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Matt Levine's Money Stuff
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Matt Levine's Money Stuff

A daily take on Wall Street, finance, companies and other stuff


February 9, 2015

http://click.email.bloomberg.com/?qs=d49c077962b6e412cc79b4e01ac2e368fb7ff2ffbb284d8c00a25d0886fb343f
bloombergview.com

Hi -- This is the first e-mail edition of Matt Levine's Money Stuff, a daily newsletter from Bloomberg View with links and commentary about Wall Street, business and other stuff. If you haven't already, please
http://click.email.bloomberg.com/?qs=d49c077962b6e412bfe1e3ff5afaf53137660a279ce81ca97fa6ec226f3090b3
subscribe at this link , it is easy. Or find it on the web
http://click.email.bloomberg.com/?qs=d49c077962b6e4129a8cfbdbf644bd8e58351f66a5cabaee4336f496aec0eec2
here . Thanks!

HSBC was bad.

I for one cannot resist a headline like
http://click.email.bloomberg.com/?qs=d49c077962b6e4121e0237b523fc84b50a812d918e66f985ac718dbc7f14aff4
"Catalogue of malpractice endorsed by bankers laid bare in HSBC files." What you really want with malpractice is not just one or two examples, but a whole catalogue that you can leaf through and imagine how each particular malpractice would look in your living room. This Guardian article about tax practices at HSBC's Swiss subsidiary does not disappoint. There is the client who planned to share an undisclosed account with his daughter: "The account is 'undeclared', a fact with which [she] may not be entirely at ease -- as a compliance officer at Kleinwort Benson," wrote HSBC. There are bearer shares, and a client who asked HSBC to "'help him get back money into the UK on a "non-declared"
basis' by carrying in bundles of cash." HSBC declined, but offered to give him the bundles in Switzerland, after which "what he decided to do with friends of his ... was his affair." And there is a "Serbian businessman" who "wanted to deposit \u20ac20m (L15m)," and was told that "as per today the bank did not interfere in his money transfer transactions but would have preferred to reduce those activities on a lower scale. [He] understands our concerns and will use smaller amounts." This is mostly old news -- the leaks
http://click.email.bloomberg.com/?qs=d49c077962b6e412a80ebbace4f6184ca7a2aa2d1952de2de2c7c76534c6bd12
reflect HSBC as of 2007 , and the bank promises that it's gotten better since -- but it's a pretty good show all around.

Big banks and little banks.

Because they worry about banks being "too big to fail," U.S. regulators have imposed capital requirements that go up the bigger and more interconnected a bank is. But how do you measure bigness? The answer has to be "in units of money," but that means that when the dollar becomes more valuable against the euro, U.S. banks look bigger and more systemically important, relative to the rest of the global financial system. So
http://click.email.bloomberg.com/?qs=d49c077962b6e4122f4bcb7727b1b239c4c0752d5ba8765708070d8733ff90ce
their capital surcharges go up . "Steven Chubak, an analyst with Nomura Holdings Inc., said banks like J.P. Morgan Chase & Co., Citigroup and Bank of America Corp. face the biggest impact and might be pushed to hold hundreds of millions of dollars more in capital each because of the currency fluctuations." This strikes those banks as weird and unfair -- "It seems like a slightly strange outcome that financial institutions in the slower growth part of the world would end up with lower capital and those in the faster growing part of the world would end up with more capital," says Harvey Schwartz of Goldman Sachs -- but, I mean, you can say that about anything that makes banks bigger. (And
they do!) Big successful interconnected banks just make people nervous, whether their bigness comes from organic growth or mergers or just currency fluctuations. And just imagine how Credit Suisse feels! (
http://click.email.bloomberg.com/?qs=d49c077962b6e4121d2df56e7a45a22197cf72910a3a95f8caaafd48f04f08b3
Bad. )

On the other hand, no one is surprised that "
http://click.email.bloomberg.com/?qs=d49c077962b6e412bb785395f9a12073420fe1741c2504fb939e5be2e339f7ec
There are economies of scale when dealing with regulation," right? The more you regulate banks, the more expensive it is to comply with the regulations, and those costs don't grow linearly with size. So you might as well get bigger -- or get acquired by someone bigger -- to deal with all the regulation. Basically any bank regulation will tend to (1) do whatever it's supposed to do and also (2) encourage banks to get bigger; this seems to be true even of regulation that is supposed to make banks smaller. And
http://click.email.bloomberg.com/?qs=d49c077962b6e4129c8e56eebcdb2e139e358f293d993ea10a2a773d377580da
here is a story about small banks teaming up with Lending Club to try to do more consumer loans:

The banks are expected to buy unsecured loans of less than $35,000 without requiring collateral. Until now, small banks generally haven't been able to justify the cost of underwriting those loans because big banks can do so much more efficiently.

Now, instead of analyzing the loans on their own, the banks will rely on Lending Club's software, which uses a data-driven process to evaluate a borrower's ability to repay.

Just ask a big bank: Scale is really important in banking. And not just for regulatory reasons.

Banks and oil.

http://click.email.bloomberg.com/?qs=d49c077962b6e412aa791517d04071319f96a9a886a494b909033794533254c9
Here are
http://click.email.bloomberg.com/?qs=d49c077962b6e4125b15b9d6089230264b33ffec8100745b5192a5546a8a62ee
some claims , from the
http://click.email.bloomberg.com/?qs=d49c077962b6e412f50ed142bd70530e35d629b711d7f2e59935c9e46b17ec2c
Bank for International Settlement , about financialization and oil-price volatility. Craig Pirrong
http://click.email.bloomberg.com/?qs=d49c077962b6e4125c0e0b444333a8ba89ec70c4e3a9de423f83f70cb85a4ea4
is skeptical . One claim is that oil-company indebtedness exacerbates energy price swings, as excessive leverage can drive distress and also force energy companies to keep pumping oil uneconomically. Makes sense! Another claim is that the oil-hedging markets also exacerbate volatility:
http://click.email.bloomberg.com/?qs=d49c077962b6e412aa791517d04071319f96a9a886a494b909033794533254c9
that "at times of heightened volatility and balance sheet strain for leveraged entities, swap dealers may become less willing to sell protection to oil producers." Which I ... understand less? Like, the time to hedge is before a crash, not after, right?

Tech stories of yore.

Here's
http://click.email.bloomberg.com/?qs=d49c077962b6e4127330dc509941a456ec2fd36934578608db2e160cd5f4ae0e
the story of RadioShack's collapse told through the eyes of Salus Capital, which loaned RadioShack money in late 2013, more than six years after
http://click.email.bloomberg.com/?qs=d49c077962b6e412cd51a0879615277958fbff13d5a994d0d2bce8ef71a62714
that Onion article claiming that even the CEO couldn't figure out how RadioShack was still in business, and less than two months before
http://click.email.bloomberg.com/?qs=d49c077962b6e4128283b780c2e7ab86b5a6e1f10870a4ddc6dcd43630cda369
that Super Bowl ad basically admitting it. The world is strange:

Even before the $250 million loan was disbursed in late 2013, RadioShack was threatening to sue the lender, Salus Capital Partners, for trying to back out, according to two people familiar with the transaction who asked not to be named because the talks were private. Months later, as RadioShack sought creditor approval to shutter stores in a bid to avert bankruptcy, Salus rejected the plan, which would have left the firm with fewer assets securing the loan.

They signed the loan agreement in October, and by December, Salus threatened to call a material adverse change, RadioShack threatened to sue, the loan ended up getting funded, and I guess a fun game would be to speculate whether that lengthened (money!) or shortened (intransigent lender blocking turnaround plan!) RadioShack's path to bankruptcy.

Elsewhere in old-timey tech, Kevin Roose
http://click.email.bloomberg.com/?qs=d49c077962b6e412e82fcdc3686bd808fa131ccbfc4a540bd129fd47af8b03b7
visited Waterloo, Ontario , to do some archaeology on the remains of the great BlackBerry Gold Rush of ought-five. One former Research in Motion executive "recalls that he had to get private security during a trip to Indonesia to protect himself from a mob of adoring BlackBerry fans." That is ... no longer the case, but hey, a lot of former BlackBerry employees now work at startups housed in former BlackBerry buildings in Waterloo, so the circle of life continues.

Meanwhile in Greece.

I guess everything related to Greek Finance Minister Yanis Varoufakis has to be analyzed through a game-theoretical lens, so what game is he playing when he
http://click.email.bloomberg.com/?qs=d49c077962b6e4128dd60c53d45cdf33a67e3472899256f5852768c1a17e630c
tells Italian state television that "Italy's debt situation is unsustainable" and that unnamed Italian officials "approached me to tell me they backed us but they can't tell the truth because Italy also risks bankruptcy"? Or what was his boss Alexis Tsipras
http://click.email.bloomberg.com/?qs=d49c077962b6e412fa894ed8580a2de54a913a3f8bbd5614901e88723730582c
up to when he "came close to tears at one point during his speech Sunday evening" repudiating the existing bailout and asking for a bridge loan to give Greece time to negotiate a better deal? (Jeroen Dijsselbloem of the EU:
http://click.email.bloomberg.com/?qs=d49c077962b6e412d6de80a854252318f8041f5057b1192d806c3ccf73a0bb80
"We don't do bridge loans." ) I have lost track of the bluffs and counter-bluffs or whatever is going on here, but it's hard not to read the "nice-Italy-you've-got-here-shame-if-anything-were-to-happen-to-it" stuff as anything other than a rather desperate escalation.

Would you like a free copy of 'Atlas Shrugged'?

It's
http://click.email.bloomberg.com/?qs=d49c077962b6e41206319358498189eb9921f82d8f399c365f7b582d7438e2f2
in Danish though :

Saxo promotes a vision of individual responsibility free from government intrusion. The firm hands out copies of "Atlas Shrugged," Ayn Rand 's hymn to individualism and capitalism, to employees and clients. It offers a free copy of the Danish translation of the novel to anyone who fills out a form on its website.

Part of Saxo Bank's notion of individual responsibility seems to be that clients who lost all the money in their (non-recourse) margin accounts when they were stopped out of Swiss franc trades last month should show up at Saxo with some more money and, probably, an apology. Let's see how that goes.

How the FERC works.

My model for electricity markets is that they have convoluted rules set by federal and regional regulators, and the rules are dumb, and people figure out ways to exploit flaws in the rules for profit, and then the Federal Energy Regulatory Commission comes in and says "Hey no fair you're not supposed to make money off our dumb rules!" Just write better rules, man, you might think, but if you're JPMorgan you can't really say that, so you just quietly
http://click.email.bloomberg.com/?qs=d49c077962b6e412bfeef7837db60e8765d725fc34e4617d8566c1fc8020ed9d
pay fines for following the dumb rules. But Powhatan Energy Fund isn't JPMorgan, and so after they were accused of exploiting some rules they launched a mad and delightful war against the FERC. (We've
http://click.email.bloomberg.com/?qs=d49c077962b6e4121126df21d88e8bc2cee754f3ad39f6ea4e28da9ab2e22c92
talked about them before but, honestly, the details aren't that important.)
http://click.email.bloomberg.com/?qs=d49c077962b6e412baca27fae6d23db0926d4024834427c85e685b3046079b9c
This filing is a week old but, if you like this sort of thing, it is full to the brim of this sort of thing:

Second, finding and exploiting market inefficiencies (or loopholes) is what traders do. They look to maximize profits within the existing rules, even if those rules are flawed.

Or (citation omitted):

Similarly, Kevin Gates wanted to maximize profits: there is nothing wrong with wanting to "scale up and try[ing] to become rich." This is America.

There are sections headed "Dr. Chen's Trades Were Not 'Wash-like' Or 'Wash-type' -- Whatever The Heck That Means," "The Staff's Stubborn Reliance On The Unpublished, Non-Precedential Amanat Case Is Just Lame," and "Uttering the Phrase 'Enron' Or 'Death Star' Does Not Magically Transform The Staff's Investigation." It's like an angry trader's dream of what a legal brief might look like ("This is America"!); I recommend it highly.

RIP John Whitehead.

Here are some obituaries for John Whitehead, former co-head of Goldman Sachs, from
http://click.email.bloomberg.com/?qs=d49c077962b6e412aeabe85ccf718bdd2707c9a503d70c6ec09aa5d7242913a4
Bloomberg News , the
http://click.email.bloomberg.com/?qs=d49c077962b6e4124f6055e91297e32ac4dfdd58ff4f13ccbc2760638bbcf58e
New York Times , the
http://click.email.bloomberg.com/?qs=d49c077962b6e4122a8afe4070500d938b51a6653215827eae872eb048b92b9b
Financial Times (don't miss the story of Whitehead showing up at the office in a seersucker suit and being told by Walter Sachs to "go home right now and change out of your pyjamas"), and the
http://click.email.bloomberg.com/?qs=d49c077962b6e4129a570ede2b4a0c7f27af0688cb90e830745568db27b636f2
Wall Street Journal . Whitehead is perhaps best known for codifying Goldman's
http://click.email.bloomberg.com/?qs=d49c077962b6e4121e5b4693c84a119627e55a624707c6fa29bd5779d5fe2c2b
"Business Principles," which feel a little bloated and corporate if we're being honest; connoisseurs prefer his far punchier
http://click.email.bloomberg.com/?qs=d49c077962b6e4124c8cf2dd22e8983938e02af0fb155d496c6c2f4e1684deed
10 rules for business development , which include gems like "Important people like to deal with other important people. Are you one?," "It is just as easy to get a first-rate piece of business as a second-rate one," and my personal favorite, "Don't waste your time going after business you don't really want."

Things happen.

"It turns out that 'alpha' is a
http://click.email.bloomberg.com/?qs=d49c077962b6e4129ab226fc91db0f4a9301ac6fa8e111a80aa95ffcfa287393
remarkably personal statistic after all." Analysts don't like
http://click.email.bloomberg.com/?qs=d49c077962b6e412f90a100e932550a2e8378caeb733f4998ea6419869627520
Warren Buffett's quarterly disclosure ; Buffett obviously doesn't care. Bill Gross is
http://click.email.bloomberg.com/?qs=d49c077962b6e412e7d5ab0c49c309173b2a56af32f290a1100c3400172a04c3
"not trying to build Pimco part II," and he and his family "
http://click.email.bloomberg.com/?qs=d49c077962b6e412512a4d5b4facc01eb71a1af867ceb41660311d19566960d2
own more than half of the bond fund he runs on behalf of Janus Capital Group Inc." Ukraine's impending
http://click.email.bloomberg.com/?qs=d49c077962b6e412f7034c2edfe01a577b82f6f53930edcec7c466db7964f798
debt restructuring . AngelList
http://click.email.bloomberg.com/?qs=d49c077962b6e412410bbbc0dc998286303aff35c5e0a90c866baf6a77cfdb20
syndicates . Larry Summers: "Only raise US rates when
http://click.email.bloomberg.com/?qs=d49c077962b6e412a1b3d8353102ac60ea0788c235e4148e9a5d81205f2c036e
whites of inflation's eyes are visible." Watch out
http://click.email.bloomberg.com/?qs=d49c077962b6e412c672ba47895e27a8aba237f1747ff77f1cbe6fddb65b591f
for spies . Open-plan offices
http://click.email.bloomberg.com/?qs=d49c077962b6e412498dd10270fb72620f0dd4ca504dafb7ff913c1d5ec7cdb6
are terrible . Health Experts Recommend Standing Up At Desk,
http://click.email.bloomberg.com/?qs=d49c077962b6e412272c703a9456d6d97d6e25aefc08d48711f1a63679aff73e
Leaving Office , Never Coming Back. How cocaine
http://click.email.bloomberg.com/?qs=d49c077962b6e412556121750c5a4c6dd2aa1a101b50f6eb2480994c11a78d9c
crushed my trading skills .

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