Bonds, Buffett and Ballghazi

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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SALT vs. Buffett.

Here's Dan Loeb on Warren Buffett at the SkyBridge Alternatives Conference:

“I love how he criticizes hedge funds, yet he had the first hedge fund,” Mr. Loeb said. “He criticizes activists, he was the first activist. He criticizes financial services companies, yet he loves to invest in them. He thinks that we should all pay taxes, yet he avoids them himself.”

Cute! Stephen Gandel thinks that "Loeb’s Buffett diatribe may have been inspired by recent events related to Dow Chemical," in which Buffett seems to support chief executive officer Andrew Liveris against Loeb's activism. Coincidentally, here is a Reuters investigation into "whether Liveris, 61, was exploiting his position at Dow to finance his lifestyle, further his personal pursuits, or favor his family and friends." The activists don't just pick these companies randomly, you know.

Other activists, though, are more straightforward admirers of Buffett; here is a Forbes story about how Bill Ackman plans to use his position at Howard Hughes Corp. "to change his reputation from the modern-day corporate raider everyone loves to hate into a corporate empire builder" modeled on Buffett's Berkshire Hathaway. And in other Buffett news, his derivatives are doing better, thanks.

BlackRock wants more CDS trading.

Investors like single-name credit default swaps because they provide a relatively efficient way to express views on corporate credit, and because it's become harder to express those views by buying bonds. The Volcker Rule and the capital requirements and the low dealer inventories and the demand for bonds from exchange-traded funds and so on and so forth, you know how it is, bonds are hard to find these days. The problem is that single-name CDS is even harder to find, because the Volcker Rule and the capital requirements and so forth hit CDS even harder than they did bonds. So BlackRock, in its perennial quixotic quest to improve credit-market liquidity, is going around trying to make the single-name CDS market more attractive, in part by moving it to clearinghouses that will require less dealer capital. Do you think this will go as well as BlackRock's electronic trading platform for bonds? Or as well as its effort to get issuers to standardize the terms of their bonds? I for one am looking forward to the new golden age of CDS trading, but not soon.

Elsewhere in market structure, spoofing remains more or less a mystery, with much debate about whether it's bad and how to spot it. Virtu is making a lot of money trading currencies, Chi-X is "is exploring a sale that could fetch as much as $400 million," and PricewaterhouseCoopers published "An objective look at high-frequency trading and dark pools."

Ballghazi is real.

A little off our usual subjects here, but the 234-page report on the Patriots' deflation of footballs is pretty irresistible. One thing about Ballghazi is that it is a pretty low-tech scandal: Everything can be done with a football, a needle, a nod and a wink. No complicated system of permanent electronic recording is required. If you're going to do something wrong, low-tech is good. 

But then they went and texted each other about it! Texts like "I have a big needle for u this week" and (of Tom Brady) "The only thing deflating sun..is his passing rating." Just don't do that, man. They had committed the perfect crime, but they couldn't resist the siren call of constantly recording all of their misdeeds in permanent misspelled electronic form. It is the great curse of modernity, for criminals. There are very important lessons here for would-be Libor manipulators.

Elsewhere, "Four big banks are expected to plead guilty to rigging foreign-currency exchange rates and pay billions in combined penalties as part of settlement agreements expected to be announced as early as next week"; you might remember three of those banks from the time they admitted to rigging foreign-currency exchange rates and paid billions in combined penalties as part of settlement agreements announced six months ago.

An equity hedge.

Here's a fun Moneybeat story about how Anheuser-Busch InBev made "nearly 30% of its profit in the first quarter," $757 million, from a hedge on its own stock. The idea is that AB InBev pays some of its employees partially in shares, and buys those shares in the market to deliver to employees, so it "hedged" its exposure to the share price by entering into derivatives contracts indexed to 35.4 million shares of its own stock. Moneybeat says that the hedge "appears to be a fairly simple option," but it's reasonably clear to me that it's actually just a delta-one swap on the stock: AB InBev pays its dealer the amount that the stock goes down, and the dealer pays AB InBev the amount the stock goes up. Every so often they reset the swap and AB InBev takes its (so far, mostly) profits. (See page F-59 of its annual report.)

This sort of trade is not unheard-of -- I actually did one once -- but it's pretty unusual. Entering into this swap was economically equivalent to just buying back a lot of shares, so most companies just buy back the shares. (The swap requires less money up front, but are you really getting better leverage terms from your derivatives-dealer bank than you would from the bond market?) If you just buy back shares, your income doesn't go up and down for subsequent changes in your stock price, but if you do a swap on the same number of shares it does, creating weird earnings volatility. And this is a very silly "hedge": AB InBev is hedging its own success, so the swaps provide income when its business is good and losses when it's bad. 

Ugh some politics.

Senator Bernie Sanders has a new bill that would require the Financial Stability Oversight Council to identify all the banks that are "Too Big To Fail," and then require the Treasury to break them up "so that their failure would no longer cause a catastrophic effect on the United States or global economy without a taxpayer bailout." Meanwhile they couldn't "use any insured deposit amounts to fund" various risky activities, or have access to any Fed programs. So by hypothesis this would identify banks whose failure would "cause a catastrophic effect" without a bailout, and then ban bailouts only to those banks, ensuring catastrophe.

So this bill is obviously magical thinking of the most depressing and cynical sort; it cannot be meant literally as legislation, but is just a way to posture that Banks Are Bad. I'm less sure that's true of the Vitter-Warren proposal to restrict the Fed's ability to act as a lender of last resort; that definitely is anti-bank posturing, but it also seems like they mean it? I mean, I get the moral hazard thing, but it is odd that the reaction to a mostly successful rescue of the global economy is to try to make sure that it never happens again. Not the failure, I mean, but the rescue. Here's an article on "Why Elizabeth Warren Makes Bankers So Uneasy, and So Quiet."

For some balancing cynicism, here's a conservative think tank arguing that Dodd-Frank "could reduce gross domestic product by $895 billion between 2016 and 2025." If someone tells you the cost of something over ten years, they're probably trying to fool you.

In possibly related news, Bank of America spent some of its shareholder meeting yesterday "countering charges from a shareholder that its sprawling size made it 'too big to manage,'" and Paul Davies is skeptical about the value of big-bank revenue synergies.

Door revolves.

My model for Point72 Asset Management is that federal prosecutors conquered SAC Capital and razed it to the ground, but then instead of salting the earth, they seeded it with jobs for former federal prosecutors. The latest is that "Kevin J. O’Connor, a former United States attorney for Connecticut," will be general counsel. Weirdly "Point72 has so far had less success" in luring former F.B.I. agents to its apparently mammoth compliance department.

More bitcoins.

Yesterday we talked a little about cryptocurrencies that are tied to other assets, and the consensus that they make no sense -- because the asset backing requires a central ledger, which defeats the distributed-ledger point of cryptocurrency -- remains strong. Here is Guan Yang. Meanwhile Ripple Labs Inc., which arguably has some elements of a central-ledger cryptocurrency dealer, was fined $700,000 by the Financial Crimes Enforcement Network for anti-money-laundering failures. In happier news, it is probably not the case that bitcoin is the Mark of the Beast. And Tyler Cowen recommends Nathaniel Popper's new book on bitcoin, "Digital Gold," as do I.

Things happen.

Nicole Cliffe on D.E. Shaw: "Much of my job was taking quants and programmers to lunch during their interview day and ordering the truffle burger at DB Bistro Moderne while talking about Doctor Who (so they would assume it was a place where women eating burgers would talk to them about Doctor Who)." SEC in-house courts favor the SEC. Odey Asset Management's flagship fund "slumped 19.3 per cent last month, after it was caught out when the Australian dollar strengthened against the US dollar." Max Levchin's online lender Affirm has raised $275 million. How do you value Mylan's stock if you're Perrigo, or Teva, or Mylan? "French prosecutors have filed preliminary criminal charges against a unit of J.P. Morgan Chase & Co. for its alleged complicity in tax fraud." LPL Financial is in trouble again for how it sold ETFs and stuff. These how-much-money-is-your-college-major-worth things never look at classics majors. Clorox Wants to Be Known for Salad Dressing and Lip Balm, Not Just Bleach. Masonic Fraternal Police Department. Is The New McDonald’s Hamburglar Hot?

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To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net