Money Stuff

Unwanted Deposits and Bank Reshufflings

Also hedge fund statistics, equity derivatives, the debt ceiling, stock buybacks, etc.

No one wants your cash.

A bank is a magical place that transforms risky illiquid long-term loans into safe immediately accessible deposits. Like most magic, this requires a certain suspension of disbelief. We live in skeptical times, though, and people who would once have gazed with childlike wonder on the magic being worked by banks are now all like, well, that is kind of a risky mismatch, you should really hold a lot more capital against all those flighty demand deposits. And so you get stories like "Big Banks to America’s Firms: We Don’t Want Your Cash":

Many businesses have large sums on hand and opportunities to profitably invest it appear scarce. But banks don’t want certain kinds of cash either, judging it costly to keep, and some are imposing fees after jawboning customers to move it.

The banks’ actions are driven by profit-crunching low interest rates and regulations adopted since the financial crisis to gird banks against funding disruptions.

Corporate demand deposits are viewed as risky funding for a bank, which of course they are; have you seen that movie? And so regulators, who want to make banks less risky, discourage banks from taking that flighty short-term funding and investing it in risky loans. But the exact and only purpose of a bank is to take flighty short-term funding and invest it in risky loans. Everything else is ancillary. 

Fund advisers.

On Friday, the Securities and Exchange Commission "published a report that provides private fund industry statistics and trends, reflecting aggregated data reported by private fund advisers on Form ADV and Form PF," and it is kind of a delight. I mean, I struggle a little to find much meaningful information in the aggregates: The hedge fund industry (the majority of the assets covered by this report are in hedge funds, though private equity, venture capital and real estate funds are also represented) is too heterogeneous for generalizations to be all that useful. (The New York Times struggles too, pointing out as highlights that "The use of derivatives by funds rose to $14.8 trillion from $13.6 trillion, but derivatives made up a smaller portion of total net assets, 221 percent versus 256 percent," and that very very few hedge funds "use high-frequency trading strategies.")

But the report at least points to that heterogeneity. The SEC finds $3.4 trillion of net asset value in 8,635 hedge funds as of the last quarter of 2014, with $2.7 trillion of that in 1,541 "qualifying hedge funds," that is, funds with at least $500 million under management that are managed by advisers with at least $1.5 billion under management. Of about $2.7 trillion in qualifying funds, on my reading, 20.8 percent is managed by the top 10 advisers, and 30.2 percent by the top 20. So by my math the average top-10 hedge fund adviser has about $56 billion under management, while non-qualifying hedge funds -- the large majority of the funds reporting to the SEC -- average something like $100 million. 

Deutsche Bank.

I used to work at Goldman Sachs, where the cultural and structural divide is pretty clearly between investment banking, on the one side, and sales and trading, on the other, so it always puzzled me that the big universal banks tend to have divisions that are like retail banking, commercial banking, credit cards, mortgages, etc., and then investment-banking-and-sales-and-trading as one big unit. Investment banking and sales and trading seem so different! I suppose they are more like each other than they are like credit cards, but still.

I guess Deutsche Bank was never that big on credit cards, but now it will split its Corporate Banking and Securities business into two units, more or less Corporate Banking (and investment banking) and Securities (sales and trading). This comes as part of a bigger management reshuffling under new co-Chief Executive Officer John Cryan:

As part of the reorganization announced Sunday, Deutsche Bank will abolish its 19-member group executive committee as well as 10 of its 16 management board committees while expanding the board to 10 members from eight and supplementing it with four general managers.

“We want to create a better controlled, lower cost, and more focused bank that delivers long-term value to shareholders,” Cryan said in a statement.

Here is a guide to the changes, which also include splitting asset and wealth management in two (dividing high-net-worth clients and institutions/funds) and lots of personnel shuffling (including the departure of "several longtime executives close to recently departed co-CEO Anshu Jain" and the probable addition of "the first women on Deutsche Bank’s board since Ellen Ruth Schneider-Lenne’s death in 1996").

Elsewhere, Credit Suisse's strategy under Tidjane Thiam may follow the example of UBS, with "cost cuts, a sharpened investment bank focused more on equities and less on credit and currencies, and the possible disposal of Credit Suisse’s subscale U.S. private bank."

A story about equity derivatives.

I found this story a little hard to understand, and I used to sell equity derivatives for a living, but the gist of it seems to be that the government of Papua New Guinea bought a big chunk of shares in a company called Oil Search, funded and collared by UBS, in a deal that delighted bankers but is otherwise controversial:

Through a series of leaked documents and interviews Fairfax Media has reconstructed what UBS insiders describe as one of the "most amazing deals" the bank has ever done. Others, however, say the amazing part is that the bank was able to get away with it. They see a cash-strapped government getting stitched up.

Bankers often find that outsiders don't fully appreciate their most beautiful derivatives deals.

Speaking of unappreciated beauty, here is another somewhat hard-to-follow story about a banker who "claims he was fired so his boss could take the credit for his idea to save Barclays £51.5 million and boost his own bonus." Barclays Capital Services had done a 551.5-million-pound deal with an Italian bank that was then rejected by the Bank of Italy, which "left the Italian bank desperate to reclaim the fee they were in the process of paying to Barcap," apparently 51.48 million pounds. But "Barcap refused to give up their fee leaving the two banks in a standoff and staff desperate to rescue the long-standing profitable relationship." And in swooped our hero, whose "genius solution" was "an 'unwinding' or undoing of the original transaction which had caused the problem." I ... don't understand why that is genius? Like, one, that seems obvious, but two, I am not sure how it gets Barclays paid? Anyway now he's suing, so perhaps we'll find out.

A story about training quizzes.

Don't cheat on them? "Goldman Sachs Group Inc. is dismissing about 20 analysts globally in offices including London and New York after discovering they had breached rules on internal training tests," and JPMorgan "fired 10 employees for similar offenses last month." The question is whether this shows that trading is an industry full of cheaters, or whether it shows that trading is an upstanding business with zero tolerance for cheating. That is kind of a boring question though.

People are worried about the debt ceiling.

Look, people are incessantly, noisily worried about bond market liquidity, but I like to flatter myself that my sheer persistence in chronicling those worries in every single edition of Money Stuff has helped to get them attention in the corridors of power. Now we have a problem with the debt ceiling. The problem is that Congressional Republicans may refuse to raise the debt ceiling, leading to a catastrophic and pointless default by the U.S. on its obligations. On Friday, the Treasury announced that "There is Only One Solution to the Debt Limit," which is for Congress to raise the debt limit. Treasury specifically ruled out a couple of tricks to get around the debt limit: 

Some commentators have suggested that the President could invoke the Fourteenth Amendment of the Constitution as a justification for issuing debt in excess of the debt limit. Others have suggested that Treasury could mint and issue a large-denomination platinum coin to obtain cash without exceeding the debt limit.  But as we’ve said before, the Fourteenth Amendment does not give the President the power to ignore the debt ceiling. And neither the Treasury nor the Federal Reserve believes that the law can or should be used to produce platinum coins for the purpose of avoiding an increase in the debt limit. 

But another trick goes strangely unmentioned: There are those who believe that Treasury can issue super-high-premium bonds to raise money that is not subject to the debt ceiling. It's a little weird, and would require Treasury to change some of its own plumbing, but as an emergency measure it seems workable, and the time to change the plumbing is before the crisis. (I know, I know: That is bad game theory.) I don't know why Treasury didn't address this trick, but my worry is that it's just not on Treasury's radar. So if I can do my part to solve the debt ceiling crisis by ending every Money Stuff with "Debita impendiorum maximorum vendenda sunt," then that's what I'll do.

People are not worried about China selling Treasuries.

I keep reading articles about how no one is worried about China dumping all of its Treasury holdings, which makes me think I'm missing something. Here's the latest, from Bloomberg. Here are previous iterations from BloombergFT Alphaville, the Wall Street JournalBarron's, Slate, CNBC, and Noah Smith here at Bloomberg View. Of course Zero Hedge is worried. 

People are worried about stock buybacks.

My toy theory of stock buybacks is that the public equity markets are for returning cash to investors, and that those investors can then re-allocate that cash to earlier-stage, more innovative companies that need money in private markets. So if S&P 500 companies are spending almost all of their income on buybacks, that is not a sign that American capitalism is out of ideas; it is just a sign that the ideas are elsewhere. But here is J.W. Mason with a systematic demolition of that toy theory:

IPOs in 2014 raised a record $90 billion for newly listed firms. (Over the past ten years, the average annual funds raised by IPOs was $45 billion.) Secondary offerings by listed firms totaled $180 billion, but some large fraction of these involved stock-option exercise by executives rather than new funding for the corporation. Prior to an IPO, the most important non-bank source of external funding for new companies is venture capital funds. In 2014, VC funds invested approximately $50 billion, but only $30 billion of this represented new commitments by investors; the remaining $20 billion came from the funds’ own retained profits. (And there is some double-counting between VC commitments and IPOs, since one of the main functions of IPOs today is to cash out earlier investors.) Net commitments to private equity funds might come to another $200 billion, but very little of this represents funding for the businesses they invest in — private equity specializes, rather, in buying control of corporations from existing shareholders. All told, flows of money from investors to businesses through these channels was probably less than $100 billion.

Meanwhile, total shareholder payouts in 2014 were over $1.2 trillion. So at best less than one dollar in ten flowing out of publicly-traded corporations went to fund some startup.

People are worried about bond market liquidity.

Ugh, they just aren't this morning, sorry, though I'm jaded enough to expect that they will be again tomorrow. The rule of thumb is that if I can't find a bond market liquidity story on Monday, Beyoncé will release an album about bond market liquidity on Tuesday. Meanwhile, though, people are worried about bond market income. There isn't much of it, is the worry, and it creates weird dynamics for investors and issuers alike. 

Things happen.

Morgan Stanley Misses Estimates on Drop in Bond Trading Revenue. Wave of Megadeals Tests Antitrust Limits in U.S. Puerto Rico Governor’s Fiscal Oversight Plan Raises Doubts. China Economic Growth Falls Below 7% for First Time Since 2009. Report Warns of Chinese Hacking. Hedge Fund Saba Capital Calls Redemption Lawsuit A Malicious Attack, Denies Impropriety. South African Probe Finds Currency Traders Shared Details. Detention of networker extraordinaire Sam Pa creates shockwaves. Here at Bloomberg View, Antonio Weiss argues against re-privatization of Fannie Mae and Freddie Mac. Four Ways of Looking at a TBTF Subsidy. You don’t really need 8 hours of sleep. Abolish prison. Wealth therapy. ‘Pizza Rat Boulevard’ Briefly Comes to Brooklyn. Is the world real?

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