Bank Worries and Libor Lying

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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People are worried about banks.

A measure of the success that global regulators have had in making banking boring is that now even the bank crises are pretty boring. Or whatever is happening right now to European banks. Stocks are down, credit-default swaps are wider, and additional Tier 1 capital securities are a particular focus after (strongly denied) reports that Deutsche Bank might not have enough money to pay interest on its AT1 notes this year. But it's less of a crisis and more of a slow immiseration:

“The worries about these bonds represent real fears that the European banking system may be weaker and more vulnerable to slowing growth than a lot of people originally thought,” said Gary Herbert, a fund manager at Brandywine Global Investment Management LLC, which oversees about $69 billion in global fixed-income assets. “It’s the epicenter of growth concerns globally. And it doesn’t look pretty,” he added.

Here is Paul Davies:

In truth, banks don’t face an acute crisis as in 2008. It is something that in some ways looks worse: a chronic profitability crisis that makes it impossible for banks to build up barely-adequate capital bases.

Obviously the big European banks still have a lot of markets exposure, but they are far less markets- and investment-banking-oriented than they were in 2008; they also have "'ample liquidity,' with deposits flowing in and higher capital buffers." Even the worries about additional Tier 1 securities are in some sense boring: Those securities are supposed to bear losses when banks get weaker; unlike in 2008, when risk spread to unanticipated places, here the worries about banking are focused exactly where they're supposed to be. A portfolio manager says that "AT1s are instruments of regulators, by regulators, and for regulators," which is absolutely right, and they're working as designed.

So today's worries are less about hidden losses on wild bets and more about an inability to make all that much money. In his memo assuring employees that Deutsche Bank is "absolutely rock-solid," Co-Chief Executive Officer John Cryan focused on legal expenses:

Cryan said he isn’t concerned about the Frankfurt-based lender’s ability to meet legal costs, he wrote in the memo published on Tuesday. While Deutsche Bank will “almost certainly” have to add to its provisions for legal costs this year, the firm has already accounted for it in its financial planning, according to Cryan.

The problems are the boring and chronic problems of banks facing low growth, restructuring pains and the turn of a credit cycle; the excitement has gone out of even the crises.

Sales vs. fraud.

Liam Vaughan at Bloomberg took a deep look at how the U.K. prosecution of six brokers accused of manipulating Libor fell apart, and it is fascinating and occasionally hilarious. My favorite part is broker Noel Cryan's explanation for exchanging "dozens of instant messages" with convicted Libor manipulator Tom Hayes "in which he pledged to help manipulate the rate." The explanation is that he was lying:

Prosecutors argued the communications proved Cryan’s guilt. But he testified that it had all been a ruse. He’d never actually followed through on Hayes’s requests, he said, but only deceived him to allow his firm to pocket the more than 200,000 pounds commissions Hayes’s bank paid as rewards.

When Chawla asked Cryan how he justified lying to one of his best and longest-standing customers, Cryan cracked a wide smile. “It’s called broking Mr. Chawla,” he said.

Oh man, is it? They should put him back on trial for defrauding Hayes's bank out of those 200,000 pounds. We talked just yesterday about the sometimes porous boundary between salesmanship and fraud, but here we are at a bizarre triple boundary between brokering, deception and Libor manipulation. In any case, the Serious Fraud Office "didn’t have any proof that Cryan had actually passed on Hayes’s requests to Tullett Prebon’s cash brokers to carry them out," which is kind of a weird oversight. One lesson here is that written electronic communications in which defendants agree to manipulate Libor are not necessarily by themselves enough to prove that those defendants manipulated Libor. Since Libor cases tend to be all about the incriminating chat logs, that's an important lesson.

Elsewhere in U.K. enforcement:

The Financial Conduct Authority (FCA) has today fined Achilles Macris £792,900 for failing to be open and co-operative with the Authority. Mr Macris was Head of CIO International for JPMorgan Chase Bank, N.A. in London. In the role he was responsible for a number of portfolios, including the synthetic credit portfolio, at the time of what became known as the ‘London Whale’ trades.

Market structure.

Here's a comment letter on IEX's application to become a public stock exchange from Eric Budish, a professor at the University of Chicago's Booth School of Business who is the main advocate for replacing our current equity market structure with frequent batch auctions. The comment letter is pro-IEX, but is much more strongly pro-frequent batch auctions, as you might expect:

IEX’s design only prevents latency arbitrage for pegged orders, which are non-displayed, and does not prevent latency arbitrage for standard limit orders, which are displayed. This is not an oversight, but rather reflects a fundamental tension in IEX’s design. IEX’s method of preventing latency arbitrage relies directly on price information coming from other exchanges, so IEX is only able to prevent latency arbitrage for orders that are explicitly pegged to prices discovered elsewhere. For standard, plain-vanilla limit orders – which contribute to price discovery, rather than being pegged to prices discovered elsewhere – IEX’s design has no effect on latency arbitrage. The displayed part of IEX’s market is a standard continuous limit order book (as essentially mandated by Reg NMS), with latency arbitrage built in. The only difference is that the race between liquidity providers and stale-quote snipers is delayed by 0.00035 seconds out of the starting gate. 

In other vaguely market-structure-ish news, Yelp's earnings "were released early due to a coding error by vendor PR Newswire." The Commodity Futures Trading Commission's whistleblower program has eight employees and a $268 million fund, but in four years it has given out only two awards for a total of $530,000. And: "Obama Will Seek to Double Budgets for Wall Street Regulators."

Oil and gas.

It was a weird day for Chesapeake Energy Corporation yesterday, as its "shares initially lost more than half their value after a Debtwire report that it had brought on restructuring attorneys from Kirkland & Ellis LLP to help sort out its balance sheet." The stock recovered some after Chesapeake issued a statement saying, no, Kirkland have been our lawyers since 2010, there's no news here. Also that "Chesapeake currently has no plans to pursue bankruptcy and is aggressively seeking to maximize value for all shareholders," never something you really want to write in a press release.

Elsewhere, if you are an oil company and you want to hedge the price of oil, you can buy a floor on the price of oil. But that floor is expensive. You can cheapen it by selling a cap; the combination of bought floor and sold cap is a collar. But even a collar can cost money, depending on the strike prices of the floor and the cap, so you can cheapen it even more by selling back another floor -- "sometimes called a subfloor" -- at some ridiculously low oil price. This is called a "three-way collar." It is straightforward option math, but the deep psychological idea is that if oil gets to that laughably low subfloor price, things will be so bad that losing the protection of your hedges will be the least of your worries. Guess what happened?

Asset management.

Here is Robin Wigglesworth on the "smart beta wars," in which big active fund management companies are trying to compete against the inexorably advancing forces of indexing and exchange-traded funds by launching smart beta funds that "take a basic passive investment strategy but tweak it to generate above-market returns, for example by weighting companies in a stock index completely equally, favouring cheaper stocks or those with momentum." Read to the end, where "smart beta 2.0" gets a mention.

Here is Joseph Cotterill defending Tim Geithner for borrowing money from JPMorgan to invest in his own Warburg Pincus funds: He's putting skin in the game, which is a good thing.

Here is Bloomberg's Janet Lorin on a study finding that "smaller U.S. college endowments lost money on their hedge fund investments in the most recent year, trailing larger universities that often have access to better-performing managers," and honestly $25 million does seem like kind of a small endowment to invest in hedge funds? At the high end, though, Bloomberg's Sonali Basak reports that "American International Group Inc. plans to exit at least half the hedge funds in which the insurer is invested." And Bloomberg Gadfly's Duncan Mavin points out that hedge funds themselves are getting nervous about banks, and "have rapidly expanded their prime brokerage relationships -- a sign they're concerned again about the prospect of a disruption to the service."

Apollo LBOs Apollo.

I saw the headline "University of Phoenix Parent Apollo Education to Be Taken Private," and I held my breath and clicked, hardly daring to hope, but it's true, it's true: "Private-equity firm Apollo Global Management LLC agreed Monday to buy Apollo Education Group Inc. for about $1.1 billion." The Wall Street Journal says that Apollo Education "isn’t related to Apollo Management despite the name," but soon that won't be true any more! I have nothing substantive to say about this, but the parallel existence of Apollo the private equity firm and Apollo the for-profit college company has long been a nagging loose end in the capital markets, and I'm glad they've decided to tidy it up.

People are worried about unicorns.

I say sometimes that the tech industry is about moving fast and breaking things, while "finance is an industry of moving fast, breaking things, being mired in years of litigation, paying 10-digit fines, and ruefully promising to move slower and break fewer things in the future." This is a perpetual problem for the fintech industry, which has tech DNA and financial regulation, but it's not just fintech. Will Alden at BuzzFeed tells the story of Zenefits, which "offers free human resources software to small businesses, but makes its money acting as a broker when its users purchase health insurance for employees." Apparently a lot of its insurance deals "were done by employees without necessary state licenses," because, you know, move fast, break things. Its founder and chief executive officer, Parker Conrad, has now resigned, and new CEO David Sacks is in full rueful-apology mode:

Sacks, in the email, said Zenefits’ “culture and tone have been inappropriate for a highly regulated company.”

“I believe that Zenefits has a great future ahead, but only if we do the right things,” Sacks told employees. “We sell insurance in a highly regulated industry. In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die.”

Incidentally this seems to be mostly the result of Alden's reporting at BuzzFeed, which first brought Zenefits's compliance problems to light, so this is an interesting disclosure:

Andreessen Horowitz, one of the tech world’s most prominent venture capital firms, has invested more money in Zenefits than in any other startup in its portfolio. (Andreessen Horowitz is also an investor in BuzzFeed.)

That's one Andreessen Horowitz unicorn goring another.

Elsewhere in fintech and unicorns, Felix Salmon was as creeped out by that SoFi Super Bowl ad as I was.

People are worried about stock buybacks.

Nah, buybacks are great, "Buybacks could be the stock market savior this year."

People are worried about bond market liquidity.

Here's the latest from the New York Fed Liberty Street Economics blog, "Corporate Bond Market Liquidity Redux: More Price-Based Evidence," looking at "realized" bid-ask spreads and price impact of trades in corporate bonds. "The results presented here reinforce our earlier message that corporate bond market liquidity appears ample based on the bid-ask spread and price impact measures." Elsewhere, Bloomberg Gadfly's Nir Kaissar notes that "A lot of people are worried about corporate leverage."

Me yesterday.

I wrote about Argentina. In other Latin American sovereign-debt news, "the question is not if Venezuela will default, but when they will default,” says a guy.

Happy birthday to Money Stuff.

Money Stuff kicked off as an e-mail newsletter one year ago today. It's been a fun year; thank you for subscribing, or clicking or whatever. We'll have a big party for the one-year anniversary of "People are worried about bond market liquidity."

Things happen.

What Clinton said in her paid speeches. Global Bond Rally Near 'Panic' Level With Japan Yield Below Zero. It seems unlikely that the next Treasury Secretary will come from Wall Street. Legal Fees Reach New Pinnacle: $1,500 an Hour. Google CEO Pichai Receives Record $199 Million Stock Grant. Brixmor Top Executives Manipulated Financials, Company Says. Richest Schools Queried by U.S. Lawmakers on Endowment SpendingSomehow there's another Bill Ackman webcast about Herbalife this morning at 11:30. The SEC, Insider Trading and the Super Bowl. Criminalizing doxxing. Slovakia's stock market is up. Trump: Markets in a 'big, fat, juicy bubble.' Swiss Probe Fine Wine Scam That May Have Targeted Dead Chef. How to Snapchat like a teen. Dog-sized rabbit. What is the incidence of pet pantries?

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Matt Levine at

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