Libor Cartels and Hedge-Fund Failures

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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It is fairly well established that a bunch of big banks manipulated the London Interbank Offered Rate, and that the dollar numbers attached to Libor manipulation are quite large, so a bunch of investors and plaintiffs' lawyers got together a while back to sue the banks and get some of those dollars. One of their main theories was that the banks' collusion to manipulate Libor was an antitrust conspiracy. But the district court threw out this theory, reasoning that it can't be an antitrust conspiracy for the banks to get together and agree on Libor, because banks getting together to agree on Libor is just Libor. It can't be illegal to do anticompetitive stuff with Libor, because Libor isn't a competitive market; it's "a cooperative endeavor," so the fact that the banks cooperated in setting a false Libor, while it might be bad, can't be an antitrust violation. I am not an antitrust expert but I found this interpretation clever, and fairly convincing.

But yesterday an appeals court said, no, it can still be an antitrust conspiracy: When a bunch of competitors get together to fix prices, even if that is kind of what Libor was anyway, that just looks so much like an antitrust violation that it has to be one. "Horizontal price-fixing constitutes a per se antitrust violation," said the court. Again, I am not an antitrust expert but I find this kind of convincing too. I mean, they (allegedly) conspired to fix prices. Amidst all the dumb Libor e-mails and chats, one trader called it a "cartel." It sure sounds like an antitrust problem.

Anyway it's a big problem, because the Libor that the banks manipulated affected not only the payments on their own derivatives but also lots of other derivatives that they had nothing to do with:

Requiring the Banks to pay treble damages to every plaintiff who ended up on the wrong side of an independent LIBOR‐denominated derivative swap would, if appellants’ allegations were proved at trial, not only bankrupt 16 of the world’s most important financial institutions, but also vastly extend the potential scope of antitrust liability in myriad markets where derivative instruments have proliferated.

The appeals court sent the case back to the district court to think about that one for a while.

Hedge funds.

If you work at a hedge fund, it's not enough to make the right call on Portuguese bank bonds. You also have to not work for a fund that implodes because of bad energy bets, or because your founder gets arrested. Take Scott Wilson, formerly of a Grupo BTG Pactual hedge fund, who was short Novo Banco bonds, but for nought:

Wilson’s firm could have made about $28 million overnight, according to a person familiar with the matter. But it didn’t.

The BTG fund, for which Wilson no longer works, saw its assets drop to about $250 million in February from more than $4 billion in November as investors pulled money following the arrest of BTG Pactual’s billionaire founder Andre Esteves.

Or Toby Dodson of Achievement Asset Management, who had a similar bet but had to shut it down because his firm had "lost too much on U.S. energy companies." "Keeping investors onside for long enough to profit from trades that sometimes take months to pay off can be as challenging as being right these days," and, sure, but not having your founder get arrested is actually kind of a low bar. Every hedge fund that closes has some correct bets; the problem is usually more bad bets than good ones. But every hedge fund manager will be tempted to analyze the winning positions as thwarted brilliance and the losing ones as unforeseeable bad luck.

Elsewhere, insurance companies are reducing their hedge fund allocations. "Tudor Investment Corp., one of the oldest and most expensive hedge funds," is cutting the fees on its main share class from 2.75 percent of assets and 27 percent of profits to 2.25 and 25. (Some other share classes have fees of 2 and 25, or 4 and 23.) And Kyle Bass has some weird fee structure on his Hayman China Opportunities fund where the performance fee is 15 or 17.5 percent, but then goes up "to 20% after a 100% net return – in other words, if and when the fund doubles its money." I don't know the time horizon he's contemplating, but if I doubled my investors' money in short order I'd want more than a 2.5 percentage point fee bump. It is a little weird that you don't see more nonlinearity in hedge-fund performance fees; doubling investors' money is a whole lot more valuable than limping along with single-digit S&P-correlated returns, and you'd think managers would be able to charge more than 20 percent if they actually do that. And, conversely, charge a lot less if they don't. Anyway Bass's main fund is down about 7 percent this year on bad oil bets.


Last week I mentioned the lawsuit that Megan Messina brought against Bank of America for gender discrimination and whistleblower retaliation. One of Messina's claims was that she was paid less than her male peers, and even paid less than some of those peers' direct reports. And to support that claim, her complaint included a list of (alleged) compensation for a whole bunch of Bank of America fixed-income traders. Which is ... awkward:

Messina’s alleged pay table is understood to be causing outrage at other banks. Especially at Goldman Sachs, where pay on the the trading floor is now said to be considerably lower. “People here are up in arms over the figures in the Messina report,” says one Goldman insider. The pain is made worse because BAML’s trading business contains plenty of ex-Goldmanites after Tom Montag joined from Goldman in 2008, and set about hiring his ex-colleagues.

Man, I have to say, I left banking at the right time. None of her numbers -- low-to-mid-single-digit millions for managing directors in charge of credit trading businesses -- seemed that surprising to me. 

Elsewhere in pay jealousy, remember those Perella Weinberg restructuring bankers who left amid great acrimony last year? They apparently called their new firm "Ducera Partners," and they have hit paydirt as one of Monsanto's two main advisers in dealing with Bayer's acquisition proposal. "The New York-based bank will bring in about $50 million for its work advising Monsanto," estimates a guy, if the deal closes. I count nine professionals, so that's low-to-mid-single-digit millions for each of them from one deal. 

Meanwhile, here is a story about how Adam Jonas, the Morgan Stanley analyst who covers Tesla, has been bullish on the stock at the same time that Morgan Stanley has been winning investment banking business from Tesla. "The spirit of the law was compromised," says Doug Kass, on no evidence whatsoever; based on my own experience at an investment bank, I highly doubt that Jonas's price targets were coordinated with bankers to try to win investment banking business. Also, I mean, after a brief dalliance with a Sell rating, Jonas has been bullish on Tesla since September 2012, when it was in the low $30s; it closed yesterday at $216.22. So he has mostly not been wrong.

Elsewhere: "Banks Keep Cutting Bond Traders With One-Third Gone Since 2011." "The U.S. Securities and Exchange Commission is investigating whether Deutsche Bank AG inflated the value of securities in its mortgage-bond trading business and masked losses around 2013." Moody's cut Deutsche Bank's senior unsecured credit rating from Baa1 to Baa2; Deutsche Bank is "disappointed." And: "J.P. Morgan Private Bank Lays Off Nearly 100 Employees."

Market structure.

Here's how the CME Group's futures exchange used to work:

CME customers are allotted data connections to the exchange. Some have more, some have less. Given that their speeds varied noticeably under the old architecture, the more lines a trading firm had, the better odds it could find a faster one. Trading firms with a lot of links had the chance to fish around for the fastest way to get trades done. Other firms that didn’t have as many connections or the computer programming resources to test around and find the quickest, most efficient way in were at the mercy of the connections they had.

That sounds bad, and now it has been fixed. So everyone will have "fair and efficient access to the futures markets," which means that whoever has the fastest computers and best programming resources will get their trades executed first. As Citadel's Remco Lenterman put it on Twitter, the previous "variance ('jitter') acted as a sort of randomiser, evening playing field," but now the CME is a pure first-in-first-out system where "the fastest participant always wins." I don't count that as exactly a full-throated defense of the old system -- remember, "the more lines a trading firm had, the better odds it could find a faster one," so it wasn't exactly a randomizer -- but it's true that if you like speed bumps and dislike high-frequency-trading arms races, the move from a glitchy uneven system to a fast efficient one might not be entirely positive. 

Meanwhile, at the New York Stock Exchange's trading floor in downtown Manhattan, which is definitely an important place where people trade lots of stocks, Paula Abdul taught floor traders some dance moves. Here is a GIF.

Who is the CEO of Deutsche Bank?

Look honestly it is confusing. There is John Cryan, but he is fairly new -- it was Anshu Jain this time last year -- and anyway most articles refer to him as the Co-Chief Executive Officer. Other Co-CEO Jürgen Fitschen just stepped down last week after floating around for a surprisingly long time. Still this is not at all right:

If there were any prevailing doubts of his stature on Wall Street, Mr. Trump said the chief executive at Deutsche Bank could easily allay it.

“Why don’t you call the head of Deutsche Bank? Her name is Rosemary Vrablic,” he said in the recent interview. “She is the boss.”

Ms. Vrablic is a private wealth manager at Deutsche Bank in New York. She is not the company’s chief executive; John Cryan holds that role. Both declined to comment on Mr. Trump.

It is standard practice in banking to make the client feel like the person he is dealing with is more important than she really is. But somehow I doubt that Deutsche Bank told Donald Trump that his private banker was the CEO.

People are worried about unicorns.

Palantir Technologies, the Spy Unicorn, is planning to buy back up to $225 million of stock from its employees at $7.40 per share, which "is significantly above the level that several mutual fund investors are currently valuing preferred shares of Palantir." (A popular valuation, at funds including Fidelity, is $5.92 per share as of March 31; one fund is at $3.79.) If a public company were offering to buy back stock from employees at above-market prices, that would raise some obvious conflicts of interest. Why waste shareholders' money (or rather, give it to employees) by buying back stock at a premium? Also the employees can just sell their shares in the market; the company doesn't need to be involved. But Palantir isn't a public company, it's difficult for employees to sell in the (illiquid) secondary market, and there's no particular "market price" for the stock. Presumably management disagrees with the mutual funds' marks, and presumably it would be demoralizing both for employees and for investors if the company in effect endorsed, say, the $3.79 valuation. So paying a bit more is a relatively harmless signal of optimism.

Still it is awkward. This is a problem that public companies have solved, by having public markets for their stock, with transparent prices, that let employees get liquidity whenever they want without weird conflicts of interest and valuation disputes. Being private these days is almost as good as being public; you can still raise billions of dollars from public mutual fund investors and pay your employees in stock that they can then sell for cash. But there are still some glitches.

Elsewhere: Inside the Venture-Capital Arm of "Sesame Street." And: "Even with all of our efforts, it appears that the minotaur does not scale."

People are worried about stock buybacks.

I'm sure someone is worried about the Palantir buyback. But here is James Mackintosh on "The Ideal Investment: Companies That Don’t Invest."

Investors looking for the next bust should pay close attention to the capital cycle of corporate-investment surges followed by retrenchment. Edward Chancellor, an author and former fund manager, sets it out nicely in Capital Returns, a collection of essays by Marathon Asset Management LLP. “All too often,” he writes, “high returns attract capital, breeding excessive competition and overinvestment.”

The ideal management—from a shareholder perspective—would invest the absolute minimum, operate in an uncompetitive industry and return its fat profits to the owners.

On the surface, this advice is different from the usual complaint that companies are crippling themselves by underinvesting in their businesses and spending too much money buying back stock. But Mackintosh's view isn't that different from that of the complainers. "When shareholders cheer on corporate investment, it is worth paying close attention to the risk that they are merely driving up competition and so driving down future profitability," he writes. And:

A plausible case can be made that the corporate caution induced by the 2008 financial crisis contributed to the wonderful returns made by shareholders in its aftermath. Companies were reluctant to invest despite elevated profit margins, instead returning spare cash via share buybacks. With the triple tailwinds of a low starting valuation, easy money and little wage pressure, margins remained high and stocks prospered.

That is kind of the complaint about buybacks: That more corporate investment, and less capital return, would be good for consumers and workers, but would lower returns to capital. Of course if you provide the capital you will think that is bad.

People are worried about bond market liquidity

Here are two papers from Willis Towers Watson, on "The changing nature of market liquidity and the need for action" and on "Understanding and measuring the illiquidity risk premium." The latter finds that "illiquidity risk premia are currently at the low end of fair value" as longer-horizon investors demand less premium for holding illiquid assets and central banks drive down risk premia. The former counsels my favorite approach, despair:

Be wary of ‘solutions’ – Some market commentators proclaim that market liquidity augmentations such as electronic trading and dark pools represent a potential solution. However, this remains a peripheral liquidity source in corporate credit markets and is far from proven as a general solution. The other hope is market standardisation as a solution to the current liquidity malaise. We remain sceptical. Yes, greater standardisation of credit markets would probably improve market efficiency and most likely greatly improve liquidity, however we see little sign of this happening and no impetus to drive this change.

Elsewhere, the U.S. Treasury has not joined the global rush to sell longer-than-30-year bonds because, you guessed it:

“The Treasury likes to see large, liquid markets, and something like a 50-year bond is not going to be particularly liquid,” said James Moore, head of investment solutions in Newport Beach, California, at Pacific Investment Management Co., which oversees about $1.5 trillion.

Me yesterday.

I wrote about fraud, and breach of contract, and hustles. So did John Carney.

Things happen.

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Matt Levine at

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