Levine on Wall Street: Snowballs and Croque-Monsieurs

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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Bank regulation is hard.

It's always dumb to say "X is not a panacea," because no one ever said it was, but some people kind of think that bank leverage ratios are a panacea. The idea is: You can't know what a bank is up to, risk-weighting is subjective and can be gamed, so just require banks to have equity equal to a certain percentage of their unweighted assets and call it a day. Dan Davies on the leverage ratio is essential reading if you're interested in bank regulation. His core point is that, while the leverage ratio is a good tool in regulating bank capital, it is not a good idea to make it the only tool, and it's not as simple or as immune to gaming as its supporters think.

Sometimes banking reformers make a nod in the direction of derivatives by saying that they want “all off-balance sheet risks taken into account”. But they never say what they mean by this, because they can’t -- in order to require capital for risks which aren’t on the balance sheet, you need to have a whole load of formulae and risk modelling which isn’t given to you by the balance sheet, and you lose the ability to pretend that the risks faced by a big bank are actually very simple and only made to look complicated by nefarious bankers with their “complicated” formulas.

We've talked before about how this works in practice: The actually existing leverage ratio proposals are pretty complicated. A bank is a complicated thing facing complicated risks. It is so unbelievably tempting to believe that there is some simple solution out there to regulate banks simply, that all the complexity is a mirage, and that a vigorous independent regulator could come in and sweep out all the nonsense and make banks safe and simple and glorious again. There is no evidence for that view.

No, bank regulation is hard.

Here's a story about how big banks did bad things and entered into settlements (deferred prosecution agreements, non-prosecution agreements, etc.) with regulators and prosecutors that required them to confess to all of their past bad things and stop doing future bad things, and how the regulators and the prosecutors are finding new bad things (and un-confessed old bad things) and debating whether to scrap the agreements and punish the banks some more. Pro: You gotta punish bad things. Con: If you grind the banks down to nothing then you don't have banks any more, and didn't you want banks? "The cycle of misbehavior is difficult to break," ha. I'm sure there are lots of simple solutions available for this problem.

Au revoir, croque-monsieurs.

Jeremie Banet, the former Pimco portfolio manager who quit to sell croque-monsier sandwiches out of a truck a day after Bill Gross yelled at him, is coming back to Pimco as a portfolio manager. So the timeline is, Gross yelled at him in a meeting, he quit the next day, Gross left at the end of September, and Banet was back a month later. But all of those events are unrelated. The food truck, which Banet started because "it was time to follow his heart," will apparently continue under his wife's supervision. Basically any time a financial-services employee quits to do something food-related you can read a profile or trend piece about bankers becoming artisanal picklers, and I am looking forward to the reverse stories about the trend of cheesemongers and pastry chefs becoming bond investors.

Something about bitcoin.

Earlier this week, two bitcoin-related companies hired former Securities and Exchange Commission chairman Arthur Levitt as an adviser to "help them understand the imperative of a robust approach to regulation." Yesterday Levitt robustly approached a regulator on their behalf, spending an hour with Ben Lawsky, the New York State Superintendent of Financial Services, who has proposed rather strict regulation of bitcoin infrastructure providers. We know this because Lawsky tweeted about it, calling Levitt a "very special and wise man." Levitt returned the love, calling Lawsky "a good, fair, reasonable regulator." It's somehow fitting that bitcoin lobbying takes place in public, on the Internet.

Tell your clients where your assets are.

Here's a Securities and Exchange Commission enforcement action against an asset manager that was "repeatedly late in providing investors with audited financial statements of its private funds," and even the SEC knows how boring that sounds; the little quote in the press release begins "The custody rule is not a technicality" because the SEC is good at protesting too much. Still I was a bit moved by the point that these guys had "left their clients waiting for months at a time to have the materials they need to verify the existence and value of fund assets." In this post-Madoff world, it's not unreasonable to ask your fund manager "hey did you abscond with all our money?" And if the answer is "I'll get back to you in a few months," that is not reassuring.

This seems fun.

Here is a story about Jaber George Jabbour, who used to sell derivatives at Goldman Sachs, and who now runs his own advisory firm basically helping public entities who were tricked by bankers on derivatives trades. The elephant in that particular room is Libya, which has some derivatives-trickery lawsuits against Goldman pending, and Jabbour is trying to get involved in that lawsuit on Libya's side despite having previously sold derivatives to Libya for Goldman. (Not the ones they're suing about though.) Jabbour's big public success so far is winning back some money for Metro do Porto for their terrible snowball trades (including with Goldman ). When he's not advising beleaguered governments on breaking derivatives trades, he's inventing new alphabets, and if I weren't doing this job I'd probably be doing exactly what he's doing.

This seems fun too.

Or I'd be doing this, if it was an option: Credit Suisse accidentally wired $1.5 million to the manager of a small hedge fund, who then disappeared, apparently to Monaco. Credit Suisse wants its money back. The story gets stranger. Seriously my main career ambition as a banker was to get a large mistaken wire transfer and flee the country, but it never worked out for me.

Things happen.

Checking in on electronic bond trading platforms. Some people have their doubts about the quality of hedge fund reinsurance. Fiat Chrysler will spin off Ferrari. American Realty Capital Properties lost 19 percent of its market value, and its chief financial officer and chief accounting officer, because "some amounts related to non-controlling interests likely were incorrectly included in adjusted funds from operations, an error the audit committee believes was identified but intentionally not corrected." We the Economy. Chubb can't have representatives in Syria, but it can have "surveyors." Parents Trick Children Out of Halloween Candy. Why it's called candy corn. "SI congressional candidates unable to name last book read." Shakespeare's Work Emails. Who's a good dog?

  1. I suppose at this point it's time for the inevitable: Disclosure, I worked there, still own a little restricted stock. I sold derivatives, though not to Libya or Metro do Porto or, I think, to anyone who sued over them, though I could be wrong about that last part.

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