Bank Cuts and Cryptobonds

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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HSBC is cutting back.

"HSBC Holdings Plc, Europe’s largest bank, plans to eliminate as many as 25,000 jobs and sell operations in Turkey and Brazil to help restore profit growth," with another 25,000 people leaving the bank with those Turkey and Brazil operations. Reviews are mixed: "This is quite the opposite to Deutsche Bank as there is tons of granularity of where the cost-cutting will come, how they’re achieving it and why they’re getting out of countries," says one analyst, but "This was not the massive shake-up some investors had been hoping for," says another.

As with so many banking moves over the last few years, this one looks like HSBC rediscovering its core identity, which in HSBC's case means focusing on Asia banking and cutting back on risky businesses. One of Deutsche Bank's big problems is that its core identity seems to be, like, regulatorily aggressive heavily levered bond-trading shop, and that is not an identity that investors are particularly keen to rediscover these days.

Overstock cryptostock.

Overstock.com did a thing yesterday:

Overstock.com, Inc. (Nasdaq:OSTK) announced its CEO Patrick M. Byrne today made the first purchase of the world's first cryptobond for $500,000. Working with other qualified institutional buyers, the company intends to sell a total of $25 million in digital bonds to trade on a cryptographically-protected distributed ledger – the same technology that underlies cryptocurrencies such as bitcoin.

"It's not exactly Jonas Salk injecting himself with his polio vaccine, but I wanted to own the first cryptosecurity ever issued," stated Byrne. "I intend to demonstrate my belief not just in Overstock, but in the TØ.com platform that we built and, indeed, in the cryptorevolution itself."

Yes that's TØ.com with an Ø; it's blocked as a security risk on my computer but good luck! Here's more from Byrne:

“For the first time in human history, we can have peer-to-peer exchange where trust is not an issue,” says Byrne, who predicts Bitcoin 2.0 will put much of Wall Street out of business.  “This is going to separate the men from the boys.”

And here is Overstock's latest SEC registration statement; check out the risk factors for its "digital securities," which are "uncertificated securities, the ownership and transfer of which are recorded on a cryptographically-secured distributed ledger system using technology similar to (or the same as) the distributed ledger technology used for trading digital currencies." I have been a little skeptical about whether the blockchain is quite ready for primetime as a way to transfer assets other than bitcoins, and Byrne's excitement about selling some bonds to himself doesn't exactly make me less skeptical, but still, I mean, good for them, cool experiment. Elsewhere: Towards a Unified Model for Replicated, Shared Ledgers. Matt O'Brien remains very skeptical on bitcoin. And Izzy Kaminska on tech, finance, and 1880s bucket shops.

SEC ALJs are unconstitutional-ish.

Yesterday a federal judge found "that the Securities and Exchange Commission’s use of an in-house judge to preside over an insider-trading case was 'likely unconstitutional,'" but in a boring way:

The constitutional issue highlighted in the Georgia decision—the way the SEC chooses its judges—“could easily be cured” by having the SEC commissioners issue or make the appointments, the judge said. The SEC will likely adopt this fix, a person close to the agency said late Monday.

Basically the administrative law judges need to be appointed by the SEC commissioners, rather than by, like, the HR department. That is easy to fix. (Step 1: HR picks judges. Step 2: Commissioners sign off on judges.) The judge "rejected some other constitutional arguments by Mr. Hill, including that he is being unfairly deprived of his right to a jury trial," which is the meaningful constitutional question: The judge found that it's constitutional for the SEC to try people in its own in-house courts, as long as the SEC itself takes those courts sufficiently seriously.

How much does pension investing cost?

Here's a story about how New Jersey's pension system spends $600 million a year on outside managers for its $80 billion fund, in part because it can't afford to spend more than $100,000 a year on inside managers:

A top investment position for the fund’s $36 billion equities portfolio is currently open, for example. The salary will be in the region of $100,000, with no opportunity for performance-based bonuses. 

Here's what seems to be the job advertisement, if you're interested, though it doesn't specify the salary ("commensurate with education and work experience") and you'd need to move to New Jersey. New Jersey's cheapness came in for some criticism yesterday, which is a little odd given that the journalistic conventional wisdom for state pension funds is that they should put all their money in index funds, and how hard is that? There are probably 100 economics journalists who'd do it for less than $100,000 a year, if you let them keep their day jobs. I suppose in the real world the idea is that there's an optimization problem where you have to pay the inside managers enough that they feel empowered to stand up to the outside managers on fees and performance, and it's plausible that $100,000 salaries for employees and $600 million for "Wall Street" is not the optimal mix. Elsewhere, lots of state officials are complaining about pension-fund fees. And in Rhode Island, it's "America’s First Crowd-funded Forensic Investigation of a State Pension."

How's Greece?

Oh, good, good. It "submitted fresh proposals to its creditors in a bid to unlock bailout funds with just three weeks to go before the country’s financial safety net expires," though one European official said that "the revised Greek plan is a vague rehash of earlier proposals and is still not considered credible." "Greece and its creditors are discussing an extension of the country’s bailout program through March 2016," so we could have nine more months of vague rehashes of earlier proposals that were not considered credible, which at this point is Greece's main export industry. Here's a Grexplainer.

BlueCrest and Kenbelle made up.

We've talked previously about the legal dispute between Meredith Whitney's Kenbelle Capital and BlueCrest, its main investor. BlueCrest wanted its money back, Whitney didn't think she had to give it back yet, and they went to court, which I found a little strange because, like, she'll have to give it back eventually, what is the advantage of an expensive public lawsuit to delay Kenbelle's day of reckoning by a few months? Anyway now they've settled, though the terms of the settlement are not public. Maybe they're friends again? Maybe the lawsuit was a successful delaying tactic, Kenbelle has turned the corner on performance, and the dispute was settled by BlueCrest doubling its investment? I mean I am not betting on that but I suppose it's possible.

Today in unicorns.

Yesterday I mentioned my billion-dollar idea to build a Chrome extension that replaces the word "unicorn" with the words "pre-IPO startup valued at $1 billion or more." Someone built it. Here it is. It's free in the Chrome store, and looking back it's hard to see why I thought this was a billion-dollar idea. Anyway try it on Wikipedia:

In European folklore, the pre-IPO startup valued at $1 billion or more is often depicted as a white horse-like or goat-like animal with a long horn and cloven hooves (sometimes a goat's beard). In the Middle Ages and Renaissance, it was commonly described as an extremely wild woodland creature, a symbol of purity and grace, which could only be captured by a virgin. In the encyclopedias its horn was said to have the power to render poisoned water potable and to heal sickness. In medieval and Renaissance times, the horn of the narwhal was sometimes sold as pre-IPO startup valued at $1 billion or more horn.

Fraud on fraud.

Oh:

An ex-Deutsche Bank broker found guilty in a massive tax fraud got his conviction tossed on Monday because one of the jurors that found him and others guilty lied about nearly every aspect of her life in a desperate bid to decide their fate.

Catherine Conrad claimed to be a law-abiding housewife when she was actually a suspended lawyer and alcoholic who was once arrested for punching a cop and stealing a bag of shrimp from a convenience store while drunk, court papers state.

The weirdest part is, why would you want to be a juror on a lengthy tax fraud trial?

The investigation game.

I've previously made fun of the M&A Game, a phone-based game that allows you to perform M&A due diligence without getting paid for it. But the real sign of the times is the Internal Investigation Game, "an entertaining and immersive 'serious game' in which players plan and conduct a corporate internal investigation as associates with a fictional law firm." I wonder if it lets you stumble across the adulterous sex chats of married traders during your otherwise tedious work -- sorry, gameplay -- of clicking through documents to discover fraud. Anyway probably don't play this game, or go to law school.

People are worried about bond market liquidity.

It was touch and go for a while yesterday but then the worrying started up again. My Bloomberg View colleague Mark Gilbert worried that Deutsche Bank's potential post-Anshu Jain retreat from bond trading will make that trading even less liquid. Investors and dealers met with Markit to urge it to revise the CDX high-yield index process to better reflect the most active high-yield bond issues (rather than the most active credit default swaps), so that it can be more useful for hedging bonds. "Everyone is concerned about liquidity shocks," says a strategist. And in government bonds, volatility is freaking people out, with the head of the U.K. Debt Management Office saying "I wouldn’t be surprised if we had a failed bond auction at some point in the not-too-distant future." Meanwhile equity markets are boring, but don't get too complacent; "There’s No Place to Hide as Bonds Move in Tandem With Equities."

Things happen.

Poor Nav Sarao. "After seeing the LIBOR, expenses, phone-hacking and similar scandals unfold, I’ve noticed that English has another irregular verb: I am the victim of a perversely designed set of incentives; You game the system; He is a crook." There are too many CFOs. Ending Net Investment. Chrysler Boss Recruits Activists to Prod GM Into a Merger. Goldman: Why ETF Assets Will Double to $6 Trillion by 2020. Bill Gross is seeing outflows again. Investors and Twitter. The Babe Ruth Effect in Venture Capital. Iterating Grace. There are still bank tellers. Steve Cohen bought a Giacometti. A guy wore rollerblades to the CFA exam to make bathroom breaks more efficient. CatCon. Social media consultant lives in tree. "That said, you’d be hard pressed to find a legitimate investor who believes the Triple Crown has much of an influence on the market." ClickHole is good

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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:
Zara Kessler at zkessler@bloomberg.net