Levine on Wall Street: Bill Gross and Edward Quince

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.
Read More.
a | A

Bill Gross is doing things.

"Gross, who had a bandaid under his right eye, said 'it’s been a rough few weeks' since he decided to leave his former employer," which is a perfect sentence, though Bill Gross didn't write it. He did write this, his first Investment Outlook at Janus, and do you think they edited it? It more or less as ... I'll go with "idiosyncratic" ... as his Pimco letters. Gross still displays his customary facility with transitions:

We dipped, we twirled, I even did a bop or two. Travolta would have been proud. We were “Stayin’ Alive!” Most of all, however we smiled! Not the perfunctory smile of our self-conscious wedding dance three decades before, but big, huge, free-flowing grins of having fun -- real fun on a dance floor!

Midnight came as it does in most fairy tales, but I wondered no more what I had missed in the years before we had met and the 30 years since. My puzzle was complete. Sue had asked me to dance, and it turned out to be just like a fairy tale. Picture perfect.

Picture perfection or fairy tale endings do not describe the global economy or even its financial markets more than five years after its Minsky/Lehman moment. While U.S. bond and equity markets have been thrust into a seemingly safe outer orbit, the same cannot be said for other developed and developing nations.

Also, there's some James Bond stuff, all in all you'd have to say he's still got it.

Edward Quince, secret Federal Reserve chair.

Speaking of James Bond stuff, Ben Bernanke used a pseudonym, "Edward Quince," on e-mails during the financial crisis. This is very much in the raises-more-questions-than-it-answers category, with the big ones being "why Edward Quince?" and "why use a pseudonym at all?" The answer to that last one is: "Fed general counsel Scott Alvarez testified that Mr. Bernanke had used the email pseudonym while at the central bank 'to make sure that he didn’t get extraneous emails,'" and while I can't say I entirely understand how that would work, I am sympathetic with the goal. Actually come to think of it I have a pseudonymous e-mail account myself and it is wonderful, I recommend it highly to everyone.

Morgan Stanley is still doing private equity.

Among the most confusing ideas in the Volcker Rule is that banks shouldn't be involved in private equity. Running a private equity fund is a great, stable, low-risk business! You get paid fees, and other fees, and some more fees, while your limited partners take the bulk of the risk. The problem is that they don't usually want to take all of the risk; the limited partners tend to expect the bank to invest in the fund alongside them. Morgan Stanley solved this problem by just pointing to the Volcker Rule -- which limits banks' investments in their own private equity funds to 3 percent -- and saying "whaddarya gonna do," and that seems to be going well for them. This actually fits well with Morgan Stanley's shift from risky bond-trading to more stable asset managing, and it's sort of weird that the Volcker Rule would be an obstacle to that shift. Amusingly, the other way to do private equity in a Volcker-compliant way is to own 100 percent of the fund and just call it "merchant banking." (There are clever workarounds here too.) It's only when you own 4 through 99 percent of the fund that you run into trouble. You might think that owning 100 percent of an illiquid levered equity fund would be riskier than owning 4 percent of it, but that is not how the Volcker Rule sees it.

E*Trade let a lot of unregistered stock sales happen.

One way that penny stock fraud often works is: You and your buddies set up a fake or fake-ish company, you issue yourselves a million shares of stock for a millionth of a penny a share, you talk up the stock, you sell it for two pennies a share, and you have two million pennies. It turns out this is illegal not just because you're probably lying about the stock, but also because you are corporate insiders -- you founded and own and control this fake-ish company -- and you need to sell the stock pursuant to an SEC registration statement and a prospectus, or qualify for some exemption from that requirement. And you didn't: You just pumped it up on message boards and sold it in the regular-way market through your brokerage account. That's illegal, and you can see why: It's much easier for the SEC to prove that you had to register your sales, and didn't, than to prove that you lied about your company.

It also means, apparently, that the SEC can go after brokers for letting you sell the shares illegally. And not just shady brokers who are in on your scheme. Real brokers, too, have to check a little to make sure you're allowed to sell your shares. Here's a weird Securities and Exchange Commission action against E*Trade, which "sold billions of penny stock shares for customers during a four-year period while ignoring red flags that the offerings were being conducted without an applicable exemption from the registration provisions of the federal securities laws" and is now settling with the SEC for $1.5 million.

Elsewhere in SEC news.

The SEC's Investor Advisory Committee wants to change the definition of "accredited investor," which determines who is allowed to invest in things like hedge funds, private placements, and certain kinds of idiotic scams. Right now you just need to be sort of rich to be "accredited," but the committee thinks that's arbitrary and suggested things like measuring "financial sophistication and experience in trading and investing," and hahahaha how? I hereby volunteer to write the Standardized Test for Whether You Can Invest in Hedge Funds; it will be a series of critical reading questions based on passages like this article. I actually think that the "accredited investor" standard is irretrievably awful -- why should rich people get better investment opportunities than everyone else? or worse ones? -- but I guess you have to do something. I have laid out my own investor-risk-accreditation proposals in footnote 1 here.

And there is still more from the SEC! Apparently it lost 200 laptops full of sensitive market information. I don't know why it would do that. That's pretty weird.

Here's a ranking of law firms.

It's Above the Law's ranking of the "Power 100 law firms," and while I don't know what a Power 100 law firm is or really want to, I find the ranking intuitively plausible, perhaps more so than the generally accepted Vault rankings. (Disclosure: I used to work at the company that publishes Above the Law, and before that I used to work at the law firm that's ranked #1 in its rankings, so I'm at least doubly biased.)


Here is a story about how an Australian teenager created a role-playing game to simulate working in an office, as a joke, and then saw it taken over by real office workers. If you've read a better story this week about business news, or about the human condition, please do let me know, at my pseudonymous e-mail address.

Things happen.

Breaking up with a hedge fund. Bill Ackman sees a buying opportunity in Fannie Mae and Freddie Mac. Jesse Litvak doesn't have to pay back the money he made, or maybe even go to jail. Republicans don't like the Fed's reverse repo program. Eric Holder: so-so on mortgage fraud. "P&M: Citigroup poaches ABS expert from RBS for RMBS role" is just a pleasing headine. As is "CARL ICAHN: Marc Andreessen Has Screwed More People Than Casanova." Brett Icahn seems to be pretty good at managing a hedge fund. "The redistributive effects of financial deregulation: Wall Street versus Main Street" is a somewhat misleading title. Peter Boockvar "metaphorically says that one group has been killed by the Fed's policies."

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