Levine on Wall Street: IPOs and Post-Its

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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Alibaba is public now.

But what does it all mean? Well, for one thing it means that Jack Ma is quite rich; the value of his stake went up by about $5 billion on the first day of trading, so he's probably not sweating too much the fact that the initial public offering was in some strict sense underpriced. And Alibaba now has lots of money and may start buying stuff. Also the greenshoe was exercised, "officially making it the biggest initial public offering ever." Does it mean that the IPO window is closed? No, say some IPO consultants and stock exchanges. And what does it mean for Yahoo? On Friday, as Alibaba was up by 38 percent, Yahoo was down by 2.7 percent, leaving it worth negative $11.6 billion, depending how you count. One way to count: Yahoo owns about 400 million shares of Alibaba, so every time Alibaba goes up by a dollar and Yahoo remains flat, Yahoo's non-Alibaba business is worth $400 million less. On Friday, Alibaba went up by over $25 a share, and Yahoo was down a bit, meaning that Yahoo's business somehow lost $10+ billion of value in a day. Capitalism is amazing!

That Post-it guy.

A while back I gave you a straightforward game-theoretic explanation of how to insider trade; the idea is that you need an insider (to provide information) and an outsider (to trade), who ideally won't know each other, will communicate only in person to avoid electronic monitoring, and will communicate by writing on and then eating Post-its to avoid wiretaps. And of course you meet at noon under the clock at Grand Central, because if you don't know each other and can't communicate, then that is the midtown New York Schelling point. Anyway the guys who did that got caught a while back, and on Friday prosecutors finally charged the guy who actually ate the Post-its. He "has agreed to forfeit $1 million and a 2008 Audi Q7 automobile as part of his guilty plea," but will probably get a lesser sentence than his co-conspirators, both because he is cooperating against them and because, come on, he ate Post-it notes, cut him some slack.

What do you think about bank ethics and culture?

Come tell the New York Fed on October 20; they're dying to hear what you have to say. Not really, but they will be holding a conference on ethics and culture that day. Elsewhere in bank ethics and culture, hoo boy. "At least 75 per cent of advisers" in Australia cheat on the incredibly easy financial-advising licensing exams. Goldman's response to a Libyan Investment Authority lawsuit "lifts a veil on techniques deployed by the company and other western financial institutions to win and deepen client relationships with the $66bn sovereign wealth fund -- techniques that law enforcement agencies in the US are probing as to whether they tipped over into potential bribery." And why are finance wages so high?, some professors ask; the answer they give is mostly rent-sharing, but they seem to me to give insufficient attention to the possibility that the high wages compensate for difficult working conditions. (You're around all those cheaters, for one thing.) Elsewhere: Why is Thomas Piketty's 700-page book a bestseller?

What do you think about Treasury fails?

Speaking of the New York Fed, here's a Liberty Street Economics blog post about Treasury fails. People got really into Treasury fails a while back on the theory that they might Mean Something, but I could never figure out what they might mean. The answer seems to be nothing:

One possible explanation is that a large block of the security changed hands from one investor to another. Some buyers of a security wait until they actually receive delivery of the security before entering into contracts to lend them out. Because some securities are delivered late in the day, well after the securities lending markets are active, a significant change in the ownership of a specific security can result in a one-day discontinuity in the borrowable supply of that security, increasing fails.

I'd be surprised if that's any less boring than it sounds, but you know where to find me if I'm wrong.

Oh anti-Abacus.

The poor Securities and Exchange Commission is stuck making a rule that bans banks who do synthetic securitizations from betting against the buyers of those securitizations, because Goldman did that and aroused enough congressional ire that the ban got written into Dodd-Frank. The ban is dumb because a synthetic securitization consists entirely of a bet against the buyers of the securitization; there is literally nothing else to it; banning bets against the buyers of synthetic securitizations would ban synthetic securitizations and who on earth would want that? No one, I falsely assert. Anyway the SEC is trying to figure out how much of a debacle this rule will be, but I say unto you that however much or little of a debacle it is in practice it is a huge debacle in theory and shouldn't that count for something? Also there is some pretty solid Photoshopping here.

Downside correlation risk premium.

Stock option prices tell you how much investors are willing to pay to be protected from the downside risk of a bank. If you have prices for options on a basket of banks -- a bank index say -- and also prices for options on the individual banks, you can compare the two and figure out how much investors are willing to pay for systemic bank risk versus individual bank risk, loosely speaking. Some Fed researchers did that, calling the systemic thing "downside correlation risk premium," and looking in particular at how those numbers changed when U.S. and European governments intervened by injecting capital into banks between 2008 and 2013. "We find that, irrespective of their characteristics, intervention announcements significantly reduce DCRP in the U.S. while for the euro area, interventions were largely unsuccessful at reducing DCRP." The conclusion is I guess that America is better than Europe at making banks credibly too-big-to-fail.

Things happen.

Tesco "overstated expected first-half profits by about £250m," which you should not do. Siemens will buy Dresser-Rand. Herbalife has an exciting new public relations campaign. Citi failed to escape its bit of the Argentine mess. The Iceland bank mess is closer to being resolved. Blackstone is giving up on Russia. Finra wants to brighten dark pools up a bit. "[T]he risk of financial misreporting was substantially higher for executives with more masculine faces." Ice cream has back vowels and crackers have front vowels. King Arthur Pendragon "is mobilizing the Druids' 'warrior arm.'" Man ends blog.

  1. Explaining the fallacy (fallacies) here is left as an exercise for the reader. Hint: Was the offering "underpriced"? Consider also Softbank.

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