Bailouts, Banking and Whistleblowers

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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Should AIG have gotten a better bailout?

Hank Greenberg has been suing the United States for years, claiming that the bailout of AIG "cheated shareholders out of at least $25 billion." Everyone has always thought that this was a fairly crazy claim, and it was roundly dismissed in a New York federal court, but he's having better luck in D.C., where a judge now seems to be "leaning toward a finding of liability." There are two separate questions here. The first is: Was the bailout illegal? And the answer to that might actually be, you know, sure, maybe some corners were cut here and there. There was a financial crisis going on, if you remember, and respecting the niceties of Delaware corporate law -- or even of the Fed's legal authority -- wasn't necessarily at the top of anyone's list. 

But the second question is: Who cares? I mean, Greenberg is suing for money, and no matter how illegal the bailout was, he only gets money if the illegality caused harm to AIG shareholders. The government's argument is that the bailout, unpleasant as it may have been for shareholders, was better than bankruptcy and liquidation during a financial crisis, and that AIG's board knew that and took the bad bailout over the much worse bankruptcy:

According to a person with knowledge of the government’s preparations, the case could hinge largely on a single fact: that A.I.G. shareholders never lost anything. Indeed, the value of their shares increased after the bailout. To prove a Constitutional violation requires someone to be harmed — and therefore even if the judge proves sympathetic to some of Mr. Boies’s arguments, the government believes the lack of economic loss will carry the day in its favor.

Greenberg has his own view -- I guess that bankruptcy would actually have worked out great for shareholders? -- but that view still seems fairly crazy to me. 

Should banks be boring?

Here's a story about how sad regional banks are that interest rates are still low, because their business is just clipping net interest margin and that's harder to do when rates are low forever. One argument that you sometimes hear against Glass-Steagall and in favor of exciting derivatives-trading banks is that business diversification makes banks safer: A bank that just takes deposits and makes loans is at the mercy of interest rates and credit conditions, while a bank with lots of trading and investment banking businesses can make its own destiny, and can make money even while rates are low and boring. As more or less happened this quarter; the big universal banks did great, while the boring regional ones did not. This argument breaks down a little in bad times, when you actually need diversification -- when credit is crashing, bond-trading businesses often exacerbate rather than mitigate problems in boring lending businesses -- but, still, score one for the universal banks this quarter.

What's up in Argentina?

Well here's the plan:

Argentina said it planned to auction Tuesday $500 million of local-law bonds due 2024, without using banks as intermediaries. Buyers must have accounts registered with the local securities regulator or express “timely interest” with parties that have such accounts, according to a statement announcing the sale.

But those bonds are denominated in dollars, and is it possible that some of them might be sold to investors outside of Argentina? Sure it's possible. So NML Capital, the unit of Elliott Management that has been suing Argentina for years, "sent a letter to Deutsche Bank AG seeking information on the local debt sale planned for Tuesday and whether the bank is offering the bonds to investors outside the country." If they are being sold outside of the country, then, under the ruling of a New York federal court, they are probably not allowed. Deutsche Bank appears to be on the hook just because it tried to sell local-law bonds for Argentina before, but got shut down, and that "without using banks as intermediaries" line seems a bit too cute. 

We have talked before about the state of play between Argentina (where there is a government that wants to sell bonds) and New York (where there is a federal judge who wants to stop Argentina from selling those bonds). The key question at this point is not so much whether the New York judge will conclude that these bonds are being sold outside Argentina -- sure he will! -- but rather whether he can do anything about it. If Deutsche Bank is involved in selling them, Deutsche can get in trouble; if Citi or anyone else is involved in making payments on them, Citi can get in trouble. Only if Argentina has been incredibly careful and clever about avoiding even the most glancing contact with New York will it get away with selling new dollar bonds abroad.

Elsewhere in sovereign debt, the Greece news remains unpleasant, with the European Central Bank cracking down on emergency liquidity assistance haircuts, but on the other hand there seems to be absolutely no contagion to the rest of what used to be called the European periphery. Now I guess the periphery is a club of one, which doesn't seem great for Greece's negotiating position. And Bill Gross thinks the 10-year German bund is the "short of a lifetime."

Shareholder rights, or not.

I like this story about the upcoming annual general meeting of the Swiss National Bank, which has shareholders and so has shareholder meetings, even though it is a national central bank and not run by or for the benefit of those shareholders. Many of those shareholders are mad about the SNB's decision to abandon the cap on the franc earlier this year, but "the SNB’s independent status means any complaints won’t affect monetary policy." Instead, the complaints are largely symbolic expressions of frustration about a management that will nonetheless be re-elected to pursue its policies without shareholder input. It's like 99 percent of shareholder meetings at regular companies, in other words. Meanwhile in the U.S., fewer companies are settling proxy fights, choosing to go to a vote instead of giving in to activist demands.

Double whistleblower!

There's a saying that I will paraphrase as: "If you run into a jerk in the morning, you ran into a jerk. If you run into jerks all day, you're the jerk." Here's a story about a guy who has received two entirely unrelated seven-digit whistleblower rewards, one for "helping kindle the Justice Department’s record $16.65 billion settlement last summer with Bank of America Corp." and one for "reporting his former employer, a Seattle pharmaceuticals firm now called CTI BioPharma Corp., for allegedly defrauding Medicare." Also he is on "Real Housewives of New Jersey." I would not want to have him over for dinner, I think. One problem with whistleblower reward programs is just aesthetic; they tend to channel millions of dollars of government money to people who at least, you know, sat suspiciously close to some fraud, and who are also -- according to a professor who studies them -- "not always the most relaxed, easygoing people in the world."

Things happen.

Elliott Management is getting into the buyout business. Bulge bracket banks are defending their fee share against boutiques. The U.K. Financial Conduct Authority is serious about record-keeping. Is Government Debt Too Low? Goldman: Vote Tory. Goldman settled a sex discrimination case. Blythe Masters talks bitcoin. Here's BlackRock's 506 waiver for its conflicts-of-interest problem (previously). The economics and politics of Thomas the Tank Engine. Buttered coffee. Bourbon heist. Competitive vaping

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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:
Tobin Harshaw at tharshaw@bloomberg.net