Pharmacy Benefits and Amish Banking

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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Happy Merger Monday.

The big mergers and acquisitions news today is that UnitedHealth is acquiring Catamaran Corp. for about $12.8 billion. Catamaran is a pharmacy benefits manager that will be merged with UnitedHealth's OptumRX to compete with the biggest pharmacy benefits managers, Express Scripts and CVS Health. It's "an industry with about $100 billion in annual revenue that may quadruple by 2020," which sounds to me like a pretty depressing statement about the U.S. health care system, but I don't know much about the industry and perhaps I'm missing something.

Meanwhile, on Friday afternoon the Wall Street Journal reported that Intel is in talks to buy Altera, driving the stock up more than 25 percent in the last half-hour of trading. Apparently someone bought 2,958 April $36 Altera call options for 35 cents one minute before the Wall Street Journal story came out, though I guess it is hard to measure the timing of these things precisely. One thing that I often say is: If you have inside information about a merger, probably don't buy short-dated out-of-the-money call options on the target. (Especially one minute before the deal hits the newspaper!) On the other hand sometimes people just get lucky, and who can say if this is luck or illicit knowledge? (The SEC can say, is the answer, and probably will.)

Meanwhile here is Dan McCrum on how the news of the Heinzkraft deal didn't leak: The information about the deal was tightly controlled, perhaps because Heinz/Berkshire/3G didn't need big banks to finance the deal and so involved only small M&A teams from small banks. On the other hand, sure, there were no articles about the deal until it was announced (though there'd been rumors ever since the Heinz buyout), but there was a bit of a spike in block purchases of Kraft stock before the deal was announced, so perhaps it leaked a little. Though block purchases are no short-dated out-of-the-money call options.

Elsewhere, Dow Chemical is selling its chlorine business to Olin Corp. in a reverse Morris Trust transaction. And first-quarter M&A activity has been strong -- up 9 percent from this time last year -- driven by more volume in $1 to $20 billion deals, though less in $20+ billion deals. 

Still elsewhere, Australian listed law firm Slater and Gordon is buying the professional services unit of Quindell "to become Britain's leading personal injury law firm," and if you are an American lawyer this, from Slater and Gordon managing director Andrew Grech, will sound weird:

Under Slater and Gordon ownership, he said, Quindell’s professional services division “will be reoriented to focus on fast-track road accident, employers liability and public liability claims. Existing noise-induced hearing-loss cases’ file portfolio will be expedited to drive claims resolution and maximize cash generation.”

But ... isn't law a noble calling, not a business of maximizing cash generation? Apparently views differ.

Today in liquidity.

Here (from Barron's) is another entry in the "lack of liquidity is an increasing worry in the fixed-income market" category. And here is a Bloomberg News article that I do not entirely understand -- there is a lot about Masters of the Universe -- but that I think says that dealers are less important as liquidity providers in the Treasury market, leading to an opportunity for end-users to buy more in primary auctions. (And of course liquidity worries.)

One somewhat obvious question about the bond-market-liquidity-is-drying-up story is: Well, okay, if big banks are being driven out of bond market-making by regulations (Volcker, capital requirements) that are aimed specifically at banks, why aren't other entities -- non-bank broker-dealers, hedge funds -- stepping into the market to take over the job of providing liquidity? I mean, the banks always seemed to find bond trading a profitable business: If they can't do classic bond market making any more, why wouldn't Citadel or Jefferies or Virtu or BlackRock grab market share from them? Equities trading was a profitable business, and then it was eaten whole by non-bank high-frequency traders, so there is precedent.

I don't really know the answer; some possibilities include:

  • bond trading -- in the classic market-making sense -- actually isn't such a great business, and needs to be cross-subsidized by cross-selling other banking business;
  • conversely, bond trading is lucrative, but the only way to get market share is by cross-selling your bond platform from your other banking businesses (like new-issue underwriting);
  • relatedly, bond trading is lucrative, but cannot be automated, and relies on the sort of networks and connections that are hard to build up if you are (a) a computer algorithm or (b) a buy-side competitor of your potential customers; 
  • despite new regulations, banks still have artificially cheaper costs (too-big-to-fail support, deposits, etc.) than non-bank entrants would; or
  • it's coming, but non-banks have been slow in getting into the market-making business because of inertia and investment mandates and other temporary problems.

Other ideas? Here's a story about how Citadel is fighting for swaps market share.

Today in banking.

Here's a sweet little story about Bank of Bird-in-Hand, the only new bank created in America since Dodd Frank, in Pennsylvania Amish country. It "doesn't offer online banking, but its sole branch does have a drive-through window that can accommodate a horse and buggy." Like many small banks, it struggles with a regulatory regime that seems to require some scale to really get right. For its first annual bank examination, "The bank paid for 'white hat' hackers to test its cyber-security infrastructure and hired a consultant to test the bank’s sensitivity to interest rates." I wonder if they tested its buggy-window security infrastructure. Don't you kind of want Bank of Bird-in-Hand to get into the bond market-making business?

Elsewhere, the Bank of England has outlined its new stress test scenario ("including a collapse in Chinese growth, a deep eurozone recession and a liquidity crunch in emerging markets," and testing the stressed leverage ratio as well as risk-based capital). And the Dutch government may do an initial public offering of nationalized ABN Amro, after a bit of a fight over pay raises temporarily delayed the deal. Apparently the Dutch don't want the bank returned to the market until it is fully scrubbed of the market culture that got it in trouble in the first place.

Poor Citi.

So Argentina's securities commission "suspended Citigroup Inc.’s local subsidiary from operating in the country’s capital markets" because Citi struck a deal that allowed it to make payment on local-law Argentine bonds. The deal wasn't good enough for Argentina:

“The signed agreement especially affects bondholders in that it doesn’t guarantee their payment and excludes the legitimate right Citibank Argentina has to appeal judicial decisions that affect bondholders compromising compliance with Argentine law,” the commission said in the statement. The accord “leaves the rest of the institutions involved in the process of bond payments unprotected.”

I have said before that this makes no sense: Citi can't guarantee the bondholders' payments, any more than Argentina can, since there are other parties involved in the chain of payment and New York courts can do bad things to many of those parties. Citi is one part of the chain of payments; a New York judge banned it from performing its part; it heroically negotiated an exemption to allow it to fulfill its obligations to Argentina and its bondholders; and its reward was ... more punishments from Argentina. I feel like I am not entirely unsympathetic with Argentina in its fight with its holdout creditors, but it's hard to endorse Argentina's shabby treatment of its allies.

Payday lending.

Here is Alexis Goldstein on lobbying efforts by payday lenders, which as she puts it often amount to saying "Hey, we're at least better lenders than the mafia!" E.g. from a Consumer Financial Protection Bureau comment by a payday lending employee:

“No, we’re not going to go break legs or threaten a first-born or anything like that, but we expect them to come back in….Those 22 states that do not offer payday lending, do you really, really, honestly think that they are not getting that money from some other place? You’re wearing rose-colored glasses.”

I mean I don't know isn't there a little truth to that? (No, as it happens, says Goldstein: "A quick search of some recent criminal cases finds a not insignificant number of individuals tried and convicted for creating debt traps that are downright generous compared to those of many payday lenders.") There's an if-usury-is-outlawed-only-outlaws-will-do-usury element to the industry; the best way to prevent predatory lending is not to ban predatory lending but to work on creating less predatory options for people who need money.

Things happen.

Ben Bernanke's Blog. Don't get complacent over Grexit. Young activists. Ronald Barusch on Omnicare. Hail cannons. The Sales Director Who Turned Work into a Fantasy Sports Competition. Baby TV. "For all of these reasons, it appears very likely that Kant had no influence on evidentiary approaches in 18th Century Bulgaria" (via). Prisoner e-mails prison instructions to release him, gets released.

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To contact the author on this story:
Matt Levine at

To contact the editor on this story:
Zara Kessler at