Lucky Investors and Venezuelan Bonds
This is the purest investing philosophy, from an Och-Ziff Capital Management Group investor about Och-Ziff's newish and well-paid co-chief investment officer, Jimmy Levin:
“Was it luck? I don’t know, maybe, I’m not sure it really matters,” said Mike Rosen, chief investment officer at Angeles Investment Advisors, who has put money into Och-Ziff’s credit-opportunities fund. “I do want to invest in lucky people -- that’s better than investing with unlucky people.”
The $280 million pay package is, of course, a vote of confidence. “You pay people for what they’ve done, but you also pay people for what you think they’re going to do,” Rosen said.
Let's say you ran a fund-of-funds and built a perfectly rigorous set of tools to evaluate whether a manager's success is due to skill or luck. Let's say you determined with total certainty that Fund X's excellent returns are 100 percent due to luck. Would you invest? Conventional wisdom would say that you should only invest in a fund -- and, certainly, only pay high fees to that fund -- if its success is due to skill. Skill, the theory goes, is enduring and repeatable and worth paying for; luck is random and can change in an instant. But would you be a little tempted to be like "well, better to be lucky than good, here's all my money"? There is a famous reductio ad absurdum in finance about how you shouldn't trust the winner of a coin-flipping contest to manage your money. But surely someone would! "I do want to invest in lucky people," they'd say, "and look at how confidently she flips that coin!"
Also Levin met Och-Ziff founder Dan Och "when Levin was a counselor and water-skiing coach at a camp in Wisconsin where Och’s children spent part of their summer," which is an investing philosophy in itself. Do you think he planned that? Do you think that the investing clubs at Harvard and Wharton track where hedge fund managers send their kids to camp, and then get their members counselor jobs at those camps? If you want a hedge-fund job, is it better to spend a summer interning at Goldman Sachs, or teaching water-skiing to Dan Och's kids (or tennis to Bill Ackman)? Is meeting a famous hedge fund manager while teaching water-skiing at a camp in Wisconsin the sort of good luck that predicts more good luck in the future?
Elsewhere, here are "A Dozen Lessons on Investing from Ed Thorp," the legendary inventor of blackjack card-counting and the Black-Scholes theorem. Here he is on the Graham-Dodd/Warren Buffett approach to investing:
The way I sized up the Ben Graham approach was that it would be a total lifetime of effort. It was all I would be doing. Warren demonstrated that. He’s the champion of champions. But if I could go back and trade places with Warren, would I do it? No. I didn’t find visiting companies something I wanted to do. I never even thought about finance until I was 32.
The best advice in life is the kind that goes like "if you do this, you can be rich, famous, successful and also lazy." The "work all the time until you die and you'll be a billionaire" sort of advice is more of a mixed bag.
A Venezuela theory.
Most countries that default on their debt at least have the advantage that it's hard to foreclose on them. Usually when a country runs out of money and refuses to pay its creditors, the main penalty is that creditors don't lend it any more money. This is bad enough; after all, the country has run out of money and needs more. But usually the creditors can't seize the country's stuff, except in limited symbolic ways, like when Argentina absent-mindedly allowed a hedge fund to seize a navy ship.
Venezuela, though, is different: It is a country with a hard-to-sustain debt load, but it has an oil company attached, one that sells a lot of oil in the U.S. Venezuela's state-owned oil company is called Petróleos de Venezuela SA, and it has a lot of debt outstanding, and people tend to think that PDVSA's debt is Venezuela's problem and Venezuela's debt is PDVSA's problem. So if either Venezuela or PDVSA restructures its debt, then it will need to deal with the risk that holdout creditors who refuse the restructuring might try to go after the streams of dollar payments that PDVSA/Venezuela get from selling oil into the U.S.
Here is a proposal from sovereign-debt restructuring experts Lee Buchheit and Mitu Gulati on "How to Restructure Venezuelan Debt." The modern way to restructure sovereign debt is to make sure that your bonds contain collective action clauses, in which holders of a supermajority of the bonds can vote to extend maturity or reduce interest or principal. The government negotiates with its main bondholders, and convinces them that restructuring the debt is the only way for them to get paid anything, and when they agree that binds everyone: Holdouts can't keep their bonds and demand more. Most of Venezuela's sovereign bonds do contain collective action clauses allowing a restructuring with a vote of 75 or 85 percent of the holders, though some do not, and even getting 75 or 85 percent of each series of bonds to agree to a restructuring might be challenging. (More modern collective action clauses aggregate voting across series, to prevent a hedge fund from blocking a restructuring by building up a 26 percent position in a single bond.) Buchheit and Gulati have some ideas for how Venezuela can improve its chances here, including their delightfully named "cryonic solution" that we have previously discussed.
But the PDVSA bonds are harder, because they don't contain collective action clauses: PDVSA is a company, and its bonds look kind of like normal New York-law corporate bonds, and corporate bonds don't usually contain collective action clauses. (Because, for corporations, the rough equivalent of a collective action clause -- a restructuring binding on all creditors -- is bankruptcy, which is not so appealing for PDVSA/Venezuela.)
But there's a trick that might work. One clause in the PDVSA indenture (Section 10.02) allows PDVSA to "delegate any of its obligations hereunder" if it gets the approval of a majority of bondholders. Buchheit and Gulati propose that PDVSA could do an exit consent in which it offers consenting bondholders new exchange bonds (with longer maturities, lower rates, and perhaps lower principal) in exchange for (1) handing in their old bonds and (2) on the way out, voting to amend the old bonds to delegate PDVSA's payment obligations to a new company. Call it "PDVSB." (Oh, fine, they call it "Newco.") This Newco would not have to be a particularly good company; in particular, Venezuela's oil revenue would not have to run through it. So you get your choice: Exchange into the new bonds, which have longer maturity and lower interest and maybe lower principal, but which are backed by Venezuela's oil revenues; or keep your old bonds, which have the same terms as before, but which are now backed by whatever Venezuela decides to put into Newco. And if Newco defaults, that's not PDVSA's, or Venezuela's, problem.
This seems like cheating, but something like it was explicitly blessed by a U.S. appeals court in the recent Marblegate decision, which allowed a company to do a restructuring that left holdout bondholders with bonds in a more-or-less empty shell. (Buchheit and Gulati don't want to make Newco a purely empty shell, because that "would be seen for what it is -- blatantly coercive and punitive -- and will inevitably end up in court," and propose instead "to fund Newco with a percentage of its net revenues from the sale of oil during periods when the average price of Venezuelan oil exceeds a specified threshold," giving the Newco bonds some chance of being paid off if the price of oil recovers.)
Will it work? I don't know. The world of sovereign bond restructuring is mostly not driven by general principles: It's not like there is agreement on the correct way to go about a negotiated restructuring, and a consensus that everyone will abide by the results. Instead it is a hodgepodge of idiosyncratic bond provisions, and of individual judges confronted with those provisions and tasked with interpreting them. Gulati told me by e-mail that he and Buchheit found their solution "because I was teaching a class on How to Restructure Venezuelan Debt – and Lee had come down to talk to my students – and then we had drinks, and did what we do over drinks (sadly, reading indentures)." That sounds idyllic, actually, and it's really the only way to do it.
Elsewhere: "‘They All Deserve to Die’: Caracas Militants Vow to Take Up Arms."
Oh London Whale.
Bruno Iksil, the "London Whale" trader who left JPMorgan Chase & Co.'s chief investment office after losing several billion dollars on credit-index derivatives trades, has an incredible personal website with several rambling PDF documents explaining his version of what happened in his debacle, and who is to blame, and how he has been portrayed unfairly. "Who could gobble such a gross bluff?," Iksil asks.
Bruno Iksil was also the star witness against Javier Martin-Artajo, his boss, and Julien Grout, his subordinate, in a U.S. criminal case charging them with covering up the London Whale losses by mis-marking the positions on JPMorgan's books. This was always a bit of a tough case: Iksil was the Whale, so if you are going to punish someone for the Whalery, he seems like a more sensible target than the guy he worked for and the guy who worked for him. (Also Martin-Artajo and Grout do not live in the U.S., and made the sensible decision not to come to the U.S. just to be put in jail.) But it recently became untenable, and on Friday prosecutors dropped the case:
Mr. Iksil’s potential testimony was put in doubt by a deposition he gave in a civil case brought by the Securities and Exchange Commission over the trading loss, a lawyer for Mr. Grout said. In the deposition, Mr. Iksil disclosed that he had written a 400-page memoir that would cast doubt on the core of the federal government’s case.
Yes well. Iksil's discussion of the mis-marking, in a lengthy PDF on his website, is part impenetrable and part complainy and part exculpatory, and doesn't seem like it would be all that helpful to prosecutors. Who knows what the memoir will be like? (I mean, it's a good guess that it'll be fun.) There is perhaps a lesson here for prosecutors, which is, don't cut a deal to let the main player in an alleged conspiracy cooperate against the tangential figures. That might not work out, and also, there's no reason it should work out.
Oh Wells Fargo.
Here is a goofy story about a former Wells Fargo & Co. employee, Gary Sinderbrand, who is suing his brother for defamation, as one does. The brother also works at Wells Fargo, and Sinderbrand subpoenaed some Wells Fargo documents as part of the case, and Wells Fargo apparently misread the subpoena and thought it was supposed to send him all of its documents? So now Sinderbrand is in possession of "copious spreadsheets with customers’ names and Social Security numbers, paired with financial details like the size of their investment portfolios and the fees the bank charged them," as well as "extensive information on Wells Fargo’s financial advisers employed by the bank, their performance, their compensation and their client lists."
Oops! This is not supposed to happen, and is very embarrassing for Wells Fargo, and for reasons that I cannot quite make out, Sinderbrand did an extended end-zone dance to celebrate receiving the data: After "noting that a less scrupulous recipient of such data could have easily posted it online," he instead showed it to the New York Times, which published some mild blind items. ("One file, for example, contained details on the holdings of a well-known hedge fund billionaire who had at least $23 million invested through Wells Fargo Advisors.") Wells Fargo has asked him to return the files, but he ... hasn't? He's just making ominous noises about what a less scrupulous person might do with them? Nobody comes off well here. I guess the point is that a bank's information security procedures are only as strong as their weakest link, and that sometimes that weakest link is the outside discovery vendor for an outside law firm responding to a defamation lawsuit in which the bank is not a party. Also it is probably best not to sue your brother if you can help it.
Blockchain blockchain blockchain.
In Friday's Money Stuff there was some half-joking speculation about what U.S. law enforcement authorities would do with all the bitcoins they keep seizing from criminals, and about a thousand of you e-mailed to point out that the answer is already settled: They auction them off. One reader also pointed out that there's another settled approach, which is that the law-enforcement agents steal the bitcoins from their own agencies. That does seem a bit more in keeping with the spirit of bitcoin.
Elsewhere, here is Paul Murphy on Monkey Capital, a "decentralised hedge fund" that is doing an initial coin offering with both a white paper and a yellow paper. I do not know why it requires two papers, or what the colors signify, but it seems like a good time. And here is Elaine Ou on "Ethereum's Eternal September."
People are worried that people aren't worried enough.
The CBOE Volatility Index has now closed under 10 for seven straight trading days, the longest streak ever. (The previous record was four days in 1993.) So markets are exceptionally quiet. Obviously people worry:
Still previous valleys have been followed by surges in volatility, and some investors are holding elevated cash levels because they remain wary that a broad selloff could lie ahead.
People are worried about unicorns and also stock buybacks.
Here is Rana Foroohar with the twofer: The unicorn worry is that there are fewer initial public offerings, and that now "the goal of an IPO is all too often for investors to 'exit' with as high a valuation as possible" instead of to raise operating capital. The buyback worry is that they encourage short-termism, and so Foroohar calls for "making share buybacks illegal."
One interesting question here is: Would banning share buybacks by public companies make private companies more or less likely to go public? On the one hand, imposing more rules on public companies should make being public less attractive: Why go public and be more restricted, when you can stay private and do whatever you want? On the other hand, it seems to me that the right way to think about a lot of these issues is as a power struggle between entrepreneurs and investors. Share buybacks are an essentially pro-shareholder tool, a way to discipline managers and prevent them from wasting shareholder money on wasteful ideas. If public companies aren't allowed to do buybacks, then their managers will have more power and their shareholders will have less. And if entrepreneur-managers are the ones making the decision to go public, they might actually like a rule against buybacks: They might find it less a restriction on their freedom, and more a protection against their shareholders.
People are worried about gray rhinos.
I don't expect this section to recur too often, but obviously a metaphorical financial animal with a central horn belongs in Money Stuff, so here we are:
The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires.
Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a “gray rhinoceros,” without naming specific companies.
Elsewhere in gray-rhino fears: "Banks That Funded HNA's $40 Billion Spending Spree Halt New Loans."
U.S. Foresaw Better Return in Seizing Fannie and Freddie Profits. Wall Street Outlasts Congress on Banker Pay, But Still Loses. Bank of America Chooses Dublin as Post-‘Brexit’ European Hub. Vanguard closes in on BlackRock’s number-one spot. Direct lending funds' fading all-weather appeal. Deutsche Bank and Barclays face hit from fixed-income falls. WebMD Agrees to Be Bought by Buyout Firm KKR for $2.8 Billion. The "Tesla of the Seas." More kids choose summer camps that focus on finance. Brosectomies. Here's A Baggage Claim Full Of Crabs.
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