Levine on Wall Street: Tofu Burgers and Big Boy Pants
Capital requirements are going up.
The latest from the Financial Stability Board is that "the biggest banks may be required to have total loss-absorbing capacity equivalent to as much as a quarter of their assets weighted for risk," and imagine a 4:1-levered bank! Don't imagine it too hard, though; "loss-absorbing capacity" includes bail-in-able holding company unsecured debt, and "Analysts have suggested the extra debt that may need to be issued could extend into the hundreds of billions of dollars." Banks have lots of claimants that regulators want to protect, so those regulators are trying to make sure that at least a quarter of claimants are the ones they don't want to protect:
For debt to count towards TLAC it would have to have a remaining maturity of more than a year, Carney said. “The second thing is it has to be subordinate to other creditors, to creditors who if they were bailed in would contribute to a disorderly resolution,” such as derivatives counterparties, he said.
That's a pleasingly practical standard -- "subordinate to creditors we worry about," basically -- though it seems a bit tricky to implement. One trick is to make sure that banks aren't selling loss-absorbing stuff to people that the regulators actually do want to protect. So, for instance, there'll be limits on how much bank equity and TLAC-eligible debt banks can hold: If they all hold each other's bail-in-able debt, it's harder to actually bail it in.
FX settlements are coming.
Soon? Wednesday? Get excited. The U.K. Financial Conduct Authority "has learned lessons from its protracted Libor investigations" and is going to settle its investigations into big banks' foreign-exchange manipulation quickly and all at once. I suppose this is good for justice and the rule of law and all that, though for myself I had grown fond of the slow drip of stupid Libor e-mails and chats over the course of like a year. Still, FX should be fun even if it all comes at once. And it seems like a joint international settlement that will also feature some UBS precious metals trading because why not.
What is Merrill Lynch up to?
Eating wheatgrass and doing "mild aerobics" to Kid Rock songs, apparently? That's at the behest of a wellness guru that Bank of America Merrill Lynch wealth-management head John Thiel has brought in to, I gather, cure acid reflux among Merrill brokers with "liver oil, wheatgrass, flax, chia and a type of algae called spirulina." There are other gurus! Here's one:
People who know Thiel say he has wholeheartedly embraced the New Age lifestyle that Johnson, Schwartz and another guru called davidji advocate. Davidji (pronounced david-gee and spelled with a lowercase "d") describes himself as a former banker on his web site, and specializes in wellness of the mind. Davidji said he was not immediately available for an interview.
People familiar with his Merrill training sessions say they feature bongo drum playing and meditation. A video on his web site - www.davidji.com/ - shows davidji sitting on the beach with his pet dog, named peaches, whom he says he meditates with every day.
I have no problem with any of this; acid reflux is one of the major problems facing the financial industry. On the other hand,"brokers have complained about tofu burgers served at a retreat for top producers," and it's a fair complaint. Everyone knows that top producers eat steak.
What is Sears Holdings up to?
I don't know? I mean, on some bare factual level, I can tell you what it's up to. On Friday, Sears Holdings Corporation issued an 8-K pre-announcing some financial results and saying that it might put 200-300 of its stories into a real estate investment trust and then sell shares in the REIT to its (Sears Holdings') shareholders via a rights offering. Which is not to be confused with the rights offering of Sears Holdings bonds and warrants that is currently being conducted, or the rights offering of Sears Canada shares that ended on Friday. Sears is pretty into rights offerings, is one conclusion you could draw here. The stock closed up 31 percent on Friday, with investors greeting the REIT announcement with the sort of ecstasy you'd expect to see from people who are, you know, not Sears Holdings shareholders. Breakingviews is skeptical, and guesses that part of Friday's gains might be due to short covering. We've talked previously about some potentially short-squeeze-y aspects of the current rights offering, and the timing of the REIT announcement during that offering is at least interesting.
How does Apple run its business?
Last month GT Advanced Technologies, a sapphire supplier to Apple, filed for bankruptcy, apparently due to a contract with Apple that I called "by most reasonable standards, terrible." GTAT's chief operating officer does not disagree! In an affidavit unsealed on Friday, he complained about the contract, calling it "onerous and massively one-sided" and a "classic bait-and-switch strategy." So he turned it down, right? No, of course not, it's Apple. He complained, and Apple said -- and here I'm quoting the COO, allegedly quoting Apple -- "Put on your big boy pants and accept the agreement." Apple gets to do that.
Should it? Here's one of the provisions GTAT objects to (emphasis in the affidavit):
GTAT must accept and fulfill any purchase order placed by Apple on the date selected by Apple. If there is any delay, GTAT must either use expedited shipping (at its own cost) or purchase substitute goods (at its own cost). If GTAT's delivery is late, GTAT must pay $320,000 per boule of sapphire (and $77 per millimeter of sapphire material) as liquidated damages to Apple. To put this figure in perspective, a boule has a cost of less than $20,000. Apple, however, has the right, without compensating GTAT, to cancel a purchase order in whole or in part at any time and reschedule a delivery date at any time.
Well, yes, I mean, that's not very nice for GTAT. But that's also how you make really really sure that your boules show up when and where they're supposed to. Apple is a supply chain company, and this is how the supply chain sausage gets made. The problem is that a contract like this serves two functions. First of all, it creates powerful incentives for contractors to work hard to satisfy Apple's demands quickly and efficiently. But second, it serves a signalling function: A supplier will only sign an awful contract like this if it's pretty sure that it can meet Apple's annoying demands. GTAT apparently could not, and had misgivings about pretending that it could. But it was told to put on its big boy pants anyway, and it did, and now everyone regrets it.
Some leveraged lending.
Periodically in this linkwrap I mention that U.S. banking regulators are complaining about how they've told banks not to make leveraged loans at more than 6x leverage, and the banks keep doing that, and they should stop. The frequency of the complaints suggest that they're not having much effect. Here's another one! It comes with data, including the awful-sounding fact that 45 percent of new leveraged loans exceed that 6x guidance. (Leveraged loans make up $767 billion of the $3.4 trillion shared national credit portfolio, so figure as a ballpark 10 percent of monitored loans exceed the guidelines.) The highly leveraged loans, unsurprisingly, come in for more regulatory criticism than the other ones. Check back in here in like a month for more of the exact same news, or if you don't want to wait that long, just get angry now I guess? I don't know what to tell you. Every time I read this news, I can't take seriously a 6x leverage cap imposed by regulators. It just seems weird and arbitrary and not in keeping with how bank regulation works. Apparently no one else takes it seriously either.
Do you want to be a Fraud Scene Investigator?
The North American Securities Administrators Association has a game called FSI: Fraud Scene Investigator, where you ... where you ... where you click on a screen to pretend to Google inappropriate penny stocks that an unscrupulous promoter has pitched to your grandmother. Is what seems to be going on. I don't know. It is quite wonderful, in an if-you-liked-Oregon-Trail-you'll-love sort of way, though I confess that I have not played through to the end and worry a little that there might be like 12 hours of gameplay. But if you want to teach your kids about law enforcement, but keep them away from violence and gore, and also excitement, you could always let them loose on this. (Disclaimer: Like I said, I stopped after a bit, and cannot absolutely assure you that there's no gore later on. Perhaps Grandma takes matters into her own hands when she catches up with Mr. X.)
Here are Robert Townsend and Weerachart Kilenthong on "A market-based solution to price externalities," which as far as I can tell aims to be sort of a general theory of how to regulate weird corners of finance. Many of those weird corners feature things that externalize risks by not fully taking into account the costs of illiquidity, crises, etc. Townsend and Kilenthong propose to define "discrepancy from market fundamental," to "give this discrepancy a common price per unit discrepancy, determined by a market," and then to let people participate in those weird markets only if they've bought some discrepancy. I imagine this as, for instance, a solution to the "too-big-to-fail premium" debate for banks: Instead of arguing about the value of the premium, or regulatory efforts to cut back on it through increased capital requirements, just sell too-big-to-fail-ness to the highest bidder at a market-driven price. I don't know. It's fun to think about anyway. Elsewhere in speculative but interesting, Tyler Cowen links to a paper by Andrea Matranga asking whether Neolithic agriculture developed because of an increase in seasonal climate variation 10,000 years ago. Matranga's C.V. notes other papers including "What Have the Romans Ever Done for Us? Aqueduct Suitability and the Administration of Empire."
High-frequency eyeball trading.
If you're interested in equity market structure, you should read this story about possibly inefficient algorithmic intermediation in online advertising marketplaces, if for nothing else then because it will make you more careful about saying things like "Regulation NMS is what caused fragmentation in U.S. equity markets and created opportunities for high-frequency scalping." The proper lesson is more like that electronic trading of anything, regulated or otherwise, creates opportunities for high-frequency scalping, though views on the efficiency of that may differ.
A survey says your bonus will be down. John Carney values Fannie Mae and Freddie Mac and doesn't like what he sees, even ignoring the net worth sweep. What's up with Treasury volatility? The New York Fed has a staff report on stress tests. "But how can a firm be both solvent and insolvent at the same time?," asks James Stewart, but you know the answer. Detroit creditors' haircut came with crashing literalism. Corporate insiders probably shouldn't get awkward margin loans on their stock. "Putting the shareholders first is capitalism’s biggest mistake." Is running a big hedge fund a "special contribution" to a marriage? "Fewer than one in five active managers outperformed the stock market in the year to the end of October." Some "arbitrages" are indistinguishable from "working for a living." Another Goldman alum has my dream job.
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