Levine on Wall Street: Getting to the Other Side
What's up with Bridgewater?
This weekend the Wall Street Journal served up a sensibly-sized portion of Ray Dalio being Ray Dalio:
For most new Bridgewater employees, "it's a little bit like entering the Navy SEALs," says Mr. Dalio. "There's a period -- usually about 18 months -- of sort of adaptation to this. And some make it and some don't make it. And so we call it 'getting to the other side.'" He adds that "the other side looks like: They can't work anywhere else and the reason they can't work anywhere else is they don't know what anybody's thinking anywhere else. They don't have an ability to speak their mind anywhere else. They don't have the guardrails of their weaknesses. Everybody's got weaknesses. They can't candidly address weaknesses."
There's software to rate everyone's weaknesses, though it can be overridden: "When the system recently reported that the company's head receptionist was underperforming, executives decided that it was a case of the software not being calibrated to effectively measure her work." The question that I always want to see answered in these things -- and never do -- is: Did Bridgewater's disappointing performance in 2013 cause any unusual soul-searching at the company? I mean, obviously the default amount of soul-searching there is a lot of soul-searching, but was anyone like, "hang on, our radical honesty got us 5.25 percent returns in Pure Alpha, maybe we should scrap it and start being passive-aggressive with each other"? Or do they just decide that the markets are not calibrated to effectively measure their work?
What's up with Citadel?
Among other things, Citadel is a fantastic regulatory success story. The story being: Once upon a time stocks and bonds were traded by broker-dealers, but over time that stopped being true, and stocks and bonds were traded mostly by big banks, and those banks came upon rough times, and people got all mad because the big banks were gambling with depositor/taxpayer money or whatever, and so they sort of tried to stop the big banks from trading stocks and bonds, though they never quite came out and said that. The problem with coming out and saying that is, the broker-dealers are mostly gone (or are now big banks), so if you ban banks from trading stocks and bonds, then basically no one will trade stocks and bonds. And that's sort of happened, in bonds. (On the other hand, too many people are trading stocks!) As a matter of economic theory, if trading stocks and bonds is valuable for the world, and banks can't do it, then someone else will step up and do it, but in practice there are some big barriers to new competitors.
Except Citadel, Citadel is great, they're expanding into lots of market-making businesses that banks are leaving. The latest is the over-the-counter swaps market:
“A lot of people are saying banks are running out of the OTC derivatives market like it is a burning building,” said David Weiss, a senior analyst at research firm Aite Group LLC. “Citadel is signaling that this is a good time to put your money down and make markets.”
And the new regulations -- which they helped lobby for -- make it easier for them to compete with the established banks:
Central clearing “eliminates any balance-sheet advantage of large dealers that are perceived to be ‘too big to fail,’” Citadel said in a written presentation for a January 2011 meeting with the SEC.
There's a nice symbiosis here: Regulators want someone other than the big banks to be making markets in derivatives, and Citadel wants that someone to be Citadel.
What's up with Morgan Stanley?
As you may have heard, it has a lower-risk, more wealth-management-focused strategy than some of its rivals. James Gorman told a roomful of executives the strategy in 2013:
As the consultant talked, he began to jot down a series of questions: "What do we do? How do we do it? With what result?" Suddenly, eh walked to the podium and asked the consultant for the microphone ...
On the crucial first question, the paper on Gorman's desk says "Advise, originate, trade, manage and distribute capital for governments, institutions, and individuals, and always do so with a standard of excellence." Says Gorman, "I think for the people in the room, it was a pivotal moment. There was a lot of 'Oh, I get it.'" Afterwards, 97% of the executives said in an anonymous survey that they approved of the company's strategy, according to Morgan Stanley.
That might be the least dramatic thing I've ever read in my life. Is there an investment bank that doesn't advise, etc., capital for governments, etc., and try to do it excellently? Come on.
What's up with synthetic CDOs?
No big deal but the World Bank's International Finance Corporation is providing $90 million of credit risk protection on $2 billion of Crédit Agricole emerging market loans.
The deal is an example of a “synthetic securitisation” or “reg-cap trade,” which involve banks purchasing credit risk protection -- typically from a hedge fund or insurer -- on part of a portfolio of loans. Using the structures frees up a bank’s regulatory capital, enabling it to increase its lending while the providers of the credit protection can earn a hefty return.
IFC also gets to support much more lending than if it just loaned the money out directly. Everyone wins I guess? One way to read this is that it's a way to evade regulatory capital requirements, but I suppose another reading is that regulatory capital rules are designed to channel activity in certain ways, and this is one of the ways. Maybe Basel et al. want more trades like this.
What's up with Credit Suisse?
Credit Suisse has apparently dumped its electronic-fixed-income business into a subsidiary, sold a stake to Tower Research, and is now thinking about "whether to sell equity to outside investors and turn the subsidiary into an independent company." The idea would be to "keep clients who are flocking to more-efficient electronic markets, while avoiding the brunt of tougher capital rules that are hitting fixed-income businesses across Wall Street." Again this would seem to be an intended consequence of capital regulation: Get big banks out of fixed-income trading, and create a more hospitable environment for independent market makers. Though in this case an independent market maker whose equity is largely owned by a big bank.
And how about Blackstone?
This story about Blackstone Group's Tactical Opportunities Group fits right into the theme:
“An awful lot of what Tac Ops does was either done by the big banks on their proprietary trading desks or by hedge funds in their illiquid side pockets,” Tony James, Blackstone’s president, said in an interview last month. “Both those sorts of capital have been eliminated and unless they come back, there will be tons of opportunities.”
And in particular Tac Ops recently took an insurance company off of Goldman Sachs's hands, when capital rules made it too expensive for Goldman to keep.
The euro as the funding currency of choice. "According to fliers handed out by waitresses, diners can also purchase what are known in China as wealth-management products with returns well in excess of what banks and the local stock market are offering." Tyson's buying Hillshire. Wall Street cares about Main Street. The winning Buffett lunch bid was $2.16 million. Spitznagel's goats gotta go. “Under-performing a mollusk was humbling to say the least.”
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