Levine on Wall Street: Legal Pads and Yogurt Drama

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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What's on Bill Ackman's to-do list?

Here is a story about a legal pad. Bloomberg Markets did a big profile of Bill Ackman, and it came with a big picture of Ackman in his office, and if you shout "enhance! zoom in!" a few times at your computer, you can see a list of people on a legal pad, and those people all seem to be prominent corporate executives, though it would be funny if one of them was like his tennis instructor. What is the list? Is it a list of future activist targets? Well um no. (Most of them are not current public-company executives, and the ones who are have known Ackman interest already.) Is it a list of people for Bill Ackman to call back? Um probably? But wouldn't it be better if it was a prank? If I ever run the best-performing large hedge fund in the world, when they come to photograph me I'll have a legal pad on my desk with "Don't you have better things to do?" written on it, only in Quenya. Also if you zoom in on my eye you'll see a reflection of a creepy clown just off camera. I'd be such a good hedge fund manager. Although my financial calculator preferences run toward the HP 12C, and I'm pretty sure that's an HP 17bII on Ackman's desk, so I don't know if that's disqualifying.

Elsewhere, Ackman said yesterday that he "may be done with public shorts," with Herbalife being "one of the last." The Herbalife spat has intensified recently; the stock has had a really rough 2015, and the company yesterday said that "Bill Ackman is entirely predictable - with his Herbalife put options expiring next week, he is off on yet another tirade of misrepresentations, the sole purpose of which is to drive down our share price." Is that true? I have no idea, and I take Ackman at his word that he plans to follow this short to the ends of the earth, but it is an awkward fact about his shift from being physically short Herbalife stock to being short via put options. The physical short never expires, though it might be taken away from you at any time if borrow dries up. The put options are more robust, but they are also more limited in time, and you really do want to make sure you're in the money when they expire. And, sure, TV appearances can help with that.

Some politics.

Remember swaps push-out? Basically there was a rule that seemed to have relatively minor effects, but that banks disliked, and there was a giant war over it that played out on an entirely symbolic level. No one who voted to repeal swaps push-out knew what it was -- the bill was written by Citigroup! -- and no one voted against did either. You can tell because it was characterized as a vote to allow banks to gamble with taxpayer money, and yesterday there was a new fight, over a completely different and even dumber thing -- delaying implementation of the Volcker Rule provisions relating to collateralized loan obligations -- and it was characterized the exact same way. (Nancy Pelosi: "Republicans are seeking to tie the hands of Wall Street’s watchdogs and further delay the Volcker rule that protects the American economy by prohibiting large banks from risky gambling with taxpayer-backed funds.") Anyway though Democrats stood firm and now banks won't get a delay in the Volcker Rule CLO rules and your taxpayer money is safe from CLOs, congrats. I said about swaps push-out that trying to understand it in terms of optimal financial regulation is impossible: Nobody in charge seems to know or care what these rules are, or what their effect would be, or how they make banks safer or less safe or whatever. The whole thing is just an exercise in posturing, and a long game about whether the overall tenor of banking regulation will be stricter or less strict in the new Congress. "Stricter" lost a round with swaps push-out, and so dug in its heels over Volcker CLOs, and I guess there'll be more of that sort of oscillation, but none of it will have anything to do with principled regulatory thinking.

Some literary criticism.

If you work in an industry that impinges constantly on your personal life, your options are pretty much (1) complain a lot, (2) quit to be a blogger or whatever, or (3) romanticize the intrusions as a sign that your work is meaningful and essential. Here's a presentation from TPG about its acquisition of Chobani that is pretty funny; start with slide 16, which says "Hamdi calls Kevin -- and he picks up -- during Easter Mass" (that is, Chobani founder Hamdi Ulukaya called TPG executive and now Chobani president Kevin Burns). But it doesn't just say that. It's a full-page, rebus-style illustration of what a phone call during Easter Mass looks like: big picture of church, inset picture of Blackberry with "INCOMING CALL -- Hamdi Ulukaya" on its screen, little hourglass off to the side representing Chobani's "Liquidity Deadline" to give a sense of drama. At the bottom of the slide -- and of the seven previous slides -- it says "Structured creative deal with lots of iterations along the way," because of course it does. Ryan Grim and Ben Walsh at the Huffington Post have further hilarious analysis of TPG's stylistic choices here (don't miss "The Napkin"), and keep in mind that this was from a braggy presentation to TPG investors, presumably made with the expectation that they'd all be like "oh, cool, definitely glad you interrupted church to buy us a yogurt company, we value your sacrifices."

DTC and appraisal arbitrage.

So if you don't like a merger, you can refuse to take the merger consideration and demand that a Delaware judge "appraise" your shares, and then whatever he or she decides is their value, the acquirer has to pay you, with interest. This is an increasingly popular strategy, in part because of the interest. But it requires that you vote against the deal. Here is the story of Merion Capital, which wants appraisal of its Ancestry.com shares. Merion did not vote against Ancestry.com's deal with Permira, because it bought its shares after the record date for the deal. And it couldn't prove that the people it bought the shares from voted against the deal. But its (successful) argument was: Look, we don't own the shares, and those people didn't own the shares. The main owner of Ancestry.com shares was Cede & Co., the nominee of the Depository Trust Company that basically holds everyone's shares in every U.S. public company (on behalf of brokers, who in turn hold DTC participations on behalf of clients). And Cede voted 10 million shares against the deal, way more than Merion wants appraised. So Cede can get up to 10 million shares appraised, on behalf of its beneficial owners:

But the judge said there were enough Cede votes against the buyout to “cover” Merion, which only own 1.3 million shares. Historically, courts didn’t scrutinize the issue as long as the total number of shares seeking appraisal didn’t exceed the number of shares that abstained or voted “no” -- as was the case here.

Though I don't know how you scrutinize the issue if you do get more appraisal requests than "no" votes, which does seem possible if you don't require specific share tracing. But leaving that aside, this is cool, no? Part of the purpose -- really the main purpose -- of DTC/Cede is to make administration easier, so no one else has to keep track of who owns stock. But DTC also adds value by this sort of value-maximizing abstraction. Some 10 million shares were voted against the deal. Each of those shares now has a valuable appraisal option. Some of the disgruntled no voters will let that option expire worthless, rather than going through the trouble of seeking appraisal. Or they would, if they owned their shares directly. But because they own them in a big pot, that pot can maximize the value of the option by basically giving it to anyone who wants to make something of it. That's good, collectively, for the shareholders, though obviously annoying for Permira.

What do derivatives tell you?

Here is a story about how Fed funds futures "show a 59 percent chance of the Fed raising its near-zero policy rate in September, little changed from before the release of the Dec. 16-17 meeting minutes," despite the drop in long-term bond rates since the meeting," possibly indicating "doubt that the Fed will be able to execute the path for rates that they have laid out." Here is Jim O'Neill arguing that the best predictor of future oil prices is the five-year forward price. And here is a story about the range of 2015 year-end S&P 500 levels implied by options volatility. The range, according to Jared Woodard of BGC Partners, is 1691.92 to 2416.68; Wall Street targets are within that range, though (unsurprisingly!) they cluster toward the high end. I sometimes idly wonder, if you are going to take option prices as a meaningful prediction of 1-year volatility, why not take spot index levels (or futures?) as a meaningful prediction of 1-year forward prices? (In other words, why not have your price target be just the forward price, or the current price grown at 8 percent, or something like that?) Like, why should current option prices predict future volatility better than current stock prices predict future price? I suppose one possible answer is that start-of-year 1-year implied volatility actually does a pretty good job of predicting the range of future returns, with only one year in the last five ending up out of the implied range.

EU farm subsidies may have been affected by foreign exchange manipulation. 

There's a lot of economics going on in just these two paragraphs:

Gribble’s payout has to be exchanged into pounds, meaning what he gets is dictated by currency traders sitting behind computer screens 50 miles away in London’s financial district. Each year a bank wins the mandate to convert about 3.4 billion euros ($4.1 billion) of subsidies to sterling. The rate they use has less to do with free-market economics than self-interest, according to four traders and salespeople interviewed by Bloomberg News who said their goal was to make the most money they could for their firms to the detriment of their clients.

“It’s despicable what these traders have been doing,” said Gribble, 60, drinking a cup of coffee in the kitchen of his farmhouse. “Those subsidy payments make the difference between us making money, or not. They are stealing money that’s essential to keeping food on the shelves of supermarkets across the U.K.”

Is it illegal for an SEC commissioner to ask if a Harvard proposal is illegal?

Does anyone else find the Gallagher & Grundfest vs. Bebchuk & Harvard fight as amusing as I do? (Perhaps Andrew Ross Sorkin?) What do you think of the latest salvo, in which Tamar Frankel of Boston University asks, "Did Commissioner Gallagher Violate SEC Rules?" Is she right that "Engaging in this type of a public pursuit of particular individuals and organizations raises serious questions whether the Commissioner complies with the SEC’s Canon of Ethics"? Or were Gallagher and Grundfest right to ask, "Did Harvard Violate Federal Securities Law?" And do you think any of them have heard of Betteridge's Law? I am just asking questions here.

Things happen.

Could 2015 Be The Year Of Mass Hedge Fund Closures? Germany might be willing to consider Greek debt relief, and Syriza wants to "tackle 'oligarchs'' grip on the country's economy." EU-US tensions remain over leverage ratio. Government official calls for a law against keeping secrets from the government. NetJets protests are awkward for Warren Buffett. ValueAct wants MSCI to break itself up and sell its stock index business. "Sudden panic is the wrong reaction; you should have been gradually panicking over an extended period," good general life advice. New York housing prices visualized. A time capsule from 1795. Why I Will Wear An Oculus Rift Continuously For An Entire Year. 

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