“It’s not Deutsche Bank’s wish, but you could almost say that because of our name, a large part of the capital market thinks we’re the Bundesbank,” Krause said during a panel discussion in Dusseldorf, Germany, on Wednesday. “Global refinancing markets always offered Deutsche Bank good conditions because in the heads of the people there was always an implicit state guarantee.”
Could that really be true? (Yes, right?) Stefan Krause is a Deutsche Bank management board member, and this was in a discussion about too-big-to-fail subsidies. I suppose the question is whether this counts as a too-big-to-fail subsidy: It is not a (correct or incorrect) market expectation that Deutsche Bank will get a bailout from Germany, but rather an (incorrect) market belief that Deutsche Bank is Germany. And if it is a subsidy, what do you do about it? Make Deutsche Bank change its name? Also do you think people confuse Bank of America with the Fed?
Student loan securitizations.
Generally speaking in financial markets, borrowers are sympathetic characters and lenders aren't. So you often hear calls to make things better for borrowers: Forgive their loans, or let them take more time to pay them back, or whatever. Who cares, you are just taking the money from the lenders, who are not sympathetic. Ah, but the lenders object: If you take money from us, we will be less able or inclined to lend to future borrowers, who are at least hypothetically sympathetic. And that's mostly true and there's an equilibrium and we muddle on.
Here's a story about how it's getting harder to securitize Federal Family Education Loan Program student loans because of income-based repayment programs that make things easier for borrowers. Of course this makes things worse for lenders: U.S. Bancorp "dropped an effort to sell a $3 billion portfolio of student loans because the bids were too low." The obvious argument here is that, if those loans lose value and banks can't securitize them, they will be less likely to make such loans in the future, and other student borrowers will be hurt. And indeed here it is:
U.S. Bancorp wouldn’t comment on what it would have done with the proceeds of the loan sale, but banks generally sell student loan portfolios to raise cash so they can make new student loans or other consumer loans, said Mark Kantrowitz, senior vice president at Edvisors.com, which tracks the student loan market.
Loan originations could also be hurt if banks take a loss on sales, he said. There could be “a lot of contagion effects,” he said. “The disruption of the capital markets may prevent some consumers from getting loans if the uncertainty persists for too much longer.”
Except here's the thing about the FFELP program: "The federal government brought the program to an end in 2010 by moving all federal student loan origination to the Education Department." Subsidized loans are made by the government now, and "U.S. Bancorp stopped making new student loan originations in 2012." I suppose that reducing the value of student loans might make it harder for other, non-student borrowers to get loans, because there is only a finite amount of bank credit or whatever, but that feels like more of a stretch than the usual story. Elsewhere, here is Jordan Weissmann on cherry-picking in student loan refinancing.
By now you've probably seen the saga of Turing Pharmaceuticals and Daraprim, the toxoplasmosis drug that Turing acquired and raised the price of from $13.50 to $750 per tablet. Here is Kevin Roose on Martin Shkreli, Turing's Wu-Tang-quoting former-hedge-fund-manager founder and chief executive officer, whose previous career includes interning for Jim Cramer, shorting biotech stocks, and being named "Worst Biotech CEO of 2014." And here is Shkreli defending his Daraprim price increase on Bloomberg Television, which is maybe the least convincing thing I've ever seen on television, and I watch the Mets. Apparently he now plans to lower the price.
The irony is that Shkreli rose to prominence by short-selling biotech stocks and then trying to drive down their prices with bad press and unwanted regulatory attention. Here's a Bloomberg Businessweek feature on him from last year:
Rarely does someone who’s made a name for himself as a short seller turn around and take the ultimate long position: starting his own company in the very industry he’s spent years strafing. Geller, who invested with Shkreli back in his hedge fund days, says this is what makes Retrophin so compelling. But has Shkreli undergone a conversion, as he claims, to creating value and saving lives? Or is he using what he learned about biotech—a field notorious for empty promises—to game the field?
The Nasdaq biotechnology index fell sharply on Monday after Shkreli's antics and the political backlash, and is down 6.5 percent this week. If you were shorting biotech stocks, you would appreciate Shkreli's work on Daraprim.
Finra vs. smart beta.
I kind of don't get why people get all agitated about "smart beta"? Here is a Financial Industry Regulatory Authority Investor Alert on smart beta, and a lot of the warnings are pretty meh. "Products that track smart beta strategies are usually less expensive than actively managed funds, but tend to be more costly than funds that track market-cap-weighted indices," and "Investors should look to see if the fund is more heavily weighted in a particular sector or country, and be aware that smart beta strategies can be less diversified than other investment strategies." There is a question of what your baseline is: If you assume that the default investment product is a relatively expensive actively managed stock mutual fund, then smart beta is probably better than the benchmark by most measures, and investors should focus their alertness on, like, non-traded REITs and stuff.
Elsewhere in regulators, "SEC Charges Two Philadelphia Area Men For Defrauding Friends And Family In Private Equity Fund" is sort of a rough headline on this Securities and Exchange Commission enforcement action. Really if you are going to defraud people in your private equity fund, try to stick to business acquaintances. And here is an SEC cybersecurity enforcement action.
A Bill Gross Investment Outlook.
Here is a Janus Capital Investment Outlook from Bill Gross that doesn't start with a folksy and uncomfortably personal story and then transition jarringly into interest rates. It starts: "So the Fed has chosen to hold off on their goal of normalizing interest rates and the ECB has countered with the threat of extending their scheduled QE with more checks and more negative interest rates and the investment community wonders how long can this keep goin’ on." That is not how Bill Gross Investment Outlooks start. He must really be mad about continuing zero interest rates. (Savers in "Mainstream America" are "not so much in a pickle barrel as they are on a revolving spit, being slowly cooked alive while central bankers focus on their Taylor models and fight non-existent inflation.") He doesn't even transition to talking about cats or sex at the end. It's interest rates all the way through. I am worried about him.
People are worried about bond market liquidity.
Their quandary: how to gain an edge on dozens of firms seeking out trading signals by buying and selling milliseconds ahead of rivals. Hours later, after one suggested tracking Treasury moves by simulating atoms colliding inside metal, a bid to predict how other traders would respond to market moves, they began tweaking their proprietary computer codes to react faster.
That's from the Wall Street Journal's continuing series on "The New Bond Market." One thing that I like to say about the bond market is that there isn't a bond market. At the absolute minimum, there are two bond markets: The market for Treasuries, which trade electronically and frequently and whose liquidity problems are those (rapid price moves in response to changes in demand) familiar from the equity markets; and the market for corporates and munis and asset-backed bonds and so forth, which trade mostly by telephone and whose liquidity problems stem from the fact that sometimes they don't trade. You'd feel somewhat silly building a diffusion model of Air Lease bond prices, though probably someone has.
You know who else is worried about bond market liquidity? The Securities and Exchange Commission, which on Tuesday "voted to propose a comprehensive package of rule reforms designed to enhance effective liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs)." The most interesting element might be this:
The proposed reforms also would provide a framework under which mutual funds could elect to use “swing pricing” to effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity. The swing pricing proposal would enable mutual funds, subject to board approval and oversight, to reflect in a fund’s net asset value (NAV) costs associated with shareholders’ trading activity. It is designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions and would be an additional tool to help funds manage liquidity risks.
Elsewhere, "Federal Reserve Bank of New York President William Dudley will give a keynote speech Sept. 30 about liquidity in financial markets," and I suppose liquidity is the key note these days, despite my best efforts. Here is bond market liquidity worrying from 1937. Here is AllianceBernstein on liquidity issues, crowding and currency hedging. David Merkel isn't worried about bond market liquidity: "One of the reasons why it is not a big issue is that the public bond market is designed to be low liquidity."And "Low yields make it expensive to trade," says Citi, pointing out that it takes more time than it used to for carry to make up for trading costs, a point that we've sort of discussed before and that might make you feel a bit better about bond market liquidity. If people aren't trading because yields are too low, then rising rates won't cause a bond-market-illiquidity crisis, they'll just make people trade more.
Also, in this newsletter on Tuesday, I wrote about a paper by Nicolae Gârleanu and Lasse Pedersen on "Efficiently Inefficient Markets for Assets and Asset Management," and mentioned its similarities to my own crude model of hedge fund fees, in which some managers generate alpha and appropriate it for themselves, while others don't and appropriate it anyway. Lasse Pedersen made this important distinction by e-mail:
One difference is that our model implies that managers with alpha should charge a fee less than the alpha (rather than the full alpha as you say). The reason that this is the equilibrium in our model is that smart investors must be compensated for the costs of finding an informed manager (search and due diligence costs). This compensation comes in the form of outperformance even after fees.
Consistent with our model, recent empirical papers find that “a sizable minority of managers pick stocks well enough to more than cover their costs” (Kosowski, Timmermann, Wermers, White (2006)).
That does seem more sensible. The trick is of course to be in the sizable minority.
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Welp : “It’s not Deutsche Bank’s wish, but you could almost say that because of our name, a large part of the capital market thinks we’re the Bundesbank,” Krause said during a panel discussion in Dusseldorf, Germany, on Wednesday. “Global refinancing markets always offered Deutsche Bank good conditions because in the heads of the people there was always an implicit state guarantee.” Could that really be true? (Yes, right?) Stefan Krause […]