Burger Battles and Libor Pleas

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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A Libor deal.

Remember Libor? The other day I tepidly endorsed banking regulation by frequent arbitrary fines, but still the story of Deutsche Bank's impending Libor manipulation settlement seems awfully cynical. Deutsche Bank will pay a much bigger fine than all the other Libor-manipulating banks, even though no one seems to think that it was the worst Libor manipulator, due to a series of more or less arbitrary factors. Deutsche is the last bank to settle, and "questions have arisen about whether the bank was too slow to produce documents when the investigation was just beginning years ago," affronting regulators into charging them more. Waiting also allowed more regulators to show up: In addition to the usual Justice Department, Commodity Futures Trading Commission and the U.K. Financial Conduct Authority, Deutsche has to negotiate with the New York Department of Financial Services, which didn't even exist when Libor was being manipulated. Also there will be a meaningless symbolic guilty plea -- from a Deutsche Bank subsidiary in the U.K. -- because sometimes the Justice Department wants that. On the other hand, there was a lot more outrage at the early settlements than there seems to be now, so there's a sense in which Deutsche Bank should be glad that it waited. The moral is that you should probably be, like, the third bank to settle whatever the manipulation of the month is: Go too early and you're a symbol of fraud, but go too late and the price goes up.

Steak 'n Shake by Biglari.

The drama over the activist fight at Biglari Holdings ended yesterday, in a shareholder meeting in which chief executive officer Sardar Biglari defeated an activist challenge from Groveland Capital, but we can hold it in our hearts forever. Here's the history of Biglari Holdings, which is roughly (1) Sardar Biglari gained a board seat at Steak 'n Shake Co. as an activist investor, (2) he became CEO, and (3) "he re-christened the burger company Biglari Holdings and told investors he viewed the company as a platform to buy other businesses" (so far including Maxim magazine). The article refers to him as "a Warren Buffett wannabe," and remember that Buffett built his corporate empire out of a textile-mill company, but still I am tickled by the idea that the next Berkshire Hathaway might have started life as a burger company. Anyway Groveland got annoyed by the governance oddities and Biglari's efforts "to become a sort of 'CEO for Life,'" and ran a proxy fight in which Biglari made fun of a Groveland nominee's Facebook page and in which Institutional Shareholder Services declared: "Neither choice is appealing." ("Both sides claimed that as a victory.") Yesterday Biglari Holdings announced that Groveland had failed to win any board seats, and:

One shareholder asked Mr. Biglari whether he had learned anything from the conference. Mr. Biglari said he learned how stupid others are, blogger Jonathan Heller tweeted.

A valuable lesson.

Economic crimes.

I've written a little about prison sentences for financial crimes, and one thing to know about them is that they're driven more or less entirely by how much money was involved. If you swindle widows and orphans out of their last dime, leaving them starving and impoverished, but you only make $100,000, you are likely to get less prison time than a guy who carelessly trades on third-hand inside information that makes his employer $10 million. A lot of people, including me, think that the moral and deterrence purposes of criminal law are not especially well served by tying the punishment solely to the amount of money involved. The U.S. Sentencing Commission seems to agree: Yesterday it "adopted a new framework for fraud cases that gives more weight to an offender’s intent and role within a scheme, which could help minor participants win lighter sentences," and "shifted emphasis from severely punishing those who caused a large group of victims to lose a small amount of money, to those who caused 'substantial' financial harm to even one victim." (Here's the news release.) So bankrupting orphans will now be punished more harshly, while making a lot of money on victim-less-ish, not-so-intentional crimes will be punished less harshly. 

In other news, here is a Securities and Exchange Commission civil fraud case against an alleged boiler room that "misrepresented that eCareer shares would be sold only to accredited investors when in reality stock has been pitched and sold to people not necessarily meeting that definition, including some non-accredited investors aged 85 to 98 years old." 

How to alter your report card.

Yesterday the SEC brought civil fraud charges against Katsuichi Fusamae, the former controller of Molex Incorporated's Japanese subsidiary. As controller, Fusamae was responsible both for accounting and for investing Molex Japan's excess cash, a ludicrously dangerous combination. Never put the same guy in charge of investing your money and accounting for it. Fusamae did what you'd expect: He started trading stocks on margin, lost money, borrowed more using corporate accounts, and hid the losses from his employers using some pretty low-tech tricks:

As part of Molex's annual audit, the company's outside auditors sent confirmations to the Japan-based broker-dealers and banks with which Molex Japan had existing relationships, which were supposed to be returned directly to the auditors. The confirmations sent by Molex's outside auditors asked the banks and broker-dealers to disclose, among other things, the balance of all accounts and all loans held in the name of Molex or Molex Japan. On several occasions, Fusamae contacted the banks and broker-dealers and asked for a meeting with them before they returned the completed confirmations to Molex's outside auditor. At the conclusion of his meetings with the representatives from the various banks and broker-dealers, Fusamae kept the completed confirmations and told the representatives from the banks and broker-dealers that he would return the completed confirmations to Molex's outside auditor. Fusamae then used whiteout to redact the portions of the confirmation referencing the unauthorized trading and unauthorized borrowing and mailed the falsified confirmations to Molex's outside auditor.

This kept up until he couldn't borrow any more money, at which point "Fusamae stopped showing up for work and, on April 5, 2010, he mailed a confession letter to the company." The company restated earnings and recorded losses of over $200 million for the scheme. Now the SEC is suing Fusamae and, appropriately, Molex, which settled, for failures of internal controls. It doesn't seem to be going after the auditors who were fooled by whiteout, however.

A pre-roadshow. 

Here's a story about how Etsy's initial public offering will include a retail chunk with allocations limited to $2,500, maximizing the number of small investors who can buy, frustrating retail investors who want to buy a lot of stock, and creating an opening for jokes about how the IPO is artisanal, hand-crafted, twee, Brooklyn, pickles, beards, you get the idea. Then there is this though:

Etsy Chief Executive Chad Dickerson and Chief Financial Officer Kristina Salen traveled to regional Morgan Stanley brokerage offices to pitch the offering to small investors and Etsy vendors, the people familiar said. Cities they visited included Cleveland and Rockford, Ill., which aren’t usually on the IPO roadshow map.

The pitch was aimed at brokers with clients that buy or sell on Etsy, and the two executives wore clothes they purchased on Etsy to the meetings, some of the people said.

Really the bankers should have knitted clothes for the executives during their IPO pitches, and the executives should have worn those clothes to the roadshow.

The point of banking is to conceal risk.

That's a thing I say sometimes. Here's a paper from the Philadelphia Fed:

We study an optimal disclosure policy of a regulator that has information about banks' ability to overcome future liquidity shocks. We focus on the following tradeoff: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (the Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We relate our results to the Bayesian persuasion literature and to the debate on disclosure of stress test results.

And here is a story about how regulators have pushed a lot of derivatives trading to clearinghouses, and are now getting worried that that just concentrates a lot of risk in clearinghouses. This is a question that leads to a lot of lobbying: Clearinghouses lobby regulators to force banks to clear trades, while banks lobby against clearing requirements by pointing out the risks of clearinghouses. Delightfully the banks' "intense lobbying effort" against the clearinghouses is led by The Clearing House Association, "which represents Wall Street banks, not derivatives clearinghouses."

Things happen.

Felix Salmon interviews the Argentine ambassador. Muddy Waters' short-selling is not as effective as it used to be. Role of HFTs Questioned in Swiss FX Move. The Intel/Altera deal seems to be dead. The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market. TPG nabs Bono and Ashton Kutcher as special advisers. "Investment banks within reach of adequate returns." Wearing Luxury Brands Makes You Seem More Qualified for the Job. Police Horse Named Jacob ‘Trying His Hoof’ at Painting.

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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