Levine on Wall Street: Dark Pools and Dollar Bets

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 is fighting its dark pool case hard.

I'm no expert in the Martin Act, the New York statute that basically makes everything fraud. But Barclays's lawyers sure think they've found a loophole, and I'm at least intrigued, maybe even persuaded:

The NYAG’s reading of the Martin Act would render the Act virtually unlimited in scope. His sweeping interpretation would improperly reach any purported misstatement that could possibly have an effect on a securities transaction. Under this expansive view, the NYAG could bring Martin Act claims against an internet service provider that misrepresents the reliability of an internet connection used to trade securities, or a software company that misrepresents the reliability of its trading software. The Opposition cites no New York authority supporting this dramatic expansion.

That's from Barclays's reply in the New York Attorney General Eric Schneiderman's Martin Act lawsuit against Barclays for (allegedly) lying about its dark pool. (We've talked about it here and here.) Barclays's point is that the Martin Act is a law against fraud in the sale of securities, and Barclays wasn't selling securities. It was selling a dark pool, which is just, like, software. No one was defrauded about the securities; they were, at most, misled about the platform they used to buy the securities. This is sort of hypertechnical, but then, lawyers love hypertechnical arguments, and this one has the ring of plausibility to it.

Get a mortgage to go short the dollar.

I'm totally with Warren Buffett here, not that he needs my support, but getting a 30-year fixed mortgage really is "a good way to go short the dollar, short interest rates." (Disclosure: I got a 30-year fixed mortgage a few years ago, pretty much on this reasoning, plus, you know, I moved.) Buffett calls it "a no-brainer," since pretty much everyone thinks rates will go up sometime over the next 30 years, but of course the more you think that, the more compelling the trade is. Like, if you think hyperinflation is coming, don't buy gold or bitcoins (what if the other one turns out the be the right answer?), just get a big honking mortgage and you'll end up in a free house when the dollar's value evaporates. Elsewhere, the L.A. Times investigated Ben Bernanke's claim that he can't refinance his mortgage, and found that he probably could, even without two years of stable income, if he went to a portfolio lender like a small bank or credit union. It's the lenders who securitize loans that require steady employment. Lessons you might draw from this include (1) lenders with no skin in the game have higher (or at least more rigid) credit standards than those with skin in the game and (2) Ben Bernanke probably regrets the rise of securitization.

Blackstone is giving up some extra fees.

Private equity firms are both money managers and operators of companies, and so they sort of naturally think they should be paid by their investors for managing the money, and by the companies for operating the companies. Their investors think that they should pay the PE firms once for managing the money, and get a share in any of the running-the-companies fees. This creates a gap in expectations that is bridged by, basically, giving the investors a share in the fees, but building in various tricks by which the PE firms got more than their headline share. You could call this equilibrium "fraud," if you want, and parts of it might be, but it might also be sort of a negotiated everyone-gets-some-of-what-they-want-and-saves-face equilibrium. Anyway enough people have complained about it now that the equilibrium is shifting, and now Blackstone is giving up some running-the-company fees to please investors.

Herbalife is doing ... great?

Here is Charlie Gasparino reporting that Herbalife is "telling investors it’s all but certain the Federal Trade Commission will not shut down the company at the conclusion of its wide-ranging investigation." That is sort of a low bar? Like, generally speaking, you should take it as a given that almost every multi-billion-dollar public company is almost certain that it won't be shut down by the FTC almost all of the time. The ones who go around telling you that are presumably the ones that are least confident? I don't know. The stock was down 3.4 percent.

Preet Bharara discusses incentives.

Here's an interview with Southern District U.S. Attorney Preet Bharara (via Bess Levin), in which he sort of confronts the critics who point out that his office's obsession with insider trading cases is a little silly:

I have never said that insider trading is the crime of the century. It has not been my personal focus. It's the focus of the press because there are a lot of wealthy people that like the reporting of it.

Hmm yes but what about those 86 insider trading cases, versus, you know, not so many financial crisis cases?

I would suggest that some of these critics go to law school and apply themselves and become prosecutors and make the case that they think we should be making. This is by reputation and track record the most aggressive office in white-collar crime in the country ever, and if we’re not bringing a certain kind of case, it’s because the evidence is not there. Pure and simple.

It's not a revolving door problem?

Ridiculous. It's actually worse -- it's idiotic. Because when people are in government and they are responsible for prosecutions or for enforcing regulations, every single one of them knows that the bigger case they make, the bigger person they become and the bigger opportunities they have.

I submit to you:

  1. That Bharara is completely right, and that anyone who thinks that federal prosecutors didn't bring criminal cases against senior bankers because they had bad incentives has never met a federal prosecutor; and
  2. That taking a human being away from his family and imprisoning him for years so that you can become a "bigger person" and have "bigger opportunities" is at least as morally suspect as, you know, bundling bad mortgages to get a bonus or whatever.

The new biggest bond fund is a Vanguard index fund.

So that's cool. The decline of celebrity investment managers, the rise of indexing, something about Calpers, you get the idea. (Disclosure: A plurality of my money is in Vanguard index funds, maybe including this one, I haven't checked. I was also pleased and surprised to discover recently that I have a little bit of money in the Pimco Total Return Fund. I'm sticking with it, though; gonna give the new guys a chance.) Elsewhere, bond trading is picking back up. And is there a bond liquidity problem?

Things happen.

Profits are down, bonuses are up, legal expenses are out of control, you know the drill. Marc Andreessen and Izzy Kaminska on the future of finance. Here is an excellent story about cheating at video poker that may or may not be a metaphor for financial prosecutions. Former Broker Pays Gambling Debts With Investors' Money. "Financial therapy" is basically what it sounds like. The Art of Calling in Sick. London School of Economics disbands men’s rugby club over misogynist leaflet. Just say you go to Havard. A Ranking of All 117 Sweaters Seen onTwin Peaks. An oral history of 'The Meh List.'

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