Levine on Wall Street: Revolving Doors and Leveraged Loans

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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Goldman and the New York Fed are friends.

Here's a story about a young New York Fed employee who left the Fed to go work in the financial institutions banking group at Goldman Sachs, and it seems reasonable to assume that his highest and best use was not building Excel models for bank mergers. He "was asked to help Goldman clients handle regulatory issues like the Fed's annual stress test," and in doing that he seems to have talked to his former colleagues a bit. Which is ... fine ... ish? It's not a great look. But at some point he "shared some potentially confidential supervisory information about a Goldman banking client," which he had gotten from a former colleague, and which is definitely not OK. So now he's been fired, and his boss has been fired, and everyone who was already talking about Goldman's excessive chumminess with the New York Fed has more chumminess to talk about.

So this is a revolving door story, but what kind of revolving door story is it? Notice how Goldman is apparently staffing up with ex-regulators -- this guy's boss had formerly worked at the Federal Deposit Insurance Corporation -- to advise its financial-institution clients on regulation. That is not exactly a core investment banking business, but it is presumably a valuable one, though I don't know if Goldman is paid for the advice or if it's just the usual provision of free work in the hopes of later winning merger mandates. Anyway it's a considerably more valuable business as new regulations come into effect: Once you start running stress tests, banks need advice on stress tests. And the best people to give advice on stress tests are the ones who ran the stress tests. In my taxonomy of revolving door theories, this seems like a solid number 3: Regulators who create and enforce complicated rules thereby also create the need for banks to hire lots of ex-regulators as highly paid experts in dealing with those complicated rules. Though I guess you also need someone to advise the banks on the rules about what ex-regulators are allowed to do for the banks. Maybe another highly paid ex-regulator can do that?

Incidentally, that Carmen Segarra This American Life link reminds me, the latest This American Life episode is actually a rerun from last year, about a car dealership on Long Island, and it is wonderful. It is mostly about making price-insensitive trades in the closing period of trading in order to be paid off on a derivative, though it is also about salesmanship, and about salesmen's undying love for "The Art of War." If you are interested in foreign exchange manipulation or bond markets or finance or economics or capitalism you should listen to it.

Here's a leveraged loan deal at 6.5x EBITDA.

I keep saying this but it keeps happening: Regulators say that banks shouldn't make leveraged loans at greater than six times EBITDA. Banks keep doing it. Regulators keep complaining. It keeps being weird: The rules are weird, a random intrusion of arbitrary regulation into the banks' business judgment, and the banks' collective and so far unpunished decision to ignore the rules entirely is even weirder. Here's a fun story about a leveraged loan deal at 6.5x EBITDA, which Barclays, Bank of America, Goldman, Royal Bank of Canada, and Nomura are working on, while Citi, Credit Suisse, JPMorgan and UBS "are sitting out the deal on the advice of their internal monitors." But not only are the banks at odds on what's allowed, so are the regulators:

The OCC has said it has a “no exceptions” policy on new loans. The Fed, on the other hand, expects disagreements among banks about individual deals. It has told the banks it regulates it is willing to accept such disagreements, so long as the bank is judging loans using an internal system that meets supervisors’ expectations and that flags deals that fall clearly outside the regulatory guidance before those transactions get closed, a Fed official said last month.

I guess you'd have to say the Fed is right here; if there is a "no exceptions" policy it doesn't seem to be working very well.

Gentleman, there are no bankers here, this is the Treasury Department's office of domestic finance!

I've never met Antonio Weiss but he is a mergers and acquisitions banker at Lazard who's also the publisher of, and a former editor at, the Paris Review, so he's all right by me. He is not all right by some senators, who "have indicated at least some level of discomfort" with his nomination to be Treasury undersecretary for domestic finance because he worked on Burger King's merger with Tim Horton's, and that was a tax inversion transaction, and people really hate tax inversions. This is pretty muddled; the Burger King deal was a very mild tax inversion indeed, and Weiss "did not advise the chain on the tax component," though I'm not sure why that would matter. (Also "Lazard itself has advised on only a few inversions so far this year," though Lazard itself rather famously inverted to Bermuda a few years back.) Also a group of community bankers wants Treasury to hire a community banker instead, which is a fairly straightforward preference for a group of community bankers to have, though not a compelling one. It's not like there are a lot of community bankers who are also the publisher of the Paris Review.

Financial market memories are short.

The median hedge fund manager has apparently been doing it for less than five years; 80 percent have been in the job for less than ten. I feel like, if I were an unsuccessful hedge fund manager, five years would be way too long to limp along miserably, and if I were a successful one, five years would let me accumulate enough money to stop doing it. So that leaves long tenures for sort of high-mediocre managers, and obsessively driven successful ones. I guess the obsessively driven ones are the ones you want. Anyway now there's a better than 50/50 chance that the person running your hedge fund wasn't doing that during the global financial crisis.

JetBlue is becoming awful, for Wall Street.

"JetBlue Airways Corp. is adding baggage fees and cutting passenger legroom to improve its lagging financial results," which it announced in this blandly horrible slide deck for its investor day yesterday. Slide 20 shows the menu of baggage fees, offering three tiers of service: Better (no bags), Even Better (1 bag, "Other Benefits"), or Best (2 bags, "Other Benefits," and "Increased Flexibility"). "Expect incremental operating income of >$200m," says the slide. The legroom reduction is slide 24 (34.7 to 33.1 inches of pitch, 15 extra seats per A320). The stock was up about 4 percent. Isn't financial capitalism great?

Sears Holdings' rights offering has expired.

The rights were over-subscribed, so Sears will be getting $625 million from its weird sale of notes and warrants and things.  The stock is down quite a bit since the announcement of the rights offering so I guess ... has its short-squeezy effect run its course? Is it still to come? Was it never there at all? Your guess, on this matter, is probably far better than mine.

Things happen.

Are banker bonus restrictions the first step toward the "introduction of a stock of restrictive/conditional money, along with mechanisms to substitute bespoke illiquid money for liquid generic money"? Speaking of illiquid money, banking in Crimea is not great. Alibaba is selling some bonds today. Cerberus still hasn't bought its LPs out of Freedom Group. Being reminded that you're a banker makes you less honest. Pimco's Gini coefficient is 0.769. Bank tellers don't get paid much. Lawyer sues. Most-titled duchess dies. Fake Scottish lord pleads guilty to welfare fraud. Ex-Schwab broker barred for alleged theft of $1 million in office supplies

  1. Disclosure, I used to work at Goldman, I still have a little bit of restricted stock, and I feel like I'll be talking about them a bit today.

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