Climate Change and Sovereign Debt

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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Climate change.

The regulation of climate change as a matter of securities law is very odd. We've talked before about Exxon Mobil, which has been accused of covering up research about the risks of climate change in order to sell more oil. If those accusations are true, then that was a bad thing to do. But the odd part is that the accusations are being investigated as a matter of securities law: The problem is not that Exxon maybe lied to the public or regulators or legislators or customers or suppliers or anyone else involved in the use or regulation of oil; it's that Exxon maybe lied to its shareholders about how much climate change would cost them. Why would we as a society focus our attention on the effect of climate change on oil company shareholders? Who cares? The answer, of course, is that it is easier to punish companies for lying -- or almost-lying, or being careless, or omitting things -- in securities filings than it is to punish them for lying anywhere else.

Here is an article titled "S.E.C. Is Criticized for Lax Enforcement of Climate Risk Disclosure," and again I find it very odd. I mean, I can understand why the Securities and Exchange Commission's thoughts about climate change might be limited to its effects on investors. (The SEC's thoughts about all issues are, necessarily, limited to their effects on investors.) But the concern is actually that the SEC is not worrying enough about the effects of climate change on investors: "The S.E.C. has been underreacting in the extreme," says Senator Brian Schatz of Hawaii. The goal of the critics seems to be to get the SEC to use securities regulation as a mechanism of environmental regulation, despite the SEC's apparent lack of interest. In some ways it's a nice compliment to the SEC: Our securities regulatory apparatus is apparently so effective that we use it to address societal problems (climate change, conflict minerals, income inequality) that other regulators can't manage. The SEC is such a model regulator that it will soon do all of our regulating.

To be fair, though, it's not just political; there are also investors who are complaining. While energy companies do make climate-change disclosures, "many of these are vague generalizations that give investors little to work with":

Chevron, for example, wrote that “incentives to conserve or use alternative energy sources” might reduce demand for its products. Exxon noted that new laws might “reduce demand for hydrocarbons.” Neither company made clear to investors what the financial costs might be.

These are issues of a societal, or really planetary, scale. Chevron might be a bit better at predicting the political climate, or the actual climate, than its investors are, but it's hard to imagine Chevron reliably quantifying the future effects of climate change and climate regulation on its business. 

“We’re not asking for anybody to predict the weather or to become climate scientists,” Senator Schatz said. “We’re simply asking that the S.E.C. acknowledge that there is real risk for companies, and that it ought to be disclosed.”

I guess. But it is disclosed. The critics want it to be quantified. Elsewhere in regulatory agencies: "A Legal Battle Brews Over the Power of America’s Consumer Finance Watchdog."

Sovereign debt.

For most of the last 10 years, Argentina had a consistent offer for holders of its defaulted pre-2001 bonds: It would give them new bonds worth about 30 cents for every dollar of the old bonds. Some holders of old bonds objected. They sued, fought Argentina in court for years, and kept racking up victories, even in the U.S. Supreme Court. Once they seized an Argentine navy ship. Facing the imminent prospect of defaulting on its new bonds, Argentina was forced to the negotiating table. Its minister of the economy came to a mediation session in New York, sat down with the holdout bondholders, and offered them: 30 cents on the dollar. The consistency, at least, was impressive. Argentina was happy to negotiate terms with the holdouts, as long as those terms were 30 cents on the dollar.

But that was a year and a half ago, and since then Argentina has gotten a new government and made much more conciliatory noises about settling. Including at Davos:

In a bid to end a bitter legal dispute that has effectively barred the country from international capital markets since 2001, Alfonso Prat-Gay, finance minister, told a panel that Argentina would honour the face value of debts owed to the US hedge fund holdouts while seeking to negotiate the costs of accumulated interest.

“We want to put an offer on the table,” Mr Prat-Gay said, adding that Argentina was offering 120 cents on each dollar owed.

The problem, he said was that the creditors, including Elliott Management, were asking for 350 cents on the dollar, which had spiralled due to accumulated interest payments over the past decade on certain loans.

Obviously 120 is quite a bit more than 30. Also this just seems more like negotiation: Argentina says a number, Elliott says a higher number, Argentina raises its number, Elliott lowers its number, etc., you know how this works. The old government of Argentina apparently didn't.

Here is Charles Blitzer on "Best practices to resolve Argentina's debt dispute." Here are Juan Cruces and Tim Samples with "a quantitative analysis of factors underlying a potential settlement, including key valuation and investment hypotheticals." At Bloomberg, "Argentina's Fix-It Man Is Slowing Down and Investors Are Worried." Here is Robin Wigglesworth on proposals, from the International Monetary Fund and elsewhere, to fix the sovereign-debt restructuring process. Meanwhile, "Venezuela risks Argentina-style legal drama if it defaults." And "Negotiations to restructure roughly $9 billion of the debt of Puerto Rico’s power company collapsed late Friday, raising the prospect of the biggest default yet in Puerto Rico’s deepening debt crisis."

"In the short run, the market is a voting machine but in the long run, it is a weighing machine."

This is enjoyable:

Since its inception 1 year ago, a new index powered by crowdsourced investment ideas outperformed the S&P 500 by nearly 1.5%.

The CrowdInvest Wisdom Index is harnessed to an app that lets users vote on investment ideas. The index is open to all stocks listed in the U.S. with an average daily trading volume of $15 million or more over the preceding 20 days. The top 35 net long votes make it into the index, which is rebalanced monthly. Up to 4 companies in the index will be replaced on a monthly basis.

Voters on the app are limited to 1 vote per stock per month.

First of all, it is a sign of the times that this thing has to be called an "index." It's just a mechanism for picking stocks. Imagine a mutual fund that was like "we invest in an index that is constructed by surveying our analysts and putting their buy recommendations into the index, which is rebalanced every time we have a meeting." But index funds are hot, so "index" is now just the name we give to mechanisms for picking stocks. (Consider the "proprietary indexes" in structured products, or Sallie Krawcheck's Women's Index.) 

But also, isn't it fun that this thing outperformed? (It seems to have beaten the S&P but also the Russell 2000.) "Martin Mickus, founder of CrowdInvest, says he got the idea after reading the book 'The Wisdom of Crowds,' by James Surowiecki," figuring that the crowd could outsmart the experts at stock-picking. But the market is already a crowd. (And it already outsmarts the experts, which is why actively-managed funds keep underperforming.) The wisdom of crowds is how prediction markets, or just regular markets, work. The point of the CrowdInvest index is that it is a different weighting of the crowd's wisdom: In the market, you get one vote for every dollar you invest in a stock; in the CrowdInvest index, you get one vote per stock per month, plus you have to download an app. There are many plausible reasons to think that the dollar-weighting will be smarter: Putting more dollars into a stock is a good way to signal intensity of belief in that stock, for instance, whereas downloading a stock-voting app is a good way to signal that you have too much time on your hands. But here we are: The app's voting mechanism worked better than the market's. 

Twitter.

I should have a recurring "I am worried about Twitter" section. I am. "Twitter chief executive Jack Dorsey has confirmed the exit of a large swath of the company's leadership team," and he did it "in an elogated 'Tweenjoy' tweet" (here), which cannot have been tweenjoyable for him. "Was really hoping to talk to Twitter employees about this later this week," he tweemarked, before twannouncing the departures of four executives. Sadly there is not a Moment about the reshuffling, though there is one about a Kanye track list. Separately, Dorsey apparently "had told the company that one condition of returning as CEO was that the entire board must eventually be replaced"; I assume another condition was that everyone had to be replaced as disruptively and awkwardly as possible. Anyway:

The San Francisco-based company plans to announce the appointment of two new board members soon, said the people familiar with the plans. While the names of the new directors could not be learned, one of them was a high-profile media personality, the people said.

This makes sense, since Twitter is a beloved necessity for almost everyone who works in media, which is why I am confident that Twitter will find one of the few media people who doesn't use Twitter. Hiring non-Twitter users to make Twitter less appealing to Twitter users seems to be Twitter's core strategy. Anyway Matt Yglesias's advice for Twitter remains about right, though I doubt he's the media personality they have in mind.

Relativity.

Here is a story involving money, algorithms, Elliott Management, expense reporting as "an art form," a baby wolf and "one of the greatest salesmen Hollywood has ever known," who did stuff like this:

Because the performance of any one movie is unpredictable, studios have always managed risk by betting on an entire slate of films. But Kavanaugh presented banks with a couple of big ideas: Borrowing a tool from Wall Street, he touted his “Monte Carlo model,” a computer program that runs thousands of simulations, as a device that could predict a film’s success far more reliably than even a sophisticated studio executive.

A good trick is, find an industry where the words "Monte Carlo model" make you sound brilliant and mysterious, then go to town. Anyway things did not go entirely well, though the ending is ambiguous. Elsewhere: "The Big Cow Con."

People are worried about unicorns.

In addition to bond market liquidity, Davos also spent some time worrying about the lack of initial public offerings by unicorns:

Executives at both the New York Stock Exchange and the Nasdaq stock market said on the sidelines of the World Economic Forum here that they expect very few companies to try to make their market debuts.

I guess that's a non-unicorn worry too. And Robert Greifeld talked up Nasdaq's secondary trading system for private stocks, and "predicted that these private markets would become even more popular" given the need for liquidity and the absence of IPOs.

In Blood Unicorn news, "U.S. health inspectors have found serious deficiencies at Theranos Inc.’s laboratory in Northern California," and Theranos "appears to be incurring losses on many" tests that it outsources to the University of California at San Francisco. A very unicorny model for disrupting the blood-testing industry would be (1) pay someone else to run traditional blood tests, (2) sell those tests to patients at a loss, and (3) make up the difference with venture capital funding.

People are worried about stock buybacks.

Here is John Coffee with "Hedge Fund Activism: A Guide for the Perplexed," which is only partly about buybacks. Coffee's main goal here seems to be to stop activist "wolf packs" by "changing the definition of 'group'" under Section 13(d).

People are worried about bond market liquidity.

People are especially worried about bond market liquidity at Third Avenue, which "froze its Focused Credit Fund in December, after assets dropped from $3.6bn in July 2014 to less than $800m." To Third Avenue's credit, sort of, it had been worrying about liquidity for a while, and was trying to deal with it: "The fund’s managers were sufficiently concerned to consider alternative solutions more than a year before the havoc caused by December’s freeze," and "they decided to raise locked-up capital in a vehicle that better matched the liquidity of the underlying assets" by starting a business development corporation. Which probably would have been a good idea. The bad idea is that they were discussing the BDC plan with American Realty Capital, and "the plan was derailed in November 2014 after American Realty publicly revealed 'intentional' accounting errors." Also there may have been a certain amount of boiler-rooming at, or at least near, American Realty Capital. Mutual funds may not be the best vehicles for investing in distressed debt, but the alternative investing vehicles have their own problems.

Meanwhile in the Treasury market, off-the-run Treasuries yield about 2.2 basis points more than on-the-run Treasuries, up from a five-year average of 1.26 basis points, because of liquidity. This being the Treasury market, there is a lot of hand-wringing: 

“It’s all about the cost of balance sheet,” said Ward McCarthy, the chief financial economist at Jefferies Group LLC. “This makes it more expensive for anybody to be involved in the Treasury market in anything besides the active securities. That makes it more difficult and probably more costly for investors to manage portfolios.”

It has gotten to a point where the Treasury, in its quarterly dealer survey on Jan. 15, asked for feedback on “liquidity conditions for off-the-run Treasuries” and “what steps the Treasury should consider if you believe that liquidity in off-the-runs has diminished.”

Elsewhere: "What Liquidity Crisis? A Contrarian’s View on Bond Market Liquidity."

Things happen.

A Colleague Drank My Breast Milk and Other Wall Street Tales. Blankfein, Gorman Handed Pay Reductions After 2015 Stock Slump. Tyco International and Johnson Controls Are Said to Be MergingU.S. Banks Cut Off Mexican Clients, as Regulatory Pressure Increases. SunEdison to Give David Einhorn’s Greenlight Capital a Board Seat. Calculating SEC Civil Money Penalties. Sotheby’s Announces $12 Million Loss Over Taubman Sale. When Novo Banco came to Davos. Meet The Most Photographed Trader On Wall Street. "We find that moral hazard effects are limited if bailouts are systemic and broad-based." Mike Konczal on shadow banking. Why Robots Mean Interest Rates Could Go Even Lower In The Future. Why I Challenged My Kids to Start Companies Before College. N.E. Patriots wide receiver Julian Edelman honored as 4th-best Jewish football player ever. "Could she tell the difference when he returned after being a badger from, say, when he returned from being an otter?" A Small Cocktail Hour Will Be Held At The Conclusion Of This List Of Adorable Marmosets. 

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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