Levine on Wall Street: Weapons of Mass Destruction

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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Some good earnings.

Deutsche Bank reported fourth-quarter net income of 441 million euros, versus analysts' estimates of negative 341 million euros, so that's a nice surprise. Particularly pleasant were Deutsche Bank's trading businesses, which inspired a lot of investor grumbling as recently as this week, but which turned out to have beaten expectations last quarter and are having a good start to 2015:

“Improved volatility and client activities in areas like foreign exchange, rates, and equities are driving stronger results in all our core trading businesses compared to last year,” Jain said on a call with analysts, adding he expects increased volatility to persist through the year.

That sounds like code for "we were on the winning side on the Swiss franc," except that it isn't; Deutsche Bank reportedly lost $150 million on the franc on January 15. But even so it seems to be having a good January, and generally enjoying the up-tick in volatility, which is a good reminder that trading is a moving business, not a storage one, and gains in activity can make up for losses on inventory. But DB's cheeriness is a bit out of consensus: Most of the other banks have reported weaker trading results and blamed them on too much volatility, after a long spell of too little. Deutsche Bank, uniquely, seems to have it just right.

Elsewhere in earnings, Facebook is a video company this quarter? I don't even know. Remember monthly active users, and mobile? Here is Katie Benner on Facebook being Amazon. But Facebook's identity changes from quarter to quarter, so there's still some chance that Facebook will decide to be Twitter for a while, before Twitter becomes Facebook entirely. Or maybe it could be Ello? Yahoo? GeoCities? It's less than three years ago that Mark Zuckerberg said "we don't build services to make money; we make money to build better services." Here is Matt Klein on Apple's GDP, which is smaller than Slovakia's but bigger than Oman's.

Some good corporate communications.

In 2008, TPG, the private equity firm formerly known as Texas Pacific Group, hired Adam Levine, "a deputy press secretary under former President George W. Bush," to be its spokesman. Things didn't work out, and Levine (no relation) decided to call upon his Bush administration experience in his dealings with his bosses. So for instance he e-mailed them:

I am not a vengeful or a spiteful man. But if you and your partners continue to handle this matter as you have thus far, this could very quickly deteriorate into a live fire exercise in the importance of handling public affairs issues with care and caution.

Live fire, huh. 

In fact, Levine commented that he would "take down" TPG the same way that he took down Scooter Libby. This was a reference to the fact that Levine, who had worked as deputy press secretary in the George W. Bush administration, contended that he was the one responsible, through his grand jury testimony, for sending I. Lewis "Scooter" Libby to prison ...

Well. Those quotes are from TPG's lawsuit against Levine, which accuses Levine of taking TPG confidential information, altering it to make it look worse, and then leaking it to the press. And of course TPG's complaint is just one side of the story and might be wrong. (Levine's representative says "This is a blatant and shameful attempt to discredit a whistleblower.") But there's certainly a consistency to the allegations, anyway: Levine also allegedly "referred to himself as a 'weapon of mass destruction' for TPG and said that 'he could bring TPG down in ten days.'" Weapons of mass destruction? Scooter Libby? Either TPG has built a web of false allegations around a character constructed out of Bush administration catchphrases, or this guy was really stuck reliving his glory days in Washington.

Some Yahoo follow-up.

Here is an argument that Alibaba doesn't have to to acquire Yahoo's SpinCo (which we talked about here), because SpinCo "likely won't affect Alibaba's own share price" and "won't have much influence over Alibaba management." The latter point is obviously true, but I don't really buy the former: If 15 percent of your stock is in the hands of a weird publicly-traded holding vehicle that trades at a discount, that will reduce liquidity in your main stock and also lead to creepy arbitrage trades that will tend to drive down the price of the main stock. (Or, just, "hey I can buy Alibaba at $100 a share or Alibaba Lite at $90, I guess I'll buy Alibaba Lite!")

But more broadly, this is correct: Alibaba doesn't need to buy SpinCo. (And basically can't for a year.) It just should. SpinCo ought to trade at a discount to Alibaba (liquidity, tax uncertainty, etc.), so an exchange in which Alibaba gives SpinCo's shareholders, say, 375 million Alibaba shares and gets back SpinCo, with its 384 million Alibaba shares, could be a win both for SpinCo's shareholders and for Alibaba. And Alibaba is in the unique position of not caring about the built-in tax gain on SpinCo's Alibaba holdings, since it could just keep those shares in the SpinCo box forever. As I said a while back (read "SpinCo" for "Yahoo"):

If you or I buy Alibaba stock, we want to have Alibaba stock; we want to be able to sell it one day, and generally have it be interchangeable with the other Alibaba stock in circulation. But if Alibaba buys Alibaba stock, it doesn't want Alibaba stock for trading or investing purposes. It has all the Alibaba stock it needs. It can actually print more Alibaba stock if it wants to. If Alibaba buys Alibaba stock, it's to retire it. It wants to take that stock out of circulation. If the stock sits in a U.S. subsidiary, and can't be extricated without paying taxes, that doesn't matter. From Alibaba's point of view -- particularly, from the point of view of measures like shares outstanding and earnings per share -- issuing 384 million shares to Yahoo, in order to acquire a corporate husk that owns 384 million Alibaba shares, is a nothing. 384 minus 384 is zero.

None of this means that Alibaba will buy SpinCo. But that trade seems Pareto optimal (except for the IRS), so it'll be sort of annoying if it doesn't.

Meanwhile, Alibaba reported earnings, beating expectations on net income but missing on revenue. And will the rest of Yahoo become a takeover target? Sure, why not. Possibilities include SoftBank, an AOL deal (though neither side seems that interested), or ... ? I don't know, I feel like I see more "Yahoo might be a takeover target" than I do "here is who'd buy Yahoo." Facebook I guess?

Some housing finance.

Subprime is back! By which I mean that "Hedge fund Seer Capital Management, money manager Angel Oak Capital and Sydney-based bank Macquarie Group Ltd." are buying up non-prime loans and "plan to pool the mortgages into securities of varying risk and sell some to investors this year." Forecasts call for low-single-digit billions of issuance this year. You can debate the exact causes of the financial crisis but it's fair to say that subprime securitization went poorly in 2008, and one question you might ask is, was that because of specific failings in origination or correlation modeling or capital rules, or was it because Subprime Is Evil? The former seems more like a reason than the latter, but I guess we'll find out. Also of course there's no guarantee that the specific failings have been entirely fixed: "The reason that investors haven’t come back to the market in general is that the problems related to conflicts of interest and the lack of transparency haven’t been solved," says one investor.

Elsewhere in not-quite-prime housing finance, if you sell renters a rent-to-own option -- an out-of-the-money call option on the value of their house -- and they mostly end up not exercising the option, then were you ripping them off by charging them the option premium? I used to sell options, and have no problem with charging option premium in the abstract, but, yeah, sure, I'd probably go with yes on this one? Still elsewhere, a Fannie/Freddie lawsuit will continue, and Mel Watt of the Federal Housing Finance Agency got yelled at by Congress.

Get your peer-to-peer loans from Goldman Sachs.

"Executives now favour the terms marketplace lending or non-bank lending," instead of "peer-to-peer," because, you know, the borrowers are often businesses, and the lenders are mostly hedge funds. And even "non-bank" is a stretch: "Société Générale and Goldman Sachs are among several banks discussing a plan to back Aztec Money, an emerging peer-to-peer financing platform that has created an online market place where people can bid for company invoices." Your basic model could be that financing transactions cry out for intermediation, and no one is more finely attuned to cries for intermediation than the banks are. 

Things happen.

Paul Krugman on Greece. Felix Salmon on "Sovereigns, Vultures and Ignoble Cowardice." English ATM robberies. Bill Ackman blames event-driven hedge funds for Pershing Square Holdings' disappointing stock price. Jack Bogle doesn't like that ETFs have "a huge amount of institutional ownership: large organizations that trade like the dickens"; also he thinks "Smart beta is stupid." McDonalds fired its CEO. A Financial Transactions Tax Hiding in Plain Sight (in bankruptcy though). Caesars's bankruptcy case will be heard in Chicago. A Virginia SWAT team robbed a poker game at gunpoint. SEC Allows Pot Dealer to Register Stock Sales. Coinbase doesn't have a BitLicense or whatever. Hamptons house prices are up. Puppy Super Bowl predictions, and puppy abuse Super Bowl ads. Breaking Madden. Porcupine predicts Super Bowl victory for Seahawks. 

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