Levine on Wall Street: Copper and Capital

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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It's not that hard to manipulate copper.

Craig Pirrong, who knows a lot more about commodities markets than I do, objects to my take on copper. My view is sort of efficient-markets-y: If one person buys up all the copper in the LME warehouses and then tries to raise the price, the much much greater supply of copper that's not in those warehouses will flow into the warehouses and limit his ability to do that. And I still think that's broadly true, but broadly true may not be the point. Pirrong quite rightly points out that there's lots of friction along the way, and the frictions may matter more than the limits in actual fact:

World supply may have an effect on the slope of the supply curve into warehouses, but that slope can be positive (thereby creating the conditions necessary to corner) even if the share of metal in warehouses is small. The slope of the supply curve depends on the bottlenecks associated with getting metal into warehouses, and the costs of diverting metal that should go to consumers into warehouses. These bottlenecks and costs can be acute, even if the amount of warehoused metal is small. Diverting copper that should go to a fabricator or wire mill to an LME warehouse is inefficient, i.e., costly. It only happens, therefore, if the price is distorted sufficiently to offset this higher cost.

So there are limits to cornering, but they may not be binding on an actual economic actor: You can't push prices up very much, or for very long, but you may be able to push them up high enough and for long enough to make yourself a lot of money.

Stress test window dressing.

"Wall Street’s biggest debt dealers have been dumping speculative-grade securities at the fastest pace on record ahead of annual stress tests by the Fed," which is sort of charming. Stress tests are a long lumbering process but they're applied to a specific snapshot of a bank's balance sheet, so the banks have every reason to make that snapshot look pretty. Elsewhere, here are Nicolas Veron and Gavyn Davies on the European stress tests. And even in the Treasury market, liquidity is weird.

Shadow Banking and Bank Capital Regulation.

Here's a post and article from Guillaume Plantin of Toulouse modeling shadow banking in a way that I find congenial: Shadow banking is a way of financing bank assets that is like banking (issuing money-like liabilities in money market funds, etc.) except that (1) it is not capital regulated and (2) "banks and MMFs interact in a spot market in which banks cannot commit to not use their private information" and so have a market-for-lemons problem. Here's a fun conclusion of the model:

Finally, if banks have more granular information than regulators about the riskiness of their assets, then tightening capital requirements in the presence of shadow banking also comes at the cost of an excessive encumbrance of their least risky assets. Banks find it preferable to refinance these safer assets in the shadow banking sector because their private information is less problematic for such assets that are therefore better collateral. Unsecured creditors, such as depositors (or deposit insurance funds), are then left with lower quality collateral.

You could point to things like subprime securitizations that look, at least in hindsight, like counterexamples.

Robot Charles Schwab.

"The San Francisco-based company said today it will launch an automated online investment advisory service sometime in the first quarter of 2015"; it will be called "Schwab Intelligent Portfolios," and what does that say about the portfolios created by Schwab's humans? Here is the press release; I like the chief executive saying that robo-Schwab will be "appropriate for a wide range of investors -- from those who are just getting started to those who have accumulated more wealth, but prefer a technology powered approach to investing." Is that last bit "rich people who don't trust financial advisers," or "rich people who from long experience with Seamless and Uber just don't want to talk to human service providers any more"? Elsewhere, about half of Americans in the middle quintile of income own stocks, "either directly or indirectly through retirement accounts," and the median holdings of a 45-54-year-old family are $44,000. One hopes that the $44,000 is in diversified mutual funds, or at least robot portfolios. And here is a story about a robot launching a robot stock index, though the index does not seem to have been created by robots, it's confusing.

Here's a dumb way to manipulate FX.

"Foreign-exchange traders’ messages on Facebook ... are being sought by European Union antitrust regulators as they expand a probe into alleged collusion between banks beyond work e-mails and instant messages," and the mind boggles. Do people really exchange work-related messages on Facebook? They should be fired for that, regardless of the content of those messages. It is the worst way to communicate this side of, like, voicemail. "'Perhaps in future' regulators 'should just "friend" all traders,'" says a lawyer, and I'm sure he's pleased with himself for that nonsensical joke (Your Facebook messages don't have to go to all of your friends! You can have private Facebook messages! Unless the terms change!). In other Facebook news, Twitter is desperate to add more users, which is not good news for current users.

"The most important charts in the world."

Is what Business Insider calls this collection of charts picked by various financial figures to illustrate key points about the world economy, and it's sort of depressing reading. The majority pretty much goes for "continuing economic malaise," with a side dish of "weird instability in weird places," though there are outliers. Elsewhere, here is a Bank of England working paper with the glum title "Optimal monetary policy in the presence of human capital depreciation during unemployment."

Josh Harris may buy Crystal Palace.

There's a popular view that American interest in European soccer comes mostly from Brooklyn hipsters, but in my experience the financial industry runs the hipsters a close second. (Financial journalists are obviously the worst of both worlds.) The financial guys have the advantage that they sometimes just buy European clubs. The latest is Josh Harris of Apollo, who already owns some American sports teams but who's looking to get into soccer with delightfully scrappy premier league team Crystal Palace.

Things happen.

Could a Four-Year-Old Do What Carl Icahn Does? Valeant is getting ready to raise its Allergan bid. Adair Turner: The Consequences of Money-Manager Capitalism. UBS had some legal provisions. Italy's banning some bank short selling. Here are some more claims about Jefferies investment banker Sage Kelly. "Participants' blood alcohol concentrations were found to positively correlate with utilitarian preferences." A very important life rule is that if anyone says "here's a good thing to read about Gamergate" you should run screaming from the room, but this Adrian Chen story about an 8chan party at a strip club in Queens might be an exception. "Police are trying to identify a smartly-dressed man in a three piece suit who allegedly attacked a group of friends in the City after they shouted 'cheer up' to a passer-by." (Via.) The Hairpin on 1989. Who's a good dog?

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