Quirky IPOs and Rogue Brokers

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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Good IPOs.

Yesterday's signs-of-the-times initial public offerings not only priced at the top of their ranges, they also traded nicely in the aftermarket. Etsy priced at $16, opened at $31, and closed at $30, suggesting that its somewhat odd distribution mechanism -- selling lots of shares to retail investors in very small (fine yes hand-crafted artisanal bespoke etc.) batches, and lots of other shares concentrated "among a smaller number of institutional investors than is typical in IPOs" (fine yes thoughtful investors who discover and buy unique shares and build relationships with the company that sold them) -- left a lot of money on the table. But fine yes it's a quirky twee IPO and it's not all about the money, it's about bringing joy to people everywhere. Actually there's something to that; Etsy is unusual in being a public B corporation, as Katie Benner has discussed here at Bloomberg View, which means that it answers to a higher authority than share price maximization. Also it's one of just two public companies headquartered in Brooklyn.

Meanwhile in impersonal robotic offerings, Virtu priced at $19, opened at $23, and closed at $22.18, a near-perfect 17 percent IPO pop, suggesting that algorithms might be good at pricing stocks. Yesterday we talked about Frank Ingarra of Northcoast Asset Management, who thought that "the bigger guys" like himself (with $3 billion under management) would stay away from the deal because high-frequency trading is "chipping away at our performance." How'd that work out?

T. Rowe Price Group Inc., one of the biggest critics of high-frequency trading, now finds itself in a seemingly surprising spot: It acquired shares of HFT firm Virtu Financial Inc., a key player in reshaping how everything from stocks to currencies are bought and sold.

Ahahaha. No word from Northcoast, though, and I'm sure it was hard to get a deal done without them; Virtu's bankers would have had to rely on piecing together little tickets from the likes of T. Rowe, with its $750 billion of assets.

Meanwhile in "private IPOs," or I guess private follow-on offerings, Slack raised $160 million at a $2.8 billion valuation, for no particular reason.  That's on top of raising $120 million in October, which Slack "hadn't even touched" before this round. Etsy's actual IPO raised $307 million (including greenshoe) at a $1.8 billion valuation (now $3.3 billion), and it at least had a use of proceeds (sort of). Elsewhere, the Financial Times checks in with Ashton Kutcher and Snoop Dogg on their startup portfolios, and I kind of do not want to believe that "There’s a new term cropping up in startup pitch meetings: 'One-on-one.' It means the company is seeking to raise $100 million at a valuation of $1 billion." I'm all for cute truncation of dollar amounts ("a buck" for a million dollars, etc.), but this is too much.

Bad broker.

I sometimes wonder why so many investment scams pretend to be investing in risky exotic things; if I ran a Ponzi scheme, I would tell my victims that they were investing in an S&P 500 index fund, which seems like it might attract a wider audience than, like, loan-sharking to hockey players. So I like the style of Michael Oppenheim, a former JPMorgan private-client vice president arrested yesterday for allegedly stealing $20 million from his customers, mostly "by promising he would purchase safe and secure municipal bonds on their behalf." Muni bonds are the sort of boring investment that would lull victims into complacency; also they have this advantage:

Both Customer A and Customer C trusted Oppenheim. As a result, Customer A never questioned why he did not receive regular account statements for his municipal bond mutual fund. When Customer C's accountant asked Oppenheim for a 1099 tax form reflecting his municipal bond managed account program positions, Oppenheim told him that no 1099 was necessary since the portfolio consisted only of tax-free bonds, an explanation Customer C's accountant accepted.

Ha! Other times, though, he did have to send statements, so he allegedly took other customers' account statements and "simply pasted Customer A's name and account number" onto them.

So far, good scam. But here's where he loses me:

Almost immediately after each deposit of Customer A's and Customer C's stolen funds into his brokerage accounts, Oppenheim embarked on sizeable trading of stocks and options, including Tesla, Apple, Google and Netflix. Soon after each deposit, Oppenheim typically lost the entire amount of the deposit.

I feel like if I stole $20 million I could find so many uses for it that were not, you know, day-trading Netflix stock. And to be fair this guy sometimes did find other uses -- "When Oppenheim did have positive cash balances in his Broker 1 or Broker 2 accounts, he sometimes wired the funds out to bank accounts in his name or to accounts he held jointly with his wife," and used them to pay his mortgage or whatever -- but most of the money he allegedly took, including "$13.5 million in 2014 alone," he just threw away trading. From the SEC's and FBI's allegations, I assume his goal was not to steal from his clients but to borrow from them, make a killing in the market, and return their money with no one being the wiser. But that never works. Just take the money and spend it, man. Spend some of it on a fake passport and a ticket to a non-extradition country, which would be a lot more useful right now than a bunch of Tesla options.

Good earnings.

People generally seem pleased with this week's financial-sector earnings, which are taken as a sign that "Wall Street’s biggest names are getting their mojo back." (The good week also puts some pressure on Morgan Stanley, which announces next week.) I particularly like John Carney's point that Goldman Sachs's 14.7 percent return on equity last quarter represents "one of its best quarters on a risk-adjusted basis":

That return is all the more impressive because it was achieved with a leverage ratio of around 11 times. To put that in perspective, consider that back in 2007 when Goldman earned a return on common equity of 32.7%, it was levered 26.2 times. If the firm’s capital structure back then had looked more like it does today—meaning it had to carry a lot more capital—the return on equity would likely have been around 11% back then.

I did some similar rough math last year. (Also I used to work at Goldman.) It would be weird to expect big banks to match their pre-crisis return on equity numbers, if they're doing similar businesses with more than twice as much equity. But presumably that should make them safer, and investors should pay as much for a safe 14 percent return as they would for a higher but riskier return.

Blackstone's earnings were also impressive, but I really liked this womp-womp moment from its earnings call:

Three months ago, Blackstone Group LP’s energy dealmakers were “scrambling” to invest in oil companies, according to its president, Tony James. No longer.

“We thought there would be a lot to do,” James, who runs New York-based Blackstone with Chief Executive Officer Steve Schwarzman, said on Thursday. “That really hasn’t developed. We haven’t put as much new money out as we hoped or expected.”

More financial news articles should be of the form "thing that everyone said would happen didn't happen." Also:

“They’ve been able to go out and raise a lot of debt and, in some cases, equity publicly at values that we wouldn’t touch,” James, 64, said while speaking on a conference call with reporters discussing first-quarter earnings. “Public markets took away a lot of opportunity.”

They do that sometimes.

Revolving doors.

Ben Bernanke is a pretty good economist, and a lot of financial firms want to hire good economists, and as a good economist he might want to be paid a lot of money for his skills. But because the Fed does function as a bank regulator -- even though the Fed chairman isn't primarily in the regulation business, he's in the monetary policy business -- it might look a little unseemly for him to go to a regulated bank. So he took an advisory gig at Citadel LLC, a non-bank financial firm with a lot of money and an interest in macroeconomics. And, you know, with an opening in fixed income; Citadel's former head of fixed income left "after losing $1 billion last year in a variety of trades."

But here are the Wall Street Journal and Breakingviews and Quartz and Gawker raising eyebrows to various heights about Bernanke's move, because revolving doors are bad, and because even though Citadel isn't regulated by the Fed it could be, or it could take business and traders from banks that are, or, you know, it was indirectly bailed out by Bernanke's decision to save the financial system. (And therefore that decision is retroactively suspect? Bernanke should have let the economy collapse to avoid the appearance of a conflict of interest taking a job seven years later?) The default setting of outrage at any move between government and the financial industry feels counterproductive. Big banks, small banks, foreign banks, boutique investment banks, hedge funds, private equity, all cause controversy. But some of those places provide real opportunities for corruption, and some do not, and it seems unfair that everyone who leaves government for any financial job gets the same accusations of rent-seeking. 

Elsewhere, when Ruth Porat left Morgan Stanley for Google last month, there was a brief flurry of theorizing on whether tech was becoming more like Wall Street in unpleasant, or possibly pleasant, ways. My view was, no, Google had a chief financial officer before, and then it hired a different CFO, but that probably doesn't mean much for The Future Of Tech. But here is an article about Ted Ullyot, formerly general counsel at Facebook (and before that a senior Justice Department lawyer), joining "venture capital firm Andreessen Horowitz as its first partner to focus on policy and regulatory affairs," which I think says rather more interesting things about the industry:

“I think a lot of the uncertain legal and regulatory issues we faced in the earlier days at Facebook -- explaining the business to people in DC and in Brussels and state AGs -- made for the most exciting and interesting work there for me,” Ullyot says. “When I was leaving Facebook, which by then was pretty stable, I thought it would be nice to work again with companies that face similar issues.”

At Andreessen Horowitz, Ullyot will have plenty to keep him occupied. The VC firm’s portfolio is full of legal minefields, including ride-sharing (Lyft), bitcoin (Coinbase) and drones (Airware).

Nothing says "tech is becoming finance" like a newfound focus on regulatory affairs.

Things happen.

The Fed probably won't raise rates in June, says Jon Hilsenrath. "GE industrial rump shows strength." Greek yields are up. Small hedge funds had a big year in 2014. The GoPro dude was the highest-paid U.S. CEO in 2014. A defense of appraisal litigation. Finra found that 15 percent of brokerage firms make substantial amounts of money selling "alternative investments such as options, BDCs, and leveraged inverse ETFs" to investors over the age of 65. Paris, Texas vs. Paris, France. Gawker might unionize. Darien Father Says Son's Little League Demotion Tied To Affordable Housing Proposal. Is Harry Potter and the Goblet of Fire Based on Mario Party 2? Dogs are great. "This year, April 16 officially becomes North American Meeting Industry Day."

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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