FX Pleas and California Activists

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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Happy FX guilty plea day.

I've said this before and been wrong, so I'm not holding my breath, but today is the day that five big banks are expected to plead guilty in various combinations to manipulating foreign exchange rates, or in UBS's case plead guilty to manipulating Libor because it manipulated foreign exchange rates.

UBS is already on the tape with its announcement of its $545 million in total fines, which is a masterpiece of ... I was going to say "burying the lede" but it isn't really. UBS's headline is "UBS participates in resolutions of industry-wide FX matter," which is precisely right: If everyone pleads guilty at the same time, or close to it, then no one is really all that guilty. The news is the industry-wide resolution, not one bank's shameful guilt. And because of the bizarre procedural mechanics of this resolution, the text of UBS's FX-manipulation news release can boast that "UBS has not been criminally charged for FX conduct" a paragraph before it mentions that "UBS AG has agreed to plead guilty to one count of wire fraud for conduct in the LIBOR matter, pay a USD 203 million fine and accept a three-year term of probation."

Last week's expected FX guilty plea day did not go off as planned, apparently because the banks needed an extra week to go around to regulators and get waivers allowing them to continue to conduct business despite a criminal conviction. Here is an amusing story about Credit Suisse's efforts to obtain a waiver from the Department of Labor (which it needed to keep its status as a "qualified professional asset manager" so it could trade on behalf of pension fund clients) after it pled guilty to assisting in tax evasion. As part of that waiver process, Credit Suisse's lawyer, Melanie Nussdorf, had a question for the DOL:

Nussdorf, a partner at Steptoe & Johnson LLP who worked at Labor in the 1980s, sought to clarify who, among all the pension clients in the Credit Suisse universe, needed to be told. Labor responded that it was enough, in many cases, to tell the pension managers rather than the clients, prompting Nussdorf to repeat “thankyou” 600 times.

Guys I know you're not in the strongest negotiating position here but this looks a little desperate.

Calpers vs. Calstrs.

Here's a story about how the California Public Employees' Retirement System was an early pioneer in activist investing and has now become respectable, preferring to "engage companies quietly behind the scenes." Meanwhile the California State Teachers' Retirement System, which came later to activism, now really enjoys it: It has "tripled the size of its activist fund portfolio since 2012 to roughly $5 billion," has done well on those investments, and endorsed Trian's proxy fight at DuPont, which Calpers voted against. Activism is a tough question for public pension funds because activists and public employees share a lot of interests, like good governance and sticking it to lazy entrenched overpaid wasteful managers, but activist investing is not generally thought of as being labor-friendly, either. Stereotypically and over-simplistically, activists are for shareholders against managers and employees; pension funds are for shareholders and employees against management.

Meanwhile in France the Florange Law, which requires French companies to "give two votes to any share held for longer than two years," is controversial. I'm generally a fan of diversity in corporate governance structures, so I think it's cool if companies adopt a two-votes-after-two-years rule, but France already allowed companies to do that, and many did. The Florange Law makes it mandatory-ish; it "allows an opt-out if two-thirds of shareholders approve one by March 31, 2016," though for companies where the French government owns a big stake that is hard to achieve. While I'm a fan of diverse government structures, I'm also a fan of engineering around regulatory requirements, and if I were a French investment banker I'd be trying to build, like, a single-stock fund that could own a chunk of a company forever, get double votes, and then sell equity interests in itself to activists

A disclosure problem.

On Monday ECB board member Benoît Coeuré "told a room of bankers and hedge-fund managers in London that the European Central Bank will front load its asset-buying program before a summer lull." This was market-moving information, as we know because it moved markets 12 hours later when Coeuré's speech was published. Meanwhile those hedge fund managers seem to have had a distinct informational advantage. 

This looks bad and nefarious but delightfully it seems to have been just an accident: 

The ECB said in a statement that the intention had been to release the remarks on Monday as Coeure spoke, and that a procedural error prevented that happening until Tuesday morning.

The overall construct here is sort of shady-looking but really hard to avoid. It really does seem like you'd want central bankers to "maintain a dialog with the investment community" by going to dinners and talking and stuff, even if that means that some big investment managers get a lot more face time with ECB board members than mom and pop retail global macro investors do. And I guess if the ECB members say interesting things at those dinners, they'll have a better dialog, so there's some argument for them making news at the dinners. As long as they release the speech before anyone can trade. And if you're going to do that you really have to make sure you hit the button at the right time. 

Picking winners in leveraged lending.

U.S. bank regulators don't like leveraged loans that are too levered, so they put out regulations telling banks not to make loans at more than six times earnings before interest, taxes, depreciation and amortization. I spent like a year making fun of the fact that the banks were ignoring those rules, but now compliance seems to have improved. So now banks aren't making many loans at more than 6x Ebitda, but Jefferies is. Jefferies arranged $2 billion of debt for Epicor Software, an Apax Partners portfolio company, after Bank of America and Royal Bank of Canada passed due to the leveraged-lending guidance.

The reason this works is that leveraged loans have not, for quite some time, been primarily a bank-balance-sheet product. The role of a loan arranger is a lot like that of a bond underwriter, going out to find investors rather than lending the whole $2 billion from its own money. Some 85 percent of leveraged loans are held by non-banks, mostly CLOs. So Jefferies, with its small balance sheet, is not at too much of a disadvantage against Bank of America, with its huge balance sheet. I mean, it was at something of a disadvantage -- arranging a loan is easier when you can commit to owning a chunk of it -- but the new regulations have reversed that. Now Jefferies is in great shape to be a leveraged-lending powerhouse, because all the previous powerhouses aren't allowed to do it any more.

This seems pretty arbitrary: If banks weren't holding most of their leveraged loans, banning them from arranging those loans won't make banks much safer, and if the loans are still getting done then the rules aren't making companies much safer. Still, it shifts risk a bit from too-big-to-etc. banks to little Jefferies, which I guess is a purpose of post-crisis rules. I sometimes wonder why the other restrictions on banks, especially the Volcker Rule, haven't caused a similar rise in non-banks taking over the banks' trading businesses.

A sham.

"The Federal Trade Commission and 58 law enforcement partners from every state and the District of Columbia have charged four sham cancer charities and their operators with bilking more than $187 million from consumers," and maybe a good preliminary question is why 59 law enforcement agencies would need to sign on to this lawsuit? Like, you talk about your bloated administrative costs. The complaint is 148 pages, of which the first 13 are contact information for all the lawyers and the last 52 are just signatures. Could the FTC and, like, four state attorney generals not have handled this?

The other obvious question is why people run Ponzi schemes. In broad outlines -- here's an infographic -- a charity scam is a much better scam. If you run an investment fraud -- a Ponzi, or a degenerate Ponzi where you just steal investors' money rather than using it to pay off earlier investors -- you have, you know, investors. They give you money and expect to get it back, with profits, and with account statements along the way. You have to go around forging account statements, and you have to either give some investors their money back with "profits" or prepare for a pretty short-lived scam.

But the way a charity works is: People give you money, and that's it. They never want it back, and once they give they're not your "clients," you're not their fiduciary, and they don't require monthly updates. They expect never to see their money again, so they won't go looking for it. Plus lots of legitimate, or legitimate-ish, charities spend most of their money on overhead and fundraising, and pay their executives pretty lavishly, so this chart of the alleged sham cancer charities doesn't look too far out of line:

Source: Federal Trade Commission

Why go to all the trouble of a Ponzi? The obvious answer is that it is a lot easier to get money out of people by appealing to their greed than by appealing to their charitable impulses. The program costs of a fake charity are much lower than those of a Ponzi, but the fundraising costs are much higher.

Things happen.

People are worried about bond market liquidity. Hedge funds are machine learning in the cloud. Hanergy Thin Film Power had a rough day. Emerging market bank hybrid securities, hmm. There's an awful lot to worry about: Jack Bogle. Scientists are even more unethical than bankers (earlier). Economic espionage. When acquirer and target in M&A talks share an auditor, purchase price can suffer. Amanda Miranda Panda is the 2015 Name of the Year; in my view Lancelot Supersad, Jr., was robbed. (As was Bloomberg's Zeke Faux.) "The Tijuana Manhattan, made with tequila in the place of whiskey and served in a rocks glass with no ice at all, even though it was the temperature of a freshly killed snake." It's raining spiders. Here's a Camera That Finally Lets Your Dog Take Pictures.

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(Corrects references to complaint page numbers in fifth item.)

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