Panama Papers and Marquee Data
The Panama Papers.
Mossack Fonseca is a Panamanian law firm that helps people set up companies in tax havens. A whole lot of its internal documents fell into the hands of the Süddeutsche Zeitung, which shared them with the International Consortium of Investigative Journalists, and yesterday approximately one billion articles were published exploring what the leaked documents reveal about the asset-shielding habits of the rich and famous. There is a certain amount of gee-whiz-shell-companies-exist stuff, but also a lot of interesting revelations.
If you are interested in the intersection of money and power, for instance, there are the $2 billion of dollars in assets allegedly shielded for Vladimir Putin and involving the cellist Sergei Roldugin, Putin's best friend from way back ("Putin was at KGB training school with Roldugin's brother"), who seems to have a nose for business:
The transactions, however, include apparently fake share deals, with shares “traded” retrospectively; multimillion-dollar charges for vague “consultancy” services; and repeated payments of large sums in “compensation” for allegedly cancelled share deals. In 2011 a Roldugin company buys the rights to a $200m loan for $1. “This is not business, this is creating the appearance of business in order to continually move and hide assets,” Andrew Mitchell QC, a leading authority on money-laundering, told BBC Panorama.
("Mr. Putin was never involved," a Russian bank executive told Bloomberg Television, adding some colorful language.) There are also allegations that Ukrainian President Petro Poroshenko, who "promised voters he would sell Roshen, Ukraine’s largest candy business, so he could devote his full attention to running the country," hid his stake offshore instead. Things are rough in Iceland, too, where the Prime Minister allegedly secretly owned bonds issued by the country's major banks while he was dealing with their crisis-era collapse, leading to a potential no-confidence vote and a very awkward television interview. If you are interested in celebrities, Lionel Messi is mentioned ("Messi and his father were owners of a Panama company, Mega Star Enterprises Inc.," which is a little on the nose). And of course FIFA is allegedly involved.
The history of Mossack Fonseca is itself fascinating: Fusion claims that the firm formed a company for a man convicted of laundering the proceeds of the 1983 Brinks-Mat robbery in London, and that:
Jurgen Mossack’s family landed here in the 1960s. During World War II, his father had served in the Nazi Party’s Waffen-SS, according to U.S. Army intelligence files obtained by the ICIJ. Once in Panama, the elder Mossack offered to spy on communists in Cuba for the CIA. (Mossack Fonseca said the firm “will not answer any questions related to private information regarding our company founding partners.”)
And if you are just interested in the structure and purpose of financial vehicles, there is still much to enjoy here, starting with the leaked memorandum from a Mossack Fonseca partner saying that "Ninety-five per cent of our work coincidentally consists in selling vehicles to avoid taxes" -- a weird coincidence! -- and perhaps culminating with this:
The leaked files show the firm regularly offered to backdate documents to help its clients gain advantage in their financial affairs. It was so common that in 2007 an email exchange shows firm employees talking about establishing a price structure – clients would pay $US8.75 for each month farther back in time that a corporate document would be backdated.
Mossack Fonseca replied that "Backdating of documents 'is a well-founded and accepted practice' that is 'common in our industry and its aim is not to cover up or hide unlawful acts,'" but: $8.75 a month! It's not like it costs Mossack Fonseca more to write "2006" than it does to write "2007." If I were rich, I'd go to Mossack Fonseca and have them found a company for me in 1066 ($99,750), just so I could brag about how old it was. The essence of finance is time travel, as we have discussed, but this perhaps takes that notion a bit too literally.
Here is a Mossack Fonseca response, saying that "For 40 years Mossack Fonseca has operated beyond reproach in our home country and in other jurisdictions where we have operations. Our firm has never been accused or charged in connection with criminal wrongdoing." Here is an interactive feature from ICIJ, and some key findings, and some graphs. This Voxsplainer of the leaks is good. And in an apparent coincidence, Planet Money re-ran a delightful 2012 episode on offshore shell companies last week that is well worth listening to.
Banking and tech.
Here is a profile of Marty Chavez, the head of technology at Goldman Sachs, who is sometimes mentioned in the potential-future-chief-executive-officer conversations. Current CEO Lloyd Blankfein "has said he wants Goldman to be thought of as a tech company," and I guess nothing would show that more clearly than letting a technologist run the place. Chavez's, um, marquee project is "Marquee," which involves more or less giving clients access to previously internal Goldman technology tools and data:
But it has faced internal resistance. Some colleagues complain that the company is handing out valuable information while paving the way for job cuts.
Mr. Chavez has responded forcefully, according to people who witnessed some of these conversations. “He basically said something to the effect of: ‘If your job is a purely manual job and you are just clicking buttons, you should look to upgrade your skills set now,’” said Adam Korn, a trading executive. “He was pretty direct.”
The challenge for the financial industry in the next decade will be about moving up the value chain as basic button-pushing jobs at banks get automated away, or disrupted by startups or blockchains or whatever. (This was a major challenge for the last decade, too, though it was perhaps masked a bit by the bigger challenge of the financial crisis.) It seems sensible to get a head start on that by disrupting yourself: Goldman is unlikely to maintain a long-term competitive advantage just by having good databases, so it might as well give away the databases to help focus the mind on how to add value on top of them.
Anyway the profile has the inevitable claim that Chavez (gay, Latino, former heavy drinker, bearded, dog owner) "represents a departure from the button-down partners of Goldman lore," but honestly this description of his office strikes me as very Goldman indeed:
A few feet down, a basketball perches on a shelf.
“Basketball is so not me that I decided to put it up there so people could say, ‘What is Marty doing with a basketball in his office?’” he said, bursting into a peal of laughter.
The key is always to mess with people a little. (Disclosure: I used to work at Goldman, and I still miss SecDB, the computer system that "is still the spine of its operations.")
Elsewhere, Bats Global Markets is going to try again with an initial public offering. And Healthy Markets submitted a comment letter critical of the Securities and Exchange Commission's proposal to allow "de minimis" delays of up to 1 millisecond in processing quotes by stock exchanges, which would allow IEX's application to be an exchange to go forward.
Too big to etc.
Neel Kashkari is holding an "Ending Too Big to Fail Policy Symposium" today at the Minneapolis Fed (there is bacon), and there are articles about him at the Wall Street Journal and Reuters. There is something a bit, I don't know, aesthetically jarring about Kashkari raising his own political profile by grabbing onto the too-big-to-fail issue from inside the Federal Reserve. As he is aware, though he turns it to his advantage:
"The Wall Street critics can't argue with me on the substance of too-big-to-fail, so they criticize the messenger," he told Reuters in an email. "I welcome their criticisms because they are an implicit admission that I am right."
I mean, no, you can be both wrong and ambitious, but, sure, ad hominem insinuations are perhaps not the most compelling criticism of Kashkari's program. But I am only human: How can I resist this tidbit from the Journal?
On Wall Street, some bankers were stunned 42-year-old Mr. Kashkari would go after the industry that had once employed him and to which he still has close ties. Before accepting the Fed job late last year, Mr. Kashkari sought out several senior Wall Street executives, including J.P. Morgan Chase Chairman and Chief Executive James Dimon, with whom he had wide-ranging conversations that included his next potential career move, according to people familiar with the conversations.
Some executives interpreted the meetings as informal job interviews, the people said.
To be fair, I'm sure a lot of senior bankers also think that the big banks should be smaller or better capitalized, though Jamie Dimon probably isn't one of them.
Elsewhere in bank capital regulation:
We study the effect of bank capital on the supply of mortgages. We fully control for endogenous matching between borrowers, loan contracts, and banks by submitting randomized mortgage applications to the major online mortgage broker in Italy. We find that higher bank capital is associated with a higher likelihood of application acceptance and lower offered interest rates; banks with lower capital reject applications by riskier borrowers and offer lower rates to safer ones.
My view is that calls for very high levels of bank capital are a category mistake because the major purpose of banks is to produce money claims, e.g. deposits and other short-term debt instruments, and requiring banks to be heavily equity funded reduces the supply of money claims and is economically contractionary. But I am less impressed by the argument that higher bank capital would directly reduce lending, and empirically it seems not to.
I sort of like the idea that activism is an asset class, as opposed to just a behavior; in any case it just had its first down quarter -- by volume, not value -- since 2009:
There were 91 new activist campaigns launched in U.S. through yesterday, according to WSJ-FactSet Activism Scorecard, down from 116 in the first-quarter of 2015.
Every year since 2009 has started faster than the one before, culminating in a record number of activist campaigns in 2015.
The explanation is in part that some big activists were too busy dealing "with several high-profile catastrophes in their portfolio," oops. Corporate America should root for trouble at big companies that are beloved by hedge funds, to make things easier for the rest of them. Among big activists, Third Point and JANA were up in March, while Greenlight broke even.
Elsewhere in activism news, sort of, Scott Barshay is leaving Cravath, Swaine and Moore for Paul, Weiss, Rifkind, Wharton & Garrison. Barshay is perhaps Cravath's top mergers and acquisitions lawyer, and while he explains that "joining Paul, Weiss was like getting an invitation to join the dream team," there are plausible financial explanations for the move:
Cravath, like some other New York-based firms, pays its partners through a “lockstep” system based on seniority, while many other U.S. law firms tie compensation to performance. Paul Weiss follows a modified lockstep system that gives the firm “flexibility at the upper end for star performers,” Brad Karp, the firm’s chairman, said in an interview Sunday.
Oh right I said this was activism news, sort of:
Adding Mr. Barshay, a staunch opponent of activist shareholders, will bring at least one change to Paul, Weiss’s legal practice. Though the law firm has mostly represented corporate clients, it has counseled some activists like the hedge fund Elliott Management in their campaigns against companies.
Mr. Karp said that the firm would now cease all work representing those investors.
It is hard to become the trusted counsel of America's corporate elites if you are also helping their critics write mean letters to them. (Disclosure: Barshay once interviewed me for a job at Cravath, which I declined for another M&A dream team.)
The Wall Street Journal has a fun look at what went wrong in Anbang's pursuit of Starwood, and while it remains a bit mysterious, one thing that is fairly clear is that the official explanation for why Anbang abandoned its bid can't be quite right:
In the end, said Fred Hu, Chairman of Primavera Capital Group, a partner in Anbang’s bid, the consortium walked away because the price got too rich. “It was a simple and prudent commercial decision.”
Yes but the Anbang consortium was the highest bidder already, at $82.75 per share, and its rival, Marriott, "knew whatever it could cobble together wouldn’t equal $82.75 in cash," and instead started "raising questions about Anbang." Which Anbang answered by walking away.
Anbang chairman Wu Xiaohui "served as Anbang’s lead negotiator," and "at times his bankers didn't speak during entire meetings"; he called last-minute meetings at the end of August and on Easter Sunday, which was a bit rough on the other side's vacation plans. And:
Starwood and its advisers insisted Anbang agree that a deal would still close, and the cash would change hands, with or without Chinese regulatory approval. The Chinese company agreed. That sort of guarantee is rare and demonstrates the wariness with which some Western companies approach Chinese bidders and how intensely Anbang wanted its prize.
It's more than rare, right? Basically every merger agreement contains a clause to the effect of "this deal won't close if it turns out to be illegal." That's just how, you know, law works. This deal apparently contained a clause to the effect of "this deal will close even if it turns out to be illegal"? You can see how that might -- eventually -- give Anbang pause.
Don't put it in e-mail!
Here's a ProPublica story about how Habitat for Humanity got a grant to provide affordable housing in New York, and used it to buy buildings in Bed-Stuy after their owner (developer Isaac Katz) had kicked out the previous tenants. Not a great way to provide affordable housing! As Habitat for Humanity knew:
“There’s zero doubt in my mind that [Katz is] a bad guy and did bad things,” wrote then-Habitat-NYC Executive Director Josh Lockwood in a June 2011 email, responding to a colleague’s inquiry. “Agreed its unlikely that an investigative reporter would target us specifically, but obviously we’d need to be prepared in the event s/he does.”
Look, if you're doing something that you don't want an investigative reporter, or for that matter a prosecutor or a regulator, to find out about, your best bet might be to stop doing it. But failing that, don't send e-mails about how you hope they won't find out! That makes it more or less inevitable that they will.
Elsewhere in charitable financing, here is a story about how banks are shutting down accounts for charities that "deliver aid to refugees and others in Syria, Turkey and Lebanon." In a world that is constantly getting outraged at middlemen who enable money laundering and terrorist financing, it is understandable that banks would want to stay very far away from any gray areas. Unfortunately, to a conservative enough bank, lots of legitimate charities in Syria, Turkey or Lebanon might qualify as gray areas.
People are worried about unicorns.
"There are going to be lots of dead unicorns," says this Financial Times headline, and, like, 10 years ago, would you have guessed that that would one day be a Financial Times headline? I hope that in 2026 the financial press is full of headlines like "How long can the elves continue dancing in the forest?" and "Hard times are coming for the Invisible Mole People." Elsewhere, there is an "I.P.O. standoff" preventing billion-dollar tech companies from going public:
Traditionally, that is the size at which private companies contemplate a public stock offering, but many of those companies want valuations that no I.P.O. investor would swallow. So rather than taking a cut in price, they have decided to hibernate under the auspices of the private market, where some have still been able to raise more cash.
You say hibernate, I say gambol in the Enchanted Forest, whatever. Meanwhile, Slack can't stop raising money (earlier, earlier, earlier). And here is a writeup of a Delaware Court of Chancery ruling that "there is no per se affirmative obligation, absent a request for stockholder action, in a closely held company, to produce financial statements." This may be of interest to certain unicorns.
People are worried about bond market liquidity.
Have you heard that liquidity is terrible in corporate bonds, and that nobody is buying or selling any more? You have, right? Like, for instance, I mention it here literally every day? And yet:
A frenzied March for investment grade corporate bonds culminated in record trading on the final day of the month.
Trading on Thursday hit the highest level in records going back to 2005, according to data from Trace, where trades are reported through the Financial Industry Regulatory Authority.
That's $22.9 billion of investment-grade volume last Thursday, bringing March volume to $444 billion, "the most for any month since 2008." I don't know what to tell you, except that people remain worried about bond market liquidity.
I wrote about the new-issue premium in corporate bonds. One point that I made is that, if a company is issuing a lot of bonds, it should expect to pay a bit (in the form of new-issue premium) to compensate investors for providing it all that liquidity. But a reader e-mailed to point out: "Large investors are also benefitting from the liquidity of a new issue -- e.g., PIMCO, who constantly has a lot of cash to put to work, can't go buy bonds in size in the secondary so they're saving on the bid/ask spread too." It's a fair point, though probably on balance the investors are giving the issuer more liquidity than vice versa.
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