Algorithmic and Artisanal IPOs

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 earnings.

Let's see. Goldman Sachs had a good quarter, making $5.94 a share versus $4.26 estimates, with a 10 percent increase in fixed-income trading revenue, perhaps validating Goldman's commitment to trading even as some rivals back away. Here's the press release. (Disclosure: I am a former Goldman employee, and a former shareholder.)

Citi made $1.51 a share, beating expectations of $1.39, though with a decline in trading revenue made up for by impressive cost-cutting. Here's the press release, presentation and supplement.

BlackRock beat expectations, $4.84 GAAP or $4.89 adjusted versus $4.52 expected,  as assets increased to $4.77 trillion in an environment where asset-manager profitability is a bit squeezed.

"Blackstone again broke all of our asset and earnings records in the first quarter," with $1.37 of economic net income and $1.05 of distributable earnings per unit and assets under management rising to $310.5 billion.

And yesterday's Bank of America earnings seem to have disappointed everyone; John Carney points out that its return on equity "is so far below a 10% theoretical cost of capital that there can be little question that BofA is currently destroying value." 

Some IPOs.

I really enjoyed this article from yesterday morning about Virtu Financial's initial public offering, in which some investors who think that the market is rigged and Virtu is rigging it expressed doubts about buying Virtu shares:

“There are going to be people who think it’s a good business and want to get in,” said Frank Ingarra, head trader at Northcoast Asset Management LLC, with $3 billion under management. “It’s the bigger guys like myself that don’t like them because they’re chipping away at our performance.”

Must have been tough to get the deal done without the big guys, huh? Oh hmm no: The deal priced yesterday evening at $19, the top of the marketed range, raising $314 million at a $2.6 billion valuation. I will go ahead and hypothesize that the top N allocations in the offering went to bigger investors than Northcoast, for some large N. "We spent very little time discussing regulatory issues or controversies," said Virtu's chief executive officer. I suspect that this means that big asset managers are not as fussed about high-frequency trading as they are sometimes made out to be, though the alternate explanation is that big asset managers just want to buy stocks that will go up and can compartmentalize their worries about the morality of the underlying business.

But yesterday the markets were kind to the automated and the handcrafted alike: Etsy also priced an IPO, also at the top of the range, raising $267 million at a $1.8 billion valuation. One theory of Etsy's attractiveness is that it is a potential M&A target, probably for EBay, raising the specter that some day soon Virtu-like algorithms will be trawling EBetsy, buying tiny baroque-style portraits of animals and reselling them at one-cent markups milliseconds later.

Oh and one more IPO was announced yesterday, sort of:

AshleyMadison.com, a dating website for cheating spouses, wants to hook up with investors by pursuing an initial public offering in London this year.

The site’s parent company, which failed with a previous IPO attempt in Canada, said on Wednesday it is looking to raise as much as $200 million to exploit booming demand for its services.

Its head of international relations "said 'Europe is the only region where we have a real chance of doing an IPO' because of its more liberal attitude toward adultery." 

Some Lehman stuff.

One popular theory of the collapse of Lehman Brothers is that it used an accounting trick called "Repo 105" to disguise its leverage, fooling investors into thinking it was less risky than it actually was. It's weird that this theory has never fared all that well in court. Lehman's collapse was Bad, and disguising risk is Bad, and there's been, what, seven years of calls to lock up bankers for the financial crisis, and it always seemed like Lehman was the obvious place to start. But no one has ever gotten in all that much trouble for Repo 105. The latest trouble is a $10 million settlement between Ernst & Young, Lehman's auditor, and the New York State Attorney General, for approving Lehman's accounts "in spite of knowing that Lehman was not disclosing the existence or impact of the Repo 105s." I don't know, $10 million to settle a four-year-old lawsuit over the key moment of the financial crisis, it's kind of an anticlimax, especially since E&Y settled with private investors for $99 million in 2013, and this settlement will just bump up the investor recovery in that case slightly. E&Y shrugged it off:

Ernst & Young noted that the settlement didn’t include any findings of wrongdoing by the firm or any of its professionals. “After many years of costly litigation we are pleased to put this matter behind us,” Ernst & Young said in a statement.

What's Elizabeth Warren up to?

I don't follow this stuff closely enough to know how much of Elizabeth Warren's speech yesterday consists of new proposals -- you can read her prepared remarks here, or the one-page summary of the proposals here, or an American Banker article here -- but Elizabeth Warren on financial reform gets everyone excited, pro or con, so I figured I'd link to it here. There's a lot of puffery about "the culture of cheating on Wall Street" and shutting it down by limiting deferred prosecution agreements and increasing fines and going to trial more. There's a call to "break up the biggest banks" by reinstating Glass-Steagall and limiting the Fed's ability to serve as a lender of last resort, which, you know, okay. There are calls for tax changes, including limits on deduction of debt interest and executive bonuses, and a "targeted financial transactions tax designed to have no impact on regular mom-and-pop investors." And there's a call to "tackle the shadow-banking sector," though there are no specifics there. If I had to characterize the overall thrust of these remarks I would say that they focus on deterrence and punishment rather than on risk mitigation, which is not necessarily the way I'd go, but which I suspect is more popular than my way.

Speaking of too big to fail.

Here is a Federal Reserve discussion paper finding that there's not really a too-big-to-fail premium:

Estimates of investor expectations of government support of large financial firms are often based on large financial firms’ lower borrowing costs relative to smaller financial firms. Using pricing data on credit default swaps (CDS) and corporate bonds over the period 2004 to 2013, however, we find that the CDS and bond spreads of financial firms are no more sensitive to borrower size than the spreads of non-financial firms. Outside of the financial crisis period, spreads are more sensitive to borrower size in several non-financial industries. We find that size-related differences in spreads are partially driven by higher liquidity and recovery rates of larger borrowers. Prior to the financial crisis, we also find that financial firms exhibited generally lower spreads that were less sensitive to size than spreads for several other industries. Our results suggest that estimates of implicit government guarantees to financial firms may overemphasize sizerelated borrowing cost differentials.

New plot for my financial thriller.

This is so great: The former "information security director at the Multi-State Lottery Association" won a $14.3 million jackpot after he allegedly "accessed the secure room housing the computer and infected the random number generator with software that allowed him to control the numbers generated." He goes on trial for fraud next week. "In order to carry out the operation undetected it is claimed that Tipton changed the settings of the security cameras so that they only filmed one second of every minute," which is just a perfect thriller detail in that it seems to unnecessarily create tension. He's got 59 seconds to break in, insert his thumb drive, and sweat while klaxons ring in the distance and the little progress bar crawls across the screen. Why not film one second of every five minutes?

Elsewhere in financial thrillers, "At least 21 financial advisers in Switzerland under U.S. indictment remain at large," and Bloomberg's Jesse Drucker went to Switzerland to meet with some of them. They seem to have adapted well to fugitive life.

Things happen.

"At the current pace, stock buyback authorizations are set to total $1 trillion this year, blowing past 2007’s record of $863 billion." Saudi Arabia Adds Half a Bakken to Global Oil Market in a Month.  Ben Bernanke gave a speech, and got a job at Citadel. The Mario Draghi confetti-bomber wants "peace and happiness for our lives, for Greece, and for all countries around the Mediterranean sea." Regulators Are Alarmed At Terms of Repo Pacts. People are worried about bond market liquidity. The CFTC sent a bunch of "special calls" by mistake. Rules of thumb. Remember, TurboTax is the reason that taxes are hard. Tyler Cowen’s three laws. The Pope's iPad. Will Meerkat go the way of Ello? Why Are Fast-Food Restaurants Hiding Their Condiments Behind the Counter? There's a New All-Potato Restaurant in Town, and It's Called Burlap Sack.

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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