Money Stuff

Holdouts, Inquiries, Routers and Hats

Also European banks, broker misconduct, cool teens and "The Big Bang Theory."


Yesterday was sort of the deadline for Argentina's big holdout creditors to get a deal done before they lost all their leverage, and guess what, they got a deal done! Last month Argentina offered the holdouts 72.5 percent of their $5.9 billion of New York claims for principal and interest, which the holdouts refused; yesterday's final deal was for 75 percent, plus "$235 million for claims outside that jurisdiction and some of the holdouts’ legal fees." So the holdouts may have gotten an extra, say, $380 million ($235 million plus 2.5 percent of $5.9 billion) for holding out for those last few weeks, even though those weeks included a key court decision that went very much against them. That's a pretty good payoff for a few weeks of holding out, though of course you'd expect that after 15 years the holdouts would be pretty good at holding out.

The deal isn't quite final: U.S. District Judge Thomas Griesa is holding a hearing today, and Argentina's Congress needs to approve the deal and repeal its "lock law" banning payments to the holdouts. Argentina will need to sell new bonds to fund the deal, which will be an intricate little dance given the currently existing injunction against paying interest on any new bonds, but I am pretty confident they can work that out. The substantive issues have been resolved; now it is just a matter of sequencing and careful lawyering, and there's no shortage of lawyers floating around. Also there are some miscellaneous holdouts who still haven't settled, or even negotiated. "I hope they are motivated to offer my clients an even better deal," says a lawyer for some of them, implausibly.

It's good news! "This is the equivalent of a giant albatross being lifted from Argentina’s neck and comes just in the nick of time," says a guy. Argentina expects to "eventually be able to issue debt at similar borrowing costs to neighboring Uruguay, at about 4.5 percent." (Its existing 8.28 percent dollar bonds of 2033 trade at a yield in the 6s, even though they haven't paid interest in almost two years.) But questions linger. "The fact that these guys were able to make a handsome return certainly raises the likelihood that holdout strategies may be employed going forward in places like Venezuela," says another guyJoseph Cotterill asks: "Is it actually a deal that has delivered equal treatment to anyone, like you might perhaps have expected from a 15-year pitched battle over the meaning of an 80-word equal-treatment clause?" And Argentine Finance Minister Alfonso Prat-Gay asks: "If we were able to do this in three months, why did it take 15 years?"


Valeant had a pretty bizarre day yesterday. On Sunday night, it announced that Chief Executive Officer Michael Pearson was returning from medical leave and that it was withdrawing its financial guidance. This worried people:

Investors sent the stock down as much as 9.5% Monday morning on the flurry of news. And one analyst is warning that there’s no way to know what’s coming next.

“We think investors should just delete all comments from recent investor meetings and calls and brace themselves for an entirely new story,” Mizuho analyst Irina Koffler wrote in a research note.

That turned out to be correct, and quickly. Next up was an analyst call with Pearson that was "canceled due to media interest." The call "had been scheduled to give an overview of its fourth-quarter results," and "the drugmaker told analysts that the call was never intended to be formal." So the situation seems to have been:

  1. Valeant is not in a position to make the legally required financial disclosures to the public, because of an accounting inquiry.
  2. But it is in a position to "give an overview" of those disclosures on a call with some sell-side analysts.
  3. But not if everyone is going to make a big thing of it. 

Isn't that ... aren't you not supposed to disclose your financial results early to a select group of favored sell-side analysts, formally or otherwise? I thought that was frowned upon. This drama was in turn succeeded by a disclosure later in the day:

In response to media inquiries, Valeant confirmed that it has several ongoing investigations, including investigations by the US Attorney’s Offices for Massachusetts and the Southern District of New York, the SEC, and Congress. With respect to the SEC investigation the Company confirmed that it received a subpoena from the SEC in the fourth quarter of 2015 and, in the normal course, would have included this disclosure in its 2015 10-K. We do not have further detail to provide at this time.

The stock closed down 18.4 percent, at $65.80. Again, the situation seems to be:

  1. Valeant got a subpoena from the Securities and Exchange Commission in the fourth quarter, i.e., at least two months ago.
  2. It was planning to disclose that subpoena in its 10-K, which would have been due around now, but it delayed the 10-K for the accounting investigation.
  3. It didn't see the need to disclose the subpoena otherwise, until someone asked.
  4. Someone asked, it disclosed the subpoena, and the stock dropped 18.4 percent.

I don't know! I foresee lawsuits. I mean, in addition to the other lawsuits. Details on the SEC investigation are hazy, though it "is separate from an existing investigation into a company purchased by Valeant last year, Salix Pharmaceuticals Ltd." Elsewhere, managers at the Sequoia Fund, Valeant's largest shareholder, said "that their 'credibility as investors' had been bruised by the controversy around Valeant." Valeant's biggest anonymous Twitter cheerleader gave up, saying that "Valeant is certainly giving their best impression of a house of cards on the verge of collapse." Moody's put Valeant's credit rating on review for a downgrade. And Valeant's irritable-bowel-disease drug Xifaxan -- it doesn't roll off the tongue as smoothly as "toenail-fungus drug Jublia," but it too has a Super Bowl ad, "featuring an animated character that looked like an intestine" -- is facing generic competition. 


The dispute over whether IEX's router should be allowed to bypass its "speed bump" when IEX becomes a public stock exchange is not as long-running or as important or, frankly, as interesting as the dispute over Argentina's bonds, but it does seem to be at least as bitter and emotional. And it was also resolved yesterday! IEX caved:

IEX proposes to redesign our Router so that any routable order will first go to IEX’s Router and not directly to the IEX matching system. The Router will interact with the IEX matching system over a 350 microsecond speed-bump in the same way an independent third party broker would be subject to a speed bump. Pursuant to the redesign, our Routing logic, when necessary, will have the ability to route to IEX and away exchanges simultaneously utilizing only public information, which will protect the IEX routing member from electronic front running to away exchanges. Because the IEX Router will now interact with the IEX matching system over the speed bump, the IEX routing member’s order will be able to access displayed liquidity on away exchanges without interference caused by a trade (or signal) on IEX.

The idea is that routable orders to IEX will now be treated sort of how a broker's router would treat them: IEX will estimate how much liquidity is available on IEX and elsewhere, and then simultaneously send out orders to IEX and other venues so that none of those orders can be "front-run" by high-speed traders seeing executions on one exchange and racing to update their prices on other exchanges. As opposed to the previous plan in which the order would go to IEX, execute as much as possible on IEX, get back the results without waiting for the speed bump, and then route to other exchanges before the high-speed traders know about the execution on IEX.

This is not quite as good for IEX's customers -- they can't be sure about getting every possible share of liquidity on IEX before going elsewhere -- but I suppose it is fine, and it answers one of the main objections to the speed bump, though it leaves open the controversies about IEX's pegged orders and about the speed bump as a general concept. I don't know if giving in on the router issue is enough to get IEX through on the other two. Citadel, perhaps unsurprisingly, says no:

“We’re really glad they’re removing the unfair advantage they’re giving their routing broker. Their application should still be denied.”

Elsewhere in exchange news, "Intercontinental Exchange Inc. on Tuesday said it is considering an offer for London Stock Exchange Group PLC, potentially gate-crashing the British company’s proposed $28 billion merger with Deutsche Börse AG."


It is no fun to be a European bank these days:

Barclays Plc fell the most in more than three years in London trading amid investor concern that the bank’s profit outlook is weakening as the firm slashed its dividend.

The lender also will sell down its 62 percent stake in Barclays Africa Group Ltd. over the next two to three years to a level that allows it to deconsolidate the unit, according to a statement Tuesday. The shares plummeted 10 percent to 154.3 pence at 10:22 a.m. in London, the most since June 2012.

Bucking a trend slightly, CEO Jes Staley "is keeping the firm’s investment bank, describing calls to exit the business 'shortsighted.'" Elsewhere in Europe, "British financial regulators said on Monday that they would continue to exempt small banks and similarly sized financial institutions from European rules that cap bankers’ bonuses." And Deutsche Bank announced the early results of its debt tender offer, which were pretty meh, but that's good: "The relatively low investor participation in the public tender offers for both the Euro-denominated and US Dollar-denominated securities tendered reflects improved market sentiment and an investor preference to retain exposure to Deutsche Bank." Also Deutsche is the best bank at Twitter.

 "The Market for Financial Adviser Misconduct."

Here are Mark Egan, Gregor Matvos and Amit Seru:

If individual firms are strict in disciplining bad employees, why are there so many repeat offenders in the population of financial advisers? To prevent repeat offenses, advisers have to be fired following misconduct and not be reemployed in the industry. Instead, we find that 44% of advisers who lost their job after misconduct find employment in the industry within a year. The hiring of employees with misconduct records undoes some of the discipline practiced by firms. 


Why are some firms willing to hire advisers who were fired following misconduct? If firms had identical tolerance toward misconduct, such rehiring would not take place. We find that advisers with misconduct switch to firms that employ more advisers with past misconduct records when compared with other advisers who are looking for jobs. These results suggest that there is matching between advisers and firms on the dimension of misconduct. 


The disciplinary records of financial advisers are public record. Therefore, one might ask why competition among advisers and reputation does not drive out bad advisers and firms. One potential reason is that some customers may not be very sophisticated. Such customers do not know either that such disclosures even exist, or how to interpret them. If there are differences in consumer sophistication, then the market can be segmented. Some firms "specialize" in misconduct and attract unsophisticated customers, and others cater to more sophisticated customers, and specialize in honesty, in the spirit of Stahl (1989) and Carlin (2009).

For what it's worth, Goldman Sachs (where I used to work) and Morgan Stanley seem to be specialists in honesty, despite occasional public perceptions the other way, while "more than one in seven financial advisers at Oppenheimer & Co., Wells Fargo Advisors Financial Network, and First Allied Securities have engaged in misconduct in their past."

The oldest trick in the book.

Here is a story about the 1MDB scandal, in which investigators are probing more than $1 billion of deposits into the personal bank accounts of Malaysian Prime Minister Najib Razak, which might have come from "a Malaysian state development fund called 1MDB that the prime minister founded":

The investigators are focusing on an entity they believe was a crucial conduit: a firm with a name almost identical to that of a state-owned Abu Dhabi company called Aabar Investments PJS.

In filings, the 1MDB fund has reported paying more than a billion dollars to Aabar—not specifying a full name. Rather than going to the state-owned Abu Dhabi company, investigators believe the money flowed to the similarly named firm, which was registered in the British Virgin Islands, and $681 million made its way circuitously from there to Mr. Najib’s account.

If you ever find yourself in a position to direct a wire transfer to an account that you have set up for yourself, naming the account "J.R. Morgan" or "Goldberg Sachs" or "Credit Swiss" or whatever probably increases your chances of not being noticed.


Honestly I am probably never going to get around to writing a memoir of my time at Goldman Sachs, which is a shame because Goldman Sachs memoirs seem to be a hot commodity these days. (You don't even have to have worked there to write one!) But you know who should really write a Goldman book? Luke Thorburn, "the only Goldman Sachs employee to contribute to Donald J. Trump’s presidential campaign," who "has been placed on administrative leave" for selling knockoff Trump hats without Goldman's approval:

The Times confirmed that Mr. Thorburn is associated with a website that sells hats that resemble Mr. Trump’s red and blue “Make America Great Again” caps, replacing the word “America” with “Christianity.”

Goldman employees are allowed to pursue outside business opportunities, but they first must get clearance from the company. Mr. Thorburn, a financial adviser in the bank’s wealth management division, had not received approval before pursuing the hat endeavor.

He was questioned, about the hats, and "ultimately, the bank became concerned about apparent inconsistencies in Mr. Thorburn’s story," about the hats, so it put him on leave, because of the hats. Don't you want to know more, endlessly more, about how that went down? And about what it was like to live a double life as a Goldman Sachs employee (in New York!) and a marketer of Trump-themed paraphernalia? The title could be "Make Goldman Sachs Great Again." Good lord I will happily ghost-write it for him, I don't care, it's just something that needs to exist in the world. 

What was Jamie Dimon up to in high school?

John Micklethwait interviewed Jamie Dimon for the cover story in Bloomberg Markets:

JD: I read Graham and Dodd’s Security Analysis in high school. The big, thick one. So I was always interested.

JM: You liked it even then?

JD: I did, yeah.

JM: I suppose that didn’t get you dates immediately.

JD: I did fine with that category. I played sports.

JM: You handicapped yourself.

JD: I was a normal human being, but I did like that. I read a lot. I also liked math and science.

I don't know, I think it is fine to be into securities analysis in high school. Stay strong, little stock nerds! Don't let the tech-nerd bullies get you down. Dimon is also a proponent of bank-based finance over market-based finance:

Remember that banks aren’t markets. The market is amoral. The market doesn’t care who you are. You’re a trade to the market. The market will sell you if they think you’re riskier. Banks didn’t do that.

JM: You’re saying banks are more moral than markets?

JD: Yes, because a bank is a relationship. I can’t desert you and expect to have a strong relationship afterward. If I told someone, “I know you’ve been buying milk from me and you need milk to survive. But the price is no longer $2 a gallon. It’s going to be $40 a gallon. I’m going to bankrupt you.” What do you guys think of me? You would hate us. I mean, obviously some of these banks did bad stuff. Yet even in the depths of the crisis, banks didn’t materially change the prices for clients.

When the banks get out of bond market-making, what will that do for bond market liquidity?

The Big Ben Theory.

I had sort of assumed that no actual nerds watch "The Big Bang Theory," but this article informs me that "Apple co-founder Steve Wozniak has reportedly been moved to tears by the geeky roommates’ relationship woes and appeared on the show in 2010," and that Ben Bernanke is such a fan that he begged to be on the show, accepted a non-speaking cameo role, joined the Screen Actors Guild, hung out with the cast, got a check for $69 for his brief appearance, and didn't cash it. "The check has 'The Big Bang Theory' written on it, and to him, that makes it worth far more than the face value." I don't know what to think, except that the Fed needs to target higher inflation.

People are worried about unicorns.

Here is a somewhat surprising chart of big private tech firms' "valuation put on their common stock and how close that number is to the value of preferred shares issued in fundraisings." Private tech companies tend to raise money from venture capitalists in the form of convertible preferred stock. The features of this preferred stock vary, but generally speaking a share of preferred should be worth exactly as much as a share of common if the company does an initial public offering at a sufficiently high price. In less optimistic scenarios -- non-IPO exits, down rounds, bankruptcy etc. -- the preferred has more protections than the common, so it should be worth more. But if you are bullish, those protections should not be worth all that much, and you'd expect the common stock valuation to be pretty close to the preferred valuation. Anyway the ratios on this chart range from 100 percent (for Snapchat) all the way down to 23 percent (for GitHub).

Elsewhere: "Airbnb guests shocked by decomposing corpse in garden," though the corpse was human, not unicorn. And: "These startups want to kill the coffin" by composting corpses, possibly at Airbnb rentals?

People are worried about bond market liquidity.

They are closely connected issues, but I always feel a bit like I'm cheating when I include mutual-fund liquidity risk news in this section. But here is the U.K. Financial Conduct Authority on "risks posed by open-ended investment funds investing in the fixed income sector," with recommendations about good practice for liquidity risk management and disclosure. Elsewhere: "Exxon Offers $12 Billion Bond Issue."

Things happen.

Japan Sells 10-Year Bonds at Negative Yield For the First Time. Citi to Sell 20% Stake in China Guangfa Bank for $3 Billion. Glencore Tumbles to Loss, Promises Accelerated Debt Reduction. The Rise and Fall of Commodities Hedge Fund King Willem Kooyker. Banned hedge fund manager "Philip Falcone said that there's 'an awful lot of mediocrity' these days in the hedge fund space." Icahn Makes Bid for Federal-Mogul, an Auto-Parts Supplier. "David Tepper’s Appaloosa Management LP said it will ask a judge to set an expedited trial in Delaware in its dispute with SunEdison Inc." BlueCrest Denies It Would Profit From Norske Skog Default. Biggest Insider-Trading Case in U.K. Started With 'Stag Party.' The Next Dodd-Frank Headache for Banks: Living Wills. The SEC dislikes non-GAAP accounting. The Hostile Poison Pill. The regulatory state and the importance of a non-vindictive President. Happy birthday interfluidity! Google's Driverless Car Hit A Bus In California. Pipelines. Häagen-Dazs heists. Two-million-dollar beanie. Steve Ballmer Trampoline Dunk. Can fictional cats talk? "For each of the 13 Dog Days of Summer held at the D-backs’ Sunday home games, pets can enjoy concessions such as dog-friendly ice cream with toppings like kibble and other pet treats." 

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