Greece, China and an Escaped Whale

Good news for everyone. Plus: Carried interest taxation and IPO pandering.


As I understand it, last weekend's referendum in which Greek voters overwhelmingly rejected the Troika's previous package of austerity proposals improved the Greek government's negotiating leverage by ... letting it agree to more or less that same package of austerity proposals? I suppose there's a model where that could make sense. Like, by having the proposals rejected by its voters, the Greek government signals that it is making a big concession by eventually agreeing to them, and that, as European Union President Donald Tusk put it, "A realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors." And remember that Yanis Varoufakis gave that interview where he said that the referendum was not about rejecting austerity but about demanding debt sustainability in exchange for the austerity. I hope he was right? Hugo Dixon is unimpressed. German conservatives are skeptical. France is more optimistic. Markets are ecstatic. Joe Weisenthal likes Euclid Tsakalotos's signature on the proposal. Greeks are accepting Bulgarian leva. And Matt Yglesias argues that, in a world of abundant capital and low growth rates, defaulters will find it easier to regain market access and so rational debt default will become more common.


I like this Chinese peer-to-peer margin lender:

“The majority of our borrowers tend to let it go when their positions are going to be liquidated instead of adding collateral to wait for the markets to recover,” said Liu Yang, founder and chief executive of “They can’t completely trust us too, so many have transferred much of the profits away.”

Five times leverage seems to have been standard, which works poorly when stocks drop by 28 percent in a month. On the other hand in the business of banks lending to companies secured by those companies' own shares, everything is ... great? "'Currently, because we give a discount of 20 to 30 percent, we are in a safe place,' said one banker from a top-10 listed Chinese lender." And here's Felix Salmon:

In China, however, stocks really aren’t about price discovery: it’s not a market where value investors like Warren Buffett carefully look at fundamentals and buy stocks they consider to be cheap. The Chinese stock market is much less mature than the US stock market, and it can feel much like a gambling parlor: indeed, this latest boom in Chinese stocks took place just as the Chinese government cracked down on old-fashioned gambling in Macau. It’s almost as if China took the money it would otherwise have spent on baccarat, and spent it on stocks instead.

Lots of people are scolding China's government for its heavy-handed, desperate-looking, and not all that effective meddling with markets. "Even the Karachi Stock Exchange didn't come up with something like this," says Albert Edwards (or his correspondent), though if you read the story it's clear that Karachi's solution to its 2008 crash -- a mandated price floor on the index -- was actually much nuttier than China's current efforts. (As Justin Fox has pointed out here at Bloomberg View, most of what China has done has been "tried in the past in New York, London or elsewhere.") In any case China's markets have been up for two straight days, so maybe everything's all better now?

Free Bruno!

Remember the London Whale? Guy named Bruno Iksil? Lost JPMorgan $6.2 billion trading credit derivatives, and got it fined another $1 billion for losing the first $6.2 billion? The U.K. Financial Conduct Authority was looking to fine him personally, but now it's given up on that. The Whale and his podmates always seemed like odd villains to me: Sure, there are some allegations that they mis-marked their book, particularly as things got bad, but mostly it looks like they (and JPMorgan) were vilified less for the mis-marking and more for losing so very much money in such a dumb and embarrassing way. (And in a book that was supposed to be a hedge.) And, you know, it's mostly not a crime to be dumb.

Capital markets bankers are a little obvious.

JPMorgan is following Goldman Sachs and Morgan Stanley in encouraging its bankers to use Uber, and Nathaniel Popper at the New York Times notes that Uber will presumably do a huge initial public offering, so the banks' moves "fit squarely within a hallowed tradition of banks going to sometimes amusing lengths to secure a prized initial offering and the significant fees and reputational lift that it can provide." I don't know, though. Why wouldn't a bank reimburse for Uber? It's a cheap convenient efficient car service that you don't have to arrange in advance. That seems pretty useful for traveling bankers. Of course some people dislike it for its aura of Randian capitalist dystopia but, you know, these are banks.

In other IPO news, pet food company Blue Buffalo launched its deal this week, and I wonder if its bankers (JPMorgan and Citigroup) brought their dogs to the pitch? Or just ate some dog food themselves? Blue Buffalo's prospectus features both a Letter From Our Founder (page 63) and a picture of the founder (up front), who appears to be an Airedale, which makes the letter an even more impressive specimen than, like, Mark Zuckerberg's. Disclosure: My dog is a, for all I know satisfied, Blue Buffalo customer, if anyone wants to give me (or her) a cut of the IPO fees.

Carried interest tax elasticity.

Here is Victor Fleischer arguing that taxing carried interest as ordinary income rather than capital gains would raise more money than the government estimates, in part because the government is under-counting how much carried interest income there currently is, but also in part because the government is assuming that carried interest realization is like regular capital-asset realization. When tax rates on regular capital gains go up, people sell fewer capital assets, reducing capital gains tax receipts. But when tax rates on carried interest go up:

The problem with relying on traditional econometric models of capital gains tax elasticity is that carried interest is not a capital asset. It is labor income, the amount of which happens to be determined by reference to a capital asset. Because carried interest is labor income, the usual techniques for avoiding capital gains taxes don’t work.

Fleischer's argument is that private equity fund managers would not want to defer selling portfolio companies because they don't want to "risk a decline in the value of the portfolio company and lose the carried interest allocation altogether," and because "employing a deferral strategy to reduce personal taxes would breach the manager’s fiduciary duty to act in the best interest of investors." That seems basically right, though I guess you'd expect some effects at the margin, with private equity funds holding positions a bit longer to defer their managers' personal taxes. (I mean, holding positions a bit longer because market conditions aren't right to sell or whatever, but with just a hint of personal tax deferral.) But in a world where everyone worries that investors are too short-term oriented, that might be okay.

People are worried about bond market liquidity.

A little? It's very quiet on the liquidity front, though dealer positions in corporate bonds fell closer to February's two-year low. 

Me yesterday.

I wrote a bit more about Wednesday's NYSE outage. In related news: The Quiet War Squirrels Are Waging on U.S. Stock Exchanges.

Things happen.

The average hedge fund has had a rough five years. What's Patrick Drahi up to? There's too much oil. A 1MDB investigation. "Praise by name, criticize by category." Goldman gives up on jailed teens after its social program fails. It's hard to sell Greenwich mansions. The code of the suburb. "They want it to be a place where they and other people publish things that they like and don’t hate." Stoop shrimp

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