Money Stuff

Sports, Beer and Naked Shorts

Also Valeant, unicorns, buybacks, liquidity and swap spreads.

Draft Duel.

"Daily fantasy sports is neither victimless nor harmless," says New York Attorney General Eric Schneiderman, and any time a prosecutor says that you should be suspicious. Nobody announces a murder indictment by saying that murder is harmful. People know that murder is harmful. Daily fantasy sports is (are?) considerably more debatable. On the other hand, Schneiderman, who yesterday told FanDuel and DraftKings to stop accepting entries in New York, is surely right that online daily fantasy sports is gambling. Here is his letter to DraftKings with his reasoning, which includes the phrase "The illegality of DFS is clear from any reasonable interpretation of our laws." It also analogizes daily fantasy sports to betting on games, which is right, and distinguishes it from "traditional fantasy sports" that reward skill over a full season, which is also right. And, refreshingly, it doesn't mention the sort-of-insider-trading stuff at all. It's just: Daily fantasy sports is gambling, gambling is illegal, ergo daily fantasy sports is illegal. FanDuel's best counterargument -- and it is not a trivial one -- seems to be, well, why didn't you shut us down sooner then? From its response:

The game has been played — legally — in New York for years and years, but after the Attorney General realized he could now get himself some press coverage, he decided a game that has been around for a long, long time is suddenly now not legal. We have operated openly and lawfully in New York for several years. The only thing that changed today is the Attorney General’s mind.


Valeant's big conference call yesterday was pretty meh -- the stock was down all morning, the Q&A began with a warning that Valeant wouldn't answer specific questions about Philidor, and the CEO said inspiring things like "The company is going to survive" -- but much more interesting is this Wall Street Journal article about Ruane, Cunniff & Goldfarb's Valeant research. That's the firm that manages the Sequoia Fund, Valeant's largest shareholder, and it was worried. So it did research. That is, it called up former Philidor employees and asked them what was going on:

Staff from Ruane Cunniff paid ex-employees and pledged to keep names of those they spoke to confidential, said David Poppe, the firm’s president. He said the firm paid $1,000 to talk with one former employee for two hours and discussed giving that ex-employee several thousand dollars if the person would keep Ruane Cunniff exclusively apprised “about what was happening at Philidor,” though the firm eventually decided against entering into any further arrangement.

“We went into our own due diligence phase, and we reached out to a number of people. Some of them wanted to be paid for their time, and we did pay them for their time,” Mr. Poppe said. He said Ruane Cunniff told every person it spoke with that it “did not want them to violate any nondisclosure agreements they had signed with Philidor.”

This all seems to have been lawyer-approved, and Ruane Cunniff didn't end up selling, but I must say that Valeant continues to be a fascinating laboratory for intuitions about corporate disclosure, insider trading and conversations between companies and investors generally. 

Elsewhere, Safeway seems to have given up on a $350 million deal with Theranos after employees had some doubts about Theranos's technology.


"Anheuser-Busch InBev NV made a formal $107 billion offer for SABMiller Plc, sealing a long-anticipated deal that combines the world’s biggest brewers into a company controlling about half the industry’s profit," and the agglomeration of industrial beer really is an amazing thing to behold:

A tie-up between the two beer companies, if it gets the green light from regulators, would bring AB InBev brands such as Budweiser, Corona and Stella Artois together with SABMiller’s Grolsch and Peroni, and give the combined company a major presence in the U.S., China, Europe, Africa and Latin America. Together, AB InBev and SABMiller sell more than 30% of the world’s beer.

Obviously antitrust regulators are interested, and "to gain regulatory approval, Molson Coors Brewing Co. will acquire SABMiller’s 58 percent stake in MillerCoors for $12 billion, giving it full control over brands like Coors Light and Blue Moon." There are other industries -- banking, obviously, and it's sometimes talked about with social media and other bits of Internet plumbing -- where people address antitrust concerns by calling for the monopoly to be recognized and regulated as a public utility. Perhaps we need a Beer Utility to serve the public interest and bring us our industrial beer at a regulated price.

Naked shorts.

Here is an Economist article about's battle against naked short sellers. In 2015! This battle has been going on forever, good lord; here is a 2007 complaint that was recently made public. Let me say three things about naked short selling:

  1. The big scandalous proof of naked short selling is that it creates "phantom" shares. "That, Overstock asserts, explains why at one point the number of shorted Overstock shares was higher than the number of shares the firm had issued," says the Economist. This is simply, arithmetically wrong. Imagine a company with 100 shares outstanding. A owns 20, B owns 20, C owns 20, D owns 20, E owns 20. X borrows 20 shares from A and shorts them (not naked!) to F. Now A owns 20 (economically, for disclosure purposes, etc.), B owns 20, C owns 20, D owns 20, E owns 20 and F owns 20. There are 120 shares held by long investors, and 20 shares short (so still net 100 shares). Then X borrows 20 more shares from B and shorts them to G, borrows 20 from C and shorts to H, 20 from D to I, and 20 from E to J. Now 10 long investors each own 20 shares, for a total of 200 shares, with 100 shares shorted. Then X goes to F -- who owns 20 shares and has, as it were, custody of them, unlike A through E who have already loaned out their shares -- and borrows 20 shares to short to K. Now X is short 120 shares even though there are only 100 shares outstanding. Nothing naked ever happened; shares were always borrowed. You can keep going forever. Overstock actually makes a fairly solid case that there was a naked short selling conspiracy in its stock, but the number of shares sold short has nothing to do with it.
  2. That scheme allegedly started in about January 2005. Overstock ended January 2005 at $52.17, down about $17 from where it started the month. Could be naked short selling! It ended 2005 at $28.16, and has never seen $40 again. In 10 years. This does not especially look like a scheme to manipulate Overstock's stock price by creating phantom shares to increase shorting pressure in 2005 through 2007. It looks like a lot of people correctly deciding that Overstock was overvalued in 2005, putting on a short position, and being vindicated by the events of the subsequent decade.
  3. Probably naked short selling should be legal? As a scheme, it is not a scheme to manipulate prices, it's a scheme to make money on stock borrow costs. If naked shorting were legal, you wouldn't have borrow costs, and the whole thing would go away. And I can't see much harm in it, beyond some administrative things (you'd have to figure out voting rights).

Neel Kashkari.

Neel Kashkari is sort of a random choice to be president of the Minneapolis Fed, but he gives hope to all of us former Goldman Sachs bankers and current Twitter addicts, so there is that. Here is Ben Walsh:

Kashkari told WSJ his resume would be an asset and that it shouldn't be boiled down to just Goldman Sachs and the Treasury. To manage TARP, “the fact that I had went to Wharton and got my MBA and worked at Goldman are all fine, but I really relied on my engineering skills as a research engineer working on NASA missions,” Kashkari told The Wall Street Journal, employing the rarely used "people criticize me for being a banker, but really I’m a rocket scientist" tactic of feigning modesty.

Here is a 2009 article about Kashkari that features the sentence "The moon hits his stubble, which is six days old," and Kashkari's post-TARP to-do list ("1. build shed, 2. chop wood, 3. lose 20 pounds, 4. help with Hank's book").

People are worried about swap spreads.

I might have to change this newsletter's title to Money Worries. Here are Bloomberg's Lisa Abramowicz, and a Financial Times Q&A, and Bloomberg's Tracy Alloway and Liz McCormick from last week. What should I think about negative swap spreads? My basic model is, like, the funding costs of a funded thing (buying Treasuries) are higher than the funding costs of an unfunded thing (receiving fixed on a swap), and the leverage-ratio cost of owning Treasuries (fully on balance sheet) is higher than the leverage-ratio cost of a swap (partly excluded), so, sure, the swap might be a more attractive way to bet on rates than the Treasury bond. But I suppose I am missing things.

People are worried about unicorns.

Fidelity marked down its Snapchat investment by 25 percent, possibly because "Snapchat is still searching for a sustainable revenue model," which I suppose would make it hard to merit a $16 billion valuation. Here is a doomy DealBook article reading this markdown and others like it as "signs of growing unease over the dizzying valuations of some of the most richly priced private companies," but remember Fidelity marks down holdings all the time. (Often much bigger holdings than its $34.5 million in Snapchat.) It's just that usually they're publicly traded holdings so the markdown is obvious and mechanically tied to market prices. Now that private markets are the new public markets, public investors like Fidelity will tend to own private-company shares, and the markdowns will be a bit more awkward.

People are worried about stock buybacks.

I have said before that the 2016 U.S. presidential election might end up being all about stock buybacks, so I was pleased to see that Ben Carson spent some of last night's Republican debate worrying about stock buybacks:

Ben Carson mixed issues when discussing Wall Street policy, arguing that “some of the monetary and Fed policies that we are using makes it very easy” for Wall Street and other companies to “buy back their stock and drive that price up artificially. Those are the kinds of things that led to the problem in the first place.” No one has ever suggested that corporate stock buybacks were a cause of the financial crisis.

I do sometimes wonder for how long financial policy will have to be addressed just to solving, or pretending to solve, the global financial crisis of 2008. I mean, 2008 was a long time ago! Maybe corporate stock buybacks will be a cause of the financial crisis of 2023, and we should nip them in the bud now. I do not particularly believe that, but people sure are worried about them.

Here is Mike Konczal on the Republican financial debate ("There was a weird detour into whether or not deposit insurance exists," cool cool). Elsewhere, "S&P downgraded the credit rating of McDonald's one notch on Tuesday after the burger giant said it would increase debt to return US$10bn of cash to shareholders by the end of next year."

People are worried about bond market liquidity.

I briefly mentioned the Goldman Sachs note about negative dealer inventories in this space yesterday, but it has gotten more attention, so I'll count it again today. Here are Bloomberg, the Wall Street Journal and Business Insider. It is worrying stuff! From Bloomberg:

"I was somewhat of a contrarian about the liquidity worries, but the evidence is starting to pile up," Himmelberg said Tuesday. "The trend reflects the rising cost of holding corporate-bond positions. This looks increasingly like a growing headwind that will be with us for some time."

In the end, everyone comes around to worrying about bond market liquidity. 

Me yesterday.

I wrote about yesterday's expanded indictments against the accused JPMorgan hackers, payment processors, pump-and-dumpers, illegal casino magnates, bitcoin exchange operators and general jacks of all criminal trades. Here is a more detailed, and delightful, account from Bloomberg.

Elsewhere in pump-and-dumps, two people "were convicted by a federal jury in Brooklyn on all counts for their role in a $95 million international market manipulation scheme" using "call centers in Canada, Thailand and China." There are just so many pump-and-dumps. 

Things happen.

This story of how some of England's Rugby World Cup players "lost money on shares recommended to them by their kit man" is amazing, "even by the lofty standards of English sporting stupidity." From Default to Darling: Argentina Bets Pay Off for Hedge Funds. The Strange, True Story of How a Chairman at McKinsey Made Millions of Dollars off His Maid. OPEC Challenges Shale Afresh as Iraq Crude Floods U.S. Market. Deutsche’s riskiest bonds in spotlight. Why Indexing Beats Stock-Picking. Companies may soon have to capitalize a lot more leases. "How much should a director be paid?" Philosophers get paid more than welders. Vladimir Putin's daughter is a billionaire. "'I’m the worst, I’m like Old Faithful,' Paul Tudor Jones said of his crying record." The Case for Buying a Home You Can't Afford. Rolls-Royce recall. This Jeans Startup Wants To Disrupt Your Crotch. Clip-on man buns.

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