Coke, Cookies and Universal Banks

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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Valeant or whatever.

Finance is complex and interconnected, and events in one corner of the financial world propagate rapidly and unpredictably, which is why somehow the debate about Valeant's specialty pharmacy relationships has devolved into a snowballing insult war about whether Oreos are worse for you than Coke. The blow-by-blow is that Bill Ackman defended Valeant's practices and compared the company to a Warren Buffett investment, and then Buffett's business partner Charlie Munger called Valeant's business model "deeply immoral," and then Ackman said, yeah, well, I'll show you deeply immoral:

“I have a problem with Berkshire’s ownership of Coke,” Ackman told an audience of about 200 people. “Coca-Cola has probably done more to create obesity, diabetes on a global basis than any other company in the world.”

The very best part of this is that he said it at "an event commemorating Warren Buffett's 50 years leading Berkshire Hathaway," which is just an amazing way to ruin a party. "I'm never one for avoiding controversy," said Ackman, and if you ever find yourself saying that it is probably superfluous. Anyway, Coke responded that Ackman's "comments are irresponsible," and there is the awkward fact that this year Ackman invested in Mondelez, which makes Oreos:

Pershing Square’s staff worried about Mr. Ackman’s hard line on sugar. A colleague brought Mondelez products to the investment committee and waited to see if Mr. Ackman would eat an Oreo. He ate two. That was the go-ahead to start buying.

“Everything in moderation,” Mr. Ackman said Wednesday. “It’s complicated.”

He pointed out that Mondelez products such as cookies and candy bars can be treats after a healthy meal, not outright replacements as Coke products can be for water.​ ​​

One conclusion might be that all corporations are at least a little bit evil (but delicious). 

In other news, Pershing Square is down 21.2 percent so far this year. And back in actual Valeant news, Aswath Damodaran looks at its valuation and is pretty bearish, getting a going-concern value of $72.10 per share. "The Valeant story reinforces many of my existing biases against companies that grow primarily through acquisitions," says Damodaran. Some debt investors are worried. And Valeant and Ackman will have to face an insider trading lawsuit over their Allergan tender offer.

Finally, Roddy Boyd at the Southern Investigative Reporting Foundation has an interesting story about half a million shares of Valeant stock that were granted to chief executive officer Michael Pearson "in error." The erroneous grant was in May 2013, when the stock was at $84.47, and the error was fixed in March 2014, when the stock was at $139.96. The correction for the error was that Pearson paid Valeant back for the price of the stock on the delivery date (plus interest). Meaning that Pearson benefited (by millions of dollars) from the appreciation in the intervening year. Which strikes me as basically fine? It's like Valeant accidentally loaned Pearson some money to buy stock, and then he paid back the loan with interest (and kept the stock). What would be worrying is if this was essentially a free option -- that is, if the price had declined, would Valeant have corrected the error by canceling the stock? But there's no particular reason to think that.

Are big banks bad?

Here is former Citigroup chief executive officer John Reed arguing that "We were wrong about universal banking," and what is it about former Citigroup CEOs thinking that? It was a big deal when Sandy Weill, "the man who invented the financial supermarket," said that banks and investment banks should be broken up. But maybe the right conclusion to draw here is that universal banking is a bad idea, for Citigroup. Anyway, Reed makes some good points, arguing first that the cost efficiencies of universal banking are overstated and that "it is possible that combining so much in a single bank makes services more expensive than if they were instead offered by smaller, specialised players," and second that universal banking is an awkward cultural fit:

Mixing incompatible cultures is a problem all by itself. It makes the entire finance industry more fragile. This is what I mean by an unstable cultural balancing act at the core of universal banking and, the restructurings and management changes we are now seeing in European financial institutions.

As is now clear, traditional banking attracts one kind of talent, which is entirely different from the kinds drawn towards investment banking and trading. Traditional bankers tend to be extroverts, sociable people who are focused on longer term relationships. They are, in many important respects, risk averse. Investment bankers and their traders are more short termist. They are comfortable with, and many even seek out, risk and are more focused on immediate reward. In addition, investment banking organisations tend to organise and focus on products rather than customers. This creates fundamental differences in values.

Spoofers gonna spoof.

On the one hand, the fact that Igor Oystacher is being investigated by the CME for spoofing after previously being fined by the CME for spoofing and currently being sued by the Commodity Futures Trading Commission for spoofing might make you think that Oystacher really likes spoofing. On the other hand, Oystacher's defense all along has been that he never spoofs, and that regulators and exchanges have just consistently misinterpreted his legitimate behavior as spoofing. And if that is your defense, then changing your behavior looks almost like an admission of guilt. So I guess you just have to keep doing it. Even though everyone thinks it's spoofing. 

Elsewhere, "Spoofing Warnings Sent as Finra Teaches Brokers to Spot Cheats."

People are worried about unicorns.

"Unicorns face end of the 'steroid era,'" worries the Financial Times, quoting a professor who says that "valuation setting in private markets is such a challenging process that we don’t really believe whatever number is set." The Information is even starker, saying "VCs' Message: Winter is Coming." Man, winter is coming for the steroid-fueled zombie unicorns. My next billion-dollar startup idea is Uber, but for metaphors about tech industry financing. 

Elsewhere, Square, which is doing a down-round initial public offering with a part-time CEO, at least has a hip roadshow:

Square passed out copies of a 250-page prospectus that was square-shaped, rather than the standard 8.5 by 11 inches. Lunch was served by the New York restaurants Little Beet and Mayhem & Stout.

Meanwhile in the millicorn-and-under space, a lot of small businesses are having a hard time raising money through crowdfunding. And here is a list of private companies that Fidelity has re-valued since purchase, including a $9.52 million common stock investment in NJoy that "has been written down to just $12."

And in China:

Only in China can an investment bank predict 300 percent returns from initial public offerings and call the estimate “conservative” with a straight face.

China International Capital Corp. did just that in a report on Thursday as analysts led by Hanfeng Wang outlined their predictions for the country’s new IPO system. Post-IPO performance is likely to shrink from an average gain of 681 percent in the 18 months through June, Wang said, amid weaker investor sentiment and a relaxation of regulatory curbs that kept a lid on IPO valuations at about 23 times earnings.

On the one hand, an IPO regime that regularly leads to 300 percent pops is terrible for business, insofar as it forces companies to give away their shares at 25 cents on the dollar. On the other hand, 23 times earnings, on its face, doesn't seem like a totally unreasonable cap? And 92 times earnings -- the post-300-percent-pop multiple -- seems a bit high? But then, many American unicorns don't bother with earnings -- Square has never been profitable -- and they manage to go public. In any case, if there is a pseudo-mythological term for big Chinese companies that have not yet gone public, please do not tell me about it. 

Apple payments.

I am pretty skeptical that bitcoin is the future of money, and I am at least a little skeptical that the blockchain will be as revolutionary for finance as its boosters think. But I must say that bitcoin/blockchain/etc. have at least done a lot to highlight how dumb and inefficient the U.S. payments system is, and to light a fire under banks and tech companies to try to find something better and faster and simpler. I don't think that that exactly captures the news that "Apple Inc. is in discussions with U.S. banks to develop a payment service that would let users zap money to one another from their phones rather than relying on cash or checks" -- that's just Venmo, I think, and will presumably rely on the current clunky underlying infrastructure -- but it's a start. Presumably no payments system designed by Jony Ive would take days to settle.

Millennials.

Here's a guy whose financial advice to young people is, like, don't get a job, don't worry about credit cards, don't bother with a cash emergency fund, drink all the lattes you want, don't buy a house, don't worry about investing, just put it in index funds. Honestly for upper-middle-class millennials this advice is fine. I mean, don't use your 401(k) as an emergency fund, that is dumb, and you should probably get a job, but otherwise I can live with it, especially the lattes and the index funds. But I want to talk about his biography:

He was fiddling with QBasic programming language at 9, sold software on EBay at 11, tripled and then lost $7,000 in bar mitzvah money day trading in the tech boom, started bingeing on Buffett and Munger at 20, and co-founded a startup called Flowtown at 23.

First, yes, cool QBasic shoutout. But also a good data journalism project would be to get a list of all the people whose day trading of their bar mitzvah money has been mentioned in a news article. Call it the Tim Sykes club. I feel like -- I am just speculating here -- there are a lot of them, but they are probably not that well represented at the very highest levels of finance. (Bill Ackman, who bet his bar mitzvah money on his SAT scores, doesn't count.)

People are worried about stock buybacks.

"What looks like buybacks are actually thinly veiled management-compensation plans," says my Bloomberg View colleague Barry Ritholtz, citing a study finding that despite the rise in buybacks companies continue to issue more stock -- much of it in compensation -- than they buy back. Honestly it's not even that veiled; lots of companies explicitly say that their buybacks are intended to offset dilution under share-based compensation plans. You issue stock to management, and then you buy back stock from shareholders for cash. The net result is sort of like if you had paid the managers the cash, except that now they have stock and are thus more invested in the business. This is not particularly undisclosed, though it is a bit subtle, and whether it's good or bad depends on how much you think managers should be paid. Elsewhere at Bloomberg View, here is Justin Fox on J.W. Mason's examination of what investors do with buyback cash.

People are worried about bond market liquidity.

"The Next Meltdown? Taleb and Today’s Fragile Bond Market" is the headline here, and the argument is that "markets are fragile when they are crowded." It is certainly plausible that a lot of bond-market-liquidity worrying is really bond-market-crowding worrying, a worry that the ecosystem of bond trading is less diverse than it used to be. And: "Bond traders miss out in bankers’ pay rise." 

Things happen.

Apollo's Josh Harris's helicopter landed on a soccer field, causing a youth soccer game to be canceled. Puerto Rico Is Running Out of Options. The euro was pointless. Global Banks Rewrite Contracts in Bid to Avert Lehman Repeat. Mylan Hostile Takeover Bid for Perrigo Is Rare Nail Biter. Energy Default Alarms Get Louder as Pain Seen Lasting Into 2016. AB InBev saves by lining up $75bn jumbo loan itself. Tullett Doubles Down on Phones as ICAP Goes Electronic. Carl Icahn Looking to Sell the Fontainebleau Las Vegas. Several smaller daily fantasy sports sites close shop in NY. William Cohan prophesies doom. France won’t dine with Iran unless wine is served. Sheryl Sandberg will sponsor a submarine. Books about bankers. Influential Jews. Expensive shack. Fancy dollhouse. Skateboard stroller. On-demand pot. Lush beard. Robert De Niro Stunned To Learn Of Man Who Can Quote ‘Goodfellas.’

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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