Levine on Wall Street: Breadsticks and Batteries

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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Debating the future of Olive Garden.

Activist hedge fund Starboard Value has a lot of detailed operational suggestions for Darden Restaurants:

For instance, Starboard says there is $4 million to $5 million in wasted food that could be saved by being strict with an Olive Garden policy that gives each diner one breadstick, and only more if requested. Starboard was clear, however, that Olive Garden wouldn't get rid of the popular never-ending breadsticks offer, but instead wait to be asked, in an effort not to waste.

Starboard also wants more focus "on being authentic Italian," including one slide "noting that it had learned Olive Garden no longer put salt in the water for its pasta." This gives me an excuse to link to my all-time favorite piece of business journalism, also in the Wall Street Journal, also about Olive Garden, which features the president of Olive Garden saying "We don't use the word 'authentic.'"

Here is Starboard's deck, which also makes fun of Darden's lavish headquarters and points out (slide 99) that Darden's corporate executive chef reports to the executive vice president of marketing: "Why is Culinary subservient to Marketing?," asks Starboard, but you can figure it out. The breadsticks are slides 104 and 105, the pasta water is slide 164, and don't miss slides 142 to 149, on alcohol, or slides 167 to 169, comparing dishes on Olive Garden's website to pictures in the actual restaurants. On the other hand (slide 115), Starboard wants Olive Garden to stop making soup from scratch and just truck it in "and add a few ingredients in the restaurant," so it's a culinary mixed bag. But any proxy fight fought over the candidates' culinary credentials is a good proxy fight in my book.

Pondering the future of Radio Shack.

"Our ability to generate cash from operations depends in large part on the level of demand for our products and services" is both boilerplate and tautological but it's sort of poignant coming from Radio Shack, no? You can't write about Radio Shack without mentioning that famous Onion article, but the amazing thing is that article is seven years old. Radio Shack has baffled the world for far longer than anyone would have thought possible in 2007, and while it is currently "working with creditors and other parties to get more capital and avoid bankruptcy after posting another quarter of mounting losses and plunging sales," I have trouble imagining that this is the end. Why now and not years ago?

Wilmington Trust hid a bunch of bad loans.

Oh man, remember 2009?

According to the SEC’s order instituting a settled administrative proceeding, Wilmington Trust omitted from its disclosures in the third and fourth quarters of 2009 approximately $338.9 million and $330.2 million, respectively, in matured loans 90 days or more past due. Instead, it disclosed just $38.7 million in such loans for the third quarter and only $30.6 million in its annual report following the fourth quarter.

Here's the Securities and Exchange Commission's order. The trick is that if a loan comes due and then isn't paid back then that's bad. But if a loan is extended, well, then, it's current and there's no problem. So Wilmington Trust would just "internally approve" a lot of loan extensions on the last couple of days of each quarter, whether or not they ended up being extended, so it didn't have to report that it had so many bad loans.

One model of hedge fund manager fees.

It's this: Some people are exceptionally good investors and charge a lot of money for it. Others take advantage of the "compensation scheme masquerading as an asset class" thing and charge the same amount of money for not being so good at investing. If you are a fund-of-funds manager who is paid a lot of money to help institutional investors invest their money in hedge funds, one thing you could do is steer their money to the good hedge funds that are worth what they charge, and keep away from the bad hedge funds that aren't. Or you could just complain publicly that hedge fund managers "should not be remunerated for doing nothing," but you are the one remunerating them. Just stop doing that! Elsewhere, Third Point raised "$2.5 billion in fresh cash from investors in just two weeks," and Anthony Scaramucci is moving his fund-of-funds from CNBC to Fox Business.

Just lever up your bonds a bit.

So says Bill Gross:

“It’s probably a good time to lever in a mild sort of way,” Bill Gross, who co-founded Pacific Investment Management Co., said in a television interview today. For the next three to five years, investors should expect “the ability to borrow short and to lend long, much like banks do.”

There is a mild debate these days over whether big asset managers should be regulated by the Fed as too-big-to-fail entities. The argument against is: Well, asset managers are pretty much all equity-funded and not susceptible to bank runs, so even if they're enormous they don't pose the sorts of systemic risks that banks do. It's not like they borrow short to lend long or anything.

Some market structure.

JPMorgan is worried about the credit quality of clearinghouses: If you shift all derivatives trades to a clearinghouse model, then you reduce the risk of one counterparty (AIG) secretly taking on too much bilateral derivative risk and blowing up the financial system, but you increase the risk that a blow-up of a clearinghouse will be really bad. And clearinghouses don't have all that much incentive to capitalize themselves. Elsewhere, here is a law review article on maker-taker and securities fraud.

Scottish independence.

It will apparently be bad for banks, but good for lawyers, which seems appropriate for the times we're living in.

Things happen.

"CEOs who finish a marathon in a given year are associated with a significantly higher firm value." Alibaba's underwriters bought Jack Ma a birthday present. The SAC Capital insider-trading prosecutors won a major award. It's okay for BGC Partners to pour water on its traders. "The startup that took home $50,000 is called Alfred because the last tech bubble already took Jeeves." "[A] world where two young, well-educated kids from Westchester can start a media company with little more than a Goldman bonus, contributions from well-off family, friends and VC firms, and some talking points." Possibly lagging indicator: CS 50 overtakes Ec 10 as Harvard's biggest course. Safety schools, ranked. "Your mother uses the internet." Apocalypse Pooh. Dog Horoscope Writer Needed.

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 editors on this story:
Toby Harshaw at tharshaw@bloomberg.net
Toby Harshaw at tharshaw@bloomberg.net