Immigration Orders and Odd Tenders
I think sometimes about how Anthony Scaramucci compared the Department of Labor's fiduciary rule to Dred Scott, the 1857 U.S. Supreme Court decision protecting slavery and ruling that African-Americans can't be citizens. "The left-leaning Department of Labor has made a decision to discriminate against a class of people who they deem to be adding no value,” said Scaramucci, a fund-of-funds marketer who was also an adviser and spokesman for Donald Trump's campaign. And he said that, if Trump were elected, he'd repeal the fiduciary rule.
Trump, meanwhile, never said that. Instead he promised to ban Muslims from traveling to the United States. Scaramucci tried not to think about this: "I’ll make a prediction right now that he will not put a ban on Muslims coming into America," he once told Gawker. Did he believe that? Or did he think that the Department of Labor rule requiring financial advisers to put their customers' interests ahead of their own is the great moral evil of our time, comparable to slavery, and that a ban on Muslim immigration was an acceptable trade-off to end that evil?
Now Trump has his Muslim ban, sort of. On Friday -- Holocaust Remembrance Day -- Trump issued an executive order banning people from seven Muslim-majority countries from traveling to the U.S. The ban covered U.S. lawful permanent residents who have spent years following the law and building lives here, interpreters who heroically helped the U.S. military, children of U.S. citizens, dissidents who fought hostile regimes, scientific researchers, Syrian Christians, British Olympians, and endangered refugee children who were carefully vetted to be allowed into the U.S.
But you know what Trump hasn't done yet? Repeal the fiduciary rule! Or even talk about it. Its future remains uncertain, and while there is a good chance that it will eventually be repealed, big brokerages are moving to implement its changes now anyway.
This is a widespread pattern. Many people in the business and financial and technology communities listened to what Trump said, and cheerily assumed he'd do something completely different. Sure he talked about restricting trade and banning Muslim immigrants, but what they heard was that he'd enact "sensible immigration policy" and pro-growth trade agreements, reduce taxes, cut back regulation and generally improve conditions for business. As I said in November:
Peter Thiel and others said that Trump should be taken "seriously but not literally." Taking Trump literally means believing that he'll do what he says. Taking him seriously means believing that he'll do what you want.
And what has happened so far? Immigration bans (with more to come), abandoned trade agreements, "alternative facts," unprompted promises to bring back torture. And what has not happened so far? Tax policy is a complete mystery, with an unclear and walked-back promise to impose a border tax. Health-care policy is even more mysterious. Trump has made vague promises to cut regulations by 75 percent, but his specific regulatory focus seems to be on increasing penalties on companies that move operations abroad. Everything Trump literally said is coming literally true; everything the serious people heard remains an unserious hope. Businesses may eventually get the tax and regulatory reform they wanted, but it's not a priority. The technology industry, and some others, are beginning to figure this out:
Trump has "had this extraordinary honeymoon where Wall Street has kind of discounted all the negative aspects," Richard Fenning, the CEO of consultancy Control Risks, told Bloomberg Television. As companies react to the migrant ban, "perhaps that honeymoon is starting to be over," he said.
More than that, though. One upshot of Trump's executive order is that United States lawful permanent residents, who have jumped through years of hoops to comply with the intricate immigration rules enshrined in U.S. law, are no longer protected by that law. They can be deported at the whim of the President, or his advisers, or a Border Patrol agent. (The order originally barred lawful permanent residents, though after some confusion, now it will not, unless the Secretary of Homeland Security wants it to. On the other hand, soon it may apply to citizens.) The nation of laws that they immigrated to is gone, replaced by a nation of arbitrary rule.
If the president can, without consulting the courts or Congress, banish U.S. lawful permanent residents, then he can do anything. If there is no rule of law for some people, there is no rule of law for anyone. The reason the U.S. is a good place to do business is that, for the last 228 years, it has built a firm foundation on the rule of law. It almost undid that in a weekend. That's bad for business.
Anyway! Here is a delightfully silly takeover battle between OneMain Holdings, Inc., a consumer finance company with a $3 billion market capitalization and a few billion dollars in annual revenue, and IEG Holdings Corp., an online loan company that trades over-the-counter, has a $53 million market cap, and has a few million dollars in annual revenue. Surprisingly, IEG is trying to take over OneMain. Actually that's not quite right: OneMain is majority-owned by funds affiliated with Fortress Investment Group LLC, and those funds are "unlikely to tender" into IEG's offer, so IEG is unlikely to gain control of OneMain. But it has tendered for OneMain shares, and will take whatever shares it can get.
You might wonder where a $53 million company will get the money to buy a $3 billion company, but no money will change hands; IEG is offering its own stock in the deal. In exchange for one share of OneMain -- which closed on Friday at $22.06 on the New York Stock Exchange -- IEG is offering two shares of itself, which seem to be trading in the $5 range. (Bloomberg's last reported price is from last Thursday, when it traded 360 shares, or about $2,000 worth, and closed at $5.50.) Careful observers will note that two times $5-something is less than $22.06, and OneMain's management are nothing if not careful observers; they provided this helpful table of relative value on January 20:
One might think that would end the matter? But who knows. There is a long and curious tradition of "mini-tender offers," in which a bidder offers to buy stock at a discount, relying on investors "assuming that the price offered includes the premium usually present in larger, traditional tender offers." To be fair, IEG gamely defended the value of its offer earlier this month, while admitting that its tender offer "may appear like a David and Goliath battle":
The consideration offered by IEG Holdings is not only adequate, but attractive. In our view, the offer reflects the current underlying value of OneMain.
This is not a lowball offer, and, in the opinion of IEG Holdings, values OneMain appropriately, considering, among other things, the value of business combination synergies and OneMain’s falling share price trend. Without the swift and substantial changes to OneMain’s business model proposed by IEG Holdings, we believe that OneMain’s value will diminish further. This highlights the urgency in completing this tender offer as soon as possible, while there is still time to save OneMain from continuing to pursue its flawed and visionless “brick and mortar” strategy.
Don't forget the synergies! IEG's chairman and chief executive officer also said "Let's make OneMain great again," since that's a thing that business leaders say now.
Jesse Litvak is a former Jefferies LLC bond trader who lied to customers about the prices he paid for bonds, in order to get them to pay him more for those bonds. Is that fraud? It's a weirdly hard question; in my anecdotal experience, about half of financial-markets participants I talk to think it's unforgivable criminal fraud, while the other half think it's sharp but acceptable practice. (After all, the customers got the bonds they wanted at prices they were willing to pay.) Litvak was convicted of fraud by a jury in 2014. But he appealed, and a federal appeals court threw out his conviction and sent the case back for a new trial so that the jury could consider Litvak's argument that, essentially, everybody lies about bond prices so it's really no big deal. The appeals court didn't agree with that argument, exactly; it just concluded that jurors should hear it and make up their own minds. I said at the time:
Maybe lying to customers about bond prices is a crime, maybe it's not a crime, and it's up to 12 randomly selected laypeople to decide. Leaving the rules of financial markets to be determined based on after-the-fact review by non-experts chosen at random and empowered to impose prison time is a very American system. But boy is it strange.
Last Friday, Litvak's new jury made its decision, and found him guilty on one of 10 counts. (That is sad for him; in the federal white-collar sentencing system, one conviction is not all that much better than 10.) But I have to say, the new jury did about as thoughtful a job as you could hope for in deciding when lying about bond prices is and is not a crime. The only count on which he was convicted involved a time that "Litvak altered an electronic chat to make it appear he had paid more for the bond than he did, then forwarded it to a trader at Invesco Ltd. to whom he was trying to sell the security":
Altering a document was the smoking gun that proved different from "trade talk," according to Michael C. Keats, a partner at Stroock & Stroock & Lavan LLP in New York, who wasn’t involved in the case.
"That was really one of the uglier allegations," Keats said, adding that the prosecution could have more narrowly focused the case.
This is a totally sensible distinction. If you go to a used-car lot, and the salesman says to you "I can give this to you for $5,000, but you're killing me, I'm losing money on the deal" -- you kind of assume that he's making money on the deal. But if he shows you a bill of sale proving that he bought the car for $5,500, you are entitled to assume that he didn't forge that document. Same, the jury apparently concluded, in the bond market.
So is that the rule now? Well, not really. Juries don't write legal opinions that bind future juries. This jury heard all the arguments and apparently decided that lying about bond prices is not a crime, unless you do it by altering documents, in which case it is a crime. You may or may not agree with that rule, but it's a rule. It's just not the rule. It perhaps guided one jury's decision, but the next collection of 12 laypeople may come up with a different rule. All these prosecutions of lying bond traders, and what is and isn't legal isn't really any clearer than it was when Litvak was first arrested.
Market structure NIMBYism.
Modern market structure is a complex field; to truly master it, you need to understand market-microstructure economics, telecommunications technology, computer science, solid-state physics, and perhaps most importantly rural English district-council zoning politics. If you get that last part wrong, all the rest of your work can go to waste:
At a public meeting last night, Dover District Council rejected separate planning applications from Vigilant Global, part of Chicago-based DRW Holdings LLC, and New Line Networks -- a joint venture between Chicago-based Jump Trading LLC and New York-based KCG Holdings Inc.
“In 26 years as a councilor, this is the worst application I have ever seen,” said Bernard Butcher, the vice chairman of the planning committee in his response to Vigilant’s application. “This particular proposal is just unsightly, it’s too incredibly stupid for us to even contemplate.
“There have to be other locations where it will not cause so much havoc and unsightliness,” he told the meeting.
We have talked about this proposal -- to build a thousand-foot-tall tower to beam microwaves across the English Channel -- before. "Stupid" is in the eye of the beholder, I suppose; I can think of few recent pieces of financial writing that I found more charming than DRW's proposal, which featured before-and-after renderings of bucolic English fields, with and without the radio mast, as well as a series of diagrams explaining why the tower had to be so tall. (Briefly: The earth curves.) Also I am not sure that there are other locations where a thousand-foot-tall tower would just blend in? London, I suppose, but that might defeat the purpose. Basically if you are going to put a thousand-foot-tall radio mast in a field, it's going to rather dominate the field. It's just a question of whose field it is, and who has to look at it. Anyway, RIP the rural English high-frequency-trading tower, an idea that was too beautiful -- well, too ugly -- to live.
Elsewhere, Citadel Securities Chief Executive Officer Kevin Turner, "a voracious reader of business-strategy books," "is leaving the market-making firm just months after he was hired." And here is Modern Markets Initiative on the "NYSE American" exchange and its speed bump.
Here is a Securities and Exchange Commission fraud case "against two New York City men accused of running a Ponzi scheme with money raised from investors to fund businesses purportedly created to purchase and resell tickets to such high-demand shows as Adele concerts and the Broadway musical Hamilton." They allegedly raised "more than $81 million from at least 125 investors in 13 states," and "went so far as to misrepresent that an agreement was in place with the producer of Hamilton to purchase 35,000 tickets to the musical." It is always nice to see (alleged) Ponzi schemers with their fingers on the cultural pulse. You'd hate to see people getting swindled into funding a fake ticket-reselling business for, like, a regional touring production of "Pippin."
Elsewhere in SEC enforcement, here's an $18 million fine against Citigroup Global Markets for overbilling clients. The problem is that the clients would sign account agreements setting out the fees they'd pay, and then Citi would just ignore the agreements and charge them different fees, because it "failed to confirm the accuracy of billing rates entered into its computer systems in comparison to fee rates outlined in client contracts." Oops! Also Citigroup lost about 83,000 account agreements, which makes it especially hard to figure out what fees it should be charging. I suppose the lesson is, when you sign up for a brokerage account, you should stick around and make sure that your broker puts your account agreement into a file, instead of just throwing it directly in the garbage.
And elsewhere in the cultural pulse, "Seattle-based financial technology startup LendingRobot is launching an automated hedge fund that will invest exclusively in loans originated on peer-to-peer (P2P) lending platforms." In hindsight I can't quite figure out why I never launched a peer-to-peer-lending robo-advisor. Oh well. I guess the idea of a peer-to-peer-Hamilton-ticket-reselling robo-advisor is still available.
Don't do this.
Look, we all know that sometimes the best way to get a raise is to go out and get a better offer from a competitor, and then shop that offer to your current employer. It's awkward, but it happens. But if you are going to do that, you can't sign a contract with the competitor that includes a million-dollar breakup fee if you back out:
Five Credit Suisse bankers who reneged on agreements to join Jefferies this month may face demands that they pay more than $10 million to their scorned suitor, according to a person with knowledge of the matter.
The bankers signed contracts with Jefferies that left some of them on the hook for payments of at least $1 million -- and others much more -- for backing out of the agreements.
You go to your boss with a verbal offer, not an ironclad signed contract. Obviously suing to enforce these contracts isn't a particularly great look for Jefferies either, but really, what were these bankers thinking when they signed them?
People are worried about unicorns.
Trump’s next steps could strike even closer to home: His administration has drafted an executive order aimed at overhauling the work-visa programs technology companies depend on to hire tens of thousands of employees each year.
It is fair to say that the political and regulatory environment overall does not seem especially ... unicorny? The bulldozers are moving in on the Enchanted Forest. Meanwhile, Elon Musk is crowdsourcing possible amendments to Trump's immigration orders.
People are worried about bond market liquidity.
"People are worried about Chinese property bond market liquidity," Alphaville informs me.
Goldman presses May to protect City post-Brexit. Buffett’s Go-To Billionaire Dealmaker Has Wall Street on Edge. A Default in China Spreads Anxiety Among Investors. Citigroup Plans to Exit Mortgage Servicing by End of 2018. Wells Fargo Locks Horns With Some Shareholders Over Proxy Proposals. The curious case of Constellation Health and Blackstone’s former top deal maker. CSX, Rail Veteran in Settlement Talks. Fugitive Ex-Billionaire Batista Flying to Brazil to Face Arrest. FT Global MBA Ranking 2017. Shadow lobbying. "Pre-filled vape pens and pre-rolled joints." Odd Lots: Stay in School, Even if You're Planning to Join the Mob. "Months later the same team launched Zo, another female millennial-inspired bot, on to Facebook Messenger and chat app Kik." Text adventure. Intellectual raves. Open-source sofa. Clueless Insidious. Goldfish car.
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