Levine on Wall Street: Francs, Fraud and Oil

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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We could just talk about the Swiss franc all day, right? All month? Let's see. The fallout continues; Everest Capital Global, an $830 million hedge fund previously known for a bet against the Swiss franc that "contributed 0.6 percentage points to gains" in December, was "wiped out" last week by that same bet, oops. A rescue attempt at Alpari failed. Some Germans are gleeful though. And Klaus Schwab predicted that the peg would be abandoned just before Davos, because of course he did. 

FXCM, the retail foreign exchange brokerage that ran into trouble last week, got its $300 million from Jefferies/Leucadia, in the form of a "senior secured term loan with a two-year maturity and an initial coupon of 10%" that entitles Leucadia to "a certain percentage" of any sales proceeds or equity distributions from FXCM, interesting. (More details here; it's a waterfall, but broadly speaking that "certain percentage" is quite high!) A fun fact about FXCM is that it seems to have treated its 50-to-1 levered margin loans as non-recourse ("At FXCM, your maximum risk of loss is limited by the amount in your account"), which tells you that its retail FX business was so profitable that it could afford to give away 2-percent-out-of-the-money puts free with every order. (Um, "free.") Jason Zweig asks retail investors: "Still Want to Trade Currencies?"

If you do, there is always the Danish krone, which is still pegged to the euro. Denmark's central bank cut its deposit rate yesterday to defend the peg, and everyone seems nervous. Guan Yang here at Bloomberg View would prefer to see the peg abandoned, but isn't optimistic. "It is wrong to claim that Switzerland and Denmark (and Cyprus?) are the first countries to leave the eurozone," says Tyler Cowen, "but not uninstructive either."

What were Switzerland's reasons for abandoning its peg? Matt Klein points out that "Switzerland’s problem isn’t an expensive currency but anemic consumption." One fact is that the Swiss National Bank holds a lot of euros, and is at risk of losing a lot of money, on a mark-to-market basis, as those euros decline in value. (Against the franc! I mean.) This fact sort of has the shape of a reason, but is it a reason? There is some fun discussion on the internet about whether and why a central bank might need capital, or want to avoid losses. Here are Cowen and Yang again, and Cullen Roche. On the other hand, the SNB is a weird central bank, one that is owned by private shareholders and Swiss cantons who want to see profits, though Yang points out that all they really want are dividends and you can just print dividends.

One other thing is, I feel like this post I wrote on Friday didn't entirely work? (And many of you agree!) The intention was something like "hahaha the Swiss franc is not a normally distributed process, so this is not really a once-in-a-gazillion-years event," but I guess everyone knows that. In particular anyone setting risk limits at a bank knows that; it would be horrifying if people literally have value-at-risk limits based on the last year of pegged Swiss franc volatility. (Umm ... they don't, do they?) I meant it to illustrate a broader point about volatility and complacency and historical experience, but perhaps it's not a great story to illustrate that point. Also that point is a bit of a cliché. So, sorry! That vol chart is still funny though.


How levered should an oil company be to the price of oil? There are arguments for a range of possibilities. Equity investors might plausibly want exposure to oil from their oil-company investments, so they might oppose a lot of hedging. (Though I guess if you really wanted oil exposure you could just buy oil?) On the other hand, the costs of distress are real enough, and you don't want your oil company to go out of business because of a brief dip in prices. So you might say, it would be worrying if independent exploration and production companies were heavily leveraged during an oil-price downturn, and it would be even worse if much of their debt availability was itself tied to the price of oil. But here we are:

As oil companies embark on their semi-annual discussions with bank lenders -- a process known as the “redetermination of the borrowing base” -- they are faced with a major difficulty coinciding with the slumping price of crude.

“The problem they’re going to face is that their availability of capital from the banks is limited by the collateral value attributed to their assets,” says Buddy Clark, who heads the energy practice at Dallas-based law firm Haynes and Boone.

He says that during last October’s redeterminations banks were using an oil price of $80 a barrel. Based on a recent informal survey of bank lenders by his firm, prices are coming down significantly, with at least one lender now pricing at $50 a barrel for 2015.

"This could start a downward spiral for some of these companies because liquidity will dry up," says a Standard & Poor's analystSpeaking of which, "Standard & Poor's has downgraded eight US oil and gas exploration and production companies after the ratings agency completed a review of the sector in light of the steep decline in oil prices." And airlines, being airlines, may somehow find a way to make cheap fuel into a bad thing.


Yesterday a London jury found Magnus Peterson "guilty of fraud, forgery and furnishing false information" in connection with the collapse of his hedge fund, Weavering Capital (UK) Ltd. in 2009. This isn't great:

Weavering imploded in March 2009 after it was discovered that the main assets of its flagship exchange-traded macro fund were $637m in swaps trades with an offshore company also controlled by Mr Peterson, called Weavering Capital Fund.

The phrase "pretend transactions" was thrown around, as was an accusation that Peterson "forged the signatures of his father-in-law and brother, the directors of the macro fund and WCF respectively, on ISDA agreements that governed the forward-rate agreements at the centre of the scam." And:

He also used the counter-party fund he controlled to invest in various private ventures without his investors’ knowledge. These included a documentary film based on the book “Grey Wolf,” which suggested Adolf Hitler faked his suicide and fled to Argentina, and a production of the rock musical “Spring Awakening,” the SFO said. 

On the other hand, the Serious Fraud Office has "closed its investigation into suspected accounting and disclosure abuses connected to Hewlett-Packard’s $11 billion purchase of the British technology company Autonomy." And meanwhile in Canada there is "what police are calling a 'romance and investment' Ponzi scheme," which goes something like this:

Investigators with York Regional Police say the suspect found his victims on online dating sites or local bars. They say he told them he was a financial expert and after dating the women for a short period of time, he would ask them for money.

In one incident, police say he befriended a woman who he met several times at an Aurora, Ont., bar before convincing her to invest more than $50,000. He allegedly told her that he could generate significant short-term returns for her investment.

The alleged scammer "described himself as Richard Gere from the movie 'Pretty Woman,'" says the police, and "was previously sentenced more than 10 years ago to six years in prison for his involvement in a tooth-whitening fraud scheme."

Hey it's a new dark pool.

"Big money managers led by Fidelity Investments are close to launching a private trading venue designed to let them buy and sell large blocks of stock without the involvement of Wall Street firms and high-speed traders," which I guess sounds sort of nice? Isn't that what IEX was for? Didn't my Bloomberg View colleague Michael Lewis just write a book about how IEX was started so that big money managers could buy and sell large blocks of stock without ... well, without bad involvement from Wall Street firms and high-speed traders? I guess this one has no involvement? Besides Fidelity, this one has lined up BlackRock, T. Rowe Price ... hmm wait a minute JPMorgan? JPMorgan is a Wall Street firm, right? Huh. Every six weeks or so you can read about big money managers getting together to launch bond trading platforms to cut out the banks, and I guess now that will be true of stocks too.

How Goldman Sachs works.

If you like international financial intrigue, I highly recommend this Wall Street Journal article about how Goldman Sachs came to arrange an $835 million loan to Banco Espírito Santo shortly before Espirito Santo collapsed. "Jose Luis Arnaut, a former Portuguese government minister who Goldman had just appointed to its prestigious international-advisory board because of his thick Portuguese Rolodex," started things off, but the Oak Finance vehicle that Goldman used to fund Espirito Santo wasn't just about Portugal:

Oak Finance’s purpose -- providing vital funding for a project aimed at increasing Venezuela’s refined-oil output -- also ticked a box for Goldman as it tried to expand its relationship with the Venezuelan government, people familiar with the matter said.

And of course the greatest benefit of any deal is that it might win you the next deal; this is true even if the first deal was lending to a company just before it went broke. So:

Goldman officials hoped the Oak Finance deal would pave the way for future business with Espírito Santo, people familiar with the relationship said. Following Mr. Salgado’s departure, Mr. Esteves and other Goldman’s bankers unsuccessfully pitched for work advising Espírito Santo on ways to stay afloat, these people said.

As well they might, since staying afloat would be useful for Goldman too.

Meanwhile in Argentina.

Umm: "The Argentine prosecutor who last week accused President Cristina Fernandez de Kirchner of trying to absolve Iranian officials from their involvement in the most deadly terrorist attack in the nation’s history was found dead in his apartment." So there's that. "Since the formal accusations had already been made, it’s likely that public pressure to see the evidence Nisman had against the government will make it difficult to cover up now." Oh.

And at Calpers.

"Calpers, or the California Public Employees’ Retirement System, said it was hoping to cut the number of private equity managers it used by more than two-thirds, to 120 or fewer," which is still really quite a lot of private equity managers? Like, how many private equity managers could you name? That's for $31.5 billion in investments, though; if you figure there are now 360 managers, that's an average ticket size of like $88 million. The idea is to "drive down fees" with, I guess, volume discounts.

And in midtown.

Here's a perfect sentence:

The son of Wall Street titan Mario Gabelli caused a scene at hot new restaurant Hunt & Fish Club, bellowing “Do you know who my father is?” as Fox Business’ Charlie Gasparino tried to calm him down.

Also a witness reports that "Charlie kept saying things like, ‘You’re embarrassing your father.’"

Some law and economics.

Here is a study asking "Do Takeover Laws Matter?"; the answer is sort of, but in a strange way ("a firm’s probability of being successfully taken over through hostile means increased significantly following poison pill validation by case law and state statutes"). Here is a defense of Grundfest & Gallagher. And here are a couple of appreciations of Henry Manne, the great scholar of law and economics, corporate law, and insider trading, who died this weekend. 

Things happen.

Morgan Stanley's earnings missed expectations. The Fed still plans to start raising rates later this year. Euribor went negative. Steve Cohen apparently isn't buying the Nets. Caesar's pre-bankruptcy debt restructuring may not have been entirely kosher. "Citic, one of China’s biggest state-owned conglomerates, has agreed to sell a 20 percent stake for more than $10 billion to Itochu of Japan and Charoen Pokphand Group of Thailand." Soc Gen is splitting the chairman and CEO jobs. Betting against Beta (and Gamma) Using Government Bonds. The Limits of Bimetallism. Shake Shack's S-1/A is out with a price range of $14 to $16 per share. Ken Grossman, founder of Sierra Nevada Brewing Co., is a billionaire, and has a daughter named Sierra. Dogs in Classic Kids' Movies, Ranked by How Much I Want to Hug Them. Normcore Norton Anthologies.

  1. My former employer, a bit of whose restricted stock I still own.

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