Levine on Wall Street: Underwater Stress Tests

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

There were some stress tests.

Here they are. Here's the European Central Bank's press release announcing 25 billion euros of capital shortfalls at 25 of the euro area's 130 largest banks, and 48 billion euros of re-valuation of assets after the asset quality review. But most of that 25 billion euro capital shortfall has already been filled, leaving just 6.35 billion euros of capital still to be raised. Here's the presentation, and the aggregate report. Here's the asset quality review of Lithuanian bank AB DNB bankas, just so you can see what the asset quality review of a Lithuanian bank looks like. Here's a breakdown of the asset quality review results. Italy did not do great. Monte dei Paschi remains the worst. Greece is trying to stay chipper. Here's a single Excel file with all the data, if that's your sort of thing. Here's Heard on the Street calling the stress tests a "Goldilocks result," finding enough problems to look credible but not enough to induce panic. Here's Dan Davies a week ago looking fairly prescient. Here's Lombard Odier saying that the "news is both worrying and reassuring, but not in equal measure," which is a good all-purpose line, especially if you stop there.

Bill Ackman does things.

A semi-serious hypothesis: Bill Ackman has a secret competition with another hedge fund manager (Einhorn? Icahn?) to see who can get the most outrageous stories about his own competitiveness into profiles. Can this really be true?

Last year, Mr. Ackman and some friends took a scuba-diving trip off the coast of Myanmar. The sun was warm, the ocean calm, but even in this idyllic setting, Mr. Ackman felt compelled to devise a competition he could win. After surfacing from each dive, he checked his air gauge against everyone else's, to see who had used the least amount of oxygen while diving. Using less oxygen suggested less stress, thus proving who was least rattled under water.

His next group vacation "is Navy SEAL training," so look forward to the profile about how he and his buddies competed to see whose heart rate was lowest after killing a man.

Hedge funds aren't that bad.

Here is Cliff Asness with a "(somewhat tepid) defense" of hedge funds. Asness is himself sort of a hedge fund manager -- he might dispute that -- and also a hedge fund skeptic, but his focus here is on criticisms that a hedge fund index underperforms the stock index. He just runs the regression (from 1994 to 2014) and gets a beta of 0.37 and an alpha of 3.5 percent, which sort of explains why hedge funds underperformed so badly in 2013: 2013 was a good year for stocks, and if you were not invested aggressively in stocks you missed out on that. In particular, over the financial crisis -- July 2007 through February 2009 -- "hedge funds handily beat both stocks and" a 60/40 mix of stocks and bonds. So they are more or less, in aggregate, working as designed. On the other hand, their correlation to stocks is going up. Here's what he sees as the better criticism of hedge funds:

What is going on with hedge funds is that they are still about as net long as before, but the positions they are taking around this average net long seem less aggressive. In geek language, hedge funds' beta to the S&P 500 has been relatively stable, as correlation has risen and volatility has fallen; this is not a good development for fee-paying hedge fund investors. You don't pay high hedge fund fees for the net long market exposure. That's something you stomach if you get enough of the good stuff. The good stuff you pay hedge fund fees for is the uncorrelated return in excess of that net long in stocks (I'm implicitly ignoring any possible returns from timing this equity beta). It appears that less "attempted good stuff" is going on now than there used to be.

There's another Bank of America mortgage settlement.

Come on! Come on! How is this possible? But the latest is that a "final piece" (ha!) of the settlement "is being held up by an internal fight at the U.S. Securities and Exchange Commission" over whether Bank of America should get the standard set of waivers allowing it to easily raise capital, etc., despite confessing to various frauds in its selling of mortgages. On the one hand I guess I can't fault the Democratic SEC commissioners for saying, y'know, BofA has had a poor track record of telling the truth in offering documents, maybe we should make offerings harder for them. But the actual consequences don't have much to do with the crime -- it's not like anyone will check if they're telling the truth in new offering documents -- and so denying BofA the waivers would mostly just annoy the bank, annoy investors, and make the financial system slightly less stable in order to prove a dumb political point.

The Clippers are also a nice tax shelter.

One thing that I learned yesterday is that buying a sports team is tax deductible. I mean, you can amortize a "franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts)" over 15 years, and since sports teams tend not to be full of hard assets, most of the purchase price will be deductible over time. Specifically, the Financial Times looked at Steve Ballmer's purchase of the Clippers and concluded "that Mr Ballmer could claim about half of the purchase price in current terms" in amortization. One way to think of this is that if he'd bought a $2 billion yacht, that would not be deductible (probably!?); if he'd given $2 billion to charity, that would be deductible; but he bought the Clippers and that's 50 percent deductible. Most things that people do as hobbies are not tax deductible, but really rich person hobbies are more likely to be deductible, because a favorite hobby of really rich people is avoiding taxation.

Anti-structuring is rough.

Meanwhile, if you have $12,000, it's illegal to deposit it in the bank via two $6,000 checks, or sort of. It's illegal enough that the Internal Revenue Service can take your money without ever charging you with a crime, anyway. That doesn't seem like great tax policy either.

Things happen.

Options Embedded in ECB Targeted Refinancing Operations. Banks are investing in cyber-security start-ups. "When news came that the chairman was taken into custody, it was a shock to banks" that had loaned him money. "Berkshire Beyond Buffett: The Enduring Value of Values" is a book title. There's a fun fight over a Caravaggio. There's a really fancy mall on Long Island. "Not all of the justices went to elite institutions. Some went to Yale."

  1. Another thing I learned yesterday is that the Charge of the Light Brigade happened on St. Crispin's Day. Did everyone else know that? Anyway, happy belated St. Crispin's Day!

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