Altered Prescriptions and Golden Swanicorns

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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Oops, Valeant.

One thing that I will say about Valeant is that I am not at all an expert in U.S. health insurance law and practice, and you probably aren't either. So it is just about possible that this is not as bad as it sounds:

A specialty pharmacy that fills prescriptions for Valeant Pharmaceuticals International Inc. has altered doctors’ orders to wring more reimbursements out of insurers, according to former employees and an internal document.

But it sure sounds catastrophically terrible, no? "We have a couple of different ‘back door’ approaches to receive payment from the insurance company," said a Philidor training manual. In writing!

Today's big Valeant news was supposed to be Bill Ackman's conference call defending Valeant, but events have rather overtaken him. There's that Bloomberg article I just quoted on the prescription alterations, and a Wall Street Journal article about Philidor's sales tactics. There's the news that "the three largest pharmacy-benefit managers said they’re moving to terminate Philidor." That all led up to today's biggest Valeant news, which is "that it is severing all ties with Philidor Rx Services, LLC, and that Philidor has informed Valeant that it will shut down operations as soon as possible." Because of, you know. This stuff.

The positive view of this -- and other allegations against Philidor, for instance that it might waive insurance copays illegally -- is that it is standing up for doctors and patients against big evil insurance companies. That is the view of the managers of Sequoia Fund, Valeant's largest shareholder:

Clearly, Philidor exists to dispense Valeant-branded prescriptions to patients who might be asked to accept a generic substitute at a drug store. This bothers some observers, though every prescription that Philidor fills is written by a doctor who intended that the patient receive a Valeant drug. Our research suggests many dermatologists like Philidor and resent having their prescribing decisions questioned by managed care. 

Right? You say insurance fraud, I say champion of the little guy against the unfeeling health-care bureaucracy. But Valeant CEO Mike Pearson said: "We have lost confidence in Philidor's ability to continue to operate in a manner that is acceptable to Valeant and the patients and doctors we serve," so that's the end of the line for Philidor.

Here is an absolutely blistering post from John Hempton on the case against Valeant. "If this manual tells staff how to deceive insurance companies then it's a slam-dunk for systematic fraud," he writes. ProPublica has a story about how Philidor did not disclose that it was denied a California pharmacy license when it was buying up other pharmacies. Dan Davies says: "I think the question is no longer 'is it just Philidor' but 'is it just Valeant.'"

Crowdfunding.

Today the Securities and Exchange Commission will vote to approve final rules on crowdfunding:

Under current rules, only “accredited investors”—those whose net worth exceeds $1 million, excluding their primary residence, or who earn more than $200,000 a year—are allowed to participate in crowdfunding. The new rule would allow anyone to invest up to $2,000 or 5% of their annual income or net worth, whichever is greater, in small-scale fundraising projects up to $1 million in a 12-month period.

I wrote yesterday about a strange corporate governance fight at Facebook, and noted that many modern companies are not perfect fits for the traditional expectations of public stock markets. We have the Internet and the blockchain and so forth; technology has enabled new ways to invest in companies other than calling up a broker and asking him to buy 100 shares for you on the New York Stock Exchange. So I suppose this rule is good, though I mean, how many crowdfunding frauds do you think we'll see now? 

Crowdfunding company Fundrise applauded the new rules in a post titled "Crowdfunding Will Fund A Golden Swanicorn," in which its CEO Benjamin Miller says "I truly believe that crowdfunding will fund a cure for cancer," and if those aren't the two best sentences you read today you'll have a pretty good day.

In other crowdwhatevering news, "People Have Some Interesting Thoughts About Peer-to-Peer Lending." And you can apparently lease a car on the blockchain with your Visa card for some reason?

Meanwhile in regular unicorns.

One traditional expectation of public stock markets is that stocks have prices. Every day, every stock on every public exchange has a closing auction, and prints a closing price, and if you ask anyone what her Facebook stock is worth she can just look it up and say $104.88 per share with total confidence down to the penny. That is useful for lots of purposes. Mutual funds, for instance, which own stocks on behalf of investor clients, can tell their investors exactly how much their stake is worth, and can take new investor money -- or redeem exiting investors -- at exactly that value. This is not as much of a thing in many other areas of finance. Many bonds don't trade much, and you have to guess at their value; even bonds that trade frequently have only a last trade, not an exchange-endorsed "closing price." Loans, derivatives, etc. can be even worse. And shares of private companies, of course, trade rarely or not at all, so their valuations tend to be subjective and uncertain. I can tell you to the penny what EMC is worth, but the value of Dell, which is buying EMC, is a matter of debate and triangulation.

Here's a Wall Street Journal article about how a lot of big relatively vanilla mutual funds own shares in private companies, and aren't sure how to value them:

As of June 30, mutual-fund managers at BlackRock Inc. valued the firm’s stake in Uber at $40.02 a share. Hartford Financial Services Group Inc. said $35.67. Fidelity Investments said $33.32.

If you believe that the default trappings of public ownership have become less essential, and that private markets are the new public markets, then this is a bit annoying. It's not the end of the world -- sophisticated investors have put a lot of work into figuring out how to value their investments! -- but the old default expectations of public trading and transparent pricing did make a lot of things easier.

People are worried about bond market liquidity.

There are so many flavors of bond market liquidity, though, and so many unexpected pressures on it. Here is a delightful working paper from the Treasury's Office of Financial Research titled "Regulatory Arbitrage in Repo Markets." Banks borrow a ton of money in the tri-party repo market, posting collateral (a lot of it agency mortgage-backed securities) and getting very short-term cash loans. A lot of this borrowing is used to fund further repo borrowing by the banks' clients: A hedge fund owns an agency MBS, funds it by repoing it to the bank, and the bank funds it with tri-party repo. This is a fine, boring business.

But new capital and liquidity rules make it much more expensive for banks to do this trade. Well, sort of. Actually they make it more expensive for banks to do this trade once per quarter, when the banks' balance sheets are measured for capital purposes. So there is a distinctive pattern of repo usage dropping dramatically for one day at the end of each quarter:

Ha! If you are worried about bank regulation and regulatory arbitrage, this might bother you. It also has fascinating monetary-policy effects, as repo lenders (mainly money market funds) turn to the Fed's Reverse Repo program as a place to park their cash on the days when banks stop borrowing in the repo market.

But it might also bother you if you are worried about bond market liquidity, because when banks stop funding bonds in the repo market, they have to sell the bonds:

I show significant spillover effects from repo window dressing to other markets. If non-U.S. bank dealers window-dress to report lower leverage, then when they withdraw collateral from repo, they must also sell those assets. I use the Financial Industry Regulatory Authority’s (FINRA) Trade Reporting and Compliance Engine (TRACE) Agency bond transaction-level data from 2010 to 2013 in a time series regression with time-fixed effects for each quarter to test whether dealers are trading abnormally around the end of the quarter. I find that dealers sell heavily to customers in the last days of the quarter and immediately buy agency bonds back once the new quarter starts. In an empirical test of the theoretical findings of Froot and Stein (1998), I find that this self-imposed deleveraging causes a significant change in the market quality for agency bonds at quarter-end.

New dark pool.

Here's a Wall Street Journal article about Luminex, which will open next week as "a private trading platform designed to give the world’s largest asset managers a new place to buy and sell large blocks of stock." Luminex is a pure block crossing platform open only to "institutions with a billion dollars or more under management and a 'long-term investment strategy.'" The idea is that if one big long-term institution wants to buy a lot of one stock, and another wants to sell, they can find each other. The question is how often that will happen:

Some market observers said Luminex members could struggle to find others who want to buy when they want to sell, and vice versa, because they will often have largely similar investment ideas.

It also is unclear how much Luminex members will use the venue, said Justin Schack, a managing director with Rosenblatt Securities Inc. who studies the stock market. “There’s a natural ceiling to how much block trading will get done in this market in general,” he said. “It’s a small portion of the market.”

But that's fine: "Luminex will be another 'tool in the toolbox' of big institutions, said Robert Minicus, head of global equity trading at Fidelity." Luminex doesn't need to gain massive market share to be useful for its customers. This makes it a little different from bank-run dark pools, which all sort of aspire to be generally useful venues for finding liquidity whenever a customer wants it (so that customers trade with the sponsoring bank, and the bank avoids exchange fees). If you want your dark pool to be useful for trading every stock, every day, then just matching long-term institutional investors up with each other is probably not a workable strategy, which is why so many bank dark pools cater to high-frequency traders, and sometimes get in trouble for it.

How regulation works.

Neil Irwin makes excellent and important points on Wall Street regulation:

Many of the choices a president and his or her appointees make are not so much about “more regulation” versus “less regulation” as they are about “regulation that favors X industry” versus “regulation that favors Y industry.”

As I have said before, "Wall Street is not a monolith, and being 'tough on Wall Street' makes no sense." Any Wall Street regulation, no matter how tough, will be good for some elements of "Wall Street." The trick is for the regulation to be right, not tough.

In arguably somewhat related news, will Carl Icahn do what Elizabeth Warren couldn't and break up the too-big-to-fail banks?

Things happen.

Pfizer Deal for Allergan Could Spark Political Fight Over Taxes. People are not worried about the debt ceiling. People are not worried about Belarusian bonds. Earnings releases are happening earlier in the morning. New York Court Pans Merger Objection Lawsuit Disclosure-Only Settlement. Wells Fargo may not have enough TLAC. "Dozens of top brokers from Credit Suisse Group AG’s U.S. private-banking unit are unhappy over their proposed recruitment by Wells Fargo & Co." R.B.S. Profit Rises, Though Restructuring Costs Weigh Down Results. Will Shift in Insider Trading Spell a Comeback for Steve Cohen? Questions for Yanis Varoufakis. Lunch with Sepp Blatter. Remember, everything is a felony. Elizabeth Holmes is a Glamour Woman of the Year. Phil Falcone has fancy Halloween decorations. Floss startup. MBA game. Merger madness. Manspreading murderer. Wine pairings. Basic witch. 9/11 simulator. Seal punted

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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