Levine on Wall Street: Portuguese snowballs and croque-Monsieurs
By Bloomberg
It's always dumb to say "X is not a panacea," because no one ever
said it was, but some people kind of think that bank leverage
ratios are a panacea. The idea is: You can't know what a bank is up
to, risk-weighting is subjective and can be gamed, so just require
banks to have equity equal to a certain percentage of their
unweighted assets and call it a day. Dan Davies on the leverage
ratio is essential reading if you're interested in bank regulation.
His core point is that, while the leverage ratio is a good tool in
regulating bank capital, it is not a good idea to make it the only
tool, and it's not as simple or as immune to gaming as its
supporters think.
Sometimes banking reformers make a nod in the direction of
derivatives by saying that they want "all off-balance sheet risks
taken into account". But they never say what they mean by this,
because they can't -- in order to require capital for risks which
aren't on the balance sheet, you need to have a whole load of
formulae and risk modelling which isn't given to you by the balance
sheet, and you lose the ability to pretend that the risks faced by
a big bank are actually very simple and only made to look
complicated by nefarious bankers with their "complicated"
formulas.
We've talked before about how this works in practice: The actually
existing leverage ratio proposals are pretty complicated. A bank is
a complicated thing facing complicated risks. It is so unbelievably
tempting to believe that there is some simple solution out there to
regulate banks simply, that all the complexity is a mirage, and
that a vigorous independent regulator could come in and sweep out
all the nonsense and make banks safe and simple and glorious again.
There is no evidence for that view.
No, bank regulation is hard.
Here's a story about how big banks did bad things and entered into
settlements (deferred prosecution agreements, non-prosecution
agreements, etc.) with regulators and prosecutors that required
them to confess to all of their past bad things and stop doing
future bad things, and how the regulators and the prosecutors are
finding new bad things (and un-confessed old bad things) and
debating whether to scrap the agreements and punish the banks some
more. Pro: You gotta punish bad things. Con: If you grind the banks
down to nothing then you don't have banks any more, and didn't you
want banks? "The cycle of misbehavior is difficult to break," ha.
I'm sure there are lots of simple solutions available for this
problem.
Au revoir, croque-monsieurs.
Jeremie Banet, the former Pimco portfolio manager who quit to sell
croque-monsier sandwiches out of a truck a day after Bill Gross
yelled at him, is coming back to Pimco as a portfolio manager. So
the timeline is, Gross yelled at him in a meeting, he quit the next
day, Gross left at the end of September, and Banet was back a month
later. But all of those events are unrelated. The food truck, which
Banet started because "it was time to follow his heart," will
apparently continue under his wife's supervision. Basically any
time a financial-services employee quits to do something
food-related you can read a profile or trend piece about bankers
becoming artisanal picklers, and I am looking forward to the
reverse stories about the trend of cheesemongers and pastry chefs
becoming bond investors.
Something about bitcoin.
Earlier this week, two bitcoin-related companies hired former
Securities and Exchange Commission chairman Arthur Levitt as an
adviser to "help them understand the imperative of a robust
approach to regulation." Yesterday Levitt robustly approached a
regulator on their behalf, spending an hour with Ben Lawsky, the
New York State Superintendent of Financial Services, who has
proposed rather strict regulation of bitcoin infrastructure
providers. We know this because Lawsky tweeted about it, calling
Levitt a "very special and wise man." Levitt returned the love,
calling Lawsky "a good, fair, reasonable regulator." It's somehow
fitting that bitcoin lobbying takes place in public, on the
Internet.
Tell your clients where your assets are.
Here's a Securities and Exchange Commission enforcement action
against an asset manager that was "repeatedly late in providing
investors with audited financial statements of its private funds,"
and even the SEC knows how boring that sounds; the little quote in
the press release begins "The custody rule is not a technicality"
because the SEC is good at protesting too much. Still I was a bit
moved by the point that these guys had "left their clients waiting
for months at a time to have the materials they need to verify the
existence and value of fund assets." In this post-Madoff world,
it's not unreasonable to ask your fund manager "hey did you abscond
with all our money?" And if the answer is "I'll get back to you in
a few months," that is not reassuring.
This seems fun.
Here is a story about Jaber George Jabbour, who used to sell
derivatives at Goldman Sachs, and who now runs his own advisory
firm basically helping public entities who were tricked by bankers
on derivatives trades. The elephant in that particular room is
Libya, which has some derivatives-trickery lawsuits against Goldman
pending, and Jabbour is trying to get involved in that lawsuit on
Libya's side despite having previously sold derivatives to Libya
for Goldman. (Not the ones they're suing about though.) Jabbour's
big public success so far is winning back some money for Metro do
Porto for their terrible snowball trades (including with Goldman1).
When he's not advising beleaguered governments on breaking
derivatives trades, he's inventing new alphabets, and if I weren't
doing this job I'd probably be doing exactly what he's doing.
This seems fun too.
Or I'd be doing this, if it was an option: Credit Suisse
accidentally wired $1.5 million to the manager of a small hedge
fund, who then disappeared, apparently to Monaco. Credit Suisse
wants its money back. The story gets stranger. Seriously my main
career ambition as a banker was to get a large mistaken wire
transfer and flee the country, but it never worked out for me.
Things happen.
Checking in on electronic bond trading platforms. Some people have
their doubts about the quality of hedge fund reinsurance. Fiat
Chrysler will spin off Ferrari. American Realty Capital Properties
lost 19 percent of its market value, and its chief financial
officer and chief accounting officer, because "some amounts related
to non-controlling interests likely were incorrectly included in
adjusted funds from operations, an error the audit committee
believes was identified but intentionally not corrected." We the
Economy. Chubb can't have representatives in Syria, but it can have
"surveyors." Parents Trick Children Out of Halloween Candy. Why
it's called candy corn. "SI congressional candidates unable to name
last book read."
Shakespeare's Work Emails. Who's a good dog?
1 I suppose at this point it's time for the inevitable: Disclosure,
I worked there, still own a little restricted stock. I sold
derivatives, though not to Libya or Metro do Porto or, I think, to
anyone who sued over them, though I could be wrong about that last
part.