Programming note: Money Stuff will be off tomorrow, back on Friday. Soccer transfer insider tradingIf you are the chief executive officer of a public company, and a bigger company comes to you and offers to buy your company, and you are considering it seriously, you will probably tell someone. You will definitely tell your board of directors. You'll tell the company's other senior executives. You'll hire lawyers and bankers, and tell them. You'll probably want their advice; at least, you will want to talk through the issues with a sympathetic listener. These people—people whose job is to advise you on mergers-and-acquisitions decisions—are the obvious people to talk to. Realistically, though, you might go a bit further. It is sort of officially frowned upon, but there is a decent chance that you will tell your spouse. Selling your company is a big personal decision for you, your spouse has been with you through all your ups and downs at the company, why shouldn't he or she have some input into the decision? You might tell your therapist, or your priest. You might have a network of informal advisers—old college roommates, former colleagues, fellow CEOs—with whom you discuss big career decisions. The world being what it is, you will surely tell your golf buddies. This is all potentially a problem because it is generally illegal to trade stock based on inside information. If you're the CEO and you're seriously considering a merger, you obviously can't trade your company's stock, and the people you tell generally can't either. When you tell the board members and executives and bankers and lawyers, the rules are pretty clear: They have the same obligation you do not to misuse the information you give them, and if they trade it's illegal. Sometimes they will trade anyway, and they will get caught, and they will get in trouble. But you will not get in trouble. If you hire a bank and sign an engagement letter and tell the banker "we're going to be acquired by Company X" and then she goes off and buys a bunch of your stock, she will go to jail and you will not. You did nothing wrong. You were totally allowed to tell the banker, you were supposed to tell her, you had every reason to expect that she wouldn't trade, and she betrayed your trust. You are a victim, not a criminal. This is also generally true of your priest or your therapist: They have a "duty of trust and confidence" not to use the information you gave them for their own enrichment. In the other cases, though, it can be unclear. If you tell your spouse, or your parents or children or brother-in-law, or your golf buddy, and they trade, maybe that's because they betrayed your confidence and tried to make a quick profit for themselves behind your back. Or maybe it's because you wanted to help out a family member or impress a golf buddy with a little gift of inside information. It is a factual question, a question of what you were thinking when you told them. Prosecutors and regulators will put in a lot of effort establishing not just that you told your brother-in-law your merger news, and that he traded, but also the details of your relationship. If they're going after the brother-in-law and treating you as a victim, their complaints will say things like "CEO and Brother-in-Law had a relationship of trust and confidence, and CEO regularly came to Brother-in-Law for advice on career issues." If they're going after you too, their complaints will instead say things like "CEO owed Brother-in-Law a favor, and got a personal benefit out of giving him a merger tip." We have talked in the past about two Securities and Exchange Commission insider trading cases centered around the Oakley Country Club in Watertown, Massachusetts. In one, the golf buddy was accused of betraying the confidence of his innocent executive friend. In the other, the executive was accused of intentionally leaking merger news to his golf buddy. Same basic fact pattern—executive plays golf and tells his golf buddy about corporate news—but different result based on the specifics of the golf-buddy relationship. I don't know, I think about this a lot. U.S. insider trading law requires a surprisingly nuanced and intimate examination of personal relationships. "You told your friend and he traded" is the beginning of the inquiry, not the end; what matters, for securities law, is why you told your friend, what kind of friendship you had, whether you trusted him, whether you relied on him for advice, whether you owed him a favor or wanted to help him out, all these personal things. Sometimes I read insider trading cases from other countries and am sort of surprised at the lack of this sophistication: "How," I find myself thinking, "can they not have a well-developed body of caselaw about what sorts of personal relationship will and will not get the tipper in trouble for insider trading?" Then I feel silly. It is just a strange sort of sophistication for securities law to develop. Maybe securities law shouldn't be so focused on the details of golfing relationships? But I'm not sure there's a better system. Anyway, sports gambling. You can bet on whether European football players will be transferred, and to which clubs. Obviously if a player tells you that he's going to be transferred then you can make a profitable bet on that, and if you get caught then maybe you should get in trouble (with … the … bookies?), but the question is, should he get in trouble? For telling you? Apparently England's Football Association thinks, sometimes, yes. From The Athletic: On Friday, the FA announced it had charged England full-back Kieran Trippier with misconduct in relation to alleged breaches of its betting regulations, relating to his transfer from Tottenham to Atletico Madrid in July 2019. Trippier immediately issued a statement. "I have fully complied with the FA's investigation over the past several months on a voluntary basis and will continue to do so," he said. "I want to make it clear that while a professional footballer I have at no stage placed any football-related bets or received any financial benefit from others betting." It is understood that Trippier has informed the FA's compliance unit he had no knowledge of any intended betting activity. He told a small group of friends, informally, that it looked more and more likely that he would be heading for Madrid. If some of those friends then put money on him joining Atletico, does that merit an FA disciplinary charge? Isn't it an issue between bookmaker and customer, rather than between footballer and Football Association?
It just reads like a classic insider trading case, turning on questions like, did Trippier get a "personal benefit" from tipping others? (He says he didn't get any "financial benefit.") Did he tell the others in a "relationship of trust and confidence," to seek their advice on a big career decision, or did he tip them intending to make a gift of inside information? He needs to explain and justify his friendships to the FA. He needs a securities lawyer. Interim normalSometimes I say that investment banks are socialist collectives run for the benefit of their workers. The coronavirus crisis has caused me to question that theory, as some investment banks have pushed workers to risk their health to come into the office and make more money for shareholders. (And, to be fair, for themselves.) But this Citigroup Inc. banker has restored my faith in the workers' paradise that is Wall Street: "I call it the 'interim normal.' I refuse to call it in the new normal," Leon Kalvaria, chairman of the bank's institutional-clients group, said Wednesday in a Bloomberg Television interview. "We're working our way through this interim normal, and then there will be demand to get back into having human interaction, both flying places and doing meetings." Kalvaria and his team of bankers have become more efficient since the outbreak forced them to start working remotely in March, but most of them miss the social interaction they get from the office and face-to-face meetings, he said.
His team is "incredibly busy" and "more efficient," but they miss each other! They want to hang out with their friends! Sure they don't need to come to the office or take long business-class flights in order to get deals done and make money for shareholders, sure they can maybe even make more money for shareholders by doing focused work and efficient phone meetings at home, but where is the fun in that? You don't get into investment banking to make money for shareholders; you get into investment banking to hang out with other investment bankers and take lots of business-class plane trips. You can't optimize investment banking for efficiency and profitability; you have to optimize it for making the bankers happy. People are worried about oil asset liquidityAn occasional theme of this column in the last few months is that a giant economic crisis is bad for liquidity for simple intuitive reasons, not weird technical ones. When things are bad and uncertain, fewer people want to buy stuff, but meanwhile people who want to sell stuff still wish they could get the prices they would have gotten before the crisis. There are fewer trades, and bid/ask spreads—the gap between what sellers want and what buyers offer—are wider. People often write about liquidity as an arcane technical feature of market structure, and blame regulation or robots when it dries up, but you really do not need to look for some secret glitch in market functioning to explain the lack of liquidity these days. People just don't want to buy stuff; that'll do it. Anyway liquidity in oil-asset divestitures is bad: Before Covid-19 and the oil-price rout, most of the world's biggest energy companies had planned to sell billions in assets to help pay down debt and maintain dividends. Now, those divestment programs are in jeopardy. Since the start of the year, BP PLC, Exxon Mobil Corp. and Occidental Petroleum Corp. have had major asset sales restructured or delayed indefinitely as coronavirus lockdown restrictions decimated energy demand and oil prices fell by two-thirds. Oil companies have moved to slash costs and spending as prices have plunged. In the most extreme cases, some have cut dividends. Many leadership teams in the industry had previously seen asset sales as a way to strengthen finances but their options are narrowing as buyers focus on conserving cash and banks rein-in deal financing as the possibility of a global recession becomes more likely. "There's massive uncertainty on what the world's going to look like post this virus and what it means for oil and gas prices, so buyers will be hesitant to commit capital," said Biraj Borkhataria, co-head of European energy research at RBC Capital Markets. ... As oil prices stabilize, analysts say companies looking to raise dividends or accelerate their transitions to lower carbon energy will have to make hard decisions about whether to sell assets in a buyer's market.
"Massive uncertainty" is bad for getting buyers to commit capital, but it's also bad for getting sellers to sell assets. If you just knew that oil prices would be $15 per barrel forever, then you'd find buyers to pay that price, and sellers would grudgingly adjust. But the problem is when oil prices are low and no one knows if or when they might get higher; buyers will only pay low prices, but sellers will hold out for higher ones. People are worried about dividendsA good basic rule of bank regulation is that bank capital requirements should be countercyclical, high in good times and low in bad times. In good times, banks should build up capital, both because they can (times are good and earnings are high) and because the good times might end: When things go bad, banks' assets will lose value, which will reduce their capital. In bad times, banks will naturally have less capital (their assets lost value); if they have to keep the same ratio of capital to assets, they will respond by shrinking assets, that is, by lending less. You don't want banks to pull back from lending in a crisis. So you make the capital requirements high in good times, so that they can afford to be lower in good times. In the coronavirus crisis bank regulators have generally done a good job of this. Capital requirements were relatively high before the crisis, as stress tests required banks to have capital buffers in case things went wrong. Once the crisis hit, requirements were relaxed and buffers reduced so that banks could lend more. There is an oddity though. The stereotypical way that banks respond to capital requirements is that if they have too little capital, they reduce assets: They stop lending and sell securities until they get the correct ratio of capital to assets. (That is, they reduce the denominator of the capital ratio.) If they have too much capital—if they are way above the requirements—then they reduce capital: They increase dividends and do stock buybacks to return capital to investors. (That is, they reduce the numerator.) And so the Federal Reserve's stress tests were, in the good years, more or less a test of how much stock banks could buy back: If a bank was well above the Fed's stressed capital requirements, it would hand the money back to shareholders through buybacks and dividends. If the bank was below the requirements, or worried that it might be, its executives would go around complaining that the capital requirements restricted lending. That was in the good times. In the bad times the capital requirements have been relaxed so that banks can keep lending. But on the stereotypical view, if the capital requirements are relaxed, won't banks just do more buybacks and dividends? Isn't that how banks respond to lower capital requirements? Anyway here's a staff brief from the Financial Stability Institute of the Bank for International Settlements on "Banks' dividends in Covid-19 times": The current crisis presents authorities with two challenges: they need to ensure that firms have sufficient resources to support the real economy, and they need to ensure that these resources are put to that use. To achieve the first objective, authorities have recommended that firms use their capital buffers, and have relaxed capital requirements in various ways, including by reducing CCyB rates to zero, reducing RWA or adjusting leverage ratio calculations. Yet capital relief alone does not ensure that all available resources will be deployed as intended by supervisors. To achieve this second objective, a number of supervisory authorities have imposed restrictions on capital distributions. Those restrictions are a natural complement to the relaxation of capital requirements, as they induce banks to devote as much resources as possible to absorbing losses and maintaining lending levels. Moreover, by suspending or severely limiting all distributions, the restrictions may contribute to a more socially acceptable sharing of the overall costs of the pandemic (Carstens (2020)). At the same time, supervisors need to weigh the potential market impact of any action taken that could affect the remuneration of capital instruments.
One point here is that if you lower capital requirements to spur lending, you have to explicitly remind banks not to just blow it all on dividends. Another point is that if you are worried about a financial crisis, suspending all banks' dividends might be better than allowing really well-capitalized banks to keep paying them: The point is not just to optimize each bank's capital, but to avoid panic, and if some banks cut dividends and others don't then investors might get nervous about the ones that do. A third point is that you want banks to be able to raise capital, and cutting the payments on capital instruments—making banks stop paying their preferred-stock dividends, for instance—might make it harder for them to raise capital in the future. JETSThis is an arithmetic situation that you don't see every day: The $580 million U.S. Global Jets ETF, ticker JETS, has seen 44 straight days of inflows totaling $632 million.
Usually if an exchange-traded funds has inflows of X over some short recent period, and it has total assets of Y at the end of that period, Y is bigger than X. Just, like, if you have an investment fund, and it's been around for a while, and people put $632 million into it over two months, at the end of those two months you should, ideally, have more than $632 million. This is not a guarantee. If you started with very little money—JETS had about $52 million of assets at the end of 2019—and you added $632 million of investor money over two months, and over those same two months you lost a chunk of their money because your investments went down, then you could end up with less than $632 million. For instance $580 million. There is nothing impossible about it. It is just unusual. Usually established funds are pretty big, relative to both their monthly inflows and their investment gains or losses, so having recent inflows that exceed assets is strange. Or if inflows are big relative to prior assets, that's usually because the investments are going up; people tend to rush to buy stuff that's going up. To start from almost nothing, add a bunch of money in a short period, and end up with less than you added is weird. I guess it's not that weird, in these weird times. The basic investing theme of the coronavirus crisis is "distress." The things that were working two months ago are not working now, and the way to make money is to jump in to buy dislocated assets for cheap. So distressed-debt investors are raising new funds, private equity firms are calling capital, and day-traders on Robinhood are piling into an ETF of mostly airline stocks. ("The number of users at retail trading platform Robinhood who are holding JETS surged to more than 19,000 this week," compared to 500 at the start of March.) A lot of distressed funds are starting from zero and growing rapidly to take advantage of the new reality; JETS is, in a loose sense, one of them. If you buy distressed assets at the bottom, and they go up, you get rich, which is why there is a general rush into distressed investing ideas; "traders eager to capture a rebound in airline stocks are driving flows into JETS." If you buy them at what you think is a bottom, and they go to zero, you lose your money, which is why distressed investing is risky. If you buy them a few weeks before the bottom, then your fund will be in the red pretty much from the beginning, but that's not really the point; the point is not to make steady gains but to get in near the bottom and hope for better days. Things happenDouble Black Swan Hitting Texas Drags Down the Rest of the U.S. Silver Lake Springs Into Action as Buyout Firm's New CEOs Seek Opportunity in Downturn. Junk-Bond Sellers Desperate for Funding Swallow Yields Over 10%. Post-Flash Crash Fixes Bolstered Markets During Coronavirus Selloff. Insurers' Earnings a Mixed Bag in First Quarter with Coronavirus Impact. Qatar Wealth Fund Said to Seek $7.6 Billion Loan Backed by Stock. 'Buffer' Funds Lure Investors Seeking Protection in Market Turmoil. NMC Health collapse leaves battle lines drawn. Americans' $2bn lockdown booze binge. 'Freedom Fighters' Led by American Tried Invading Venezuela. Is it possible that Elon Musk's and Grimes's baby is really named X Æ A-12 Musk? "Eppur si muove." Grandmother's tiger sculpture sparks armed police and helicopter response. Louisiana police warn of 'aggressive chicken' stalking bank customers. 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! | 
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