Money Stuff

Charity, Leverage and Crime

Also physics, unicorns and bond market liquidity.

The Zuckerbaby takes.

The Chan Zuckerberg Initiative, to which Mark Zuckerberg and Priscilla Chan have pledged to donate 99 percent of their Facebook stock, is not a charitable foundation, but just an LLC. That is, it's just a pot into which Zuckerberg and Chan can put their money, and out of which they can give money to charities, or for-profit investments, or political advocacy, or whatever. Here are some explainers from BloombergNew York Times, Vox and Bloomberg again.

One upshot of this is that they won't get a tax deduction for putting money into that pot, because it is not a charitable foundation. This is of course not at all important to them, because they don't have that much taxable income (Zuckerberg is paid $1 a year, and most of their wealth is in unrealized capital gains). Also, they are planning to give away 99 percent of the shares that make up the bulk of their fortune, and giving away 99 percent of your money to shield yourself from income taxes on the other 1 percent is economically nonsensical. (Consider the first law of tax.) But a surprising number of people (even at the New Yorker!) are making claims like this

There’s an almost overnight financial benefit, too: The Facebook founder will deduct the fair value of his gift to his foundation from his taxable income in the year he makes the donation. A donor like Zuckerberg could realize a tax benefit equal to about one-third of the value of his gift.

Nope! No foundation, no tax benefit. 

Elsewhere, Dylan Matthews has some ideas for what Mark Zuckerberg should do with his money, including giving it to his college roommate or spending it on monetary policy lobbying. (These are mostly not jokes, though who's to say what a joke is really.) David Auerbach asks, "Can We Trust the Hacker Philanthropists?" And here is Anil Dash:

Here’s the truth: No matter how good their intentions, the net result of most such efforts has typically been neutral at best, and can sometimes be deeply destructive. The most valuable path may well be to simply invest this enormous pool of resources in the people and institutions that are already doing this work (including, yes, public institutions funded by tax dollars) and trust that they know their domains better than someone who’s already got a pretty demanding day job. That may not be as appealing to the cult of disruption within the tech echo chamber, but would be exactly the kind of brave and unexpected move that might offer Max a great example of how to engage with the real world that the rest of us live in.

Leveraged loans.

We have been talking on and off for what feels like forever about U.S. bank regulators' odd and sometimes ineffective focus on banning banks from making leveraged loans at more than 6 times leverage. Part of the oddity is that the banks don't really "make" those loans with their own money. Instead, they mostly intermediate between borrowers and market investors, like they would in a bond deal, so it is odd to think of leveraged loans as more of a risk to the banking system than high-yield bonds are. But here is an excellent, nuanced, detailed Wall Street Journal story on the regulators' push to ban highly leveraged loans, which makes it clear that they thought of their mission as limiting excessive leverage in the financial system broadly, not just protecting the banks:

Some veteran regulators, including at the Fed, wanted to issue general guidelines and leave lending decisions up to the market, say people who participated in the discussions. If banks were selling the loans to willing investors, these regulators thought, then federal agencies shouldn’t intervene.

Other regulators were adamant about the need for a single, specific underwriting standard for all loans. They recalled how the Fed, OCC, and FDIC had published joint guidelines for risky mortgages in 2006 and 2007, but that was too late to ameliorate or avert the housing crash.

The single standard won out, and the rest of the article is a history of the regulators' slow but ultimately successful efforts to convince banks that they were serious.

Elsewhere in leveraged underwriting, the banks underwriting the Dell/EMC deal have a 12 percent rate cap on their takeout, as "Wall Street firms are struggling once more to sell the buyout debt they guarantee, forcing them to take losses on some existing deals and to be more cautious about the new ones they commit to." And: "The Credit Markets Are Softening and Funding Is Tightening."

Financial crime.

Yesterday Richard Choo-Beng Lee, who cooperated with prosecutors in their long-running investigation of insider trading at and around SAC Capital Advisors, was sentenced to 21 days in jail, which is not a particularly long sentence as insider-trading sentences go, but which was still rather a shock to him since other insider-trading cooperators have normally avoided prison. I guess now that the Newman decision has more or less killed the hedge-fund-insider-trading crackdown, there is less reason to make cooperation appealing.

In related news, "The Securities and Exchange Commission’s case against hedge fund billionaire Steven Cohen is moving forward again, after prosecutors Monday withdrew their request for a two-year freeze imposed while they pursued criminal insider trading charges against his employees." That case is a civil failure-to-supervise case connected with insider trading, and one fact that may be relevant to SAC's supervisory culture is that Richard Choo-Beng Lee is one of two SAC Capital traders named Richard Lee who pled guilty to insider trading and cooperated with the government.

Meanwhile in England, poor Tom Hayes is appealing his barbaric 14-year prison sentence for Libor manipulation. "Hayes ‘Didn't Invent’ Libor Rigging, Lawyer Says in Appeal Fight," is the Bloomberg headline, and while I am sympathetic, no one appeals a murder sentence on the grounds that he didn't invent murder. 

In Switzerland, Hervé Falciani, a former HSBC private bank employee who leaked secret documents led to revelations "that HSBC’s Swiss banking arm turned a blind eye to illegal activities of arms dealers and helped wealthy people evade taxes," was sentenced to five years in prison for his troubles. "He is currently living in France, where he sought refuge from Swiss justice, and did not attend the trial," which seems sensible.

And in Brazil, is Andre Esteves too big to jail? I mean, he's in jail, but that is creating nervousness at his investment bank, BTG Pactual, and in the Brazilian financial system more generally. "The crisis in a major bank is the last thing Brazil needs in the middle of this whole economic and political mess," says a guy.

Bill Gross Investment Outlook.

I've been worried a bit about Bill Gross because his recent Investment Outlooks have lacked the random paragraph or two of irrelevant personal material about cats or showers, followed by a screeching transition to bond markets, that had become the hallmark of his style. I guess he was just saving up the irrelevancy, because his latest Outlook has almost two pages of physics fun facts, including advice like "To be 'relatively' immortal, forget about cryogenics – just go fast, or live in a dark hole," and "If you’re incredulous or just mad by now, go back to the Kardashians." The screeching transition is: "More breaking news – this time on the investment side: central banks are casinos."

People are worried about unicorns.

Farhad Manjoo argues that many unicorns should go public sooner rather than later. This is in part a top-ticking argument, or as he puts it, "public companies can withstand long spells of skepticism," with perhaps an implication that long spells of skepticism are coming for many unicorns. But there is also this, on the contrast between Box (public) and Dropbox (unicorn):

By going public first, Box has arguably boxed in Dropbox’s horizons — and if Dropbox ever goes public, it’s going to have to explain why investors should pay a premium over its already public competitor. (Dropbox declined to comment.)

The same logic applies to employees. If you’re an engineer looking to work at a cloud storage company, you could go to Dropbox, where you’ll receive stock options at a lofty $10 billion valuation that you’ll have a hard time turning into actual money. Or you can go to Box, in which you’ll get shares at a relatively reasonable valuation that can also be traded on the public market.

Sure, the public market may place lower valuations on unicorns than the private market does, but that has some advantages. Elsewhere: "Painted Bunting in Prospect Park Rare as a 'Unicorn,' Birders Say."

People are worried about bond market liquidity.

Bloomberg Gadfly's Lisa Abramowicz notes that "Specific junk bonds are simply plummeting in value on little trading," and suggests that hedge fund redemptions may be to blame. In possibly related news, "Hedge Funds Brace for Redemptions." And bond trading isn't what it used to be.

Me yesterday.

I wrote about Yahoo's potential sale of its core business. So did a lot of people, actually; here are Bloomberg Gadfly's Brooke Sutherland and Gillian Tan on potential buyers, Gadfly's Shira Ovide on Marissa Mayer's legacy, Fortune's Erin Griffith on the possibility of a private equity buyer, the Wall Street Journal's Miriam Gottfried on Yahoo's lack of a strategy for its core business, and Fortune's Dan Primack with some notes on the potential sale. Here is a detailed argument from Venkat Subramaniam that Yahoo should sell its core business.

Things happen.

ECB Cuts Its Deposit Rate to Minus 0.3% as Boost to QE Awaited. Tinder for M&A. S&P downgrades raft of US banks. "Fewer female chief executive officers have the weapons corporations typically use to fight off hostile takeovers than their male counterparts." McDonald's Said to Face EU Probe Into Luxembourg Tax Deals. E-mails reveal concerns about Theranos’s FDA compliance date back years. Authorities Making New FIFA Arrests in Switzerland. Realty Capital Securities to Shut Down and Pay $3 Million Fine to Massachusetts. SEC: Grant Thornton Ignored Red Flags in Audits. Who Turns Down the Best Business Schools? Dog boxes. Chewbacca's Hair Routine in The Force Awakens Is Actually Pretty Glam. Finally: Someone Has Made Cocktail Bitters Out of Human Tears.

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