Advice for banks.
Dan Davies has some advice for Tidjane Thiam, the incoming chief executive officer of Credit Suisse, of which perhaps the main theme is "Remind CS who they are." Meaning: Focus on businesses and geographies where Credit Suisse has an advantage, and don't try too hard to compete in, say, Asia, or in "high-volume macro trading." But also meaning: Don't fall for the idea that Credit Suisse can just give up on investment banking without consequences.
If Credit Suisse kicks investment banking and becomes a pure play wealth manager, it will forever be the number 2 player. While it maintains its investment banking franchise, it remains, to at least some extent, the master of its own destiny.
This is to some extent contrarian advice; elsewhere you can find a lot of almost unseemly enthusiasm for giant cuts to investment banking at Credit Suisse. Here's an analyst yesterday on Thiam's appointment:
"The big question is how the big investment bankers in New York are going to take it. If I were a head hunter, I would pick up the phone as soon as I wake up this morning. However, this might help new management make some decisions about the investment bank."
"You can't fire all of us, we all quit." That seems somewhat unlikely. Where would they all go? Though here's another analyst on Deutsche Bank's decision not to retrench too much from investment banking:
“Market share gains are going to become easier for them, especially now that Credit Suisse may not have its foot on the pedal,” said Neil Smith, an analyst at Bankhaus Lampe in Dusseldorf. “Deutsche Bank will probably announce some trimming. They may try to dress it up as deep cuts, but they’re right not to change too radically.”
Arguably, what, there is room for one continental European investment bank, and whichever bank is laziest about firing all its investment bankers and traders will end up with a dominant and lucrative position? One is a pretty arbitrary number; it could be three, or zero. "Continental" is also a pretty arbitrary word; things aren't so hot in the U.K. either. But there's some competition for whatever spots there are, and given the esteem in which investment banking is currently held, the way you compete is by saying you're going to radically restructure your investment bank and then not really doing it.
Also here is a story about Citigroup's investment bank's comeback, driven largely by a big increase in derivatives trading positions, that sheds a little light on the European situation. Citi's success is driven in part by this fun regulatory arbitrage:
Citigroup, for instance, bought credit derivatives last year with a notional value of $250 billion from Deutsche Bank, Germany’s largest bank and a big Wall Street player, in a deal reported by Risk magazine. European banks are shedding certain derivatives because they are ahead of their United States counterparts in applying provisions of a capital regulation known as the Basel III leverage ratio.
It fills me with patriotic pride to think that the big commercial bank least trusted by American regulators is gaining share in investment banking because it is more lightly regulated than European banks.
What's Steve Cohen up to?
Point72 Asset Management, which in its prior incarnation as SAC Capital was known for using human analysts to discover information about companies that no one else had (some of it illegal!) and then trade on it, is now pivoting to using computers to discover patterns in information that everyone else has, and then trade on it. You can see why this would be appealing to the compliance department. The new quantitative-investing project is called Aperio, which means "I uncover," "I lay bare," "I reveal," "I open," "I disclose," "I unveil," etc., in Latin, and it's safe to say that it would not have appeared on the old SAC Capital coat of arms.
You can see why the old model would be less attractive than it used to be: Basically anything that Point72's human analysts do to ferret out information -- which is their whole job! -- is going to look a little suspicious to its new army of compliance officers, and to jokers like me who make fun of Point72 for little things like the time a guy at another hedge fund was fired for inappropriately sharing information with a Point72 analyst over instant messaging. So now there's no IMing at Point72. Also no fun. Also no outside investor money (though "some executives at Point72 are considering asking the U.S. Securities and Exchange Commission to limit any potential ban on managing outside capital to three years"). It's all enough to drive humans to look for other jobs, which is where computers really come in handy.
A while back I attempted to catalog the possible theories of the regulatory revolving door. Two theories I proposed were:
3. Regulators want to get higher-paying jobs at banks, so they are hard on banks in ways that force the banks to hire lots of ex-regulators -- to understand complicated rules, say, or to work as monitors for regulatory settlements.
5. Regulators want to get higher-paying jobs outside of banks, so they ban banks from engaging in certain activities and then quit to do those activities themselves.
What is the theory of John Ramsay, who worked at the Securities and Exchange Commission for more than a decade, including as director of trading and markets, and who is now criticizing stock exchanges and SEC regulation as "chief market policy officer" at IEX Group? Is it: The market-structure regulation of which Ramsay was in charge was so complicated that it creates good jobs for ex-regulators who can help dark pool/exchange operators navigate it? Or is it: The market-structure regulation of which Ramsay was in charge was so bad that it creates good opportunities for ex-regulators to help new firms disrupt the old way of doing things? "IEX, he said, can be part of the solution," says the article, but didn't he create the problems? Anyway, compare Ramsay's reception -- as IEX's "resident straight talker" -- with that of Bart Chilton, the other prominent market-structure regulator who recently left to advocate on behalf of market participants.
Blockchain bucket shop!
Here is a website, Sand Hill Exchange, that lets you speculate on private companies by trading futures contracts that represent one-billionth of the value of a private company. The contracts settle when the company goes public or is sold. It is ... not obvious that these contracts, which appear to be "security-based swaps," comply with the regulations of the Securities and Exchange Commission and the Commodity Futures Trading Commission. (And unlike most actual private-company stock trading venues, Sand Hill Exchange cheerfully advertises that you don't need to be an accredited investor to trade its stuff.) But don't worry about that:
What Sand Hill appear to have done is to simply sidestep the entire 40-year old edifice of the CFTC by using the blockchain, that bit of the Bitcoin infrastructure that acts as a distributed public ledger, for transactions.
Haha what? Just because you mumble the word "blockchain" doesn't make otherwise illegal things legal. Otherwise buying drugs and ordering murders on Silk Road would be fine. Also the website does not, let us say, fully specify how Sand Hill Exchange's "smart contracts" work. A "smart contract," in the lingo, is a piece of computer code that creates a self-executing contract. So a call option contract might say "I'll pay you the difference between the closing price S and the strike price K of stock XYZ on date D"; a smart contract would just code those variables in and transfer the money from my bank account (bitcoin wallet, whatever) to yours on the relevant date, without the need for us to trust each other or any third-party centralized exchange. Maybe Sand Hill Exchange is letting people trade smart contracts through a blockchain system that it has set up? Or maybe it is letting people trade fully margined dumb futures contracts through its own computers, just like Intrade used to do before it was shut down? Which is what it sounds like? From the fact that Sand Hill Exchange collects margin? And doesn't describe how its blockchain works at all, sort of defeating the purpose of a decentralized blockchain-based system? And there is this:
Sand Hill Exchange makes every effort to obtain the exit valuation of a company. In the event a valuation cannot be determined, the most recent trade for all outstanding contracts will be reversed. In all cases, the decision of Sand Hill Exchange is final.
That does not sound especially self-executing. Anyway Ello seems to be trading at about a $52 million valuation, which is a data point.
Blockchain ... other thing.
Anything that Blythe Masters does is presumptively interesting and viable but I don't really understand what her new bitcoin thing is:
Digital Asset Holdings aims to be a venue for buyers and sellers of financial assets to meet and transact, switching currencies into bitcoin in order to cut the cost and time of settlement and make use of the decentralised “block chain” as a secure record of transactions.
Sure cool fine. Maybe BlackRock can find a way to trade bonds electronically on this thing.
Goldman is taking its BDC public.
We've talked before about how Goldman Sachs really gets the Volcker Rule, and here's another example. (Disclosure: I used to work there.) Banks are not allowed to run hedge funds or private equity funds, if those funds use more than a trivial amount of the banks' own money. But they are allowed to run, and invest in, business development companies, which are mezzanine lending funds that charge hedge-fund-y fees. So they do. Yesterday Goldman Sachs announced the initial public offering of its BDC; Goldman owns about 20 percent of the BDC currently, and charges a 1.5 percent management fee and 20 percent performance fee. So it's a 1.5-and-20 vehicle making illiquid investments in risky credit securities of unrated companies using mostly outside money but a substantial chunk of the bank's. And it's fine!
More on that beautiful French insurance arbitrage. Apple is good at timing the bond market, though its new watch "feels clearly skewed to the geeky men’s side of the population." Hedge funds had a good year in 2014 (other than the performance thing). Tyler Cowen on open market operations for negative nominal yield bonds. Alison Frankel on consumer class actions. NYDFS Announces MoneyMutual Will Pay $2.1 Million Penalty; Montel Williams to Withdraw Endorsement for New York Payday Loans. A Vanguard alternatives fund. Closet indexing. Market Liquidity and Heterogeneity in the Investor Decision Cycle. SHO Time for Limits-to-Arbitrage and Asset Pricing Anomalies. Ferrets are still illegal in New York. Guy Throws His Eyeball At Lawyer. Should Companies Discontinue Unpaid Intern Fights?
To contact the author on this story:
Matt Levine at firstname.lastname@example.org
To contact the editor on this story:
Zara Kessler at email@example.com
Dan Davies has some advice for Tidjane Thiam, the incoming chief executive officer of Credit Suisse, of which perhaps the main theme is "Remind CS who they are." Meaning: Focus on businesses and geographies where Credit Suisse has an advantage, and don’t try too hard to compete in, say, Asia, or in "high-volume macro trading." But also meaning: Don’t fall for the idea that Credit Suisse can just give up on investment […]