Round Numbers and Revolving Doors

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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Oh Greece.

Look, I am neither a game theorist nor a politician, I'm just a guy with a blog, and fortunately no one expects me to renegotiate multilateral sovereign bailout packages. But if anyone did, I would probably try to follow a strategy like:

  1. Go into a room with the other side.
  2. Work out a compromise.
  3. Sign it, leave the room, and go back to my supporters.
  4. Declare total victory.

There are no earth-shattering insights there, but the strategy that both Greece and its eurozone interlocutors seem to be following starts with declaring total victory, which does not leave a lot of room for compromise once they get into the room together. Here is German Finance Minister Wolfgang Schaeuble saying that Europe "can't negotiate about something new," and here is Greek Prime Minister Alexis Tsipras tweeting that "our policies will be implemented in full." I feel like until pretty recently there was a certain amount of shared support for revisions to Greece's bailout to make its debt more sustainable, revisions that could be spun as a victory for either side. Now, less so, though here is a more optimistic view. So yeah good luck with that everyone; let me know if I can help.

Apple numbers.

An important psychological barrier for Apple stock was $120.18, because while many companies have traded at higher stock prices than $120.18, none have ever done so with so many shares. Yesterday Apple breached that barrier, closing at $122.02, so congratulations everyone. Elsewhere in Apple news, a lot of people seem to insist on misunderstanding what the phrase "the law of large numbers" means:

"Stock-market observers always use this term as it applies to Apple, but it really bothers me and probably everyone who knows what the law of large numbers is," says Zach Shrier, co-founder of the Los Angeles financial advisory firm Shrier Wealth Management. "It would be the same thing as Tim Cook saying, 'I don't believe in gravity because I think Apple can keep going higher.'"

Finally in Apple numbers that confuse me, is it really the case that Apple saves money by issuing debt in Swiss francs? I mean, I get that the nominal interest rate on the bonds is lower than it would be on dollar bonds. But does Apple have a lot of costs that it pays in Swiss francs? Or is it just swapping this debt to dollars at an all-in rate that looks like its dollar rate?

Oh HSBC.

The other day I said that there's a right way to evade taxes (structure your affairs such that you don't owe taxes) and a wrong way to evade taxes (sacks of hidden cash). HSBC's Swiss subsidiary has recently become notorious for doing a ton of tax evasion the wrong way, back in 2007. But this seems a little unfair to HSBC:

HSBC’s Swiss bankers aggressively marketed a device that would allow its clients to avoid a new tax introduced under a treaty Switzerland signed with the European Union, the HSBC files reveal.

The treaty required Swiss banks to withhold a 15 percent tax on the income from hidden savings accounts of European Union customers. But the treaty was dumb, in that it applied only to individual accounts. So HSBC quite naturally suggested that its clients move their funds to corporate accounts:

This would technically belong to a shell company, set up in such secretive offshore havens as Panama or the British Virgin Islands. To be doubly sure, the company itself in turn could, for a further price, even be registered as technically owned by an offshore trust or foundation, generally in the tiny principality of Liechtenstein, where details of the trust deed could be kept completely secret. The customer would be written in as the “beneficiary” of the trust, but not the legal owner of the company.

I don't know, I mean, setting up shell companies in secretive offshore tax havens is pretty much how you do tax evasion the right way? If the law says "Category X pays Tax Y," and you make yourself Category Not-X, then why should you have to pay Tax Y? That's how the game works. This one is on the treaty writers.

Door revolves.

I love the fact that Harry J. Wilson, the activist taking on General Motors, used to work for the Obama administration's auto bailout task force. Which was in charge of recapitalizing General Motors. And now guess what he wants General Motors to do! That's right, buy back $8 billion of stock. (Also put him on the board of directors.) Imagine if Tim Geithner or Sheila Bair hooked up with some activist hedge funds to pressure Citigroup to reduce its capital.

Regulators have opinions.

The Securities and Exchange Commission's director of trading and markets thinks that fixed-income trading should be more like equities trading, and I guess he would think that. U.S. equities markets have instant anonymous liquidity, low markups, lots of pre-trade transparency, really everything that people are calling for in bond markets. And yet everyone complains all the time there too.

Meanwhile Keith Higgins, the SEC's director of corporation finance, has some views on 14a-8 proposals, which are the proposals that shareholders submit to pester companies into having better corporate governance or environmental policies or whatever. There's a rather notorious recent paper by Daniel Gallagher (an SEC commissioner, and so Higgins's boss) and Joseph Grundfest, arguing that the 14a-8 proposals submitted by Harvard Law School to declassify corporate boards all probably violate the securities laws. This view is controversial, and Higgins in this speech sooooooort of disagrees with his boss's position. Or, at least, explains why the SEC hasn't cracked down on the proposals even though at least one commissioner thinks that they're fraudulent.

And here is Elizabeth Warren saying that "big banks are going to keep using small banks as a cover for their special rollbacks," but that Congress "shouldn't fall for that trick." I don't know what this is about substantively, and Elizabeth Warren and I probably do not agree on all points of bank regulation, but this sure seems right. A useful thing would be to prohibit Congress and lobbyists from using the modifier "small." In a sentence like "This bill would be good for small [business/banks/farms/whatever]," the word "small" normally means "big," and should be deleted. And here's some stuff about "bipartisan agreement on a number of common sense improvements"; obviously "common sense" is another phrase that, as dictator, I would ban.

Oh ConvergEx.

We've talked before about ConvergEx, a brokerage that ran a pretty simple scam in which it told clients that it would buy stock for them for, say, a one-cent commission, and would then secretly mark up the stock by, say, five cents before tacking on the commission. That scam is very easy to catch, because stock trades and their prices tend to be reported in real time, so if your trade happens at $50.00 and you get charged $50.06 you'd think you'd notice. (To be fair, ConvergEx did some of its trading in foreign markets that are less transparent than that.) But you have to look at the right moment: If you tell ConvergEx to buy you a lot of stock and report back at the end of the week, and you don't ask for details on when exactly it bought your stock, ConvergEx can just basically charge you the highest price of the week and you'll never be the wiser. 

Anyway yesterday ConvergEx's former chief executive officer agreed to pay $783,000 to settle SEC charges, and while the complaint against him doesn't add that much to what we know from the $107 million settlement with ConvergEx in 2013, it is still funny. Like I don't really know how this got in there:

Misleading Conduct With Respect to Business Cards

In or about April 2011, an employee of ConvergEx’s transition management business was traveling to pitch a large, prospective customer and asked to take a trader who understood international markets to the meeting. Lax recommended that Daspin travel to the meeting to solicit the customer’s business. Lax, however, did not want Daspin to start the meeting by providing representatives of the prospective customer with business cards that truthfully indicated that Daspin was employed by CGM Limited in Bermuda. Revealing Daspin’s employment as a trader at CGM Limited could have raised questions about why ConvergEx had a trader who was located in Bermuda.

As a result, Lax requested new business cards for Daspin to use during the trip that falsely indicated that Daspin was employed by ConvergEx Group in New York.

I feel like being in Bermuda wasn't really the problem? But okay. There are also more details about how the CEO, Craig Lax, personally directed the scam, at one point calling up the head trader to tell him that he "needed to take at least $5 million in TP on a particular customer's trades." ("TP," for "trading profits," is how they referred to the hidden markups.) The trader replied, "I always try to make as much money as possible . . . But if we have one of those low, volatile days where the highs and lows are not wide . . ." He trailed off, but what he meant was that then it's hard for him to charge the customer all that much more than he paid for the stock. You need the highs to be much higher than the average price if you're buying at the average price and selling at the highs. As with most hidden markups, this one is an optionality strategy, and so it's helped by volatility.

Things happen.

Private equity recruiting now starts in kindergartenMatt Klein on loose credit, fraud, and the housing bubble. A profile of Hedgeye. The Koch brothers are backing a new leveraged-lending fund. Now is the time for controversy over RadioShack's bankruptcy bonuses. There are no Ted's Montana Grills in Montana, or Texas Roadhouses in Texas. What does Powerball tell us about inflation expectationsWealfies.

Etc.

Yesterday I told you the plot of my financial thriller, which revolves around a bank buying death derivatives and then manipulating the payoff function. Apparently I am late to this genre; readers pointed out that both Robin Cook's "Death Benefit" and P.A. Corky Gillis's "The Death Bond Conspiracy" seem to have similar plots. Also there is already a book called "Death Swap," though its plot sounds different. So never mind, go read those I guess.

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(Corrects Alexis Tsipras's title in the second paragraph.)

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