Taxes, Bonuses and Ghosts
I said yesterday that there are two ways to think about the problem of inversions: Either you blame companies for inverting, or you blame the tax code for driving companies to invert. Here is John Cassidy blaming companies pretty hard ("The Pfizer-Allergan Merger Is a Disgrace"); here is Bloomberg View's editorial board blaming the tax code ("The system is so illogical, in fact, that fixing it has become a rare topic of bipartisan agreement."). Two related things that you sometimes hear are:
- That companies have a patriotic duty not to invert, or alternatively,
- That companies have a fiduciary duty to their shareholders to minimize their taxes.
Each of these positions strikes me as more or less a myth. On the one hand, "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." No Irish company has any duty to pay U.S. taxes on its Irish income, and in this cosmopolitan age, no U.S. company has a duty not to sell itself to an Irish company. The tax code is an actual written law, and you can just go see what it requires, and do that, and not do other things.
On the other hand, shareholders do not "own" public corporations, and there is no fiduciary duty to maximize profits. (There's even a book called "The Shareholder Value Myth.") Obviously lots of companies that could lower their taxes by moving abroad nonetheless don't, and shareholders have no right to sue them for neglecting that opportunity. One thing you could broadly say about modern financial capitalism is that the myth of profit maximization is ascendant and the myth of patriotic taxpaying is not, which is why inversions are so popular despite political efforts to stop them.
Anyway, remember, the Pfizer/Allergan deal is not an inversion: "Pfizer shareholders are getting 56 percent of the combined company and Allergan, 44 percent," putting Pfizer's shareholders below the 60 percent threshold to qualify as an inversion. Here is a good, calm, straightforward explanation of the tax mechanics behind the deal. Bloomberg Gadfly's Max Nisen, like a lot of investors, wants Pfizergan to break up already. The price is underwhelming. There are a lot of fees. Hillary Clinton and Donald Trump and Bernie Sanders all oppose the deal. And: What big M&A deals could possibly be left?
Deutsche Bank co-Chief Executive Officer John Cryan is getting into the Christmas spirit:
“Many people in the sector still believe they should be paid entrepreneurial wages for turning up to work with a regular salary, a pension and probably a health-care scheme and playing with other people’s money,” Cryan said at a conference in Frankfurt on Monday. “There doesn’t seem to be anything entrepreneurial about that except the compensation structures.”
Well, and the attitude. You pay people like entrepreneurs and they will act like entrepreneurs and invent mortgage-backed derivatives. You tell people to turn up for work with a regular salary with pension and health care, and they might not. Perhaps more accurately, the "they" in those sentences are different sets of people; if you advertise piles of at-risk compensation you will attract a different sort from those you'd attract by advertising your health-care scheme. Obviously an entirely plausible reaction to the financial crisis is that bankers got a little too entrepreneurial. More from Cryan:
“I sit on trading floors and wonder what drives people,” he said. “I don’t fully empathize with anyone who says they turn up to work and work harder because they can be paid a little bit more, but that may be a personal view. I’ve never been able to understand the way additional excess riches drive people to behave differently.”
Of his own pay, he said: “I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.”
I have to say it is a little worrying that we now have criminal laws against spoofing -- defined, not quite accurately, as entering orders that you do not intend to execute -- and we also have a bunch of different regulators running around trying to catch spoofing, not all of whom are necessarily fully up to speed on modern market structure. But spoofing seems to be the regulatory flavor of the moment, and now there is this:
The investigation, still in its early stages, is examining whether fake bids and offers in FX options were posted on the electronic trading platforms hosted by the interdealer brokers, in order to ramp up interest from options traders in largely illiquid emerging-market currencies, according to the person familiar with the investigation.
That's about an investigation by New York Attorney General Eric Schneiderman into possible "ghosting" -- a flavor of spoofing -- by interdealer brokers. I mean, don't do that, but Libor manipulation it isn't. Elsewhere: "A European regulator is examining 45 potential cases of abuse in one of the world’s largest energy markets, but faces a big hurdle in pursuing them: Many countries aren’t prosecuting the alleged wrongdoing."
If you were American International Group CEO Peter Hancock, how excited would you be to keep meeting with Carl Icahn?
Therefore, while we plan to accept Mr. Hancock’s offer to continue having discussions and meetings with AIG, we do not believe that he will ever sincerely consider what we, and so many others, have proposed. Nor do we believe that the AIG board of directors will respond to the demands of AIG shareholders absent a clear mandate. As a result, we intend to commence shortly a consent solicitation that will enable shareholders to express their views directly to the board, which may include a proposal to add a new director who would agree in advance to succeed Mr. Hancock as CEO if asked by the board to do so.
I feel like that prejudges the issue a bit? Anyway, Icahn's plan to launch a consent solicitation to demand that AIG break itself up and/or add a new shadow CEO is pretty unusual, but it is Carl Icahn, what did you expect? In any case it will keep those meetings awkward, which might actually be the point. Icahn is also up to something, including "potentially attaining board representation," at Xerox, where he announced a 7.1 percent stake. And Elliott Management announced a stake in Alcoa, though it may have "already played its activist role silently by encouraging the split" of Alcoa into two companies announced in September. Elliott also announced a new co-CEO, Jonathan Pollock.
Oh and Yahoo has an activist (Starboard Value) telling it not to spin off its Alibaba shares, a consultant (McKinsey) looking at what parts of its business to get rid of, and a CEO (Marissa Mayer) who does this:
When the Ms. Mayer is forced to deliver bad news, she employs what she calls a “jiu-jitsu move”—trying to create a diversion by producing tantalizing information, according to people who have worked closely with her.
Sometimes companies do bad things, so the class-action lawsuit system exists to hold them accountable for those bad things. But class actions sometimes end up being more or less a racket for plaintiffs' lawyers to extort fees from companies without doing anything useful for the class they purportedly represent, so the courts allow class members to object to class-action settlements to try to keep the lawyers accountable. But those objections themselves sometimes end up being more or less a racket for "serial objectors" to extort payments from plaintiffs' lawyers without doing anything to protect the interests of class members. There is a law of conservation of rackets; any system you create to keep people honest will be abused by dishonest people. Here is Alison Frankel on "a onetime California lawyer turned serial class action objector" who was sanctioned "for filing a frivolous objection to an antitrust settlement."
Yesterday I argued that "If you accept that allocating capital is a worthwhile social function, then automating it so that fewer people can do it more efficiently is also worthwhile," and also frees people up to do whatever warmer and fuzzier thing it is that you'd rather they be doing. Izabella Kaminska disagrees:
The more you disrupt banking, or trading, or asset management, the cheaper and easier it becomes for anyone to set themselves as a bank or trading shop. That makes it much more profitable for a far greater number of individual firms to enter the rent extraction business. The size of the rent extraction footprint doesn’t shrink, it just gets distributed more widely.
Anecdotally I suspect I have the better of this argument in the narrow field of equities trading, but on the broader issue of, like, the role of the financial industry in society, I can see her point.
I have to say, if I were the Fed Chair, and I got an economically half-literate patronizing letter from Ralph Nader of all people telling me to raise interest rates, I would probably shoot him back an e-mail saying "please remove me from this distribution list" and leave it at that. But Janet Yellen is more polite than I am.
People are worried about unicorns.
Unicorns are descending on Washington, though not in an enchanting whimsical way, more in a lobbying-against-labor-regulation sort of way. Tinder is a mess. "The market for food delivery via app is 'overcrowded'"; I guess food delivery is to 2015 what laundry was to 2014. Here's a guy who shot a unicorn, though by my count it looks more like a tricorn. I recognize that many of the tech-ish/startup-ish companies I've mentioned here today, like that deer, are not technically unicorns, but we take a broad view of the unicorn mandate, down here in "people are worried about unicorns."
People are worried about stock buybacks.
I have nothing today, but remember yesterday's was the Wall Street Journal's "Is the Surge in Stock Buybacks Good or Evil?" I feel like that should count twice. No one ever calls bond market illiquidity evil.
People are worried about bond market liquidity.
Today's liquidity worry is in off-the-run Treasuries:
Faced with capital constraints, primary dealers, who are responsible for underwriting the US government’s debt, have struggled in their traditional role of being middlemen for investors. That has resulted in the price of older or “off-the-run” Treasury debt issues cheapening beyond their usual discount compared with current or “on-the-run” bond benchmarks.
Capital Burden of U.S. Bank Exams Could Rise, Tarullo Says. The Fed’s New Worry: Do Bank and Market Safety Rules Conflict? The Oxford Economist Running the Fed’s Interest-Rate Machine. Wall Street braces for losses on leveraged deals. Puerto Rico Bond Payment Overshadows Debt Exchange Optimism. Financial transactions taxes "may be poor instruments for both revenue-raising and Pigouvian objectives." The Bank for International Settlements on digital currencies. World Soccer's Financing Secrets Revealed in Leaked Documents. SEC: Stockbroker Stole Investor Money for Home Renovations. "Bloomberg reviewed the names of more than 30 corporate turnaround plans from the last decade and found that the titles come in several euphemistic flavors." Ryan Gosling: "He’d yell out things like, 'Lay into him about your negative carry,' and I’d be like, [timidly] 'Now?'" Never read the comments. Portable pizza pouch. Consulting vs. banking. Socialism vs. capitalism. Cops vs. robbers. This Website Turns Photos of Your Pets Into 3D Reliefs You Can Actually Pet. Salmon cross road.
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