Levine on Wall Street: Stress Tests and Dollar Wars

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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Happy European bank stress test week.

Next weekend, the European Central Bank and European Banking Authority will release the results of their asset quality review (in which the ECB decides if banks should write down their assets) and stress test (in which the EBA decides if they need to raise more capital). This is a hard job: You want to create confidence that the tests were rigorous, without creating panic that many banks failed them. So it's mighty convenient that there are two tests. Dan Davies thinks there'll be lots of AQR failures with minor consequences, and few stress-test failures with serious consequences:

I think I can see the thinking behind this way of presenting the results. The Euroland supervisors are hoping that the headline news will be made by the front pages of the reports, so they will be able to have it both ways  -- a big headline in the Financial Times and the Wall Street Journal saying that their test was credible because it failed so many big names, while at the same time tipping the wink to market analysts that most of the “failures” were not really failures at all, and that nearly all of the required recapitalisations have already happened. To be honest, I find this communication strategy rather clever.

Elsewhere, Ireland isn't too stressed about its banks, this year anyway.

The battle of the Levines.

Here's a letter from Mark Levine, a portfolio manager at Elliott Advisors, to Howard Levine, the chief executive officer of Family Dollar, declaring a proxy fight with the goal of getting Family Dollar, which has a merger agreement in place with Dollar Tree, to be more responsive to Dollar General's higher but riskier offer. So I count three Dollars and two Levines in that last sentence, which was written by a third Levine. (I'm no relation to the other two; I don't know if they're related to each other, though obviously I hope so.) A lot is now up to timing of antitrust review: If, for instance, Family Dollar's deal with Dollar Tree gets antitrust clearance soon, and Dollar General's offer does not, then you could imagine the Tree deal going to a vote of Family Dollar shareholders well before the 2015 annual meeting at which Elliott wants to vote out the Family Dollar directors. 

Private equity and hedge funds.

Gretchen Morgenson looked at some private equity limited partnership agreements and didn't like what she saw. Here's a lawyer:

“I think it is unseemly and counterintuitive that these state officials who have billions of dollars to invest don’t drive a harder bargain with the private equity folks,” he said. “A lot of pension funds have the attitude that they are lucky to be able to give their money to these folks, which strikes me as bizarre and certainly not acting as prudent stewards of the public’s money.”

There are a bunch of unpleasant terms in these agreements, as you'd expect; generally speaking high-powered agents want their principals to let them do whatever they want at the principals' expense, and the agents write the contracts. But that doesn't necessarily mean that the principals aren't driving a hard bargain. It's worth distinguishing terms -- indemnification, fiduciary duties, tax allocation on excess distributions of carry, that sort of thing -- from the core economics like, you know, what the fees are (and how well the fund does I guess). You could imagine a tradeoff between terms and economics, where limited partners could get sensible terms and high fees or lower fees with harsh terms. Not that there's much reason to think that happens. Elsewhere, pension funds are increasingly skeptical about hedge funds. But Princeton's endowment was up 19.6 percent in the last fiscal year, behind Yale but ahead of Harvard.

Some art.

Here's a story about the art market. Ron Perelman liked a painting at Larry Gagosian's gallery. Gagosian asked $8 million; Perelman offered $6 million. No deal. Days later, Gagosian sold it to the Mugrabi family for $7.25 million in what Perelman now thinks was a collusive transaction. Then Perelman made another offer, and Gagosian said the new price (for a trade he'd broker between the Mugrabis and Perelman) was $11.5 million. They settled on $10.5 million. Perelman is now suing for reasons that remain somewhat elusive to me. 

One obvious reaction is Felix Salmon's: Gagosian asked for a price, Perelman negotiated it down, they agreed on $10.5 million, that's the deal, and how Gagosian split that with the Mugrabis is irrelevant. Perelman wanted the painting enough to pay $10.5 million for it, so that should end the discussion. Another reaction might be: If you think of this painting as a tradeable commodity, a "wash sale" between Gagosian and the Mugrabis to "paint the tape" and increase the apparent value of the painting would look sort of like fraud. (That, for instance, is almost precisely the Jesse Litvak case.) So the question is sort of, do people buy art because they like the art or because of their perception of its market value? I guess for a $10.5 million Cy Twombly that sort of answers itself.

Some podcasts.

On this week's Slate Money podcast, Felix Salmon and Cathy O'Neil talked with John Lanchester about his new book, "How to Speak Money," which drove me to Ello to make what I think is the obvious point that the complexity and difficulty of finance is mostly an invention of journalists, not of the financial industry. People in finance tell simple clear stories about how things work and what their economic motivation is. People who want to criticize finance are the ones who insist on difficulty and inscrutability. This is strictly a point about communication strategy, not substance, but it gets very weird. So Anat Admati, who wrote a whole book to explain what's wrong with the claim that "if you increase the amount of capital that banks have to hold, then that capital will stay idle and they won't be able to do as much lending," replied that, no, the financiers are the ones who insist on complexity. 

Elsewhere in podcasts, here is Stephen Colbert talking about his workday, also on Slate, and it is great. And go listen to Alex Blumberg's Startup podcast, a podcast about starting a business to make podcasts, which is amazing.

Things happen.

Here is Marc Andreessen talking to Kevin Roose about the nature of work, the political system, Hootie and the Blowfish, and arguing with people on Twitter. Here is an excellent Freddie deBoer post about police violence; a good exercise is, re-write it about the wildly popular prosecutions of insider traders, with "mass incarceration" substituted for "police violence." Pritchett and Summers: "the single most robust empirical finding about economic growth is low persistence of growth rates," and "outside of the OECD countries, the process of economic growth is not at all well characterized by business cycle variations around a (relatively) stable mean" (via). Ally Financial is doing great. Claims about Eric Schneiderman. Some more Nazi awkwardness for UBS. Goldman Sachs has become Republican.

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:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net