Levine on Wall Street: Stress Tests and Weed Street

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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Stress tests.

While you're getting excited for this weekend's European stress tests, don't forget next year's U.S. stress tests. The scenarios came out yesterday, and just for giggles let's read the bad one:

The severely adverse scenario features a substantial weakening in global economic activity, accompanied by large reductions in asset prices. In the scenario, the U.S. corporate sector experiences increases in financial distress that are even larger than would be expected in a severe recession, as spreads on high-yield corporate bonds, leveraged loans, and collateralized loan obligations (CLOs) backed by leveraged loans, widen to levels the same as the peaks reached in the 2007-2009 recession. The scenario also includes a rise in oil prices (Brent crude) to approximately $110 per barrel. The international component of the severely adverse scenario features severe recessions in the euro area, the United Kingdom, and Japan; and below-trend growth in developing Asia. For economies that are heavily dependent on imported oil -- including developing Asia, Japan, and the euro area -- this economic weakness is exacerbated by the rise in oil prices.

Reading market roundups at random I see that "European markets edged lower Friday ahead of the results of sweeping EU bank stress tests, with traders’ moods darkened by news that a case of Ebola was confirmed in New York City overnight," which of course is not part of anyone's scenarios. You can't take the scenarios too seriously. The point of the stress tests is, one, to check to see that banks have plausible systems for dealing with risk and, two, to somewhat arbitrarily inflate the amount of capital required at the riskier banks.

The Wolf of Weed Street.

"I pour honey in the market's ear and let buy calls roll off my tongue like gum balls," says a guy who touts marijuana-related penny stocks on Twitter, and it's all like that. ("The Wolf of Weed Street" is his coinage, and his followers are of course the "Wolf Pack.") Tim Sykes makes an appearance ("He does not look anything like Tom Cruise."). "The Wolf Pack is the Fight Club of penny stocks" is another quote, of course. The Wolf's definition of "fundamentals" is worth reading ("Well, they have a business and a vision," it begins.). "Why anyone would take investment advice from a Twitter handle escapes me at the moment," concludes the writer, and he is right.

Liquidity and Treasuries.

I still don't quite know what to think of the bond-illiquidity story, but here is Tracy Alloway arguing that the perception of illiquidity caused money managers last week to hang on to risk product -- probably propping up prices in risk assets and not testing liquidity -- while dumping rate product, which remains extremely liquid, in part because new regulations that restrict dealers don't really affect Treasuries. And here is a fun story about someone in the Treasury futures market forgetting that the U.S. didn't issue 30-year Treasuries for a while, and so selling millions of dollars of futures at way too low a price. One lesson here is that modern liquid markets are algorithmic markets, and algorithms are often dumb.

The SEC takes in a lot of money.

Here is a Yale Law Journal comment on the monetary penalties imposed by the Securities and Exchange Commission. The SEC's collections have risen dramatically in recent years, for reasons that you're probably well aware of, but there has not been a corresponding rise in amounts paid back to investors through "Fair Funds" and other restitution. Which makes the SEC quite a profit center for the government.

Standard General Hedge Fund.

Here is the fun story of Standard General, a hedge fund started by two alumni of Och-Ziff with a name "inspired by hoary brands like Standard Oil and General Electric," which they liked because it "didn't even sound like the name of a hedge fund." I don't know if they live in Brooklyn but that preference gives off a nice midcentury-throwback-hipster vibe, which is entirely fitting with their investments in Media General (that name!), American Apparel (that name!), and RadioShack. Also one of the managers seems to have completed a hostile merger of a Stuyvesant High School alumni association, which does not at first sound like something that should be possible.

Herbalife in Venezuela.

Pershing Square commissioned this report on Herbalife's Venezuela activity ; the gist of it is that Herbalife sells its product in Venezuela and allows distributors to convert bolivars into dollars at a considerably more favorable exchange rate than Herbalife, or anyone, can actually obtain on the unofficial market. Herbalife denies this. The report argues that Herbalife's profits are overstated because it's booking sales at unrealistic exchange rates; Herbalife disagrees. More interesting than the factual dispute is the report's model of Herbalife as money-transfer system, in which expatriate Venezuelan distributors allegedly use their Herbalife royalties to effectively turn bolivars in Venezuela into dollars abroad. If you believe the report's claims about the exchange rate then this could be a perpetual-motion machine in which you transfer money in at the unofficial rate and out at the much more favorable Herbalife rate.

What else is Bill Ackman up to?

The Allergan/Valeant/Pershing Square securities lawsuit drags on, and Bill Ackman gave a deposition. Here is a redacted transcript. Here are some highlights. Here is the highest of the highlights:

Q. Do you recognize Exhibit 19?
A. It was an e-mail that I sent [Valeant CEO] Mike [Pearson].
Q. And you say “I have a good idea.”
A. Yes.
Q. Do you recall what you were talking about?
A. I have a lot of good ideas.

He also said "I love depositions," and you can see why.

Charlie Ergen is no fun for investment bankers.

Which means he's fun for the rest of us. "Goldman Sachs Group Inc., Citigroup Inc. and Wells Fargo & Co. all view the 43rd-richest man in the world as a client of last resort when it comes to deals," because of his "willingness to back out at the last minute" and "hard-nosed negotiating over fees and deal terms." So much of financial activity is about social convention. Banks are selling a fuzzy and hard-to-quantify service at highly negotiable rates; they get paid because senior bankers create a relationship in which clients want to pay them. If you're just immune to that convention, you can save a lot of money. On the other hand you can end up a "client of last resort," which mostly just means that the bankers complain about you to the press sometimes.

How's Bill Gross doing?

This well:

Janus Capital warned its shareholders they will see higher compensation expenses next year, as the company throws its resources behind Bill Gross and his new bond fund.

I guess that's not all for him though.

How to be lazy.

Useful:

The third principle is that you should always try to get a job where there is no clear relation between input and output. The public sector is obviously a skiver’s paradise. In 2004 it took two days for anyone to notice that a Finnish tax inspector had died at his desk. In 2009 the Swedish Civil Aviation Administration discovered that some of its employees had spent three-quarters of their working hours watching internet pornography. In 2012 a German civil servant wrote a farewell message to his colleagues, on his retirement, confessing that he hadn’t done a stroke of work for the past 14 years.

Things happen.

Here is a fascinating look at the tensions between Germany and the European Central Bank. African sovereign debt is hot. Facebook has yet another lockup expiring soon. "As Nigel looked out his office window towards the lights of Canary Wharf in the distance, he struggled to remember the definition of a collateralized debt obligation." Reynolds Notes the Irony in Its New Office Smoking Ban. "Business journalism will be a growth area forever." "Bus driver who kicked passengers off because 'he hadn't had lunch' was just following rules."

(Corrects direction of futures trade in third item.)

  1. From Christine Richard, a former Bloomberg News reporter who has written a book about Bill Ackman.

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