Levine on Wall Street: Private Markets and Rigged Markets

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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Venture vs. IPOs.

The Wall Street Journal points out that there are "at least 49 U.S. venture-capital-backed companies with a valuation of $1 billion or more" that are not publicly traded, "the highest number on record." Initial public offerings are becoming less interesting for small growing companies, which can get venture financing and only go public when they've gotten pretty big. If your model of the stock market is that companies that are building businesses come to the stock market to finance those businesses, your model is wrong. The stock market is where companies that have built businesses go to cash out their shareholders. The S&P 500 spends 95 percent of its earnings on buybacks and dividends.

One big question is, who should allocate capital to new ideas? There are a bunch of candidates, each with their strengths and weaknesses, clustered in different markets. Venture capital firms could do it. Or the management of Yahoo. Or index funds. Or activist hedge funds. Or banks, for that matter. As more companies stay private, the capital allocation function shifts from public allocators (mutual funds, hedge funds) to private ones (VC firms, Yahoo, banks I guess).

Some rigging.

Charges are coming -- against "a bank," "individuals," and "several firms, including at least one in the U.S." -- for foreign exchange rigging. I very much look forward to reading these charges; my conjecture is that the shady-sounding conduct that set off the investigations -- trading ahead of fixings -- was probably fine (hedging a fixing risk rather than "front-running"), but there will probably be a lot of horrific chat-room collusion that is not fine at all, and preserved in ungrammatical bro-y writing. Elsewhere Barclays is settling a Libor-rigging class action for $20 million, which honestly seems kind of low to me, though it will "cooperate with a group of Eurodollar-futures traders suing other banks."

Bill Gross's new bond fund added $66.4 million in September.

That increased the size of the Janus Global Unconstrained Bond Fund by about 523 percent, and brought it to about 0.04 percent of the size of Gross's old fund at Pimco. So ... getting there? Seriously he quit at the very end of September, and just started managing the Janus fund this week, give him time.

Are you ready to read an interesting letter?

Because Carl Icahn has promised to send one to Apple today. Here is a conjecture: There are Twitter celebrities who get more retweets and favs than Icahn, but nobody on Twitter, not even Justin Bieber, can more consistently get news coverage of every tweet than Icahn can. Elsewhere in Apple-adjacent news, today is GT Advanced Technologies' first bankruptcy hearing, where it will explain what went wrong with its Apple relationship; early signs are that the "sheets of sapphire produced by GT Advanced kept failing technical benchmarks, including drop tests," and unfortunately GT Advanced had pinned its capital structure to meeting those benchmarks.

Is insider trading a victimless crime?

The Securities and Exchange Commission got $602 million out of SAC Capital for insider trading, which it wanted to keep. (Well, give to Treasury.) But investors in the companies that SAC insider traded want the money, and under the Sarbanes-Oxley Fair Fund rules, they have some claim to it. So the SEC is debating whether to give it to them. It's pretty awkward: If you think that insider trading harms the people on the other side of the trade, then surely you should give the settlement proceeds to those people? And if you don't think that, then why pursue it?

Foreign companies have lower tax costs than U.S. ones.

Here Ronald Barusch argues that an "unintended consequence" of the anti-inversion rules is that they make it easier for foreign companies to buy U.S. ones, since foreign companies don't pay U.S. tax on non-U.S. earnings, while U.S. companies do:

The fact is the Treasury action gives companies that escaped U.S. extraterritorial corporate tax before September 22 a significant advantage in the competitive bidding process for U.S. companies that can be folded into their grandfathered structures.

Well sure, but this is not really about the anti-inversion rules, or even about mergers. It's about the U.S. tax system. Charging U.S. companies tax on earnings abroad, when foreign companies are not taxed on those earnings, gives foreign companies financial advantages over U.S. companies, including among other things in buying U.S. companies. That can't exactly be a novelty -- charging companies money costs them money! -- and, you know, somehow U.S. companies muddle through. But I suppose a few high-profile takeover fights might focus attention on their plight.

The most photographed barn in America.

A week ago, MarketWatch announced that it would no longer use photographs of New York Stock Exchange floor traders to illustrate stories about stock markets, because floor traders are just a photogenic throwback who have very little to do with how actual stock markets function. I applaud this renunciation, though I do not plan to join in it, because you try finding an appropriate illustration for posts about equity market structure, come on. "Ooh it's a picture of some servers in a room!" No thank you. Anyway, a floor trader named Peter Tuchman, "himself the subject of a disproportionate number of emotive trading-floor shots over the years," wrote in yesterday to complain. It is an energetic, though somewhat confused, piece of trading-floor nostalgia. Tuchman unsurprisingly dislikes high-frequency trading, which rendered many of his former colleagues redundant, but falls into error in saying "we don't do that here at the NYSE." I mean, I'm sure Tuchman doesn't. But the NYSE's actual business consists of catering to high-frequency traders, who are the traders who actually provide its volume.

Things happen.

It's time to speculate about bonuses; Morgan Stanley investment banking up, JPMorgan and Citi fixed-income down, is the speculation here. "The data breach at JPMorgan Chase was among 'the most troubling breaches ever,'" despite the fact that, again, no money was taken. Spoofing "is 'a bush-league move' that most elite high-frequency firms do not engage in." Venezuela is quietly devaluing its currency. Norway has cool banknotes.

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