Levine on Wall Street: Banks, Lawyers and Churches

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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Santander is raising money from shareholders to give it back to them.

Nobody believes in Modigliani-Miller but do you understand the Santander news? Banco Santander SA raised 7.5 billion euros ($8.9 billion) in an accelerated bookbuilt stock offering to shore up its capital position, and that is sensible enough. (Dan Davies on Twitter argues that Santander was undercapitalized due to its size, lack of non-common-equity capital, and consolidated group structure, and probably still needs to raise subordinated debt.) And Santander also announced a dividend cut, from 60 euro cents a year (per share, or around 7.6 billion euros total on the new share count) to 20 (2.5 billion), and, again, sensible enough: If you badly need to raise capital you probably shouldn't also be paying "more than 100 percent of available profit" in dividends to your shareholders. But Santander's old dividend was paid mostly (86 percent) in stock, and a dividend paid in stock doesn't actually decrease your capital. (Also: A dividend paid in stock is a nothing! It's just a small share split!) The new dividend will be paid mostly (75 percent) in cash. So Santander was formerly paying effectively 8.4 cents a share in cash (14 percent of 60 cents, or around 1 billion euros a year total), but will now be paying about 15 cents a share in cash (75 percent of 20 cents, or about 1.9 billion euros a year total). Paul Murphy:

Skirting the requirement to offer pre-emption rights to its shareholders, Santander is raising €7.5bn in cash from shareholders so as to send almost €2bn in cash back to shareholders later this year.

That first part is about the fact that European bank investors seem to prefer rights offerings to accelerated bookbuilt offerings for their capital raises, unlike U.S. investors. But the second part seems hard to argue with: Why raise all that money just to give it back over the next four years? I suppose the point of a capital raise is to signal strength, and the point of a cash dividend is to signal strength, and the point of cutting the dividend is to make it sustainable in cash, so all of that argues in favor of the move. But it is not, like, a banner day for market efficiency.

Elsewhere, the Financial Times Lex column issued a statement of its beliefs, which are worth considering as you read about Santander ("Dividends do not change the intrinsic value of a company," #6), though also just in general. Which do you disagree with? I am probably more of an efficient-markets believer than they are (#14), though that's partly just our different lines of work. And I more or less entirely disagree with the statement that "Control and ownership should go together" (#7); I'm a structure-contracts-how-you-like kind of guy. And I like quarterly reports (#13), though they're probably right on the merits of that one. Otherwise I mostly buy this.

What did JPMorgan do to these churches?

So I mean look. Like I just said, I'm an efficient-markets guy. I put most of my money in index funds. If I had $31 million, I might get a bit more creative, but would I be paying 8 percent fees for a "fund of fund of funds," or buying structured notes with built-in edge to the issuers of up to 11 percent? No. Here is a story about some church trust funds advised by JPMorgan who did exactly that, and who are now suing JPMorgan for not being a very good trustee. JPMorgan's defense includes that the trusts actually did pretty well, all in all, with a positive return over 2006-2013 despite the financial crisis, and that the church is cherry-picking the losing investments while ignoring the winning ones. I am sympathetic to those arguments, but I am also just kind of not a believer in structured notes or funds of funds (of funds). Do you sell structured notes or funds of funds of funds? I assume that there are good client-centric reasons why unsophisticated and trust clients get put into those investments, that's not just "they have big fees"? I would love to hear what those reasons are.

How Wachtell bills.

The opportunity in representing a company in an M&A sell-side assignment is that your client doesn't really pay your bill: You get paid after the deal closes, so your client is effectively spending the buyer's money. (Yes I know the incidence of investment-bank fees is debatable, but with law firm bills this feels mostly correct.) The problem is that your client doesn't really pay your bill: You get paid after the deal closes, so the buyer has to sign the check, and the buyer has no reason to love you, since you've just been trying to get it to pay more for your now-vanished client. So the buyer could always make trouble for you. This is not exactly a usual occurrence, but Carl Icahn is an unusual guy, and after taking over CVR Energy he went to court over both Goldman's financial-adviser bill and Wachtell Lipton's legal bill. (Disclooooosure: I worked for both! ) This may have had something to do with the fact that Goldman and Wachtell fought pretty hard against Icahn's takeover, though there are other factors at play too. Like for instance: Wachtell's bill was pretty large, not explained, and not based on billable hours. The American Lawyer got Wachtell's fee agreement with CVR, and it's a delight:

While the firm explains in the document that its fees are not based on deal size, it nonetheless provides a range contingent on a transaction's value. The document states: "While our fees are not based on the amount involved in a matter, experience indicates that merger and acquisition and takeover fees have typically ranged [from] 1 percent or more on matters under $250 million and 0.1 of 1 percent or less on matters over $25 billion."

The firm also makes clear that it won't give clients details about how Wachtell staffs its matters, or how the work was done. "The firm does not furnish long-form descriptions of services or details as to particular lawyers and hours," the billing policy states.

 And:

M&A partners at rival New York firms say Wachtell stands alone among law firms in its ability to bill clients this way. “Wachtell has such a powerful brand,” says an M&A partner who declined to be named. "It gives them the ability to price with impunity." He adds: "The rest of us are enduring increasing scrutiny and fly specking [from clients]. It’s not that the rest of us are suffering, but these guys are getting away with something that no one else gets away with. They operate in a different world altogether."

I don't really have a point here, this is just bragging, that place is great. 

The best-performing venture capital fund ever.

I mean, there's a question mark in Dan Primack's headline, so maybe not. But Lowercase Ventures closed its $8.4 million seed fund, Fund I, in 2010, and invested that $8.4 million in Uber, Instagram, Twitter, and some other things that I'm sure are perfectly lovely. "Through Q3, the fund had returned 3.47x of called capital and was 'sitting on an additional 76.19x net value,'" but in the fourth quarter, Uber raised money at a $40 billion valuation, giving the fund an overall multiple of 216x, by Primack's math. "Or, in real dollars, nearly $1.3 billion on just under $6 million in call-downs," though most of it so far unrealized. Private markets are the new public markets, but that'd be hard to do in four years in the public markets.

People are paid money to work in finance.

Here are some stories about comp averages. First, we have average pay for "material risk takers" at European banks: Goldman paid $4.7 million, on average, to its 121 European code staff, with bonuses of 5.5 times salaries; JPMorgan paid $2.4 million to 209 code staff (4.1 times); Barclays $2.2 million; Citi $2.1 million. And here we have: "the average salary at hedge funds come in at a whopping $368,000." Which is not that whopping, in context? I feel like I encounter a lot of people who don't believe anything about compensation averages, over pretty much any group of financial-services employees, because any sort of averaging probably brings in people who are not relevant to your compensation situation, and everyone everywhere is a special snowflake. But I guess those European code staff are particularly special snowflakes, at least compared to those hedge fund people.

The conference circuit.

Cardiff Garcia went to the American Economics Association conference and wrote about it, with a focus on income inequality, but there is much else here to enjoy. Elsewhere, the CES technology show is going on in Las Vegas, and it is rather more widely covered. You can get a fake Apple Watch. You can go to "the unofficial brothel of CES." You can Soulcycle with Dick Costolo. I bet there's some tech stuff too.

Things happen.

Justin Fox is at Bloomberg View! George Magnus on sustainable finance. Natural Gas Market Is Ice Cold. Phoenix and the challenges of housing policy. The determinants of global bank credit-default-swap spreads. The buy side doesn't love the new ISDA derivatives stay protocol. Despite his Hawaiian shirts, Allan Landon may not actually be a community banker. These Fed-themed ties (Ben Bernanke with a helicopter, Janet Yellen on a dove, a guy kicking a can) are awesome. Bet against the Fed, whatever. "It's Like Facebook, But For Stocks," and even worse it's called "Tip'd Off." Cuddlers. The Twitterloin. What did Henry Blodget find in his hotel room this week? Russia is lovely this time of year. Notes On Other Household Appliances From William Carlos Williams. Heads-up limit hold'em poker is solved; more here and here.

  1. I mean, so did the S&P, whatever.

  2. And had occasional CVR Energy contact while at Goldman, though not as far as I recall on anything to do with the Icahn defense or acquisition.

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