Stock Trading and Hedge-Fund Posture

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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Equities at Citi.

Salomon Brothers disappeared into Citigroup more than a decade ago, but its legacy endures, and even traders who missed the glory days still like to think of themselves as working at Salomon rather than Citi. And a central piece of that enduring Salomon Brothers legacy, as made famous by my Bloomberg View colleague Michael Lewis in "Liar's Poker," is looking down on equities trading. The insult "Equities in Dallas" originated at Salomon ("We could not imagine anything less successful in our small world than an equity salesman in Dallas; the equity department was powerless in our firm, and Dallas was, well, a long way from New York"), and I am fond of a cruel story about gamma-hedging equity options. It is fair to say that, across Wall Street, there is still some residual embarrassment about working in equities just because Salomon Brothers bond traders so savagely, stylishly and memorably made fun of it a quarter-century ago. 

So here's a story about how Citigroup is trying to improve its position in equities trading, "an unexpected choice for a classic bond shop." I'll say! Citi's chief executive officer Michael Corbat is "a 55-year-old former Salomon Brothers trader who spent his formative years dealing bonds," and this must hurt for him. But fixed-income is risky and capital-intensive, while equities trading tends to be safer and more efficient. I'm not sure that comparison does anything to reverse the Liar's-Poker-era stigma, but it does make equities look good to a bank CEO in 2016.

That's a theme these days: The stuff that appeals to banks is not necessarily the stuff that bankers find sexy. For instance, cost-cutting:

The nation’s six largest lenders will spend $61.8 billion on items including employee compensation, marketing and real estate in the fourth quarter, the lowest total for a quarter since the final three months 2008, according to analysts’ estimates. That’s helping companies deliver more revenue to the bottom line, which at a projected $19.9 billion for the group would be the most for the final quarter of a year since 2006.

The longstanding stereotype is that the big banks are run for the benefit of bankers and traders, rather than shareholders: The bankers are actually there, for one thing, making decisions, and in an industry where so much of the compensation is bonus-based, the bankers and shareholders are both residual claimants on the bank's earnings. But when big banks improve their bottom line by making things more boring and less pleasant for their employees, that eats away a bit at that stereotype.

Elsewhere in banks, "Morgan Stanley and Goldman Sachs Group Inc. are trading below their tangible book value for the first time in more than two years."

China, etc.

It makes sense that China's economic uncertainty would cause economic uncertainty in the rest of the world. China is big. It makes less sense that volatility in China's stock market would cause market volatility in the rest of the world, because China's stock market seems to be unusually retail-focused and driven by technical pressures and gambling rather than economic fundamentals. But it is really weird to see China exporting its retail-oriented, technically-driven, limit-down style of markets to the rest of the world. Here we are, though: "The South African rand plummeted by the most in more than seven years on Monday," falling as much as 9 percent against the dollar at one point, and the reasons seem not to have been entirely fundamental:

The rand’s slide on Monday probably came after “a combination of stops and margin calls caused mass capitulation” by Japanese retail investors, Gareth Berry, a foreign-exchange strategist at Macquarie Bank Ltd. in Singapore, wrote in a research note.

Chinese stocks were down again today, though "China’s financial system is 'largely stable and healthy,' the country’s foreign exchange regulator said at the weekend." And here is a story about an investment firm started by former Long-Term Capital Management executives to "connect Chinese investors with international hedge funds, as turmoil in the world’s second-largest equities market spurs demand for overseas assets." Elsewhere, "Schwarzman Scholars Announces Inaugural Class to Study in China," with somewhat awkward timing:

As Mr. Schwarzman spoke, the Chinese stock market was closed after a free fall, and he waved away an assistant bearing phone messages, telling her, “That can wait.”

What are hedge-fund managers like?

Here is a New Yorker profile of Damian Lewis, who plays a hedge-fund manager in "Billions," and who studied hedge-fund managers to figure out how to do it:

“I found the hedge-fund guys I met all to be very, very concentrated listeners—watchful and articulate and quick to defend, if needed,” Lewis recalled. “They all seemed to have this contained sitting posture. The legs, if they weren’t crossed at right angles, tended to be close over the knee, their hands put together.”

So there you go, if you want to manage a hedge fund, you should cross your legs like this.

Bill Gross.

Somehow I missed Bill Gross's Investment Outlook when it came out last week, but he has more or less returned to form:

Instead of cake, the 49.5% (males) will just have to chomp on their Carl’s Jr. hamburger and dream of a night with 23-year-old Kate Upton lookalikes that show them how to eat it during Super Bowl commercials. And if that’s too sexist, then Carl’s is substituting six-pack hunks instead of full-breasted models to appease the other 49.5% (females). It’s a Xanax society. We love it.

Purists might object that this is all economic analysis, of a sort, while a classic Bill Gross introduction would be a long anecdote about his cat or shower linked to the body of the analysis by only the most tenuous of transitions. That is, all this hamburger-Kate-Upton-Xanax stuff is a little too normal to be classic Gross.

David Bowie.

This is a newsletter about money stuff, not culture stuff, but the boundaries are a bit porous; we keep talking about those Bill Gross Investment Outlooks after all. David Bowie died yesterday, and in addition to his obvious cultural importance, Bowie was a significant figure in the history of finance, who pioneered the business of securitizing musical royalties:

Bowie struck a licensing deal with EMI for his back catalogue giving the group the rights to release 25 Bowie albums from between 1969 and 1990. These included his most popular work – Ziggy Stardust, Aladdin Sane, Hunky Dory and Let’s Dance – as well as unreleased studio and live recordings. He was guaranteed more than 25 per cent of the royalties from wholesale sales in the US.

Those rights were then securitised, turned into $55m of Bowie Bonds, offering a 7.9 per cent annual coupon. The bonds were “self-liquidating”, meaning the principle declined each year, and the rating agency Moody’s blessed the deal with an investment grade credit rating.

I don't see any reason that musical and financial-structuring creativity shouldn't be related.

Self-driving regulation.

Here is a paper by two law professors predicting a frankly alarming future of regulation-by-artificial-intelligence:

Lawmakers will be able to use predictive and communication technologies to enact complex legislative goals that are translated by machines into a vast catalog of simple commands for all possible scenarios. When an individual citizen faces a legal choice, the machine will select from the catalog and communicate to that individual the precise context-specific command (the micro-directive) necessary for compliance. In this way, law will be able to adapt to a wide array of situations and direct precise citizen behavior without further legislative or judicial action. A micro-directive, like a rule, provides a clear instruction to a citizen on how to comply with the law. But, like a standard, a micro-directive is tailored to and adapts to each and every context.

One can just about imagine some form of this in financial regulation, though one can also just about imagine a slippery slope from this to "The Matrix" (or "The Return of the Archons"):

People are worried about bond market liquidity.

It is not exactly bond market liquidity, but hedge funds and other investors are getting excited to divide up the $1.87 billion class-action antitrust settlement over credit-default swaps trading. We talked about that settlement a few months ago; the big banks were accused of conspiring to limit competition in the CDS market by undermining efforts to increase transparency and start new exchanges. So you could read the settlement as saying that CDS market illiquidity cost investors at least $1.87 billion, compared with the level of CDS market liquidity that would have existed if banks had just allowed for competition. That reading strikes me as a bit implausible. I said last time that the settlement seems to reflect "pretty high counterfactual expectations for how much better the market could have functioned," and all the bond-market liquidity woes make me doubt that efficient all-to-all electronic trading of credit default swaps is coming any time soon, even with the banks' cooperation. But that's not important right now; what's important is that the money is coming soon (probably later this year), and I wonder if the average credit-trading hedge fund would prefer an efficient transparent CDS market or a multimillion-dollar cash windfall.

Elsewhere, "U.S. public pension plans and mutual funds are sheltering more of their holdings in cash than they have in years." The mutual funds seem to be motivated by "the risk that investors spooked by volatile markets will pull out more of their money," which is in part a symptom of bond-market-liquidity worrying. But the pension funds might be more of a cause:

The movement of longer-term money to the sidelines has left the market increasingly in the hands of investors such as hedge funds, high-speed traders and exchange-traded funds that buy and sell more frequently, potentially leaving it more vulnerable to sharp swings, according to some money managers.

And here is a story about the Fed's plans to use margin rules to crack down on leverage in the securities-financing market, and you know what the reaction to that will be. Here's Karen Petrou of Federal Financial Analytics:

“These rules may improve the markets’ security, but they may well undermine their liquidity because you have fewer players” in a time of stress, she said. 

Me Friday.

I wrote about Steve Cohen's return to hedge-fund management in 2018. Here is Bloomberg's Katherine Burton on the subject, quoting a former investor in SAC:

“I think people will be lining up to give him money,” he said. “He’s one of the greatest traders in history.” In the two decades he ran his hedge fund, Cohen returned 25 percent a year, on average, and he never had a losing year in the portfolio he personally ran.

If I were Cohen, I would schedule a LeBron James-style press conference on January 1, 2018, and then announce that I was retiring from hedge-fund management. Who needs the hassle? He's rich enough. But that attitude is probably why I'm not him.

Elsewhere here is a Securities and Exchange Commission no-action letter essentially waiving certain automatic consequences of Cohen's securities-industry bar (specifically, consequences relating to private fund-raising by companies of which he is a shareholder). I generally think that the SEC's automatic consequences for wrongdoing tend to make the SEC look silly, and this one is an example. Like, you can't really think that Steve Cohen's actions should bar companies in which he is a minority shareholder from raising money. But it is also a bit embarrassing to grant Steve Cohen a waiver at the same time you are banning him from the industry for two years. There is no way to win with the automatic punishments.

Things happen.

How Valeant Tripled Prices, Doubled Sales of Flatlining Drug. Puerto Rico Pleads for Congressional Help as Lawsuits Are Filed. EU Announces Ruling on Illegal Tax Breaks in Belgium. Why Lending Club has shunned securitisations. Saudi Aramco I.P.O. Prospect Reflects Kingdom Looking Beyond Oil. "What I think probably some people have forgotten is that Sprint has assets and it can leverage those assets," says Sprint's CFO. Law Firms Risking Obsolescence, Report Says. Deal Means No Fraud Retrial for Ex-Chairman of Dewey & LeBoeuf. Charles Koch had lunch with the FT. "In FANG we take refuge." America, Your Credit Rating StinksHillary Clinton Made More in 12 Speeches to Big Banks Than Most of Us Earn in a Lifetime. Snapchat wants to manage your money. Allegro McDonald's.

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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