Money Stuff

Banks, Oil, Davos and Blockchains

Also "The Big Short," whistleblowers and corporate control.


"Morgan Stanley reported $908 million in fourth-quarter profit and a revenue gain that exceeded analysts’ estimates as equity trading rose and expenses fell." Here are the press release and presentation, which grades "Progress in Fixed Income and Commodities ROE" as "Failed to meet objective: Initiated major restructuring." There's also a slide on "Continued Compensation Expense Discipline," good times.

Elsewhere, "Bank of America Corp. said its fourth-quarter profit rose 9%, thanks in part to growth in its consumer bank and trading revenue holding up despite tough market conditions." Here are the press release, presentation and financial supplement.

In head-to-head Bank of America vs. Morgan Stanley news, "The No. 1 brokerage in the country for most of the past decade, Merrill is now at risk of slipping to No. 2 behind Morgan Stanley in terms of annual revenue." Also perhaps in terms of fun:

Merrill and Bank of America was an uneasy marriage from the start. Merrill brokers prized their independence and feared their pay and autonomy would be scaled back under the ownership of a firm that boasted of being “the Wal-Mart of banking.” Gone are the holiday parties of the precrisis Merrill, and the international unit was sold to a Swiss firm, which means overseas travel to see clients has been curtailed.


There's apparently too much of it:

Global oil markets could “drown in oversupply,” sending prices even lower as demand growth slows and Iran revives exports with the end of sanctions, according to the International Energy Agency.

And "there is some concern the Iranians can pull a rabbit out of the hat and pull out bigger volumes," says a strategist. You might think that having more of a necessary commodity would be good, but here is Paul Krugman (and Tyler Cowen) on how "small oil price declines may be expansionary through usual channels, but really big declines set in motion a process of forced deleveraging among producers that can be a significant drag on the world economy." 

It's definitely bad if you are in the business of producing oil, though it is possible to overstate the badness. For instance, here is a Zero Hedge article claiming that "the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down"; the Dallas Fed took to Twitter to deny the story, saying that "The Dallas Fed does not issue such guidance to banks." Or here was a story about North Dakota sour crude, which was briefly apparently selling for negative 50 cents a barrel:

Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it offered to pay $1.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a corrected list of prices posted on its website Monday. It had previously posted a price of -$0.50. The crude is down from $13.50 a barrel a year ago and $47.60 in January 2014.

The -$0.50 seems to have just been a mistake, and I feel like you should be extra careful to check your numbers when they vary around zero. "Telling producers that they have to pay you to take away their oil certainly gives the producers a whole bunch of incentive to shut in their wells," says a guy, which is quite reasonable but which turns out not to be strictly in accordance with the facts. Still, as incentives go, positive $1.50 is a lot closer to negative $0.50 than it is to $47.60.


Some rich people are in Switzerland this week to talk about the world, and if that sounds interesting to you maybe you should be writing this section of Money Stuff. "It seems as if much of the conversations in Davos are a form of sanitized debate," concedes Andrew Ross Sorkin. "The official Davos theme this time — 'Mastering the Fourth Industrial Revolution' — may sound oddly out of tune," writes Liz Alderman. "Davos Robot Eclipses Davos Man as Gloom Descends on World Elite," proclaims this Bloomberg headline. If you're at a Davos party and the robot isn't there, you are at the wrong party; the robot is always at the coolest party. It's got an algorithm.


The big appeal of the blockchain is that it allows for a secure, decentralized database that everyone can rely on without traditional governance mechanisms of trust and agreement. The code takes care of the trust. The problem is that this is not true, as proved by the breakup in bitcoin over transaction size limits. Here is the Wall Street Journal on the fork in bitcoin among Bitcoin XT, Bitcoin Core and Bitcoin Classic, three different ways to structure the bitcoin blockchain, each of which has its adherents, and none of which can win out through cryptography alone. Here is former bitcoin developer Mike Hearn, an XT proponent: "Despite knowing that Bitcoin could fail all along, the now inescapable conclusion that it has failed still saddens me greatly." Coordinating economic transactions among humans remains an unavoidably human problem: It's not enough for your computers to agree, you have to agree on what they're supposed to agree about. 

Non-bitcoin blockchain optimism proceeds apace; here is Paul Murphy on a new U.K. government report advocating blockchains for health care and passports for some reason. 

"The Big Short."

I have in my life watched a number of cop shows. There is a stereotyped cop-show relationship, amusingly parodied in "So I Married an Axe Murderer," in which the hero cop is held back from catching the murderer by his intransigent by-the-books superior. "You're a loose cannon, McBain!" shouts the lieutenant. "You're off the case!" The lieutenant's position is always obviously absurd. We never understand his reasoning, are never asked to give his arguments sympathetic attention. He's just an underdeveloped loud obstacle in the hero's path, a source of false conflict.

To me, the movie of "The Big Short" sometimes felt like two hours of that. ("You're shorting the housing market!? You're off the case!") But other people have taken it as a reason to re-litigate the financial crisis. Michael Grunwald, in Politico, argues that the movie's mistake is that "synthetic CDO's didn't create the crisis," and that the movie

actually overstates the complexity of the crisis. It ultimately misstates the relative importance of stupidity versus fraud in creating the crisis. And it severely understates what has been done to make sure the crisis doesn’t happen again.

Mike Konczal disagrees, arguing that the movie appropriately "doesn't focus on the financial crisis," but instead "focuses on how the housing bubble was created and sustained while previewing the destruction it would take on the people whose homes were in those mortgages bonds." And:

Only securitization, which sets the plot in motion, could align the many bad incentives necessary for the housing losses. The Big Short does a great job of showing how each of these actors’ poor decisions amplify the damage the others could cause.

And here are David Dayen, Dean Baker and Christine Hurt on "The Big Short." Elsewhere, here is Bess Levin on the first episode of "Billions."

Is there anything you want to share with the SEC?

On Friday, the Securities and Exchange Commission "announced a whistleblower award of more than $700,000 to a company outsider who conducted a detailed analysis that led to a successful SEC enforcement action."

Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower, added, “This award demonstrates the Commission’s commitment to awarding those who voluntarily provide independent analysis as well as independent knowledge of securities law violations to the agency.  We welcome analytical information from those with in-depth market knowledge and experience that may provide the springboard for an investigation.”

Ohhhhh. Ummmmm. Hmmmmm. Yes. Look, SEC, I don't want to tell you how to do your job, unless you pay me $700,000. If the private sector has expertise that the SEC lacks, and that can lead to a successful enforcement action, then I guess the SEC should pay for it. And maybe a bounty system like this is even the most efficient way to pay for it.

But hoo boy is the world full of cranks. Cranks who think that the real problem is naked short selling, or latency arbitrage, or gold manipulation, or fluoridation, or something else that the SEC hasn't noticed but really ought to. Many of those people would be happy to provide free advice to the SEC about how it could go about catching the real crooks. But I suspect many more of them would be even happier to provide paid advice. And now they know that's a possibility. I predict that the whistleblower-hotline inbox will soon be a lot more full, and more ridiculous. 

Market structure.

Deutsche Bank, which has already been sued in the U.S. over its use of "last look" in automated foreign exchange trading, will apparently be sued in the U.K. too. There are a lot of bank misdeeds over the last few years -- FX fixing, Libor -- where the damage to identifiable customers is hard to quantify. But if banks were using last look without disclosing it, it ought to be pretty easy to figure out how much that cost customers, which probably makes it an appealing topic for lawsuits.

Elsewhere in market structure, this apparently happened:

On Friday, January 8th, 7pm, Sarah Meyohas will perform at 303 Gallery. Surrounded by blank canvases, Meyohas will discuss financial markets.

Over the next ten days, Tuesdays to Fridays, 1-4pm, Meyohas will trade stocks on the New York Stock Exchange during regular market hours. She will place her trades directly from 303 Gallery. Once she affects a stock's valuation, Meyohas will announce the change in market capitalization and record the shift with oil stick. Marks will accumulate in a gestural record of the stock's performance. The line, value over time, is an index of her movement, physically in the gallery and virtually in her ownership. Each painting is one of many financial records, but unique as an artwork. Any trade may only result in one painting.

If you're an equities trader and you noticed Meyohas affecting a stock's valuation, do let me know. 


In New York Magazine last week, Stephen Witt wrote the most complete account I've yet seen of the Valeant/Philidor/R&O/etc. saga. Valeant, or at least Philidor, does not come off looking great:

The audit showed that, in addition to the business Reitz oversaw personally, R&O was filling thousands of prescriptions all over the country. These prescriptions had been filled with Reitz’s name and pharmacist-identification number, but they were dispensed to patients that Reitz had never heard of. Many were for medications that R&O didn’t carry, and a few were even backdated to before R&O had been sold.

When Reitz called Philidor to object, the Philidor representative told him not to worry, as the company’s lawyers had signed off on this practice.

Also fun: "Ackman is a contrarian, so perhaps it was Pearson’s lack of adorability that made Ackman love him."

People are worried about stock buybacks.

Stock buyback worries get you coming and going: People worry that stock buybacks prevent innovation, enhance inequality, strip companies of their productive capabilities, etc., but when they stop, people worry about that too:

One reason for the recent poor market performance is that corporate buybacks are precluded during the month before earnings are released. Any destabilizing macro news that occurs during the blackout window amplifies volatility because the largest source of demand for shares is absent.

Sometimes I imaginine a market in which the only agents are (1) index funds and (2) corporate chief financial officers, and all demand is either index demand or corporations buying back their stock when they think it's cheap (or selling it when they think it's expensive). I don't think it would quite work as a way to allocate capital, but it's fun to think about.

People are worried about bond market liquidity.

My theory is that bond market liquidity worrying is procyclical: In boom times, people worry about hidden dangers in the bond market, while when markets are down they have more pressing things to worry about. So I'd expect a bit of a slackening in bond market liquidity worrying, but you never know. Here is Gretchen Morgenson worrying about high-yield bonds in general, but there are enough liquidity-related concerns to count it here. 

Meanwhile in Treasury-bond liquidity worries: "The Treasury Department on Tuesday plans to ask for input on how the market has changed and what should be done so that it can operate more smoothly." 

Me Friday.

I wrote about two Goldman Sachs settlements, one for mortgage bonds, one for naked short selling.

Also, in Money Stuff on Friday, I mentioned a Deutsche Bank review of "whether some employees exaggerated demand as they marketed new securities backed by risky auto loans." I called this "the next frontier" in regulators' efforts to stamp out once-sort-of-standard sharp practices in bond markets. On Twitter, Stefan Loesch pointed out that the investigation has some similarities to the case of Terra Firma and EMI Group: Terra Firma, Guy Hands's private equity firm, agreed to buy EMI for 265 pence a share, but later sued Citigroup, EMI's bankers, for allegedly lying about the existence of another bidder for EMI. The bankers' job was of course to create the impression that there was a competitive auction for EMI, but preferably without actually lying about it.

Things happen.

Barclays’s New CEO Beats a Retreat in Africa. Bond Pain in Emerging Markets Nowhere Worse Than in Africa. Puerto Rico Revises Plan to Reduce Debt as Optimism Dwindles. Market for Private-Label Mortgage Bonds Is Recovering, but Slowly. What Donald Trump’s Plaza Deal Reveals About His White House Bid. Cohen's Point72 Seeking to Hire Up to 70 for London Office. SEC Wins Jury Verdict in Insider Trading Case (earlier). "For the full year, lawsuits were brought in 87.7% of completed takeovers versus 94.9% in 2014. However, the lawsuit rate dropped precipitously in the fourth quarter of 2015 to 21.4% of all transactions in the wake of Delaware's challenge." Merger Options and Risk Arbitrage. Everyone is a Closet Technician. Uber for helicopters. The tennis racket. Soccer bonds. Vatican finance chief sings praises of free markets. Million-pound former toilet for sale in London's Spitalfields. Harvard student: "We certainly hadn’t prepped for the poor having a Marxist revolution." Who likes Nickelback?

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