather than competing for investment banking clients by offering them access to a huge retail buyer base.
Who's mad about high frequency trading today?
All we know for certain is that some high frequency traders have made enormous profits that resemble economic rents. Virtu Financial, a major high frequency trader, disclosed in 2013 that, over the past five years, it only lost money on one day, and industry observers estimate that high frequency trading earns about $1 billion per year in just the United States.
Is that a lot? One claim is that there's about $33 trillion of stock traded in the U.S. each year, meaning that high-frequency traders make about three-tenths of one one-hundredth of one percent of each trade for providing their liquidity services. This is a lot less than old-school liquidity providers charged, though they make part of it up in volume. But you do probably need a "compared to what?" before you can get really mad about a bare number. Meanwhile JPMorgan is forming a 150-person group to tell clients how to execute their orders.
Who made money selling bonds to the Fed during QE?
Here's a Fed staff working paper about quantitative easing reverse auctions of Treasury bonds in 2010 and 2011, in which primary dealer banks competed to sell $780 billion of bonds to the Fed. The paper describes the auction mechanism, which allowed for a certain amount of cleverness insofar as the Fed used a model to compare prices across different bonds, so if you could figure out the model you could figure out the most profitable bonds to offer. Delightfully there's a league table, which is arguably a decent measure of cleverness: 1
But the Fed should get points for cleverness too; it paid about $160 million above midpoint prices for $780 billion of bonds, or about 2 cents per $100, which isn't too bad.
You won't like your bonus. If your company is openly looking for your successor, that's a "subtle sign you're about to lose your job." Love misguided. Power duos. Poor doors. Meanwhile São Paulo is cutting back on gated towers. Soon you'll be able to buy Saudi stocks. "If Mr Cameron wants to sanction Russia, he would do better to sanction Chelsea and support Paris Saint-Germain instead." Weird Al has a song about corporate jargon. Yo metadata. Quit Yo before you're hard, quit Cynk before you're soft. "Patrons 'Feel Weird' About Williamsburg Starbucks on Opening Day."
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