Bond Trading, Mining and Condiments

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.

I feel like the old Greece dynamic was that Greece and its creditors would meet and agree to some can-kicking, and then the Greek government would go home and scuttle the deal, and they'd meet and do it all over again, but angrier. That dynamic has reversed: Alexis Tsipras seems to be working hard to get the deal approved in parliament, despite saying that he agreed to it "with a knife at my neck," while the creditors are sort of backing away. Wolfgang Schaeuble keeps dropping extremely unsubtle hints that Greece should just leave the euro, and the International Monetary Fund keeps releasing analyses showing that "Greece's debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far." Meanwhile, the European Commission is seeking to use an EU rescue fund for Greece. If you'd like some lefty writing about Greece, as I'm sure you do, may I refer you to J.W. Mason ("The euro system today is an instrument in the hands of European capital to roll back the gains of social democracy") or Sam Kriss ("Despite their pleas for an alternative, they’ve never approached austerity as anything other than a deterministic inevitability," also, "The Bemächtigungsapparatus, or structure of domination, exists only to serve the desires of another, ‘ontogenetically prior’ impulse – but, syntactically, it’s never clear whether this prior impulse is cannibalism or masochism"). 

Bank earnings.

Bank of America announced earnings this morning. It made 45 cents a share and beat expectations, with lower expenses generally and a 95 percent decline in legal expenses. Yesterday's bank earnings seem generally positive, with both JPMorgan and Wells Fargo experiencing very low charge-off rates, although the news is kind of boring: The performance improvement comes from cost cutting, declining legal expenses, improving borrower credit, etc., not sexy trading activity. And bank earnings might get a whole lot more boring if Jamie Dimon stops doing them:

“Don’t be surprised one of these days if I don’t show up - - don’t read anything into it” or assume he’s hiding from bad news, Dimon said at the end of Tuesday’s call. Lake does “such a good job, that I’ve become unnecessary to be on all of them, and I can obviously go do other things.”

Some microcap manipulation.

I try not to give investing advice but do you see what is wrong with this company?

Warrior Girl’s purported business changed from hydroelectric power (in 2008) to extracting oil from tar sands (in 2009) to online education (in 2010).

What about this one?

Everock, Inc., a Canada-based mining company that relocated to Nevada and sold sandwich spreads after reorganizing itself with Nature’s Peak in 2008. 

Those are from this Securities and Exchange Commission case against "15 individuals and 19 entities for their roles in alleged schemes to manipulate the trading of microcap stocks" by pumping and dumping. One of the great pleasures of microcap pump-and-dumps is that you want to pump a stock in a trendy industry, trends change, and it turns out to be easier to change what your company supposedly does than it is to go make a new public company. (It's not like you have to change what the company actually does! It probably doesn't do anything!) So this sort of "mining-turned condiment company," in the SEC's immortal words, isn't all that uncommon. ("Blank check" fraud also causes a lot of microcap pivoting.) This one also led to a criminal case, and the prosecutors have their own keen sense of irony:

In a recorded call from 2010, Gallison told Randles that Moneyline maintained a private internal telephone system that did not go through a U.S. server on which he and Randles could hold "private conversation[s] that the Fed cannot get a wiretap on."

And from the SEC complaint:

Randles also was aware that the Moneyline Entities activities were illegal, and he worried about being arrested for his participation. For example, on June 7, 2010, prior to traveling out of Costa Rica, Randles expressed concern to Galli son that Randles would be "hauled off' a plane and arrested while traveling outside of Costa Rica due to the Moneyline Entities' illicit activities. Gallison attempted to put Randles at ease by telling him that "the SEC doesn't know ... you've done more than $100,000 worth" of transactions and "the first couple times doing [illegal] stuff ... when the SEC raps your knuckles ... it's civil," so there [would be] no concern about being arrested in a criminal proceeding. Gallison told Randles that he should not worry, because "the whole issue with [the Moneyline Entities] is that ... it's tough ... for anyone to figure out what ... we are doing in the first place." Gallison then encouraged Randles to "go have a nice trip and make us some money!"

I try not to give legal advice either, but any time you talk about having conversations that the Feds can't get a wiretap on, you're probably on a wiretap.

Elsewhere at the SEC.

Here is a very nitty SEC action against OZ Management, which manages Och-Ziff funds. Och-Ziff told four of its prime brokers that its sales of a stock were long (or short) if its fund had (or did not have) shares of that stock at the prime broker. So if an Och-Ziff fund was overall short 100 shares of XYZ, but was long 200 shares at Prime Broker A and short 300 shares at Prime Broker B, and then sold 50 shares through Prime Broker A, then it would report that sale as a long sale to Prime Broker A, even though it was really a short sale. I think. I mean, here:

OZ Management sent a different version of the trade file to the four prime brokers. Unlike the “fund view,” the version sent to these prime brokers identified a sale as long or short based on the relevant fund’s position in the stock at the prime broker where the trade was sent for settlement and not based on whether the sale in question had actually been marked long or short when OZ Management sent the sale to the market through its executing brokers (the “prime broker view”). Because this logic was focused on listing the trade in the trade file in a manner consistent with the fund’s position in the security at the prime broker, it sometimes switched the identification of the trade type from the way it was identified when OZ Management sent the sale to the market through its executing brokers.

So that's the wrong answer, fine. Getting this wrong messes up SEC enforcement: Those prime brokers submit the information to the SEC, which uses it "(1) to assist in the examination for and investigation of possible securities law violations, principally involving insider trading or market manipulation; and (2) to conduct market reconstructions, primarily following significant market volatility," though I can't quite see how this mis-marking would interfere too much with those purposes. And Och-Ziff's mis-marking seems to have led once to a Regulation M violation, where Och-Ziff shorted shares just before a stock offering and then bought shares in that offering, a no-no though an apparently inadvertent and frankly harmless one. It's all ... you know, not great, shouldn't have done it, a bit sloppy, but not really a big deal? I don't think? But Och-Ziff was fined $4.25 million, which is really quite a lot of money for some administrative mistakes. I guess draconian penalties for getting the little things wrong will improve compliance culture, or something, but it seems a little odd.

People are worried about bond market liquidity.

So one thing they're doing, if they're BlackRock, is "trading bonds directly with inter-dealer brokers," who normally, as their name suggests, only intermediate bonds between dealer banks:

A large investor trading directly with inter-dealer brokers marks a sea change for Wall Street, where big bond trades traditionally are executed between asset managers and large banks like JPMorgan Chase & Co. and Goldman Sachs Group Inc. Trading venues run by ICAP and Tullett Prebon, meanwhile, have historically brokered trades between banks and stayed clear of interacting directly with buy-side investors such as BlackRock.

BlackRock has long been an advocate of more "all-to-all" trading venues, where banks and buy-side investors could all come together to trade bonds with each other, as they do with stocks on the stock exchange. But an inter-dealer broker is an odd sort of all-to-all exchange, insofar as the customer base seems to be basically (1) banks and (2) BlackRock. 

You can separate bond market liquidity worries into two rough categories. One is, just, liquidity is expensive now: It's hard to find bonds because dealers don't keep a lot of inventory, so you have to call a lot of people or pay up a lot for bonds. (The evidence for this seems to be anecdotal rather than in, say, bid/ask spread statistics.) A good way to solve that would be to disintermediate the banks, who aren't helping that much anyway, and using inter-dealer brokers is sort of a step in that direction.

But the other worry is, liquidity will be a crisis later: Dealers don't keep a lot of inventory, so they won't be there to cushion volatility when bond prices drop. I am skeptical of this worry, but people keep saying it. If that's your worry, then disintermediating dealers -- making it harder for them to make money when conditions are relatively normal -- seems like a bad answer, no? If they can't make money on their inventory now, they're going to keep even less of it.

Elsewhere, "Cash levels in fund managers’ portfolios are at their highest since December 2008," and one way for a bond manager to avoid the liquidity mismatch problem -- you know, investors want to redeem out of bond fund, bond fund has to sell bonds, bond prices crash, more investors redeem, vicious cycle, etc. -- is to just hold a lot of cash. Cash is always liquid.

Me yesterday.

I wrote about appraisal rights and DTC. I also wrote about yesterday's Twitter merger hoax. Here is a history of stock-market hoaxes from the Wall Street Journal.

Things happen.

Tsinghua Unigroup wants to buy Micron, and David Einhorn has good timing. It's easy to get car loans. Activism is up. A debt collar. Stock Price Response to Non- and Deferred Prosecution Agreements. Senator Tammy Baldwin wants to deter bankers from moving to government. China margin debt and ETFs. Unicorn idol. Tech strip clubStick-on apartments. Vape guitar. Performance art. Pentaquark

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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