Can-Kicking and Activism

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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It seems increasingly clear that February's deal between Greece and its official creditors was just a way to spread out the recriminations over several months instead of concentrating them all in a weekend. Bloomberg has the current state of negotiations, or whatever you'd call this:

While “so-called” partners, including unidentified International Monetary Fund officials, want to “blackmail” Greece into adopting measures that would hurt the working class, “we won’t betray the people’s mandate,” Energy Minister Panagiotis Lafazanis said, according to an interview published Sunday in Athens-based Real News newspaper.

Greece and its creditors of the IMF, the ECB and the European Union are still far from agreeing reforms needed to unlock tranche aid, IMF Europe chief Poul Thomsen said Monday in an interview with Handelsblatt.

The deadline for the next firm kick of the can is the end of the month, and everyone seems too busy kicking one another's shins to even know where the can is. Greece's 2017 bond is trading at a yield of almost 27 percent as another default seems probable, and Greek finance minister Yanis Varoufakis took a meeting with Lee Buchheit, the leading sovereign debt restructuring lawyer. J.W. Mason and Wolfgang Münchau argue that Greece can and should default but remain in the euro (Mason: "the real problem with default is the need to need to ensure that the Greek payments system continues to operate even if the ECB tries to sabotage it"), which at this point seems like the optimistic case. Here is a considerably grimmer post from Sober Look arguing that "the Eurogroup is experiencing what many dealmakers would categorize as 'deal fatigue'" and that Greek banks' use of emergency liquidity assistance from the European Central Bank will complicate any default. And here at Bloomberg View, Mark Whitehouse looks at Greek capital outflows, and Mohamed El-Erian posits "a 45 percent chance that a last minute messy compromise allows the muddling-through to continue; a 10 percent chance that a meaningful policy breakthrough will be achieved, and a 45 percent chance that the outcome is a Graccident in which both the Greek government and its European partners lose control of the situation."

Elsewhere in sovereign debt, here's Anna Gelpern on the official or private or whatever status of Russia's Ukraine bond, and on Ukraine's restructuring possibilities

Activism and diversification.

We talked last week about a frankly wacky proposal to ban diversified mutual funds on the theory that companies compete less vigorously in order to maximize the wealth of their diversified investors. There are roughly two ways for a company to think about serving its shareholders: It can try to maximize the value of their shares in the company, or it can try to maximize the overall value of their investments, recognizing that many of them are broadly diversified. The first approach is considerably more traditional, and encouraged by things like executive stock options; one surprising aspect of the ban-mutual-funds research is that it finds circumstantial evidence of companies actually using the second approach. (Matt Klein is unimpressed by that evidence.)

One interesting place to look for that divide is between traditional mutual funds, which tend to be diversified, and activist hedge funds, which tend to be concentrated investors. So here's Ronald Barusch on the BlackRock letter against "short-termism":

Huge money managers like BlackRock will likely be judged over the long term on their ability to maximize returns in their broad range of investments. Activist hedge funds, meanwhile, invest in a much more limited number of companies. They tend to first come up with ideas to enhance the value of an investment in the company, then buy shares with the objective of getting their ideas implemented.

You could tell a sort of esoteric story of management-versus-activist fights in which the management accuses the activist of pushing short-term thinking at the expense of its long-term shareholders, but really means that the activist is pushing the company to be more competitive at the expense of its diversified shareholders. I don't think that this is quite the right story -- and here is John Coffee on evidence that activism actually does lead to cuts in research and development spending -- but it's kind of interesting. And here is a story about hedge fund co-investments, in which hedge funds ask their limited partners to join them in individual investments rather than just investing through a (more) diversified fund.

Elsewhere, here are Cliff Asness and friends on value investing, by which they mean "the highly diversified 'academic' (though many practitioners follow it also) version of value, not concentrated value-based stock picking." They are suspicious of concentrated stock picking, despite its occasional notable successes:

Warren Buffett is to value investing what George Burns, the comedian who lived to 99 years of age while smoking 10 to 15 cigars a day for 70-plus years, is to the health effects of smoking.

Morgan Stanley.

Morgan Stanley made $1.18 per share, or 85 cents after adjustments, beating expectations, and everyone seems to have had a nice trading quarter. In other Morgan Stanley news, it's "in talks to pay about $500 million to settle a probe by New York’s attorney general into whether the Wall Street firm misled investors in mortgage bonds that cratered during the financial crisis." It's 2015, so any new mortgage settlements are likely to be a bit non-traditional; this one is fairly traditional in its number (nine digits) and cause ("misled investors in mortgage bonds"), but at least somewhat unusual in its parties. Morgan Stanley was never all that big in mortgage lending, or mortgage fraud. And Eric Schneiderman has played a leading role in national coordinated mortgage settlements -- he got to co-announce the $13 billion JPMorgan settlement -- but a nine-digit settlement with a single state, with no coordinated federal or multi-state deal, would be a novelty. [Update: Actually there was a $102 million Morgan Stanley/Massachusetts mortgage settlement in 2010, so it's not quite as much of a novelty as I'd thought.] 

Even more novel: Quicken Loans Inc. "sued the U.S. Department of Housing and Urban Development and the Justice Department," saying that "it is fed up being pressured to settle charges for fraud it says it didn’t commit." I can see how that would be frustrating.

Hedge fund news.

Oh um hey Jon Corzine is starting a hedge fund? Maybe? He's still being coy:

“Jon Corzine is not managing anybody’s money and has not asked a single investor to put money into a fund,” said Andrew Levander, a lawyer for Mr. Corzine. “He is gratified that others might want to invest with him.”

One of the great clichés of the financial industry is that losing a billion dollars makes you more attractive to potential employers and investors, since it shows (1) that you can take risks and (2) that people have trusted your skills in the past. 

Speaking of public figures going to hedge funds, here is James Kwak lamenting Ben Bernanke's move to Citadel in terms that strike me as reasonable ("it’s sad that we live in a world where even Ben Bernanke -- once perhaps the second-most powerful man in the world -- feels like the only thing worthy of their time is just another hedge fund"), and here is Matt Yglesias lamenting that move in terms that strike me as obviously wrong ("lobbying and related advocacy work are more straightforward, and even honorable, ways to cash in than what Bernanke is doing"). And here is a guy saying that Bernanke is "going to go down as one of the most vilified people of the 21st century. Mark my words."

Elsewhere, Lynn Tilton made a video about the Securities and Exchange Commission's use of administrative proceedings in securities fraud cases, which you would not think would be an occasion for gripping cinematography.

Bye bye blockchain bucket shop.

We talked a while back about Sand Hill Exchange, a website that was supposed to allow unaccredited investors to bet on the future value of private companies; also there was something about blockchains. I had a strong feeling at the time that Sand Hill Exchange's proposed business model did not fully comply with all relevant regulations. Anyway Sand Hill Exchange is now "for entertainment purposes only," so I guess you missed your chance to invest in Ello.

Happy 4/20.

I kind of expected to have more weed-related content today but here is Bloomberg on the "55 public companies whose business is based largely or completely on legal marijuana," many of which have pretty jagged stock price graphs.

Things happen.

On May 13, the SEC's Equity Market Structure Advisory Committee will examine the trade-through rule. The Swiss franc thing makes people nervous about foreign exchange trading. Deutsche Bank is getting ready to divest Postbank. "Stock buybacks are an important explanation for both the concentration of income among the richest households and the disappearance of middle-class employment opportunities in the United States over the past three decades," says an economist; I have a somewhat different view. Overdeterrence and bank punishments. Fed leaks. "It's also possible that, just as many dated styles come back into vogue eventually, unions have taken on a kind of retro cool among the youth of today." Congrats Jim Cramer! An oral history of Airplane! Lesser-Known Trolley Problem Variations. Why Doesn't Westeros Have A Central Bank?

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Matt Levine at

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