The stocks It is conceivable that the present value of the expected future earnings of big U.S. public companies declined by more than 7% this weekend. I don't know, I'm not saying that it's true, but it's conceivable in a way that I am not sure it ever has been before. Not that expected earnings have never declined before, or by a lot, but in a weekend? But the epidemiological and, especially, economic news of the coronavirus is moving really fast. On Saturday night restaurants and bars in New York City were busy, now they are closed, and I suspect a lot of the economy is following more or less the same path on more or less the same timeline: nervous but resilient last week, shut down this week. If your business is closed it will make less money than if it is open; if it is closed for months it will make a lot less money. If you are buying the future earnings of businesses, you should probably pay less now than you would have last week, never mind a month ago.[1] A decent general model for the stock market is that economic news moves slowly and stock traders get bored and overreact to stuff. People carefully parse economic data and Fed press releases to get subtle clues about the second derivative of changes in the economic environment, and then make large bets based on their conclusions, and many of those bets will be wrong. Stock prices move around far more than corporate incomes do, meaning that the volatility in stock prices is hard to justify on the economic fundamentals. In some ways this model is pessimistic about human fallibility, but it is also a rather calming model; it assumes that nothing is as good or as bad as it first appears (to stock markets). And a lot of stock market structure is sort of built around this general model. Stock exchanges have circuit breakers so that, if stocks go down by too much—more than 7%, for broad U.S. market circuit breakers—trading is paused for 15 minutes. The rough idea here is that if stocks go down a lot, it's probably because someone overreacted to something, and they need to take 15 minutes to think about what they've done while other, calmer investors are enticed into the market to buy the stuff that is now on sale. Sometimes the business cycle will turn and stocks will go down, but there's probably no fundamental reason for them to go down a lot in a few minutes, and if they do, that is probably a technical problem to be corrected. This is a calm sensible technocratic model that might not apply if the economy shuts down over the course of a week? The S&P 500 fell 11% as of 9:51 a.m. in New York, wiping out all of the gains during 2019's rally and bringing into play the 13% circuit breaker that would pause trading for 15 minutes. The index plunged 8% at the open and trading halted for 15 minutes. Hyper-turbulent financial markets started the week back in risk-off mode, with investors trying to assess the likely extent of the economic damage after countries around the world moved to combat the virus spread by virtually shutting down social activity. "The market's in panic mode," Chris Rupkey, chief financial economist for MUFG Union Bank, said in a phone interview. "The move overnight was a shock and the market isn't taking it as the Fed officials riding to the rescue. They're taking it as 'get out of the way, look out below, this could be really, really bad.'" We have talked a bit recently about those circuit breakers, because they have been triggered a lot. Today was the third time in about a week, and each time they've been triggered shortly after the open: Investors digested news overnight, decided the news was real real bad, sold a lot of stocks, and were then forced to take a 15-minute timeout to see if they were sure. They were sure! That made some traders question the value of bothering to halt the stock market. "Coming out of the open and halting right away doesn't seem like the most optimal thing," said Mehmet Kinak, global head of systematic trading at T. Rowe Price Group Inc. Mr. Kinak said a marketwide halt could make sense in the middle of the trading day. For instance, if an unexpected midday news development sent markets into a tailspin, a 15-minute pause could help investors digest the news and prevent panicked selling, he said. James Angel, a finance professor at Georgetown University who has studied circuit breakers, agrees. "Halting the market immediately after it opens is just dumb," he said. Though here is a funny alternative view of what circuit breakers are for: Some traders said circuit breakers offered nice moments of calm during an otherwise wild week. At Robert W. Baird & Co.'s trading desk in Milwaukee, they prompted an "eerie silence" as traders stood up and stretched, recalled Jack Miller, the firm's head of trading. "I would say they accomplished what they intended to accomplish," Mr. Miller said. Yeah look I do not object, exactly, to circuit breakers as a way to give stressed-out traders 15 minutes to stretch and meditate; they are having a hard time. But that is not actually what they are intended to accomplish. The intention is that the traders calm down and meditate and come back refreshed and ready to buy stocks. This works great if they were selling stocks due to stress and panic and inattention; if they were mindfully and intentionally selling stocks, though, they'll get right back to it when the pause is over. Elsewhere, my Bloomberg Opinion colleague John Authers makes the tentative case for closing stock markets for a while. The Fed (1) I think that general model applies pretty broadly, beyond just stock-market circuit breakers. The basic approach to stabilizing financial markets is about averting panic. People have a history, in financial markets, of overreacting to stuff, and financial markets tend to be fragile under that sort of overreaction. A few bank loans go bad, people run to the banks to get their money out, the banks don't have enough money, they have to sell assets rapidly at fire-sale prices, the system collapses, etc.: The problem is not so much that the loans went bad, but that the follow-on panic collapsed the system. And so the basic crisis-management tools of central banking are about averting those systemic consequences by reducing panic and fire sales in the banking system. Classically, if people all want to withdraw their money from their bank accounts, the central bank will lend banks enough money to give them all their money back, so the banks don't need to call in loans and propagate the panic. More broadly, in modern systems, if people all want to withdraw their money from financial assets and keep it in cash, the central bank will fund (or buy) all the financial assets so their prices do not collapse. Eventually things will get back to normal, the assets will recover their value, and the central bank will get its money back. Again, that general model—"markets overreact and the job of regulators is to stem panic"—is a pretty good one but not 100% reliable, and if the problem is not financial-market panic but rather an exogenous fundamental reduction in wealth, then … well, then it's probably still good for central banks to stem panic, support markets and avert fire sales? Panic and fire sales are still bad, they can still make the real problems worse, they should be contained, even if the measures to avert them can feel a little beside the point. Anyway: The Federal Reserve swept into action on Sunday in an effort to save the U.S. economy from the fallout of the coronavirus, slashing its benchmark interest rate by a full percentage point to near zero and promising to boost its bond holdings by at least $700 billion. Underlining the sense of urgency amid mounting recession fears, Fed Chairman Jerome Powell told a hastily assembled press briefing by telephone that the virus's disruption to lives and businesses meant second quarter growth would probably be weak and it was hard to know how long the pain would last. That left him advocating a clear role for fiscal policy to help cushion the blow. "The thing that fiscal policy, and really only fiscal policy can do, is reach out directly to affected industries, affected workers," Powell said. "We do know that the virus will run its course and that the U.S. economy will resume a normal level of activity. In the meantime, the Fed will continue to use our tools to support the flow of credit." Here's the Fed's announcement of the rate cut and quantitative easing. Here is another announcement of coordinated swap lines with other central banks. And here's one about other actions to support the banking system, including reducing reserve requirements to zero and encouraging banks to borrow at the discount window. The mechanics of the financial markets have been seizing up, as demand for cash increases, so the Fed is pouring cash into the markets—by buying bonds, but also by freeing up banks' cash—to fix those mechanics. That's what the Fed is for. It is not a wholly adequate response to economic conditions but then why would it be? Fixing the fundamentals is not exactly the Fed's job. What would be a wholly adequate response? I don't know. Here is my Bloomberg colleague Joe Weisenthal: The problem, as Larry Summers eloquently put it, is that "economic time has been stopped, but financial time has not been stopped." In other words, if we all cocoon for two months, we might physically survive, and the infrastructure of h modern world would be waiting for us upon our re-emergence, but in the meantime the bills pile up. The rent's due. The mortgage is due. … What we need is cash to keep people from going bankrupt or evicted. Cash to keep the lights on. Cash to keep people employed; to keep their healthcare. Cash to buy basic necessities, like food or medicine. So let's not think in terms of reviving growth for now. Let's think in terms of cash, so that for as long as we're in deep freeze, people can stay alive and continue to meet their financial obligations. In some ways you can think of the Fed's response as slowing down financial time for certain parts of the financial system: If you own securities and have financial obligations, the Fed is making sure that you can get cash for those securities to meet those obligations. But if you have a job and need to pay rent, and your job has stopped paying you, the Fed will not backstop your liquidity. Again, not its job, but you might reasonably feel aggrieved that the bit of government responsible for backstopping financial-market liquidity is so much better and faster at its job than some of the other bits. Meanwhile here is a pleasingly bold proposal from Emmanuel Saez and Gabriel Zucman for "Keeping Business Alive: The Government as Buyer of Last Resort": In the context of this pandemic, we need a new form of social insurance, one that directly targets and works through businesses. The most direct way to provide this insurance is to have the government act as a buyer of last resort. If the government fully replaces the demand that evaporates, each business can keep paying its workers and maintain its capital stock, as if it was operating under business as usual. To see how the notion of a buyer of last resort works, take the case of the airline industry. If demand drops by 80%, the government would compensate this missing demand, in effect buying 80% of plane tickets and maintaining sales constant. This would allow airlines to keep paying their workers and maintain their planes and equipment without risking bankruptcy. It's sort of full communism now, intermediated through corporate capitalism. I do not expect the Fed to use its emergency powers to start paying for airline tickets that it won't use. Still that does seem like a direct response to the problem. The Fed (2) A lifetime ago, on March 5, we talked about new Federal Reserve rules for bank capital and stress tests. The basic idea is that banks have to have some minimum amount of capital at all times, to make sure that they are robust and solvent and can meet their obligations. But if you have to have a minimum amount of capital at all times, what that actually means is that you need to have more capital than that, almost all the time. If the capital requirement is 8% of risk-weighted assets,[2] and you have $100 of assets, $92 of debt and $8 of capital, and your assets lose 0.01% of their value, then you have $7.99 of capital for $99.99 of assets, and you are undercapitalized and in trouble. Really you need to go around with substantially more than 8% capital, so that some little hiccup—or even some big market crash—won't leave you undercapitalized. Everyone knows this, and banks manage themselves to have extra capital, but it is also directly baked into the regulations. The regulations set minimum capital requirements, and they also set a "capital conservation buffer," which is just extra capital you need to have to make sure you don't fall below the capital requirements. And the Fed conducts stress tests, in which it imagines bad scenarios for banks and checks how much capital they'd have if those scenarios came true. A bank's capital requirement is not actually the minimum requirement, but rather "enough capital so that, if things go wrong in a bad but plausible way, you will still meet the minimum requirement." Again we were talking about this on March 5, 11 days but also a million years ago, because the Fed was tweaking the mechanics of those rules, simplifying how it would measure those buffers. Times were good, 11 days ago, and the Fed was thinking proactively about how best to regulate banks' extra capital so that they could return money to shareholders but, if the bad times came, they'd still have enough capital. Yesterday's Fed emergency statements have the effect, among other things, of saying "the bad times are here, go nuts." For instance: The Federal Reserve is encouraging banks to use their capital and liquidity buffers as they lend to households and businesses who are affected by the coronavirus. ... These capital and liquidity buffers are designed to support the economy in adverse situations and allow banks to continue to serve households and businesses. The Federal Reserve supports firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner. Eleven days ago, big banks were required to have enough capital so that, in a sustained downturn, they'd still have at least 8% capital. Today big banks are required to have 8% capital. One way to put this is that it "supports firms that choose to use their capital and liquidity buffers to lend," but banks do not exactly lend their capital. Bank capital is not a pot of money that banks put aside somewhere for a rainy day; it is a measurement of how much the value of banks' assets exceeds their liabilities. Capital gets lower in a downturn not because banks lend more but because the value of their assets goes down. Eleven days ago people paid a lot of attention to the theoretical question of how to quantify how much money banks would lose in a hypothetical crisis. Today the U.S. stock market is much lower, frackers and airlines and lots of other borrowers are facing distress, the big U.S. banks have halted buybacks, and the crisis feels a lot less hypothetical. M&A In general, if you are in the process of selling a business on the mergers-and-acquisitions market, the last couple of weeks have been bad for your prospects of getting a good price. Stocks are down, so the value of your business—or of its public comparables, or of the stock currency of a potential public acquirer—is down. Financing will be harder to come by. Competition among buyers will be less intense just because no one is flying in to do in-person due diligence. Your bankers are working from home in their pajamas and so will presumably be less effective at talking up the value of your business to potential buyers. Also stocks are down because economic activity has been disrupted; the business that you are selling will probably have worse earnings, over the next few months or longer, than you expected even a few weeks ago. So if you started a sales process and got preliminary non-binding indications of interest last month, there is a good chance that the ultimate price will be a lot lower than those indications of interest. Unless your business makes hand sanitizer in which case you should probably ask for a trillion dollars: French industrials group Air Liquide is selling its Schülke unit, whose products range from the alcohol-based hand rubs that have become a hot commodity since the outbreak started, to hospital disinfectants and industrial cleaning products. It is asking would-be buyers to offer a higher sum than it first envisaged when the sale process began last year, according to people familiar with the situation, reflecting what one person called the "coronavirus effect". ... Yet bidders, which include several private equity firms, are wary of overpaying for a business whose product is the "flavour of the month", said one potential buyer. "Private equity will be very sensitive to the normalisation of sanitiser sales." … One of the "ultimate questions" about the Schülke sale is whether people will continue using more hand sanitisers once the coronavirus outbreak subsides, said another potential buyer. "Of course there's extreme demand right now, but that's not necessarily affecting the fundamental value of the company," they said. "I think the spread of valuations is going to be pretty [wide]." The New York Times has been following the saga of a man who hoarded 17,700 bottles of hand sanitizer to try to profit from their scarcity, but this is sort of the high-finance version of that; if you own a stream of future hand sanitizer profits, you might as well try to sell it at inflated prices today. They should really pivot to do an initial public offering instead of a private sale. I mean if I were a banker I would not be advising anyone to go public right now! Except a hand-sanitizer company! But it does feel like within a couple of weeks 30% of the market capitalization of global companies will come from hand sanitizer; you might as well try to capitalize on that. Is the coronavirus securities fraud? I wrote on Friday that, because everything is securities fraud, the novel coronavirus is securities fraud, and I predicted that there'd be lawsuits. "My wild guess," I wrote, "is that the first coronavirus securities lawsuit will be filed next week, against a cruise operator or possibly an airline." Well, I was correct in spirit, but not diligent enough in my research, because in fact the first coronavirus lawsuits had already been filed the day before I wrote that. I was right about cruise operators too: On March 12, 2020, a shareholder of Norwegian Cruise Lines filed a securities class action lawsuit in the Southern District of Florida against the company, its CEO, and its CFO. The complaint purports to be filed on behalf of a class of shareholders who purchased the company's shares between February 20, 2020 and March 12, 2020. The class period begins on February 20, 2020, when the company filed an 8-K with the SEC, in which the company published its fourth quarter 2019 and year-end 2019 financial results. The company's February 20, 2020 press release accompanied the 8-K. In the press release, the company said that "despite the current known impact" from the coronavirus outbreak, as of the week ending February 14, 2020, "the Company's booked position remained ahead of prior year and at higher prices on a comparable basis." … The complaint alleges that these and other statements in the company's SEC filings were false and misleading. Specifically, the complaint alleges that the defendants made false and misleading statements or failed to disclose that: "(1) the Company was employing sales tactics of providing customers with unproven and/or blatantly false statements about COVID-19 to entice customers to purchase cruises, thus endangering the lives of both their customers and crew members; and (2) as a result, Defendants' statements regarding the Company's business and operations were materially false and misleading and/or lacked a reasonable basis at all relevant times." The story here is that Norwegian was allegedly telling potential customers wild falsehoods to get them to continue to book cruises during the coronavirus pandemic. You might think that the people harmed by those falsehoods would be the customers, who were induced to pay for cruises and risk illness or death, but if there is one lesson of this column it is that the real victims of every bad act are actually shareholders. Here's another one though: On March 12, 2020, an Inovio Pharmaceuticals shareholder filed a securities class action lawsuit against the company and its CEO based upon the CEO's statements about the company's development of a COVID-19 vaccine. A copy of the Inovio Pharmaceuticals complaint can be found here. … The complaint alleges that on February 14, 2020 [Chief Executive Officer J. Joseph] Kim appeared on Fox Business News and stated that Inovio had developed a COVID-19 vaccine "in a matter of about three hours once we had the DNA sequence from the virus, and "our goal is to start phase one human testing in the U.S. early this summer." The complaint alleges that the price of the company's shares rose more than 10% in the next few days after this televised statement. The complaint alleges further that in a "well-publicized" March 2, 2020 meeting with President Trump, Kim stated that Inovio had developed a COVID-19 vaccine, stating "we were able to fully construct our vaccine within three hours … our plan is to start [trials] in April of this year." The complaint alleges that the based on this statement the price of Inovio's share "more than quadrupled" in the next few trading days, reaching an intra-day high of $19.36 on March 9, 2020. There is some dispute about where Inovio is in the process of developing a vaccine, and the stock fell as people considered the announcement more carefully; it closed on Friday at $7.20. My usual theory of "everything is securities fraud" is that if a public company does a bad thing, or a bad thing happens to it, that is also securities fraud. That theory, I insist, is weird; it is strange to regulate all bad actions—lying to senior citizens to sell them on dangerous cruises during a pandemic!—through the mechanism of securities fraud, to treat everything as primarily of interest to shareholders. On the other hand if a public company throws a press conference to announce that it has done a good thing, and is lying about it, that is just securities fraud, that one is straightforward, that's fine. Things happen US investors brace for ratings downgrades as turmoil deepens. Nightmare on Wall Street Was All About Liquidity. In Market Rout, ETFs Are Where the Action Is. What Caused a Junk-Muni ETF to Go Into Freefall? Bankers Go Home, Tellers Stay: Virus Exposes Office Inequalities. China's JD.Com Moves To Follow Alibaba With Hong Kong Listing. Christine Lagarde apologises for botched communication of ECB strategy. New York, California Want More Power Over the Financial Sector. 'Dead Sea Scrolls' at the Museum of the Bible are all forgeries. "I just bought a bottle of hand sanitizer for one bitcoin." 'Finishing school' for donkeys helps them find new homes as pets. Neural net names in rem legal cases. "The executive said that the bank had asked all relationship managers to dial into an early morning video conference call 'to make sure everyone has got dressed and out of their pyjamas'." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] It's never investment advice! Don't trade on this statement, and especially, don't email me to explain that actually now is a great time to buy stocks. Here in the footnote I will concede that I am a pessimist and that I don't know anything; if you want to email to explain why I'm wrong, just take this footnote as a victory and delete the email. While I am conceding things here I think it is perfectly plausible to say that in fact the bad news was available a week (or more) ago to people who were paying attention, and that nothing really changed this weekend; to some extent I am stylizing the facts for clarity and dramatic effect in the text, and *I* am not materially more panicked today than I was on Friday (which was quite panicked!). [2] There are lots of different ways of measuring capital, with different numerators (common equity, tier 1 capital, etc.) and denominators (risk-weighted assets for "capital ratios," all assets for "leverage ratios"), and there are different thresholds for different sizes of banks, so it is a little hard to say that the actual capital requirement is any particular number. Nonetheless it is sort of traditional, in vague general discussions like this, to pretend that it's 8%. | 
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