Barclays, Banks, Bonds and Buffett

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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Barclays.

Barclays joined the other British banks in having a rough year; it announced earnings today, or rather, it announced a net loss for the year. Or wait no: "Excluding the legal provisions and other one-time charges, Barclays said its full-year pretax profit had risen 12 percent to £5.5 billion from £4.9 billion in 2013," exceeding expectations, but of course it doesn't really get to exclude those provisions, which take it to a loss. Last quarter's provisions included another 750 million pounds of legal reserves for currency rigging, bringing the total to 1.25 billion pounds, and chief executive officer Antony Jenkins "said on Tuesday that he can’t rule out further provisions for currency rigging, overshadowing his effort to boost earnings." Here's an analyst:

"They’re still suffering from the legacy of the pre-credit crisis -- those issues are still coming back to haunt them."

So, fun fact. Barclays has not yet settled any currency-rigging cases, which is why its reserves continue to be a black box, but if you look at the other banks' FX-rigging settlements so far, they seem to cover behavior over, very roughly speaking, 2008 through 2013. (Or maybe 2009 through 2012.) That is, mostly post-crisis behavior. It is tempting to casually equate all of the big regulatory investigations and settlements with an an unhealthy focus on revisiting pre-credit-crisis problems that were cleaned up ages ago: They just feel so repetitive, and so unrelated to the banks' current business prospects. But that's not quite right. It's a little weird to consider 2013 a "legacy" year. 

Banks.

Elsewhere in banking, "Morgan Stanley said the New York Attorney General’s Office plans to sue the firm alleging it had misled investors in bonds tied to subprime mortgages," and that's definitely pre-crisis legacy behavior. The incessant revisiting of mortgage cases -- the banks paying new fines every year to different regulators over the same mortgages -- is what makes every other investigation feel like old news, and makes it easier for banks to pretend that last year's market manipulation is just a legacy issue. Speaking of pre-crisis legacies, what are bonuses at Lehman Brothers like this year?

Meanwhile at JPMorgan, the consumer bank is on the ascendant, with Jamie Dimon joking that people "feel sorry for the investment bank" by comparison. That feels like a dis-synergy of keeping them together; if JPMorgan were to break up as some analysts want, probably no one would feel sorry for the investment bank. Anyway, the consumer bank's head, Gordon Smith, "is in line to succeed Jamie Dimon should JPMorgan Chase need a new chief executive in the near future," and it's a little weird to be named the temporary-CEO-in-waiting? Seems like some bad incentives there.

And in bank capital, foreign banks are worried about the Fed's upcoming stress tests, and Sheila Bair wants more transparency on how the Federal Reserve calculates global-systemically-important-bank capital surcharges. I sort of assume that arbitrary opacity is part of the Fed's regulatory toolkit, but the FDIC, which Bair used to run, is more of a bright-lines sort of place. 

Buffett.

I'm glad I got my Buffett take out of the way early because, man, it is a crowded field. Just at the New York Times there's Neil Irwin on Buffett's defiance of corporate finance theory, Joe Nocera on Buffett's equanimity and general being-good-at-investing, and Andrew Ross Sorkin on Buffett's expressed dislike of investment bankers. (Lloyd Blankfein told Sorkin: "Warren’s comments about bankers must be based on conjecture or hearsay. As far as I know, he doesn’t take advice from bankers or pay them.") And here is an annotated version of his annual letter. It's a good letter, but is it just possible that it was somewhat lower in information content than everyone was hoping for? I, for one, have not learned how to compound my investments at 20 percent a year for 50 years; perhaps others got more out of it. Buffett himself, meanwhile, went on television to express his own takes on the proper investment strategy for LeBron James ("just make monthly investments in the low-cost index fund") and on Elizabeth Warren's manner ("She would do better if she was less angry and demonized less").

Bonds.

"It's official, there are no more sellers of bonds," says an investor, and this use of the word "official" ranks high on my list of pet peeves. On the other hand, Securities and Exchange Commissioner Daniel Gallagher said that "a lack of liquidity in corporate-bond markets could pose a 'systemic risk' to the economy when interest rates rise," so maybe it is official? 

Never mind that now, the point is, there is one huge seller of bonds, and it can dictate terms: "Actavis Plc got more than $70 billion of orders for a bond offering that will help finance its purchase of Botox-maker Allergan Inc., as yield-starved debt investors swarm," and I guess "yield-starved" and generally bond-starved are two sides of the same coin. The same negative-yielding coin. Actavis's deal is for $22 billion and is BBB-/Baa3, and two different money managers are quoted in that article saying "hungry for yield," so I guess it must be true, and also bond managers have a limited set of metaphors. If you're worried about the liquidity stuff and its effect on stability -- and so many people are so constantly and vocally worried about it that I feel like I shouldn't be? -- then the dynamic here, where the only sellers are issuers levering up to do big mergers, wouldn't necessarily be comforting.

Bailouts.

Well here's something:

Negotiations have begun on a third bailout package for Greece worth between €30bn and €50bn, the Spanish economy minister said on Monday.

You have to keep careful track of the euphemisms to know how to interpret that; as far as I can tell a "bailout package" is a punishment for Greece, which has insisted that it will not need a third one, and there are complex dynamics around Spain and Greece trying to undermine each other by dropping hints like this. There are official denials of the third-bailout negotiations, but also quasi-official acknowledgments. Meanwhile, here is a timeline for Greece's payment obligations, which include a number of payments due to the International Monetary Fund in the next few weeks, creating a "cash crunch," so you could see why there might be some reason for new negotiations.

Bill Gross.

Bill Gross told Bloomberg Television that he plans to spend "the next two, three, four years" proving that he still hasn't lost the touch that he once showed at Pimco. Is that a good investing pitch? Like, what, he's gonna use your money to try to prove he's still got it, and if he can he'll retire, and if he can't he'll just double down again? I don't know, it's mostly his money anyway. And what sort of motivations do you want in your money managers, if not insecurity and self-aggrandizement? In any case Gross has not lost his touch in writing Investment Outlooks; yesterday's featured an extensive discussion of Wiggles the Pomeranian and Honey the Golden Retriever, followed by the usual screeching transition to bond markets. Elsewhere Stan Druckenmiller had some thoughts for CNBC.

Things happen.

General Electric is sad about oil prices, but Glencore is ecstatic. Genworth has some accounting problems. Lumber Liquidators may or may not have some formaldehyde problems. The politics of "The Shareholder Value Myth." IEX hired a former NYSE regulator. That guy suing Preet Bharara is not going to win. Two Sigma Investments won "the coveted Firm of the Year award and another two trophies" at the Absolute Return Awards last week, and had two of the top three finishers at the National Museum of Mathematics' "Masters Tournament." Price-weighted indices are dumb, and what's the Nasdaq Composite up to? Fewer Women Run Big Companies Than Men Named John. "The effect of video game playing on problem solving ability is comparable to the effect of educational activities." There's an Uber magazine. Romance and "late accounting submissions" at the CIA. Charlie Gasparino: “Is It Easy To Make The Jump, Culturally, From Wall Street To Porn?" Child enjoys Dilbert

(Corrects date of earnings release in first paragraph.)

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