Boutiques, Bonds and Trading Apps

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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Boutiques.

Here's a theory about the recent revival of investment banking boutiques:

“The deregulation of financial services starting in the early 1980s created an artificial revenue stream which gave the big banks a competitive advantage when it came to compensation,” says a senior executive at a large independent investment bank who asked not to be named. “The financial crisis ended that dynamic.”

Or here is how Blair Effron puts it:

“Dillon Read where I started was about providing intellectual capital. UBS [which acquired Dillon Read in 1995] was a provider of financial capital.” 

You can see why the universal-bank model would be attractive. Financial capital is in many ways so much more tractable than intellectual capital. You know how much financial capital you have. You can go to a pitch and tell the client, "we can lend you $X." Of course you can also go to a pitch and tell the client "we are really really smart," and believe me that is most of what investment bankers do, but proving that can be slow and tricky and elusive and hard to repeat. Financial capital scales, while if you're selling intellectual capital, you have to actually keep thinking; it is exhausting. And in a certain light -- the light of 2006 -- financial capital just looked more stable and predictable than intellectual capital; a business built on selling mortgage bonds seemed safer and more sensible than one built on selling ideas. Now, the opposite.

Sovereign debt.

A conceptual issue in sovereign debt restructuring is, should you distribute the pain evenly among different creditors, or should you distribute the value evenly? For instance: If you own $100 face amount of a 20-year bond previously trading at 60 cents on the dollar, and I own $100 face amount of a 1-year bond previously trading at 80 cents on the dollar, and the issuer defaults and hands out new 30-year bonds worth 50 cents on the dollar, should you and I get the same number of new bonds? Loosely speaking, U.S. corporate bankruptcy law would say yes: We each have the same $100 claim, so the specific terms of our bonds get washed away in the restructuring and we each get the same value, even though that hurts me more than it hurts you. But you could just as easily imagine different answers. For instance you could imagine a rule where everyone's maturity gets extended by the same amount, so you get new 25-year bonds, say, and I get new 6-year bonds. Anyway here's a story about the Ukraine restructuring deal, where "A group of bondholders owning the nation’s shortest-dated international debt said on Tuesday that the agreement is biased against them because their payments are delayed for more years than everyone else." They are hoping to adjust the package of new bonds to get a "uniform extension of maturities," so that their new bonds will come due before the new bonds given to longer-dated holders.

In other Ukraine news, here's "A short history of the world’s wackiest bond," the Irish-listed Ukraine bond owned by Russia with a debt-to-GDP-ratio redemption trigger and somewhat murky legal status. Meanwhile in Argentina, foreign exchange reserves are running low, but "The silver lining for creditors is that dwindling reserves will prompt the next government to negotiate a solution to a decade-long legal battle with holdout hedge funds in order to regain access to international capital markets." Argentina's default is weird because it was driven not by an economic inability to pay but rather by legal complications; the weird result is that, as Argentina's ability to pay gets worse, bondholders' chances of getting paid get better. And in sovereign-ish debt, Puerto Rico has put together "an economic recovery and debt-adjustment plan" that will project Puerto Rico's primary surplus as a starting point for debt restructuring negotiations. 

Customer service.

"United Continental Holdings Inc. Chief Executive Jeff Smisek and two top lieutenants stepped down as the result of a federal investigation," but not an investigation into whether cross-holdings of airline stocks by diversified mutual funds constitute a violation of antitrust laws, which, I remind you, is a thing that several law professors think. No, this is an investigation "into the airline’s relationship with the former chairman of the Port Authority of New York and New Jersey," and it is kind of amazing. Here's a Bloomberg article about it from a couple of weeks ago:

Halfway through dinner at Novita, an Italian restaurant in Manhattan, Port Authority Chairman David Samson surprised the group with a request of his own. He complained that he and his wife had grown weary of the trip to their weekend home in Aiken, South Carolina, because the best flight out of Newark was to Charlotte, North Carolina, 150 miles away. Until 2009, Continental had run direct service from Newark to Columbia, South Carolina, 100 miles closer.

In a tone described by one observer as “playful, but not joking,” Samson asked: Could United revive that route? An awkward silence fell over the table.

CLIENTS, amirite? I cannot help thinking of the Middle Eastern sovereign wealth fund official who got mad at his Bank of New York Mellon banker for not giving his son and nephew internships fast enough. The client (or whatever Port Authority is -- here sort of an investor) wants what the (human in charge of the institutional) client wants, and if what he wants is illegal, what do you do? Probably you fall into an awkward silence. United also revived the route, though, which has not gone particularly well for it.

Volatility. 

Here is Andrew Lo on algorithmic trading:

I think it’s doing two things. One it can be exaggerating the moves if it lines up with what the market wants to do. So if the market is looking to sell because of an impending recession, then I think we’re going to see a lot of the algorithmic trading going in the same direction. And if the time horizon matches, you will see that kind of cascade effect. At the same time, I think algorithmic trading can play the opposite role. They can dampen some of the market swings if they’re going opposite to the general trend... The one thing that is true, though, is that algorithmic trading is speeding up the reaction times of these participants, so that’s the choppiness of the market. Everybody can move to the left side of the boat and the right side of the boat now within minutes as opposed to hours or days.

And here is "Investment Strategies Meant as Buffers to Volatility May Have Deepened It," which feels somehow tautological, or semi-tautological, or tautological-in-practice. Meanwhile, "the 'risk parity' investment industry is fighting accusations it aggravated the recent market turmoil, accusing rivals of misunderstanding or scapegoating the strategy to excuse their own poor performance." And here is Tracy Alloway on volatility: "The dramatic events of last month underscore the degree to which the explosion in the popularity of volatility trading is now feeding on itself, creating booms and busts in implied volatility."

Trade it, trade it good.

Oh hey here's this:

Trading Ticket has developed a tool called Trade It that allows publishers, mobile-app developers and exchange-traded-fund issuers to facilitate securities orders from their websites or mobile applications.

A user reading an article about a technology stock on a financial-news app on his phone, for example, would be able to place an order to buy that stock directly from the app. The tool is linked to the user’s brokerage account, so the order would be executed by the broker-dealer rather than by the publisher.

Nathan Richardson, Trading Ticket’s co-founder and chief executive and a former Yahoo Finance executive, said the company’s technology reduces friction for retail investors by allowing them to trade quickly without having to switch among different websites or apps.

This is both a wonderful tech story and a wonderful finance story. One common complaint about Silicon Valley is that, for all its world-changing rhetoric, many of the hottest startups are actually in the business of making life slightly more convenient for upper-middle-class young men. Trading Ticket has raised $4 million from Citi Ventures and Peter Thiel's fund to save investors the trouble of switching between tabs.

On the other hand, one obvious problem with finance is that there's not enough friction for retail investors. You can see why it would be a good business to make trading more of a fun frictionless game, and to make impulse purchases of stocks easier. But it's harder to imagine it working out well for those retail investors. If you were designing a financial system from scratch, would you really want to make it easier for amateurs to walk around and buy stocks on their phones without doing any research?

Dying unicorns.

"VCs have 'Dying Unicorn' lists, but they aren't sharing them," is a real Fortune headline, and I would hope that they're at least not sharing them with their children. It could be traumatic for a child's first experience with mortality to be the death of a gentle and beautiful mythical creature, or for that matter of the fuel-cell and e-commerce and so forth startups that appear on these lists. Anyway, whatever you do, don't miss the picture with the article. 

Meanwhile in Ubercorn news, here's a profile of Uber and Travis Kalanick that is ... I mean, it is one thing to quote Ayn Rand, but then there is Kalanick's apprenticeship to Michael Ovitz, where people were criticized for being "'a Peter and not a Howard' — that is to say, a weak-willed conformist, like Peter Keating in Ayn Rand’s The Fountainhead, rather than its individualistic hero, Howard Roark." Kalanick's tastes improved somewhat later on, when "He wore a cowboy hat and referred to himself as the Wolf, after the cold-blooded, coolly rational fixer played by Harvey Keitel in Pulp Fiction." 

Dying foodyism.

My Brooklyn neighborhood Vietnamese gastropub advertises "Niman Ranch flank steak" on its menu, and I do not think that "Perdue flank steak" would have quite the same effect, but nevertheless Perdue is buying Niman Ranch. Meanwhile Lagunitas, which makes really good beer, is selling 50 percent of itself to Heineken, which makes, you know, beer. The transaction apparently drove Lagunitas's founder to write a long Tumblr post adapting the "God is dead" parable from Nietzsche's "The Gay Science" to apply to, I guess, beer. That all really happened. I don't quite know what it all means, but it does feel a little like the American food culture supercycle might be coming to an end.

People are worried about bond market liquidity.

This joke is also slowly dying, but news of its death hasn't reached every corner of the world yet, so you can still find some liquidity worrying if you look hard enough. For instance, in Japan, "The Bank of Japan is becoming increasingly concerned its massive government bond purchases are drying up market liquidity." And in Nigeria, JPMorgan is removing the country from a government bond index, which "will force funds to sell Nigerian bonds, triggering potentially significant capital outflows and raising borrowing costs for the government." 

Me yesterday.

I wrote about the civil and criminal fraud cases against three former Nomura bond traders who were allegedly a bit dishonest with their customers about how much they'd paid for some bonds. It is a weird time to be a bond trader.

Things happen.

J.P. Morgan’s Client ‘Steering’ Questioned. China Just Killed the World's Biggest Stock-Index Futures Market. You can compare European and U.S. bank leverage ratios now. Malaysia’s 1MDB Fund Scandal Spreads to U.A.E. Alleged market manipulation at a digital video company. Alleged undisclosed perks at MusclePharm. Harvard Endowment First in Pay Raises, Last in Ivy Performance. Starting a Business is Easy (for Harvard Business Grads). Harvard Seen Forgoing $108 Million a Year Divesting Fossil Fuels. Dustin Curtis on fixing Twitter. "This kind of market." Money solves problems. Russian five-year-olds dig their way out of nursery to buy sports car. Space whiskey.

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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 of this story:
Matt Levine at mlevine51@bloomberg.net

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