Levine on Wall Street: Contempt and Capture

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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Argentina is in contempt of court.

U.S. District Judge Thomas Griesa has told Argentina that it can't pay interest on its bonds without first paying off holdout bondholders led by Elliott Management. Argentina disagrees, as is its right as a sovereign nation. Judge Griesa has also told a whole range of U.S. intermediaries that they can't help Argentina evade his order, and that is working out swimmingly for him, though poorly for those intermediaries, Argentina, its bondholders, and even really Elliott. Argentina isn't paying interest on its bonds -- not because it doesn't want to, but because the whole mechanical process of paying that interest is blocked by U.S. court order -- but it isn't paying off Elliott either. To try to get things moving, or just to have something to do, Elliott asked Judge Griesa to hold Argentina in contempt of court. Because Argentina has nothing but frequently and vehemently expressed contempt for Judge Griesa, he agreed. He has not yet specified a penalty for that contempt; Elliott wants a fine of $50,000 per day, but the problem with that fine is that Judge Griesa has no way of collecting it. If you have no power to enforce an order against a country, issuing an order finding that country in contempt is pointless. You have no power to enforce that one either! In like a month Judge Griesa will be finding Argentina in contempt for not paying its contempt fine. The contempt will be recursive. Eventually Judge Griesa will send in drones but that day seems pretty far off.

Bank of America messed up some accounting.

A while back Bank of America did a dumb thing where it overstated its regulatory capital by $2.7 to $4 billion, depending how you count, for several years. It duly got in trouble with the Fed, which delayed and reduced its plan to return capital to shareholders. That was a sensible punishment: If you find out that Bank of America is inept at keeping track of its capital, then it stands to reason that it's riskier than you previously thought, and you should probably make it hold on to more capital to make it safer. Plus, shareholders love capital return, so cutting share buybacks makes shareholders mad and maybe motivates them to, you know, urge management to do a better job. (That was a dumb sentence to type, but it really is the theory behind punishing bank shareholders for the failings of management.) But yesterday the Securities and Exchange Commission fined BofA $7.65 million for the same conduct, because every bad thing that a public company can do is also securities fraud, and this fine makes considerably less sense. Bank of America (1) had too little capital and (2) misled shareholders about it, so the SEC's solution was to (1) reduce its capital and (2) punish shareholders. Financial regulation is weird.

A bit more on Carmen Segarra.

Apparently the place to discuss regulatory capture is on Medium. Here is Dan Davies:

Regulated institutions generally have better contacts and relationships with the top central bankers than their supervisors do. And for whatever reason, top central bankers never developed the necessary knee-jerk aggressive response to any attempts to make use of these relationships to affect the behaviour of supervisors.

So banks never need to listen to their line-level regulators because they can always get those regulators' bosses' bosses' bosses to overrule them. Here is Felix Salmon, mostly agreeing. And here is Alexis Goldstein with a litany of Fed enabling of banks. Elsewhere, Martien Lubberink explains the transaction that got so much attention in the Fed tapes, in which Goldman agreed to hang on to some Santander Brasil stock for a year before delivering it to Qatar. He thinks it was pretty vanilla. And Adam Ozimek has a good point:

This American Life ep should lower avg est corruption belief. Goldman and NY Fed secretly taped & all u get is in non-confrontational nerds?

Some more Allergan.

If you're interested in mergers and acquisitions, but more especially if you're interested in corporate governance and shareholder rights, you should read this Ronald Barusch column, which in a certain light is rather chilling:

Allergan’s board is almost certainly getting advice from its lawyers that it is required to do what is best for shareholders, even if most of its shareholders disagree with its analysis. Thus, if the board concludes that a Salix acquisition is a good deal for Allergan and is better for shareholders in the long term than the current terms of Valeant’s bid, expect the board to move forward.

That's not just "Allergan's board can ignore what shareholders want." That's "Allergan's board has a fiduciary duty to ignore what shareholders want" -- and do a big hasty acquisition that they apparently weren't considering until Valeant came along, just to prevent shareholders from voting on the Valeant deal. As Barusch points out, the shareholders would still get to vote on kicking out Allergan's directors, and could well do so, but that's a sacrifice the directors might be willing to make to frustrate shareholder desires. If you go around saying things like "corporations are owned by their shareholders," now might be a good time to stop that. Elsewhere, John Coffee and Darius Palia have a new paper on hedge fund activism.

Lloyds fired some people.

People who work at banks get some of their pay in cash and some of it in deferred forms (stock, long-term incentive plans). At any given time, some of your deferred compensation will be vested, and a lot of it will be unvested. If you leave -- whether you're fired or you quit -- you'll normally lose the unvested compensation, though there are many circumstances where they'll cut you a break and accelerate vesting so you can get the deferred comp to which you're not strictly entitled. (Quick personal anecdote: If you quit to be a blogger, you will lose your unvested stock!) But if you are fired for manipulating Libor, it would be extremely odd for the bank to accelerate your vesting. Really the least they can do is not give you the deferred compensation that you haven't earned yet. So when Lloyds announced yesterday that it had fired eight accused Libor manipulators, it also said:

Awarded but unvested bonuses and long term incentives totalling approximately £3 million in aggregate for the individuals who have been dismissed will be forfeited in accordance with the Group’s standard practice.

This was widely reported under the formula that Lloyds "Claws Back Bonuses," but a "clawback" to me (and to UK banking regulators) is a different thing. A clawback is, you earned a bonus for doing some stuff, and then later that stuff turns out to have been riskier or more illegal than everyone thought, so they take back your bonus. (And, if you've already spent it, they sue you.) The bonuses taken back here were unvested -- that is, not quite earned -- and most likely awarded well after the 2006-2009 Libor manipulation in question. This is just a regular old firing. Lloyds is not quite ready to, like, go sue these guys for the bonuses it paid them in 2007.

Things happen.

Haim Bodek vs. the New York Stock Exchange. Jamie Dimon gave Eric Cantor a pep talk. Don't worry too much about a subprime auto bubble. Law firms are making more money. Helaine Olen's tweetstorm on the latte factor would, in a reasonable world, end all discussion of the latte factor. Get your bagels from a German conglomerate. Find out lifetime earnings by major, though as usual in these exercises all the good majors are omitted. Florida men accused of "defrauding investors in a purported startup television network" by falsely claiming that Michael Jordan was involved. We May Never Know If Larry Ellison Flew a Fighter Jet Under the Golden Gate Bridge.

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