Taxes, Drugs and Commodities

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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Yahoo!?

When Yahoo asked the Internal Revenue Service to bless a tax-free spinoff of its Alibaba shares, the IRS declined with such intense passive-aggressiveness that Yahoo has apparently decided to go ahead with the spinoff and see if the IRS will do anything about it. From a securities filing yesterday:

On September 23, 2015, Yahoo’s Board of Directors authorized the Company to continue to pursue the plan for the Aabaco spin-off transaction as previously disclosed, except that completion of the spin-off will not be conditioned upon receipt of a favorable ruling from the IRS. 

Oh! If the IRS decides to fight the spinoff, and wins, the result "will be a blood bath from a tax point of view." As Victor Fleischer pointed out on Twitter, this seems like a very aggressive reading of the IRS's silence to indicate approval. It kind of seems like the IRS's silence might indicate something more like sullen grievance, and sullen grievance is of course a well-known precursor to litigation.

Valeant.

I feel like with just a few small tweaks the story of Martin Shkreli could be a very satisfying financial thriller. Shkreli, remember, is the guy who made his name as a biotech stock short-seller, then pivoted to running his own biotech company, which bought a generic drug called Daraprim, jacked up the price 5,500 percent, and defended that move by quoting Eminem on Twitter and giving terrible television interviews. Hillary Clinton came out with a plan to regulate drug prices and mandate more research and development spending. Biotech stocks fell. And yesterday Valeant, a very much bigger biotechnology company that also does more acquiring than in-house R&D, fell 16.5 percent -- losing more than $11 billion of market value -- on news that "Democrats in the U.S. House asked to subpoena the company for documents relating to drug price increases, the latest move by politicians seeking to curb price hikes on drugs":

"Valeant is using precisely the same business model as Martin Shkreli," the Democrats said in their letter to Chaffetz Monday. "Both appear to be engaging in the same business model of acquiring potentially life-saving drugs to maximize their own corporate profits."

So the tweak for my thriller is: What if the former-short-seller-now-biotech-CEO was actually still secretly short selling biotech companies? And concocted a clever plan to make the biotech industry look terrible and then profit from its misfortune and regulation? I suppose the idea is more general; you could, like, short banks and then go work at a bank and manipulate Libor. The point is, if you are going to bring your entire industry into disrepute, you might as well profit from the disrepute.

Glencore.

"People smell blood, and they are circling" commodity trading firm Glencore Plc, whose stock has lost 76 percent of its value since March and whose credit default swaps are now quoted upfront. "Investors are fleeing from a business they see as confidence-based, and therefore prone to unravel at speed." Glencore's production business has been hit hard by the commodities downturn, and its trading business has not cushioned it:

“They’d touted the trading business as being a less cyclical business that would stabilize the more cyclical mining business,” said Craig Pirrong, finance professor and commodity expert at the University of Houston. “But what’s happened is the extreme cyclicality of the mining business has compromised its viability as a trading company.”

In happier news, I suppose, Goldman Sachs's enforced-or-at-least-strongly-hinted-at-by-Congress retreat from some commodities businesses may have saved it from a similar fate.

Trump taxes.

Obviously Donald Trump's tax plan is a joke, but that is not unique to his plan; the important thing about Trump's plan is that it's a funny joke:

If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households – over 50% – from the income tax rolls. They get a new one page form to send the IRS saying, “I win,” those who would otherwise owe income taxes will save an average of nearly $1,000 each.

That is good comedy! It also strikes me as excellent politics; in the Trump world of winners and losers, telling people in the bottom half of the income distribution that they're actually winners is a very clever move. Otherwise the plan is a big tax cut for the rich, though it does contain some intriguing elements. "We will also phase in a reasonable cap on the deductibility of business interest expenses," says Trump's plan, following up on Jeb Bush's proposal to end the deductibility of interest on corporate debt. This is an idea that you hear a lot, mostly from the left-hand side of the economic spectrum, and I would not have expected it to become Republican orthodoxy. Especially from a (former?) real estate magnate. I gather real estate investing involves a lot of borrowed money.

Elsewhere in interest deductibility, here is a puzzle on leverage and tax rates from FT Alphaville. 

Enforcement.

Here's a $19 million Securities and Exchange Commission settlement with Hitachi, Ltd. for violating the Foreign Corrupt Practices Act. The allegations are that "Hitachi sold a 25-percent stake in a South African subsidiary to a company serving as a front for the African National Congress (ANC)," won contracts to build power stations in South Africa, and kicked back money to the ANC through dividends and "'success fees' that were inaccurately booked as consulting fees without appropriate documentation." One noteworthy fact here is that the U.S. securities regulator fined a Japanese company for bribery in South Africa, in an impressive bit of extraterritorial reach. In other (Volkswagen) news, the U.S. legal system "extracts bigger fines and more guilty pleas from overseas companies than from their American counterparts."

And in other SEC news, here's a case against Credit Suisse for "submitting deficient information to the agency over a two-year period about trades done by its customers"; the order is unbelievably boring, just series of small computer mistakes. Credit Suisse is paying $4.25 million to settle. Here's an enforcement action against a small New Mexico bank holding company for understating its loan losses in 2010 through 2012. 

And here is an insider trading case against two attorneys and an accountant for a board member of Pharmasset (and two further tippees), who allegedly "discussed the fact that the Pharmasset board was negotiating to sell the company at a significant premium" at the board member's "year-end personal tax and estate planning" meeting and then immediately went out and bought Pharmasset shares. This happened in Florida but really that is no excuse, come on, you can't do that.

People are worried about bond market liquidity.

When I say things like "people, as you may have heard, are worried about bond market liquidity," that is a bit of ironic understatement; I'm assuming you've heard. You're reading Money Stuff. I've mentioned it 92 times, give or take. More generally, if you work in the financial sector or consume financial media, it has been rather an intense topic of discussion. But I recognize that lots of people don't work in finance or consume financial media, and while bond market liquidity is a hot topic in finance, it has yet to displace, say, Taylor Swift in the popular imagination.

But last night Liquidnet ran a commercial about bond market liquidity on Monday Night Football, so I assume that the rest of America has now woken up to the terrifying reality that readers of Money Stuff have long been aware of (that people are worried about bond market liquidity). The ad coincides with the launch of Liquidnet's fixed income dark pool, which I suppose will solve the problem:

Liquidnet, the global institutional trading network, today announced the launch of their Fixed Income dark pool that facilitates direct, peer-to-peer trading of corporate bonds among asset managers in the US, Canada and Europe, creating a much-needed hub of institutional liquidity. Liquidnet has enrolled more than 120 asset managers, representing a critical mass of liquidity and a sizeable portion of assets under management for high yield and investment grade bonds in the US. At launch, the platform will enable trading for US and European corporate bonds (high yield and investment grade), emerging market corporate bonds, and European convertible bonds.

Elsewhere, Andrew Ross Sorkin reads the Saba Capital mis-marking lawsuit as a sign of bond market illiquidity to come

The lawsuit — and the valuation that the fund received — illustrate an issue that has been bubbling up over the last year: It is very possible that a liquidity panic could lead to the next financial crisis.

Consider the SEC's proposal last week to allow "swing pricing" in mutual funds, in which funds could "effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity" -- that is, charge redeeming investors for the liquidity costs of cashing them out. In some sense isn't that just what Saba is accused of?

Carl Icahn is worried about stock buybacks.

There's a very doomy 15-minute video at carlicahn.com titled "Danger Ahead" that was released overnight. It's sort of a Donald Trump endorsement, sort of an attack on Wall Street, there's some stuff about earnings quality, some complaining about zero interest rates. There are even some slides about how stock buybacks are bad, though Icahn does mention that Apple's stock buyback, which he demanded, is good. I really don't know what is going on. My tentative theory of Icahn is that he has spent the last few years more or less trolling public companies for fun, and it's been fun, but seeing Donald Trump trolling on a larger stage has inspired him to step up his own game. "A lot of people die fighting tyranny. The least I can do is vote against it," remains the inspirational quote (from Carl Icahn) at the top of the site.

Me yesterday.

I wrote about materiality and meetings between companies and shareholders.

Things happen.

European Dark Pools Brace for Continent-Wide Limits on Trading. U.S. transactions have "accounted for 50% of all fees paid to investment banks" so far this year, the highest proportion since 2002. Jack Dorsey really might end up running both Twitter and Square. The Trust Indenture Act and bankruptcy law. Axel Springer Buys 88% of Business Insider for $343 Million. Forex Scandal Drives Shift to Algo Trading. Mian, Sufi and Verner: Household Debt and Business Cycles Worldwide. Productivity measurement. Man camps. Hot hands. Corporate improvTontines.

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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