Levine on Wall Street: Big Banks and Nice Banks

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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Jefferies is nice.

This memo. This memo. Rich Handler and Brian Friedman, who run Jefferies, have some advice for their vice presidents, senior vice presidents, and managing directors. Here's how it starts:

As an officer of Jefferies, each of us sometimes feels we carry the weight of the world on our shoulders to satisfy the needs of our ever more demanding clients, higher ups within our firms (yes even the two of us report to the Board of Directors), and all of the life pressures that define us as we raise our families, try to be the best spouses and partners possible, and lend assistance to the friends, charities and all others who are not as fortunate as we are.

Get past the grammatical debacle and you'll notice that they seem to be saying (though it's a little ambiguous!) that vice presidents are officers, a piece of extrinsic evidence that Sergey Aleynikov's lawyers would do well to keep in mind. The thrust of the memo is: Be nice to analysts and associates. Wait, to whom? Can you explain who we're talking about here?

You see them around the trading floors, in the investment banking and research bullpens, and throughout offices such as Jersey City, London and Los Angeles. They are the youthful faces, with fresh attitudes, incredible work ethics, and an unbendable desire to help add value, make a difference, learn, and begin building their own careers.

Wait we have an office in Jersey City? But also: "an unbendable desire to help add value"?

Get to know our young folks as our potential long-term partners. Take an interest in where they grew up and the school from which they recently graduated.

Okay fine that's sort of nice, but in the most generic possible way. "You went to Wharton? I also went to Wharton. Good talk."

Ok, “back to school time” or “done with school time,” whichever it is, we all know what time of year it is for all of us at Jefferies -- time for the home stretch on fiscal 2014. We have finished nine months that add up well and we have never had more momentum or opportunity. We all feel it and are living it. Three more months and we enter fiscal 2015 (if that doesn’t make you feel old, nothing will).

Guys what on earth. Imagine sitting down to write a memo to your officers saying "hey, let's try to be humans," and then confessing that you measure out your life in fiscal years. It's not quite the effect they were going for.

Big banks will need more capital.

Here is Daniel Tarullo's prepared testimony about bank capital and liquidity regulation; here are Bloomberg News, the Wall Street Journal, and DealBook. One key point is that big U.S. banks will get a bigger bigness surcharge than Basel rules require, which feels sort of finger-in-the-air to me; my two reasonably confident predictions about the bigness surcharge are (1) it will cause big banks to shrink some marginal businesses but (2) it will not cause any of them to break up. On the other hand, "the surcharge formula will directly take into account each U.S. GSIB's reliance on short-term wholesale funding," and increasing capital requirements based on short-term wholesale funding is an important thrust of the proposals generally. That seems right, right? If your funding is not prone to runs, then you don't need that much capital. (Ask MetLife!) If it is, you do. Basing capital requirements entirely on asset risk, and not at all on funding risk, seems weirdly blind to what actually happened in the last (in every?) crisis, so this seems like a good step.

What's up with Scotland?

I sure don't know but here is an excellent roundup from Guan Yang, covering everything from prospective currencies to prospective national anthems. John McDermott went to Yestival. Paul Krugman is pessimistic on the currency question. Here is a Bloomberg QuickTake, and a Voxsplanation. Apparently if Scotland leaves, the rump UK will be more Tory, and also the weather will change.

Coke only got 49 percent support for its compensation plan.

Remember that vote where Warren Buffett abstained because Coke was paying executives too much, but he didn't want to rock the vote, and the compensation plan ended up passing with 83 percent of votes cast? Well, when you count other abstentions, it only got 49 percent, which is not legally meaningful but is sort of embarrassing. "Coca-Cola believes that the shareholders are there just for their convenience," says the leader of the opposition to the plan, and what else would they be there for? Elsewhere, New York University is not the greatest advertisement for Marty Lipton's governance theories.

CoCo CDS.

The best part of this job is that when I confess in this linkwrap that I don't get something, someone writes in to explain it. So let's try that here: I don't get CoCo credit default swaps.

The securities, known as contingent capital bonds or CoCos, convert to equity or are written down after a bank breaches preset capital ratios. Bondholders are eager to be able to hedge against losses on the riskiest notes because the market is forecast by UBS AG to grow to $80 billion in Europe by the end of the year.

“Tier 1 CoCos are already a big market and there’s much more to come, so it makes sense trade CDS on this,” Willemann said. “There might be initiatives to look at Tier 1 CoCo CDS next year.”

The point of CoCos, as I understand them, is to make some of banks' fixed-income funding providers internalize the risk of that funding and charge for it appropriately. The idea here is ... what? Investment fund buys 7 percent bank coco, spends 5 percent on CDS, gets a risk-free return, meanwhile some bank or insurance company or hedge fund is taking the credit risk on the bank's contingent capital without outright owning it? I mean, fine, that's how CDS works. I guess I get it. You want hedge funds to buy the CoCos against CDS to arbitrage prices to correct levels blah blah. But CoCos are designed to make it easier for banks to write down debt with predictable and non-disastrous consequences: to impose losses on identifiable investors who knew going in that they were taking that risk. Separating the CoCos from their risk seems like a step back from that.

Some SEC enforcement.

Here is a Securities and Exchange Commission action against a small hedge fund for (allegedly)

  1. misusing soft dollars to pay its own employees, and day-trading inefficiently to generate those soft dollars; and
  2. window-dressing by bidding up its thinly traded largest holding on the last day of every month, for like 28 months.

So don't do that. And why didn't the SEC investigate Detroit for its pension disclosures?

Which Hedge Funds are Most Skilled at Picking Stocks?

A bunch of funds you've never heard of, mostly, so what have you learned?

Things happen.

"Trump Entertainment Plans to File for Bankruptcy Again" but I don't think Donald Trump has anything to do with the company any more; his name alone is enough to provoke bankruptcy. Dave & Buster's will try an IPO (again). The big FX probe is surprisingly narrow, but there's "evidence of criminal behavior following an investigation into banks’ alleged manipulation of ISDAfix." There's still a high-frequency trading lawsuit against the stock exchanges. Here's a strange feud between consultants. Some lawyers want corporate disclosure to be less lawyer-y. Some people are in a hurry to get out of Point72 Asset Management. Alibaba and cash on the sidelines. There's a CLO surge. Strange work. Make up your job title. This is a duckblur.

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