Money Stuff

Bond Quotes and Performance Art

Also T+2 settlement, corporate formation, stock indexes under communism and office complaints.

Some bond market liquidity.

In 2015, the Public Sector Pension Investment Board of Canada sued Boaz Weinstein's hedge fund, Saba Capital Management, claiming that it dishonestly mis-marked some bonds in order to underpay the board on a redemption request. The lawsuit was not especially compelling when it was filed, and over time it frittered away into almost nothing: A judge dismissed most of the claims, leaving only an argument about contract interpretation, and this week it was settled "as a commercial dispute involving a good faith disagreement over the valuation of two highly illiquid corporate bonds." Never mind!

But it's a fun story, not about hedge-fund malfeasance but about bond market liquidity. The pension board was a big investor in Saba and wanted out. Saba needed to sell a lot of stuff to cash out the pension board at its net asset value. It had been sending investors monthly statements of net asset value computed in the usual way, using pricing services (including Bloomberg's) that use trades and broker quotes to compute a fair value of bonds. The broker quotes are generally non-executable email runs: A trader will send out quotes to a client saying that bonds are bid at 64 cents on the dollar and offered at 65, but that doesn't necessarily mean he will sell them at 65 or buy them for 64. Those quotes are just an opening to the conversation; if you call him up and ask to sell bonds, he might pay you 64 for them, or he might put you on hold and call around looking for someone to buy them, or -- apparently -- he might just say "I don't want to buy or sell those bonds." 

When Saba had to actually sell bonds to cash out the pension board, it sharpened up its pricing by getting real bids, and found prices on some bonds that were a lot lower than the reported prices. The pension board initially claimed that this proved that Saba "rigged" the bids to get lowball numbers, but that seems obviously wrong. The problem was not that Saba rigged the bids to get prices below "fair value." The problem was much more fundamental: The "fair value" that people were quoting for the bonds in the abstract was not a particularly good guide to the price at which you could actually sell the bonds.

The dispute centered around some McClatchy Co. bonds due in 2027 and 2029 (the "MNI 27s" and "MNI 29s"). Bloomberg says there were $300 million of the MNI 29s originally issued, of which about $276 million are still outstanding; they are deeply junk-rated (Caa2/CCC). In mid-March of 2015, according to Saba's summary, Bank of America Merrill Lynch was quoting them at 64 bid, 65 offered; Goldman Sachs & Co. was quoting them at 63/66. Here's a transcript of the Instant Bloomberg chat between Boaz Weinstein and the Bank of America trader:

Weinstein: Z, where would you bid a few mm of the 29s with or without 5yr cds?
Trader: most likely below where you care. 50- 2mm
Weinstein: Yes, that is low I think.
Trader: where would u bid?
Weinstein: Who knows. See it quoted much higher. Actually you should change your 65/66 quote I guess.
Trader: im happy to reflect any market you would like me to make
Trader: i have no position
Trader: and quote it only
Trader: but thats the discount i would bid to go at risk
Weinstein: Yeah, the quote seems wrong I guess.
Trader: given how illiquid it is
Trader: sure do u have a two sided market?
Trader: or what is an appropriate quote?
Weinstein: I guess if you only care at 50 on 2mm then probably 65/ for any size is wrong.

Weinstein's point is that if the trader will only pay 50 for the bonds, he shouldn't send out quotes that make it sound like he'd pay 65. (The chat says 65/66 while the summary says 64/65.) The trader's point is: Look, if you know what these bonds are worth, tell me, and I'll put that in my runs, and maybe I can find someone to trade with you, but leave me out of it. The old-fashioned notion that a bank bond trader is a dealer, trading for his own account and sending out markets that reflect where he is willing to trade, is not relevant here. 

Here's the equivalent Goldman chat:

Trader: those are pretty illiquid bonds and i dont own any of that basis
Trader: so not making it
Weinstein: Ok where would you buy 5mm then?
Trader: i dont want to buy or sell those bonds
Trader: that's why i quote them for the most part
Weinstein:  No level?
Trader: if you like a bid i can show a liquidity bid
Weinstein:  Ok let's see. 5mm
Trader:  but i dont want to offend u
Weinstein:  haha
Weinstein:  This time I asked for it.
Trader:  60/ bid 1mm, 50/ 5mm

Saba ended up sending out a bid-wanted-in-competition on some bonds -- including $31 million of McClatchy 2029s -- to eight banks, who sent it to a bunch of their clients. ("Indeed, the BWIC was so widely disseminated that PSP itself" -- the pension board -- "received it from two different dealers," says Saba.) Three banks returned bids on the McClatchy bonds, with a high bid of 31. The other five banks "could not provide any firm bids whatsoever." 

So the price of those bonds was:

  • About 65 cents on the dollar, in theory.
  • About 60 cents on the dollar, if you wanted to sell $1 million of them.
  • About 50 cents on the dollar, if you wanted to sell $2 to $5 million of them.
  • About 31 cents on the dollar, if you wanted to sell more than that, and if you could find the right bank.

There is nothing magical about this. If you are motivated to sell, you should expect to sell below fair value. If you are motivated to sell a lot, you should expect to move the price. These are illiquid distressed-ish bonds, so you'd expect the moves to be big. It's all pretty normal. But the numbers are big! And the traders are frank about their lack of interest in taking risk to intermediate bond trades on behalf of their customers. "I don't want to buy or sell those bonds" is a rough thing to hear from your bond dealer. 

I am often skeptical about bond-market-liquidity complaining. The problem is basically that if people want to sell a lot of bonds, the prices of those bonds will go down, and the people will lose money. That's true! But that's how it's supposed to work. It's not a systemic problem, particularly if the holders of those bonds are hedge funds with long lockups and rich investors. Still there's something a bit creepy about this story, which is not so much about a hedge fund that discovered it would lose money if it was forced to sell a bunch of bonds all at once -- though that is true -- as it is about a hedge fund that looked into where it could sell bonds and found out that everyone's whole concept of fair value was completely wrong.

Happy T+2 day!

Yesterday the Securities and Exchange Commission 

adopted an amendment to shorten by one business day the standard settlement cycle for most broker-dealer securities transactions. Currently, the standard settlement cycle for these transactions is three business days, known as T+3. The amended rule shortens the settlement cycle to two business days, T+2.

Congratulations everyone! (The rule goes into effect on Sept. 5.) Nothing illustrates the divide between the fintech/blockchain dream of perfect transparent instantaneous linked financial markets and grisly reality better than T+3 (soon T+2) settlement in the U.S. stock market. U.S. public-company stocks trade really really efficiently! Essentially all trading is done electronically between algorithms that can react to news in milliseconds. Essentially all shares of every U.S. public company are owned by one entity, Depository Trust Co., which can transfer shares between accounts just by updating an entry in its ledger. Everything is electronic, virtual, fungible; no physical objects need to move; no complex contracts need to be negotiated. Unlike in many other markets -- syndicated loans, oil, whatever -- conditions seem perfect for near-instantaneous settlement. And yet it takes three business days from the millisecond the algorithms agree the trade to actually move the money and the shares. Soon that will be two days, which is an improvement, but sort of an underwhelming one.

Edgar performance art.

The Securities and Exchange Commission's Edgar system for making securities filings is notoriously prone to hacking. "Hacking" maybe isn't the word; it's very low-tech. You submit an application to the SEC, have a notary stamp it, and get back your Edgar ID. Then you can just make whatever filings you want on Edgar. Want to say that you just bought Facebook Inc.? Sure, whatever, go right ahead, knock yourself out. Want to buy stock in a smallish public company, make an Edgar filing claiming that it's being taken over, and then sell your stock on the reaction to the fake news? Yeah that can sometimes work, though not as well as you'd hope

A lot of people think this is bad, and I guess it obviously is bad, though I sort of like its scruffy charm. Edgar is just one of several influential mechanisms for disseminating information. Press releases are another. Facebook and Twitter also work. All of those mechanisms can be used to disseminate false information. The fake-merger hoax can work (or fail) on Edgar, and it can work (or fail) by sending out a press release, faking a news report or circulating a rumor on Twitter. Sure it is bad to make false claims on an official U.S. government system, but are you aware of what our president is up to? 

If you assume that Edgar is more authoritative than those other sources, then you will be more likely to fall for an Edgar hoax than a Twitter hoax, but there is no special reason to assume that. It seems to me that tightening up Edgar's security procedures -- making the SEC, in essence, vouch for the truth of whatever is filed on Edgar -- is not quite the right reaction. (An Edgar that is 90 percent more secure will still be vulnerable to some hoaxes, and the hoaxes will seem that much more authoritative.) The right reaction is to realize that everything on Edgar, like everything everywhere, is uncertain, and that you alone are responsible for diligently inquiring into what is true.

Anyway here's a funny story about a guy who said on Edgar that he had sold his art company to Alphabet Inc. for $3.6 trillion of Alphabet stock. He doesn't seem to have made any money off the fake filing; he just did it for fun, or for art. I don't mind that so much.

Corporate formation.

Here is Matt Taibbi on WMB Holdings, a private company partially owned by the wife and children of Jay Clayton, the nominee to run the SEC:

WMB, and a company called CSC – with which it appears to have a connection – is a company of a very particular type, known well to white-collar investigators.

"It's a corporate formation company," says Jack Blum, an expert on white-collar crime and money laundering who is best known for his investigation of the BCCI scandal. "You call them up, and 20 minutes later you've got a Delaware corporation. I'm exaggerating, of course, but that's what they do."

Taibbi makes it sound shady, but that is what they do! CSC is Corporation Services Co., which is owned by WMB and "which employs 2,500 employees and works for 90% of Fortune 500 companies." When I was a mergers and acquisitions lawyer, I used their services all the time. Not to launder money. To do mergers. Sometimes to do a merger you need a fresh new corporation, ideally one that you name yourself to match the codenames used in the deal, and CSC will get you one. There is nothing particularly nefarious about it, unless you think that all of the administrative apparatus of modern financial capitalism is nefarious. I guess a lot of people do.

Are index funds communist?

Hahaha no that's not what this is about, but here is a helpful chart of the Russian stock index in the early 20th century:


Man, that brief rally in 1917 looked pretty misguided when Russia abolished private property. The chart is from this Bridgewater Associates "Daily Observations" note about populism, which has lots of other fascinating charts of stock markets under authoritarianism. "We won’t go into detail on all of the terrible things Hitler did when he was in power," writes Bridgewater, "as they are well known," but he did preside over a stock market rally between taking power in 1933 and annexing Austria in 1938. 

Email is fine.

I should start a section of Money Stuff called "Office Stuff," where I just issue a series of grumpy-old-man complaints about modern office life. Okay here goes:

  1. Email is fine. Here's an episode of the Bloomberg Game Plan podcast about "Learning to Love (or at Least Live With) Email." I get it. I hate getting email. But I recognize that the problem is not email as a technology; the problem is people wanting to talk to you. Email is the least annoying way for people to contact you, so it's the most popular, which is why you have so many emails, which is why, paradoxically, it feels so annoying. But, what, you want everyone to start texting you? You want them to send you LinkedIn messages? You want them to call you on the phone?
  2. Where are the boozy two-hour lunches of yore? I have had a bunch of careers -- high-school teaching, law, investment banking, journalism -- and, to my great regret, I arrived at all of them after they phased out their traditions of long drunken lunches. Are there any industries left that still do that? Anyway here's a sad story about eating lunch at your desk. It mentions "an I.T. specialist who lunched in front of his computer and assiduously avoided the break room; anyone who ate in there was odd." That seems so powerfully true to me -- who eats lunch in the break room? what is a break room? -- that it took me a minute to realize that it was mentioned because it's a change. It's not just that bankers and journalists used to go out for boozy two-hour lunches. It's that everyone used to eat sober half-hour lunches with their co-workers in a shared space, away from the actual daily work. Now you just eat at your desk while looking at your screen.
  3. Ugh, LinkedIn. "LinkedIn Wants to Hook Users With 'Trending Storylines,'" is what it says here, and can you even?

Elsewhere, "This mental trick used by army snipers will help you stress less at work." And here is a story about dealing with burnout at work that involves going to human resources to complain -- but then, "if you want to keep your job, you should have a solution at hand." What? The way to deal with burnout is to come up with a solution on your own? Just reading this made me feel burned out. Also:

Every week, the California-based product design company Zurb Inc. hosts the “Friday15,” bringing employees together to solve a creative challenge in 15 minutes. They might design a company logo or play a quick game of capture the flag—the idea is to build up a feeling of trust and teamwork, but it also helps people blow off steam after a long week.

Few things make me feel more burned out than mandatory corporate fun.

People are worried about unicorns.

But workers at big tech companies are not worried about diversity at big tech companies, so that's ... something? 

According to a recent survey of 1,400 tech employees, 94 percent of American tech workers give the industry, their companies, and their teams a passing grade on diversity. That’s in a sector where 76 percent of technical jobs are held by men, and blacks and Latinos make up only 5 percent of the workforce.

“Blacks, Hispanics, Native Americans  and women are so underrepresented that people have lost the ability to perceive what balance is,” said Aubrey Blanche, the chief diversity officer for Atlassian Inc., which makes software for team collaboration.

People are worried about bond market liquidity.

But it's nothing a few bond-trading-platform mergers can't fix:

“The prevailing narrative is that there were dozens of firms trying to do this sort of thing,” Mr. Sobel said. “That was an overstatement, but certainly there was a dozen. And you’ve seen that number shrink. You want to see consolidation in venues.”

So Trumid Financial LLC is acquiring Electronifie Inc.

Things happen.

U.S. Preparing Cases Linking North Korea to Theft at N.Y. Fed. City watchdog relaunches probe into Barclays’ cash call. Banks Trimming Compliance Staff as $321 Billion in Fines Abate. Banks and Tech Firms Battle Over Something Akin to Gold: Your Data. Meet the CFO-Banker Who May Be Next to Run Deutsche Bank. JPMorgan Chase climbs up the prime brokerage rankings. ICE, S&P to Launch LNG Derivative Contracts. Big Oil Replaces Rigs With Wind Turbines. Dole's Murdock Agrees to $74 Million Buyout-Suit Settlement. Elliott Threatens to Force Akzo Nobel to Engage With PPG. Inside the Troubled Kushner Tower: Empty Offices and Mounting Debt. Bloomberg Businessweek profiles the guy who draws "Dilbert." The "Dilbert" guy responds. Two major US technology firms 'tricked out of $100m.' "Tinderization of the NBA." Why Belle Should Have Chosen Gaston. Adulting School.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Matt Levine at

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