Swaps, Stocks and Accounting Clubs

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.
Read More.
a | A

Swaps push-out.

Remember swaps push-out? There was going to be a rule requiring big banks to move a tiny portion of their derivatives out of their insured bank subsidiaries and into their broker-dealer subsidiaries. I always thought that this was entirely symbolic, because the distinction between "insured bank" and "broker-dealer" is, for a big bank holding company, pretty thin. The holding company is the systemic thing; if JPMorgan goes under then it's not like deposit insurance will save the bank while the rest of the organization disappears. Still the banks lobbied hard to get the rule repealed, and they basically won, and there was much gnashing of teeth about gambling with taxpayer money. If you think, as I do, that the rule was symbolic, then the gnashing of teeth doesn't make much sense. But of course if you think that, then all the lobbying didn't make that much sense either. Why fight so hard against a purely symbolic rule?

Here's a paper from John Crawford and Tim Karpoff arguing, first, that the rule was basically symbolic because, at a systemically important bank, the distinction between an insured bank and a broker-dealer is pretty thin:

If a SIB is insolvent on a consolidated basis, then in the vast majority of scenarios, the probability of a taxpayer bailout will not rise or fall depending on the location of losses within the holding company family. Any resolution would likely apply to the SIB as a whole rather than to a particular subsidiary. Regulators’ current strategy under Title II of Dodd-Frank, as articulated under the Federal Deposit Insurance Corporation’s (“FDIC’s”) single point of entry (“SPOE”) proposal for resolving a SIB, is designed to allocate subsidiary losses to holding company claimants by ensuring that sufficient capital and debt claims exist at the holding company level to absorb all SIB losses, avoiding both bailouts and subsidiary defaults. Accordingly, for SPOE purposes, it does not matter whether the losses are generated at the bank or the broker-dealer.

And so, at four of the five biggest swap-dealer bank holding companies, the broker-dealer subsidiary has the same credit rating as the bank subsidiary. (The exception is Citigroup.) 

So why did the banks care? It can't be about the credit ratings of the subsidiaries where they book the swaps, because except for Citi those ratings are the same. It might be partly about the transition costs of moving swaps between subsidiaries, but that seems like a silly thing to care too much about. Crawford and Karpoff conclude that it's about capital requirements:

Uncleared derivatives, on the other hand, represent one limited subset of interests where the capital requirement at the broker-dealer, all else equal, may exceed the capital requirement for the same position at the bank.

It is a little weird that capital rules would require a higher margin of safety from broker-dealers safer than from insured banks, but here we are. In other swaps news, the International Swaps and Derivatives Association has a funny blog.

Market reporting.

Here is Wang Xiaolu of Caijing magazine confessing on Chinese television to causing "panic and disorder":

"I acquired the news from private conversations, which is an abnormal way, and added my personal judgment and subjective views to finish this story."

That was apparently wrong of him? Though it is also kind of ... the job? China is not so big on financial blogging, is the conclusion I'm drawing here. Elsewhere, Felix Salmon wants to ban daily stock market reporting:

What did the Dow do today? It’s random, it doesn’t matter. If any newscast tells you what the Dow did today, they’re implicitly telling you that the Dow’s movement today is important. Which, it isn’t. If they tell you what the Dow did today every day, then they’re implicitly telling you that daily movements in the Dow are really important, important enough to get reported day in and day out. Which is insane. No one believes that.

The Mets beat the Phillies 3-1 last night to maintain a 6.5 game lead in the NL East, another piece of near-daily-reported news that is important to many people who read about it despite being of zero absolute importance.

Annie Leibovitz for UBS.

Sure why not:

Leibovitz has picked a handful of highly successful but non-famous subjects to photograph in the series, which aims to show that the bank is "human."

The print campaign shows figures pondering questions such as: Am I really making a difference? and Am I a good father? and aims to show how UBS can help customers make financial decisions about their future. 

Has there ever been a private-wealth marketing campaign that wasn't about whether the customer is a good father? Isn't the whole pitch of private-wealth management, like, "demonstrate your love for your children by giving them more money when you die"?

The KPMG club.

"KPMG to open own Mayfair members club" is the headline here, and every sentence is a delight:

The townhouse — “five floors in which to enhance your conversations and deepen your business relationships,” according to KPMG — boasts a restaurant, presentation suite, business lounge, meeting rooms and a bar with a terrace on the fourth floor.

“We thought we’d create a West End space for people to meet, mingle and touch down,” said Simon Collins, UK chairman of KPMG. “Non-execs who have lots of meetings can often find it pretty lonely if they don’t have a base. So this is somewhere they can go, drop a bag, get something typed, call a cab, have a shower, a coffee and a sandwich, and meet other people.”

But of course, as the "international financial set" knows, there's no such thing as a free shower and coffee, and at the KPMG club "entry comes at the price of having to talk to an accountant."

Car loan discrimination.

One weird aspect of consumer finance is that it tends to be cheaper the richer you are. This is not necessarily nefarious -- poorer people are worse credit risks, economies of scale make larger accounts more efficient, etc. -- but it is the opposite of how a lot of other industries work. Poorer people eat cheaper food than richer people, and first-class airline passengers cross-subsidize the people in coach. But in finance, poorer people get expensive payday loans while rich people get cheap securities-based loans, people who can't pay off their credit card bills every month cross-subsidize the people who do, and people who can afford to hire KPMG get free coffee and showers.

Here's a Wall Street Journal story about how the Consumer Financial Protection Bureau is fighting racial discrimination in car lending, which concerns related awkward cross-subsidies. A chunk of the price of car loans is left to the dealer's discretion, and it seems that dealers tend to take a bigger chunk from minority borrowers than they do from white borrowers. The CFPB is trying to reduce discrimination by standardizing the costs more. Which means that white borrowers can't get as much of a cross-subsidy from minority borrowers: The minority borrowers will tend to pay less than they are now, and the revenue will be made up by the white borrowers paying more. As the Journal puts it, "Crackdown on Racial Bias Could Boost Drivers’ Costs for Auto Loans." It is hard to think of any particularly good reason that minority borrowers should cross-subsidize white borrowers' car loans, but on the other hand it is easy to complain that the CFPB's crackdown "will invariably lead to many consumers paying more for auto financing," as an industry representative does.

People are worried about stock buybacks.

The most interesting person worrying about stock buybacks and short-termism is J.W. Mason, and he has a new post up on the topic of "Is Capital Being Reallocated to High-Tech Industries?" My naive optimistic model of buybacks is that big public companies did their innovating in the past, and that public capital markets are largely about returning money to shareholders, but that those shareholders can then take that money and reallocate it to smaller private companies whose innovation is in the future, or at least the present. Mason doubts this view ("I have a hard time imagining a set of institutions that reliably channel funds to smaller, newer firms but stop working entirely as soon as they are listed on a stock market"), and he looks at allocation of capital among industries:

In the simplest version of the capital-reallocation story, payouts from old, declining industries are, thanks to the magic of the capital markets, used to fund investment in new, technology-intensive industries. So the obvious question is, has there in fact been a shift in investment from the old smokestack industries to the newer high-tech ones?

His answer is basically nope: Since about 2000, the share of investment in high-tech sectors has been declining; it's been growing mainly in oil and gas. Elsewhere, Chinese regulators are calling for more stock buybacks.

People are worried about bond market liquidity.

Events of the last two weeks seem to have killed off, at least temporarily, the worry that corporate bond illiquidity might turn a crash into a crisis. But Treasury bond illiquidity is still a worry. Or, rather, Treasuries are quite liquid, but Treasury volatility, or Treasury market structure, still bother people. Here is the Financial Times on "proprietary trading firms," i.e., high-frequency Treasury traders in the interdealer market:

PTFs say their role was vindicated during the wild price swings on October 15 after a report by five US regulators showed that during a crucial 15-minute window — in which the 10-year Treasury yield plummeted 33 basis points before bouncing back up — PTFs were responsible for the majority of trading, amounting to more than 70 per cent of all activity.

“It underscored just how important a role PTFs play and how the banks aren’t the liquidity providers any more,” says Bill Harts, chief executive of Modern Markets, an industry association.

For critics, it showed a market reeling in shock, as banks pulled back leaving PTFs trading almost solely with each other, algorithm versus algorithm, exacerbating the price moves.

It is interesting to consider how completely the concerns about high-frequency trading of Treasuries recapitulate the concerns about high-frequency trading of stocks, even though most of the actual issues in stock trading -- market fragmentation, co-location, Regulation NMS, etc. -- don't exist in Treasuries. Elsewhere, here is a paper on "Insider Trading and Market Structure."

Things happen.

AQR: How Can a Strategy Still Work If Everyone Knows About It? Greenlight Capital is down 14 percent for the year and is surveying investors "to gauge their thoughts about the hedge fund and its accessibility." Service providers are asking to get paid in stock of their startup customers, which seems a little bubbly? S.E.C.’s In-House Judges Not Too Tough, a Review Shows. Bill Ackman's Tennis Protege Climbs Rankings to Make Open Debut. "The low crude price is putting US banks under pressure from regulators to move quickly in classifying oil and gas loans as troubled assets when borrowers slide into difficulty." Oil is up. Do Takeover Defenses Deter Takeovers? Tri-Party Repo Pricing. "Virtual currencies like Bitcoin create a new opportunity for expressing views on repugnance." The Mirage of Fannie Mae-White House Truce Talks. Brazil's Economic Crisis Is Destroying the World's Busiest Helicopter Market. Julian Assange was a rude houseguest. Chicago Cubs no-hitter indicator. David Bowie to write songs for SpongeBob Squarepants musical. College Football Grammar Power Rankings. World's longest yard sale.

If you'd like to get Money Stuff in handy e-mail form, right in your inbox, please subscribe at this link. Thanks! 

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

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net