Levine on Wall Street: Big Banks and Shareholder Rights

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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Banks can't get too big.

The Federal Reserve finalized the Dodd-Frank-inspired rule saying that banks can't acquire more than 10 percent of the liabilities of the banking system by merger. That means about $1.8 trillion, these days, versus JPMorgan's $1.4 trillion, so JPMorgan could still roll up a couple of regional banks, though it hardly seems worth it. There are exceptions for crisis acquisitions of failing banks, though ask Jamie Dimon and he'll tell you that that hardly seems worth it either. There is also an exception for the acquisition of securitization vehicles, basically because a securitization looks, legally, like a financial company, but is really just a portfolio of loans or bonds or whatever. So legally you'd analyze it as buying a company, which would seem forbidden, but really it's just buying some loans and financing those loans with the securitization. And the intent seems not to be to prevent banks from growing their balance sheets by buying and financing loans, but just to prevent them from growing their balance sheets by doing mergers. Why that would be a useful distinction seems a little unclear to me. Elsewhere, Barclays might split into eight parts, though not in a fun way (eight separate public companies), just in a boring internal-reshuffling way.

Should shareholders get to nominate directors?

New York City comptroller Scott Stringer thinks so, and so apparently does Calpers, so I guess eventually it will happen? The going rate for the ask is that if you've owned at least 3 percent of a company's stock for at least 3 years, you should be able to nominate directors for election on the company's own proxy, which makes this fairly useless for e.g. real activist campaigns. Stringer is targeting 75 companies including eBay, Exxon Mobil, Monster Beverage, and Priceline, none of which have New York City pension funds as a 3 percent shareholder, so this does seem mostly symbolic, as so many corporate governance things do.

You have to tell shareholders if you dilute them.

If you're a public company, and you sell a bunch of stock in an unregistered transaction, then, first of all, things probably aren't going great. There are a couple of things that could be happening, of which the most benign is that some big investor is providing you with last-ditch equity financing at pretty dilutive terms. (Another alternative is: You are run by crooks who are giving themselves stock to sell in pump-and-dump transactions.) But second of all, you do have to disclose that. That's just a Securities and Exchange Commission rule. Here is an SEC press release fining 10 companies for not disclosing their unregistered securities sales. This is not Goldman selling stock to Warren Buffett; this is wee companies selling gobs of stock without telling anyone about it. One at random -- OK no because I like the name -- is Red Giant Entertainment, which in the course of three months "sold more than one billion shares of common stock" in unregistered and undisclosed transactions, an amount that "exceeded 190 percent of the number of shares of common stock outstanding" reported on the previous 10-Q. That doesn't sound like a good idea.

Janus got what it paid for.

Here's how Janus is accommodating Bill Gross, according to its chief executive, Dick Weil:

At the moment, that means furnishing a permanent office to Mr Gross’s liking in Newport Beach, California, just yards from Pimco.

Rather than giving him a large team to manage and a desk on an open plan trading floor, Mr Gross will work behind a closed door. The aim is to prevent the kinds of outbursts that upset many Pimco staff. Mr Weil says he “wouldn’t dispute” the characterisation that Mr Gross has to be managed with kid gloves.

“Bill likes quiet time to think, and our job is to make this fun and successful for Bill so he does it for a long time.”

There is a lot to love here. For one thing, Pimco and Bill Gross have long sort of halfheartedly denied that Gross made for a poisoned culture at Pimco; Janus is just straight up admitting it and trying to isolate the poison. On the other hand, there are Weil's euphemisms -- oh, he just "likes quiet time to think," and you've got to "make this fun" for him. Also, Janus is located in Colorado, and I just love the idea that the way to isolate Gross is to sit him in an office a thousand miles away and then make him close the door.

Au revoir, Leyne, Strauss-Kahn & Partners.

I just feel like European financial press releases are more emotional than American ones. Here's how the board of Dominique Strauss-Kahn and Thierry Leyne's financial advisory and investing firm declared insolvency:

The Luxembourg-based firm said in a short statement that, after the “tragic death” of Mr. Leyne, the board had discovered “additional commitments within the group of which it was unaware and which aggravate the delicate financial situation.” It added: “Consequently [the board] has decided to declare insolvency.” ...

In the statement, LSK’s board said the new information “called into question the future of the company, whose credit is irreparably compromised.”

So many adjectives and adverbs! (The precipitating event seems to have been some trades that Leyne allegedly made for a Swiss investment firm before his suicide two weeks ago. The Swiss firm called those trades "totally unauthorized," as opposed to just mostly unauthorized.) Here's the Lehman Brothers bankruptcy press release, which is all nouns and verbs and makes it sound like bankruptcy is a totally normal thing to do on a Monday. I kind of like the Leyne Strauss-Kahn approach? If your company is going under, why not call its credit "irreparably compromised" and describe the situation as "delicate"?

Prince Alwaleed has fun.

Look it's not actually the case that Prince Alwaleed bin Talal of Saudi Arabia is suing Forbes for putting him too low in its billionaires ranking. He's actually suing Forbes for accusing him of manipulating the stock price of Kingdom Holding Company, which makes up a big chunk of his assets. Here's his lawyer:

He told the court that a “vanity allegation” that the prince wanted a higher ranking on the Forbes billionaires list was “a separate and distinct allegation” but is not part of the lawsuit.

Still. He's spent 1.4 million pounds on the lawsuit so far (says Forbes's lawyer!), and the trial is still months away, and obviously the O. Henry outcome would be for the prince to spend so much money on the lawsuit that he does drop out of the top of the billionaires ranking.

Some election-y stuff.

If you're into that sort of thing: A Republican Senate probably won't do much about housing finance reform, though the Federal Housing Finance Agency still might. Hedge fund donors did a decent job of backing winning candidates. And banks mainly just want to be left alone, though their "modest wish list" includes "rolling back swaps rules and watering down restrictions on proprietary trading." And some Republicans don't like big banks, which could be a problem for big banks.

Things happen.

The definancialization of commodities. Benchmarking is "a force to up-end the relationship between risk and return," as "agency frictions bias the aggregate market upwards" and "raise the volatility of overvalued assets." Jay Z bought a champagne brand. Goldman is getting out of hedge fund stakes ahead of the Volcker Rule. Elliott Management is trying to prevent an Argentine lawyer from going back to Argentina. Greenlight Capital has given up on its Keurig Green Mountain short, but is bearish on Amazon (and here is its third quarter letter). BlueCrest is secretive and full of insomniac poker players. The first insider trader. A banker who claims to have been a CIA agent. A darts player. American Beagle Outfitters. What if you got paid in coins raining down in your office?

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