Levine on Wall Street: RadioShack's Afterlife

Also RadioShack CDS. And insider traders, hated companies, Twitter users and German gold bugs.

So long RadioShack.

Maybe the longest-awaited bankruptcy in history finally happened when RadioShack filed for Chapter 11 yesterday. But what do you make of this?

The company said Thursday that it has an agreement to sell 1,500 to 2,400 of its locations to a unit of Standard General LP, its biggest shareholder. Standard General has a deal with wireless carrier Sprint to set up stores-within-stores at as many as 1,750 locations. The rest will be shuttered under a deal with a liquidator, Hilco Merchant Resources.

The math is: 1,600 to 2,500 of RadioShack's 4,000 stores will be closed, and as many as 1,750 of the rest will become, like, half Sprint stores. That leaves as many as 650 remaining standalone RadioShacks, plus 1,500 to 1,750 half-Sprint-half-RadioShacks. RadioLeanTos. RadioTents. What even. The Standard General deal is a stalking horse, not a fait accompli, but don't mourn for RadioShack just yet.

Meanwhile RadioShack's relatively vast quantities of outstanding credit default swaps may be causing weird trading dynamics in its bonds, with the 6.75 percent bonds due in 2019 trading up from 12.5 to 15.6 cents on the dollar, possibly because traders who are long credit protection want to be able to deliver the bonds into the CDS auction. (Credit default swaps are also "making the job of restructuring advisers more difficult," because CDS owners and writers have incentives to accelerate or delay default, as we've previously discussed.) 

One thing to think is that the ISDA CDS auction mechanics are designed to defeat intuitions about these dynamics: The auction is designed to get a real, fundamental price for the bonds, rather than one driven solely by the need to deliver bonds into the auction. That doesn't mean that you can't have intuitions about it, or that they can't be right -- no auction is perfect -- but in general the mechanism is supposed to prevent bond prices from going up for dumb technical reasons like there being more CDS notional than bonds outstanding. And the fact that RadioShack's bonds are bid around 16 cents on the dollar does not to me suggest a massive market imbalance. These bonds are not in high demand relative to, you know, not owning RadioShack bonds.  Anyway here is a (somewhat old) paper about CDS auction pricing dynamics that is pretty intuition-confounding.  So I guess I don't worry too much about RadioShack bond prices. I'm probably not alone in that.

Some insider trading.

"Despite their careful planning," says the Securities and Exchange Commission about four California insider traders, "we were able to detect the suspicious trading and effectively use our cooperation program to expose their nefarious scheme." Honestly the planning was too careful: John Gray, a Barclays analyst, and his friend Christian Keller "discussed a profit sharing agreement," Gray brought in his friend Kyle Martin, and Martin "immediately opened a specific, new brokerage account to segregate the trades the three would place in their scheme from his existing brokerage account." Because, what, he didn't want any arguments about cherry-picking trades for his personal account? You gotta trust your insider trading co-conspirators a little. Shortly after opening the separate account, Martin bought call options on a company that was acquired five days later. So that pretty much wrapped the case up in a bow for the SEC.

This Pennsylvania insider trading case is maybe a little weirder. The story is that Harleysville Group and Nationwide Mutual Insurance were discussing a merger in August and September of 2011. And so, as happens when companies discuss a merger, their lawyers, and their lawyers' legal assistants, "began working longer hours than usual, including nights and weekends." One of those legal assistants complained to her boyfriend and discussed the deal with him. Then he told his dad, who told him "don't ever mention this again" and "we never talked," and, of course, traded. Most of his trading seems to have occurred after Bloomberg News broke the story of the impending merger, so that's one weird aspect of the case.

The other weird aspect is, how does this work after the Newman decision? Neither the girlfriend nor the son is alleged to have received any "personal benefit" for the tips on which the father ultimately traded. Rather, the theory is that the father himself misappropriated the information from his son: He had a relationship of trust and confidence with his son, who had one with his girlfriend, who had one with her boss, who had one with his client, Harleysville. I think that works under Newman, but it's kind of a long chain of confidentiality, and relationship-of-trust-and-confidence theories are also getting some judicial scrutiny these days.

Goldman tops another league table.

I have my biases 1 but isn't it weird that Goldman Sachs is America's most hated corporation? The first cable company on the list is Comcast at #8, though Dish Network is #3. Most of the list is made up of stereotypical villains -- Monsanto, Halliburton, Koch Industries, BP -- but somehow Sears Holding snuck on in sixth place. This is not a great list for a retailer to be on. For Goldman it's mostly a matter of indifference, but it's still strange. What did Goldman ever do to you, America? Hahaha please don't answer that, please, America. On the other side of the list, America's third-most-beloved corporation is Samsung, okay, and Microsoft is also wildly popular. Berkshire Hathaway is #11 on the beloved list, but its charm does not seem to have rubbed off on its investments in Goldman and Bank of America (#10 on the hated list). Here is an interview with Luigi Zingales about whether finance benefits society.

Twitter makes money.

Here's a Steven Levy article from Wednesday arguing that worries about Twitter's ability to monetize its user base were always overblown -- "no one has ever built a consumer Internet thing that reached scale that they couldn’t earn money on," says Ev Williams, which seems somehow depressing -- and that it's actually really good at making money, even if it's less good at growing its users. Here is a Bloomberg News article about Twitter's earnings yesterday (release, slides), titled "Twitter’s User Growth Continues to Disappoint, Revenue Surges," so there you go. The stock was briefly down, but then way up, as investors considered the matter and ultimately decided that they prefer money to monthly active users. Here is a story about how Twitter lost 7 million users for really dumb reasons like "they forgot their password," and would you expect those users to be more valuable or less valuable than the ones who stayed? Twitter is also adding features to broaden its appeal, and berating itself for being terrible at handling abuse. Elsewhere, the future of the internet will look like television.

Things happen.

Some more Greece game theory ("Could it be that far from kicking Greece, the ECB's real target is Germany?"). German gold conspiracy theorists. "My sense is you’re just going to see a hardening of existing credit castes," says a law professor about new efforts to use big data to judge consumer creditworthiness. Things aren't great for Russian banks, and new money-market fund rules will hurt U.S. bank funding. Elliott gets a win against Interpublic, but Trian gets sort of a draw at best with DuPont. Republicans are excited to mess with the Fed. Cantab Capital Partners had a good month, as did a bunch of automated traders. "At spots in three stations -- on a garbage can, a MetroCard vending machine and a stairway railing -- they also turned up traces of the bacteria that cause bubonic plague." I just don't understand Burning Man at all. "They worry about what the long term effects of the princess bedroom might be." Business Town. Harvard Bans Professors From Having Sex With Undergraduates.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
  1. Disclosure, I used to work there and still own a little restricted stock. 

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

Before it's here, it's on the Bloomberg Terminal.