Money Stuff

Memory, Mortgages and Puzzles

Also Herbalife's tender offer, flossing on the blockchain and the unicorn SPAC.

Insider trading.

Richard Lee thought that he had insider traded, but forgot that he had in fact not insider traded:

A former trader at billionaire Steven A. Cohen’s former hedge fund SAC Capital Advisors LP wants to withdraw his 2013 insider trading guilty plea, saying he had forgotten about two instant messages that show he committed no crime.

Richard Lee said in Monday court filings that the messages uncovered in the last few months demonstrated how his purchase of 725,000 Yahoo Inc shares on July 10, 2009 was based on public information.

I suppose it is now time to promulgate the Eighth Law of Insider Trading, which is: If you did not insider trade, don't forget! Don't confess to insider trading just because you can't remember if you insider traded! This law of insider trading -- which, like its predecessors, is not legal advice -- hardly seems like it would be necessary, but I guess that is a bit of a theme among the laws of insider trading.

Lee should not be confused with the other Richard Lee who used to work at SAC Capital and pleaded guilty to insider trading. That one was sentenced to 21 days in jail back in 2015; this one was scheduled to be sentenced next month, before he had his memory jogged. His story is incredible for other reasons too. First of all, you just don't see this sort of thing a lot in criminal cases: Not a lot of people plead guilty to, say, murder, and then four years later wake up and say "oh wait I just remembered I didn't kill that guy" and try to withdraw their pleas just before sentencing. 

Second, if you can't remember whether or not you insider traded ... you've probably insider traded? Like, not necessarily that time, but if you got confused about whether one particular trade was based on public information or an insider tip, then that does suggest that some of your other trades were based on insider tips. Otherwise how would you get confused? 

Third, Lee didn't just plead guilty to insider trading. He also agreed to cooperate with prosecutors to build cases against his fellow insider traders. If it turns out that his insider trading confession was just a misunderstanding, then that presumably casts doubt on the cases against everyone he cooperated against. Not necessarily: Lee's story now seems to be that he did get an insider tip passed along by an analyst, but that he had already bought most of his shares based on public information. I suppose you could make the case that the analyst was still doing bad insider-trading stuff even if Lee's own buying was innocent. Still it does make his cooperation a bit less compelling. 

Elsewhere in insider trading:

The U.S. Justice Department has opened a criminal investigation into whether top officials at Equifax Inc. violated insider trading laws when they sold stock before the company disclosed that it had been hacked, according to people familiar with the investigation.

As I've said before, I have my doubts: The executives sold relatively small portions of their stock just a few days after the breach was discovered, and Equifax says that they didn't know about the breach when they sold. My assumption was that "it would just be too dumb" to learn of the breach and immediately rush out to sell 10 percent of your stock. On the other hand! Equifax's business model seems to be basically to collect a bunch of potentially harmful information about every American consumer, sell those consumers protection against Equifax's own information, and then not provide that protection, so I guess you can't put anything past them. Oh, also: "Equifax Suffered a Hack Almost Five Months Earlier Than the Date It Disclosed."


Every wave of financial innovation stirs up a lot of people with the business plan "hey instead of borrowing money to do ____, individuals should be able to finance ____ with equity," where the "____" is usually "buy a house" or "pay for college," though sometimes it is weirder stuff. (I assume someone somewhere is building a sell-equity-in-avocado-toast startup.) I am generally pretty skeptical of this approach, but on the other hand, I think Loftium sounds cool:

It will provide prospective home buyers with up to $50,000 for a down payment, as long as they are willing to continuously list an extra bedroom on Airbnb for one to three years and share most of the income with Loftium over that time.

I mean, it probably doesn't sound cool if you don't want to Airbnb an extra bedroom for three years, but no one is forcing you to use it. But it is a clever evolutionary step in home financing. The basic issue is that, while owner-occupied homes are both consumption goods and investment assets, they do not normally have cash flows. This makes them somewhat inconvenient investment assets to finance: If you sell equity in your house, the investor only makes money on the appreciation when you sell your house, which can take a long time. But Airbnb's innovation was turning homes into cash-flowing assets. And Loftium's innovation is financing that cash flow: Instead of selling shares in your house, you sell a share of the Airbnb income from your house, which is a shorter-term and perhaps more tractable investment. (Loftium bears the risk that the Airbnb income might be lower than expected.)

Obviously further innovations are possible. If this takes off, next we will see people securitizing those cash flows, so that instead of selling your future Airbnb income to some startup, you can sell it to a trust that will combine it with other people's Airbnb income, slice it up and sell tranches to European banks. And finally someone will tokenize it, and you will be able to do an initial coin offering on the blockchain to help pay for your house. The thing about financial innovation is that there are only so many tricks, and people keep re-applying them, in predictable combinations, to every asset they can think of.


I have to say you don't often get public companies making detailed disclosures about casual merger conversations that never went anywhere, but here is Herbalife Ltd.:

The discussions were on-going throughout this time period, however, the Company did not receive an offer and was not provided with any specific valuation for the Company’s shares. The transaction under discussion proceeded in the direction of a potential “all-cash” purchase of all outstanding common shares by Party A. The Company instructed its financial advisor to terminate discussions with Party A. On August 16, 2017, the Company’s financial advisor sent Party A formal notice communicating the Company’s decision to terminate all discussions and rescind Party A’s access to the data room previously established for conducting due diligence on the Company. On August 20, 2017, after receipt of the notice formally terminating discussions, a representative of Party A and a representative of the Company had a conversation. Party A did not indicate a desire to reinitiate the discussions at a future date, but they did indicate that they had not lost interest. However, the Company is not seeking to reinitiate discussions at this time.

That's an updated version of Herbalife's tender offer to buy up to $600 million worth of its stock, a tender offer that comes with a contingent value right that will pay selling shareholders more if Herbalife goes private within the next two years. When we last talked about that tender offer, I pointed out the awkwardness of that CVR: Herbalife seems to have determined that its terminated merger talks are so material to shareholders' tender-offer decision that it should not only disclose them, but also compensate shareholders if those talks do eventually lead to a deal. On the other hand, Herbalife was buying hundreds of millions of dollars' worth of stock while those talks were going on -- in open-market purchases -- without disclosing them.

So there is a bit of a needle to thread here, to explain why Herbalife thinks the merger talks are material now that they're terminated but were not material when they were actually going on. I suppose this paragraph is meant to do that: The talks were casual, never mentioned price, and never went anywhere, but on the other hand the potential buyer "did indicate that they had not lost interest."

Blockchain blockchain blockchain.

After Jamie Dimon said last week that "if we had a trader who traded Bitcoin I'd fire them in a second," one obvious question was: Do JPMorgan traders trade bitcoins? And the answer is sure, whatever, sort of. ("JPMorgan Chase & Co has been routing customer orders for bitcoin-related instruments, a spokesman said on Monday, despite the bank’s chief executive’s calling the crypto currency 'a fraud.'")

Elsewhere, here is Jamie Foxx touting the initial coin offering of a "zero trading fee cryptocurrency exchange" named, somehow, "Cobinhood." And I think that I have mentioned that I now get more or less daily emailed press updates from Dentacoin, "the first Blockchain concept designed for the Global Dental Industry," and today's was a doozy:

Dentacoin introduces a number of tools, which reward people for simple activities, such as providing feedback, giving opinion on different topics, and even doing regular things like brushing and flossing twice a day. Every activity is contributing to the global dental industry, therefore patients need to receive the equivalent value for their contribution, paid entirely in Dentacoin. 

Floss your teeth twice a day, but on the blockchain! 

Finally here is James Mackintosh arguing that Gresham's law proves that bitcoin is worthless:

Even if bitcoin worked better, it is in a Catch-22 because of Gresham’s law, the nostrum that bad money drives out good. Given the choice of spending inflationary government-issued money or something which holds its value, everyone would spend the bad paper stuff and hoard the bitcoin. You wouldn’t want to be the person who spent 10,000 bitcoins on two pizzas in 2010, when a bitcoin was worth a fraction of a cent. Those bitcoins are now worth $40 million. But if no one spends bitcoin, it will never get established as a currency.

Ehh I don't think Gresham's law works that way. "Given the choice of spending inflationary government-issued money or $4,000 bitcoins with a 'real' worth of zero," I could equally well argue, "everyone would spend the dumb bitcoins and hoard the dollars." More generally, bitcoin's value for most of its users doesn't seem to be transactional: It's a store of wealth and a speculative investment more than it is a functioning medium of exchange, but its users seem to be okay with that.

People are worried about unicorns.

Here is Chamath Palihapitiya, the unicorn SPAC guy, telling Andrew Ross Sorkin that the entire concept of unicorns -- billion-dollar tech companies that remain privately owned -- was just a trick that Facebook Inc. played on everyone:

“We at Facebook basically flipped the narrative, and we did it on purpose,” he said. “Our whole thing was ‘Let’s stay private longer.’ And the reason we did that was we were pretty sure it would trick a lot of other people into not trying to go public or take advantage of the capital markets.”

He said Facebook hoped that “all those companies would eventually die because they were not that good and we would suck up all of their talent.”

Okay! On the one hand, plenty of private tech companies have found ways to access plenty of capital without going public, so I am not sure that the trick exactly worked. On the other hand, Palihapitiya is probably right that companies that pay their employees in stock, and stay private forever, will have trouble with employee retention. "How are you supposed to build an iconic legacy business when your entire employee base walks out the door every five years," he asks.

Palihapitiya also defends the fees of his special purpose acquisition vehicle -- he gets 20 percent, as opposed to the 7 percent or less that banks charge for an initial public offering -- this way:

But if his company acquires a business five to 20 times its size through a reverse merger, he said, the fee is the same as or smaller than a banker’s fee — and it is all in stock, so unlike the banks, Mr. Palihapitiya’s interests are aligned with the company’s.

That is ... not quite right? His unicorn SPAC, Social Capital Hedosophia Holdings Corp., raised $600 million to go out and acquire a private tech company in a reverse merger. It could go buy a $3 billion unicorn with that money, of course, because the acquisition could be done with stock: Hedosophia could acquire the unicorn by giving the unicorn's existing shareholders 83 percent ($3 billion divided by $3.6 billion) of the combined company, leaving 17 percent ($600 million divided by $3.6 billion) for the original Hedosophia shareholders (and effectively raising $600 million for its business). In that case the SPAC sponsors' 20 percent fee (call it $120 million) would be only about 3.3 percent of the market capitalization of the combined company.

But of course if that $3 billion unicorn just did an IPO, its bankers wouldn't charge it 7 percent -- or 3.3 percent -- of its entire market capitalization. They'd charge it 7 percent (or probably less) of the amount it raised in the IPO. (In Hedosophia's case, the "amount raised in the IPO" is, roughly, the $600 million of cash that Hedosophia has to contribute to a unicorn merger.) When Facebook went public, its bankers charged a fee of 1.1 percent of the amount raised -- and Facebook sold about 20 percent of its stock to the public. So the bankers' total fees were about 0.2 percent of its market cap, an order of magnitude less than Palihapitiya's fees.  


Here is a Bloomberg News recap of Compass, a puzzle hunt organized by hedge fund Pine River Capital Management this past weekend. (Disclosure: I participated in Compass; my team came in eighth, finishing a bit after 2 a.m.) It's stuff like this:

Organizers attached altitude and depth gauges to balloons and buoys just off a dock with a 50-foot long number line running from -35 to +35.

The gauges were pre-set with the y coordinates, and the number line was marked with x coordinates. Teams kayaked, collected numbers, then graphed them to see the shape of the constellation Ursa Major. It also took decoding a message in a bottle and using a stellarscope to get to the solution, the word "Overtake."

I sometimes think that you can get a more accurate picture of modern Wall Street culture at a puzzle hunt than you can from "Wall Street," or even "Liar's Poker." Of course finance attracts different types, and there are certainly lots of bankers and traders who prefer models and bottles to decoding messages with stellarscopes. But right now, with the rise of quantitative investing and high-frequency trading and automation of banking tasks, the charmingly -- in my biased estimation -- nerdy types seem to be ascendant. The old-school swaggery bro stereotype of the financial industry sometimes fits awkwardly with the fact that it recruits a lot of math Ph.D.s and then sets them to work solving puzzles. And some of them like to spend their spare time solving puzzles too.

Meanwhile, in awkward timing, Pine River "is closing its master fund after a wave of client withdrawals that would bring assets below $300 million." At least they went out with a puzzle hunt.

Things happen.

Toys ‘R’ Us Seeks Bankruptcy, Crushed by Debt and Online Rivals. CFPB Settles With Owners of Wall Street's Worst Student Debt. The Fed, a Decade After the Crisis, Is About to Embark on the Great Unwinding. The World’s Biggest Wealth Fund Hits $1 Trillion. This former hedge fund guy is a one-man nonprofit investigating some of America’s shadiest companies. Trump election blamed as foreign MBA students shun US schools. Little-Known Lender’s Stand Threatens a $29 Billion Solar Market. Welcome To The World's First Rotating Jail, Which Had An Unfortunate Tendency To Cut Inmates' Limbs Off. Happy Talk Like a Pirate Day. "Swiss prosecutors are trying to figure out why someone apparently attempted to flush tens of thousands of euros down the toilet at a Geneva branch of UBS Group AG." 

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