Levine on Wall Street: Robin Hood and Bonus Caps

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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How else can you manipulate swaps?

Here are two European Commission antitrust settlements with RBS, UBS, JPMorgan and Credit Suisse over manipulation of Swiss interest rate derivatives. The first is a 61.6 million euro fine against JPMorgan for teaming up with RBS to manipulate Swiss franc Libor, and a little Libor settlement is hardly news. But the second breaks some new ground; it fines the banks a total of 32.4 million euros for this:

The Commission's investigation disclosed that between May and September 2007, RBS, UBS, JP Morgan and Crédit Suisse agreed to quote to all third parties wider, fixed bid-ask spreads on certain categories of short term over-the-counter Swiss franc interest rate derivatives, whilst maintaining narrower spreads for trades amongst themselves. The aim of the agreement was to lower the parties' own transaction costs and maintain liquidity between them whilst seeking to impose wider spreads on third parties. Another objective of the collusion was to prevent other market players from competing on the same terms as these four major players in the Swiss franc derivatives market.

That's strangely tantalizing? EC Antitrust doesn't go into a lot of details, so I don't have the embarrassing e-mails about this particular cartel. On the face of it, it doesn't sound particularly terrible. I mean, retail prices do tend to be above wholesale prices. But it was bad enough to require fines seven years later, so I guess the e-mails were pretty outrageous.

How are the Allergan/Pershing Square/Valeant lawsuits going?

Oh, you know, great. Pershing Square and Valeant have filed some counterclaims in Allergan's California lawsuit (remember, Allergan is suing them for insider trading in its stock), and the counterclaims are probably pretty juicy, in that they're mostly redacted in the filed versions, which are just a sea of black bars. The gist is that "Allergan CEO David Pyott personally led a campaign of 'misconduct' to fend off a $55 billion hostile bid from Valeant Pharmaceuticals," doing things like questioning Valeant's accounting and then withdrawing its accounting expert just before he was going to be cross-examined. Pershing/Valeant also accused Allergan of ignoring the advice it got from its M&A adviser, Goldman Sachs, to talk to Valeant, instead hiring new advisers to dig up dirt on Valeant. Most interesting to me are the accusations that Allergan conducted a surreptitious roadshow in Canada aimed at getting Valeant shareholders to sell their stock, driving down Valeant's stock price; Pershing/Valeant's theory is that this would violate proxy solicitation rules. I think the idea is that if Pershing/Valeant were maybe a bit loose on the insider trading thing, and Allergan was a bit loose on the proxy solicitation thing, it all cancels out, everything should be dismissed, and the deal should just go to the shareholders to decide.

Here's some Robin Hood stuff.

A bunch of hedge fund managers talked their books for charity yesterday, so, I mean, here are some books. Dan Loeb is long Amgen, and wants it to break up into "GrowthCo," which grows, and "MatureCo," which is mature, and wouldn't it be nice if breakup cases actually came with real proposals for the names of the new companies instead of generic NewCo names? It would make it harder. Here is Loeb's third quarter investor letter, with more on the Amgen case; he's flattish for the quarter and up 6 percent for the year. Carl Icahn thinks EBay should spin off PayPal; if you've been paying close attention you'll notice that Icahn has been advocating that for a while, and that EBay has agreed to do it, but, y'know, it's his point and he's sticking to it. Icahn is also "quite concerned that something is going to happen" to the stock market, so position accordingly. Elsewhere, Bank of America estimated the strike price of the Fed put; it's apparently 10 percent down from recent lows.

How's the mortage servicing business going?

Pretty terrible: "New York state’s top regulator expanded its probe of Ocwen Financial Corp. , saying the mortgage-servicing company backdated thousands of letters to borrowers that prevented them from being able to promptly correct problem loans." Ocwen confessed the problem -- "due to software errors in our correspondence systems, we inadvertently sent improperly dated letters to some borrowers" -- in a press release that said it affected only 283 borrowers in New York, and then had to issue another press release saying "Ocwen is aware of additional borrowers in New York who received letters with incorrect dates but does not yet know how many such letters there were." Ben Lawsky says "potentially hundreds of thousands," which is more than 283. I think of it as a miracle of modern finance that mortgages can be originated and transferred and sold and serviced and paid off and someone is keeping track of it all, but I guess the lesson is that they're not. Meanwhile in Las Vegas, the Mortgage Bankers Association is full of complaints that banks get sued too much over mortgages, and it's hard to be sympathetic after the Ocwen stuff.

How's Bill Gross doing?

Pacific Life Insurance Co., which invented Pimco in 1971 and owned it until 1994, "is moving some money to Gross's new firm, Janus Capital Group," from Pimco. So that sounds like a vote of confidence in Gross, at the expense of Pacific Life's corporate child? Except that the decision was made before Gross's move? Just a weird coincidence? Or, like, they were trying to get away from him, and failed? "Hey, great to see you, how funny that we both ended up here," they laugh nervously.

Dan Davies on bonus caps.

He is not a fan:

So, the regulation of compensation levels has obvious costs. The intended benefits are that it will “reduce risk taking incentives”. As I’ve mentioned earlier, I did some of the original regulatory economics work on this subject, and it was, largely, wrong. Or at least, it was based very heavily on one particular case (Nick Leeson at Barings Futures Singapore), which extrapolates reasonably well to a few similar incidents (Jerome Kerviel at SocGen and Kweku Adoboli at UBS also seemed to have been motivated by bonus upside potential), but not to any of the big failures that really caused the problems  --  recall that the subprime CDO crisis in the investment banks was not related to risky instruments, far from it. It was caused by AAA and super-senior tranches of CDOs, instruments which were believed by everyone who held them to be very very safe indeed. Also, looking back even at the Leeson and Kerviel cases, the real damage wasn’t done by people speculating on the upside --  it was done when the rogue traders tried to cover up their mistakes and nobody detected what they were doing until it was too late. Basically, bonus regulation is the answer to a question that nobody asked.

Obviously there are mood-affiliation benefits to demanding that bankers get paid less, though.

Things happen.

Luxembourg is in danger of losing its "most valuable export: tax relief." Why would the ECB buy corporate bonds? The impact of liquidity regulation on banks. Herbalife: "This is war." Here's a terrible story about a startup. Here's a weird startup that just got Google money. Here's a strange data point about the Hustler Club. "There’s a hashtag being passed around a certain clique of finance twitter." Pensioner who lost case about golf handicap faces legal costs of €500,000. Moronic Mailroom Worker Worked Way Down From CEO. Dachshund's Creek.

  1. Also that headline begins "Ocwen Accused Anew," which is fun to say.

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