Levine on Wall Street: Banks Making Money, Humans Trading Stocks

There are earnings, there are mergers, there are derivatives, there are scams, and there are studies of high-frequency trading and bank bailouts. And time traveling arbitrageurs.

Some earnings.

The fun one is Herbalife, which missed yesterday on declining revenues in the Americas. Ominously it's the first miss since 2008 so maybe it's all downhill from here? Or maybe it's a company and life is uncertain and sometimes it misses estimates (by a penny!). (It raised 2014 guidance, for what that's worth.) Obviously the all-or-nothing-battleground perspective is more fun. "The shorts on Twitter/Seeking Alpha having spent some time saying that the numbers don't matter (just the business model) are now claiming some victory on numbers," says John Hempton.

Also in earnings, Deutsche Bank had a complicated quarter(beating on pretax income but missing on net income), beat expectations on fixed income revenue, and is spending 1 billion euros to fix its inability to report financial information to the Fed's satisfaction. UBS had a quarter dominated by legal expense, as one does. And Greenhill & Company beat expectations with revenue of $63 million for the quarter, down 27 percent from this time last year. So much I suppose for this year's merger boom, though being a boutique M&A adviser is necessarily lumpy and they're expecting big things from the next quarter.

Some mergers.

Will Family Dollar Tree result in a bidding war? It could be Family Dollar General, or the General Dollar Family or whatever. That's Carl Icahn's hope, and can we just talk briefly about the fact that Carl Icahn still has a blog and it's still called "Shareholders' Square Table"? Didn't you expect that it was mostly a one-campaign stunt? But no it's totally his blog, it's great. I hope he assigns Keith Meister periodic quests.

Elsewhere inversions are mergers, and mergers generate fees, and those fees are paid to banks. And there's a Zillow/Trulia merger, and here is a process note:

In the interest of keeping matters secret, both sides used code names: Zillow was “Zebra,” while Trulia was “Tiger.”The password to access the electronic data room was “jungle.”

Surely this is the first news article to report a merger's data room password? I hope this trend goes further, like next time maybe reporting the name of the beleaguered analyst who set up the data room.

Some derivatives.

Here is a story about how U.S. banks are doing derivatives out of their foreign subsidiaries, and removing their U.S. parent guarantees, so as to avoid U.S. regulations that require derivatives to be executed on swap execution facilities. The Commodity Futures Trading Commission has asked suggestive questions but not, so far, done much. Also:

A host of financial support arrangements between parents and subsidiaries -- including keepwells, liquidity puts, indemnity agreements and master trust agreements -- are all described by the CFTC as having "the essence of a guarantee" -- whatever level of support they provide.

Other people disagree about what the essence of a guarantee is, and oh man wouldn't you like to see that litigated?

Elsewhere, is private label mortgage-backed securitization dead or just resting? Don't miss the chart, which sure looks dead. And Pimco has bought all of the bonds, there are no more bonds, so now it's writing credit default swaps instead.

Some markets stuff.

Humans are trading stocks for some reason. I guess the reason is that the algorithms are so touchy, and if you try to buy a lot of stock from them they rapidly adjust their prices upwards. So you gotta find another slow-moving human to sell you stock. The theory here is something like:

  • In the one second that you want to buy stock, demand greatly exceeds supply and the algo-determined price goes way up.
  • In the one (different) second that someone else wants to sell stock, supply greatly exceeds demand and the algo-determined price goes way down.
  • If you can somehow get on the phone and align your seconds, then you can just trade at the price that balances supply and demand, and avoid the algos entirely.

Something something market efficiency. But if you were worried that markets were rigged because of rapid order cancellations, here is a debunking. Elsewhere, a permabear is bearish. And you know who is good at market timing? Barack Obama.

Some news junior bankers can use.

Morgan Stanley is raising associate and vice president (but not analyst?) salaries "by about 25 percent as part of an effort to improve working conditions and retention," and it is pleasing to me that when investment bankers think about how their working conditions could be improved, their first thought is "well more money obviously."

In other working-condition-improvement news, I can't really advise junior investment banking employees who are sick of building discounted cash flow models to just outsource them to random people on the internet. On the other hand Thinknum looks sort of fun to me. Try it for yourself; here's what Thinknum thinks of Herbalife, for example, though they don't seem to have an all-or-nothing-battleground model yet.

Some scams.

Here Peter Henning considers the difference between puffery and, like, real fraud, but the main (but not legal advice!) takeaway for everyone everywhere is, don't organize your life around being able to say "but we were lying to sophisticated investors." I mean, maybe it's fine, but nobody's exactly going to like you for it. And here is John Lanchester, who doesn't really trust anything anyone says about finance, which is how you know he's sophisticated; that and that it's in the New Yorker.

Elsewhere Phil Falcone's former chief operating officer will be spending some time away from the securities industry for letting Falcone borrow a bunch of money from his gated hedge fund in fishy circumstances. Smith & Wesson bribed Pakistani police officials with guns to get them to buy more guns. And this story about the collectibility of the Yukos arbitration judgment (good luck!) ends with an absolutely terrifying paragraph, so that's super.

Too correlated to fail.

There's a new too-big-to-fail subsidy study coming, but here's a Minneapolis Fed paper about herding that seems more interesting. Here's the premise:

Policymakers do not intervene when big banks are threatened simply because those banks are too big. Rather, they intervene because the potential systemic costs resulting from bank failure are considered too big

Which means that if you are a bank your best bet is to do what everyone else is doing, because if it's right then that's good, and if it's wrong then you can say "it's not my fault, the system collapsed, bail me out!" Whereas if you're a contrarian and you fail, you fail by your lonesome. This is true of every aspect of life, of course, but you can model it more formally in bank bailouts. (Via.)

Things happen.

"Rational arbitrageurs should be earning money in the future and spending it in the past." Bank of Gamestop adds products. The banker's oath. This American Lear. Factory rye. Hipster on Leash Walked by Man on Segway in Williamsburg.

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    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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