Levine on Wall Street: Independence and Indemnification

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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Scotland is a mess.

I suppose there are economic and political arguments on both sides of the Scottish independence question, but the overwhelming all-purpose financial argument is pretty much "don't change complicated things because you never know what will happen." Here, for instance, is the head of Scottish Financial Enterprise, a financial services trade group, on the referendum:

Politics is determining this choice and not the interest of our industry.

Imagine a nation deciding its political future based on politics rather than the interests of its financial industry! But, yes, it'll be a mess. Scottish banks will have to plan for all sorts of uncertainties. The pound will plunge, or is plunging. Scottish-law bonds will ... umm ... have some new Scottish law to deal with probably. I hope Elliott Management or someone has a clever scheme worked out to play this separation.

Poor Mathew Martoma.

A lot of the ring of SAC-Capital-related insider traders seem to me to have been convicted on pretty shoddy evidence, but then there is Mathew Martoma. He sure seems guilty, and since his insider trading seem to have saved SAC some $275 million, his sentencing today is going to be very unpleasant. Insider trading sentences are pretty much entirely determined by how much money you made, not your level of culpability, and $275 million is a lot of money. (How much money you made for yourself is irrelevant, incidentally: If you tip someone off in exchange for a steak dinner, and he trades and makes $50 million for himself without telling you about it, you're on the hook for the $50 million.) The Wall Street Journal has a good roundup of concerns about that system, and about the uncertainty of judges maybe following that system and maybe not, though the general barbarism of sending people to prison for decades for nonviolent crimes is mostly unexamined background here.

Go ahead and commit crimes at JPMorgan.

Here's Gretchen Morgenson on Goldman Sachs's indemnification provisions (which we discussed here), which are ambiguous on whether Goldman will pay for a vice president's legal defense. Morgenson points out that "the corporate bylaws of other banks definitively state which employees will have legal fees covered in the course of their duties." JPMorgan's bylaws cover any "director, officer, or employee"; Morgan Stanley's are more like Goldman's, though perhaps they do clearly exclude VPs. As far as I can tell JPMorgan indemnifies not just every VP, but every, like, bank teller, though of course if you're found not to have acted in the scope of your duties, etc., you have to give the money back. Really banks should use this difference as a recruiting tool: "Come work for us, we'll pay your legal bills when you inevitably get sued, unlike the other guys."

Are you keeping receipts for your Seamless meals?

In law school, you learn that if your employer provides you with free meals, that's generally taxable income and you probably have to pay taxes on it, with some exceptions. Then you go work for a law firm or investment bank and get a meal allowance for your constant Seamlessing, and no one -- not even the tax lawyers -- seems to think that that's taxable compensation. This is a puzzle that is far beyond my comprehension, but apparently the IRS is looking into free meals at Google, and here is a sentence:

The rules may address the unusual legal question of whether employees at the Googleplex in Mountain View, Calif., are more like New York office workers who can duck out for lunch or akin to lumberjacks in a remote logging camp who need to have food trucked in.

The isolated warlike tribe of floor traders.

There is a small but delightful body of anthropological research on the financial industry, and here is a strong entry about a London School of Economics sociologist studying the floor traders on the New York Stock Exchange "on late-night trips to lower-Manhattan bars, fishing excursions and jaunts to a surfer-themed restaurant on Long Island." He learned about their strange customs, and their strange lotions, and will miss them when they go extinct:

When Mr. Beunza started his research, the floor felt like "a very masculine place," he says. "A coat check for shoes. Lots of paper on the floor. Various types of lotions in the men's restroom. It used to be more of a club." The vibe is less frenetic now. Many traders have lost their jobs.

Doubling down.

Here's a fun paper by Jonathan Rhinesmith at Harvard; it's from June but I just saw it now (via Matthew Boesler) so whatever. He observes that "when investment fund managers 'double down' on positions that have run against them, they outperform." But this is not just mean reversion; roughly speaking, it's that fund managers won't double down unless they're really sure that they're right:

My results are consistent with a career risks mechanism for this phenomenon. By adding to a losing position -- the opposite of window dressing -- managers are making their losses particularly salient. I demonstrate in a panel regression that investment managers avoid adding to losing positions. Furthermore, managers outperform by more when they double down after greater past losses in a position. These findings suggest a position-level limits to arbitrage effect. Even when an asset decreases in price for non-fundamental reasons, some of the investment managers with the most relevant knowledge of that asset may be particularly hesitant to add to their positions because they have already suffered losses in that asset.

The strange fact is that "being really sure you're right" does seem to correlate with being right.

Things happen.

The Alibaba roadshow kicks off today. Tax inverters are unlocking $21 billion in trapped offshore cash. But Chuck Schumer wants to limit deductions for inverted companies, retroactive to 1994. "A benchmark is to price what a credit rating agency is to quality." Amazon's business model. And Olive Garden's. And law enforcement's. Annual income $200,000, annual expenditure $300,000, result misery.

  1. And will no doubt plunge further if an independent Scotland, as expected (by some people!), adopts bitcoin as its currency.

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