Money Stuff

Giants Still Walk the Earth at Banks

Also bond market liquidity, crypto miscellany and VC sex parties.


Working at an investment bank is a sort of anonymous business. You go into the office every day, you work hard, you meet with clients, you chase the money, you do what you can to contribute to the bank's bottom line. But that bottom line is massive, and there are a lot of people who contribute, and when the bank reports earnings every quarter it's not like they can give a shout-out to everyone who did their part. "Steve in equity derivatives has been working on improving his ability to make small talk with clients, and you can really see the difference in our revenue numbers, so good job Steve," is something that Jamie Dimon does not say on earnings calls. If you want that sort of personal recognition, investment banking is not the industry for you. You have to do something really special to get called out individually in an earnings release. So congratulations to -- well, they don't name him or her, but whoever printed the Steinhoff margin loan for JPMorgan Chase & Co. got a nice mention in the earnings release:

The bank recognized a $143 million mark-to-market loss on a margin loan to a single customer in its stock-trading unit, the New York-based firm said Friday in a statement. The bank didn’t identify the client or say what caused the loss. The writedown was tied to Steinhoff, the South African retailer engulfed in an accounting scandal, according to a person briefed on the matter.

Steinhoff announced on Dec. 5 that it had uncovered accounting irregularities. The disclosure prompted a plunge in the share price of the Frankfurt- and Johannesburg-listed company, along with the resignation of Chief Executive Officer Markus Jooste and Chairman Christo Wiese. 

They should have named the person. JPMorgan should have a special dining room reserved for people whose losses were big enough to get their own line in the earnings releases. (It should be in Bruno Iksil's house in France.) I hope everyone in equities buys this person a drink tonight. In this environment of tight regulation, diminished risk appetites and boring banking, losing $143 million dollars on a trade is kind of an impressive accomplishment.

JPMorgan's 4Q Fixed-Income Trading Revenue Falls 34%

I mean, it will be a shared one. JPMorgan didn't even make the Steinhoff margin loan:

Citigroup, HSBC Holdings Plc, Goldman Sachs Group, and Nomura Holdings together made a margin loan to an entity controlled by Steinhoff’s then chairman Christo Wiese to purchase additional shares in the company in the fall of 2016. Though JPMorgan wasn’t among the initial lenders, losses from the margin loan were expected to have been spread among a wider group of banks.

Total losses could be 1.6 billion euros, and I hope the whole syndicate has reunion drinks on the anniversary every year. 

I am kidding a little about the "impressive accomplishment" stuff, but only a little. Back in the olden days it was a mark of pride to lose a lot of money on a trade: It meant that someone had trusted you enough to give you a lot of money, and that you went ahead and took big bold risks with it. But modern banking is subtly different. This trade lost a ton of money, yes. But it was not meant to be a risky trade: It was a loan secured by shares in a public company that was syndicated out among half of the banks on the Street. If the loan had gone right, no one would have made a $100-million profit; margin lending is not all that lucrative a business. No one swaggered into Jamie Dimon's office to pound the table and say "I know it's a long shot but I will bet my career on this." This was just boring anonymous bread-and-butter banking -- syndicated secured lending to clients to allow them to achieve their business goals -- that went horribly wrong.

Anyway, here are JPMorgan's earnings release, presentation and supplement. There was a $2.4 billion charge related to the new tax law. Wells Fargo & Co. also announced earnings today and had a tax-related gain; here are its earnings release and supplement.

People are worried about bond market liquidity.

The Securities and Exchange Commission has for a long time devoted a lot of attention to equity market structure: There are rules about how exchanges operate, and an Equity Market Structure Advisory Committee, and lots of attention paid to the perceived evils of high-frequency trading and dark pools and whatever. Bonds, meanwhile, were bonds. You just called up a bank and asked to buy some. The "market structure" in corporate bonds was the telephone. Of course there was a market structure, but it was tacit and sociological, made up of customs and relationships rather than rulebooks and exchanges. It wasn't as legible as equity market structure, so no one paid attention to it. Former SEC Commissioner Dan Gallagher liked to remark that the SEC had over 100 employees devoted to the equity markets, and just 0.5 employees -- half of one person's time -- focused on corporate bonds.

But that is changing. For one thing, bond market structure is getting more legible: As electronic trading platforms proliferate and replace dealers' telephones, there is just more structure to talk about. ("Our goal by the end of the year is that every trade we do is going to be done electronically," says the head of credit trading at Alliance Bernstein.) Also, though, people worry more about bond market structure than they used to. They worry more that the old unwritten customs of the bond market, which governed how dealers interacted with customers, were the wrong customs and need to be changed. And of course they worry about bond market liquidity: If it is too hard to buy and sell bonds, and if that difficulty might somehow lead to a market crash or even a systemic crisis, then probably someone should be thinking about it.

So yesterday the SEC held the first meeting of its Fixed Income Market Structure Advisory Committee, which will bring together a bunch of bond-market types to help it figure out what to do about bonds. "While the media may have moved on to other topics," said Commissioner Michael Piwowar in his opening remarks, "it was not long ago that bond market liquidity (and most especially, the lack thereof) was the subject generating the most intense debate and concern in the financial markets." I like to think that was a reference to Money Stuff, which did keep up a "People are worried about bond market liquidity" section for at least a year, but which has now gotten bored and moved on. (I like to think this in part Piwowar cites me in a footnote.) But, fair enough: I will continue to talk about how people are worried about bond market liquidity here, as long as the people who are worrying about bond market liquidity specifically cite my "People are worried about bond market liquidity" in their worrying. As long as it is self-referential I can stay interested.

Meanwhile the SEC just disbanded the Equity Market Structure Advisory Committee yesterday?

The regulator on Wednesday emailed members of the Equity Market Structure Advisory Committee, informing them it was being dissolved, according to two people familiar with the matter. The group, created in 2015, was authorized through Tuesday. Ryan White, a spokesman for the SEC, declined to comment.

The group tried to tackle some of the market’s biggest controversies, including how to prevent a repeat of the haywire session in August 2015 that saw exchange-traded funds untether from their underlying holdings. But the SEC has yet to act on suggestions.

Maybe in a few years SEC commissioners will be complaining that the agency spends all its time on bonds and doesn't even know what is going on in equities any more.

The crypto.

Let's fire up the Random 2018 Headline Optimizer and see what we get today, shall we? Oh it is "XBT Selling Bitcoin Domain Name After Suing Over Trump Dossier," great. The domain name -- -- is pretty much the ticker symbol for bitcoin, and so it is potentially worth a lot of money. A lot of bitcoins. The (non-bitcoin-related) company that owns it is auctioning it off, with a minimum bid of 200 bitcoins. Also something about the Trump dossier but the bitcoin stuff is bad enough, don't you think?

Meanwhile, here is some more information about Eastman Kodak Co.'s vague pivot to the blockchain, which more than tripled its market capitalization for a while (though it sold off a bit yesterday). It seems to be a licensing deal with a copyright-enforcement company, with a pink-sheets cryptocurrency company called Appcoin Innovations Inc. also involved. Also, "on Jan. 8, the day before Kodak’s crypto announcement, no fewer than seven directors acquired derivative securities convertible to common stock, according to Form 4 filings with the Securities and Exchange Commission." This is not as nefarious as it sounds: They received grants of restricted stock units from the company on January 8; they didn't just go out in the market and buy call options the day before announcing their crypto thingy.

Still the timing is arguably a little awkward. The board compensation plan awarded board members a fixed dollar amount -- generally $150,000 -- worth of RSUs each year. On January 8, with a closing stock price of $3.10, that translated into 48,388 RSUs per director. By Wednesday's close those RSUs were worth over half a million dollars. If the grants had come just a day or two after the announcement, the directors would have about $150,000 worth of RSUs, like the compensation plan provided; instead, they had an immediate huge gain. That seems convenient for them. "Annual equity grants to non-employee directors automatically occur on the 5th trading day of each calendar year and vest after one year," said the company, so the January 8 date was fixed, but you might wonder if the blockchain thingy could have been announced a day or two earlier. Obviously timing that announcement to give the directors a windfall seems a bit gauche. On the other hand, the restricted stock awards are meant to give the directors an incentive to do things that move the stock price up. They certainly did that here.

Elsewhere in the avalanche of crypto:

  • "MoneyGram International Inc. signed on to run a pilot program testing XRP, a digital currency created by San Francisco startup Ripple, in its payments network, the companies said Thursday"; both MoneyGram and XRP rallied.
  • "People Desperate to Buy Bitcoin Are Paying With Credit Cards."
  • The U.S. Marshals are auctioning about $50 million worth of bitcoins, though they do not accept credit cards. 
  • A reader pointed me to this 2000 paper about the dotcom boom, titled "A Rose.Com by Any Other Name," which found "a striking positive stock price reaction" -- 74 percent -- "to the announcement of corporate name changes to Internet related dotcom names." "The effect does not appear to be transitory; there is no evidence of a post announcement negative drift," and it is "similar across all firms, regardless of the firm's level of involvement with the Internet." (Emphasis added.) You didn't have to do internet stuff to benefit from the internet boom; you just had to reference the internet in your name. If you are a finance Ph.D. student, now is the time to get started on a follow-up paper titled "A Block by Any Other Chain," though I guess you'll have to wait a few months to see if there's any post-announcement negative drift when all the companies that have pivoted to blockchain don't launch any blockchain products.
  • After China indicated it will crack down on cryptocurrency, Chinese public companies are pivoting back away from crypto: "At least a dozen Chinese listed companies have issued statements this week playing down links to blockchain technology."
  • Teen let's say hedge fund manager Jacob Wohl has also pivoted to crypto.
  • And The Dogecoin Guy, who I guess qualifies as a cryptocurrency elder statesman at this point, is worried about where all this is heading.

And here are a pair of crypto-skeptic posts from Izabella Kaminska at FT Alphaville, one on the overblown case for private blockchains in the traditional financial system:

For the most part it is just a bundle of pre-existing technologies brought together in a cryptocurrency context to solve a problem most of the regulated financial system does not have: a lack of trusted intermediaries.

Aside from solving that very specific issue — and doing so extremely expensively — blockchain achieves little beyond the novelty of broadcasting transactions publicly and pseudonymously in a way that achieves ledger immutability.

To all other extents and purposes, blockchain in its original bundle is not cheaper to run, not more efficient to operate and certainly not faster than the conventional settlement system. Proof of this comes in bitcoin’s own payment dysfunctionality.

And another on the overblown case for blockhain-based central bank digital currencies

If, however, central banks really wanted to provide digital access to their balance sheets to every single person they could have done so years ago using existing technologies. Blockchain, whatever flavour it comes in, is entirely unnecessary for accomplishing this objective. ...

What crypto fiat issuance talk really constitutes (and we’re sure central bankers are aware of this) is the popularisation of an agenda to wean the world off fractional reserve banking, albeit without full consideration of the negative externalities that come along with doing so.

People are worried about unicorns.

One of my unpopular beliefs is that jargon is mostly just fine. Sometimes you want to say a specific thing, to an audience that shares your background knowledge, and using a "jargon" word is the easiest way to do it. People complain endlessly about the word "synergies," because they think it sounds nebulous and fake, but in the mergers-and-acquisitions context it actually means something quite specific and useful. If I told you that someone bought a CDO-squared of RMBS in 2006 you would know what I meant, but if I had to spell that out we'd be here all day.

Silicon Valley is a notorious hotbed of jargon, and I personally am not as close to its culture as I am to Wall Street's, so to me its jargon can seem vague and off-putting. "Unconference," for instance. If a venture-capital firm holds a conference and calls it an "unconference," what does that even mean? Is it just a dumb usage of a non-word to sound cool? It is easy to make fun. And yet it appears that "unconference" has a specific meaning that is useful to its intended audience. An unconference is like a conference, except that it ends in a late-night costumed drug-fueled sex party:

“The invite requested “glamazon adventurer, safari chic and jungle tribal attire” for the party, to be hosted at “Casa Jurvey by the Sea”—the home of venture capitalist Steve Jurvetson in the resort beach town of Half Moon Bay, south of San Francisco. It turned out that this was the afterparty for his venture capital firm, DFJ’s Big Think “unconference,” an exclusive gathering for folks in the tech industry.”

That's an excerpt in Axios from Emily Chang's forthcoming book "Brotopia," which is in part about Silicon Valley sex parties; a previous excerpt mentioned that this party featured a bag of MDMA and "a sizable cuddle puddle." Elon Musk was there, but "he believed it was a 'corporate' costume-themed party and spent his time there talking about technology and business before leaving at 1 a.m.," apparently before the cuddle puddle got going. Paul Biggar was also there, though he interpreted the invitation differently from Musk:

This wasn’t billed as a sex party; it was official party of the VC firm. But we were certainly primed for it — there was a sorta “wink-wink, nudge-nudge” thing going on. We were warned before going not to be freaked out about the stuff there, no photos were allowed(!), and definitely don’t tell anyone what we saw. I actually texted my cofounder “I think I got invited to a sex party”.

Next time you're invited to an unconference, you'll know what to expect.

Elsewhere in unicorn news, Dropbox Inc. filed confidentially for an initial public offering. And Drake is planning a Regulation A+ IPO of his liquor company.

Conversation with Tyler.

On January 29th I will be talking with Tyler Cowen at a live evening event in New York for his "Conversations with Tyler" series. Click here to request an invitation to attend.

Things happen.

Why Wall Street Hasn’t Had Its #MeToo Moment Yet. BlackRock Crosses $6 Trillion in Assets; Tax Law Bolsters Profit. Ackman’s Pershing Square fund to slash management fee. The Spark Behind Iran’s Unrest: Millions of Defrauded Investors.Three Anonymous Guys Wiped $3 Billion Off South Africa Stocks in Four Days. BP to Pay $102 Million to Settle California Suit, Becerra Says. (Earlier.) Judge Again Backs White House in CFPB Leadership Fight. Facebook Unveils Sweeping Changes, Says Engagement May Fall. Man reportedly rams stolen tank into supermarket, swipes wine. Off-peak dining. "We argue that the mafia arose as a response to an exogenous shock in the demand for oranges and lemons, following Lind's discovery in the late eighteenth century that citrus fruits cured scurvy." Charlie Gasparino boxes a cat.

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(Corrects attribution of quotation in second paragraph of second item of article published Jan. 12.)
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