Levine on Wall Street: Pimco's Shrinkage and AIG's 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.
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Some people are leaving Pimco.

The Pimco Total Return Fund had its worst month of withdrawals last month, waving goodbye to $23.5 billion of client assets, though it pointed out that "the largest daily outflow occurred on the day of Bill Gross’s resignation from the firm" and the next two days were less bad. The possible shrinkage of Pimco has a lot of people worried that it will be forced to sell a lot of inventory and expose the illiquidity and fragility of the bond markets. I kind of don't get it though:

Banks are less willing to cushion big swings using their own balance sheets and Gross’s exit shows just how little it takes to move the needle in the global bond market, which has ballooned by 48 percent since 2008.

The day Gross left Pimco to join Janus Capital Group Inc. (JNS), Mexican government bonds declined 0.3 percent, inflation-protected U.S. bonds lost 0.4 percent and debt of Verizon Communications Inc. (VZ) -- one of his bigger company holdings -- dropped 0.3 percent. That compares with a 0.05 percent decline on the Bank of America Merrill Lynch Global Broad Market Index.

That is ... I mean, a 30 basis point price move is not that much? I see the 10-year Mexico bond as having a price volatility of about 6.2 percent over the last year, meaning that a one-standard-deviation one-day move is about 38 basis points. The Verizon 5-year has a 10 percent annual price volatility, meaning that its one-standard-deviation one-day move is about 60 basis points. So these are pretty chill moves? Also apparently Pimco can redeem investors in kind if they redeem more than $250,000 worth, and it'd be pretty fun if they gave some retail investor $300,000 of an illiquid emerging market bond and said "here, you sell it."

How's that AIG trial going?

Don't count on AIG's shareholders getting their $25 billion back, I guess? Greenberg's lawyers currently seem to be engaged in getting the government to admit that it could have charged AIG a lower interest rate for its bailout, a weird irrelevancy insofar as it didn't charge that lower interest rate. John Cassidy calls the trial a comedy, and DealBook points out that "One unusual facet of the A.I.G. case is that nearly all of the witnesses that Mr. Greenberg’s team is calling are hostile," which is just a classic trope of trial comedy. It is actually a plot point in "My Cousin Vinny." The only bigger trial-comedy cliché would be if Hank Greenberg acted as his own lawyer and cross-examined himself, running between counsel table and the witness box to ask and answer increasingly hostile questions. Let's hope.

What does ISS do?

Institutional Shareholder Services recommended that Allergan shareholders vote against Allergan's acquisition of Sal -- hmmm, wait, no. ISS recommended that Allergan not acquire Salix Pharmaceuticals without a shareholder vote. But Allergan's acquisition of Salix, with or without a shareholder vote, is pure rumor at this point. ISS's job, traditionally, is to tell shareholders how to vote on proposals submitted to them. Telling Allergan what proposals to submit to shareholders, and what deals to do and how, is a subtly different job. If you're paying ISS for advice on how to vote on things, this does not help you. If, on the other hand, you're paying ISS to represent pro-shareholder-y views without your having to do it explicitly, then this sort of lobbying is exactly what you want.

Anyway ISS is obviously right that Allergan shouldn't do a big merger just to thwart a shareholder vote, come on, that is terrible. In related news, Darden's board is probably about to be thrown out for doing exactly that, and also the breadsticks thing.

Elizabeth Warren is unhappy about the Segarra tapes.

Senator Warren did an interview with NPR about the New York Fed's interactions with Goldman Sachs, in which NPR pointed out that Goldman's Santander trade was perfectly legal, so what's the problem? And her answer was I think interesting:

Yeah, but this is partly the role of a regulator. A regulator doesn't say to a big financial institution: "Hey! Step right up here. Get your toes on the line, and so long as you can make a legal argument that you have not crossed the line, then, hey, we're -- we're all cool here."

That's not the way regulation of large financial institutions is supposed to work -- they're supposed to be using judgment. And remember, part of this judgment is about whether or not there has been compliance with the law. The fact that Goldman could mount a legal defense here is not really the point of these tapes. The point of these tapes is that the regulators are backing off long before anyone's in court making a legal argument about whether or not they came right up to the line or they crossed over the line.

What does this mean? One thing it might mean is that regulators shouldn't let banks do the things they're allowed to do, but only the things that they're extra-super-allowed to do. But that's just a change of measure. You could change the rules so they only allow the things that are currently extra-super-allowed, and then just allow the things that are allowed.

Or it could mean that regulators should go to court on every doubtful case and let a jury sort it out. This seems terribly inefficient. "Can we do this trade?" "Hmm, I don't know, let's litigate and we'll tell you in a decade."

Or it could just mean that banks play the game of pushing right up to the line of what's allowed, and regulators are in the different game of retreating sheepishly from the line, so they will always lose. Which is a reasonable criticism, but not a good reason to start blocking legal transactions as a pure show of muscularity.

The anti-malarial bed nets of the capital markets.

Ever since I gently made fun of them a year ago, I've enjoyed the work of Kerrisdale Capital, the self-promotin'-est hedge fund in New York. And yesterday they justified my faith in them by releasing this genuinely funny video to promote a short-sale presentation they're giving next week. And really why not release a video promotion with high production values and clever writing to promote your trades? If you're Bill Ackman and you announce a presentation, a lot of people will show up, maybe bring something to read and some snacks, and jump into your trade with you. But if you're a smaller fund, half the battle is convincing people to listen to your thesis so you can convince them that you're right.

Wall Street really is very male.

Yesterday I was a little skeptical about Vettery, a Wall Street recruiting service that announced that new investment bank analysts were 77.5 percent male. But then they explained their methodology to me, and now I'm persuaded that they're capturing all investment bankers, not just people who use their service. (Though it's investment bankers, not traders, etc.) So, eep, those are some bad numbers. There's some spread: Goldman and Morgan Stanley's new analysts are 70 percent male by their figures, JPMorgan 71 percent, the bulge brackets as a whole 73 percent. And the new investment banking analyst classes at the lower tier of banks in their study are an amazing 85 percent male.

Things happen.

"BlackRock’s Larry Fink has said policy makers are at fault for pushing investors into riskier assets, and should stop criticising the resulting market movements." Joseph Stiglitz wants do debeak vultures. Brian Moynihan has a new job title. So does Snoop Dogg, or whatever his name is now; DealBook says "Now, he can add another title: venture capitalist," and really I'm surprised he wasn't a venture capitalist already. Somehow the Volcker Rule is forcing RBC not to get rid of its prop trading unit. "Merrill, 44, sees himself as a rebel in the world of finance ..., with shoulder-length hair, a tattoo with peacock feather patterns on his left arm and black fingernail polish on his left hand." "Suppose that when they meet with bankers, for example, Fed officials had to wear cameras and audio recorders, which could be obtained by FOIA requests." How to view art. "He was an excellent writer, as a monk I cannot judge." Ben Affleck In Talks to Star in ‘The Accountant.’

  1. Source: Bloomberg, MBONO 10 12/05/24 <Corp> HVT. There are 260 trading days in a year, give or take. That's a 6.2 percent annual volatility; you can divide by 16 (approximate square root of 260; volatility goes with the square root of time) for daily volatility, and get about 0.38 percent. But that's a percentage of price, which is right now around 130; if you divide by 130 you get about 29 basis points of par.

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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