Levine on Wall Street: Buybacks and Bank Settlements

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.
Read More.
a | A

Buybacks are fine.

Here is an op-ed from the chief financial officer of IBM, Martin Schroeter, justifying IBM's stock buyback strategy, which has come in for some criticism. Here is my simplistic story of IBM that I'm sure is wrong in every detail but nonetheless emotionally true: IBM floated around for decades making cheese slicers or whatever, and then it played a major role in inventing the computer as a commercial product, and it got colossally rich from the rise of computers, and then its computers got pretty stodgy, and so it sold its computer business and now does mostly consulting stuff that I'm sure is nice and lucrative but not, like, it's not gonna invent the computer again. And now it's a mature thrower-off of cash, and it sensibly throws that cash off, and its shareholders catch it. "Our clients, and owners and partners, also have views of the competencies we have developed during our 100+ year history," says Schroeter, and it's a fundamental sentence: IBM is good at making cheese slicers and stodgy computers and consulting, but no one is getting an IBM Watch for Christmas this year. It should stick to what it's good at, and if it doesn't have enough good ideas to use up its cash, it should give the cash back to investors so they can invest it in good ideas at other companies that are good at other things. "The public equity market is not a mechanism for companies to raise money," I said the other day. "It's a mechanism for companies to reward the people who previously gave them money." IBM is in rewards mode. Elsewhere here is a claim that "Microsoft could potentially buy back more than half its stock," which even the analyst making it concedes is not really true, but, I mean, no one is getting a Microsoft Watch for Christmas either.

Balance the budget with bank settlements.

The story of how New York got and divided its windfall on the BNP Paribas sanctions settlement is fascinating and and a little creepy. Like ... I'm pretty sure that New York doesn't have sanctions on Sudan and Iran? But New York, the state and the city, have made more than $5 billion this year from the BNP Paribas and Credit Suisse settlements, with the state getting 2.6 percent of its annual budget just from BNP. The Manhattan District Attorney's office made $449 million off that case, which it is using for things like putting tablets in police cars and funding rape-kit and substance-abuse programs. There is a troubling aura of profiteering about the whole thing, but on the other hand as law-enforcement profiteering goes this seems relatively benign. It's just a weird quirk of global finance that the punishment for funding genocide in Sudan is that you have to fund rape kits in Manhattan.

Some credit default swaps.

Is Elliott Management buying lots of CDS on Caesars Entertainment Corp. while also using its big position in Caesars bonds to try to push the company into bankruptcy? I mean, I hope so, right? It's what I would be doing. Why wouldn't Elliott be doing that? (On the other hand, why would you be selling CDS to Elliott if it's in the driver's seat to force a bankruptcy?) This sort of "empty creditor" thing does come in for a lot of criticism; see, e.g., Blackstone's lovely Codere trade, or for that matter Argentina, where Elliott was (apparently falsely?) accused of owning tons of CDS while also pushing the country into default. It is somewhat hard to prevent: Big lenders to companies that are sliding into default really ought to hedge their risk, no? I suppose one answer is that they could hedge their risk by selling their bonds to someone else with properly aligned incentives, instead of by buying CDS. Maybe the CDS writers should have a seat at the table to negotiate the refinancing. In a pretty obviously related story, some private equity barons took over a basketball team and decided it would be a good idea to finish in last place.

A Ponzi princess.

I was not particularly expecting to enjoy this video exposé about Laurie Schneider, who was sentenced to 36 months in prison for running a Ponzi scheme, but I totally did. The trick is that one of her customers recorded her making the classic fake promises of a financial schemer -- personally guaranteeing his investment, promising that documents were signed and notarized -- and it's an almost uncomfortably close-up look at how Ponzi schemers deceive their victims. I still don't get it! I mean, I wouldn't have invested with her, and I was surprised that her victims were unembarrassed enough to talk on camera. Elsewhere, here is an alleged pump and dump.

Remember, bank financial statements are fake.

I mean, sure:

Sir David Tweedie, chairman of the International Valuation Standards Council, will warn in a speech on Thursday night that the ways in which investors, auditors and regulators are measuring banks’ health is grossly undermined because it hinges on the lenders’ individual valuation of financial instruments, for which there is no common metric.

And because a bank's income is largely about changes in those valuation, measurements of income are also "grossly undermined." I mean, compared to what though? If you run an International Valuation Standards Council, you probably want some International Valuation Standards. I suppose that is good for comparability, and comparability is a good thing, but on the other hand any accounting or valuation regime will be semi-arbitrary and no regime will actually tell you what a bank is worth.

A Punch and Judy show.

If you missed Bill Gross's monthly Investment Outlook for Janus yesterday, probably you should fix that. There's a lot about domestic violence in the NFL, puppet shows, and comic strips; there's a brief disquisition on the sex life of the Old Woman Who Lived in a Shoe, and then there is a discussion of how policymakers could "have thought that money printing and debt creation could create wealth instead of just more and more debt." (Cullen Roche: "any discussion about 'debt' is usually too narrow in scope.  That’s because debt does not exist alone on balance sheets.  Balance sheets balance.  And that means liabilities have corresponding assets or contra assets.") Even better than reading Gross's Outlook, however, might be listening to him read it, which you can do here on a web page that Matt Klein compares to the Samuel Beckett play "Not I."

Businessweek is 85 years old.

And it's collected a list of the 85 most important (fine, "disruptive") ideas of the last 85 years. It is fun. Somehow both junk bonds (#7) and the fixed-rate mortgage (#17) are more important than "credit" (#19), but Michael Milken's paean to junk bonds will almost make you believe it:

As late as the 1960s, access to financial capital was controlled by relatively few bankers who dispensed it to privileged clients—a few hundred corporations with an investment-grade rating. Such companies, whose managements were almost all male, white, and part of the Establishment, were considered safe. This institutionalized the denial of capital to many entrepreneurs with great business ideas. Among its victims were minorities and women. 

Financial technology, including the prudent use of non-investment-grade debt and many other securities types, helped right that wrong. 

Also: kitty litter (#73), the whiteboard (#82), the cubicle (#14), the AK-47 (#26).

Things happen.

Allison Schrager on low volatility investing. Turney Duff on insider trading. William Cohan on Elizabeth Warren on Antonio Weiss. Evan Jenkins on the efficient market hypothesis. White-collar prosecutor becomes white-collar defense attorney. Vatican finds hundreds of millions of euros 'tucked away.' James Watson's Nobel Prize went for over $4.7 million. Some bitcoins were also sold at auction. And some art ("We don’t brag, we don’t talk. We just want the quiet thud of a check on our desk."). Ron Perelman's lawsuit against Larry Gagosian was dismissed. The new Sylvester Stallone movie will be about him parachuting in to North Korea to get back his Social Security number. Congratulations to Marsala, the 2015 color of the year. Pharoah paid 2 and 20.  "If there’s a brand promise to Aéropostale, it’s that the teenager can wear our clothes, go to school and not be teased or made fun of [for] the way they look.” Jaw makeovers.

  1. Not legal advice, but, like, you should never get all that excited just because something is notarized. Notarized is the lowest form of officialness. Maybe try getting things that are audited.

  2. Fine, just 20, whatever.

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