Levine on Wall Street: Barclays and Burger King

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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Barclays got in trouble.

Barclays was fined 38 million pounds by the U.K. Financial Conduct Authority, and then fined another $15 million by the U.S. Securities and Exchange Commission, for various forms of sloppiness with client protections. (FCA release and order, SEC release and order.) The regulators try to spice this up a bit -- the FCA says "Barclays fined £38 million for putting £16.5 billion of client assets at risk" -- but it seems irreducibly dull. They got systems and programs wrong, they didn't keep the right forms for the right legal entities, and they did a bad job of figuring out what products they could sell and what commissions they could charge to customers that they acquired when they bought Lehman Brothers' wealth management business. There is almost no lesson here. I mean, with the FCA order, the lesson is "keep track of your customers' assets" -- a lesson that the FCA has tried to teach Barclays before -- and that's fair enough. You should build robust systems to make sure you're doing your job. But with the SEC order, the problem is less that Barclays didn't have good systems and more that it had trouble integrating Lehman's systems. When it acquired Lehman in a shotgun-ish marriage in the depths of the financial crisis. That's sort of excusable, though I guess they kept up the bad systems for a long time.

The inversions thing.

Look, the tax code is a law, passed by Congress, that says what sort of taxes different people should pay for different stuff. One key feature of that law is that foreign companies operating abroad don't pay U.S. taxes. (Sensible, right?) Another key feature defines what a foreign company is; in particular, if a U.S. company merges into a foreign company and the U.S. company's shareholders hold less than 20 percent of the surviving company then, poof, it's foreign. This is called an "inversion." People are mad at inversions. So the Treasury Department is cracking down on inversions. But two things it can't do are (1) make foreign companies operating abroad pay U.S. taxes or (2) redefine how a company gets to be foreign. Because those things are in the law written by Congress, and Treasury is just interpreting and implementing the law. Since it's a tax law, the Treasury regulations can do a fair amount, but they're all going to be tinkering at the edges and unlikely to Stop Inversions. Here is Victor Fleischer: "Indeed, most proposed inversions are likely to go forward, especially those that make sense as a business matter above and beyond the tax benefits, some of which the new rules will curtail." And Burger King, in particular, will be fine.

Is John Paulson active or passive?

A pretty dumb rule of U.S. securities law is that it treats "active" and "passive" buyers of large chunks of a company's stock differently. if you buy more than 5 percent of a company's stock and have designs on it, you have to disclose all your designs and arrangements and purchases and so forth, so the company can put in a poison pill and shout about short-term activists who are only out to make a buck for themselves. But if you don't have designs on it, you can do much more abbreviated and casual disclosure. John Paulson -- well, the headline here is "Paulson Pushed for Family Dollar Sale as Passive Investor," so you can see the problem. It's not obviously a problem, per se. Even if you're a passive investor you're allowed to meet with management, hear what they have to say, give them some ideas. You just have to stay away from "changing or influencing the control of the issuer." A lawyer says "If they went so far as to arm-twist, it’s possible they lost their passive status," but it would be a little rude to twist someone's arm in a meeting.

Free ride on Bill Ackman!

I'm not generally a fan of the the idea that you should invest by looking at hedge fund managers' 13Fs and then buying whatever they owned 45 days ago. But this is different. This is Bill Ackman himself pointing out that most of the gains in the stocks he buys come after he discloses his positions. This is an important point for him because, one, it validates activism as a strategy (he's actually adding value), and, two, it sort of defends against the vague insider-trading taint in cases like Allergan. But there is a potential arbitrage, which is that you can get "most" of the gains of Ackman's strategy while paying none of his fees. Just buy after he discloses his stake. I do not exactly recommend this as a strategy -- past performance no indicator etc., plus someone's got to pay him to come up with activist ideas -- but someone should run the numbers on whether it outperforms the actual after-fee returns of the funds.

The magic of payment for order flow.

If you were a high-frequency market maker, how much would you pay to interact with stock orders that people placed on an app on their phones? A lot, right? That's like the definition of uninformed order flow; you're not going to face a lot of adverse selection there. Anyway there's a new app called Robinhood (ugh), built by two guys who have "launched companies in algorithmic trading and investment bank software," that will let you trade stocks from your phone with no commission. Matt Yglesias says "zero consumer-facing fees will let it sign up a massive user base and generate revenues through other means. What exactly those means will be is a bit uncertain at this point," but it's not that uncertain to me! To be clear, though: Yglesias is right that the reason not to trade stocks from your phone is that you're probably bad at trading stocks from your phone. It's not that you'll be trading against high-frequency traders who are paying to trade against you. You probably will be, but that's the least of your worries.

Who's funding Hank Greenberg's AIG lawsuit against the government?

The answer is Ken Langone, Chris Flowers, and a player to be named later. Wonderful possibilities like Pete Peterson (imagine the cut-the-debt guy funding a lawsuit whose goal is to add billions to the national debt!) and Steve Cohen (just ... !) turned Greenberg down.

Lenders of last resort.

Here's a Bank for International Settlements grab-bag of papers from central bankers and professors talking about the lender of last resort function of central banks, how central banks did it during the last crisis, and how to re-think it for the next one (including speculation about an international lender of last resort). William Nelson of the Federal Reserve, for instance, has a list of lessons from the last crisis, starting with the understated "LOLR is unpopular." Elsewhere, here is some unrelated criticism of the European Central Bank:

“We remember Le Petite Prince on the French Franc… Beyond Europe, the Cook Islands currency recently showed a nude woman riding a huge shark through a wave.”

The illustrators said that while much of Europe might lack sharks, “we’re sitting on staggering beauty and creativity, past and present. Our currency could do a better job telling us how we got here,” they said.

Things happen.

Matt Klein on housing finance. A senior secured loan program is like a CLO but slightly different. Argentina's gonna miss another coupon. The polar bear who took on Wall Street. Don't "give false testimony in a long-running lawsuit over the collapse of a bank client’s media empire." Don't "issu[e] false and misleading press releases proclaiming large sales and fantastic revenue projections while the purported health food company actually was a failing enterprise." Don't be a lawyer for a boiler room scam. Don't put a giant phone in your pocket. Preet Bharara had a party. Which Wall Street Journal dot drawing are you? (I am obviously Grumpy Cat). "Bennett zoned in on a hedge fund employee with a cardigan wrapped around his neck and tried his time-tested opener: 'Hey, have you heard of Rock Paper Scissors?'"

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