Cockroaches, Chains and a Black Scenario

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.

Yesterday Greece showed up at the key meeting of European finance ministers with no proposal for debt relief, and while I fully support this effort to give us all a break from Greek-crisis news for a day or two, it was not to be. The European Commission responded by saying that it has "a Grexit scenario prepared in detail," which I guess it had time to do while Greece was busy not making proposals for debt relief, and Sunday is now the deadline for a deal or, failing that, the "black scenario." And then Greece threw something together:

Greece formally requested a three-year bailout from the eurozone’s rescue fund Wednesday and pledged to start implementing some of the overhauls demanded by creditors by early next week.

Elsewhere, Citigroup's Willem Buiter has a plan to wean the Greek government off aid from international institutions while keeping its banks open. Joseph Cotterill is skeptical about parallels between Greece in 2015 and Germany in 1953. And should Greece do something with bitcoin?

Meanwhile in metaphor news, Jeffrey Gundlach thinks that a Grexit will lead to contagion because "There's never one cockroach," while European leaders believe in "the 'chain theory,' which holds that the entire chain would become stronger were its weakest link to be eliminated." That is not how chains work.

China.

Umm:

Investors trying to sell Chinese shares have found themselves locked out of 72 percent of the market.

At least 1,331 companies have halted trading on mainland exchanges, freezing $2.6 trillion of shares, or about 40 percent of the country’s market capitalization. Another 747 fell by the 10 percent daily limit on Wednesday, making it all but impossible to find buyers at the prevailing price.

The thing is, you'd have to be pretty perverse to go buy shares in the 28 percent of the market that's still open. What happens when (if?) the other 72 percent gets turned back on? There's a lot of people lined up to sell, and they're going to push prices down. Maybe wait until then to buy. That's the problem with trying to stem a stock market collapse by banning selling. It tends to discourage buying:

“The market has failed,” said Hao Hong, a China strategist at Bocom International Holdings Co. in Hong Kong. “It’s distorted because we keep changing the rules as we play the game.”

"Nothing is 100% perfect," according to Deng Xiaoping. Here is a theory. Not everyone is discouraged: "Goldman Sachs Says There’s No China Stock Bubble, Sees Rally." Good for them.

Puerto Rico.

We talked the other day about how Puerto Rico's municipal institutions -- the territory itself, and also its public corporations -- are ineligible for bankruptcy protection under U.S. law, and how weird that is. I mentioned at the time that Puerto Rico had written its own bankruptcy law for its public corporations, but a federal court had struck it down. On Monday a federal appeals court affirmed that decision -- still no bankruptcy for Puerto Rico -- but in an interesting way. The opinion is straightforward: States, and Puerto Rico, can't create bankruptcy laws that conflict with federal law. But it also says that, while the Constitution limits the bankruptcy possibilities for states, "Congress is not so constrained in addressing Puerto Rican municipal insolvency owing to Puerto Rico's different constitutional status," so "other solutions may be available." To Congress, though. Not to Puerto Rico. 

But there's also a fascinating concurring opinion by Judge Juan Torruella, who sits in Puerto Rico, agreeing that Puerto Rico's law should be struck down but also finding that the Bankruptcy Code's rules excluding Puerto Rican municipalities from bankruptcy protection are unconstitutional:

Not only do they attempt to establish bankruptcy legislation that is not uniform with regards to the rest of the United States, thus violating the uniformity requirement of the Bankruptcy Clause of the Constitution, but they also contravene both the Supreme Court's and this circuit's jurisprudence in that there exists no rational basis or clear policy reasons for their enactment.

Antony Jenkins.

I guess if you're going to get "ousted" as a bank chief executive officer, the Greece/China/etc. meltdown is a good time to do it; Antony Jenkins's departure from Barclays is perhaps getting less attention than it would have in a quieter week. Amusingly the problem seems to be that Barclays needs to shrink its investment bank faster -- "New leadership is required to accelerate the pace of execution going forward" -- but only an investment banker can do that:  

Mr Jenkins was initially dubbed “Saint Antony” for his vocal commitment to cleaning up the scandal-plagued culture of Barclays. But the former head of its retail bank struggled with its investment bank, which has become its worst performing division.

And: "For the next CEO 'it would be good to have someone familiar with investment banking as it’s such an important part of the group,' the chairman said." On the plus side, Jenkins "was incredibly professional" about the whole thing.

Asset management.

Here's a Boston Consulting Group report:

In 2014, the global value of professionally managed assets grew to $74 trillion—the third consecutive annual record—and the industry’s profits rose to match their historic peak of $102 billion. Operating margins remained steady, sitting just below the record level achieved before the financial crisis.

We talk sometimes here about the rise of low-cost index investing, pressure on fees, a growing belief that asset management is not something that owners of capital should really pay for, etc. So it's nice to see that asset managers can still earn a living. When I divide $102 billion by $74 trillion I get profits (not fees, profits) of about 14 basis points of assets. Not awful.

Broken windows.

Here is Chris Arnade on the parallels between recent financial enforcement and "broken windows" policing:

What is the financial equivalent of rounding up the squeegee men, graffiti artists, and those smoking joints in front of the police station? It means going after the easy targets, the transparent businesses where the abuses were well documented.

Doing so has resulted in a bevy of investigations and scandals named after acronyms: LIBOR, FXfix, and ISDAfix. Despite the names, all are routine and boring parts of banking.

I am not sure that Libor manipulation was quite as trivial as graffiti? In any case my personal view is that overcriminalization is bad, whether of street crime or financial crime, but no one seems to agree with me.

An Albertsons IPO.

"U.S. supermarket giant Albertsons this morning filed for an initial public offering"; it is owned mostly by a private-equity consortium led by Cerberus. I have nothing particularly interesting to say about a supermarket IPO but this one has some nostalgia value for me: The first big deal that I worked on as a lawyer was the 2006 acquisition of Albertsons by Supervalu, CVS and the Cerberus consortium. And now it's going public again, circle of life, etc.

People have stopped worrying about bond market liquidity.

Give them time though. 

Me yesterday.

I wrote about index adds, as did Kid Dynamite; my post prompted economist Colleen Carey to remind me of this classic Worthwhile Canadian Initiative post about the supply and demand for belief in the efficient market hypothesis. I also wrote about insider trading and Sergey Aleynikov; here is Peter Henning on that insider trading case. And I reviewed @GSElevator's book for Bloomberg Businessweek; Stephen Gandel also wrote about it at Fortune.

Things happen.

Dick Bove is offended that you'd even ask about the possibility of a big bank failing. Best practices for hedge fund CFOs: Never answer your phone, especially on a Friday afternoon. Jon Corzine settled an MF Global lawsuit. Stephen Lubben on the Lehman repo case. Steven Davidoff Solomon on the leveraged lending rules. Wachtell Lipton discusses SEC’s Proposed Compensation Clawback Rules. There are a lot of law firm mergers. Marco Rubio’s Economic Plan Calls For Students To Sell Themselves To Private Investors. A succession battle in the Kingdom of Araucania and Patagonia. My Vampire Facial, or I Marinated in My Own Blood for Vanity. Dirtbag Louis XIV. Park Slope Squirrel Folds Its Pizza Slice Like A Real New Yorker.

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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