Can-Kicking, Bond Calls and Casinos
It's all very depressing. This Bloomberg News headline is "Tsipras Moves From Predator to Prey at Euro 'Torture' Summit." "Two officials who observed Tsipras at the Brussels showdown independently described him as a 'beaten dog,'" which makes me wonder how European officials treat their pets if that is their go-to metaphor. All the familiar exhausting elements of the Greek drama remain in place: There's another late-night deal, another deadline to pass reforms to get more aid, another agreement to keep negotiating, another promise that this deal will "end the threat of Greece exiting the euro." The can keeps getting kicked, but the kicks are getting more vicious. "It is a typical European arrangement," said Jean-Claude Juncker, accurately. "It was crazy, a kindergarten." It's "one of the most brutal diplomatic démarches in the history of the European Union, a bloc built to foster peace and harmony that is now publicly threatening one of its own with ruination unless it surrenders." Paul Krugman is outraged. Tyler Cowen, who was previously impressed that Syriza "lost a public relations battle to Germany," now thinks that "all of a sudden Merkel has lost the 'blame game' battle." Olivier Blanchard defends the IMF's performance. And Berlin still owes Mittenwalde 11,200 guilders, which with 450 years of 6 percent interest comes to trillions of euros.
In 2013, Chesapeake Energy bought back some bonds. If it bought back the bonds by a certain deadline, they would cost about $1.3 billion. If it missed the deadline, it would have to pay an extra $379.7 million. Chesapeake thought it had met the deadline. The bondholders thought it hadn't. I thought it had probably missed the deadline, but in a quantum-uncertainty sort of way. Contracts are hard. There was a lawsuit. Chesapeake eventually lost. But meanwhile it had long since bought back the bonds (for $1.3 billion), meaning that a court couldn't just undo the transaction: Chesapeake would have to pay some (court-ordered) extra money. I said that it would be pretty unfair to make Chesapeake pay back the whole extra $379.7 million: It wouldn't have called the bonds if it knew it had to pay that much extra, and the amount of value that bondholders gave up was certainly much less than that. But on Friday a court ordered Chesapeake to pay the whole $379.7 million, plus interest. Here's the opinion; Chesapeake apparently argued for fairness, but the court went with the letter of the contract instead. The lesson is I guess along the lines of "read the documents carefully when you issue bonds," but that is a lesson that no one will actually learn so it is a bit silly to say it. Another good lesson would be "if you have a high-stakes deadline to do a thing, maybe do the thing a while before the deadline, instead of right on the deadline," but again that seems hopeless. Finance is hard but some of the difficulty is self-imposed.
We've talked before about how once upon a time banks were afraid of felony convictions, not because they feared prison (you can't put a bank in prison), but because a felony conviction would create a variety of more or less untested collateral consequences with different regulators and customers and so forth, and banks weren't sure they could survive those consequences. And then prosecutors and regulators got the bright idea of getting guilty pleas from banks by removing all those collateral consequences, so that a felony conviction would no longer be scary for a bank. This still strikes me as an odd regulatory decision, but it happened. But bizarrely no one seems to have checked on one of the most obvious collateral consequences, which is that if you have a felony conviction you're really not supposed to own a Las Vegas casino. (It's a Mafia thing.) And so now a union is challenging Deutsche Bank (Libor conviction, April 2015) over its 25 percent ownership of Station Casinos. It would be funny if the only consequences of market manipulation were (1) big fine and (2) you can't own a casino any more. Like, go ahead and issue securities without SEC review, but stay away from gambling!
Here is Gretchen Morgenson on the shareholder lawsuit against Dish Network over conflicts of interest when its chief executive officer, Charles Ergen, bought a bunch of LightSquared debt for his own account and then tried to get Dish to buy LightSquared out of bankruptcy, which would have "effectively ensured that his investment in LightSquared debt would be repaid at 100 cents on the dollar." The situation is a delight: Dish wasn't allowed to buy the LightSquared debt, so Ergen bought it for himself, which led both LightSquared and Dish shareholders to sue. I have a certain amount of sympathy with the lawsuit, but the latest revelations are about personal ties between Ergen and some of his supposedly independent directors and do not particularly move me. One of them "has taken numerous hiking trips with Mr. Ergen’s family" and once told Ergen "I love you man!" in exchange for Super Bowl tickets; four members of Ergen's family were invited to his son's bachelor party. People often act shocked when they find out that directors and CEOs are friends with each other but, like, what are you gonna do? There are only so many business schools and country clubs and charitable boards. The trick is to have some simple rules about, like, if you're the CEO of a public company, don't buy the bonds of another company and then turn around and sell them to your first company at a premium. And if you're the board, don't let your CEO do that, whether or not you go hiking with him. The bachelor parties aren't the problem; the bonds are the problem.
People are worried about bond market liquidity.
And it's getting on BlackRock's nerves: "We are concerned that the tone of comments is unnecessarily shrill." To counter the shrillness, on Friday BlackRock released two white papers. One -- "Addressing Market Liquidity" -- combines a general, un-shrill overview of the issues, an argument that BlackRock is on top of its liquidity risk, some suggestions for ways to improve bond market liquidity, and, adorably, a brief history of all the times that BlackRock tried to set up electronic marketplaces for bond trading.
The other -- "Bond ETFs: Benefits, Challenges, Opportunities" -- argues that exchange-traded funds improve bond-market liquidity by letting people get bond exposures through liquid exchange-traded instruments, and don't pose any run or liquidity-illusion risk. I have to say that I basically find this convincing: In normal times, ETFs should improve liquidity, and in crunch times, they probably shouldn't make anything worse. BlackRock would like to see more of them:
As ETFs gain acceptance, these products may evolve to address additional investor needs. For example, fixed maturity bond ETFs that have diversified portfolios that roll down the curve to a maturity date like a bond have been introduced successfully as an alternative to holding individual municipal bonds. This could similarly be applied to corporate bonds. However, the lack of look-through treatment and accounting rules make these bond ETFs less attractive than the underlying bonds. Similarly, it has been reported that Morgan Stanley has proposed the creation of ETFs that aggregate bonds of a single issuer. This would essentially create larger issues of a single issuer and thus address the proliferation of CUSIPS and the small size of individual issues. However, single issuer bond ETFs are not possible in the US under the Tax Code provisions relating to concentration risk in publicly offered investment funds that hold securities. We recommend that these rules be reexamined.
Elsewhere in liquidity, Allstate has increased bond trading as banks reduce it: "It was an opportunity for us to come in and fill that liquidity when there’s supply-and-demand imbalance." (BlackRock too says it's "adjusted our trading behavior to not just be a price taker but also a price maker.") The Financial Times looks at high-frequency trading of Treasuries. "U.S. officials have concluded that high-frequency trading contributed to the Treasury market’s wild ride last October," but how could they have concluded otherwise? And Representative Randy Neugebauer is hosting a fixed-income liquidity roundtable today so that should be fun.
Houlihan Lokey is going public. Hidden leverage in China. How to end index gaming. "Who supplies liquidity, how and when?" Investing is complicated. America has too many lawyers. Meet Grexit, the year’s worst-named software startup. Pigeons in financial history. "The predominantly Asian locales in the book are a distinction from others in the genre, but this only serves as an excuse to increase the misogyny and racism to unbearable levels." (But.) Pope Francis: Unfettered capitalism is "the dung of the devil." "The two Satanists are also trying to figure out what to do with their statue of Baphomet." Duff Beer. "It is a truth universally acknowledged that a language that uses diacritics must have a minimal pair with and without diacritics that means something rude." How do you describe Point72 Asset Management in a wedding announcement? 149.8-mile subway ride. E-mails to trees. "Hung over, you cannot fixate on the nauseating future, because the present is nauseating enough."
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