The Etsy IPO and the Triangle Document

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.
Read More.
a | A

How twee.

You occasionally read about banks' pitches to take hot companies public, and they are often cringe-worthy: Bankers wore band t-shirts to pitch Pandora, and UBS dressed "around 75 of its employees in Lululemon gear and had them descend upon Central Park for a 'flash mob' yoga session" to pitch Lululemon for some reason. What do you think Goldman Sachs, Morgan Stanley and Allen & Company did to win the Etsy initial public offering? Did they hand-write the pitchbooks in fountain pen? Crochet them? Or just produce them normally in PowerPoint on their computers, but they were wooden computers? Did everyone else know about this?

The company was founded by Rob Kalin, a carpenter making handmade wooden computers with nowhere to sell them. 

So obviously the Internet beckoned. Anyway, Etsy filed its preliminary prospectus yesterday, without a lot of capitalization numbers; Bloomberg reports that it's seeking to sell about $300 million of stock, while DealBook estimates its pre-money valuation at about $322 million, so, that's kind of weird. Use of proceeds is "general corporate purposes," as one does, plus putting $300,000 -- 10 basis points of the deal? -- into the company's Etsy.org nonprofit. But unlike a bunch of the internetty companies that I make fun of for going public for no particular reason other than cashing out insiders, Etsy is growing, had a $15.2 million net loss last year, and could probably use the money. (It's also cashing out some insiders obviously.) The filing also emphasizes "authenticity" and includes this graphic explaining why Etsy works:

Here is Conor Sen on "the quaint economy" last year. Here is "Social Conformity Despite Individual Preferences for Distinctiveness," via Tyler Cowen. Elsewhere, Warby Parker might raise money at a $1 billion valuation. And in hand-crafted artisanal finance, here's the information statement for the advisory boutique that Paul Taubman is spinning out of Blackstone.

Some bank news.

Happy stress test day! The big question is whether Citigroup will have to ritually sacrifice its entire management team, which it seems to have committed to do if it fails again. Here's a profile of a guy who thought he was out of the game, but they pulled him back in for just one more job, the biggest one yet. I mean helping Citi pass its stress test this year. Would you watch that movie? (No.) And here's a story about how Citigroup settled foreclosure-abuse claims by agreeing to compensate thousands of borrowers, and then forgot to send the checks.

Meanwhile, the New York Fed has lost some of its power to regulate the big banks, with that power going to "a little-known committee run by Fed governor Daniel Tarullo, which is calling the shots in oversight of banking titans such as Goldman Sachs Group Inc. and Citigroup Inc.," and which is unafraid to be mean to the New York Fed:

New York Fed examiners have been challenged by Washington. At times they have been shut out of policy meetings and even openly disparaged by Mr. Tarullo for failing to stem problems at banks, according to current and former Fed officials involved the discussions.

This is all the result of "a previously undisclosed paper written in 2010 known as the Triangle Document," which would be a good name for that bank-stress-test movie.

Elsewhere, I have no idea what "shadow banking" is any more, but Goldman Sachs analysts think it's peer-to-peer lenders and stuff, and estimate that "At least $11bn of the $150bn in annual profits made by US banks are at risk" of being siphoned off by shadow banks. And Jesse Eisinger points out that big banks' profits and pay don't tell an unequivocal story of banks being chastened since the crisis: "Four of the six biggest banks were more profitable last year -- yes, even after all those supposedly onerous, gargantuan fines -- than they were in 2007," and pay at three of them is up too. But at least Bank of America is safer than it used to be.

Meanwhile in mergers.

Why are pharmaceutical mergers so exciting? I swear I saw headlines yesterday saying that Johnson & Johnson had bought cancer-drug maker Pharmacyclics, but I woke up today to find that AbbVie was the winning bidder. J&J was the leading bidder for the last week, and co-developed Pharmacyclics' main drug with it, but, you know, eleventh-hour bids, last-minute late-night negotiations, all the classic merger drama. And it's all so concentrated among like six companies in one sector: You might remember AbbVie from such previous pharmaceutical merger excitement as its failed inversion merger with Shire and, I don't know, I feel like it floated around the Valeant/Allergan/Actavis hostile merger battle somehow.

Speaking of Actavis, its "investment bankers will earn more than $720 million in fees from advising the company on its blockbuster acquisitions and bond and equity deals of 2014 and 2015"; you saw in the previous item that annual U.S. bank profits are $150 billion, so we're talking like 48 basis points of that total from one company. (I mean, presumably a lot of those fees are to non-U.S. banks, and I'm comparing revenue and profit, but still: It's a lot.) 

Mutual funds.

Vanguard and BlackRock are planning to add value to index investing by being more active on governance issues, because if you've cut yourself off from exit you have to rely on voice. There is some philosophical weirdness to this, like the "empty voting" by hedged shareholders and bondholders that companies sometimes complain about: If you own the entire market, weighted by market cap, aren't you sort of hedged against the performance of any one company? Are your interests really aligned with that company when you vote for its board? Are you really a representative shareholder? Or, conversely: Since so much money is indexed or quasi-indexed, is Vanguard in fact the perfect representative shareholder, and are people whose whole wealth is bound up in one company weird and not aligned with other holders?

Elsewhere in asset management, Bloomberg News's Neil Weinberg looked into JPMorgan's claims that most of the mutual funds in its asset management division are above average, and descended quickly into madness: "The notes on mutual fund and alternative asset performance include statements such as 'the analysis excludes Brazil and India domiciled funds' -- without saying why." Can you guess why? I've seen some league tables in my time, man. I've seen league tables that you wouldn't believe. I've seen league tables "excluding REIT deals," for REIT deal pitches. I can guess why.

Anyway JPMorgan advertised "80 percent of 10-year mutual fund AUM [assets under management] in top 2 quartiles," citing Lipper, Morningstar and Nomura; Lipper and Morningstar came up with 64 and 58 percent, respectively, in the top half of their categories. (Morningstar's number was not asset-weighted.) The numbers were even weirder for alternatives -- JPMorgan claimed 97 percent of alternative assets beat their benchmarks over 10 years, with Morningstar and Lipper returning 33 and 14 percent -- but JPMorgan argues (correctly I think) that "The 10-year alternatives statistics cited from Morningstar and Lipper only includes publicly available mutual funds, which are a small portion of J.P. Morgan’s AUM in this category, as most of the AUM is in privately offered investment accounts." Anyway a general rule for league tables is that everyone has to be top quartile and you keep pounding away at the math until you are.

Some Warren Buffett.

Here is the story of how Warren Buffett defers taxes (cash-rich split-offs, etc.), which you may already have known but which is worth repeating every now and then. And yesterday I mentioned Berkshire Hathaway's SQUARZ, the first negative-coupon bond (sort of!). I spent some portion of yesterday reminiscing over SQUARZ and can now say fairly confidently that it doesn't stand for anything, it's just a funny almost-word in all capital letters. Also I should point out that the SQUARZ came with a warrant to buy Berkshire Hathaway stock at about $89,606 per share, and the stock was at $109,250 at the time the warrant was exercised, so those negative-coupon SQUARZ ended up costing Berkshire quite a bit of money. It would have done better just selling regular positive-coupon bonds.

Things happen. 

Finra hasn't barred any Stratton Oakmont alumni under its "High Risk Broker" program. You don't have to be in the eurozone to clear euro-denominated trades. The New York Fed finds that the equity risk premium "in 2012 and 2013 reached heightened levels -- of around 12 percent -- not seen since the 1970s," due to low Treasury yields. Also from the New York Fed: "How Mortgage Finance Affects the Urban Landscape." Lehman Brothers settled a lawsuit over interest rate swaps for Giants Stadium. The battle for Benihana. European Tree of the Year. Email From Work Makes You Angry: Study. Sony's Amy Pascal Delays Office Move Due to Seth Rogen Pot Stench.

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