Ketchup, Cheese and High-Frequency Trading

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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Heinzkraftzusammenschluss.

We talked yesterday about the Kraft/Heinz merger, but lots of other people talked about it too. One popular topic of discussion is how Warren Buffett's food companies will kill you. (For instance: If you eat Oscar Mayer bacon, Ore-Ida tater tots, and a Tim Hortons doughnut for breakfast, a Burger King Whopper and Chicken Fries (*face screaming in fear emoji*) for lunch, and Kraft Mac & Cheese for dinner, then, um, best of luck to you buddy.) But really this is Warren Buffett's whole brand; he's the friendly octogenarian billionaire who eats garbage. At least he's not asking you to eat anything he wouldn't.

The other big theme in Heinzkraft seems to be the coming cost cuts. Here's some background on 3G Capital's use of zero-based budgeting, which slashes costs but sounds pretty exhausting frankly. And here is Bloomberg View's Justin Fox on the penny-pinching that's in store for Kraft. Though some people think that 3G's operations are about more than cost-cutting; here is a hopeful take

“For Kraft shareholders, it’s a phenomenal deal,” Brian Yarbrough, a St. Louis-based analyst at Edward Jones & Co., said in a phone interview. “For Kraft to go grow these brands internationally would just take years and years and years. Now they can use the Heinz platform.”

Elsewhere! Here is the story of how the 3G/Berkshire/Heinz deal for Kraft came together in just 10 weeks. "Advisers for Heinz and Kraft settled on valuing Kraft at around $85-$90 a share, said two people who worked on the deal, or about $50 billion in equity value"; the stock closed yesterday at $83.17, which, taking into account time value and uncertainty, is a decent validation of their math. Here is Joseph Cotterill on the 3G model of private equity. And here you can read about how Campbell Soup investors "may be left hanging on the vine" because 3G has focused on Kraft rather than soup.

Deutsche Bank's next move.

I like this theory that Deutsche Bank might exit retail banking (as my Bloomberg View colleague Leonid Bershidsky discussed yesterday), focus on asset management and investment banking, and try to become Goldman Sachs. We talked about this when Credit Suisse hired Tidjane Thiam to jump-start its own restructuring: The era in which every big bank tried to compete in every area is mostly over, and each bank needs to decide what sort of bank it will be. But that doesn't mean they all need to be boring retail and wealth-management banks. The institutional-only, trading-driven, high-risk-high-reward approach has perhaps the highest degree of difficulty, but it has some key advantages. (High reward, more fun for bankers than retail is.) Not everyone can do it, but someone has to, and there's been an after-you-no-after-you-no-I-insist air to some of the big banks' efforts to get out of investment banking. If Deutsche Bank manages to be the last big European bank to get out of investment banking, it might find that there are good reasons to stay.

Elsewhere in banking, Houlihan Lokey is preparing to go public, and the Royal Bank of Scotland has sold $3.2 billion worth of Citizens Financial Group shares.

High-frequency trader registration.

The big news in the world of high-frequency trading is that the Securities and Exchange Commission is planning to amend Rule 15b9-1 to "require that broker-dealers trading in off-exchange venues become members of a national securities association." Meaning that high-frequency traders would register with the Financial Industry Regulatory Authority, and "would be required to open up their records for routine compliance examinations." And then what? Presumably Finra would inspect them and make sure that they're not causing flash crashes or front-running orders or whatever. SEC Chair Mary Jo White says that "This model of regulation enables the Commission to better leverage its resources, draw on extensive market expertise, and build an oversight program that is deeper and broader." I don't know what that means. (Does Finra actually have extensive expertise in regulating high-frequency prop trading firms?) Sometimes it feels like the SEC looks around at the high-frequency trading landscape, feels the need to do something, and then does a minimal symbolic thing. (This is not necessarily bad!) Here is SEC Commissioner Michael Piwowar:

This is a proposal about regulatory structure, not market structure.  In my many years as a market microstructure researcher, I have not seen one research paper on Rule 15b9-1 or requiring FINRA membership for proprietary trading firms, and I have never even heard it come up in a discussion of market structure.  And, since I have been a Commissioner, I have received countless suggestions for enhancing our current market structure; this rulemaking has not been on the list.  The document we are voting on today also does not articulate any link between the proposal and equity market structure.  We need to be mindful that the opportunity cost of this rulemaking is the valuable time that we could have spent on issues that are more clearly related to, and impactful on, market structure. 

The leveraged lending guidelines are working.

In the first quarter of 2015, just 21 percent of leveraged buyouts have been done at a leverage of more than six times earnings before interest, taxes, depreciation and amortization, meaning that almost four in five deals complied with the rules that regulators have been talking about for the last, like, year. Progress! I mean, progress toward the goal of not doing deals levered at more than 6x Ebitda, which no one really thinks is that important a goal. ("Fed Chairwoman Janet Yellen has acknowledged that leveraged loans probably couldn’t bring down the financial system ....") The tradeoff is that there are fewer buyouts, and lower returns for private equity and the "pension funds and endowments that count on private-equity returns to help them meet their obligations." On the other hand, the corporate bond market is going gangbusters.

Investment management.

I love this point from Victor Haghani, now of Elm Partners, formerly of Long-Term Capital Management:

“My LTCM experience is a constant reminder that investment managers have much less control over returns than we would like,” Haghani, 53, says. “We do, however, have complete control over what we charge, and setting fees that are fair over the long term -- both in good times and bad -- is a pretty safe bet.”

There is a reductio ad ... something of that argument, which is: If you can't control your returns, and you can control your fees, you should charge nothing, and not manage money. Obviously that is not fair to him, and not quite what he means. Still.

Elsewhere in investment management news, hedge funds that launched in 2014 drew $34.1 billion in investments, the most for new hedge funds since 2004. Josh Brown is skeptical of unconstrained bond funds. And unlisted REITs are still terrible.

Poor Citi.

Man, Citigroup cannot catch a break with this Argentina stuff. A New York federal court ordered it not to make a bond payment in Argentina. Argentina ordered it to make the payment. It negotiated a deal with Argentina's holdout creditors to allow it to make the payment, and got court approval. And now:

The agreement, announced March 22 by Citigroup, undermines the government because it doesn’t create a clear path for holders of the country’s bonds covered by local law to get paid, Economy Minister Axel Kicillof said. While it allows Citibank to fulfill its obligations as custodian of the debt by passing along payments to other financial institutions in March and June, that money is unlikely to ever make it to bondholders, Kicillof said.

“Citibank is trying to be friends with both God and the devil,” Kicillof told reporters in Buenos Aires. “It needs to comply with local law or be susceptible to sanctions.”

That doesn't even make any sense. There is a theory that the court's order allows Citi to pass on payments to the likes of Euroclear and Clearstream, but that it does not allow those parties to pass on the payments to the actual bondholders. But even if that's right it's hardly Citi's fault. Contrast Argentina's rhetoric around its own payments: The government has regularly said that it's not in default because it has made payments to trustees, even though the trustees can't pass those payments on to bondholders. But it won't give Citi the same benefit of the doubt.

"Kill my boss? Do I dare live out the American dream?"

Chief executive officer compensation is going up because companies have to contribute more to CEOs' pensions: "Longer lifespans and lower discount rates are forcing companies to add more to their CEOs’ pensions to meet return expectations and support future payouts." The average S&P 500 CEO pension contribution in 2014 was $1.5 million (11 percent of CEO pay), up from $550,000 (4 percent) in 2013, and I have to say that $1.5 million a year is a lot to put into retirement savings? The 401(k) cap is $18,000. Anyway I am always on the lookout for a plot for my financial thriller, and while a rash of mysterious deaths of retired CEOs who were living too long on their company pensions doesn't have quite the appeal of death swaps, I think I can work with it.

Things happen.

Felix Salmon had lunch with Joshua Sason (previously) and traded a bitcoin-denominated binary option on a penny stock. Does Central Clearing Reduce Counterparty Risk in Realistic Financial Networks? Matt Taibbi on the SEC and private equity. This Sick Capitalism, and "the case for or against TPP overwhelmingly hinges on whether you think getting Asian countries to adopt US-style intellectual property rules counts as a win for the United States of America." Petrobras bonds are rebounding. Schlumberger violated some sanctions. Carney’s Revamp Chief Drives BOE Shakeup as Staff Say ‘Gosh.’ It's all Chinese to the Greeks. Surreal Photos from Inside the “Fake Vacation” Industry. The U.S. political system remains astoundingly corrupt. The 212 area code remains prestigious. "A flier used to promote Seders features a Ferrari with wheels of matzo." Wharton now has a minimum GPA, this is true, I read it in the student newspaper (via). Dow Falls More Than 1% As Zayn Leaves One Direction.

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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