Levine on Wall Street: Rogue Bodyguards and Lost Inversions

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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Bank of America made money.

Give 'em a hand! That's $168 million of profit on $21.4 billion of revenue, or a profit margin of 0.8 percent, but the $5.6 billion of litigation expense for the quarter (up from $4 billion last quarter) was a distinct headwind. Maybe next quarter it'll be less, ha ha ha ha ha! Sadly after paying preferred stock dividends Bank of America had only negative $0.01 per share left over for common shareholders, but they'll take it; consensus estimates per Bloomberg were negative $0.09 per share.

Citi's in-house bodyguards had problems.

And ... what were they expecting? Banamex, the Mexican bank that Citi bought in 2001, had an in-house security unit that guarded its executives, board members, and whomever else it felt like guarding. Some clients, for a fee, apparently. It was not supposed to do that! But who was going to stop it? Were the accountants really going to tell the bodyguards to stop guarding outside paying clients? That seems unlikely, given what I know of accountants and bodyguards. The unit also did some garden-variety fraud:

The fraud at Banamex, which began around 2000 and continued through last year, also included misreporting of gasoline expenses to inflate reimbursements from the bank, and shell companies were used to launder proceeds.

And some special security-team misbehavior:

An internal investigation that started around the middle of this year uncovered evidence that employees had obtained recordings of phone calls without authorization, the person said. The communications of as many as 80 people were purchased and transcribed, according to one of the people.

Again more questions than answers (which 80 people? what happened after they were transcribed?), but if you had told me a week ago that Citi ran a unit of bodyguards in Mexico that "had a fleet of armored cars and operated surveillance equipment and alarm systems," and asked me to guess whether that unit inflated the cost of gas for the armored cars to get more reimbursements, I would have felt confident answering "yes." Citi! Always a delight.

Some international tax.

AbbVie is contemplating changing its recommendation on its merger with Shire, because that merger is an inversion, and new U.S. Treasury rules make inversions less tax-advantaged than they used to be. This would sadden merger arbitrageurs, but the way merger arbs work is that they got long Shire stock, not AbbVie, so they don't get to vote on the deal. Oh well. Also there is a $1.6 billion termination fee. This is generally not a good look for AbbVie; you can do a deal for tax purposes, but your public statements have to play up the fundamental business reasons, not the tax ones. As AbbVie's mostly have, including after the Treasury rules were first released; but the last-minute cold feet make it look almost like AbbVie was just doing the deal for the tax savings. Elsewhere in international tax, the famed Double Irish tax shelter will disappear at a stately pace, and Google isn't sweating it, or at least that's what it's saying publicly, because that's what you do.

Zachary Zwerko worked at Merck & Co.

But now he doesn't, and he's been accused of insider trading. He was a financial analyst at Merck, and the allegation is that he would learn about companies that Merck was planning to acquire, tell his business-school buddy (whose Halloween parties he attended, and with whom he's gone skiing, though there's no mention of golf), and the buddy would trade ahead of Merck's acquisitions. The buddy made $722,000 for his troubles. Zwerko seems to have made $0, although the way these things work is that the prosecutors have to say that he did his tipping "for a personal benefit"; perhaps it was the Halloween party invites. Zwerko is facing civil and criminal insider trading charges. The buddy seems not to be, at least not yet, though give it time. After the Securities and Exchange Commission and the federal prosecutors in the Southern District of New York spent so much time and effort going after so many SAC-Capital-related insider-trading cases, taking a lot of scalps but coming in for some criticism for their exclusive focus on insider trading, you might have expected -- I expected -- that they'd cool it on the insider trading for a bit. But, nope; they're right back in the saddle with a brand new, non-SAC-related insider trading case.

How do 10b5-1 plans work?

Sort of not like this? The idea of a 10b5-1 plan is that, if you're a corporate executive, you often have inside information. But you also often want to sell stock. So the deal is, when you don't have inside information -- basically, right after earnings, when the company has made a comprehensive effort to disclose everything it knows but its shareholders don't -- you can enter into a written contract to sell shares at preset times/prices/etc., and then if those shares are sold it's not insider trading. But this only works if you really didn't have inside information when you entered into the plan. The story of GT Advanced Technologies executives dumping stock in the days leading up to its bankruptcy filing, pursuant to plans that they put in place after failing to meet Apple's technical milestones but before, you know, disclosing that, is not a great story.

The market is rough.

Assorted things on that theme: There are pulled IPOs in London. Junk bonds are tanking, partly because the junk sector has become more tilted toward oil and gas issuers, and oil is tanking. Investment-grade bonds, meanwhile, "could be the canary in the coal mine" for further trouble, or not I guess. And hedge-fund herding does not work so great in a down market.

Dating vs. financial markets.

Here's a thing:

Then came high-frequency trading. Sites like Grindr, launched in 2009, or Tinder, launched in 2012, give a whole new meaning to what Michael Lewis has described as “flash boys” in the financial markets. We now swipe left or right so quickly that we can’t even fully process the transactions -- in this case, people -- flashing across our screens.

It goes on like that.

Things happen.

Activists are winning. The most lucrative MBAs are mostly the ones you'd expect. Here is a good look at coding boot camps as trade schools. "Health care, but for Uber." Inefficient routes. Changes are coming to the BitLicense. Man leaves banking to do food thing. What's Neel Kashkari up to? Adelle Waldman used to be a financial journalist, but then she moved to Brooklyn. Argent introuvable. Emotional support alpacas. Aggressive mopping. How computers work. A "dark, gritty reboot" of Rainbow Brite. How To Talk To Babies About Semiotics. Giving up.

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