Sanctions, Spoofers, Bits and Gold

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, Deutsche Bank.

One important lesson from the last few years of bank scandals is: Don't put it in writing. A lot of people got that wrong. Fine. But the really surprising thing is the number of people who came so close to getting it right, but for one small mistake. They knew not to put it in writing, and they told their colleagues not to put it in writing. Their mistake -- it is a subtle one -- is that they told their colleagues not to put it in writing in writing.

So convicted Libor manipulator Tom Hayes told a colleague to "make sure not to put it in writing" in an electronic chat that was read at a criminal trial this week. And a Deutsche Bank employee sent this unfortunate e-mail about how Deutsche Bank should evade U.S. Treasury Office of Foreign Asset Control sanctions against Iran and Syria:

"As usual, let’s not revert to the client in writing due to the reputational risk involved if the e-mail goes to wrong places. Someone should call [the client] and tell them orally and ensure that the conversation is not taped. . . . Let’s also keep this e-mail strictly on a ‘need-know’ basis, no need to spread the news in [Deutsche Bank’s Asian offices about] what we do under OFAC scenarios."

One wrong place that e-mail went was into this consent order with the New York State Department of Financial Services, in which Deutsche Bank agreed to pay $200 million for sanctions violations running from 1999 to 2006. Deutsche will also pay $58 million to the Federal Reserve. "Renee Calabro, a Deutsche Bank spokeswoman in New York, said the conduct ceased 'several years ago,' and the bank has since ended all business with the countries involved," though Deutsche Bank is still being investigated for "mirror trades" put on by its Moscow office pretty recently. 

Reading the Deutsche Bank order, I am struck -- as I was in the case of Credit Agricole -- by the fact that Deutsche's non-U.S. bankers seem to have perceived U.S. sanctions not as, like, "the law," but rather as just a source of danger that might lead to client money being, essentially, stolen on its way through the U.S. (Presumably in violation of Syrian or Iranian law!) Deutsche referred to sanctions avoidance as "OFAC-safe" practices, as though U.S. sanctions were just another risk factor to be managed. If you work in the U.S., Syria and Iran look like rogue states, but to the Deutsche Bankers covering the Middle East, the U.S. looked like the rogue:

While one of the main purposes of the nontransparent practices was to keep the Bank’s U.S. staff in the dark about the sanctions connections of the payments they were processing, Deutsche Bank New York staff occasionally raised objections to the Bank’s business relationship with U.S.-sanctioned parties based on U.S. law. Their European colleagues, however, did nothing to stop the practice but instead redoubled their efforts to hide the details from their American colleagues. 

Everybody spoofs.

I don't think that Michael Coscia should go to prison for years for spoofing in futures markets, but this seems a bit overwrought:

“The trading industry is shocked at the verdict,” said Leslie Sutphen, a former trading executive who is president at Financial Markets Consulting in Chicago.

“It seems that the Justice Department will define spoofing as excessive cancellation. If that is the case, then everybody spoofs. This will have a profound and negative effect on liquidity. 

The trial featured testimony about Coscia's expressed, albeit algorithmic, intent to manipulate markets with his big cancelled orders, and about his relative rates of cancellation of big (spoof) orders and small (executable) orders. It specifically wasn't "everyone who cancels a lot of orders is a criminal," though I suppose we could get there one day. (That would be bad!)

On the other hand, this seems wrong too: "Lawyers and analysts say the verdict clarifies the definition of spoofing." A jury verdict never clarifies anything! It's 12 laypeople who know nothing about futures markets, listening to testimony and deciding, sure, that guy sounds like a crook. "Jurors left the federal courthouse without commenting"; how could that provide a guide for anyone's future conduct? 

Here is a new guide to spoofing law from Milbank, Tweed, Hadley & McCloy LLP, which includes a good overview of the problems of proving intent:

In certain markets, traders are likely to offer a series of legitimate reasons for rapidly cancelling orders, including rapid changes in market conditions. Manual traders may argue that at the time they placed an order, they specifically intended that it be executed immediately or not at all—as with a “fill or kill” or “immediate or cancel” order. Such an order would be exposed for less time than a manual trader would have to react to market conditions—but that would not necessarily mean that the trader’s intent was to cancel. 

Heterodox monetary policy.

I guess I have to mention Representative Brad Sherman's argument to Janet Yellen about the timing of interest rate increases:

“God’s plan is not for things to rise in the autumn, as a matter of fact, that’s why we call it fall, nor is it God’s plan for things to rise in the winter, through the snow,” Sherman, a Democrat from California, told Yellen at a hearing of the House Financial Services Committee. “God’s plan is that things rise in the spring. And so if you want to be good with the Almighty, you might want to delay until May.”

I think he was kidding? It is still an amazing thing to watch. I am currently reading Roger Lowenstein's new book about the founding of the Federal Reserve, and isn't it just absolutely and continually astounding that the U.S. managed to get a central bank that is more or less insulated from this sort of thing? In any case, Bloomberg's Tracy Alloway points out that permanent ZIRP is actually mandated in the Bible. "What if God was one of us, just a dove like one of us," sings Matt O'Brien.

Elsewhere, Bloomberg's Zachary Mider has a delightful article about Sean Fieler, a hedge fund manager and sometime super-PAC founder who wants to go back to the gold standard. And here is Fieler's proposal for America to adopt "Bitgold," which appears to be just an ATM card with both "bit" and "gold" in the name? The amount in your account is linked to the price of gold, which is nice for you if the financial system collapses, though then what will you do with the ATM card?

Speaking of bits and gold, are you even the tiniest bit surprised that Overstock.com "has socked away $10.9 million in gold and silver and has a three-month food supply for each employee" to prepare for an apparently inevitable financial crisis and bank holiday? Overstock is I guess an online shopping company, but it seems to be mostly a laboratory of kooky monetary experimentation. Remember its cryptobonds, or its Marx-quoting purchase of an equity routing company for the purpose of "connecting crypto capital markets to existing national markets"? I am a little surprised that Overstock went with gold rather than bitcoins as a hedge against the coming collapse of the banking system, but either way food is a good choice. Food hedges more bad states of the world than either gold or bitcoins, unless it spoils.

In other bitcoin news, its price keeps going up, possibly because of an alleged Russo-Chinese bitcoin pyramid scheme, which is the most bitcoin possible explanation for why bitcoin would be going up. And elsewhere in monetary policy, Toby Nangle asks "to what extent have rising asset prices been a function of diminishing rather than improving prospects in the West?"

Valeant.

There is a lot of Valeant news. For instance:

But I would especially point you to this narrative of how Bill Ackman reacted to the recent allegations against Valeant:

Valeant’s stock plunged. Mr. Ackman telephoned Valeant’s CEO, pressing Mr. Pearson for explanations about Philidor and accounting issues. “Mike, is there any fraud going on at the company?” he asked.

Mr. Pearson told him he didn’t know of any fraud, but that the company would be investigating.

Mr. Ackman called his Pershing Square investment team. “We have two options: sell everything if there’s material fraud because the shares will go to zero, or buy now while the stock is a bargain. Nothing in the middle.”

Obviously sell-everything-or-double down is the classic decisive-hedge-fund-manager dilemma, but I am enchanted by imagining the conversation in which Ackman asked Pearson "is there any fraud?" and Pearson was like, um, I don't know of any fraud? Also if he did know of fraud, could he tell Ackman? What about Regulation FD? The whole conversation makes total sense -- of course you'd want to know if the company you invest in is committing fraud, and of course you'd ask the CEO -- but is also amazingly strange. 

People are worried about stock buybacks.

I often use "people are worried about stock buybacks" as a synecdoche for "people are worried about short-term thinking in public markets," so I am willing to shoehorn DealBook's entire special section on "The Long and Short of It" under this heading. I like the infographic about the causes and effects of short-term thinking, in which "Executives reward investors with stock dividends or buybacks" is just one strand in a complex network of forces. Journalists, who "are most interested in breaking stories, so they tend to focus on companies' short-term results or mistakes," have a perhaps surprising centrality in DealBook's network: There are five arrows going to or from the journalists, versus only four for corporate boards and three for activist investors. 

Other stories include the maturing of the activist investing industry, the fact that activists actually tend to be pretty long-term investors, and a man who hates ETFs. And there is "Risking Your Neck to Run With the Unicorns," about how liquidation preferences and down-round protections mean that those billion-dollar unicorn valuations may be misleading. But "the number is so important that 41 companies are valued at exactly $1 billion, a record, according to the venture capital research firm CB Insights."

People are worried about bond market liquidity.

How worrying is bond market liquidity? So worrying that there will be no Money Stuff tomorrow, because I will be spending the morning moderating a panel about bond market liquidity. (This is true.) While I'm gone, you might ponder Bank of America's warning that "dwindling liquidity in bond markets may get worse next year as more regulation hits the financial industry, raising questions as to whether rules are making financial markets safer." Or you could ponder a different Bank of America warning, this one about how "even mighty Treasuries have been affected by the liquidity crunch afflicting markets," as measured by the fact that daily changes in Treasury rates are now more affected than they used to be by heavy corporate bond issuance (and, I assume, the associated Treasury selling for interest rate hedges). Or you could just ponder what you are going to get the special lawyer in your life for "Love Your Lawyer Day," which is apparently tomorrow, making this a good time to remind you that nothing in this column is ever legal advice.

Things happen.

JPMorgan's Security Chief Jim Cummings Reassigned to Texas. Hedge Fund Managers' Paychecks to Shrink 9% Amid Weaker Returns. Big Banks Lock Horns With Personal-Finance Web Portals. Loeb Boosts Short Bets Citing Sloppy Accounting, Volatility. Tilton’s Patriarch Files Suit Against MBIA as Maturity on Zohar I CLO Looms. Two-month Treasuries. ECB graffiti. New York Attorney And Two Registered Brokers Arrested For Engaging In A $300 Million Market Manipulation Scheme. Former Employee Of Federal Reserve Bank Of New York Pleads Guilty In Manhattan Federal Court To Theft Of Confidential Information From The Federal Reserve. Guinness eliminating fish bladders to make beer vegan-friendly. Winterize your dog

As mentioned above, there will be no Money Stuff tomorrow, because of bond market liquidity. If you'd like to get Money Stuff in handy e-mail form, right in your inbox, please subscribe at this link. Thanks! 

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