Coal, Drugs and Lawsuits

Also systemic latency, size discovery, TLAC and snacks.

Climate change. 

We talked on Friday about climate change and the First Amendment. The upshot was that it is not really okay for the government to dictate to companies what they can say to the public about disputed policy issues, unless those companies have publicly traded stock, in which case the government can do what it wants. Yesterday New York Attorney General Eric Schneiderman did, to Peabody Energy, a coal company:

“As a publicly traded company whose core business generates massive amounts of carbon emissions, Peabody Energy has a responsibility to be honest with its investors and the public about the risks posed by climate change, now and in the future,” Attorney General Schneiderman said.  “I believe that full and fair disclosures by Peabody and other fossil fuel companies will lead investors to think long and hard about the damage these companies are doing to our planet.”

Peabody and Schneiderman agreed that "Peabody shall not represent in any Public Communication that it cannot reasonably project or predict the range of impacts that any future laws, regulations, and policies relating to climate change or coal would have on Peabody's markets, operations, financial condition or cash flow." I suppose the point here is that Peabody does have internal projections about the potential cost of regulation, but it is a weird bit of securities disclosure. I mean, just factually, it seems like it would in fact be hard for Peabody to predict the impact of "any future laws." They haven't been written yet! What if Peabody's predictions end up understating the impact of these unknown future laws? Will Schneiderman, or investors, have a new case for fraud? I suppose that is the point.

Otherwise, Schneiderman's order also requires Peabody to refer to the International Energy Agency's more conservative case for future coal usage any time it also refers to the IEA's more bullish case, and regulates the "character size and font" of those disclosures. There is no fine for Peabody's previous disclosures, but I guess everyone else is on notice. 

Of course there are 50 states. If another state attorney general is a climate change skeptic, should he use his state's securities fraud laws to demand that Peabody also add disclosures questioning the link between coal and climate change? Schneiderman forbids Peabody from citing an optimistic report without also citing a pessimistic one; could another state demand that Peabody not cite pessimistic data without also citing optimistic data? If climate change is a political issue, should politicians fight it out in a public company's disclosure?

Elsewhere, "Oil glut to swamp demand until 2020." And: "Oil Price Drop Threatens Industries That Help Cut Global Warming." Here is Bloomberg View's editorial board on Schneiderman and Exxon Mobil. And a crazy-sounding story that Ben Carson tells about taking a fake exam at Yale seems to have been mostly true, though I feel like if I fell for that prank I would leave it out of my autobiography.


Valeant has a "business update" call this morning, and Bill Ackman had a call partly devoted to Valeant yesterday, and who can even keep the calls straight:

Correction: November 9, 2015 
An earlier version of a capsule summary on this article described Monday’s conference call incorrectly. It was a regular investors’ call; it was not a “marathon conference call,” which describes a call Mr. Ackman held on Oct. 30. 

I feel like if you have to choose an adjective to describe a Bill Ackman conference call, "marathon" is almost always a good bet? This one "lasted just under two hours," or a decent half marathon. Ackman said that "he was prepared to accept a 'fair degree of snide comments from the press,'" and I hope that I am included in that generous dispensation, because I cannot stop myself.

What have we learned? Not that much. Ackman thinks that Valeant's specialty-pharmacy problems are an immaterial distraction, and said that "the biggest regret I have with Valeant is that we’re not in a position to buy more." And he is probably right that some of the selling pressure on Valeant, and on other Pershing Square holdings, comes from "people betting against Pershing Square." But it has been a while since Valeant itself had much of substance to say about its situation, so today's call seems like a big one. All Valeant has really disclosed in the past week or so is that its chief executive officer got blown out of a margin loan, which, oops!

Elsewhere, Andrew Ross Sorkin ponders the morality of Valeant (and Burger King). And Citron Research, which seems to have caught but misdiagnosed issues at Valeant, is going after Mallinckrodt Plc. It is sort of impressive how much credibility Citron gained from its Valeant fight -- Mallinckrodt closed down almost 17 percent on Citron's tweet -- despite getting most of the substance wrong. 

Sad postscripts. 

"Pacific Investment Management Co. on Monday asked a California court to throw out the civil lawsuit of bond investor Bill Gross, saying the complaint is 'legally groundless' and a 'sad postscript' to a storied career," and I feel like I am going to start using "sad postscript" as an insult. I realize Pimco was talking about the lawsuit, not Gross himself, but it would be a really mean thing to say about a person. 

Anyway the lawsuit is incredibly silly and Pimco's motion to dismiss seems right, as you can sort of tell from the fact that Gross's lawyer said "We are disappointed that Pimco has chosen to use a procedural tactic to delay getting to the merits of the case." (Moving to dismiss a lawsuit for not having any legal basis is a bit more than a procedural delaying tactic?) But at the New York Times, Landon Thomas looks at one issue that Gross's suit raised, which is the rather hefty administrative fees that Pimco charges its mutual funds. The issue is that the overall expenses for Pimco's Total Return Fund are pretty low, but they are divided between a management fee and an administrative fee that is unusually high. "Not all investors grasp that one half of the fee they pay for investing in a Pimco fund goes to covering overhead," writes Thomas, though I'm not sure why they should care?

Elsewhere, "the ex-chief executive of Investment Technology Group Inc. is seeking $13 million from his former firm three months after being forced out" over a Securities and Exchange Commission investigation and fine, which is not a great look.

High-frequency trading.

In September, IEX filed paperwork to become a public stock exchange, and we talked about how IEX's quote-delaying magic shoebox fits a bit awkwardly with the SEC requirement that a price-protected public exchange can't use "any coding of automated systems or other type of intentional device that would delay the action taken with respect to a quotation." I assumed that other firms would object to the shoebox. Here is Citadel's objection, in a comment letter to the SEC:

IEX will presumably argue that the IEX Access Delay is no different than the latency that already exists on some exchanges with protected quotations. While it is true that any form of communication has some latency, any such inherent latency is not intentionally created for the express purpose of delaying access to quotations and applies equally to all order types and any exchange affiliated routing broker. In contrast, IEX plans to use a device specifically designed to add a deliberate latency of 350 microseconds in addition to any systemic latency that already exists, and to selectively apply that latency. That is precisely what Regulation NMS Rules 600, 610 and 611 prohibit.

There's a footnote citing me (and others) for that first sentence -- every exchange has some delay, and IEX's delay due to its shoebox might still be less than some exchanges' delay due to slow technology -- but I have to say that Citadel seems to be right on the letter of the law? Citadel also objects to the fact that IEX's own router will not be subject to the delay, which would "give the IEX Router an unfair competitive advantage over other routing brokers and IEX participants," and that non-displayed pegged orders on IEX will update without the delay.

Elsewhere, here is a paper by Darrell Duffie and Haoxiang Zhu on "Size Discovery":

Size discovery refers to the use of trade mechanisms by which large quantities of an asset can be exchanged at a price that does not respond to price pressure. Primary examples of size discovery include "workup," a trade protocol used in the markets for U.S. Treasuries and swaps, and block-trading "dark pools," used in equity markets. By freezing the execution price, a size-discovery mechanism does not clear the market, but overcomes large investors' concerns over their price impacts. Price-discovery mechanisms, which determine a market-clearing price by matching supply and demand, cause investors to internalize their price impacts, inducing costly delays in the reduction of position imbalances. We show that augmenting a price-discovery mechanism with a size-discovery mechanism such as workup or dark pools improves allocative efficiency. 

One thing that I sort of casually assume is that it is good for the market price to reflect supply and demand. It's good for small investors who want to buy at the fair price, it's good for the use of knowledge in society, and it also has a sort of quasi-moralistic appeal: The price should be the right price. But it has some disadvantages too. If prices react quickly to changes in demand, then it will be hard for smart investors to accumulate positions at attractive prices, which will make it less rewarding to be a smart investor, which will end up making prices less informative. Or, alternatively, it will lead smart investors to over-invest in sneaky wasteful strategies to avoid price impact. So dark pools and other methods to trade large size without price impact can be helpful for markets overall.


Here is David Zaring on Total Loss Absorbing Capacity, and how it fits with capital adequacy and the leverage ratio and the net stable funding ratio and the liquidity coverage ratio and the stress tests:

Without going too far down this road, I think that these varied sorts of capital measurement are basically supposed to discourage regulatory arbitrage, though it also suggests how puissant big banks must be in handling their regulatory requirements.  Not a place for a financial startup.  TLAC is also a tax on big banks, of course, and a disincentive to become one of the thirty largest institutions in the world.

The more different capital requirements you have, the less likely it is that a bank can load up on an economically risky instrument that happens to be favored by one of those requirements. Elsewhere, Paul Davies argues that the costs of TLAC will be pretty manageable, while George Hay says that TLAC will "make banking less global."


Here is a Bloomberg story about "Why Getting Rid of Free Office Snacks Doesn't Come Cheap." For me, one of the darkest days of 2008 was when Goldman got rid of free sodas on the trading floors. Average compensation was down almost $300,000 that year, but the soda is what scared everyone.

People are worried about stock buybacks.

Goldman Sachs expects S&P 500 companies to spend a bit over $1 trillion on dividends and buybacks in 2016, up about 7 percent from this year. For all the worrying about buybacks, they just keep growing. It is hard to point to many cases where a company was like, you know what, you're right, buybacks represent all that is bad about corporate short-termism, we will invest in cancer research instead. 

People are worried about bond market liquidity.

"Dealer inventories of long-term investment-grade bonds and high-yield bonds have turned negative for the first time since the NY Fed started reporting corporates separate from non-agency mortgage mortgage-backed securities," says Goldman Sachs, and "the more we study the problem, the more we are convinced that low market liquidity is the 'new normal' for corporate bond markets." I know the feeling! Elsewhere: the Bond market.

Things happen. 

The New Overnight Bank Funding Rate. Deutsche Bank poised to name investment banking leaders. Bank of America Cut Off Finance Sites From Its Data. Goldman Sachs Says Corporate America Has Quietly Re-levered. Beyond Banking. Tainted flooring. First you get the sugar, then you get the power. "Was Ben Bernanke the most powerful 'nice guy' in all of world history?" Video: 3-Eyed Catfish Caught in the Gowanus Canal in Brooklyn. (Or was it?) How to Run a Successful Conference Panel Discussion. Wine bunker. "Poop in a pill." Pizza rat robot.

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