Levine on Wall Street: SIFI Insurers and Circus Markets

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Met Life is a SIFI-ish.

The Financial Stability Oversight Council voted yesterday that MetLife is probably a systemically important financial institution, which if finalized would subject MetLife to some capital-rules-to-be-named-later. MetLife strongly disagrees, in the form of this non sequitur:

MetLife is not systemically important under the Dodd-Frank Act criteria. In fact, MetLife has served as a source of financial strength and stability during times of economic distress, including the 2008 financial crisis.

The problem is that the term is sort of intended to mean "systemically risky," but actually says "systemically important," so you have MetLife saying things like "we're not important, we're just a source of strength and stability." And on the other hand you have the FSOC designating insurers based on their size, with "little consideration given to the probability of events that could endanger" them, as John Carney puts it. Will there be a run on MetLife's short-term debt, requiring it to sell off assets and bringing down the financial system? Umm. It's an insurer. So probably not? But of course that (in the form of collateral calls on derivatives) is exactly what did happen to AIG, so you can see why insurers make the FSOC nervous.

Blame high-frequency trading.

"This is a circus market rigged by HFT and other algorithmic traders who prey on the rational behavior of warm-blooded investors," says a man who was paid good money to run an emerging-markets equity hedge fund. (Emerging markets!) He's quitting because he keeps losing money -- "posting losses of 7% in 2012, 15% in 2013 and 4% through midyear this year" -- in a world where pretty much every stock market is going up. More of his letter is here and it is just an amazing document, blaming all of the usual conspiracy-theory suspects. If you are an asset allocator and you get a letter like this from a hedge fund manager whom you've trusted with your money, you should re-think your career choices. A taste:

With yields ZIRPed and alpha dead, beta and the ethereal pursuit of “market-” and theme-driven (social media, bio-tech, Chinese internet) returns have become the only game in town, with central banks as the arbiter.

It's the eternal question: Is alpha dead, or is it just not returning your calls? Elsewhere apparently people at algorithmic trading firm KCG Holdings are not happy, and one high-frequency trading firm (HTG Capital Partners) is suing another one (Allston Trading) over an alleged "pattern of canceled bids and offers meant to mislead other traders into moving prices favorably for Allston." And "Goldman Sachs: Why Stock Pickers Have Suffered a Really Bad Year."

Ooh a new Argentina plan.

Argentina's finance secretary is in New York meeting with investors, and "gauged investors’ interest in the government’s plan to swap its overseas bonds into securities governed by Argentine law"; one imagines that the gauge was low. But here is Joseph Cotterill on a new plan to replace the trustee on Argentina's New York-law bonds with a local trustee, without actually changing them into new Argentine-law bonds. For investors, this has the advantage of being temporary; if and when Argentina resolves its holdout dispute, the bondholders can vote to go back to a New York trustee and won't have given up any of their legal rights under the New York bonds. I'd imagine that Bank of New York would not want to stand for re-election at that point, though. It's been through a lot. Elsewhere, the International Monetary Fund "is moving closer to formalizing standards that would give it the option to require private-sector bondholders to share the financial burden when countries with serious debt problems seek assistance from the fund."

And a new Libor plan.

Here is Fed Governor Jerome Powell on "Reforming U.S. Dollar LIBOR":

First, U.S. dollar LIBOR needs to be updated to reflect current practices in unsecured funding markets and to be better anchored in actual transactions. Second, and equally important, regulators need to work with market participants to encourage them to develop and adopt alternative reference rates that better reflect the current structure of U.S. financial markets, in which borrowing and derivatives transactions are much more likely to be secured with collateral. Going forward, these alternative rates could replace LIBOR as the reference rate for new interest rate derivatives and some other contracts denominated in U.S. dollars.

And a new Twitter plan.

I don't know you but I assume that you're a normal person with a professional job and you're not spending your whole day on Twitter, whining every time they tweak the format. But I'm a journalist. So I spent much of yesterday whining because Twitter's chief financial officer -- a former Goldman Sachs banker who is not much of a Twitter user himself -- announced that Twitter has decided to adopt most of the things about Facebook that make everyone on Twitter hate Facebook. I was not alone in my whining. Jamelle Bouie:

Twitter doesn’t seem to understand why people like Twitter.

On the other hand Matt Yglesias has a point:

Why would they want to ruin twitter by making it work more like a dramatically more successful service?

Perhaps the way to say it is that Twitter doesn't understand why people like Twitter, but also doesn't care. As a profit-maximizing entity -- which, in an ad-supported world, means a number-of-users-maximizing entity -- its problem is to figure out why the people who don't like Twitter could be convinced to like it. There's no sure answer, but "they'd like it if it were Facebook" at least has some empirical evidence in its favor, in that people keep using Facebook. (Put it another way: If Twitter became Facebook overnight, and Facebook became Twitter, today's Twitter users would like Twitter less, but Twitter the company would be thrilled.) It's reminiscent of the "mere addition paradox" in ethics, which worries that utilitarians would prefer a larger miserable population over a smaller but happier one. Twitter seems to be opting for size and misery.

Things happen.

That JPMorgan hack really does seem to have come from Russia. The SEC is looking into mutual fund payments to brokers. The UK is suing Europe to be able to pay bankers more. Jérôme Kerviel is getting out of prison. But bitcoiner Charles Shrem is probably going to prison. (As is Mathew Martoma, obviously.) Bob Diamond is doing things in Africa. Academic Economists vs. Financial Analysts. Millennials are poor, like increasing numbers of Americans; perhaps they should go to college. "Do what you gotta do. I'm not going to school." "The Milky Way is a suburb (no wonder it has good ethnic food)."

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

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