Chairmanships, Spoofers and Missing Gold

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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Bank of America.

"Stung by a wave of investor criticism, Bank of America Corp. is stepping up efforts to convince shareholders that Chief Executive Brian Moynihan should remain chairman," and I kind of don't understand the thinking here? In 2009 shareholders approved a bylaw requiring the chief executive officer and the chairman to be different people, and then in 2014 the board of directors changed the bylaw back without shareholder approval (because boards can do that), and Brian Moynihan was made combined chairman and CEO, and then shareholders complained, and then the board agreed to let shareholders vote on it, and now Institutional Shareholder Services and Glass Lewis and Mike Mayo think that the shareholders should vote to re-separate the roles, and what did you expect them to think? I mean, sure, there's a case that the chairman and CEO should be the same person ("The bank has argued that taking the chairmanship away from Mr. Moynihan could be a distraction and throw the bank back into a period of uncertainty"), and there's certainly a case that the board should get to decide ("bank officials have said board members want only the flexibility that almost all big U.S. companies have, to decide whether to separate the jobs"). But the way you make that case is, you go to the shareholders in 2014 and ask them to repeal the shareholder bylaw so that you can make Moynihan chairman. You don't repeal the bylaw yourself, present it as a fait accompli, and then act all shocked when shareholders complain.

Or do you? As a human, I think that if you want shareholders to trust you with more power, you have to give the barest indication that you're trustworthy, and that you care about what shareholders want. Obviously that is not what Bank of America's directors think. What do they think? Perhaps it goes something like: If you want shareholders to give you more power, you have to believe completely in the idea of director primacy. You have to truly, in your heart of hearts, think that it is illegitimate for shareholders to want any role in governing the company, and you have to demonstrate that belief by being high-handed and dismissive of shareholder concerns. If you give shareholders an inch, the thinking might go, then you're lost, and next thing you know you'll be separating your commercial bank and investment bank because some shareholder asked you to. Better to fight on everything, and distract the shareholders with basically symbolic animosity over the chairman/CEO thing, than to give ground on this and let shareholders think that they might have some substantive power. 


Here's a really cool Bloomberg visualization of some alleged spoofing in Treasury futures on the Chicago Board of Trade. The story is about a lawsuit in which HTG Capital Partners is alleging that some other CBOT participant has been spoofing the futures market, based solely on anonymous market data. "It takes a practiced eye to catch a spoofer in that maelstrom" of data; regulators and competitors "look for irregular patterns of behavior." But even with those patterns it can be hard to convince a fact finder that the data is manipulation, rather than just a computer changing its mind a lot.

Which is why the indictment of Navinder Singh Sarao, the accused "flash crash" spoofer, is so bizarre: It cites e-mails between Sarao and his trading software programmer in which Sarao says things like "[w]e now need to make it workable in terms of me moving the market like we discussed," and "If I am short I want to spoof it [i.e., the market] down," and "If I keep entering the same clip sizes, people will become aware of what I am doing, rendering my spoofing pointless," and "at the moment I'm getting hit on my spoofs all the time and it's costing me a lot of money." It's like a prosecutor's fantasy of a spoofing case, in which the spoofer (allegedly) lays out his evil intent in plain-English writing, rather than just encoding it in inscrutable algorithms and leaving it at that.

Deferred prosecution agreements.

Sometimes companies agree to give the government a big pile of money, and in exchange the the government agrees not to prosecute the companies, and then for extremely technical reasons a judge has to sign off on that agreement. And sometimes the judge thinks that the government should have prosecuted the companies, or that the pile of money should have been bigger, and refuses to sign off. Prosecutors (and the companies) find this extremely unsporting, and they are now appealing a judge's rejection of a deferred prosecution agreement:

Under the 1974 Speedy Trial Act, a defendant must be tried within 70 days of the filing of criminal charges. The federal statute allows judges to suspend the clock when “prosecution is deferred” so a defendant can demonstrate “good conduct.” Justice Department lawyers argue that the role of a judge in approving DPAs is only to ensure that prosecutors aren’t using them improperly to evade the time requirements. Anything more “trenches upon the prosecutorial discretion of the United States,” department lawyers wrote in a July legal brief.

My sympathies are probably with the prosecutors, but the thing is that if prosecutors want to not prosecute a company, they have all the tools they need to do that. I mean, I have all the tools I need to not prosecute a company, and I am successfully not prosecuting many companies right now. You don't actually need any tools. Just don't do anything. Prosecutors probably even have all the tools they need to not prosecute a company in exchange for a pile of money. If they can't get deferred prosecution agreements without substantive court review, surely they can get some other sort of agreement -- non-prosecution agreements? civil settlements? -- without that review. Prosecutors want the particular sort of leverage and legitimacy they get from a court-approved deferred prosecution agreement, but they could probably compromise a little on that.

Buy gold!

Here's a story about Bullion Direct, which let people buy gold to protect against, oh you know why people buy gold:

Austin machinist David Kirschner said he started buying metals from Bullion Direct in 2010 to protect himself against the inevitable collapse of the financial system. “Somebody’s going to get a big haircut, and I didn’t want it to be me,” he said.

It's him! "By the time auditors and lawyers got access to Bullion Direct’s 14th-floor offices six weeks ago, there were only a handful of gold and silver coins in an office safe"; some $30 million is missing, and "an attorney representing several creditors, predicted that investors can hope to recover 2 or 3 percent of their money, at best." The founder's lawyer says "We are cooperating with the investigations."

There is a deep lesson here, which is that even if someone has convinced you not to trust the fundamental institutions of modern society, that doesn't mean you have to trust him! Just because he's opened your eyes to the vast conspiracy of the modern financial system doesn't mean that he's not also running a smaller, more focused conspiracy to take your gold. 

Congress on Puerto Rico.

For some reason the minority staff of the House Committee on Natural Resources wrote a report about hedge funds and Puerto Rico. I suppose it's not like the official view of the U.S. government on the financial system or anything, but it is still worth flagging because it is so strange and bad. The basic story of hedge funds and Puerto Rico is pretty simple: Puerto Rico's bonds were trading at low prices because Puerto Rico seemed unlikely to pay them back, and some hedge funds bought those bonds because they thought that the market expectations were too pessimistic. And now those hedge funds are lobbying Puerto Rico to pay them back. This is how distressed debt investing works, always and everywhere, and the House staff is baffled and alarmed by it:

The Democrats’ study contended the hedge funds knew the bonds were risky and bought them anyway, and now are trying to manipulate the outcome of the crisis to maximize their profits at public expense.

The thrust of the report is that hedge funds knew there were risks to Puerto Rico bonds, and bought them anyway, and therefore should not get their money back. I am not unsympathetic to some mild form of that conclusion. But that argument can't be right: It can't be the case that anyone who knowingly invests in a risky proposition should just for that reason not get his money back. We want people to invest in risky things! Sometimes we even want people to lend to risky governments! Perhaps less than they actually do, but still. 

Mobile unicorn bubble.

"Mobile is frothy and bubblelike," says an analyst. "It’s a high-stakes game of Russian roulette," says a consultant. Apparently there are too many mobile internet unicorns, and the way you cull a herd of unicorns is with Russian roulette. That ... seems ... harsh? Unicorns are gentle creatures and unused to gunplay. Also I suppose there needs to be a special portmanteau for mobile unicorns? Like, any unicorn is mobile -- the car is the ultimate mobile device, but horses are fine too -- but that's not the point, the point is that any story about unicorns requires a new portmanteau. Mobicorns. Uniphones. Phonicorns. 

People are worried about stock buybacks.

Here is J.W. Mason on shareholder payouts:

In 2014, there were 15 corporations listed on US stock markets with total shareholder payouts of $10 billion or more, as shown in the table below. Ten of the 15 were tech companies, by the definition used here. Computer hardware and software are often held out as industries in which US capitalism, with its garish inequality and fierce protections of property rights, is especially successful at fostering innovation. So it’s striking that the leading firms in these industries are not recipients of funds from financial markets, but instead pay the biggest tributes to the lords of finance.

Number one on the list is Apple, with $56 billion in dividends and buybacks, and Apple, even post-Steve-Jobs-Apple, sits uncomfortably at the top of a list of proofs that stock buybacks hamper innovation. That $56 billion seems to be more than Apple has spent on research and development in its entire history. And yet Apple has built things. Which the market financed. Now the market is taking back what it's owed.

Number two on the list is Exxon Mobil, and Mason says that "It’s hard to shake the feeling that what distinguishes high-payout corporations is not the absence of investment opportunities, but rather the presence of large monopoly rents." True! But companies that exploit monopoly rents are exactly the companies that should be paying money back to shareholders! What else would they do with it? 

Meanwhile: Glencore Scraps Dividends, Raises Cash to Cut Debt.

People are worried about bond market liquidity.

This is a cheat, but here's a story about Element Capital Management, a hedge fund that buys a lot of Treasury bonds, and that is apparently making Treasury worry about, that's right, bond market liquidity. Or at least Treasury market volatility:

Treasury likes to know who is buying its bonds and why, partly because it prefers long-term holders such as pension funds, insurance companies and central banks. Treasury officials fear purchases by trading-oriented funds could result in sales that increase market swings and potentially drive up borrowing costs.

Remember that in the corporate bond market, the liquidity worry is that too many bonds are owned by buy-and-hold investors, the opposite of Treasury's worry that too many bonds are held by flighty hedge funds. Anyway this flighty hedge fund sounds fun; it's doing some of the when-issued Treasury auction trading that banks used to do but have cut back on since the financial crisis. See? Regulation has cut back on some of the intermediation that banks used to do in the bond market, but hedge funds are stepping up to fill the gap.

Things happen.

Liar Loans Redux: They're Back and Sneaking Into AAA Rated Bonds. ‘Strippers’ Pose Dilemma for Oil Industry. CTAs did well in August. This Planet Money episode about bankruptcy is really good. The developer of the VIX has every Bob Dylan album except one, but that one "was out of line." "Look, the mission is dreary, cost-effective shambling back and forth, day after day, between school, and store, and home, and work or station, until you die." Denny’s Market Researcher Emerges From Focus Group Shaken After Finding Out What Americans Really Want For Breakfast. "Measures of cognitive ability predict honesty, whereas self-report honesty questions and a consistency check among them are of no value."

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

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Matt Levine at

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