Bad Bonuses and a Hedge-Fund Priest

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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Banker pay.

If you work at Deutsche Bank I guess you are excited for this?

John Cryan will aim to cement his reputation as an unflinching cost cutter when he unveils a new strategy for Deutsche Bank on Thursday — by reducing bonuses, slashing staff, selling assets and overhauling technology.

Cryan "has already warned colleagues that Deutsche has too many staff, with many paid too much for poor performance," and "has told staff that 'many bonuses will go to zero' this year." Deutsche will also be cutting back on interest-rate swap trading. You sometimes find people who are skeptical about whether anything has really changed in the financial industry in the wake of the financial crisis. But now Deutsche Bank -- Deutsche Bank! -- which had hoped to be the "'last-man standing' among European investment banks," seems to be going the way of the rest of the European banks, putting its faith in cost-cutting and focus rather than swashbuckling and universalism. That really is a big change.

Still, financial services remains the industry that pays MBA graduates the most, and "MBAs who work at Morgan Stanley took home the largest compensation packages, followed closely by alums at Goldman Sachs." Though here is a claim that "Junior bankers don’t do it for the money, and no amount of money would compensate for this lifestyle anyway." And elsewhere, "Pimco is overhauling a compensation system for senior staff which lies at the heart of co-founder Bill Gross’s $200m-plus lawsuit against the asset management group."

Bond exchanges.

Will corporate bonds one day trade on exchanges? Sure, why not:

Intercontinental Exchange Inc. said Monday it agreed to buy financial-data provider Interactive Data Corp. from private-equity firms Silver Lake and Warburg Pincus LLC for $5.2 billion. ICE outbid several other suitors, reflecting its view that there is big money to be made from bond-price data as the buying and selling of corporate debt shifts to electronic marketplaces.

And then there's:

Venture capitalist Peter Thiel and billionaire George Soros are leading a $25 million investment in electronic bond-trading startup TruMid Financial LLC.

The New York-based company is among a dozen firms competing to transform the corporate-debt market as worries mount over the difficulty of trading the $8.1 trillion of securities in existence. The investment, which was joined by Jeff Bahl, the former head of U.S. high-yield credit trading at Goldman Sachs Group Inc. and other individual investors, would value TruMid at more than $100 million.

Bahl says that "The business of trading bonds at banks is now glorified order taking," which I guess an exchange can do too. It probably is inevitable that bonds will eventually trade electronically, but boy have there been a lot of false starts in that direction.

Incidentally, here is ICE's press release announcing the Interactive Data acquisition, corrected for an awkward millions-for-billions typo. It came out at about 9:50 a.m. yesterday, after a trading halt. A reader e-mailed:

NYSE has recently started aggressively lecturing/warning its listed companies not to announce material info anywhere near trading hours. So it's kind of galling to see this come across the wire at 9:50 a.m.

It's true, the New York Stock Exchange (which is owned by ICE) has recently been pushing listed companies to try not to disclose material news during or near market hours. But no matter how good your intentions are, merger negotiations always have to come down to the very last possible minute.

Goldman and the Fed.

Rohit Bansal worked at the New York Fed for seven years, then left for Goldman Sachs, where "his boss assigned him to advise one of the banks he previously regulated." In doing that advising, he "received government information about that bank from Jason Gross, a former colleague who was still working at the New York Fed." He wasn't supposed to have that information, which "gave Goldman a leg up when advising the client," and when Goldman figured it out it notified the Fed.

Goldman now seems to be in line for a $50 million fine, and Bansal and Gross "will accept a plea deal from federal prosecutors that could send them to prison for up to a year." It's an interesting quasi-precedent for insider trading law. As I never tire of reminding you, insider trading is about theft, not about fairness: At its core, it punishes people who take a company's secret information and use it for their own purposes (by trading). This leads to all sorts of weird law about personal benefits and gifts of information, and all sorts of misconceptions about the purposes of the law. But, also: There are actually laws against theft! In this New York Fed case, there's no trading: The illegally obtained information was useful to Goldman in its advisory business, not to trade bank stocks. And yet prosecutors still found a way to punish it.

Hedge-fund priest!

This guy is too wonderful:

“My whole life I always knew things before they happened. I guess it’s just a gift from God,” said Mr. Lemelson, 39 years old.

He's a Greek Orthodox priest in New Hampshire who runs a $20 million hedge fund called Amvona Fund.

Mr. Lemelson said he asks his investors, who include 14 families, to follow two rules: Pray for the fund and disregard short-term performance. 

It seems to be working.

“I said, ‘They are going to have to bar me from the securities markets, because I would make too much money,’” he said.

He paused. “I’m not humble. I wish I were.”

Also this is quite a pivot: "Before ordination, he ran a website, also called Amvona, selling discount photography equipment manufactured in China."

Elsewhere, here is a claim that "You had to be a ninja to come away unscathed during this rally" over the past month, when the S&P has been up about seven percent. As a buy-and-hold indexer, guess what, I came away unscathed. On the other hand, "Odey Hedge Fund Said to Drop 17% in 16 Days as Markets Rally."

Mortgage-backed securities ratings.

Remember how there was a financial crisis? And a lot of mortgage-backed securities that had good credit ratings turned out to be terrible? And people got really mad at the rating agencies? And Standard & Poor's paid $1.5 billion to settle charges that its ratings were careless or conflicted? I guess the government keeps an eye on that stuff now. Yesterday the Securities and Exchange Commission "charged credit rating agency DBRS Inc. with misrepresenting its surveillance methodology for ratings of certain complex financial instruments." DBRS will pay almost $6 million to settle the charges, which related to its "ratings of U.S. residential mortgage-backed securities (RMBS) and re-securitized real estate mortgage investment conduits (Re-REMICs)." The wrongdoing here started in 2009, so was not crisis-related, and seems to have been due more to understaffing than to evil:

The DBRS surveillance analyst tasked with surveilling outstanding Re-REMIC ratings lacked the experience and expertise necessary to adequately do so and the firm did not have in place computer systems to help with Re-REMIC surveillance. Thus, the DBRS surveillance analyst only surveilled Re-REMIC ratings when his/her supervisors or personnel from DBRS’s rating group suggested that he/she monitor certain vintages and types.

The analyst "raised his/her concerns about the lack of sufficient resources to conduct adequate surveillance with his/her supervisor," but didn't get any help, an experience that I suspect is pretty common for financial services workers. For workers in general, really. But it takes on an added regulatory importance when the job that overwhelms you is rating mortgage-backed securities.

Elsewhere, there's a new Securities Enforcement Empirical Database.

People are worried about stock buybacks.

McKinsey & Company, though, is not, and published this interesting piece by Tim Koller titled "Are share buybacks jeopardizing future growth?" Koller's answer is that, one, we are not in an age of unusually high capital return, and, two, the capital return we do have is not impeding growth:

Distributions to shareholders overall, including both buybacks and dividends, are currently around 85 percent of income, about the same as in the early 1990s. Instead, the trend in shareholder distributions reflects a decades-long evolution in the way companies think strategically about dividends and buybacks—and, more broadly, mirrors the growing dominance of sectors that generate high returns with relatively little capital investment.

The case that I like to think about is Apple, which is very profitable and innovative and growing and so forth, but which has spent more on dividends and buybacks in the last three years than it has spent on research, development and capital expenditure in its entire history. If you think Apple shouldn't be buying back stock, what should it be doing? Or now there is Alphabet, which is literally working on human immortality, but still has $5.1 billion left over to buy back stock. If your thesis is that buybacks are hindering investment and innovation, what do you make of those companies' huge buybacks?

People are worried about the debt ceiling.

It looks like there's a deal? So I am less confident than usual that debita impendiorum maximorum vendenda sunt.

In tenuously related news, "Peter Rose, a Blackstone Group LP partner and its global head of public affairs, will retire after nine years at the alternative-asset manager." Money Stuff readers may be familiar with Rose's son Evan, who corrected my debt-ceiling Latin last week.

People are worried about bond market liquidity.

I feel like when we started talking about bond market liquidity, a lot of people were lumping too-slow trading of corporate bonds and too-fast trading of Treasuries into one vague notion of "bond market liquidity." But that seems to have changed over the past few months, to the point that now I feel a little silly linking to articles about high-frequency trading of Treasuries under the heading "people are worried about bond market liquidity." But, anyway, here is an article about high-frequency trading of Treasuries.

Me yesterday.

I wrote about Valeant and Philidor. I worry that I was a little too broad in saying "If you have an option to buy a thing for zero dollars, you own the thing." That is true if the thing is a limited-liability thing -- as corporate stock (theoretically) is -- but actual ownership tends to bring the risk of liabilities that the option (theoretically) avoids. My point was something like: The option structure was meant to avoid the liabilities of actual ownership, but may not have been entirely successful in doing so.

One other thing I forgot to say is that there's nothing lamer or more embarrassing that an embattled company can do than call up the SEC and demand that it investigate short sellers. But of course Valeant did that:

Mike Pearson, chief executive, said he had asked the US Securities and Exchange Commission to investigate allegations in a short-selling research note from Citron Research, run by Andrew Left, which wiped more than a third off the company’s shares by asking whether Valeant was “Enron part deux”.

Mr Pearson said: “[Mr Left’s] motivation is the same as one who runs into a crowded theatre and falsely yells fire. He wanted people to run. He intentionally designed the report to frighten our shareholders to drive down the price of our stock so he could make money for his short selling.”

Come on. Left couldn't resist the metaphor:

"Yelling, ‘Fire!’ in a crowded theater is a lot different than walking into a theater smelling smoke and yelling, ‘Hey everyone, there could be a fire,’" Left said. "One is irresponsible, another one is a duty."

Come on. Resist the metaphor! Look, the Citron note was overwrought, but it's ridiculous to try to blame Valeant's lost $23 billion of market capitalization over the past six days on one goofball short seller tricking everyone. Elsewhere: "It’s Crunch Time for the Hedge Fund that Helped Build Valeant."

Things happen.

Making Sense of Dell + EMC + VMware. The bridge champion who underwrites prop bets. Argentine bonds sizzle on surprise election result. Spoofing trial. "With so much money at stake, a chase by lawyers for top positions in the Volkswagen case has already begun." New York Bank Regulators Exit After Clash With Governor Cuomo’s Office. CDS is weird. "PE funds pay less, on average, than strategic buyers for comparable target corporations." Square slips back into a loss. In China’s Alleyways, Underground Banks Move Money. How I Would Launder Money With DraftKings. "My father gave me a small loan of $1 million." There are a lot of law students with sub-150 LSATs. "The newly elected city councilor's day job is Emperor at Palpatin Finance Group." The Renaissance Series. Inside London's Hedonistic, Polyamorous Unicorn Movement.

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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