Suspended Stocks and Go-Karting Lawyers

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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Greece.

"Time is running out," says Angela Merkel. When I Google "'time is running out' Greece" I get 314,000 results. It seems to maybe be true, or truer, this time. Yesterday the European Central Bank kept its cap on emergency liquidity assistance for Greek banks but decided to "adjust the haircuts on collateral accepted by the Bank of Greece for ELA," probably a symbolic gesture though some may run out of collateral. Two ECB governing council members wanted to be tougher, and remember these are haircuts on Greek government debt, so, you know. The ECB "reckons Greece’s financial system can survive until at least after Tuesday’s summit of European leaders," which is not exactly what you want your central bank saying about you. After that:

The range of options regulators are considering include deploying a backstop from creditors for banks under a new bailout agreement to attempt to raise capital privately, said the person. Alternatively, banks could impose a levy on deposits, an option that would first require a contribution from stockholders and bondholders, the person said.

A third option, consisting of seizing deposits on accounts of more than 100,000 euros, is also on the table, said the person. 

Look I don't want to be an alarmist here but ... "raise capital privately"? I feel like I'd rather buy Chinese equities.

Elsewhere: Making Grexit legal. A hedge fund advises panic. Greek finance-minister-until-yesterday Yanis Varoufakis may have been "pushed from his job after he told a journalist that Greece could introduce a parallel currency in the weeks ahead," but he rode off on a motorcycle and his publisher coined a hashtag. Meanwhile his replacement is "an Oxford-educated Marxist who is considered more pragmatic than the hardline Mr Varoufakis" and who once wrote a paper in Comic Sans. Good luck today everyone!

China.

Here is Neil Irwin zooming out on the Chinese stock bubble/crash: Sure the market is down 26 percent in a month, but it's also still up 83 percent over the last year. And it's usually been pretty volatile. Yesterday I applauded the Chinese government's stock stabilization measures, which took the canonical form of (1) mandating buying and (2) banning selling. Attentive readers will have noticed that if you take those measures to their logical extreme, you end up with a paradox, as you can't buy something that can't be sold. China has now gone to that extreme:

Chinese companies have found a guaranteed way to prevent investors from selling their shares: suspend trading.

Almost 200 stocks halted trading after the close on Monday, bringing the total number of suspensions to 745, or 26 percent of listed firms on mainland exchanges, according to data compiled by Bloomberg.

It's a total of $1.4 trillion worth of suspensions, measured I suppose at the pre-suspension market value, which is maybe not the right way to measure. The suspensions are of course the sensible way to resolve the paradox: It's relatively easy to ban selling, but much harder to convince -- or even force -- anyone to buy overvalued stocks in the midst of an implosion. I feel like I'd rather buy Greek bank equity. 

HSBC.

Here is a story about a "Birmingham-based legal team" at HSBC who went on a team-building day out at the Teamworks Karting track and somehow staged a mock ISIS execution of an orange-jumpsuited colleague, filmed it, and put it on Instagram. The important lesson here is: Never take your lawyers go-karting. Like the best-case scenario for this team-building exercise was that someone would crash into the boss and they'd all have a good laugh and head to the pub for a pint and be marginally louder and more insufferable the next day. The worst case was a mock ISIS execution. Or something worse I guess, but the result that obtained was a mock ISIS execution.

Also if this is how HSBC's lawyers behave on their day out, maybe it has bigger problems? Guess what:

HSBC Holdings Plc, smarting from a $1.9 billion fine for providing banking to money launderers and sanctions-dodgers, promised U.S. officials it would clean up its act.

Within a year, its reform efforts met resistance from leaders of HSBC’s U.S. investment-banking unit -- some of whom mounted a campaign of bullying, footdragging and discrediting against in-house watchdogs, according to previously unreported details from a report by the bank’s court-appointed monitor.

That said, I am always suspicious of a "1,000-page review" conducted by a former prosecutor and "five dozen people" working for him, appointed at the demand of prosecutors but paid for by HSBC. We in the business call that "agency costs." The "document speaks to the need for continued monitoring," presumably billed by the hour.

People are worried about stock buybacks.

Look if you pay executives to increase earnings per share and total shareholder return, they will try to increase earnings per share and total shareholder return. Stock buybacks that increase EPS and shareholder return are not an unintended side effect of performance-based executive compensation. The point of that compensation is to align executives' interests with shareholders'. Whether the shareholders should want buybacks, or should prefer longer-term investments with a lower certainty of paying off, is a separate question, one that the price mechanism is supposed to solve. Whether corporations should be managed solely in the financial interests of shareholders is yet a third, and in many ways more interesting, question. But once you decide that a corporation is there to provide financial returns to shareholders, then of course you should pay its executives based on their ability to provide financial returns to shareholders.

Elsewhere in executive pay, the new clawback rules "may increase management compensation to cover the risk of a clawback," because the key meta-rule of executive pay is that all executive-pay rules have the effect of increasing executive pay.

Living wills.

Imagine there's another mortgage crisis. What will happen to the big banks? I don't know, but here's a wild conjecture. First, the big banks will hold relatively more of their mortgages on balance sheet as banking assets, and fewer of them in securitized form as trading assets, compared with the last crisis. (Because regulation and diminished risk appetite have cut down on mortgage securitization.) Second, the big banks will hold fewer trading assets generally, again because regulation and risk appetite have moved their securities businesses into less capital-intensive forms. So plausibly -- or semi-plausibly -- a repeat mortgage crisis will be worse for the big banks' bank entities, and better for their trading entities, than the last one. In fact the trading entities might be very profitable: A trading business makes money on volatility, and if that money isn't offset by mark-to-market losses (because the directional trading book is smaller) then a crisis could be good for a trading firm.

Anyway the big banks released the public summaries of their regulatory "living wills" yesterday. "Big U.S. banks said they would chop off Wall Street arms and non-essential units if the companies were to fail, with JPMorgan Chase & Co. slashing its broker-dealer operations by as much as two thirds," and "Goldman Sachs, Citigroup and Morgan Stanley would cease to exist" entirely. Here's the Fed's collection of living wills; for a sample, try JPMorgan and Goldman Sachs.

Preferred stock.

Here's a kooky case. Emmis Communications Corp. issued about $144 million of cumulative preferred stock in 1999. It stopped paying dividends in 2008, so it is not allowed to pay common stock dividends or issue senior securities. It tried to go private, but that too was blocked by the preferred shareholders (since it would cash out the common stock before paying off the preferred). Emmis needed a two-thirds vote of the preferred to do, basically, anything. So:

Emmis signed holders of approximately 60% of the preferred shares to what the parties call “total return swaps.” Emmis promised to purchase each preferred share for about $15; Emmis paid, and the owners delivered their shares to an escrow. Closing was deferred for five years (though it could be accelerated at Emmis’s option, or if the shares were delisted and stopped trading). The selling owners agreed to vote their shares as Emmis instructed during the interim.

Get it? Emmis couldn't buy the shares, because then they would no longer be outstanding and couldn't vote. But it could buy them forward, and have the sellers agree to vote the way Emmis wanted. It did another trick (involving an employee trust) to get above two-thirds, and then held a vote to change the terms of the preferred stock to allow Emmis to do stuff. The remaining preferred holders sued, claiming that these tricks were not fair. They do not seem fair to me! As a former underwriter of securities, if my issuer client did this sort of thing, I feel like I'd have to go around on my knees apologizing to anyone who bought the stuff. But "in Indiana, apparently alone among the states, a corporation can vote its own shares," and so a federal court approved of its tricks in an opinion by Judge Frank Easterbrook, who waxed a bit philosophical about competition in corporate law:

An amicus brief filed by the Council of Institutional Investors asks us to reverse because, in the Council’s view, Emmis did not employ “corporate governance best practices.” The Council apparently scorns state law and would prefer a synthetic federal corporate common law, or perhaps a requirement that every state use the same principles as Delaware. If judges (and state legislators) could be sufficiently sure what the best practices are, that would be an attractive idea. But it is hard to know the full effects of corporate codes, which lead to contractual adjustments and changes in prices. Federalism permits states to adopt different codes, after which people can choose which states’ firms to invest in, and at what price.

People are worried about bond market liquidity.

Are they? "Muted Greek Fallout So Far Offers Fed Little Reason for Concern," though, counterpoint, "Good Luck Finding a Place to Hide as Global Markets Crumble." I guess my view is that we were supposed to worry that the lack of bond market liquidity would make bond markets extra vulnerable to a credit crisis, and now we have two credit crises (Greece and Puerto Rico), plus a stock-market implosion in China, and, you know, meh? Elsewhere, crude oil is getting crushed, and gold is not the crisis hedge that its partisans were hoping for. 

Things happen.

Bitcoin got forked. Hacking Team got hacked. Libor is still hypothetical. Elliott lost its second Samsung lawsuit (previously), but is buying more Samsung group stocks. Novogratz Takes Sole Control of Fortress Macro Fund After Losses. Too many angels. Puerto Rico will be good for the lawyers. Cravath summer associates were billed out at $295 an hour on the Energy Future Holdings bankruptcy. Being a law-firm summer associate is a boondoggle. Former pit traders still like to hang out near trading pits. Age of the Unicorns (via Dan Primack). Former Morgan Stanley Risk Manager Does The Math, Still Agrees To Become Billy Joel’s Fourth Wife. Kayaking dog

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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