Levine on Wall Street: Complicated Banks and Annoying Activists

Would you be surprised to learn that Banco Espirito Santo did some dodgy stuff? That Carl Icahn is annoying? That banks dislike the Volcker Rule?

Banco Espírito Santo was ... let's say complicated.

There is some pretty great stuff in this Wall Street Journal story about failed Portuguese bank Banco Espírito Santo and its friends at "a small Swiss financial company now called Eurofin Holding SA," which was once partly owned by Espírito Santo. It's hard to quote but here's a chunk:

Eurofin also helped manage two British Virgin Island-registered investment funds, called EG Premium and Zyrcan. The two funds regularly bought and sold assets and lent money to one another, as well as with Espírito Santo entities, according to internal fund documents. Internal Zyrcan spreadsheets referred to certain counterparties simply as "our friend," which the former executive said was a reference to Espírito Santo.

The former Eurofin executive said the two funds' largest investors were Espírito Santo-owned companies.

In the summer of 2009, Banco Espírito Santo issued so-called zero-coupon bonds with a face value of about €1.8 billion. Zyrcan was the only buyer, and it quickly sold the bonds at prices double or triple what it had paid, according to trading records. A Zyrcan affiliate said in a letter at the time to an intermediary bank that it hoped to profit by selling the bonds in several batches "to clients of Banco Espírito Santo, Lisbon."

What? Espírito Santo sold its debt to funds owned by Espírito Santo, which then sold it on at a huge profit to clients of Espírito Santo? No part of that is a great look. The suggestion of client-stuffing is bad, but, given what's happened to the bank recently, the story of placing Espírito Santo's debt with funds owned by Espírito Santo is probably even worse.

Carl Icahn's win for activism may have been less of a win than he thought.

When Family Dollar announced that it was being sold to Dollar General, Carl Icahn claimed victory, as an activist shareholder of Family Dollar that had pushed it to sell itself. Seems reasonable enough. But Family Dollar filed its proxy this week, casting some doubt on that narrative. For one thing, Family Dollar had been talking to Dollar Tree months before Icahn announced his stake and demanded a sale. Ronald Barusch points out that Icahn's public pressure for a sale could not have helped Family Dollar's negotiating position. For another, Family Dollar talked to Dollar General, as a possible higher bidder, and were rebuffed because Dollar General "would be reluctant to participate in the negotiation of a transaction with Family Dollar if Mr. Icahn were to have a role in or control over the process." Oops! Pestering management may make them sell, but it doesn't necessarily encourage other managers to buy.

There's less repo funding.

What if I told you that banks are taking on less short-term secured debt, that hedge funds are using less leverage, and that money market funds have fewer places to invest? If you're a bank, a hedge fund, or a money market fund, you'll probably be sad about those things, but financial-stability worriers will think all of that is just peachy. So the repo market is shrinking due to leverage requirements and general regulatory discouragement, and complaints about that are falling on pretty deaf ears:

New rules are "a constraint, but one that facilitates financial stability in the long run," said Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig.

There is a theory that banks' "reluctance to facilitate huge amounts of repo activity is contributing to increased volatility," but, I mean, if you're dampening volatility with short-term leverage, is that really what you want to do?

Banks would like to delay the Volcker Rule.

The part of the rule requiring banks to get rid of their investments in private equity and venture capital funds is apparently causing agita at "smaller regional banks that own stakes in the funds" and that forgot to do anything about those stakes before the Volcker Rule goes into effect next summer. (The big banks mostly have plans.) On the one hand, this is dumb: The small banks have had years to figure out what to do with their private equity investments; they still have a year to divest them ("at fire-sale prices"? meh); and they're asking for "a reprieve of up to seven years," which in financial regulation might as well be a millennium. Also the banks' congressional allies have heard "concerns ... from startups and other firms in Michigan," and convincing startups in Michigan that they'll be harmed by regional banks divesting their venture capital fund holdings is quite a trick of meta-lobbying. But on the other hand, it is very difficult to imagine how financial stability could be endangered by regional banks holding stakes in venture capital funds. So you can see why the Fed might be receptive to these otherwise silly concerns.

A nice side effect of economic sanctions.

Is that the sanctions-enforcement staff get high-paying jobs at the banks and other companies that have to comply with the sanctions. I guess it's pretty unlikely that the U.S. is actually imposing sanctions on Russia and Syria to help the employment prospects of Treasury staffers, but you could see how this might create incentives for complexity. We've talked before about theories of the regulatory revolving door, and whether or not you buy the theory that the revolving door actually encourages strict and complicated regulation, it's at least hard to see how this revolving door would encourage lax or captured regulation. It's pretty strictly the other way: The more sanctions you impose, the more money you can make.

Another former Bill Gross lieutenant is outperforming Bill Gross.

This one is Marc Seidner, who left Pimco for Grantham Mayo Otterloo & Co just before the public unpleasantness began, and who is up 6.05 percent this year versus Bill Gross's Total Return Fund's 3.16 percent. Seidner is not alone -- 77 percent of Gross's peers are outperforming him, as are most of his current lieutenants -- but he at least will talk on the record about his objections to Gross's strategy. Gross, for instance, is very publicly selling volatility, while Seidner says the thing about the pennies and the steamroller that you say when you don't want to sell options.

Towards one Frannie.

It is pretty weird that Fannie Mae and Freddie Mac are both essentially instrumentalities of the government for guaranteeing mortgage debt, but they each issue their own securities that are not interchangeable with each other. Now there's a proposal from their regulator to change that, boringly called the "Single Security project." I suppose if you're a disgruntled shareholder of Fannie or Freddie who wants them to come back to the markets as privately owned companies, this sort of consolidation of their quasi-governmental function might worry you a bit.

Things happen.

The Caesars debt restructuring has entered the flurry-of-lawsuits phase. The Securities and Exchange Commission has its doubts about alternative mutual funds. Jeff Gundlach might buy the Buffalo Bills. Banks think foreign exchange traders should have to be ethical. "Bieber-backed selfie app holds promise: CEO." People are spending less money on Candy Crush than they used to, "but chief executive Riccardo Zacconi denied that its disappointing results reflected the end of the casual-gaming boom, citing the success of a rival title featuring Kim Kardashian." Food science is "producing wonders like the peaceful coexistence of crunchy flakes and chewy raisins in one bag." Jack in the Box cronuts.

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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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