Yieldcos, Spoofers and Blockchains

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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If you haven't been following the SunEdison story, let me commend it to you, because it is bonkers. The basic setup is that you've got SunEdison, a public company that develops renewable power projects, and you've got its two yieldcos, TerraForm Power and TerraForm Global. The yieldcos are also public companies but are controlled by SunEdison, and they buy completed projects from SunEdison. The idea is that SunEdison investors get a growthy risky developer of projects, while yieldco investors get yieldy safe operators of projects with contracted cash flows. The concern is that the yieldcos are "captive buyers" of SunEdison projects, and so there are safeguards (separate managers and boards, conflicts committees) to protect yieldco investors against the risk that SunEdison will use the yieldcos as piggy banks by selling them bad projects at inflated prices.

Except that SunEdison ran into financial troubles this year, and this happened:

At a Nov. 20 board meeting, SunEdison Chief Financial Officer Brian Wuebbels asked TerraForm Power’s two-man conflicts committee to approve the new Vivint terms, some of the people said. He also sought their help raising cash, one person added, suggesting TerraForm prepay for future project purchases or repurchase shares held by SunEdison. Messrs. Lerdal and Dahya refused both requests, the person said.

The men were replaced on the conflicts committee, according to filings. SunEdison appointed new directors, while senior SunEdison officials took over management roles. Mr. Wuebbels became CEO of both TerraForm entities. Manavendra Sial, another SunEdison executive, became their interim finance chief.

"Among Mr. Sial’s first actions, according to filings and a person familiar with the matter, was authorizing a $150 million payment to SunEdison." When you have a public company (TerraForm) with a majority shareholder (SunEdison) and a conflicts committee designed to prevent that shareholder from taking advantage of the company, and the majority shareholder gets rid of the conflicts committee, gets rid of company management, and then immediately approves a $150 million payment to itself ("a partial prepayment for an Indian power project"), none of that looks like textbook corporate governance. "David Tepper’s Appaloosa Management LP, a major TerraForm Power investor, last month accused SunEdison of pressuring its yieldcos to overpay for assets and said the setup has 'obvious conflicts,'" which, coming from a disgruntled shareholder, seems like an understatement.

Meanwhile in fossil fuels everyone is sad, including oil producers, sovereign wealth funds, distressed-debt investors and Calgary



It was late 2013, and at the firm’s Chicago headquarters, a team of researchers discovered that a rival company’s algorithm was outmaneuvering their automated trader. The algo was placing futures orders it had no intention of filling to entice firms like Citadel into the transactions, then canceling them, leaving Citadel with money-losing trades. Citadel’s plan: to pit its computers against the spoofer in a high-stakes duel over market manipulation.

Citadel is smart and has good lawyers, and while I don't know the details of that high-stakes duel, I assume that everything that Citadel did was on the up-and-up. I have to say, though, that as a general matter, believing that you are engaged in a high-stakes duel over market manipulation is a good way to commit market manipulationNav Sarao's self-conception seems to have been that he was a noble little guy standing up to the evil spoofing of high-frequency traders, and look where that got him. (Arrested for spoofing, is where.) The most straightforward way to combat people trying to trick you in the markets is by trying to trick them. In lots of contexts that is an accepted and even admired part of markets. (Certainly it's how poker works, and poker is a popular metaphor for trading.) Increasingly, though, it seems to be frowned upon. Spoofing, lying to customers about bond prices -- a lot of the old market heroics will get you in trouble these days. Probably best to just report suspected spoofing to your nearest regulator, rather than taking the law into your own hands.

Elsewhere in market structure: "Speed up the SIP."


A Euromoney survey of 151 institutions found that more than half think that the blockchain "will transform banking fundamentally." I personally have been somewhere between "it will be an important way of improving efficiency but will not transform banking" and "it is just one technical innovation among many" (with perhaps a sprinkling of "it is mostly hype and won't change much at all"), but now I am getting nervous, and am almost prepared to welcome my new blockchain overlords. 

Meanwhile, here is Overstock.com's prospectus allowing it to offer securities over the bitcoin blockchain, along with two articles from Bitcoin Magazine that Overstock also filed with the Securities and Exchange Commission. The discussion of how Overstock's "digital securities" will work is on pages 34-36, and is fascinating, though I read it to mean basically that Pro Securities (a broker-dealer and alternative trading system part-owned by Overstock and using its technology) will keep the "definitive ownership record" in its own proprietary electronic database, and will record transactions in the bitcoin blockchain mostly for, like, recreational purposes.


Did you know that Donald Trump has a tax plan? I guess I knew that at some point, but then I forgot, and I suspect he did too. Anyway the Tax Policy Center did an analysis of his plan and found that it is very expensive and very favorable to the rich. I gather that is the only possible outcome for any analysis of any Republican candidate's hypothetical campaign promises on taxes -- why wouldn't you promise to give away hypothetical money in your certainly-not-going-to-be-enacted tax plan? what is the downside? -- but there you have it.

Did you know that Ted Cruz has a plan to bring back the gold standard? "We see ourselves as waging the idea battle on economics, at least to Republican primary voters," says a guy involved with a group advocating for that plan. (But not, U.S. campaign finance being what it is, communicating with or even advocating for Cruz himself.) "This is the most idiotic idea I have ever heard from a presidential candidate. The entire economics profession thinks it's a joke," says an economist, so I suppose the idea battle is joined, good luck with the idea battle everyone. Meanwhile, Bernie Sanders is a bit confused about the Fed in a New York Times op-ed, but, you know, compared to what?


"We are in the age of oversharing," says ... well, says everyone, that is a widely acknowledged and lamented fact, but in this particular case we're talking about a criminal defense attorney lamenting his clients' need to talk about their cases on social media:

Marc A. Agnifilo, the lawyer who represented Mr. Shrem, said that for clients who take to social media to defend themselves it “can feel good at the time,” but it has the potential to undermine plea negotiations that might be taking place.

It seems a little unfair that plea negotiations should be undermined just by some Twitter venting; perhaps as millennials start to take over prosecutors' offices they will be more willing to overlook defendants' social-media faux pas. Hahahaha no the opposite, millennials get really mad about social-media faux pas. Anyway a lot of that article is about Martin Shkreli, and is astute:

Denise Shull, a former trader at the Chicago Mercantile Exchange and a coach to Wall Street money managers, said there was an element of narcissism behind the social media defense.

“If you’ve already displayed attention-seeking behavior, the chances are you’re going to continue along that path if you can,” Ms. Shull said.


“A small bit of it is, ‘I’m going to try to win this P.R. battle,’ ” Ms. Shull said of Mr. Shkreli’s tactics. “But to go on and on? That would suggest that he is petrified.”

Elsewhere in Shkreli, the interim chief executive officer who replaced him at Turing Pharmaceuticals, Ron Tilles, was accused of fraud by an investor in 2006, and in turn claimed that that investor "threatened to kill him and his wife and 'chop them up.'" I assume there are no YouTube videos of any of this, though.

People are worried about unicorns.

At midnight on the longest night of the year, all the unicorns gather in the middle of the Enchanted Forest for a party where they eat rainbows, drink moonbeams, dance in fields of wildflowers and pose awkwardly for photos with Marissa Mayer. Or that was how I interpreted this article (with lots of Instagrams) about Silicon Valley holiday parties; I may have gotten some details slightly wrong. There is a goldendoodle in a tuxedo though.

Elsewhere, "The Fine Print of Snapchat’s Financing Terms." And do you have what it takes to manage the Slack Fund

People are worried about stock buybacks.

It's not exactly buybacks, but here is the always-interesting pseudo-Jesse Livermore on dividend payout ratios over time:

Stocks should continue to trade at historically expensive prices. For much of history, the tax benefit that equities conferred upon investors–specifically, the ability to use capital appreciation to defer taxation–was not adequately reflected in equity prices and valuations. Those benefits have actually increased in recent decades, as dividend payout ratios have fallen, and as preferential tax rates for equity income and capital gains have been introduced into law.

People are worried about bond market liquidity.

Is the decline in bond market liquidity due to bank capital regulation, or rules against proprietary trading, or general bank risk aversion, or herding by investors, or increased bond holdings at mutual funds and ETFs, or the low interest-rate environment, or the crash in oil prices, or ... or is it just Christmas? Bank of America's Hans Mikkelsen and Yuriy Shchuchinov:

"Our view remains that the recent plunge in high-grade energy bonds was exacerbated by the pre-end of the year holiday season lack of liquidity in the corporate bond market," write Mikkelsen and Shchuchinov. "In fact we would argue that a lot of investors have more or less closed up shop for the year, and hence shorting activity by hedge funds and other investors had outsized impact on bond prices."

Me yesterday.

I wrote about IEX.

Things happen.

Apple adopted a proxy access bylaw. Morgan Stanley Settles Charges in “Parking” Scheme. Ex-Morgan Stanley Adviser Receives Probation for Data Theft. "Ukraine is edging ever closer to committing political suicide." Credit card laundering. Lottery rigging. "Distressed cranberry operations." Markets Are Getting Jumpier, and We Can't Tell if That's Good or Bad. "Sprint Corp. recently paid a small team of consultants at least $25 million for advice that largely was never used." Amazon spurs US mutual fund winners in 2015. "Indirect incentives exist in the money management industry when good current performance increases future inflows of capital, leading to higher future fees." Business reporter’s tweets deleted at request of Bank of America. Disney Is in Talks to Leave Fusion Joint Venture. Neil Irwin on "The Big Short." Koalas Are Passing Out From Heat So Everyone’s Giving Them Water. Airplanes Hit More Turtles Than Drones. Target dog. Pig DNA. Beach slime. Bathtub theater. Financial dominatrix. Peter Schiff: Gold is still going to $5,000. The Inside Lacrosse men's and women's 2016 All-Name Teams are out.

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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