Activism, Fantasy and Pig Roasts

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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Activism.

I suspect that something like what happened to the notion of "hedge funds" is happening to the notion of "activism." Once upon a time, each industry was the province of a few smart pioneers plucking low-hanging fruit and making a lot of money for themselves. But as those pioneers got rich and famous (especially in activist investing, where notoriety is essential), they attracted imitators, ran out of low-hanging fruit, and drifted a bit stylistically, to the point where now it is almost as meaningless to talk about the performance of "activist hedge funds" in the aggregate as it is to talk about the performance of "hedge funds" in the aggregate. Similarly, talking about the effect of "activists" on companies seems too diffuse: Which activists, which companies, which proposals?

Here is a big Wall Street Journal report on activism that comes to similar conclusions: "Activism often improves a company’s operational results—and nearly as often doesn’t." Or even better: "The focus is changing to whether the idea is good or bad." (What was it before?) There is also a report card examining the performance of various activist campaigns, with ValueAct Capital Management and Relational Investors performing well, and being nice about it: "ValueAct and Relational, which typically eschew bitter public battles in favor of working with management behind the scenes, were also among the most successful at getting on the board of target companies." 

Draft duel.

Insider trading in daily fantasy sports is a little like insider trading in the lottery: Oh, sure, it undermines confidence in the integrity of the system, but did you think you were going to win? You weren't going to win. You could lose to Saahil Sud, a data scientist who "enters hundreds of daily contests," "almost always trounces the field," and "claims to risk an average of $140,000 per day with a return of about 8 percent." Or you could lose to this guy:

The statements were released after an employee at DraftKings, one of the two major companies, admitted last week to inadvertently releasing data before the start of the third week of N.F.L. games. The employee, a midlevel content manager, won $350,000 at a rival site, FanDuel, that same week.

Why would you care? I get that the argument about insider trading in capital markets is that it undermines incentives to efficiently allocate capital and discourages people from investing for retirement, but no capital allocation is being done here, and no one should invest their retirement savings in fake sports. 

Tax-haven sex mansion.

Here is Zeke Faux on two ex-Orthodox Jewish ("'The first cheeseburger,' he says, 'was f---ing awesome'") merchant cash-advance brokers who got rich, sold their company, and moved to Puerto Rico:

With a pound of lox as a housewarming gift, I’ve come to their tax-haven sex mansion to hear their improbable story—how two sons of an ultrareligious Jewish neighborhood in Brooklyn witnessed the birth of a new kind of lending, made a fortune, and then saw it all come to an end. Not in the form of an FBI raid, but with Wall Street bankers paying millions to take over the action.

It's all like that. The line between the guys like this who end up with FBI raids and the guys like this who end up with pig roasts in the tropics is very narrow and technical. These guys, for instance, got their start making small-business cash advances at 250 percent interest, "10 times the legal limit in New York state, which made it a crime in the 1960s to charge more than 25 percent." But because the advances weren't documented as loans ("merchant cash-advance companies argue they aren’t actually charging interest—they’re buying the money businesses will make in the future, at a discount"), they weren't subject to usury laws, and everyone got rich instead of going to jail.

Seating charts.

Here is a story about Abacus Federal Savings Bank, a small community bank serving Chinese immigrants in New York, which was indicted by New York prosecutors in 2012 for mortgage fraud. A lot of employees in the loan department admitted to falsifying mortgage documents, but "there was no explicit communication from any senior management condoning any of" the misbehavior, and the issue was whether the bank and its managers were complicit:

No one disputed that the bank had approved false loan applications. But, whereas Abacus blamed rogue employees, prosecutors insisted that those employees were executing a tacit policy of the bank. At one point, a prosecutor presented a diagram of an open-plan office in the Abacus loan department, showing who sat where and what wrongdoing each employee had admitted. The desks effectively encircled the desk of a supervisor who was now a defendant. How could he not have known what was going on all around him? the prosecutor asked.

I know that the conventional wisdom is that it's hard to prove financial fraud cases, but I often find myself fascinated by the low standard of proof in financial crime cases. Here prosecutors were tasked with proving beyond a reasonable doubt that a person had committed a serious crime, and they did it by pointing out that he sat near people who committed crimes. (I mean probably other things too, but still.) It didn't work, though: The jury found the bank and the managers not guilty. Which seems like more or less the right result. Abacus comes off as having worked mostly with good intentions to get people into homes, and it made pretty good loans, with "a delinquency rate less than a twentieth of the national average." "This case just involved a terrible example of poor judgment by the prosecutor," says a former prosecutor.

Conflicts of interest.

Here is an attack on Better Markets, the pro-regulation lobbying group that is often allied with Elizabeth Warren, that is interesting though a bit breathless. It accuses Better Markets of "failing to adequately disclose its relationship" with its hedge-fund-manager founder Michael Masters, even though that relationship seems to be fully disclosed, and it insinuates that Masters was shorting Prudential and MetLife while Better Markets was arguing to have them regulated as "systemically important," even though the only evidence for that is that Masters was long call options on Pru and Met. (But, sure, options are a volatility bet.) But it does seem to be hard to find people with strong views on financial regulation who don't also have some stake in the outcome; call options aside, bank regulation -- what businesses banks can be in, what funding they can provide to clients -- has implications for hedge fund managers too. Elsewhere, Robert Litan defends his research on the Labor Department's proposed fiduciary standard for retirement advisers. 

The financial crisis was stressful.

I have always found arguments about whether the government "could have" saved Lehman Brothers to be a little sterile and beside the point, but people love them, so here is Andrew Ross Sorkin on Ben Bernanke's book:

“In congressional testimony immediately after Lehman’s collapse, Paulson and I were deliberately quite vague when discussing whether we could have saved Lehman,” Mr. Bernanke writes. “But we had agreed in advance to be vague because we were intensely concerned that acknowledging our inability to save Lehman would hurt market confidence and increase pressure on other vulnerable firms.”

Now, however, he appears to have some misgivings about some of those early statements. “I wonder whether we should have been more forthcoming, and not only because our vagueness has promoted the mistaken view that we could have saved Lehman.”

There you go. If you do like this sort of thing, I recommend Philip Wallach's book "To The Edge," a refreshingly sensible look at what powers the government actually had in dealing with the financial crisis and where it got them from. And here is Tyler Cowen on Bernanke's book:

Greenspan’s marriage proposal to Andrea Mitchell was riddled with his trademark ambiguity. Bernanke, in contrast, proposed after two months of courtship.

Meanwhile in tech.

Somehow Twitter made a dramatic multi-day news story out of naming its current CEO, who is also its former CEO, its new CEO, which seems about right. But now it is official that Jack Dorsey is back in charge. Yaaay. He is also in charge of Square, which "is preparing for an initial public offering that could come before the end of the year." "Jack Dorsey’s Dual C.E.O. Role Raises Questions for Square" is the headline on that article; "Multitasking Could Hamper Jack Dorsey at Twitter" is the headline on this one. Super, super. Here is a plea for Twitter to become more open, but honestly I am sort of tired of shouting into the void about what Twitter should do and am going to give Dorsey some time to figure it out. In the morning. Before leaving for Square in the afternoon. (Really.)

My Bloomberg View colleague Justin Fox calls Twitter "America's most entertaining corporation," but consider, if you will, this series of words about Zappos:

I asked Williams about the badges. “There was just an email—finally, everyone's been waiting on it—probably 15 minutes before our call, from Tony's circle, the People Pool & Comp circle, and they have come right out and said explicitly now that in the future they're moving the compensation structure to badging skill sets that you bring to the workplace.” The email she mentioned, also known as a “shard” from Glass Frog, included a link to the new compensation policy, which outlined a labyrinthine process that has defeated my most strenuous attempts at comprehension. At Zappos, Williams said, the traditional HR concept of a career path is out the window. “We're being encouraged to think in terms of a choose-your-own-career adventure.”

What?

IEX pegs.

A while back we talked about IEX, the "Flash Boys"-approved dark pool that is filing to become a stock exchange, and I wondered about how IEX's famous "magic shoebox," which delays orders to reduce the advantages of high-speed traders, would work on a lit exchange. I asked readers to tell me how to game IEX's delay, and here is an entry from Kipp Rogers arguing that IEX's "midpoint peg" order type allows for "something like a 'conditional' last look," and that "IEX claims to have fixed all race conditions, but they have only fixed one, and by doing so they’ve created others." Maybe, though this gaming seems sort of probabilistic, and hard to characterize as "front-running."

Gawker interviewed Anthony Scaramucci.

Highlights of this include Scaramucci's cousin Sandra:

My cousin Sandra was calling my mom and said “I’m just so happy that Donald Trump is giving it to the hedge fund managers!” And then my mom said, “Wait a minute, my son Anthony’s in the hedge fund business!” And she said “Oh, I didn’t know that.” And P.S., she doesn’t even know what a hedge fund manager is.

And his advice "to a high school kid from a poor area who doesn’t want to be poor when they grow up":

The third thing—and probably I should have said it first—you’ve gotta stay off drugs. The temptation is gonna be there for you to buy and sell them. The temptation is gonna be there for you to use them. But what we know is that once that circuit starts, that’s a severe compounding negative feedback loop that leads to a disaster.

People are worried about bond market liquidity.

Every time things get a little quiet on the liquidity front, some central bank puts out some massive thing about bond market liquidity, and I wearily climb back on this dead horse. Now it's another six-part series from the New York Fed, following up on a five-parter in August. At least the goal of this one seems to be to end the worries about bond market liquidity, to which I say: Good luck with that, New York Fed! Seriously I am rooting for you. From the first installment:

In conclusion, the price-based liquidity measures—bid-ask spreads and price impact—are very low by historical standards, indicating ample liquidity in corporate bond markets. This is a remarkable finding, given that dealer ownership of corporate bonds has declined markedly as dealers have shifted from a “principal” to an “agency” model of trading. These findings suggest a shift in market structure, in which liquidity provision is not exclusively provided by dealers but also by other market participants, including hedge funds and high-frequency-trading firms. 

Larry Tabb argues that spreads should be lower, since in an agency model dealers aren't being compensated for taking risk, but I don't think that negates the Fed's point, which is that if investors can trade bonds cheaply and without moving the price much, then from their perspective liquidity seems pretty good. And the second installment this morning argues that liquidity risk (measured by jumps in illiquidity and volatility, as well as by CDX implied volatility) also seems to be under control:

While some market commentators are concerned about a decrease in liquidity, or perhaps an increase in liquidity risk in credit markets, we are not able to detect such changes. Current metrics indicate ample levels of liquidity in the corporate bond market, and liquidity risk in the corporate bond market seems to have actually declined in recent years. 

"It’s Official, There’s No Bond Liquidity Crisis," writes Bloomberg's Lisa Abramowicz. But there is some bad news: Part 3 of the series worries that liquidity risk has risen in the Treasury and equity markets. I suppose I will withhold judgment until the upcoming installment on "Redemption Risk of Bond Mutual Funds and Dealer Positioning."

Me yesterday.

I wrote about the Newman insider trading case, which now seems to be over.

Things happen.

Congress might cut banks' dividends from the Fed and use the money for highway construction. Winklevoss Twins Win Approval to Open Bitcoin Exchange. Sex, Betrayal and Bond Traders: The Fall of American Apparel. "The past year has been pretty horrendous" for Armored Wolf. SEC Charges Bristol-Myers Squibb With FCPA Violations. Three BIS papers on the lender of last resort. What If Everyone Indexed? Donald Trump is good at Twitter. This Tory Donor Was Secretly Filmed Dropping Cash-Stuffed Rucksacks At Post Offices. Ban driving. Double-sided pizza. Sexy Pizza Rat. Florida Senate candidate admits to sacrificing goat, drinking its blood.

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(Corrects spelling of Philip Wallach's name in sixth item, and Justin Fox's name in the seventh.)

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