Asset Managers and Mall Mergers

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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Everyone wants to be an asset manager.

We've been talking recently about the lack of persistence in active investment management: Funds that perform well one year are no more likely than others to perform well the next year, suggesting to uncharitable observers that good performance is more a matter of chance than of replicable predictable skill. Uncharitable observers like Timothy O'Neill

“People in this business always want to be in the top decile, and that’s a laudable goal, but mean reversion says that if you’re in the top decile, you’re likely going to be in the bottom decile,” O’Neill said.

Which is why he runs a stable of index funds? Wait no not that at all, he runs Goldman Sachs Asset Management, "the smallest division at Goldman Sachs Group Inc. and usually the last one investors ask about," but one that is having a moment recently, since it's performing well (both for customers and for the bank) and provides the sort of recurring fee-type revenue that you don't really get in prop trading. None of that comes from plain old index funds; here is a fascinating claim:

“Trends in markets have a tendency to go too far one way or the other, and clearly the pendulum is swinging in favor of passive,” O’Neill said. “But our belief is that market-cap beta, or passive indexing, is a potential bubble machine.”

How does that work? I feel like indexing can't really produce bubbles on its own, as a matter of definition, but perhaps you could tell a story like: As skeptical money moves to index funds, active management makes up a smaller and more credulous portion of the market, leading to bubbles in individual stocks that the passive money has no power to correct. Maybe? Anyway here's how good a year GSAM is having:

When the bank’s units separated for divisional dinners at a meeting last month celebrating new partners, Blankfein joined the asset-management meal for the first time since he became CEO in 2006.

Everything is seating charts. Disclosure: I used to work at Goldman Sachs, though not in asset management, and I've never had dinner with Lloyd.

Elsewhere in asset management, Bill Gross's successors at Pimco are doing better than he is. And Vanguard's bond index fund is close to unseating Pimco's Total Return Fund as the biggest bond mutual fund. And elsewhere in trading, Jefferies had a rough quarter.

A REIT fight.

Macerich has rejected Simon Property Group's $91-a-share hostile takeover offer, and its presentation to shareholders is delightfully snobby about how all of Macerich's malls are nice, while some of Simon's malls are not so nice. Macerich argues that Simon's proposal "substantially undervalues Macerich," which I guess shareholders agree with, since the stock has traded above the offer price since the deal was announced. Also it complains about Simon's "opaque disclosure and disenfranchising dual-class capital structure," which is maybe a bit rich since Macerich simultaneously adopted a poison pill and staggered board to prevent its own shareholders from voting on Simon's offer.

The other weird thing in Macerich's response is this:

Further, it appears from your press release, which indicates your belief that there is "no legal or other impediment to completing the proposed transaction," that you have not given consideration to the serious questions arising under applicable state and federal laws including those raised by your stock accumulation and other issues which present significant obstacles to consummating the transaction that you have proposed. Moreover, your partnership with GGP - the reasons for which are not explained in your letter - is problematic and not only stockholder-unfriendly but also raises questions of legality. 

Really? The "stock accumulation" line refers to a toehold position that Simon has accumulated in Macerich; people like to complain about toeholds these days, but I have never heard a serious argument that they might be illegal. The "partnership with GGP" refers to Simon's "agreement in principle to sell selected Macerich assets to General Growth Properties, Inc. (NYSE: GGP) in connection with the closing of the acquisition," and the questions raised there would seem to be antitrust ones:

By enlisting the help of General Growth, Simon essentially took one of the few other potential buyers for Macerich out of the running.

Advisers to Macerich have questioned whether this move might violate the Sherman Act, a federal antitrust and antimonopoly statute.

Is teaming up to make a joint bid for another company an antitrust violation? There's one notable case finding that it's not, and one even more notable complex of cases -- the Dahl "club deal" antitrust lawsuit against all of the big private equity firms -- suggesting that it might be. I suppose it's pretty fact-based: If you're two of the small handful of big mall REITs that might buy another mall REIT, teaming up on a bid really does reduce competition. (Just as all of the big private equity firms agreeing not to jump each other's deals would.) Whereas, say, Valeant and Pershing Square teaming up to bid for Allergan, whatever securities-law problems it might have raised, doesn't seem like an antitrust problem; it's not like Pershing was a likely independent bidder. 

Poor Citi.

As we discussed last week, Citibank's Buenos Aires branch is holding on to some payments that the Argentine government owes to its bondholders. If it makes the payments, Citi will get in Big Trouble with a New York federal court; if it doesn't, Citi will get in Big Trouble with Argentina. The solution that Citi has come up with -- probably the only solution -- is to get out of the custody business in Argentina entirely and make this someone else's problem, though let's pause here and say that is a somewhat drastic solution: U.S. District Judge Thomas Griesa has basically shut down a U.S. bank's legitimate business in Argentina.

But even that drastic solution is risky for Citi. Here's the letter that its lawyers sent to Judge Griesa about its plans, and it is a nervous letter: One could imagine that even shutting down the custody business (and transferring its assets to another bank) will enrage the judge, since a new custodian will probably make it easier for Argentina to pay off the bonds that Judge Griesa is dead set on preventing it from paying. ("We’re analyzing all entities that cannot be judicially affected by U.S. jurisdiction," says the president of Argentina's central bank, and obviously no U.S. bank would want to step into Citi's shoes at this point.) At this point, I could almost imagine Judge Griesa ruling that any effort by Citi to sell or shut down its custody business in Argentina would violate his injunction, and that Citi's only choice is over which executives to send to jail -- in the U.S. for contempt, or in Argentina for violating banking laws. None of this seems particularly fair to Citi.

Oh Greece.

I guess this is not a huge surprise:

International Monetary Fund officials told their euro-area colleagues that Greece is the most unhelpful country the organization has dealt with in its 70-year history, according to two people familiar with the talks.

In a short and bad-tempered conference call on Tuesday, officials from the IMF, the European Central Bank and the European Commission complained that Greek officials aren’t adhering to a bailout extension deal reached in February or cooperating with creditors.

Also: "German finance officials said trying to persuade the Greek government to draw up a rigorous economic policy program is like riding a dead horse." I feel like Europe could raise enough money for a new Greek bailout by selling tickets to all these meetings where they sit around and insult the Greeks.

How much is a private company worth?

It is worth keeping in mind that the very large valuations that are typically attributed to not-yet-public companies tend to be based on convertible preferred investments that (1) are small relative to the headline valuation number and (2) often come with liquidation preferences and anti-dilution protections that protect them against subsequent losses in value. Here is a Bloomberg News article that is perhaps a bit more scandalized by these practices than I am. For one thing, I'm not sure how these provisions are "backroom agreements," since they're part of the same investment agreement that, in a private company, is private. Nor am I sure how "the practice obfuscates the meaning of a valuation, which can become dangerous down the road because private investors aren't taking the same risks a public-market shareholder would." I mean, they're investing in a private company, right? Most of these securities tend to convert to common at the time of the initial public offering anyway. In any case, yes, there's some fakery to pre-IPO valuation, and that's without even considering the Uber convertible that converts at a pre-set discount to the IPO price, meaning that it offers a fixed return at almost any valuation. Elsewhere, Pinterest raised $367 million at an $11 billion valuation, up from $5 billion last year. And happy Alibaba lockup release day!

Regulatory ... something.

I don't know what to make of this:

Andrew Bowden, director of the Securities and Exchange Commission’s examinations office, has drawn scrutiny over comments he made March 5 at a conference for private equity firms and other investors. “This is the greatest business you could possibly be in,” he said in an enthused response to a question about regulatory burdens.

He went further, suggesting that his own son should join the industry. “I have a teenaged son. I tell him, ‘Cole, you want to be in private equity. That’s where to go, that’s a great business.’”

“I would love to hire your son,” came a voice from the crowd.

If you read the response in context, it is not quite as ridiculous as it sounds: Bowden's point seems to be that the regulatory burdens that his questioner complained about aren't that important, because the private equity business is so good that the additional regulatory costs are easy to bear, and well worth it to avoid messing up a good racket. 

And I reckon, it’s sort of interesting for me for private equity in terms of all we’ve seen, and what we have seen, where we have seen some misconduct and things like that, ’cause I always think like, to my simple mind, that the people in private equity, they’re the greatest, they’re actually adding value to their clients, they’re getting paid really really well, you know, if I was in that position, the one thing I would think to myself as I skipped to work was like just “Let’s not mess it up. You know, this is the greatest thing there, I’m helping people, I’m doing OK myself."

Okay fine I guess that is still pretty ridiculous. 

Things happen.

Securities and Exchange Commission Chair Mary Jo White wants fiduciary duties for brokers. The new BIS Quarterly Review is out. Citi and Barclays are nearing foreign-exchange settlements with private investors, but on the other hand some banks may have their Libor non-prosecution agreements revoked for manipulating FX. Ray Dalio thinks it might be 1937. Zoltan Pozsar explains shadow banking. Craigslist for bonds. Bill Gates finally got around to reading Warren Buffett's shareholder letter. Appraisal Arbitrage -- A Tool of Evil Hedge Funds or a Benefit to Society? Short selling is still fine. Don't give your co-workers the gift of erotic poetry. Small-batch artisanal industrial foodFinancial Four. Marx Madness. Patrick Bateman business card iPhone case.

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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