Levine on Wall Street: Bailouts, Inversions and Shell Factories

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

Will Hank Greenberg win his $25 billion AIG lawsuit?

Greenberg, the former chief executive of AIG, is suing the government for $25 billion because he thinks AIG's bailout wasn't generous enough. This sounds absurd, and is absurd, and I have laughed at it for a while, but it says here that he might win. There are some important legal arguments -- about the Fed's statutory authority to take stock in a company, for instance, or about the requirements for a shareholder vote on a stock split under Delaware law -- but a lot presumably comes down to how the federal judge hearing the case feels. The balancing of the equities is pretty much, the government did cut some corners and give AIG a harsh bailout, but, on the other hand, y'know, it was 2008, it was a bailout, what do you want. A New York federal judge dismissed a basically identical Greenberg lawsuit two years ago, on more or less those grounds. But the D.C. federal judge hearing the case now may have a different view:

In contrast, Wheeler appears intent on writing an opinion that will guide what regulators are permitted to do in the next financial crisis, said Stein, of Bloomberg Intelligence.

“He sees a real absence of established precedent about what the government can do,” Stein said.

Now, you might argue that the government should have some flexibility in how to bail out systemically important institutions in the midst of a global financial crisis, but I guess that is an unpopular view these days. I'm not sure "here's $25 billion more for AIG" would be a more popular view? Anyway. Greenberg may testify, for the government of course, because this case has been a parade of high-profile hostile witnesses. 

John Malone has fun.

A U.S. company can do an inversion merger to move abroad and avoid U.S. corporate taxes, but its shareholders will have to pay capital gains taxes on the move. That's what your tax lawyer will tell you, because it's the law. Many people -- many corporations that do inversions -- would just accept that answer and pay those taxes. But John Malone, who runs Liberty Global, is not that sort of person. He dares to dream the impossible dream, of not paying taxes. And so he found a way to avoid shareholder-level tax on his shares when Liberty Global inverted to avoid corporate-level tax, turning "a provision that was supposed to be punitive into something they used for their benefit." "He’s congenitally averse to paying taxes," says Robert Willens, but that doesn't quite cover it. A surprising number of the tools of modern financial engineering owe their existence to John Malone, whose influence extends far beyond his own individual tax bill. You should think of him less as a rich guy who doesn't like paying taxes and more as one of the deeply original artists of our time, who happens to work in the medium of not paying taxes.

A shell factory.

Here's a charming Securities and Exchange Commission settlement. Two brothers, Charles and Mark Smith, would help small businesses go public to raise money via initial public offerings. They would conduct the offering, raise money, and then not give the small businesses any of it. The small businesses would just sort of hang out for a while, then go back to being private: "they were left essentially where they started -- with small, private businesses, having received little or nothing from their association with the Smiths." So that's ... mediocre for them? But you couldn't exactly call them victims of a scam? Maybe the victims were the shareholders, who parted with money that was not invested in the businesses as promised. But: "At least 89% to 99% of those shareholders were trusts or other business interests controlled by the Smiths, or were the Smiths’ friends, relatives or acquaintances." So, roughly speaking, the Smiths took their own money, parked it with these small businesses for a while, and then took it back?

The idea is that the Smiths used these businesses to get around blank-check registration requirements; the goal was to create public shell companies -- the Securities and Exchange Commission calls this a "shell factory" -- that could then be used to take other businesses public without going through the registration process. But of course you had to go through the registration process with these companies. I kind of don't get why this seemed like a good idea.

Happy Merger Monday.

LabCorp is buying Covance for $5.94 billion. Publicis is buying Sapient for $3.7 billion. Altice is offering $8.8 billion for PT Portugal. Diageo will trade Bushmills to Cuervo for Don Julio. Elsewhere in M&A banking, The Epicurean Dealmaker makes fun of the investment banking function at Big 4 accounting firms ("So Big Four accounting firm partners are always wheedling and cajoling their financial sponsor clients to let their pet investment bankers 'do something,' and sometimes the PE guys let them."). 

Some bonds.

Municipal bonds are having a good year. Residential mortgage bond issuance is the lowest since 2000, for reasons of supply (putbacks, higher lending standards, etc.) and demand (higher property prices make buying harder). Apple is apparently planning to sell bonds, "possibly at least partly in euros." 

An out-of-office autoreply.

Obviously the story of Rurik Jutting, the Bank of America Merrill Lynch employee charged with murdering two sex workers in Hong Kong and hiding one of them in a suitcase, is horrifying. But then there's this:

An automated e-mail reply from the Bank of America Corp. (BAC) account of Rurik Jutting yesterday said he was out of the office “indefinitely” and recommended contacting someone who’s not “an insane psychopath.” ...

The automated reply also said: “For escalation please contact God, though suspect the devil will have custody. [Last line only really worked if I had followed through..]”

What? It's worth pointing out that it's not unheard-of for investment bank employees to log into each other's abandoned computers and write inappropriate e-mails, though it's a little hard to believe that happened here. 

Sometimes truth does come in a jar.

If somehow you missed this Jefferies memo on Friday, you can still read it today, because it's still prominently featured on the firm's home page

With that confirmation, we went to our partners in healthcare investment banking yesterday afternoon and said, “The two of us are going to go take a drug test, and do you want to join us?”   Our Global Head of Investment Banking and the three other investment bankers mentioned in the custody-case papers as alleged serial drug abusers stood up and each said, “I do.”

Good talk, good talk.

Things happen.

How the Market Ruined Twitter. Arnold Kling on breaking up the banks. Happy Single Supervisory Mechanism Day. "By sticking with the bond traders, however, Deutsche is in effect betting that FICC’s troubles are mainly cyclical." Ten Key Points from the Final Risk Retention Rule. Financial market benchmarks should be based on transactions, and weighted by transaction sizes, though "it is typically impossible to implement a complete absence of manipulation." UBS foreign exchange traders won't be able to trade in their personal accounts alongside client orders. Izzy Kaminska on the oil production balance. Phil Falcone goes all out for Halloween.

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:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net