Levine on Wall Street: The Bond King and the Insurance Bailout

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.
Read More.
a | A

Bill Gross Bill Gross Bill Gross.

You can read a lot of obituaries for Bill Gross's bond-picking skills; here are Megan McArdle and Gillian Tett, for instance. The view is basically that Gross was a great bond investor for the last few decades, but ill-adapted to the current regime of ultra-low rates and robust government intervention. That must sting! I like Felix Salmon's view that Gross is going to Janus for the reasons he said: to give his "full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization." That is: to prove to everyone that he's still got it and that, unconstrained by a gigantic fund and an even larger fund family, he can once again outperform his peers. Elsewhere, the vultures are circling; Pimco is reassuring investors, but financial advisers are leaping at the chance to earn some fees by flipping shares, and competitors are sending out pretty gauche e-mails to those advisers to try to take some business. Honestly do your scavenging by telephone; those e-mails are not a good look.

The AIG trial is starting.

Hank Greenberg, the former chief executive and major shareholder of AIG, is suing the U.S. government for $25 billion because he thinks the 2008 bailout of AIG was not sufficiently generous to shareholders. Really! That's really what the lawsuit is about. "I think they’re going to lose. I think they realize they’re going to lose," says a law professor. But, look, yes, the AIG bailout was less generous than the ones offered to the big banks, and that's apparently odd enough that the case is going to trial this week and Greenberg's lawyers will get to question people like Ben Bernanke, Hank Paulson and Tim Geithner to see if they can't dig up anything shady. (Even Hillary Clinton is involved!) Greenberg's theory of shadiness seems to be that, in Gretchen Morgenson's words, the government wanted AIG to be "an enormous taxpayer-funded piggy bank from which the government could funnel billions to a throng of teetering banks." Which might be scandalous! (Why?) But still probably not a reason to give $25 billion back to AIG shareholders?

Alibaba paid some fees.

Alibaba's initial public offering paid $300 million in fees, of which $250 million was divided up among the underwriters in advance and $50 million was split up among the lead underwriters after the fact as an "incentive fee." Not, like, only paid if the underwriters did a good job -- they did an okay job, I guess, though if you said the deal was underpriced it would be hard to argue with you. Rather, the split was determined after the fact, to reward the hardest-working banks at the expense of the lazier ones. The idea I suppose was to incentivize the banks to outdo each other in roadshow heroics: The more omnipresent and enthusiastic you were during the roadshow, and the more presentations and analyses you lobbed over at Alibaba, the bigger your share of the incentive pot. You would not want to have been a junior banker on this deal, is what I'm saying.

What will Yahoo do?

Starboard Value did the math that everyone else did and noticed that Yahoo is worth negative a lot of money, which makes Yahoo an obvious value investment and an even more obvious activism target. So here's Starboard's letter to Yahoo:

This substantial valuation gap is likely due to the fact that investors currently expect Yahoo to continue its past practices of (a) monetizing its non-core minority equity stakes in a tax inefficient manner and (b) using the cash proceeds from such sales to acquire businesses at massive valuations with seemingly little to no regard for profitability and return on capital.

Ouch! Does anyone disagree with that though? That's like Yahoo's corporate mission statement. Starboard wants Yahoo to look into tax-efficient monetization of Alibaba and Yahoo Japan, and is pretty optimistic, arguing that "these structures can be implemented in a relatively short timeframe, do not necessarily involve multiple jurisdictions, and can be announced in short order without running afoul of the existing underwriting or lock-up agreements with Alibaba and the underwriters." But what about using the cash proceeds from the tax-efficient monetization to make random terrible acquisitions? Starboard has a plan there too, arguing that Yahoo should acquire AOL. AOL! Why not. Here is Yahoo's response; it's also taking some steps to focus its core business that include, in Marc Andreessen's words, "shutting down Yahoo!"

More secret Fed tape stuff.

Here is a thoughtful piece from Justin Fox on the Carmen Segarra/New York Fed/Goldman Sachs thing. He's unimpressed by some gotchas:

Carmen Segarra, the former Fed bank examiner who made the tapes, tells of a Goldman Sachs executive saying in a meeting that “once clients were wealthy enough, certain consumer laws didn’t apply to them.” Far from being a shocking admission, this is actually a pretty fair summary of American securities law.

But more impressed by others:

The other smoking gun is that Segarra pushed for a tough Fed line on Goldman’s lack of a substantive conflict of interest policy, and was rebuffed by her boss. This is a big deal, and for much more than the legal/compliance reasons discussed in the piece. That’s because, for the past two decades or so, not having a substantive conflict of interest policy has been Goldman’s business model. Representing both sides in mergers, betting alongside and against clients, and exploiting its informational edge wherever possible is simply how the firm makes its money. Forcing it to sharply reduce these conflicts would be potentially devastating.

Elsewhere, Goldman is going to "bar investment bankers from trading individual stocks and bonds," and honestly why would you want to trade individual stocks and bonds?

Things happen.

"Of course you can’t value a bank by just looking at its assets, you first need to subtract its liabilities." More Allergan shareholders are worried it's going to buy Salix for no good reason. Madewell is not particularly old-timey. Apple's Irish tax situation may be illegal. "Contrary to widely held beliefs, the world has not yet begun to delever." Steve Wynn is suing Jim Chanos for slander. The Oral History Of The 2003 World Series Of Poker Main Event, Day One. Lee "Scratch" Perry says things. New York is getting a swim-up bar.

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:
Zara Kessler at zkessler@bloomberg.net