Levine on Wall Street: Supervising the Supervisors

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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The Fed is sorry.

Sorry about the whole being too cozy with banks thing. As penance, the Fed has "asked its inspector general to look into whether top supervisors were getting the information they needed to make their decisions," and if they "were hearing all the opinions of Fed bank examiners." Remember Dan Davies's take on bank supervision: "the biggest problem is that senior management of bank supervisors don’t have the supervisors’ backs"; the top people at the Fed tend to hear much more from the chief executives of big banks than they do from the examiners who supervise those banks.

The Fed's review seems to have been spurred by the Carmen Segarra revelations, in which a New York Fed lawyer recorded instances of spinelessness by Fed examiners in the face of Goldman Sachs. So ProPublica's Carmen Segarra article is worth another look today. It starts with New York Fed president William Dudley seeking an outside review of the Fed's failings as a bank supervisor in 2009. A Columbia finance professor did that review, and it was thorough and bracing, and recommended a lot of cultural changes. And then the rest of the story is about how those changes never happened. Writing reports is easy; changing culture is hard. Here is Dudley's prepared testimony to the Senate today:

The New York Fed has also devoted significant resources and attention to the reform of bank culture and conduct.  Increased capital and liquidity are important tools to promote financial stability, but in the end a bank is only as trustworthy as the people who work within it.  I have personally delivered a strong message that the culture of Wall Street is unacceptable.

That's cool, but you received a strong message in 2009 that the culture of the New York Fed was unacceptable, and here we are again.

How are Europe's short selling disclosure rules working out?

Hahaha not that great:

A Financial Times investigation can reveal that Tiger Global, which runs one of the world’s largest hedge funds, has used Cayman Islands based shell companies to make large bets against at least 12 European companies since 2012.

This "raises doubts about the effectiveness of new European rules aimed at forcing disclosure of those who make big bets against the shares of a company," though of course the FT figured it out, so in some sense the system worked. Opinion is mixed; one lawyer says that the "use of artificial structures to avoid disclosure is against the spirit of the rules," while the U.K. Financial Conduct Authority said "that there's no requirement for the beneficial ownership to be disclosed to regulators." It's always seemed a little weird to me that the short and long disclosure rules are so different; the U.S. requires disclosure of long positions over 5 percent, more or less, but does not require any short disclosure, while the U.K. requires disclosure of long positions over 3 percent and short positions over 0.5 percent. (Though not, it seems, beneficial ownership in the latter case.) I suppose there's some argument that the rules should be the same on the long and short sides?

Point72 will tone down its enthusiasm.

I guess there's a theory that SAC Capital did a lot of insider trading because of "its long-standing practice of 'tagging' trades as best investment ideas that could generate bigger bonuses." Portfolio managers could lever up their trades by telling Steve Cohen to join those trades, and then get credit for some of Cohen's profits if the trade paid off. And I guess the extra money, plus the need for Cohen's love, drove people to insider trade, is the idea. I don't know? You need a baseline; if you are investing hundreds of millions of dollars in every idea and get paid a meaningful chunk of the profits, you have incentives to go get illegal information, and it seems odd to think that tweaking the payoff structure of the incentives slightly would end the insider trading. But that's what Point72 -- SAC's more legal, but similarly lucrative, family-office successor -- is doing. "The new firm also no longer holds impromptu Sunday morning meetings during which top portfolio managers share some of their best ideas with Mr. Cohen." I guess if you don't work at a famous hedge fund it's harder to convince you to come to work on a Sunday.

Speaking of paying for information.

I continue to love the Wall Street Journal's occasional series on all the legal ways you can get an advantage over other investors. Here's one about how a former Google engineer is selling investors data on "the changing shadows of Chinese buildings, which Mr. Crawford says can provide a glimpse into whether that country’s construction boom is speeding up or slowing down." There's also a lot of stuff about mining Twitter for information, including, ghoulishly, getting notice of the Boston Marathon bombing just slightly ahead of the news reports, allowing clients of Dataminr to short the stock market ahead of everyone else. Go ahead and pay for that advantage, that's fine. But don't talk to an investor relations guy at Dell, that's insider trading. And don't get press releases a tenth of a second early, that's "insider trading 2.0." Those just wouldn't be fair.

Checking in with market makers.

Here's a Bank for International Settlements paper on market makers. I feel like the key results will not be a huge surprise to most people:

Market liquidity in most sovereign bond markets has returned to levels comparable to those before the global financial crisis, as suggested by a variety of metrics and feedback from market participants. There are, however, signs of increased liquidity bifurcation and fragility, with market activity concentrating in the most liquid instruments and deteriorating in the less liquid ones, such as corporate bonds.

And:

There are also signs of increasing concentration among market participants that demand immediacy services, such as asset managers. As a result, market liquidity could become more dependent on the portfolio allocation decisions of only a few large institutions.

The policy recommendations include trying to "mitigate the risks associated with liquidity illusion by strengthening liquidity risk management as well as by improving market transparency and monitoring," and ensuring that "improvements to shock absorption capacities brought about by ongoing regulatory reforms are effective in stressed liquidity conditions, for example via dedicated liquidity stress tests devised for that purpose." The BIS also suggests that private debt issuers should "assess and exploit any potential for greater standardisation of their issuance practices."

New York has a stock transfer tax.

I did not know this, and it's sort of wild. Apparently New York State has a stock transfer tax on the books, so every time you buy or sell stock in New York you have to pay a little money. Except it hasn't been enforced -- "100 percent of the revenue is rebated to the trader" -- in 33 years. That odd fact comes with a proposal to start enforcing it, which is not an especially good idea. "A modest tax on stock transactions would raise millions annually," say the authors, "which could be used to offset any minimal job loss," but of course you could just move your stock trading elsewhere, to New Jersey for instance, where all stock trading basically happens already, so the revenue would be zero-ish and the job losses would be ... well, minimal, it's mostly computers anyway.  If you want to enforce a financial transactions tax you need to do it over some area that is somewhat hard to exit. 

Things happen.

Your pay is going up. The U.K. has given up its fight against bonus caps. Private equity firms are disclosing more fees.  Chief Perks Officers. Uber is doing really well, according to a suspiciously timed leak. Alibaba sold some bonds. Wedbush Securities settled its sponsored access case with the SEC (previously). Ronald Barusch checks in with the Family Dollar merger. Alexis Goldstein on the SEC and "broken windows." SEC Suspends Trading in Four Penny Stocks On Ebola Claims. Meet the men who make a six-figure living off fantasy football. Bank of America Given Permission To Pay $16.7 Billion Fine. Blank stare contest

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