Auction Backups and Boring Regulation

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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BofA CFO.

Bank of America chief financial officer Bruce Thompson is leaving, and Brian Moynihan's goodbye is perhaps a little awkward: "I am confident in saying that no finance executive in the world in the past decade has contended with greater challenges." Recent challenges include "certain weaknesses" in the bank's 2015 stress test, requiring it to re-submit its capital return proposal. Also there was that time it lost billions of dollars of capital on a math error. I feel like neither of those events will make anyone's list of Top 10 Great Moments in CFOing. There are other management team changes; a fun one is that Andrea Smith, who was the head of human resources, will become chief administrative officer "and will eventually take over control of the stress-test submissions as well as the 'living wills' that the bank must report to regulators." Getting rid of the CFO and putting the head of HR in charge of stress tests seems like an extreme response but I suppose great challenges do call for creativity.

In other banking news, Citigroup will close Banamex USA and pay $140 million for not doing a great job of anti-money-laundering. "Citigroup’s decision to shut down Banamex USA was its own and not something that regulators demanded"; regulators would prefer that U.S. banks (1) offer cross-border money transfers but (2) prevent money laundering, while banks find those two goals hard to reconcile. And Credit Suisse made money last quarter.

Market structure.

When the New York Stock Exchange broke earlier this month, I pointed out that it was not a particularly big deal, because the NYSE is just some computers in New Jersey that trade stocks, and if those computers are late getting back from lunch, you can always just trade the same stocks on different computers located in different parts of New Jersey. But there would be a problem if NYSE's computers couldn't get back by 4 p.m. (or, really, a bit earlier), because only NYSE's computers can do the NYSE closing auction that generates the NYSE closing price, and the closing price is actually important. Similarly, only Nasdaq can do the Nasdaq closing auction for Nasdaq stocks. In an age of stock-market redundancy, that reliance on one exchange for each company's closing price seems a bit antiquated, so now it's going away: "The New York Stock Exchange and Nasdaq OMX Group Inc. are planning an agreement to back up each other’s closing auctions in the event of an outage." Seems good.

Public opinion.

I guess I am a bit late to it but this American Enterprise Institute report on "Dodd-Frank at Five" includes just a fascinating round-up of public opinion about banks and regulation. The first question is "How familiar are you with the Dodd-Frank law which regulates financial markets?" and four percent of respondents (in an online poll) say "Very familiar." Who is "very familiar" with Dodd-Frank? I doubt four percent of congressmen, or of bankers, are "very familiar." (Thirty-nine percent said "never heard of it.") Also this is perhaps unexpected: 

And look at this trend:

Though there is also this one:

And views on variable compensation:

Conspiracies.

Phil Falcone's Harbinger is suing Dish Network et al. for "illegally trying to strip it of control of wireless company LightSquared during its bankruptcy." This has happened before, and was delightful, and I see no reason why LightSquared litigation ever really has to end.

Elsewhere a taxi-medallion owner is claiming in bankruptcy court that Citi, which had loaned him money secured by 46 taxi medallions, foreclosed on those medallions to curry favor with Uber. "But there’s a simpler explanation for why Citi would want to foreclose: Its loans are due and haven’t been repaid." I don't know what Citi will do with those medallions, but a really cool thing would be to bring them to the Uber IPO pitch as an offering.

Oh and here is more on the JPMorgan hacking case and the bitcoin goofball who somehow seems to be at the center of it. Here's his frat brother:

“That’s absurd,” said Bryan Ravit, a Phi Kappa Sigma brother of Murgio who lives in Winter Park, Florida. “They are very stand-up guys,” Ravit said in an interview. “I would trust them with my life.”

And some confirmation that he's a stand-up guy:

Named one of Tallahassee’s top 100 singles in 2010, Murgio listed his favorite outfit as “really tight jeans that I can hardly sit down in” and Ayn Rand’s “Atlas Shrugged” as his favorite book.

And here is Paul Ford on hacks

Presidential politics.

Well here is Donald Trump's financial disclosure form. My particular interest in his disclosure was his claim that he made $362 million in 2014, "which does not include dividends, interest, capital gains, rents and royalties." Dividends, interest, capital gains, rents and royalties are how rich people make money! How did he make that much money without counting all the traditional sources of income?

Now we have the answer and it's mostly "golf related revenue," also "resort related revenue" and "golf resort related revenues," plus some "management and related fees" and so forth. (There are also some big items for "condo sales," which I guess technically aren't either rents or capital gains, so I'll allow them. Also there's a Screen Actors Guild pension.) I assume, without research, that this would make President Trump our first president to make hundreds of millions of dollars a year on golf.

People are worried about bond market liquidity.

But not enough to help Bondcube, an electronic bond trading platform that filed for liquidation. My initial reaction was, you know, no one's ever lost money betting against electronic bond trading as a cure for liquidity worries, but that's not the right reaction. For one thing Bondcube actually was matching trades. Almost:

"Liquidity was not a problem, and we had more than 500 matches so getting clients was not a problem. We could not follow through from converting matches into trades and missed our revenue targets."

Because its "delivery of technology was late, over budget and lacking in functionality," according to the chief executive officer. So the lesson here might be that if you build an electronic bond-trading platform, investors will come and try to trade bonds on it, and all you have to do is let them. MarketAxess is doing well with Open Trading, which "connects buyers and sellers of corporate bonds directly" and which did $21.4 billion in volume last quarter.

Meanwhile here's Loomis Sayles on "The Upside to Low Liquidity Bond Markets," which is basically, you know, if you're a fundamental value investor, low liquidity gives you more chances to buy at your outside bid and sell at your outside offer. And here's a Pimco op-ed urging "Don't Confuse Investment Risk With Systemic Risk," which you can if you like read as a rebuttal to Bill Gross's hints that Pimco should be regulated as a systemically important financial institution. 

Me yesterday.

I wrote more about the people who want to ban diversified mutual funds. Afterwards someone pointed me to this paper about passive institutional investors and governance:

Our findings suggest that passive investors play a key role in influencing firms’ governance choices; ownership by passive institutions is associated with more independent directors, the removal of poison pills and restrictions on shareholders’ ability to call special meetings, and fewer dual class share structures. Passive investors appear to exert influence through their large voting blocs—passive ownership is associated with less support for management proposals and more support for shareholder-initiated governance proposals. 

I think that's consistent with the view of index funds as representatives of a sort of shareholder class consciousness, voting for abstract "good governance" principles against management special pleading. Meanwhile, corporate competition is declining.

Also I wrote about the Volcker Rule, which went into effect this week, so don't forget to stop proprietary trading.

Things happen.

Pearson is in talks to sell the Financial Times. The Puerto Rico Electric Power Authority's bondholders have proposed a restructuring plan. Bridgewater has soured on China. CEOs of German banks should probably speak German. Oil and coal distress are bad for distressed debt. Ferrari filed for an IPO. Why fracking is like tiramisu. Canada man hit by lightning wins lottery. Not all photos are selfies.

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(Corrects spelling of Brian Moynihan's first name in the first item.)

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