Partying All the Way to the Black Rock

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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People are worried about bond market liquidity.

Here's how Carl Icahn worries about bond market liquidity:

At one point, Mr. Icahn described a cartoon he was imagining to get across his point. It would involve a party bus of sorts full of bond investors drinking and having a good time, and unaware they are heading toward a cliff.

“You know who is pushing it? Larry Fink and [Federal Reserve Chairwoman] Janet Yellen,” Mr. Icahn said with a laugh. “You know what’s going to destroy it? They are going to hit a black rock.”

Why are they pushing the bus? Wouldn't the black rock stop them from going off the cliff? I feel like if two people pushed a bus into a rock the damage would be pretty minimal? Anyway I know it doesn't sound like it but, trust me, it's a parable of bond market liquidity: Icahn thinks that BlackRock exchange-traded funds create the risk of liquidity illusion for bond investors. He said this on a panel with BlackRock's Larry Fink at Delivering Alpha, apparently mostly as a way to change the subject from Fink's criticisms of Icahn's activist investing. It strikes me that both of these criticisms -- Fink's of Icahn for short-termism, Icahn's of Fink for risky ETFs -- are mostly wrong, but then, when have you known a cartoon to be right?

Elsewhere here are Bloomberg News and the Financial Times on worries about high-frequency trading of Treasuries, which, it's worth noting, trade a lot on electronic "all-to-all" venues like the ones BlackRock wants for corporate bonds. Anonymous all-to-all electronic trading is the cure for corporate bond illiquidity; in Treasuries, it's apparently the disease.

On the other hand: "The Federal Reserve doesn’t see signs of liquidity problems in U.S. bond markets, despite warnings from investors to the contrary." Here is the Fed's Monetary Policy Report:

Similar to the Treasury market, a range of conventional liquidity metrics in corporate bond markets also generally do not point to a significant deterioration of market liquidity in recent years. For example, effective bid-asked spreads have remained low, and measures of the price impact, such as Amihud’s illiquidity measure, have been fairly stable (figure D). In contrast, the proportion of large-sized trades has remained low since the financial crisis, particularly for speculative-grade bonds, and turnover has declined somewhat as the growth of total bonds outstanding has outpaced the growth of trading volume (figure E). However, as in the case of Treasury securities, it is unclear whether declines in corporate bond trade size and market turnover necessarily indicate a deterioration in liquidity.

Some analysts raised concerns that the rise of buy-and-hold investors and the decline in dealer inventories relative to the outstanding amount over the past few years may have negatively affected the prospects for liquidity conditions in the corporate bond market, especially during episodes of financial stress. So far, however, corporate bond market liquidity as captured by conventional measures has not experienced substantial deterioration during recent episodes of stress in fixed-income markets, such as the sharp increase in Treasury rates in the summer of 2013 or the flash rally of October 15, 2014.

I know it is only July but I think it is time to declare the backlash to bond market liquidity worrying the financial story of 2015. 

Greece, etc.

Greece passed its required austerity measures late last night, under bitter protest, and the EU seems willing to issue a bridge loan, though the ECB may not provide more funding to help Greek banks reopen until next week. Wolfgang Schaeuble remains a bummer. Did you know that Greece still has private bondholders, and that "the third bailout’s designers are counting on private investors to resume lending to Greece with gusto in the near future"?

Elsewhere in sovereign debt unpleasantness, Ukraine is making progress in its debt restructuring talks. And in not-quite-sovereigns,  Puerto Rico's Public Finance Corp. seems to be about to miss a bond payment.

Bank earnings. 

Goldman Sachs announced earnings today; it beat expectations, though its net income was down 49 percent year-over-year on $1.45 billion of litigation provisions, way up from last year. Yesterday's Bank of America earnings "were complicated, even messy in places," but at least the legal costs are going in the right direction, and its 0.99 percent return on assets is so close to its 1 percent target. And here is Richard X. Bove on the possibility that Jamie Dimon will talk less on earnings calls:

He is not in the position of a CEO that must explain away some set of problems; educate investors; or battle with the press and the government. He needs to take the role of industry leader and spokesperson. He needs to speak far less and with much more gravitas. He needs to demonstrate with new initiatives how he will keep this mammoth company at the forefront of what is now a totally new financial industry.

He appears to understand that he has the responsibility to lead the United States financial industry into the new era. If anyone is up to this challenge it is Jamie Dimon. He may have signaled on Tuesday that he is beginning the new trek.

Samsung C&T's vote is tomorrow.

I have one or two criticisms of South Korean shareholder democracy but I have to say that I like the personal touch at Samsung C&T, which is pushing hard to round up shareholder votes for its proposed merger with Cheil Industries: 

Another shareholder said in an interview that a Samsung C&T employee left his business card—and a watermelon—with his apartment’s security guard, along with a handwritten plea to approve the deal.

Also I wish that more American proxy fights took this tone:

On Monday, Samsung bought front-page advertisements in all of South Korea’s major newspapers to rally support to its side.

“We desperately plead with Samsung C&T shareholders,” the ad read, calling it “regrettable” that Elliott was seeking to block the proposed merger. “Must the future of Samsung C&T and Cheil Industries be hindered like this?”

Presidential politics.

Every last thing about Republican presidential front-runner Donald Trump's announcement of his wealth is amazing -- the all-caps "TEN BILLION DOLLARS," the declaration that the Federal Election Commission personal financial disclosure form "was not designed for a man of Mr. Trump's massive wealth," the fact that he didn't actually release the form, the billions of dollars of value apparently attributed to the Trump brand, his previous (true!) claim that he has "a Gucci store that's worth more money than Romney" -- but here let me focus on this:

Mr. Trump's income for the year 2014, as reported in the PFD statement, is $362 million dollars (which does not include dividends, interest, capital gains, rents and royalties).

Now a very small percentage of my income comes from dividends, interest, capital gains, rents and royalties, but I don't make $362 million a year. As I understand it, if you're making $362 million a year that's not usually, like, salary. Trump is a real estate mogul and brand licenser: Where is he getting his money from if not rents, royalties, dividends, interest and capital gains? I guess we'll find out in a month, when the FEC releases the form.

Elsewhere in politics, Goldman Sachs likes Jeb Bush, and Ted Cruz spoke at the Delivering Alpha conference yesterday, which was awkward. Cruz apparently wants to "deliver alpha in government," because of course no one knows what "alpha" means. (It's okay; earlier, the conference featured a complaint that hedge funds don't hedge.) Alpha is a statistical residue of returns after controlling for your model's underlying risk factors. Once you factor in the small-government premium, Cruz's alpha is just beta.

Who owns Cudd & Co.?

After I wrote this week about the strange world of nominees -- Cede & Co., Hare & Co., Mac & Co., Kane & Co., Cudd & Co. -- who "own" so much of the stock market, a reader sent me this amazing 1974 Village Voice article demanding that Congress question Nelson Rockefeller about:

Who owns Cudd & Company?
Who owns Kane & Company?
Who owns Egger & Company?

Egger is news to me! The Voice mentioned one congressman who was "convinced -- and he has collected more than a few facts to back it up -- that a small number of Eastern banks, especially those located in New York City, exercise an undue influence on the American economy." Man, the conspiracy theories of the 1970s look downright quaint. Anyway, here is a law firm memo on the technical appraisal failure in the Dell deal.

In other follow-up news, the other day I wrote about a Twitter merger hoax apparently propagated in part through Twitter, either by trading algorithms scraping Twitter or (more likely?) by humans reacting to Twitter by trading, and their trading activity sucking in algorithms. In any case, it's worth noting that a new European Central Bank research paper finds that, "if we want to know where investor sentiment is, Twitter beats Google and both of them beat established sentiment surveys." 

Things happen.

Robert Shiller on "The Mirage of the Financial Singularity." The bank loan market is tough, and private equity firms "are increasingly turning to smaller lenders and asset managers to fund buyouts they’d normally have arranged by banks." How Lynn Tilton Went From Company Savior to SEC Target. Blythe Masters to Santander. The 1MDB controversy is bad for Goldman Sachs's business in Malaysia. The hotel industry vs. Airbnb. "VCs have no edge over public investors in their ability to value a late stage tech company, even when big picture, long term thinking is required while profit losses are incurred in the short term." "The idea of using young salesgirls as effectively tethered goats to get business from hedge funds, it’s a very common practice." (Also.) "Among Wharton's elite investment club, a regular investment banking or sales and trading internship at Goldman Sachs would be viewed as a backup plan." "As long as Communism is in the field as an alternative, you need to show people that capitalism can work. Once there is no alternative, then it's not that big a deal." "Eight years ago, I’d just begun a series of empirical studies on the moral behaviour of professional ethicists." Turn off your cell phone ringer. Montauk is full of hipstersEsperanto and the Internet. Zen hackathon. "As I dry heave into the sink, I try to remember if I read about this machine in the Book of Revelation."

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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