Prosecution Policies and Unicorn Worries

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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That DOJ policy.

A strange idea that I hear sometimes is that no bankers have gone to prison for all the bank misbehavior of the last few years. It is strange because this stuff is a matter of public record and you can actually just go count the bankers who have gone to prison. Dozens of bank executives have gone to prison for bailout abuses. Others have gone to prison for mis-valuing securities or helping clients evade taxes or manipulating Libor. Others have been convicted for deceiving clients about bond prices, but are appealing and may avoid prison. Other bankers were prosecuted but found not guilty by juries -- for the tax evasion stuff, or for misleading hedge fund clients -- and there are more cases pending for mis-valuation and Libor manipulation and bond-price deception and probably some others. 

It is true that, you know, senior executives of Goldman Sachs haven't gone to prison for the financial crisis, but the simple explanation for that is probably that they didn't commit any crimes. (Disclosure: I worked at Goldman Sachs, and probably didn't commit any crimes.) The alternative explanation -- that prosecutors just don't want to prosecute individuals for committing financial crimes -- seems basically absurd to me, since I've met prosecutors, but again, a lot of people really seem to believe it.

Those people might be a bit mollified by yesterday's speech announcing this Justice Department policy memo by Deputy Attorney General Sally Yates urging prosecutors to prosecute more individuals for committing financial crimes. "The DOJ Is Finally Conceding It Prosecutes Corporate Crime All Wrong" is the Bloomberg headline, but I would not go so far. "Much of Ms. Yates’s memo codifies practices that were already in place in Washington and in United States attorneys’ offices that are accustomed to handling big corporate cases, like those in Manhattan and Brooklyn," reports the New York Times. (For instance, the memo provides that "Department lawyers should not agree to a corporate resolution that includes an agreement to dismiss charges against, or provide immunity for, individual officers or employees," but I can't think of a recent bank settlement that provides immunity for bank employees, and I feel like if that ever happened we'd have heard about it.) The memo doesn't seem like a big practical change, though it is meaningful as a symbolic expression of prosecutors' (fairly consistent!) desire to put more people in prison. "Crime is crime," said Yates, but that's a strange way of looking at it. Murder is crime, but lying about your age on Facebook might also be a federal felony. Those things are ... different. You've got to choose what to prioritize, and the DOJ's priorities seem to be shifting a bit toward going after individuals for financial crimes.

Are hedge funds fake?

Some hedge funds had a rough August. Of course a lot of people had a rough August -- the S&P 500 was down 6.3 percent, and don't even ask about the Shanghai Composite -- but the hedge funds tend to get more attention for it. Trian was down 4.8 percent, Paulson Partners was down 4.2 percent, Greenlight was down 5.3 percent, Third Point was down 5.2 percent, and Bridgewater was down 6.9 percent. The HFRX Global Hedge Fund Index was down 2.2 percent in August, though it beat the S&P for the month and is beating it for the year. Sheelah Kolhatkar argues that, since hedge funds broadly underperformed stocks in the bull market and are now only slightly outperforming stocks in volatile times, "maybe hedge funds are for suckers." I am not especially a believer in the notion of "hedge funds" as an asset class, or an index, or an undifferentiated mass: Some hedge funds pretty consistently provide alpha and some don't, and their alpha is against different betas, and if you've got a value-adding hedge fund that's appropriate for your investment objectives you are probably not a sucker. At the same time I don't think that saying that each hedge fund is a special flower is quite a defense to charges that the industry as a whole subtracts value.

Speaking of industries as a whole that might subtract value, S&P Dow Jones Indices came out with its mid-year "SPIVA U.S. Scorecard," which measures whether actively managed mutual funds beat their indexes. They don't especially:

Based on the June 30, 2015, SPIVA U.S. Scorecard data, 65.34% of large-cap managers underperformed the benchmark (S&P 500®, 7.42%) during the past one-year period. The figure is equally unfavorable when viewed over longer-term investment horizons. Over the five- and 10-year investment horizons, 80.8% and 79.59% of large-cap managers, respectively, failed to deliver incremental returns over the benchmark.

I suppose the fees are lower than at hedge funds.

Speaking of white collar prosecutions.

Benjamin Wey, who runs New York Global Group and helps Chinese companies go public in the U.S. through "reverse mergers," was indicted yesterday for fraud and market manipulation in connection with those deals. Wey's Swiss banker Seref Dogan Erbek was also indicted, and Wey and Erbek and others were also charged civilly by the Securities and Exchange Commission. Preet Bharara says "Ben Wey fashioned himself a master of industry, but as alleged, he was merely a master of manipulation," which is just a terrible line, but not worse than this:

On or about February 7, 2011, WEY sent an email to ERBEK stating, "Cleantech just traded at $4.50 per share. Please make sure the trader buys the stock at $5 per share, stay at $5 per share bid price, not less. Please make sure this happens right away." ERBEK agreed to do so, but cautioned WEY, "Obviously, we need to be careful to give such orders/make such comments. I may explain it over the phone; please call me if you have time." 

Good e-mail guys. The lawyer for Wey's former intern Hanna Bouveng, who recently won a lawsuit against Wey for sexual harassment and defamation, expressed unsurprise at the news.

Elsewhere: "Three Members Of International Organization Of Money Launderers For The Largest Drug Cartels Arrested," and I am always fascinated by international organizations of money launderers. Like, if you're an international organization of money launderers, are you more like a gang of criminals, or more like a bank? Are you basically in the financial services industry? Are you contemplating moving some of your back-office processes to the blockchain? Also I don't quite understand how this laundering worked:

The Enterprise typically paid Colombian pesos to the drug traffickers in exchange for their U.S. dollar proceeds of drug trafficking at a heavily discounted exchange rate, which reflected the risks incurred by the money brokers.  The Enterprise then located Colombian or other South American customers – usually businesses – that needed U.S. dollars to pay for imported goods or services.  They then sold the U.S. dollars to those customers, who used the money to purchase goods and services in China for resale.

But then did they launder the pesos? Or is it like, only dollars actually need to be laundered?

Elsewhere, here is James Stewart on "The Dubious Case of Dewey & LeBoeuf." Stewart once wrote a book about how people should go to prison for lying to prosecutors, so if even he is skeptical of the Dewey & LeBoeuf prosecution you probably should be too.

People aren't worried about bond market liquidity.

Apparently hedge funds are buying more Treasuries as banks are buying fewer. I guess that's not especially a liquidity story. One thing to think about the classic liquidity worry is that intuitive perceptions of who is a long-term stable investor are kind of wrong. Long-only buy-and-hold mutual funds actually have very unstable funding: Their investors can take their money out at any time, which could require the funds to dump bonds. On the other hand, fast-money hedge funds and flight-prone highly levered banks tend to have relatively more stable funding, and might be better situated to provide liquidity in a crash. If they want to.

Unicorns.

With the slow death of bond market liquidity worries I'm auditioning other recurring features for this space. "People are worried about stock buybacks" is a strong contender, but I am also contemplating "people are worried about unicorns." Or maybe "people are coining weird new unicorn words." Anyway Laura Olin's "Everything Changes" newsletter for the Awl today is titled "If unicorns were unicorns," and if you like deadpan nonsense about unicorns I recommend that you subscribe quick. A sample, based on the amazing New York Times headline "Unicorns Hunt for Talent Among Silicon Valley’s Giants":

“Giants are known for their out-of-the-box engineering thinking,” said Sparklecorn, director of HR at Spiral, an entertainment tech outfit that specializes in hoof games. “As a species, they tend to test particularly well on our aptitude assessments for creative problem-solving.”

Giants who are already settled in Silicon Valley have an advantage in the hiring scrum: relocation costs for those not already in Southern California can run high, as you'd expect when your tea kettle is as big as a two-story house. 

For worst results, read it with the Unicorn Replacer Chrome extension.

Elsewhere in unicorns, "Technology companies’ share of U.S. initial public offerings has fallen to a seven-year low," and people are worried about unicorns:

There are now at least 117 private companies valued by venture firms at $1 billion or more, nearly double the number from a year ago. Those investors could have trouble cashing in if the IPO market isn’t able to support even higher valuations.

Things happen.

Fortune's Most Powerful Women list.  Unravelling Russia’s offshore financial nexus. Banks' $3.2 Billion Payments Put Euro-Area Crisis Fund on Track. What caused the equity crash? Petrobras Crowned New King of Junk Bonds After Rating Downgrade. Insider trading during the 8-K gap. Optimal Delta Hedging. Life Inside a Chinese Bitcoin Mine. How Stanford Took On the Giants of Economics. "Spry." BIGLAW: A Novel. The Spee Club will go co-ed. The Year The Internet Ended. A theory of grammar. Can a Brand Meditate? People like puppies, and it’s a big problem for the economy.

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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