Category: Ball Busting

The Deutsche Bank Difference

“Bloomberg – Deutsche Bank Inadvertently Made a $35 Billion Payment in a Single Transaction“

Look, it’s 5:00pm on a Thursday – I want to go home, open up a nice old world red. Something to get the pallet dancing while I watch some playoff hoops. Complex tannins, high acidity, but nothing too extravagant. A nice every day wine, a workhorse wine if you will – Produttori del Barbaresco, perhaps.

But all that is on hold until I stick it to John Cryan one more time. As soon as I saw this headline come across, I absolutely knew that this wasn’t a recent event, that they buried this thing and, now that Cryan is gone, somebody spilled the beans. Turns out, they did this before Easter and by my quick calcs that falls under our boy’s tenure. Some back office kid in Germany was tasked with wiring the variation margin that day to their clearinghouse, Eurex. That’s it, just send some money to a different account. A simple task for most, but when you’re DB, you manage to bungle the easiest of things.

Now, I don’t want to get on this lowly analyst too much. I understand fat fingers happen – that’s why there’s industry jargon for it. But when you’re wiring cash in excess of the bank’s entire market cap, I know for a fact that there are multiple channels that have to sign off on releasing a wire instruction that large (I started out in ops, don’t lie to me). So unless I’m missing something, at least two people decided to send $35B to their clearing house that day – and that, my friends, is what we call the Deutsche Bank difference.

P.S. – that wine link isn’t even an ad. That’s just, in my opinion, one of the better, reasonably priced, old world’s you can find. Do yourself a favor.

Larry Fink Only Needs to Build Another Eleven BlackRock’s to Catch Up to Schwarzman

“CNBC – Larry Fink, the chairman and CEO of investment management company BlackRock, is one of the latest Wall Street investors to surpass $1 billion in personal wealth, according to the Bloomberg Billionaires Index.”

On behalf of everyone at Leveraged Burnout (myself), I’d like to congratulate Larry Fink on finally crossing the billion dollar mark. After years of building BlackRock into the asset management behemoth it is today, Larry is finally reaping the rewards of his 0.7% stake in the company.

There is an interesting history between Larry Fink and Steve Schwarzman, CEO and founder of Blackstone. In 1988, Fink and his team was given a $5M credit line from Blackstone, in exchange for 50% of the equity, in order to build out an institutional fixed income platform. They named it BlackRock in order to establish that it was an entity within the Blackstone family. BlackRock began to take off and, with its success, came disagreements on management style. Fink and Schwarzman butted heads over equity compensation. Larry favored distributing equity to new hires to lure top talent, while Steve wanted to keep ownership with management in-house. Schwarzman and Fink amicably agreed to go their separate ways, allowing BlackRock to pursue any management style it saw fit.

The split was important not only for the two companies involved, but the broader financial services industry and its comp structure. Steve Schwarzman is worth about $12B today, while Larry just only crossed $1B. If you were to compare the two solely on the size of their wallets, Schwarzman obviously came out on top. Larry, however, used his equity as cash to build the largest asset manager on earth. At over $6T under management, BlackRock’s asset base crushes Schwarzman’s $430B, making it a much larger and more valuable company – which came directly at the expense of Fink’s own net worth.

So, I guess beauty really is in the eye of the beholder. Would you want the money, or the prestige that comes with upending an entire industry and becoming legend? It’s easy to be cynical and say take the money, but anyone that fancies themselves a Sandlot fan knows the answer isn’t so simple.

Extending Credit to Instagram Chefs Likely Not a Prudent Investment

“Bloomberg – Salt Bae Restaurant’s Owner to Start Talks on $2.5 Billion Debt“

So as a disclaimer, I’m pretty indifferent on Salt Bae. He rose to prominence last year, after the internet decided having a guy run salt through his arm hair before landing on your steak was appetizing. If that’s what the people want, then who am I to judge? I just saw this Bloomberg headline and knew immediately that I wanted to make a meme of him sprinkling coupon payment stubs on a steak, so now we have a blog post.

Anyway – it looks like Salt Bae’s restaurant, Nusr-Et, is owned by a Turkish Conglomerate, Doğuş Group, under their food and beverage subsidiary, d.ream International BV. From what I can tell, the Company has borrowed pretty heavily to bolster its international presence in the hospitality space, including restaurants. Oddly enough, the Bloomberg piece doesn’t mention why they’re looking to restructure 40% of their outstanding debt, so I’m going to infer that they’re currently dealing with an unfavorable coverage ratio. However, without the debt-fueled spending binge, NYC wouldn’t have been blessed with a Nusr-Et of our own – and what would NYC be without another overpriced, underwhelming steakhouse?

The company is looking outside the realm of restructuring to repair its balance sheet as well, including selling off assets. It recently sold a 17%, or $200M, stake in d.ream International BV to Temasek and British PE firm, Metric Capital Partners. Doğuş has also floated the idea of offloading its entire stake in d.ream International BV through an IPO, which should frighten Salt Bae. Once the public market gets its hands on a restaurant chain, the dynamic immediately switches to cost cutting and maximizing shareholder value. For a guy who built his entire brand on showmanship, quality ingredients and cachet, nothing should terrify him more than becoming the Turkish equivalent of Outback Steakhouse. So best of luck to our friend, Salt Bae, because if he doesn’t actually start raining coupon payments soon, he may be serving gimmick meals like unlimited Meze on Turkish Tuesdays, instead.

Barney Frank is Gonna Be Pissed…

“CNBC – Sub-prime mortgages make a comeback—with a new name and soaring demand“

The wheel. The printing press. Sub-prime mortgage securitization.

The three greatest innovations in human history. Prior to the wheel, ancient man was destined to live a relatively stationary life. There was no ability to explore, hunt and migrate beyond the area that you could walk and carry your belongings. It resulted in tribes and solitude. Before Gutenberg, Western Civilization was mired in a medieval rut. People relied on scribes to replicate texts, making it almost impossible to spread new ideas en masse. Once the printing press entered the scene, the great enlightenment took off, leading to what we know as The Renaissance. Preceding the boom in sub-prime mortgage securitization, banks were relegated to making markets in the infinitely boring world of agency paper and prime, private label mortgages. It was almost impossible to make a decent buck, the typical structured finance banker usually only had two or three different pairs of Gucci 53’s – these were trying times, indeed. Once Angelo Mozilo started slingin’ subprime credit around the West Coast, though, things would never be the same. Bankers were closing deals and collecting fees hand over fist. Working at a ratings agency wasn’t nearly as bad (this pertains to working in the structured finance group, can’t say the same for corporates or munis). There were even new industries growing as bankers left their analysts behind to set up their own shop as CDO managers. This was the height of human ingenuity and it changed the world (while making a handful of people a bunch of money).

Look – I’m not here to praise what happened with the sub-prime mortgage boom, but I’m not here to relentlessly bash it either, no matter how snide and sarcastic the previous paragraph was. There is no doubt that the boom in sub-prime credit and the securitization machine that fueled it played a large role in the financial crisis (side note: I wonder when we’ll stop calling it THE financial crisis, like there haven’t been many before and will be many after). But there were also other causes as well, like the rewrite of the Community Reinvestment Act in 1995, which incentivized banks to extend mortgage credit to communities with outsized populations of “credit deprived” citizens in order to stimulate local economies that needed it (good!). That also meant that banks needed to throw their standard underwriting practices out the window and lend money to people who were previously deemed unworthy of credit in the first place (bad!). One could also look to Alan Greenspan’s tenure at The Fed, where he opened the monetary spigots and took, what some believe to be, too much of a laissez faire attitude toward regulating the exploding sub-prime mortgage markets.

Securitization (sub-prime included) is a much-maligned, but widely misunderstood capital markets mechanism that does have great benefits. It plays a very important role in a modern, credit-based economy that takes place largely behind the scenes. The purpose of securitization is to assist banks in financing the borrowing activities of a large pool of individuals or corporations through the use of third party (investor) capital. The beauty is, you can securitize almost anything: mortgages, credit card balnces, aircraft leases, capital assets, you name it. Hell, even David Bowie securitized the future profits from his catalog. In a nutshell, banks are able to extend credit to borrowers, structure the future interest/principal cash flows from the borrowers into securities and sell those to investors. This allows the bank to move the debt off its own balance sheet, freeing up the capital to continue lending into the economy. This is a great thing if done in a proper way and I doubt everyone really understands how much of an impact it has on their daily life (including allowing us to live and spend the way we do).

Sure, things got out of hand last time and it really did blow up in our faces. But when I see alarmist headlines like this out of CNBC it makes me shake my head, because lending to people who need it is a good thing and all that does is perpetuate the belief that these funding mechanisms are inherently detrimental to society. Sub-prime mortgages and securitization didn’t cause the financial crisis, people did (and odds are, they’ll do it again with something else).

Connecticut Striving to Become the Municipal Equivalent of Sears

“Bloomberg – Connecticut and Hartford Get $2 Billion Offer for Properties“

Connecticut is a fiscal disaster. Their decades long episode of legislative ineptitude has put the Nutmeg State in a perilous financial position that most government officials only dream about. As it stands, CT has one of the worst public pension systems in America with an embarrassingly low 44% funding ratio, one of the largest per capita tax burdens in the nation and a shrinking tax base as corporations and citizens flee the state.

You can only operate in that way for so long before markets smell the blood in the water, and it seems like one fund just got its first whiff. Chicago-based Oak Street Real Estate Capital sent a LOI to the state capital last week, offering up to $2B in cash in exchange for certain state-owned properties structured as a leaseback, yielding 7.25%. For anyone unfamiliar with a leaseback, this is when a company sells properties and/or heavy machinery to a buyer and then leases it back for continued use. This is a common way to generate liquidity for cash-strapped companies whose fixed assets are generally worth more than the business itself, like Oak Street’s neighbor, Sears Holdings.

Sears, like Connecticut, is a balance sheet disaster. Eddie Lampert bought Sears years ago through his fund ESL Investments. In a bid to free up cash and provide some short term flexibility, he sold Sears’ best performing properties into a publicly-traded REIT called Seritage Growth Properties. The asset sale was structured as a leaseback, allowing Sears to continue using the properties as retail outlets, generating a healthy rental yield for Seritage shareholders and protecting ESL LPs from the eventual Sears bankruptcy, as they own a healthy chunk of Seritage partnership units as well. The move was savvy financial engineering which, in the face of what will be a well-publicized credit event, Lampert doesn’t get enough praise for. While the move will ultimately benefit ESL’s investors and the ridiculous corporate structure they set up with Sears, it is going to destroy the company, as the now struggling retailer has the added expense of paying rent to its own investors – and that is most likely the same fate that awaits Connecticut if they try to financially engineer their way out of this mess. They couldn’t agree on a simple budget for years, I’d love to see how they navigate the asset-backed lending markets.

 

Cryan Out; Sewing In; Retail Banking En Vogue.

“CNBC – Deutsche Bank tapped Christian Sewing to be its new chief executive, the bank announced on Sunday, confirming widespread speculation that John Cryan would be replaced.”

So, a quick update on our friend, John Cryan. As I wrote a little over a week ago, there was no doubt that he would be asked to take a long walk off a short pier once shareholders started putting calls in directly to the Board. So while that was a foregone conclusion, what wasn’t as clear was who would succeed him. Last night we got our answer in the 47 year old Deutsche Bank lifer, Christian Sewing. If you thought banking in Frankfurt couldn’t become even more boring, you’d be wrong, as Sewing is currently DB’s retail banking CEO and has a background in risk management and audit. It seems like the Board is set on simplifying DB’s complex operations and returning it to a more traditional banking model, which doesn’t bode well for any of our friends at 60 Wall Street.

While Cryan stunk at his job, Christian Sewing isn’t going to swoop in and save DB from its mistakes overnight. He’ll likely look to begin a longer term process of shedding some of the bank’s “flashier” assets / businesses, taking a deep dive into the bank’s book of business and assessing how to prepare for a future focused on retail and commercial banking – which will inevitably result in further dings to DB’s reputation and prestige in the marketplace. It hasn’t been a fun few years to be a DB employee and it doesn’t seem like it’ll be better any time soon.

Pershing Square Destroying Its Business Just In Time to Open Swanky, New West Side Headquarters

“Bloomberg – About two-thirds of the capital that investors could withdraw from Pershing Square Capital Management’s private funds was redeemed at the end of last year, according to a person with knowledge of the matter. Blackstone Group LP has been pulling its money, while JPMorgan Chase & Co. has removed Bill Ackman’s Pershing Square from its list of recommended funds for clients, the person said.”

They say there are three days in a man’s life that define him: the day he’s born, the day he dies and the day his institutional LPs start pulling their capital (nobody actually says this, I made it up for the purpose of writing this blog). Today, Bill Ackman is here to add a second notch to his legacy-defining belt.

Listen, it’s not unheard of to have some smaller, high net worth LPs redeem some cash when things get a little shaky. They most likely don’t have a deep enough capital base to ride out a cold streak from their managers, so it’s understandable. When the likes of Blackstone and J.P. Morgan start raining redemption requests on your lowly investor relations analysts, though, times are dire. Ackman has had a tough few years, marked by chronic underperformance, a gut-wrenchingly expensive divorce and what amounts to the hedge fund equivalent of a public caning from Carl Icahn. But this is America, and as far as I’m concerned, we love a great comeback story – which led me to wonder if 2018 would be the year Ackman would begin his. I can now say emphatically that 2018 will not be his comeback year, as a Pershing Square liquidation / return of capital seems to be a much more likely scenario. As the fund moves to satisfy redemption requests and liquidate hundreds of millions of dollars worth of positions into an already down year, Ackman (and his LPs) will likely be selling into deeper losses as they look for bids wherever they can get them (not ideal!), further tarnishing his record and reputation. The only thing he has going for himself at this point is that the funds are gated, limiting LP redemptions to 12.5% of their capital each quarter, allowing Pershing Square to clip some last minute management fees (isn’t the hedge fund comp model grand?).

Billy has had some high-profile misses in the last few years, getting torched most notably by Valeant and Herbalife (he also blew up his first fund, Gotham Partners, which is rarely mentioned in the media these days). While it’s fun to point out all of his mistakes, we’d be remiss not to revisit some of his biggest wins – because despite all of the negative news recently, he actually has made his investors money over the long haul, even beating out the broader market. He’s had great success in his Canadian Pacific, General Growth Properties and Wendy’s plays. His greatest, and savviest, play IMO, has to be his short of MBIA all the way back in 2002. Billy had a hunch that the mortgage credit markets were about to turn ugly and he wanted some action. He turned his sights on MBIA, who was buying mortgage credit risk by selling credit default swaps on securitized mortgage debt. Ackman went out to markets and started building a credit default swap position against MBIA’s own debt and shorting their stock, betting that the company was destined to payout on all the protection they sold, eventually bankrupting themselves. It took a few years, but the bet paid out handsomely during the 2008 financial crisis, proving Ackman was ahead of the hedge fund curve and launching him back into the limelight.

That was a long time ago, though, and investment management is a “what have you done for me lately” business. We should be thanking Ackman, though. Never has anyone provided so much content, both good and bad, for the financial media and its consumers. He has a complex tale that has been wrapped in a “truth is stranger than fiction” aura since he burst onto the scene. Whatever you think of the guy (and many hate him), we’ll be discussing his legacy for a long time – and we all know, he wouldn’t have it any other way (except the terrible returns, he’d probably take those back).

 

Inflation Is Here, but You’ve Probably Been Looking for It in the Wrong Places

“Bloomberg – The cost of maintaining a drugs, booze and cigarettes habit got a lot more expensive in the U.S. last year, rising the most of almost anywhere in the world, the annual Bloomberg Global Vice Index shows.”

Economists, portfolio managers, politicians, laypeople. We’ve all been wondering for years, how it could be possible that, in the era of cheap money, there haven’t been any inflationary consequences. Sure, one can argue that inflationary pressures have made their presence known in equity markets, as the financial system has benefited the most from a decade of low rates. But I’m talking about real inflation, the kind of insidious inflation that eviscerates the consumer’s purchasing power and drives raw material prices through the roof. Well, ladies and gents, it’s finally arrived – we’ve just been looking for it in the wrong places, at the wrong raw materials, if you will:

“The gauge compares the share of income needed to maintain a broad weekly habit of cigarettes, alcohol, marijuana, amphetamines, cocaine and opioids…”

There you have it, the purchasing power of your typical 18-30 year old, white-collar professional is deteriorating right before our eyes. According to this Bloomberg index, the weekly cost of living your best life as George Jung is about $617/week (an YoY increase of over 50%). While that sounds expensive, it’s even worse considering this amounts to 54% of average weekly income. If you’re, quite literally, blowing 54% of your take-home pay while living in NYC, you’re most likely surviving on 2 Bros. Pizza and 16oz. PBR’s at Brother Jimmy’s as well – and that’s no way to go through life (just your early 20’s).

I can’t say I’m surprised, though. If you think about how well the economy performed in 2017, a massive YoY increase like that makes perfect sense. Americans are, generally, more well off than they were at this point last year, and in true American fashion, we’re burning through our newfound wealth, celebrating like the consumers we were born to be. The jury’s out on whether being this specific type of consumer en masse is bullish or bearish for America’s future prospects, but we’ll deal with that issue when we get there – and if living to excess and dealing with the repercussions later isn’t the definition of Americanism, then I don’t know what is.

 

I’m Shocked That an ICO Promoted by Floyd Mayweather and DJ Khaled Was Fraudulent

“Gizmodo – SEC Charges Founders of Cryptocurrency ICO Promoted by Floyd Mayweather Jr. and DJ Khaled with Fraud“

I’m not even going to comment on Floyd Mayweather or DJ Khaled here, because if you invested a single dollar based on what a guy who can’t read posted on his Instagram, you should get burned. However, whatever you think about cryptocurrencies and their *sigh*, relevance, there is one indisputable fact: they have contributed to the meteoric rise of the ICO.

For anyone unfamiliar, an ICO (Initial Coin Offering) is a new way to raise start-up capital in the crypto space. At a high level, a start-up has an idea for a new payment system and agrees to issue their new currency supporting it to investors in exchange for bitcoin and/or ethereum. They then turn around and use the funds raised to develop the payment system and currency infrastructure. Say for instance, Domino’s wants to develop a system to revolutionize the way we all pay for pizza. You fund their venture with bitcoin and they give you PizzaCoin. If the payment system takes off and the value of PizzaCoin increases, good on you and your investment prowess.

The problem with the process is that it totally skirts the SEC regulatory framework for issuing securities and raising capital – ipso facto: it’s the wild west out here in ICO land. Any start-up in the world can issue its fake currency to any sucker that’s willing to fork over their fake bitcoin purchased with actual dollars. They can market the currency however, and to whomever, they please. This has resulted in numerous fraudulent companies raising millions of dollars from retail investors for their useless currencies. When I say useless, I mean totally useless – kinda like this ICO, the aptly named Useless Ethereum Token which has raised over $125K. What a world.

The worst part is that many unsophisticated investors don’t understand they’re not purchasing an equity interest in the company itself, but merely gambling on the value of the stupid currency they bought. Were one of these currencies to be widely adopted, the company itself would be clipping transaction fees left and right, but the ICO participant experiences none of the upside provided by the increased cash flows. You have investors providing equity capital to build the company and its product, but receiving a 0% equity stake in said company or product. It’s a perversion of the venture capital model, used solely to benefit the founders (equity holders) at the expense of investors bearing literally all of the execution risk.

These companies are extracting real dollars from the economy in order to build equity value for themselves, and leaving investors holding useless assets they created out of thin air. The sad part is that it doesn’t seem investors are catching on to the scheme, because every time one ICO blows up, I wake up the next day and it’s just like:

 

 

The Beef We Never Asked For (But Will Thoroughly Enjoy) Has Arrived

“CNBC – Facebook CEO Mark Zuckerberg fired back at Tim Cook, arguing the Apple CEO’s recent criticism about the social media company and its handling of the Cambridge Analytica scandal was “extremely glib.”

Now we’re talking. Last week, super nerd Tim Cook decided it was time to talk some unprovoked shit about Facebook, and proceeded to stuff billionaire alien, Mark Zuckerberg, in a locker. Cook was trying to make the point that because Apple sells products vs. offering a free service, they’d never find themselves in the position of selling their users’ private information to advertisers and data miners for monetary gain. I was surprised (but delighted) he chose to open his mouth, because that’s just asking for an embarrassing data privacy issue of your own.  Zuckerberg fired back at Cook on former WaPo wonk, Ezra Klein’s podcast. After mustering up all of the social skills he managed to observe and replicate in his thirty-three years on this planet, he called Cook’s comments “extremely glib” and said that the small-brained human race is suffering from an Apple-induced episode of Stockholm Syndrome. BURN.

This is a battle that Zuckerberg just can’t win. Cook may be a nerd, but he’s infinitely more likable (and human) than Zuckerberg is. Anyone that read Accidental Billionaires or saw The Social Network knows the weight of self-consciousness Zuckerberg carries around is so massive, it may very well collapse in on itself one day, creating a black hole so powerful that no data miner could ever suck information out of Facebook’s servers again. That same self-consciousness morphed into a sense of resentment throughout his college years, when he couldn’t fathom why his intelligence wasn’t valued by the broader swath of society (chicks def included). People pick up on that kinda stuff, and it makes that individual seem off-putting, which is why Zuck can’t win this fight. People have known the guy is a weirdo for years, and we’ve been waiting for a reason to not like him – which has finally arrived. So sit back and enjoy the show folks, because each time he concludes an interview that doesn’t help save his image (or his stock price), he is sitting there, stewing in his big alien brain, reverting back to his adolescent years, wondering why the broader swath of society JUST. CAN’T UNDERSTAND. That’s when the meltdown will begin, like when J.P the Robot get’s that voicemail in “Grandma’s Boy” (which is in the hall of fame of underrated flicks, just behind “That’s My Boy”).

I would like to point out: maybe we are suffering from an Apple-induced episode of Stockholm Syndrome? The Company literally admitted to throttling performance on older iPhones (accidentally, of course) and nobody cared. That was always amazing to me.