Levine on Wall Street: Project Linkwrap

Taylor Swift fans at Apollo, just the usual fraud at JPMorgan, sovereign bankruptcy, bond makewholes, B corps, no-doc mortgages, cat mortgages, and telepathy.

There's at least one Taylor Swift fan at Apollo.

There is much to love in this Wall Street Journal A-hed about investment banking codenames, but let's not skip lightly over the fact that Apollo did a deal codenamed Project Swift "inspired by a private-equity associate's fondness for singer Taylor Swift." (The video clip says "... inspired by a private-equity associate's crush on Taylor Swift.") At Apollo! Amazing. Anyway, "Goldman Sachs Group Inc. now requires bankers to use name-generating software that offers 10 random options like Project Calculator or Project Daniel," which is surely the dumbest use of automation in finance yet. Coming up with good codenames -- starting with the same letters as the companies involved, evocative of their businesses, thematically linked, yet secret -- is an important test of a young banker's skills. Really it should be a banking interview question. "We are working on a deal with Burger King to buy Tim Hortons, with financing from Berkshire Hathaway; please devise a system of codenames for this deal and the parties involved." Harder and more useful than building a discounted cash flow model.

Just the usual fraud.

After being infiltrated by hackers, JPMorgan "hasn’t seen unusual fraud levels," and it amuses me to think that there are usual fraud levels at JPMorgan. On the other hand, "some data related to customer accounts was affected, as was some login information for high-ranking J.P. Morgan employees." I still don't really understand what was going on here:

Retracing the hackers’ steps, investigators found layers of malicious software designed specifically to compromise unique parts of JPMorgan’s systems. That allowed the hackers to harvest data beyond just customer passwords and account information.
They extracted the data slowly, over days and months, evading security alarms designed to catch stolen data leaving the network.

I guess the slow-roasted artisanal data extraction gives them some hipster credibility (one guy says it shows "what a truly dedicated team of attackers can accomplish when they set their minds and their money to it"), but, again, why not take money? Anyone else who spends months at JPMorgan gets paid for their trouble -- Jamie Dimon "said in April that the firm expected to boost yearly spending on cybersecurity to about $250 million by the end of 2014" -- so why not these guys?

Oh hey sovereign bankruptcy.

"The International Capital Market Association, whose members include banks, investors and debt issuers, has created fresh clauses for inclusion in sovereign debt contracts that will give countries the option to bind all investors to decisions agreed by the majority." You can see why this is timely -- well, too late, but much discussed, anyway -- as analysts worry that Argentina will run out of foreign reserves thanks to the successful efforts of its minority of holdout bondholders to block payments to the majority of bondholders who accepted a restructuring but couldn't bind everyone. Here, from FT Alphaville, is the ICMA's proposed pari passu provision, which really could have helped Argentina out if it had used it a few decades ago.

You don't get a makewhole if your bonds are cashed out in bankruptcy.

This seems obviously right to me, though evidently not to the distressed debt community, so go ahead and tell me why I'm wrong. If you have non-callable secured bonds paying 20 percent interest, and the issuer goes bankrupt, your claim is for the par amount of the bonds, and if you get back par you don't have any right to complain about missing out on the future interest. Even though it's a lot of interest. If those bonds were callable at par, ditto, obviously. But Momentive Performance Materials had bonds callable with an interest make-whole, and the bondholders thought they should get the makewhole in bankruptcy. They did not. Seems fine, right? A bond callable with a makewhole should be less valuable than a bond that is not callable at all; why should it be more valuable in a bankruptcy?

B Corps.

Annie Lowrey has a column about Jessica Alba's company, The Honest Company, "a maker of eco-friendly baby products" that is incorporated as a B corporation. B corps "are open about the fact that they will not maximize profits at the expense of their social or environmental missions," and one of their boosters says "Milton Friedman would have loved this." I do too: In my view, a corporation's relationship with shareholders is based on an incomplete but nonetheless negotiated and negotiable contract, rather than simply "the shareholders own the corporation and it should do whatever makes them happy." So if people want to start companies with unusual relationships with their shareholders, whether that's dual-class voting or social missions, then that's great. My one quibble is that the B Corp. concept may obscure the fact that regular corporations aren't actually required to maximize shareholder value either. Lowrey:

Take the infamous case of Ben & Jerry’s. In 2000, the publicly traded ice-cream-maker sold out to Unilever, the Anglo-Dutch food and home-goods conglomerate. Even though there were provisions to maintain the company’s hippie ethos, the deal troubled its Wavy Gravy-loving customers. But the firm did not have much of a choice: The sale maximized shareholder value, and the company needed to maximize shareholder value.

That is, let's say, a controversial claim about corporate law. 1 But if you think that the purpose of the B corp is to allow companies to do things other than maximize shareholder value, that might also drive you to think that regular corporations can only maximize shareholder value.

No-doc mortgages.

Here's a fascinating story about banks and credit unions that give mortgages to undocumented immigrants. During the boom this was a bigger business -- Citigroup and Wells Fargo were involved -- but since the collapse it's mostly "community-based and niche lenders" (though also Citi a little). Lenders can't really sell these mortgages: Fannie and Freddie won't buy them, and just imagine the eventual fraud complaint about how you sold mortgages without checking whether the borrower was legally present in the U.S. On the other hand, these loans apparently perform better than those given to legal residents.

Things happen.

Detroit got an exit loan. KPMG maybe missed some fraud at Esprito Santo. And somebody had better figure out the fraud at Hypo Alpe-Adria-Bank. There are a lot of corporate bond deals coming next month. There are a lot of CLO deals getting done this year. How should CoCos be sold? Oh hey there's telepathy (via). Children's standing desks. Coffee naps. Cat mortgages. Taylor Swift Song or Positive Integer? I Spent an Afternoon at Burning Man’s Camp Dogecoin.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

  1. Here is an argument that Ben & Jerry's was not required to sell. Here is an argument that it was, or at least that it thought it was. Lynn Stout's "The Shareholder Value Myth" makes the case for ... well, pretty much what it sounds like. "Delaware cases have made clear that, as long as a public corporation intends to stay public, its directors have no Revlon duty to maximize shareholder wealth," says Stout. That's why boards can (sometimes) fend off hostile takeovers.

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

Before it's here, it's on the Bloomberg Terminal.