Levine on Wall Street: Teen Traders and Ionized Lavender Water

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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"Now suffer my opinions and recommendations."

Jim Cramer's TheStreet, Inc., an investment media company that was somehow worth $1.7 billion in 1999, is now worth around $75 million, and its second-biggest shareholder, J. Carlo Cannell, has had enough. Nay, more than enough. He shall elucidate:

From May 1999 to December 2013, you have extracted more than $14 million in cash payouts from TST, excluding millions more paid out as stock options. In addition, you have enjoyed considerable non-pecuniary compensation such as perfumed sedan driver(s) and assorted assistants who spray ionized lavender water on your barren cranium.

That's from a letter that Cannell sent to Cramer and filed as a 13-D, which ends with a certification that "the information set forth in this statement is true, complete and correct," and ... is it? Ionized la ... what? I beseech, nay, I implore you to read the whole thing, which asks Cramer to either sell TheStreet (which has gained value since Elisabeth DeMarse's "anointment as CEO") or quit his job at CNBC to focus on TheStreet full time (which "would require you to muster more courage and honor"). David Merkel is skeptical about the practicality of these suggestions, but I guess one of the problems of presiding over a company whose stock loses 95 percent of its value is that your top shareholders may end up being guys like this. 

Kids these days.

Connor Bruggeman turned $10,000 into $300,000 by day-trading penny stocks while going to high school. That success seems hard to repeat, so he's working on a more stable source of income:

He has also cooked up his own advice website, where users can learn his trading tips and tricks, follow along with his plays, and converse in a private chat room with Bruggemann and a few other traders, all the for the low price of just $2,000 a year. 

Should you pay for a subscription? Well, the experts say no:

Like gambling at a casino, the odds when playing penny stocks are stacked against you. The high levels of fraud and volatility mean it's very difficult to anticipate what's coming. Connor's staggering success, say seasoned traders, is not a magic method others could replicate. In fact, many I talked to doubted it was real at all.

And:

"Smartphones have exacerbated the monkeys and typewriters problem," says says Paul Kedrosky, a veteran investor. "Given enough people with smartphones, a teen from New Jersey will turn his bar mitzvah money into $300,000, purely by chance."

And:

"Trust me," said one. "This is being orchestrated by a penny stock alerts product; it's a marketing scam."

But who are you going to believe: everyone, or a high-school kid with this sales pitch?

"The company I’m in right now, the CEO got arrested for embezzling funds. He stole $185,000 from the Girl Scouts, before this." What he likes about this world is that he is competing against people like himself, mostly small-timers he feels he can beat. "[In] penny stocks, you’re playing against high schoolers. You’re playing Division III."

Leveraged lending.

Remember how bank regulators keep telling banks not to make leveraged loans at more than 6 times EBITDA, and the banks keep doing it anyway? That's still happening.

What do banks do with deposits?

When thinking about bank regulation, it's helpful to keep in mind that bank liabilities are not just driven by the bank's desire for leverage; they're also driven by investors' desire for liquid assets. The New York Fed has a two-part series on fracking deposits: Oil-country banks got a "deposit windfall" during the fracking boom, and the Fed's Matthew Plosser looked into whether the new deposits got loaned out to businesses or invested in liquid assets. The short answer is mostly liquid assets, which seems to tell a story less of banks levering up to fund risky business and more of banks levering up by accident as customers flung money at them. But there are variations among the banks. For instance, after the financial crisis, banks that historically had more access to non-deposit (debt) funding tended to lend more of their deposits, presumably because they were less worried about a liquidity crunch. And banks that have higher capital lend less, because (in Plosser's view) they have "less risk tolerance," though you could imagine alternative explanations. (For instance, it might be "a reflection of low capital banks unloading more and more liquid assets in 2008 and 2009 and therefore inflating the share of loans as a percent of total assets.") Elsewhere, here is John Carney on Texas banks, which benefited from the U.S. energy boom and are now suffering from the plunge in oil prices. And here is an article in Nature questioning whether shale-gas production forecasts are too optimistic.

Sort of a Ponzi scheme.

Paul Greenwood was sentenced to 10 years in prison yesterday, and here are two sentences about Paul Greenwood:

Greenwood, 67, the general partner of WG Trading Co., pleaded guilty in 2010, telling a federal judge that he and his former partner, Steven Walsh, had “sort of” conducted a Ponzi scheme over 13 years.

He also admitted spending at least $75 million of investor money in the commodities-trading and advisory firm to pursue his fascination with museum-grade teddy bears and other soft toys.

This isn't legal advice or anything, but you probably want to avoid telling a federal judge that you "sort of" ran a Ponzi scheme. Probably best not to tell anyone that you ran a Ponzi scheme at all -- probably best not to run a Ponzi scheme -- but there are situations, like a guilty plea, where you might have to do that, and in those situations the "sort of" doesn't quite convey the desired level of remorse. It's probably accurate enough -- true use-new-investor-money-to-pay-returns-to-old-investors Ponzi schemes are rare; WG Trading seems to have been more of a regular investment fund that Greenwood happened to steal from -- but it just sounds bad.

One way to meet your covenants.

Assisted Living Concepts Inc. ran senior living residences, which it leased from Ventas. Its lease contained certain covenants; in particular, ALC had to maintain a minimum occupancy rate. According to the Securities and Exchange Commission, ALC didn't have enough residents to meet the minimum occupancy, so it made some up. This started small (chief executive officer Laurie "Bebo initially devised a plan to include ALC workers who spent the night at a facility in the covenant calculations") and grew over time to include other employees, former employees, the CEO's family members, and "friends and their family members, including one friend’s seven-year-old nephew." Who was probably not actually living at the senior living center? I kind of don't get why they had to to this? The covenant was, like, "you need to have at least 100 people living at the center." So just say "oh, yeah, we totally have 105 people, no sweat." Why give your fake residents real names?

The saga of the 100 missing brains.

This whole tiny drama played out yesterday. The University of Texas lost about 100 brains from a research center. ("That's a lot of brains to store," said a professor. "Nobody seems to know where the brains are.") Then they found the brains. Then the story changed: Actually the brains had been "destroyed more than a decade ago." Bloomberg Businessweek estimates that the brains would be worth about $100 each, which seems low to me; I bet you could talk Steve Cohen into paying a few million bucks for a preserved brain to decorate Point72's offices. 

Things happen.

The Fed's Beige Book is full of lies. ADP payroll data leaked early on Twitter. AQR Capital Management is releasing its library of investment research data publicly. How might a China slowdown affect the world? And the "flow of Opec petrodollars into global financial markets is set to dry up." Animated hedcuts. Cat Fancy is closing down (and being replaced by Catster). Brooklyn is the least affordable housing market in the U.S. This New Steampunk Condo Development Is Proof That New York Is Over. DNA tests prove that Richard III was blond, blue-eyed, and had a different haircut.

  1. Also: "He says that he’s tried some of the more well-known stock exchanges, but felt that high-frequency traders using sophisticated algorithms were eating into his profits." Sure they were!

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