Bad Banks, Big Banks and Little Banks

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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Hi -- This is the first e-mail edition of Matt Levine's Money Stuff, a daily newsletter from Bloomberg View with links and commentary about Wall Street, business and other stuff. If you haven't already, please subscribe at this link, it is easy. Or find it on the web here. Thanks!

HSBC was bad.

I for one cannot resist a headline like "Catalogue of malpractice endorsed by bankers laid bare in HSBC files." What you really want with malpractice is not just one or two examples, but a whole catalogue that you can leaf through and imagine how each particular malpractice would look in your living room. This Guardian article about tax practices at HSBC's Swiss subsidiary does not disappoint. There is the client who planned to share an undisclosed account with his daughter: "The account is ‘undeclared’, a fact with which [she] may not be entirely at ease -- as a compliance officer at Kleinwort Benson," wrote HSBC. There are bearer shares, and a client who asked HSBC to "'help him get back money into the UK on a "non-declared" basis' by carrying in bundles of cash." HSBC declined, but offered to give him the bundles in Switzerland, after which "what he decided to do with friends of his ... was his affair." And there is a "Serbian businessman" who "wanted to deposit €20m (£15m)," and was told that "as per today the bank did not interfere in his money transfer transactions but would have preferred to reduce those activities on a lower scale. [He] understands our concerns and will use smaller amounts." This is mostly old news -- the leaks reflect HSBC as of 2007, and the bank promises that it's gotten better since -- but it's a pretty good show all around.

Big banks and little banks.

Because they worry about banks being "too big to fail," U.S. regulators have imposed capital requirements that go up the bigger and more interconnected a bank is. But how do you measure bigness? The answer has to be "in units of money," but that means that when the dollar becomes more valuable against the euro, U.S. banks look bigger and more systemically important, relative to the rest of the global financial system. So their capital surcharges go up. "Steven Chubak, an analyst with Nomura Holdings Inc., said banks like J.P. Morgan Chase & Co., Citigroup and Bank of America Corp. face the biggest impact and might be pushed to hold hundreds of millions of dollars more in capital each because of the currency fluctuations." This strikes those banks as weird and unfair -- "It seems like a slightly strange outcome that financial institutions in the slower growth part of the world would end up with lower capital and those in the faster growing part of the world would end up with more capital," says Harvey Schwartz of Goldman Sachs -- but, I mean, you can say that about anything that makes banks bigger. (And they do!) Big successful interconnected banks just make people nervous, whether their bigness comes from organic growth or mergers or just currency fluctuations. And just imagine how Credit Suisse feels! (Bad.)

On the other hand, no one is surprised that "There are economies of scale when dealing with regulation," right? The more you regulate banks, the more expensive it is to comply with the regulations, and those costs don't grow linearly with size. So you might as well get bigger -- or get acquired by someone bigger -- to deal with all the regulation. Basically any bank regulation will tend to (1) do whatever it's supposed to do and also (2) encourage banks to get bigger; this seems to be true even of regulation that is supposed to make banks smaller. And here is a story about small banks teaming up with Lending Club to try to do more consumer loans:

The banks are expected to buy unsecured loans of less than $35,000 without requiring collateral. Until now, small banks generally haven’t been able to justify the cost of underwriting those loans because big banks can do so much more efficiently.

Now, instead of analyzing the loans on their own, the banks will rely on Lending Club’s software, which uses a data-driven process to evaluate a borrower’s ability to repay. 

Just ask a big bank: Scale is really important in banking. And not just for regulatory reasons.

Banks and oil.

Here are some claims, from the Bank for International Settlement, about financialization and oil-price volatility. Craig Pirrong is skeptical. One claim is that oil-company indebtedness exacerbates energy price swings, as excessive leverage can drive distress and also force energy companies to keep pumping oil uneconomically. Makes sense! Another claim is that the oil-hedging markets also exacerbate volatility: that "at times of heightened volatility and balance sheet strain for leveraged entities, swap dealers may become less willing to sell protection to oil producers." Which I ... understand less? Like, the time to hedge is before a crash, not after, right?

Tech stories of yore.

Here's the story of RadioShack's collapse told through the eyes of Salus Capital, which loaned RadioShack money in late 2013, more than six years after that Onion article claiming that even the CEO couldn't figure out how RadioShack was still in business, and less than two months before that Super Bowl ad basically admitting it. The world is strange:

Even before the $250 million loan was disbursed in late 2013, RadioShack was threatening to sue the lender, Salus Capital Partners, for trying to back out, according to two people familiar with the transaction who asked not to be named because the talks were private. Months later, as RadioShack sought creditor approval to shutter stores in a bid to avert bankruptcy, Salus rejected the plan, which would have left the firm with fewer assets securing the loan. 

They signed the loan agreement in October, and by December, Salus threatened to call a material adverse change, RadioShack threatened to sue, the loan ended up getting funded, and I guess a fun game would be to speculate whether that lengthened (money!) or shortened (intransigent lender blocking turnaround plan!) RadioShack's path to bankruptcy.

Elsewhere in old-timey tech, Kevin Roose visited Waterloo, Ontario, to do some archaeology on the remains of the great BlackBerry Gold Rush of ought-five. One former Research in Motion executive "recalls that he had to get private security during a trip to Indonesia to protect himself from a mob of adoring BlackBerry fans." That is ... no longer the case, but hey, a lot of former BlackBerry employees now work at startups housed in former BlackBerry buildings in Waterloo, so the circle of life continues.

Meanwhile in Greece.

I guess everything related to Greek Finance Minister Yanis Varoufakis has to be analyzed through a game-theoretical lens, so what game is he playing when he tells Italian state television that "Italy's debt situation is unsustainable" and that unnamed Italian officials "approached me to tell me they backed us but they can't tell the truth because Italy also risks bankruptcy"? Or what was his boss Alexis Tsipras up to when he "came close to tears at one point during his speech Sunday evening" repudiating the existing bailout and asking for a bridge loan to give Greece time to negotiate a better deal? (Jeroen Dijsselbloem of the EU: "We don’t do bridge loans.") I have lost track of the bluffs and counter-bluffs or whatever is going on here, but it's hard not to read the "nice-Italy-you've-got-here-shame-if-anything-were-to-happen-to-it" stuff as anything other than a rather desperate escalation.

Would you like a free copy of 'Atlas Shrugged'?

It's in Danish though:

Saxo promotes a vision of individual responsibility free from government intrusion. The firm hands out copies of “Atlas Shrugged,” Ayn Rand ’s hymn to individualism and capitalism, to employees and clients. It offers a free copy of the Danish translation of the novel to anyone who fills out a form on its website.

Part of Saxo Bank's notion of individual responsibility seems to be that clients who lost all the money in their (non-recourse) margin accounts when they were stopped out of Swiss franc trades last month should show up at Saxo with some more money and, probably, an apology. Let's see how that goes.

How the FERC works.

My model for electricity markets is that they have convoluted rules set by federal and regional regulators, and the rules are dumb, and people figure out ways to exploit flaws in the rules for profit, and then the Federal Energy Regulatory Commission comes in and says "Hey no fair you're not supposed to make money off our dumb rules!" Just write better rules, man, you might think, but if you're JPMorgan you can't really say that, so you just quietly pay fines for following the dumb rules. But Powhatan Energy Fund isn't JPMorgan, and so after they were accused of exploiting some rules they launched a mad and delightful war against the FERC. (We've talked about them before but, honestly, the details aren't that important.) This filing is a week old but, if you like this sort of thing, it is full to the brim of this sort of thing:

Second, finding and exploiting market inefficiencies (or loopholes) is what traders do. They look to maximize profits within the existing rules, even if those rules are flawed. 

Or (citation omitted):

Similarly, Kevin Gates wanted to maximize profits: there is nothing wrong with wanting to “scale up and try[ing] to become rich.” This is America.

There are sections headed "Dr. Chen’s Trades Were Not 'Wash-like' Or 'Wash-type' -- Whatever The Heck That Means," "The Staff’s Stubborn Reliance On The Unpublished, Non-Precedential Amanat Case Is Just Lame," and "Uttering the Phrase 'Enron' Or 'Death Star' Does Not Magically Transform The Staff’s Investigation." It's like an angry trader's dream of what a legal brief might look like ("This is America"!); I recommend it highly.

RIP John Whitehead.

Here are some obituaries for John Whitehead, former co-head of Goldman Sachs, from Bloomberg News, the New York Times, the Financial Times (don't miss the story of Whitehead showing up at the office in a seersucker suit and being told by Walter Sachs to "go home right now and change out of your pyjamas"), and the Wall Street Journal. Whitehead is perhaps best known for codifying Goldman's "Business Principles," which feel a little bloated and corporate if we're being honest; connoisseurs prefer his far punchier 10 rules for business development, which include gems like "Important people like to deal with other important people. Are you one?," "It is just as easy to get a first-rate piece of business as a second-rate one," and my personal favorite, "Don’t waste your time going after business you don’t really want."

Things happen.

"It turns out that ‘alpha’ is a remarkably personal statistic after all." Analysts don't like Warren Buffett's quarterly disclosure; Buffett obviously doesn't care. Bill Gross is "not trying to build Pimco part II," and he and his family "own more than half of the bond fund he runs on behalf of Janus Capital Group Inc." Ukraine's impending debt restructuring. AngelList syndicates. Larry Summers: "Only raise US rates when whites of inflation’s eyes are visible." Watch out for spies. Open-plan offices are terrible. Health Experts Recommend Standing Up At Desk, Leaving Office, Never Coming Back. How cocaine crushed my trading skills

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