Greek Elections and New Jersey Swaps

Also Twitter, bitcoins, indexing, quarterly reporting and bond liquidity.


I am not an expert on Greek politics but when Alexis Tsipras announces that he will step down and call for elections and says "Now the Greek people need to have their say," I think ... didn't they just do that? Like didn't Greece rather notoriously have a referendum just last month in which the Greek people voted overwhelmingly to reject Europe's austerity demands? And didn't Tsipras then accept those demands less than a week later? It would be funny if he won an overwhelming victory in these elections and then handed over power to the loser. That's kind of his move. 

Meanwhile it is just a lot of voting and uncertainty. Moody's says that this "could elevate programme implementation concerns and, potentially, puts future official sector disbursements at risk." There has been a lot of criticism about how the euro, and the Grexit negotiations, have been a way for international technocrats to impose their will without the constraints of democracy. But it's possible that Greece's experience also shows that direct democracy is not the most efficient way to manage international finance and macroeconomics. Meanwhile, here at Bloomberg View, Rand Paul argues for auditing the Fed

Toxic swaps.

New Jersey, like many states, has issued floating-rate bonds, and then swapped them back to fixed rates using derivatives with banks. (See, e.g., page I-47 in this 2014 bond offering document, or pages I-39 and I-40 of this 2015 one.) Like many states, New Jersey was a bit nervous about this: There is some history of municipal swaps not working out quite as intended, due to divergence between the floating rate paid by the issuer (based on the Sifma muni rate) and the floating rate paid by the banks (based on Libor). And New Jersey is flirting with ratings-agency downgrades that might give its swap counterparties the right to terminate their swaps or demand collateral. So Reuters reports:

New Jersey has terminated all of its interest rate swap agreements under Governor Chris Christie, paying banks $720 million to unravel $4.2 billion of swaps and wiping from its books a potentially big, unpredictable liquidity risk.

Sure, unpredictable liquidity risk: Those swaps had a very negative mark-to-market, because New Jersey pays fixed rates and gets back floating rates, and interest rates have been low over the past few years, lower than they were in "the early to mid 2000's," when most of these swaps were done. And if those downgrades happened, New Jersey might have had to terminate the swaps and pay the negative mark-to-market to the banks, which would cost it ... um ... about $720 million. Get it out of the way though. Here's New Jersey Treasury spokesman Christopher Santarelli:

Swaps "have been considered to be toxic by market participants and the administration. The state saw an opportunity to clean up its balance sheet and did so," Santarelli said in an e-mail.

Toxic, right. There is a history of swaps causing heartache for municipal issuers, so it is entirely understandable that New Jersey would want to get out of its swaps. On the other hand, interest rates are low, and one of the big economic questions of recent months is "When Will the Fed Raise Rates?" The answer is probably soon, or soon-ish. When the Fed raises rates, the floating rate that New Jersey pays on its bonds will probably go up, costing it more money -- a cost that is no longer hedged. And when rates go up, the mark-to-market on those vanished swaps would have become less negative, making it cheaper to terminate them. As one anonymous Twitter wag put it, "Unwinding all your swaps right before the Fed starts to raise rates" is the "most State Treasurer trade ever."

Elsewhere in municipal finance, Hillview, Kentucky, is "the first city to file for bankruptcy since Detroit did two years ago." The problem seems to be not swaps but "a contract dispute with a local company, Truck America Training, over a land sale," and it seems a little rough for a business to put the city where it's located into bankruptcy.


Twitter fell below its initial public offering price on concerns about general directionlessness, and closed yesterday at $26, exactly the IPO price. I realize it doesn't work this way but it is tempting to imagine Twitter saying, yup, didn't work out, sorry; giving investors their $26 back; and going back to being a private company with a delightful but directionless product. Not everything needs to be a roaring success of late capitalism! Not everything needs to scale and monetize! I guess most of the things do though.

Bitcoin crash.

Did you know that there's margin trading in Bitcoin? Delightfully, the margin contracts are "smart" or whatever; at least, they're self-executing:

In bitcoin trading, the margin call is executed automatically. So when a number of positions on the exchange hit their limits amid the general selloff, the margin calls were executed automatically; sell orders were generated to raise enough money to cover the positions (or, in some cases we’d imagine, the positions were liquidated). 

This led to a flash crash, of course, though the backdrop of the Great Bitcoin Forking Debate isn't helpful either.

Trump through the ages.

Here is an argument that if Donald Trump had put all his money in an S&P 500 index fund in 1988 and left it there, he'd have more money today than he actually does. Now I am pretty conventional, basically believe in stocks for the long run, like index funds, have much of my money in them. But I do think that if you have a billion dollars you would be absolutely bonkers to put 100 percent of it in a stock index fund. If I had a billion dollars I'd definitely diversify into bonds, cash, land, apocalypse survival bunkers, etc. More generally you should not expect most people's wealth to grow at the same rate as the stock market over long periods of time. The stock market is the return on risk investment in business; 100 percent of people are not 100 percent invested in risky businesses. People buy houses and stuff. If Julius Caesar had put all his money in index funds instead of being assassinated, he would have quadrillions of denarii by now, but that is not meaningful advice even in hindsight. Elsewhere: "Donald Trump, Through the Ages."

People are worried about stock buybacks.

But they are also worried about the solutions. I mentioned yesterday that my old law firm, Wachtell Lipton, had floated the idea of eliminating quarterly reporting as a solution to quarterly capitalism. The idea drew some scoffs from Ronald Barusch ("The trend in public-company reporting is toward more transparency, not less"), David Merkel ("quarterly earnings results give investors an idea as to whether the companies remain on their long-term growth path or not"), and Bloomberg View's own Barry Ritholtz ("We tolerate reprehensible ideas because, ultimately, free speech leads society toward a greater truth"). Even Hillary Clinton, who has popularized the problem of "quarterly capitalism," actually wants more frequent disclosure, at least of stock buybacks. It is perhaps best to view the Wachtell proposal not as a serious plan to revise SEC reporting requirements and more as a sort of mood affiliation with corporate managements. Managements tend to dislike activists on both principled (short-termism!) and self-interested (keep our jobs!) grounds, and if the law firm that protects them from activists also issues pronouncements about structural reforms to address short-termism, that is kind of a good look.

People are worried about bond market liquidity.

Today's the last installment of the New York Fed's bond market liquidity series and it's a good one, "What’s Driving Dealer Balance Sheet Stagnation?"

On the one hand, most dealer deleveraging occurred prior to the announcement of potentially constraining regulation, suggesting post-crisis dealer balance sheet contraction is largely attributable to a decrease in dealers’ risk appetite. On the other hand, while Dodd-Frank and Basel III regulations may help explain the moderate deleveraging since 2010, it is unclear to what extent regulations constrain growth in dealer leverage and risk-taking today, over and above a lingering lack of risk appetite. 

And "dealers that expanded their balance sheets more in the run-up to the crisis (2002-2007) tended to contract their balance sheets more after the crisis (2009-2014)," which is at least suggestive evidence that dealers have retreated from trading more because they got burned in the crisis than because of the Volcker Rule. Elsewhere, earlier this month I mentioned a Goldman Sachs "Top of Mind" report on liquidity; that's now public, so enjoy.

Me yesterday.

I wrote about attempts to describe hedge funds in terms of systematic factors. Here is Meredith Jones on the problems with hedge fund databases, which seem relevant to those attempts. Yesterday I also said that "you don't see a lot of fat happy hedge fund managers in 'Mad Max,'" but I might have misunderstood the movie: As Michael Tanzer pointed out on Twitter, "The bad guy in Fury Road manages the Citadel!"

I also wrote about a few thousand illegal trades that Citigroup did because its Information Barriers Surveillance wasn't quite up to snuff.

Things happen.

It's hard to be a Greek fisherman. "The SEC, as part of its tighter scrutiny of private equity, is exploring whether certain GPs are giving lending business to certain LPs in their funds, such as insurance companies, without proper disclosure." Valeant is buying the "female Viagra" company days after it got regulatory approval. Noah Smith at Bloomberg View on the low volatility anomaly. Here's a prospectus for Lingerie Fighting Championships, Inc. (via Kayla Tausche). The Nominal Price Premium. Million-dollar parking spots. Married Role-play. "500 Days of Kristin" is "our generation’s Gravity’s Rainbow." Bicycle desks. Four Ways to Nap at Your Desk. Deez Nuts, explained. "How a CMS Won WWIII." 

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