Twitter, Greece and Too Big to Fail

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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Twitter.

America loves its corporate capitalism but some industries naturally lend themselves to mutual organization, where the customers also own the equity, share the profits, and vote on the future. There are mutual insurance companies, and the Vanguard Group, and the Park Slope Food Coop. The tech industry, with its venture funding and unicorns and libertarianism and ad-based revenue models and scaling and 1099 economy, seems like an especially staunch stronghold of traditional capitalism, but I often wonder why no one has ever built a meaningful mutually owned social network. I mean it says it right there in the name, "social network." Your actual social network is, loosely speaking, mutually owned; venture capitalists are not squeezing revenue out of your real-life friendships, though I bet the Apple Watch will find a way. The value of a social network is in the network, and while ruthlessly harvesting that network for the benefit of advertisers and investors is of course one way to go, alternate forms of business organization might better protect that value for its creators.

Anyway Twitter's chief executive officer Dick Costolo is leaving because Twitter isn't Facebook, and now Twitter will hunt for someone to make it Facebook. Or not, I don't know, here is Farhad Manjoo with what you'd have to count as a relatively optimistic proposal to make Twitter into television, or at least to show the score of the basketball game that everyone is tweeting about. Or of course there's always the possibility of Twitter becoming Google Plus. Or there is once and future interim CEO Jack Dorsey's claim "that Twitter’s board was not seeking a change in strategy or direction for the company as it searched for a new permanent leader," which I guess is always a possible reason to replace a CEO. Possible permanent successors to Costolo include Adam Bain, "who oversees global revenue and partnerships," since he "has strong relationships with many of Twitter's media partners." Another possibility is Anthony Noto, the chief financial officer, who retweets sports motivational quotes.

Erin Griffith at Fortune argues that "The lesson of Dick Costolo’s Twitter tenure is clear: Do not go public unless you are wildly profitable and growing like gangbusters," and while that is not necessarily great advice for all private companies, I am broadly sympathetic to the view that public markets have not been the most welcoming home for Twitter. Naturally the stock is up on Costolo's departure. Gawker has a double entendre headline if you like that sort of thing.

Meanwhile at Facebook a small shareholder is mad about the dual-class share structure, which, what, she didn't notice when Facebook went public? A dual-class share structure is not quite mutual ownership, but it at least insulates a social network from short-term revenue pressures and allows it to pursue its founder's vision. It's just that sometimes that vision is to be Facebook.

Greece.

Elsewhere in short-term revenue pressure, things in Greece are somehow getting worse:

“People are really fed up with this,” UniCredit SpA Chief Global Economist Erik Nielsen said in a television interview. “They’ve never seen anything so completely ridiculous, frankly speaking, from a debtor country.”

The International Monetary Fund made a point of saying "the IMF never leaves the table" as it was packing up its things to leave the table in a huff after "despairing of Tsipras’s tactics." And "Greece was told to stop fighting creditors’ demands and sign a deal," and I feel like the petulant shut-up-and-sign is pretty near the end of the list of negotiating tactics. There are not a ton of constructive places to go after that. Here at Bloomberg View, Mohamed El-Erian is not impressed by Greek Prime Minister Alexis Tsipras's negotiating approach. Greek stocks are in bad shape, and the euro is weaker after Angela Merkel said it was "too strong" for peripheral countries.

Meanwhile in happier news for the IMF, Dominique Strauss-Kahn was acquitted of aggravated pimping.

Too big to fail.

Mike Konczal, who is not particularly in the bag for the big banks, takes a look at two recent studies of the too big to fail premium and concludes pretty definitively that "the subsidy has been reduced to a small amount, if it still exists at all." That is good news! It is worth noting that "a big bank will be allowed to have a messy bankruptcy with no government support," "big bank unsecured creditors will bear the full credit risk of the bank with no bailout," and "financial markets charge big banks less to issue unsecured debt" are all slightly different statements: You could think that the government would need to support a big bank's operations in a crisis without bailing out its unsecured creditors, or you could even think that unsecured creditors would be bailed out but that the banks are now so safe and well capitalized that the value investors attribute to that contingent bailout right is zero. 

Elsewhere in banks, here is a sort of frustrating paper from the Office of Financial Research finding that 18 banks engaged in $38 billion of credit derivatives for regulatory capital relief; "the median bank engaging in these transactions could have improved its risk-based capital ratio by 8 to 38 basis points, and one by as much as 388 basis points." But the paper is mostly about the absence of good data on regulator capital relief trades and seems not to fully cover the topic; the OFR doesn't have data on synthetic tranches, for instance, which are a big source of capital relief, and I find it a little hard to believe that only 18 banks use credit derivatives in ways that reduce their capital requirements. Like, using credit derivatives to hedge credit risk would, one hopes, have the effect of reducing risk-weighted assets. Otherwise the risk-weighting would seem to be wrong.

FX manipulation.

I once noted that an oddity of the foreign exchange manipulation scandal is that the banks didn't make very much money rigging FX; for instance, I estimated that at a minimum "Citi paid about an order of magnitude more in fines than it made in manipulative profits." This was way off!

"The value that we generated from the illegal conduct in foreign exchange was order of magnitude about $1 million," Citigroup President James Forese said during a presentation at the Morgan Stanley financials conference this week.

For that Citi paid $2.5 billion in fines. Obviously the punishment should be bigger than the gains, to deter misconduct, and the banks' moral failings and the harm they did cannot be entirely measured by the profits that they made. Still that 2,500 to 1 ratio is, you know, pretty big. Elsewhere, the "Bank of England has added its voice to calls for greater scrutiny of the 'last look' in currency trading, questioning whether the practice should be allowed to continue."

Meanwhile at the SEC.

Here are two pleasingly bizarre stories about the Securities and Exchange Commission. First, the SEC's use of in-house administrative law judges is controversial, in part because people think that those ALJs always rule in favor of the SEC. They think this because the ALJs really do rule in favor of the SEC a lot, and also because one former SEC ALJ has "said she came under fire from the chief SEC judge for finding too often in favor of defendants." For some reason the SEC sought to solve this problem in part by asking one ALJ who had never ruled against the SEC "to make a formal statement on whether he has ever felt under any pressure to favor the SEC in his rulings." Now of course if an SEC employee who always ruled for the SEC just signed a piece of paper saying that he'd never felt pressured to favor the SEC, that would not end the matter. People would still have their doubts. It's hard to see what the SEC would gain from him signing the piece of paper, honestly. But he refused to sign the piece of paper, which come to think of it actually shows admirable independence.

Second, here is a story about how it's a total drag to be confirmed to the SEC, and how "One former commissioner, Annette Nazareth, has privately cautioned fellow attorneys that the confirmation process itself is extremely invasive." So some potential nominees for the commission "have been urged by colleagues to think long and hard about going to the agency if offered the job." The obvious solution is to nominate me; I would be a good SEC commissioner and am basically shameless.

People are worried about bond market liquidity.

I know, right? Still! I am one of the worst offenders; I wrote yesterday about Pimco and liquidity. Bloomberg's Lisa Abramowicz is worried that people are so worried about liquidity that they might forget to worry about default risk, a meta-worry that I will nonetheless classify under the broad category of liquidity worries. And: "How the Fed screwed up the bond market" (it's liquidity).

Things happen.

Barclays' identity crisis. Goldman Gets Serious About High-Speed Trading. Deutsche Bank's new CEO Cryan seeks to steady nerves. Activist Funds Put Executive Pay Formulas Under Microscope. Brazilian mutual funds are really expensive. "At the micro level, insider trades are significantly different from surrounding trades in both trade to trade price impact and trade lot volume, when compared with trades executed in the same thirty minute interval by other traders." The FTC is going after a Kickstarter project for the first time. Mylan’s Dutch Takeover Defense Is in Nasdaq’s Hands. Jim Grant thinks 'dad bods' could be a great reason to short Under Armour. These Are Wall Street's Must-Read Books of the Summer. Prisoners' dilemma. How to rob a bank (don't rob a bank).

Money Stuff will be off for the next two weeks while I am on vacation. If you'd like to get Money Stuff in handy e-mail form, right in your inbox, please subscribe at this link. Thanks! 

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