Greek Proposals and Expensive Buybacks

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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European leaders are working frantically with the International Monetary Fund to finalize their proposal on how to restructure Greek debt, though differences remain "over whether Greece can hit ambitious budget surplus targets to be included in an agreed text," as well as over "whether they present their proposal to Mr Tsipras’ government during a meeting or a teleconference." This being Europe, one official says that there was "at least a meeting of the texts; minds are probably further apart," which is the opposite of how normal negotiations work.

Meanwhile, as the European leaders' texts were being so agreeable, boom, Greece submitted its own proposal to its creditors, and I guess you're supposed to read this in your best Walter White voice:

“After submitting a complete proposal for a deal last night to institutions, we are not waiting for them to submit their own plan back to us,” Tsipras told reporters on Tuesday. “Greece is the one that submits the plan.”

So to recap: Greece's creditors have more or less worked out the text of the proposal to submit to Greece, though they don't agree on what that text means, or on how to deliver it. And Greece has worked out its own unrelated proposal, and plans to ignore the proposal that the creditors have been slaving over, though I guess that would be easier to do by teleconference than in person? Anyway, everything seems super, carry on. 


Are we in a stock market bubble? Hahaha whatever come on. But let's say that we are: Let's say you know that valuations are overstretched. What should you do about it? Goldman Sachs research analysts argued yesterday that companies are terrible at timing stock buybacks and so should stop doing them and focus on M&A:

In our view, acquisitions – particularly in the form of stock deals – represent a more compelling strategic use of cash than buybacks given the current stretched valuation of U.S. equities.

One problem is that, if you need to spend your cash, spending it on some other company's overpriced shares is no better than spending it on your own overpriced shares. Worse, even, since at least if you're buying your own shares you're overpaying your own shareholders. On the other hand, using your own overpriced shares to pay for another company's overpriced shares at least more or less balances out, but on the other hand it does not make much use of your cash? I guess you pay your adviser's fees in cash?

Goldman also asked Robert Shiller and Jeremy Siegel if we're in a stock market bubble; they responded "meh," or words to that effect. But here's an interesting post from Eddy Elfenbein arguing that S&P 500 valuations have more or less tracked S&P 500 dividend yields, which might give you some comfort on valuations being stretched. And here is Rick Rieder at BlackRock arguing that the current buyback boom is "just one economic distortion created by the Federal Reserve (Fed)’s excessively accommodative monetary policy," which I suppose is obviously true in the boring sense that accommodative monetary policy is supposed to encourage investors to buy risky assets like corporate equities. But I mean if stocks are overvalued, and everyone knows stocks are overvalued, isn't the right move not to buy stocks at all, your own or someone else's, but to instead invest in research or building things or whatever? 

Elsewhere, "Risk Parity Is Even Better Than We Thought," says Cliff Asness. And "How Scary is The Current Margin Debt Situation?" And "This Top Junk-Bond Fund Manager Wants to Pick Stocks for You Too."

Naked short selling.

To sell stock short, you need to borrow it first. Sort of. The law is not really that you have to borrow the shares first, but more like, you have to make a good-faith effort to borrow them first. Your broker has to get a "locate" on some shares, or at least have good reason to believe that they're "easy to borrow." There's been a recent spate of brokers getting in trouble for being lazy about those rules: For instance, Finra fined Merrill Lynch $6 million last October for short-sale violations. And yesterday the SEC fined Merrill another $11 million for what seem to be different short-sale violations. I can never muster much excitement for these violations, which always seem administrative rather than malicious, but it's worth noting that Merrill Lynch was facilitating naked short selling "during the heart of the financial crisis," in the SEC's words, even as Merrill CEO John Thain was complaining about short sellers manipulating Merrill's own stock. One lesson here is that you can't think of a bank as a unitary criminal mastermind: Probably no one in one part of the bank knows what anyone in the other parts of the bank is getting up to.


Here's the Hedge Fund Survey from the U.K. Financial Conduct Authority, whose notable findings include that "Aggregate gross leverage in the September 2014 survey stood at 67x NAV compared to 64x NAV in September 2013." Leverage of 67 times net asset value seems ... high? It is followed by a chart showing "average gross leverage per fund" of 31.8x NAV, which is rather lower than the 67x headline number; perhaps it's a matter of different weightings (funds vs. assets)? In any case, that "leverage" consists almost entirely of derivative notional: If you do a $1 billion 5-year interest-rate swap, where every three months you get paid floating Libor (currently call it $700,000 quarterly) and pay back about $4.3 million (5-year swaps are about 1.73 percent, 1.73 percent of $1 billion is $17.3 million, divide by four), that counts as a billion dollars of exposure, even though you'll never have to pay more than $86.5 million (5 x $17.3 million) over the entire life of the contract. And if you post $20 million of collateral for that swap, you look 50 times levered. You are not, however, nearly as risky as a fund that buys $1 billion worth of stock with $20 million of its own money and $980 million of borrowed money. It is a more complicated question whether you are as risky as someone with a 50x levered exposure to Swiss francs.

Lien stripping.

The Supreme Court's lien-stripping decision yesterday, Bank of America v. Caulkett, was so boring that it was decided unanimously in seven pages. Or, almost unanimously: Three Justices joined "except as to the footnote." (As a different footnote explained.) That's maybe a little exciting. The question is: If you have a house, and a mortgage, and a second mortgage, and you file for bankruptcy, and the house is now worth less than the amount of the first mortgage, can you get rid of the second mortgage? Just reading the Bankruptcy Code you'd think that you could: The Code says that a lien that "secures a claim against the debtor that is not an allowed secured claim" is void, and that a claim is "a secured claim to the extent of the value of such creditor's interest" in the property, so if the bank holding the second mortgage is underwater, its claim is not secured and its lien is void. But a 1992 Supreme Court case, Dewsnup v. Timm, read the law the opposite way to say that underwater mortgages can never be stripped down, and the debtors here made the extremely odd tactical mistake of not asking the Supreme Court to overrule Dewsnup. So it didn't, and the debtors lost. But that controversial footnote, which attracted the assent of six Justices, collects criticism of Dewsnup and certainly suggests that the Court would be willing to overrule it in the future, if someone would just ask it to. Here is Stephen Lubben with more, and Noah Feldman here at Bloomberg View in March.

Things happen.

People are worried about bond market liquidity, although possibly about the wrong bond market liquidity. Petrobras issued 100-year bonds. Are Ukraine's international bonds really local bonds? Argentina Is Racking Up Debt Even Faster Than During Its 2001-2002 Crisis. Distressed investors are fighting over Puerto Rico. Uber Is Building A Giant Glass Campus To Prove It Has Nothing To Hide. Almost all of Hanergy Thin Film Power Group's stock price increases come in the last 10 minutes of trading. A 99-year-old broker. Andrew Ross Sorkin with the sad story of a Goldman Sachs analyst who was apparently worked to death. "Conspicuous work." "Under these weird meritocratic dynamics, bourgeois characteristics make you more valuable not because they are good characteristics in themselves, but merely because they are bourgeois characteristics, and therefore relatable to the top of the economic hierarchy that directs the resources top spots in top firms are competing to get." "Greg Smith is President of blooom, a financial technology company that fixes 401(k)’s and 403(b)’s as a fiduciary." JPMorgan's summer reading list for rich people includes "Every Gift Matters: How Your Passion Can Change the World," "The Resilience Dividend: Being Strong in a World Where Things Go Wrong," and "How to Fly a Horse: The Secret History of Creation, Invention, and Discovery." KFC Sues Chinese Companies Over Alleged Eight-Legged Chicken Rumors. 50 Best Restaurants. "Before another Sony, Dan Loeb will work the craft services table on a summer blockbuster shoot; Carl Icahn will don a teal tee-shirt and jump behind a genius bar to troubleshoot your Mac." 

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(Corrects the name of Bank of America v. Caulkett in the fifth item.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Matt Levine at

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