Levine on Wall Street: Bailouts and EBay

Bagehot has fallen on hard times, Carl Icahn racked up a win, the Fed is mad about leveraged loans, and everyone is mad at short sellers.

Lehman, etc.

Dan Davies says, "It's astonishing how much intellectual labour people will do to avoid simply reading 'Lombard Street' carefully." He's talking about yesterday's front-page New York Times article arguing that the New York Fed, despite its later protestations, thought it could have bailed out Lehman Brothers because Lehman was solvent but facing a run, and about Matt Klein's discussion of illiquidity versus insolvency, which makes the point that "solvent but temporarily illiquid" is a puzzling category when banks' assets are marked to market. Bagehot, of course, said (in Davies's summary) that "The central bank should lend 1) without limit 2) against all normally acceptable collateral 3) at a penalty rate."

These days that is sometimes called a "bailout," and these days nobody likes bailouts. "Without limit" means that the Fed is funneling trillions of dollars to banks. "Normally acceptable collateral" means that it's propping up toxic securities created by those banks. And a "penalty rate," in a world where the Fed is also, you know, cutting rates, is a bit in the eye of the beholder. (Also: There's a trial going on right now about whether AIG's fiercely controversial bailout came at too steep a rate, and a similar case about Fannie and Freddie was just dismissed yesterday.) The biggest negative consequence of the 2008 financial crisis may be that Bagehot's advice -- which does work! -- has become politically controversial.

Congrats, Carl Icahn!

Yesterday EBay announced that it will spin off PayPal, as Carl Icahn asked it to do months ago. And Carl Icahn gloated, because he is Carl Icahn. And then, because he is Carl Icahn, he moved on immediately to the next fight:

It also continues to be my belief that the payments industry, of which PayPal is an important part, must be consolidated -- either through acquisitions made by PayPal or a merger between PayPal and another strong player in the industry. It is possible that this could be accomplished through a reverse Morris Trust structure because, in light of the development of strong competition such as the advent of Apple Pay, the sooner these consolidations take place, the better.

PayPal isn't independent yet, but he's already agitating for it to find a merger partner. (As are many others, to be fair.) And why shouldn't he? EBay's stock was up 7.5 percent yesterday, making Icahn $120 million on paper. Quick transactional catalysts are good! You will often hear hedge-fund activists argue that they are long-term value investors, and many of them are, and even Carl Icahn sometimes is, but of course the core of the job is agitating for transactions. So it's nice to see Icahn being so nakedly transactional here. On the other hand, here is a sort of crazy story about how EBay sort of agreed with him all along, but worried that saying so "would have distracted employees, and it would have been done in a rushed way," so they instead spent tens of millions of dollars publicly fighting off Icahn and maintaining that EBay and PayPal were better together, while quietly working behind the scenes to split them apart.

The Fed is serious about leveraged loans.

This is a good article to read in conjunction with the Carmen Segarra thing. Basically, to shorthand a bit, the Fed has told banks that they probably shouldn't make loans at more than 6x EBITDA, subject to rare exceptions. The banks have a different view of "rare" from the Fed. So now the Fed will be reviewing loans each month, "looking at individual deals and risks such as a borrower’s ability to repay," and scolding (or worse!) banks that make too many risky loans. On the other hand, "It seems like deals with higher leverage are still getting done -- and with market pressure to do so," says a lawyer. So the dynamic is:

  • Customer comes to Banker and says "I want a loan at 7x EBITDA."
  • Banker says "we're supposed to be capped at 6x."
  • Customer says "but I want 7x, and if you won't do it, someone else will."
  • Banker says fine.
  • Regulator clears throat, pipes up, says "no you're supposed to be capped at 6x."
  • Banker and Customer turn to Regulator and glare.

Then what happens? Base your answer on your reading of the Carmen Segarra situation.

There's a Pimco ETF whistleblower.

The Securities and Exchange Commission aren't the only people interested in Pimco's exchange-traded fund; here is the story of a guy who was fired from Pimco and then sued them for a grab-bag of manipulation and misbehavior. Here is his complaint, which is not what you would call persuasive. There's stuff like "In August of 2008, senior management intentionally violated PIMCO prospectus for a Convertible Bond Fund" and claims that Pimco was "acting in a despicable, oppressive, fraudulent, malicious, deliberate, egregious, and inexcusable manner." It remains difficult to know if any individual whistleblower is a brave iconoclast standing up against a terrible system or just, you know, a little strange.

Short sellers aren't evil.

There's a bizarre controversy in which TheStreet published some negative articles about a biotech company, and then the Washington Post published a very silly column indeed by Steven Pearlstein accusing TheStreet of helping short sellers manipulate the stock, and then degenerating into the usual conspiracy theories about how naked short selling deters innovation by good old American companies. Here's TheStreet's robust response, and a good L.A. Times column making the point that small-cap biotechs aren't all innocent innovators themselves. So a quick reminder: Short selling is fine; all naked short selling conspiracy theories are false; and the more time a company spends complaining about short sellers, the bigger its other problems probably are. There is sociology still to be done on why short selling leaves so many people so unhinged, while the normal long manipulations (pumping up fake companies) that regulators catch every day mostly go unnoticed or even glamorized. Elsewhere here is Andrew Ross Sorkin on companies suing shareholders for manipulating their stocks, with a particular focus on Steve Wynn's slander lawsuit against Jim Chanos, which is weird because Chanos never actually accused Wynn of anything and may not actually be short Wynn stock.

Internet site announces that 77.5 percent of its users are men.

I am ... skeptical of this, but here is a claim that 77.5 percent of first-year analysts at investment banks, in 2014, are men. Also 65 percent are white and 29 percent are Asian. This comes from "Vettery, a start-up recruiting firm," which "said it collected its data from its network of about 100,000 financial workers who have signed up for the site," as well as "regulatory filings and social sites like LinkedIn." One possible conclusion here is that first-year analysts at investment banks who are looking to leave for startups skew more male (and more white and Asian) than their colleagues.

Things happen.

The Fed's reverse repo program kind of didn't work. Government debt management at the zero lower bound. Prison banking is terrible. Are people organized as corporations entitled to constitutional rights? The Fed asked big insurance companies how it should regulate them. There will always be WKSI waivers. "But I only have one bag of kale!" Somehow investing with Zero Chaos Advisors LLC wasn't a good idea. Somehow caffeine-infused underwear didn't work out. There's a Tetris movie.

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

    Before it's here, it's on the Bloomberg Terminal.