Levine on Wall Street: Russian Bonds and Tough Cultures

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

Ruble rubble redux.

"We couldn’t imagine what’s happening in our worst nightmare even a year ago," says one market commentator, wait, no, that's Sergey Shvetsov, "who oversees financial markets at Bank of Russia," and you're not supposed to say stuff like that if you're a central banker. Man. The ruble got as bad as 80 to the dollar a dollar before rallying a bit after the government denied plans for capital controls. Fallout includes big losses for a Pimco Emerging Markets Bond Fund, which was 21 percent in Russian bonds at the end of September, oops; big losses for ruble call options buyers, who are now all but universally out of the money; and lost opportunities for retail currency speculators, many of whose brokers have stopped offering ruble trades because, come on, don't day-trade a currency crisis. The VIX freaked out, partly for technical reasons, while the Market Risk Index also showed, you know, some market risk. Meanwhile in Russia, and in sticky prices, "People who didn’t manage to exchange their money at 35 roubles or 40 roubles to the dollar have been buying up high-end goods, cars and apartments because a massive repricing hasn’t happened yet." But you can't put your rubles into Apple products, and caviar and vodka are not getting cheaper. Sell gold! BuzzFeed looks at the effect of the ruble collapse on other economies, ex-Soviet and otherwise, and Slate gloats that, in a tiny bit of poetic justice, the ruble has now passed the Ukrainian hryvnia as the worst-performing currency of the year. Paul Krugman points out that he "invented currency crises" in 1979. Dan McCrum headlined a post "Goodbye, Rouble Tuesday." 

Rough year for Jefferies.

Jefferies Group is maybe the biggest investment bank that can look back over its last fiscal year and say that the most important event of the year was probably a divorce case. (Or a couple of crazy memos.) But Jefferies's human scale also means that it's susceptible to trading debacles that wouldn't be a big deal at larger banks. So, for instance, "Jefferies Group reported a 73 percent drop in fourth-quarter revenue from fixed-income trading as the firm sustained losses on distressed debt," and also took a $60 million charge against a commodity and futures brokerage that it bought in 2011, all a possible harbinger of a rough trading year for other, larger banks. (Not that there was a shortage of harbingers.) Elsewhere in investment banking, Citigroup will be paying traders roughly what they got last year, while bankers will get a little more. Goldman Sachs is good at M&A. And Jes Staley will be joining UBS's board of directors

The importance of culture.

I made a lot of fun of Jefferies's "be nice" memo back in September, but their hearts were more or less in the right place. Here, on the other hand, is a story about Post Advisory, a bond-fund manager whose chief investment officer allegedly "punched walls, broke phones, threw pens and slammed doors in employees’ faces." Here is that CIO:

Chyung said in an interview that he didn’t punch walls. He said the environment at Post has improved and that he’s friends with many of the employees. He was also asked about his temper and whether he yelled at employees.

“Do I have an intensity about me?” he asked in response. “Yes. But it’s because I care about doing what’s right for the clients.”

Oh, cool, awesome. Here is his boss:

“The high performance of this organization kind of doesn’t come for free,” McCaughan said in a phone interview. “It comes with, in this particular case, quite a combative, quite a tough culture. And I can understand it doesn’t appeal to everyone, but it does produce the results.”

Is that not a sociologically interesting claim? I feel like a lot of high-performing investing organizations do in fact come with cultures that are, sure, tough, or weird, or both. Does high performance require a lot of wall-punching or eye-contact-avoidance? That seems like sort of a sad trade-off. But I bet someone somewhere is reading this and saying "yeah, that culture totally appeals to me, sign me up!" And so the culture perpetuates itself.

How to regulate banks.

Here is Matt Klein, with a view to which I am sympathetic:

The takeaway of all this is that a purely rule-based approach to regulation and supervision is bound to let excessive risks fall through the cracks. One way around that problem is to employ several different rule-based measures at the same time. Another is to embrace the doctrine of regulatory discretion. Uncertainty about future penalties should make bankers more cautious about using too much leverage and taking risks they don’t fully understand. Arbitrariness in government is normally a bad thing, but if it keeps excessive risk-takers on their toes then it’s worthwhile. 

I mean, I'm probably a lot more on the "arbitrariness in government is a bad thing" side, but I definitely see the appeal in bank regulation. Elsewhere, the European Union will "press on with plans criticized by the financial industry on curbing some proprietary trading and erecting firewalls between consumer and investment banks." And the U.K. bank stress test results came out this week; Co-operative Bank failed, and Lloyds and Royal Bank of Scotland kinda failed. RBS also, charmingly, got its math wrong

Meanwhile in Argentina. 

Argentina is having some trouble with its international bonds, which makes it hard to raise foreign currency. But not impossible: It has local-law bonds denominated in dollars, and can sell more, or exchange its short-dated local-law bonds for longer-dated ones. So it did that. But in a half-hearted way that didn't quite work:

The government issued just $286 million of the $3 billion in 10-year notes that it offered last week for 96.2 cents on the dollar, above the 94.4 cents they fetch in the secondary market. Offers to swap $6.3 billion of securities due next year for ones that mature in 2024 lured investors holding less than 10 percent of the debt outstanding.

So, yeah, if you sell bonds at above-market prices, you won't sell that many of them. A Jefferies strategist says: "They lost an opportunity for cashflow savings, offering no motivation to participate. Why not do it right?" The promise of the local financing is that it avoids the need to settle up with the foreign holdout creditors, but for that to work you have to actually raise money in the local market.

HFT in Treasuries.

"High-frequency trading in the U.S. Treasury market makes it harder for investors to buy and sell bonds when news events cause prices to move," is one conclusion you could draw from this Bank of Canada working paper. On the other hand, "HF trades improve price efficiency" during those same periods. Those things are of course not different: Fast electronic traders cause prices to adjust quickly to the "correct" price after any news, which is good if you like correct prices, but bad if you like buying or selling bonds at the old, incorrect prices. "Overall, our findings indicate that HF trades act as informed traders," say the researchers.

The SEC vs. Harvard. 

Jonathan Macey and Tyler Cowen, like me, are not so keen on the Securities and Exchange Commission's efforts to prevent Harvard from advocating for shareholder rights, or what pass for shareholder rights (board de-staggering), in corporate proxies. Here is Joseph Grundfest's response

Things happen.

The Office of the Comptroller of the Currency is worried about loan underwriting standards. The SEC caught some (alleged) wash trading by a penny-stock private-placement promoter, and some "quick-to-production" gold mines that (allegedly) weren't. Goldman Sachs is planning some "ActiveBeta" exchange-traded funds. American Apparel fired Dov Charney, though managers are angry. You can pay for subscriptions to "Fortune, Health, This Old House and Travel + Leisure" with bitcoins. "Bringers fall into two categories, according to its research. 'Potluck slackers,' those who don’t cook much, but 'have mastered the art of presentation,' or 'side dish smack down' bringers." Alcoholic product placement in James Bond movies. "What I want for Christmas is a man who wins the Oscar with a compass in the stock." Mom Calls Into C-SPAN To Yell At Politically-Opposed Pundit Sons.

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