Money Stuff

Swiss Banks and Bail Collateral

Also Yale, unicorn branding and the temptations and perils of bond market liquidity.

Poor Credit Suisse.

"Credit Suisse Group AG posted the biggest quarterly loss in seven years as it wrote off goodwill and set aside provisions for litigation," and there is a certain symbolism in the fact that the 3.8 billion Swiss francs of goodwill impairment are "mainly related to the acquisition of Donaldson, Lufkin & Jenrette (DLJ) in 2000." In 2000, "in a move to better compete against Wall Street's giants," Credit Suisse bought DLJ for $11.5 billion, giving it "a leading presence in junk bonds and merchant banking." Now it has lost interest in competing against Wall Street's giants, and "Chief Executive Officer Tidjane Thiam, 53, has pledged to focus the second-largest Swiss bank on wealth management to tap growth across Asia with the securities divisions hurt by tougher capital rules and a drop in revenues."

But the investment bank is still there, still paying people, still affected by "volatile market conditions and widening credit spreads on a number of legacy positions in fixed income business." And still, for accounting purposes, carried at more or less its 2000-era, leading-presence-in-junk-bonds-and-merchant-banking valuation. Until now. Now Credit Suisse has, ceremoniously, in its financial statements, bid farewell to its investment banking ambitions.

Also there were 355 million francs of restructuring costs and 821 million francs of litigation items, and 4,000 jobs will be lost.

Investors are not happy. I mean, they're fine with the scaled-back banking ambitions, but the losses are bad:

“The numbers are terrible,” said Dieter Hein, an analyst at AlphaValue based near Frankfurt who is reviewing his recommendation on the shares. “The bank has started on its new strategy and is finally moving away from investment banking. In the mid- to long-term, it’s right to focus on growth in Asia, but what bad timing given the current environment.”

In other European bank news, Deutsche Bank -- which recently wrote down its own goodwill for the 1999 acquisition of Bankers Trust -- has seen its contingent convertible bonds plunge this year.

Poor Martin Shkreli.

Martin Shkreli had a rough day yesterday:

The assets the former drug executive pledged to make bail in a securities fraud case have fallen so far in value that he may need to put up more to stay out of jail, a prosecutor said Wednesday. Shkreli used an E*Trade Financial Corp. account, once valued at $45 million, to secure his $5 million bail. Most of that account was stock of KaloBios Pharmaceuticals Inc., Assistant U.S. Attorney Winston Paes said during a court hearing. 

The drugmaker, formerly led by Shkreli, sought bankruptcy protection from creditors following his arrest in December. The shares plunged to $2.03 from a high of $45.82 in November. 

On the one hand, it is a little rough that you should have to go to jail just because your stocks fall. On the other hand, the story here is not quite that Shkreli put up $45 million worth of stock, and it lost value, and now it's worth less than $5 million. I mean, yes, when he put up the $45 million E*Trade account as bail on January 7, KaloBios had last traded at $23.59, making Shkreli's stake worth about $49 million. And, yes, it closed yesterday at $2.00, making his stake worth about $4.2 million. But that $23.59 last trade was in mid-December: After that, KaloBios's stock was halted, and it filed for bankruptcy on December 30. By the time Shkreli put up his E*Trade account as bail in January, it obviously was not worth $45 million, since it consisted mostly of stock in a bankrupt company whose stock price hadn't fallen only because trading had been halted. The events that reduced the value of the account happened in December, not this week; it just took a while for the prices to catch up. I pointed this out at the time. It's a bit strange that it took prosecutors this long to notice.

Also, when he put the account up as bail, the New York Times reported that it was "the first public accounting of just how much money Mr. Shkreli — who last year became the focal point of a national debate over price gouging in the drug industry — has made over his brief career on Wall Street and in the pharmaceutical business," and that it "should put to rest speculation on how Mr. Shkreli was able to come up with $2 million to buy the only known copy of a recent album by the rap group Wu-Tang Clan." This might revive that speculation a bit. Yes, Shkreli's KaloBios stake was briefly worth $90 million on paper, but he paid $3.3 million for it, and now it's almost back to where he started; the glory days of KaloBios speculation only lasted about a month. It's just possible that Shkreli was better at convincing people that his investments were valuable than he was at actually making them valuable

In other news, whenever Shkreli has said something horrible, I have wondered how he would ever hire new lawyers. Well, now he has new lawyers, led by Benjamin Brafman, and they have some new rules:

"One of the conditions of my engagement was from henceforth he does not speak with any member of the press at all until the criminal charges are resolved," Brafman told reporters.

Good rule! Since Brafman said that, Shkreli has tweeted a lot and done a video chat, and he appears to be headed to D.C. for today's drug-pricing hearing.


I went to Yale Law School, the law school for people who are not quite sure they want to be lawyers, and now I am in fact not a lawyer, so I sympathize with the students and alumni of Yale's business school who think it's too businessy:

Some students and alumni are voicing concerns about whether the management program remains as committed to sending students on nonprofit career paths, and worry that its push for growth comes at the expense of its character.

"A big, fancy, new, shiny, modern building attracts different students than cozy houses," says a graduate nostalgic for the cozy houses (actually mansions) that Yale's School of Management occupied before moving to its current big fancy building. He works in health-care consulting. Another consultant, a senior partner at the Boston Consulting Group, also expresses nostalgia for when SOM was at its "most quirky and traditional" (in 1982). Meanwhile, the guy who co-founded Honest Tea "says it is high time the school pursued growth, especially given its Ivy League pedigree and proximity to New York." It is a small sample, but one possible conclusion is that the more corporate your subsequent career, the more attached you are to the notion that at least your business school was hip and quirky.

In other Yale news, here's the story of "The Secretive Hedge Fund That's Generating Huge Profits for Yale." It is only tenuously Yale news -- Yale's endowment manager, David Swensen, seeded the fund alongside Tom Steyer of Farallon Capital Management -- but the fund, Nancy Zimmerman's Bracebridge Capital, is interesting enough. It's a relative-value fixed-income fund, manages $10.3 billion, has returned about 10 percent a year since inception, and is "the largest hedge fund in the world run by a woman," while being quiet enough that "Leda Braga’s $9.5 billion Systematica Investments Ltd. is often cited as the top woman-led firm."

(Disclosure: My wife works at Yale Law School.)


Wells Fargo will pay $1.2 billion to settle a lawsuit claiming that it improperly certified some mortgages for Federal Housing Administration insurance that they didn't qualify for. Preet Bharara tried to make this lawsuit sound interesting when he filed it in 2012 -- he "said that Wells Fargo had engaged in a 'reckless trifecta” of poor training, deficient loan underwriting and poor disclosure in the government-backed loan program" -- but I cannot muster much enthusiasm for it. It covered "a 10-year time frame through 2010," meaning that in 2016 Wells Fargo is paying for mortgage misconduct from 2000. The supply of pre-crisis mortgage misconduct seems limitless, the statutes of limitations are flexible, and the mortgage-lawsuit industry may be too large and lucrative ever to really end.

Elsewhere, here is a Securities and Exchange Commission enforcement action against American Growth Funding II LLC, which allegedly "promised investors 12-percent annual returns and falsely claimed its financial statements were being audited each year."

People are worried about unicorns.

It is not perhaps the most important of unicorn worries, but Uber changed its logo and people are upset.

People are worried about stock buybacks.

Not Apollo Global Management, though, which is buying up to $250 million of its own stock:

Apollo’s market value has fallen to a level that “to us is kind of an absurdity” but offers “an opportunity, clearly, in terms of repurchasing shares,” co-founder Leon Black said on an earnings call with analysts

I suppose the main buyback worry is that buybacks are a short-term fix that strip companies and stifle innovation. That worry seems less acute at a private equity firm. If it wasn't spending the money on its own stock, it would probably be spending it on financial innovation, and who wants that? Elsewhere, here are Marty Lipton and Marshall Shaffer on "evidence for the fact that, in the current corporate governance environment, short-term investors possess the undue ability to pressure companies into maximizing near-term gains at the expense of long-term growth."

People are worried about bond market liquidity.

How worrying is bond market liquidity? So worrying that the $1 billion "activist hedge fund Orange Capital, co-founded by former Citigroup executive Daniel Lewis," decided to shift from activist equity investing "into fixed-income investments that require a longer time frame," and then shut down because bond market liquidity is so bad:

Shorter duration hedge fund assets have grown at a rapid pace even as market liquidity has deteriorated, particularly in the high yield and distressed debt markets. We believe that credit investing through traditional, liquid hedge fund strategies will prove challenging for investors as the credit cycle turns.

You could just ... stay an activist equity fund ... no?

Elsewhere, the U.S. Treasury Department "will reduce the issuance of government bonds maturing in five years or more by $18 billion for the quarter ending in April," and you know where this is going:

If the retreat from risk that has characterized 2016 intensifies, the narrowing Treasury supply could amplify the fear trade in a market that already is suffering from limited liquidity and heavy momentum trading, analysts said, potentially pushing yields still lower.

Things happen.

Investors Shun Bank Stocks. Bond Markets Are Underestimating the Fed, Goldman and Pimco Warn. The Yield Curve Inverted! Toxic Loans Around the World Weigh on Global Growth. Citadel Makes Push for Seats on NYSE FloorForeign funds cut quotas in China investment scheme. Redstone Resigns as CBS Executive Chairman"Richmond Fed researchers estimate that 61 percent of the liabilities of the financial system are subject to explicit or implicit protection from loss by the federal government." Walmart Sues Puerto Rico, Claiming an Unfair and Onerous Tax Burden. Goldman Sachs's Blankfein Says He's ‘Probably Cured’ of Lymphoma. Hillary Clinton took $675,000 from Goldman Sachs for three speeches because "That's what they offered." Jose Canseco Is Tweeting About the Bank of Japan's Negative Rates. Before a Meeting, Tell Your Team That Silence Denotes Agreement. Ruth Madoff turned to pot, Funyuns and expensive wine to cope with Bernie. Ant Simulator Cancelled.

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