Drug Trials and Bank Heists
Back when it was a hedge fund, one thing that SAC Capital did was learn some negative results of a clinical trial of a drug about two weeks before those results were publicly announced, and then sell its stock in the drug company before the announcement. In a narrow sense this was a good trade, and SAC avoided several hundred million dollars of losses by getting out of the stock before the announcement. In a broader sense, this trade led to the end of SAC, which had to pay $600 million to the Securities and Exchange Commission, plead guilty to insider trading, and stop being a hedge fund because of it. Also the analyst responsible for the trade went to prison for nine years.
But a chastened SAC lived on, as Point72 Capital Management, Steve Cohen's family office. Things are different now: A monitor was appointed, former FBI agents stalk the halls, instant messages are restricted, compliance tips are rewarded, and the amount of insider trading allowed at Point72 appears to be, roughly, none. That, anyway, is my impression; I have said that "You can interpret Cohen's last few years in the wilderness as a carefully proctored test of his ability to make money without cheating."
But he still wants to make money. Yesterday Point72 announced that it had, as of the close of business on Monday, accumulated about 8.3 percent of the stock of a little drug company called Celator Pharmaceuticals. Also after the close of business on Monday, Celator announced positive results in a Phase 3 trial of a leukemia drug. The stock closed up 432 percent yesterday. It remains fairly small -- Point72 is up about $20 million on its stake -- but, still, nice trade.
Suspiciously nice? The timing is hilariously perfect, and Point72 has some insider-trading convictions in its closet. But remember that Point72 is waist-deep in FBI agents; it would be a little surprising if it was bribing the doctors on this drug trial to provide advanced notice of the results.
One relevant question might be: Is it possible to have the skill of predicting the outcome of public companies' drug trials, without getting illicit inside information? And why not? I am not a doctor, but I gather that drug trials aren't coin flips; presumably there is science that can give you relatively more or less confidence in different drugs. And if you employ people with science backgrounds, or talk to doctors not involved in the trials, perhaps you can develop a better-than-average ability to pick the right drugs.
Really that is the point of capital markets: Investors are supposed to do research, come to conclusions about companies' business models, and then allocate capital to the companies that have the best chances of success. There are lots of opportunities for this legitimate research process to blur into insider trading, and I gather that no one quite knows where all the lines are drawn. But it would be weird if a top health-care hedge fund's investments didn't tend to predict success in drug trials. You'd just usually expect the timing not to be quite so perfect.
The Bangladesh heist.
Bloomberg and the Wall Street Journal both have good stories about the Bangladesh New York Fed heist, in which thieves acquired the credentials of Bangladesh's central bank and used them to transfer $81 million from the bank's New York Fed account to the Philippines and another $20 million to Sri Lanka. In this blockchain-obsessed age, people are always complaining about how antiquated the U.S. dollar payment system is, and reading Bloomberg's account will confirm you in that notion. It's all about, like, Bangladesh Bank working frantically to restart the printer that printed confirmations of its SWIFT transactions, because apparently a critical element of central banking is getting the printer to work. Actually I guess that makes sense.
It does seem, though, like more antiquated technology could have helped here. My motto for wire-transfer fraud is "pick up the phone," and Bangladesh Bank did just that; it just didn't get an answer:
Sensing a much bigger problem than a computer glitch, Bangladesh Bank contacted SWIFT to help them analyze the transactions. It also e-mailed and faxed the Federal Reserve Bank of New York, where it kept an account, with a stop order for all unauthorized payments until further notice, Huda told police.
Over Saturday and Sunday, Bangladesh Bank failed to reach officials in New York by phone. But by that time it was also a weekend in the U.S., and nobody was available.
When we're all on the bitcoin blockchain, the theft of credentials will be an irreversible catastrophe, and no amount of picking up the phone will help. How will the person on the other side know it's you? The only proof that you're you is your private key, and someone has stolen that.
Speaking of irreversibility: The $20 million that was routed to Sri Lanka was recovered ("Pan Asia Banking canceled the payment of $20 million to its beneficiary and routed the funds back to Bangladesh’s account with the Fed in New York"), but "the $81 million that did leave the bank for the Philippines ended up in the account of a local businessman before making its way to at least two local casinos," where the trail goes cold. ("Maia Santos Deguito, the manager at Rizal Bank’s branch in the Philippine financial district accused of allowing the withdrawal of the funds, invoked her right against self-incrimination in a hearing on Tuesday.") Casino chips -- untraceable, irreversible, difficult to spend on goods and services most places -- are practically the original bitcoins.
Elsewhere in heists and international intrigue: "Bounty Hunter Tracks Chinese Companies That Dupe Investors." We live in a golden age of freely available financial thriller plots.
I like Deutsche Bank co-chief executive officer John Cryan's matter-of-factness:
“We’ve said this year is not going to be a profitable year, we may make a small profit, we may make a small loss, we don’t know,” Cryan said at a conference in London on Wednesday. “There’s a lot of stuff we have to get done this year, so this year we’re not going to be profitable.”
I imagine him keeping a checklist of stuff he has to get done, and "make money" is, like, sixth on the list. And at some point in March he decided that he wouldn't get to it this year. I know how that goes; I give up on most of my to-do list for the day by 10 a.m. Maybe it'll work out for him in 2017.
That was about the happiest the banking news is going to get today. Here is the story about Royal Bank of Scotland cutting 448 jobs in the corporate and investment bank. Here's the one about how Citigroup is going to start cutting jobs soon. Here's Jefferies with a $166.7 million loss for its first quarter.
Oh I guess this is good news: There is "no evidence" that banks changed their risk models to manipulate their risk-weighted asset numbers for regulatory capital purposes, a study has found. Other, regulatory, studies have maybe suggested otherwise, but the recent study disagrees:
Europe Economics used data from banks’ Pillar III disclosures to test whether lenders with weaker profits, slimmer capital buffers and a higher cost of capital had a greater tendency to use model changes to reduce their RWAs. Those three categories of banks are the ones where management would have the most incentive to carry out “tactical or strategic interference” with banks’ models.
“We found no evidence of such links (between banks’ situations and banks’ model changes),” the report said. “This analysis does not disprove the thought that a bank might engage in such activities — but the finding is wholly inconsistent with the hypothesis that it is common practice.”
I do not know that I buy the hypothesis that, the worse a bank's capital situation is, the more likely it is to cheat on its models to improve its capital. You could have alternative theories, like: Banks that are good at cheating on models to improve their capital tend to be in better capital situations.
Money and banking.
My former colleague Morgan Ricks has a new book out about the regulation of "money creation." Ricks argues that shadow banking, like regular banking, creates money-like obligations, and that the prevention of panics in money-like short-term debt instruments should be the goal of financial-stability regulation:
The recognition that shadow banks are engaged in money creation raises fundamental questions of institutional design. The prevailing modern approach to monetary system design involves entry restriction, or confining money creation to the government itself and to a set of specially chartered banks. This approach requires, as an essential prerequisite, a general prohibition on a specific funding model—a prohibition for which a banking charter confers an exemption. Thus, in the United States no person or entity may incur “deposit” liabilities without a banking charter (12 U.S.C. § 378(a)(2)). The emergence of shadow banking on a large scale, however, raises the question whether the legal category “deposit” is formalistic and obsolete. Is there a respectable basis for the differential legal status of deposits and (nondeposit) cash equivalents? If the issuance of deposit liabilities is a legally privileged activity with restricted entry, shouldn’t the issuance of cash equivalents be so as well?
I have a certain amount of sympathy for the idea that, like, money market funds or repo markets have the structural features of banks and bank panics, and that regulating banks one way and repo markets another might create dangerous gaps.
At some intellectual level I know that there are important differences between a "multilevel marketing opportunity," in which people sign up to sell nutrition supplements or whatever and are paid for selling supplements and recruiting new members, and a "pyramid scheme," in which people sign up to sell nothing and are paid just for recruiting new members. I just tend to think there's a gene -- or, more likely, a combination of socioeconomic factors and background cultural assumptions -- that makes some people believe that that difference matters, and other people think that they're all scams. Also, to my untrained eye, a lot of the products sold by actually existing MLMs seem to approach "nothing" asymptotically. Anyway here is Mina Kimes on AdvoCare, a nutrition MLM endorsed by Drew Brees. "Of AdvoCare's 517,666 salespeople in 2014, only 0.54 percent made $10,000 from the company and just 0.06 percent exceeded $100,000."
People are worried about unicorns.
But not at South by Southwest they aren't, where the parties continue, and many of them are unicorn-themed:
At a party hosted by Founders Fund, a venture capital firm started by billionaire PayPal co-founder Peter Thiel, two rubber unicorn masks were passed around. The night before, as the crowds thinned, a woman dressed as a fairy rode a white horse with a unicorn horn past the Hilton hotel. Even as a slowdown in venture funding has put a damper on the unicorn startup frenzy, the crowd laughed along with the joke.
Others, however, are eggless-mayonnaise-themed:
Susan MacTavish Best, a professional party-thrower, hosted an event on Saturday night for Hampton Creek, the eggless mayonnaise maker backed by prominent technology investors. "To the outsider, throwing a party at SXSW might appear to be utter madness. We fly halfway across the country to sip cocktails with our friends from back home," she said. "But once in Austin, we are free from our daily grind."
People are worried about bond market liquidity.
I mean, I'm sure they are, they always are, but there's a certain liquidity euphoria in Europe these days too:
“Companies have reacted, and they’ve reacted quickly, to take advantage of the better market conditions after the ECB” announcement, said Jeff Tannenbaum, a managing director at Bank of America Corp.
“The market feels as busy, and it feels as good as it has been the whole year,” he said.
European credit markets soared after the ECB’s surprise announcement Thursday, despite details of the plan remaining sketchy. The buoyant mood spilled over to U.S. corporate-bond markets, which also moved higher.
If you know that the European Central Bank is going to be buying corporate bonds, then it is easier for you to buy those bonds, because you know you'll have someone to sell them to. Which leads companies to issue more bonds, because there are buyers. Buyers create buyers who create sellers; liquidity begets liquidity; it is beautiful to behold. Enjoy it; in like three months you'll be reading articles about how there's no liquidity because the ECB has locked up all of the corporate bonds.
I wrote about Bill Ackman's Valeant investment. I feel a little bad piling on Ackman: Valeant is a huge company that was much beloved by many investors, and Ackman is not alone in losing a ton of money on its decline. Ruane Cunniff & Goldfarb, which manages the Sequoia Fund, owns even more Valeant stock, and added shares last quarter even though it said that "our own credibility as investors has been damaged by this saga." Still if you are looking for an Ackman pile-on, here is "Pressure on Valeant Puts William Ackman’s Image as Moneymaker at Risk." At Bloomberg Gadfly, here are Tara Lachapelle on Ackman and Valeant, and Max Nisen on Valeant's own hubris. Also here is the story of the $600 million typo in Valeant's preliminary earnings release yesterday:
“There are too many weird things happening here,” said Matthew Duch, a money manager at Calvert Investments in Bethesda, Maryland, which oversees more than $13 billion. “There were typos. That just shows the lack of controls, the lack of detail. And if it’s happening at these levels, where does it end? You want to be an investor, not a gambler.”
I hope that whoever writes the inevitable rise-and-fall-of-Valeant book calls it "There Are too Many Weird Things Happening Here."
London Stock Exchange, Deutsche Börse Agree to Merge, Creating $30 Billion Operator. The Financial Alchemy That’s Choking SunEdison. SunEdison Delays Earnings Report Citing Weak Accounting Controls. U.S. banks make cool technology, realize it can be sold. Anyone can start a quant fund. CMBS deals suffer on shopping mall woes. British Authorities End Criminal Inquiry Into Currency Markets. Active fund managers find their voice. Rattner Wins SEC Approval for Dealmaking Role With Guggenheim. If Trump wins, stocks will crash 50%: Wedbush pro. Soros, Alarmed by Trump, Pours Money into 2016 Race. Zuckerberg Settles Fraud Suit for Promise Not to Sue Back. Instagram is over. BuzzFeed readers prefer Backstreet Boys to Nirvana. Manuscript ponzi? Worm ponzi.
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