Insider Traders and Cement 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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Some insider trading.

Here is the story of "the biggest, most complex insider-trading investigation in British history," which ... wasn't that big? Or complex? It led to illicit profits of 285,000 pounds, which is less than the combined profits of the two sets of alleged insider traders at the Oakley Country Club, and those guys were not exactly criminal masterminds. The main guy here, Julian Rifat, was sentenced to 19 months in jail yesterday; he worked at Moore Capital, a hedge fund, but traded in his (accomplice's) personal account on inside information that he got from his job at Moore. (Why was a hedge fund getting inside information? Bloomberg News says he "carried on with trades that, in City parlance, left him 'wall crossed,'" so I guess his fund had agreed not to trade on the information he got.)

If this case -- relatively small, and about trading in a personal rather than fund account -- is the biggest and most complicated in British history, then I guess the moral would be either that the U.K. is well behind the U.S. in terms of the size and sophistication of its insider trading, or that U.K. authorities are well behind their U.S. counterparts in their commitment to tracking down big sophisticated hedge fund insider traders. Either way, the U.K. is certainly competitive when it comes to prison sentences (19 months for some pretty small-time insider trading!), and very competitive indeed when it comes to under-theorized level-playing-field rhetoric:

“Sometimes people don’t get insider dealing,” said Georgina Philippou, the FCA’s acting executive director of enforcement and market oversight. “If you’re insider dealing, you’re taking advantage of everyone else in the market, undermining market confidence and undermining the reputation of the U.K. markets.”

The risks of liquidity.

I was a little flip yesterday about the Great Bond Market Liquidity Problem but obviously everyone thinks it's a problem. Here is the Morgan Stanley/Oliver Wyman "Wholesale & Investment Banking Outlook," and it is grimly focused on liquidity worries. The authors "expect another 10-15% shrinkage of fixed income balance sheet from the largest wholesale banks in the next 2 years," and see "an unresolved conflict in regulator desires to reduce the interconnectedness between banks, to ensure that asset managers have sufficient liquidity to deliver on promises to their investors, and to preserve companies’ flexibility to issue in a wide range of markets." The middle concern there is interesting: An asset manager's promise to its investors is, roughly, "If you want your money back we'll redeem you at the value of your assets at the end of the day," which in some loose theoretical sense shouldn't lead to run risk at all. But I guess the implied promise is also "... and the value of your assets won't move in alarming ways between the time you get nervous and the time we give you your money back." The asset manager may have no illusions about liquidity, but if her investors do then that's just as bad.

But then there's this:

To ground our work and assess the risks from stress tests, we have analysed the periods of worst mutual fund redemptions in the last 35 years from market shocks. Contrary to some perceptions, we cannot find an example of a run on a long-term mutual fund - as opposed to short-term money market funds. The worst period for industry-wide fixed income mutual fund outflows was in 1994 when we saw on average ~5% outflows across the industry in the worst 3 months and ~13% in the worst 12 months. What was striking was that even in the most recent financial crisis bond fund redemptions were only ~4% in the worst 3 months. This compares to average cash holdings of 4% to 7% today across all US corporate bond and high yield funds on latest data, suggesting asset managers are managing risks prudentially today and risks are manageable. In addition, industry data also highlight that liquidity in funds has increased 1-3x during times of stress.

For a run risk, that doesn't sound so bad? Anyway, the authors are also pretty unimpressed by the prospects for electronic trading ("electronification doesn’t improve liquidity in tail events, per se"), and are worried about the banks' trading businesses generally. Here's more on the report from the Wall Street Journal.

Speaking of liquidity.

Foreign exchange traders had some fun yesterday:

“It was like a zoo,” said Masafumi Takada, director of currency trading at BNP Paribas in New York. “Phones were ringing. Traders were struggling to fill orders. Sales traders were screaming and yelling for the fill.”

And:

"It looked like it was just a complete stop-fest that got triggered," said Paresh Upadhyaya, the Boston-based director of currency strategy at Pioneer Investment Management Inc.

Both of those articles link the increasing volatility in FX markets -- driven by increasing unpredictability at the Fed and other major central banks -- to liquidity issues. Bloomberg News quotes one asset manager:

"Days like yesterday will make the market less liquid. People will be more reticent to commit to size, dealers will widen spreads, they’ll worry a little bit more about getting a shock like that."

And the Wall Street Journal says, "The episode intensified many traders’ concerns about liquidity -- the capacity to buy or sell quickly at a quoted price." So, I mean. Currency trading is more volatile than it used to be. (Like, six months ago -- it's less volatile, by the measure the Journal uses, than it was in say 2010 and 2011.) But that's because events have become unpredictable, right? It's not like, you know, people aren't still trading trillions of dollars worth of currencies every day. I'm just not sure what work "liquidity" is doing here, that isn't being done by just "volatility."

Happy salvaged merger Friday.

How embarrassing must this be for Bruno Lafont? Lafarge and Holcim agreed to an all-stock merger last April, with a 1-to-1 exchange ratio and with Lafont, the chief executive officer of Lafarge, staying on as CEO of the new company. Since then, Lafarge has underperformed Holcim, and, "Lafont and Holcim managers also clashed over issues including leadership style and strategy." Today the companies released a joint statement re-cutting the deal. Now the ratio is 0.9 Holcim shares for 1 Lafarge share, which on my rough math costs Lafarge shareholders over a billion dollars/francs/euros (isn't parity convenient?) from their share of combined-company value. Plus Lafont will no longer be CEO of the combined company: He's been demoted to "nonexecutive co-chairman," and "Lafarge will propose a new CEO for the merged company in the coming weeks." It's not just that he's being replaced as CEO; it's that he's being replaced by a player-to-be-named-later. His new colleagues concluded that he was worse than replacement value. I guess this is the problem with agreeing on a merger that takes more than a year to close (closing is expected in July 2015): You have a ton of time to get to know each other after the deal is signed. Sometimes, by the time the deal closes, you're sick of the guy who you thought you'd let take over your company.

The hazards of banking.

Here's a guy suing the Royal Bank of Scotland because he missed a meeting:

Aaron Rich said he faced a long-term psychiatric injury after he was prevented from attending a bank committee meeting several years ago.

Coincidentally, I've got a long-term psychiatric injury from going to bank committee meetings, har har har. But seriously folks, Rich's claim is that he wrote a report exposing how a client "had falsified its financial accounts," but his bosses froze him out, rewriting his report and preventing him from exposing the fraud to the bank's approval committee. RBS denies everything, and I tend to be skeptical of whistleblower claims based on psychological damage. (Which way does the causality run?) But either way it seems to me that people who try to blow the whistle and are ignored -- whether because they're imagining things, or because the conspiracy goes all the way to the top, or whatever -- suffer mainly an emotional harm, and often a pretty serious one. It hurts to think that you have the truth, but that no one believes you! That sort of sadness is not usually cognizable at law, but you can see why people would try. 

The future.

Here is Izzy Kaminska "on the potential of closed-system blockchains," which is a problem that I find puzzling: All those "smart contracts" that rely on bitcoin-like blockchain processing to verify and enforce obligations, how do they get people to do the processing? Bitcoin does it by paying them in bitcoins ("mining"), which makes it hard to separate the blockchain as technology from the bitcoin as currency. This was one of my questions about Sand Hill Exchange, the blockchain bucket shop: How does it validate contracts in the blockchain? What blockchain? It seems to be a more general problem. Also, here is Kaminska on "the return of goldsmith banking" in a negative-interest-rate world. And here is a story about space lawyers.

Things happen.

"Welcome to your first day on Wall Street, kid! What do you want to do: buy money or sell money?" Goldman Sachs gave out friendship bracelets at SXSW. What’s Right With Finance. German couple pay $935 Greece WWII reparations. Don't just read the docket entry, actually read the document. Law school applications keep falling, and college freshmen are more likely to already have declared their majors. "Roughly two-thirds of immigrants who serve time in the federal prison system are locked up for 'illegal reentry' -- an offense that was once rarely prosecuted." Why Are Kazakhs Stocking Up on Russian Toilets? Mathematicians with Paris streets named after them. How Larry King tweets. "A good friend of mine has about 25% of his net worth tied up in Magic: the Gathering cards." Advice for entrepreneurs: "Have a great personality, and be cool and fun." "Embrace the boredom and drudgery."

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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