Money Stuff: Goldman Does a Malaysia Deal

Money Stuff

Oh, Goldman

Disclosure, I used to work at Goldman Sachs Group Inc., and I remain mostly favorably disposed toward the place. Partly for the reasons anyone might be fond of a former employer: I learned a lot there, I have a lot of friends who worked or still work there, I generally think that it is full of good people who try to do good work in a good way. But I also have a certain perverse aesthetic admiration for how they sometimes operate. Like even when they are doing evil, even when they are abjectly apologizing for doing evil, they do it with a certain sense of style. 

So once upon a time Goldman helped an entity called 1Malaysia Development Berhad raise about $6.5 billion from bond markets, much of which was then stolen by 1MDB's promoter, Jho Low, and used to pay for his lavish lifestyle and to bribe Malaysian government officials. Also hundreds of millions of dollars of the bond proceeds were used to pay Goldman's fees, and hundreds of millions more were used to pay kickbacks to the Goldman partner who did the deal. Malaysia's current government—not the one that took all the bribes—is understandably unhappy about all this, and Goldman has the deepest pockets around, and one of its former partners did help Low steal the money, so Malaysia went after Goldman to get some money back. And now it has a deal:

Goldman Sachs Group Inc. has reached a deal that would see Malaysia drop all criminal charges against the bank in exchange for $3.9 billion of reparations for its role in raising money for the troubled sovereign wealth fund 1MDB, according to people familiar with the matter.

The deal includes a cash settlement of $2.5 billion paid to Malaysia, the people said, asking not to be identified as the discussions are private. Another $1.4 billion will come from seized 1MDB assets being returned with the help of the U.S. Justice Department and Goldman Sachs, the finance ministry said in a statement.

Yes but here's how Goldman puts it:

The agreement in principle would involve the payment to the Government of Malaysia of $2.5 billion and a guarantee that the Government of Malaysia receives at least $1.4 billion in proceeds from assets related to 1MDB seized by governmental authorities around the world. In connection with the guarantee, Goldman Sachs performed valuation analysis on the relevant assets and believes based on that analysis that the guarantee does not present a significant risk exposure to the firm. 

That last sentence is just gratuitous showing off, isn't it? "Our Stolen Assets Valuation Group modeled these assets and concluded that they have at least a 95% chance of being worth more than the $1.4 billion put that we wrote against them."

Honestly, they financial-engineered their settlement for doing financial-engineering crimes, it is so Goldman. "We are better at evaluating and pricing and hedging weird financial risks than our counterparties are," is the basic message here, "so we will take on those risks, at the right price." I want to imagine that the negotiations went a little like this:

Malaysia: We need $3 billion, plus whatever we get from all the apartments and yachts and movie rights that were bought with the stolen money and seized by foreign authorities to hand back to us.

Goldman: You don't want to take the legal and credit and operational risk on getting those assets back, or the market risk on selling them. Why don't we write you a derivative guaranteeing a minimum price on those assets, and knock $500 million off our cash settlement? 

Right? They are creating value for a customer. Malaysia doesn't have the capacity to value these assets and assess the likelihood of not collecting them or of their prices collapsing or whatever. If it can offload that risk to Goldman—which has expertise in valuation and risk management, plus it helped steal the assets in the first place—then that is good for Malaysia. So Goldman, always looking out for ways to help its clients and customers and prosecutors, structured a derivative to give Malaysia the certainty it wants.

Of course Malaysia is not explicitly paying for this derivative, but presumably the cash settlement would have to be bigger if Goldman wasn't offering the guarantee. As a former Goldman structurer I confess that I am just itching to tweak this deal. What if it was like "Goldman guarantees the stolen assets will be worth at least $1.4 billion, and if they're worth more than $1.8 billion Malaysia and Goldman split the upside 60/40"? Cheapen the put by selling some calls, you know how it is, this is basic instinctual stuff. I bet someone at Goldman suggested it, and the lawyers shot it down. It's too cute even for Goldman.


Oh dear:

Billionaire investor Bill Ackman is officially on the lookout for a mega-merger after his new blank-check company raised $4 billion in an initial public offering and rose in its trading debut.

"We're in a unicorn mating dance and we want to marry a very attractive unicorn on the other side that meets our characteristics," he said in a Bloomberg TV interview Wednesday. "And we've designed ourselves to be a very attractive partner."

I shudder to continue that metaphor but I suppose that is why they pay me the big bucks so here goes. Yes, right, Ackman's SPAC—"Pershing Square Tontine Holdings Ltd., the largest-ever special purpose acquisition company"; we have discussed it before—is trying to seduce a unicorn to leave the Enchanted Forest of the Unicorns and come live with it in the public markets. The public markets are a scary place for a shy little unicorn, or a big unicorn really, so Ackman has to be an attractive partner.

One question that I have with SPACs is: If you are a unicorn, is a SPAC a merger partner, or a tool for going public? Formally they're a bit of both. A SPAC is an empty shell company that goes public, raises money in an initial public offering, and then uses that money (plus some more money from its sponsors or friends, here Pershing Square) to merge with some private company, which will thereby become public. So the goal here is for Pershing Square Tontine to merge with some "mature unicorn"—Airbnb Inc., Palantir Technologies Inc., and SpaceX are some names that are thrown around—with the result that the unicorn will be public and Ackman will end up with a big stake in it. That is two trades at once: The unicorn becomes a public company, with a bunch of unrelated public shareholders, and it also gets a big cash investment from Ackman's hedge fund, which presumably remains a long-term holder and perhaps also gets some governance rights, board seats, etc.

A lot of the discussion around SPACs these days emphasizes that they are a tool for going public; here is Ackman:

Ackman said his pitch to target companies will emphasize the relative ease of going public through a merger with Pershing's SPAC, compared to the risk and headaches of an IPO, direct listing or sale to a private equity firm. Completing a deal could take only two weeks, he said. …

"If you're an investment banker today, you're going to call your favorite $10 billion company and say, 'Isn't this an interesting way to go public,'" Ackman said. "We welcome the inbound call."

But there is something a bit strange about that emphasis. If your goal, as a unicorn, is to go public and remain independent, why would you do it by selling a huge block of stock to a famous activist investor? For one thing he is an activist, and might not just leave you alone to do your own thing. But for another thing he is famous, and if a SPAC is just a capital-markets tool to make unicorns' IPOs easier, why should it have a famous sponsor? Why shouldn't an investment bank just have an associate set up a bunch of SPACs, and then sell them to the public with the pitch "hey we will do some IPOs this year and you can pre-buy one of them sight unseen," and then go to unicorns and pitch "hey we've got a bunch of SPACs lying around, if you want to go public quickly and easily you can just merge with one"? Why not cut out the role of the famous sponsor in SPACs and make it a pure capital-markets tool?

Obviously part of the answer is that people invest in SPACs because they trust the famous sponsor to get good deal flow, find a good company, and merge with it at a good price. If you have a track record (or a reasonable expectation) of making a lot of money for your SPAC investors, then you should be able to raise a lot of money from SPAC investors. But this is a bit double-edged. If you go to a private tech unicorn and say "yes look I can take you public and give you a billion dollars because people know that I make a lot of money for investors," then what you are really saying to them is "people expect me to take you public at a price that is too low; I can give you a billion dollars because you'll give me stock that's worth $2 billion." If you are a tech unicorn whose particular concern about going public is that IPOs underprice companies, then this is not an appealing story! You want to sell your stock to the highest bidder, not to someone who has built a reputation for being good at buying companies cheap. 

But you can have a more nuanced story, not "I will create value for my investors by taking you public cheap" but rather "I will create value for my investors, and you, by making your company better, and also public." I think in reality a lot of people invest in SPACs, and a lot of companies merge with SPACs, because they believe the sponsors add real value. Here's a Financial Times article about Michael Klein, a former Citigroup banker who is now a very successful SPAC sponsor; what is striking about it is that Klein is not described as a capital-markets functionary who gives companies a new tool to go public, but as a sort of private-equity-firm-but-for-public-companies. The pitch is not "we'll take you public faster and leave you alone," it's "we'll be a good merger partner who will invest in your business for the long run": 

On a call setting out the MultiPlan deal last week, Mr Klein claimed that what set his blank-cheque vehicles apart was the roster of individuals who invested in the Spacs and worked with the target companies if they had relevant expertise. 

The group, which is called Archimedes Advisors and sits within Mr Klein's firm, includes former Ford CEO Alan Mulally; Apple's former design chief Jony Ive; Joe Ianniello, who used to lead CBS; and John Thornton, the ex-Goldman Sachs banker who chairs Barrick Gold. To help unearth companies, Mr Klein has also recruited Oak Hill CEO and founder Glenn August, who injected $500m into the financing for MultiPlan. …

Mr Klein is adamant that he and his partners are in it for the long run. "We are very long-term investors. We don't have a fund. We're investing for decades," he said announcing the deal. "We're not in the business of buying LBOs [leveraged buyouts]. We're in the business of investing behind growing companies." 

And so Klein gets board seats and other rights in the companies he takes public, and he gives them advice. It's a sort of half-IPO, half-merger. Ackman seems to be going for something like that here too. His SPAC is relatively light on financial bells and whistles, with limited warrant coverage and not much in the way of free shares for him, and with Pershing Square (Ackman's hedge fund) planning to invest a lot of money in the eventual unicorn target alongside the SPAC. The pitch to the unicorns is not "we'll take you public cheap and build in lots of tricks to make SPAC investors rich," it is "we're good activist investors who spot good companies and make them better, and wouldn't you like to partner with us." It is, you know, a marriage. 

Which is fine, good, lovely, positive-sum financial engineering, I have no complaints. I just want to spell it out a bit here because, again, the common story these days is that a SPAC is a substitute for an IPO that is cheaper and avoids mispricing. I have argued before that that is wrong, but in particular here I want to point out that the SPAC is (sometimes) a marriage and an IPO generally isn't.

An IPO is, you sell stock to some people who want to buy it, and in general you hope that they'll be good stable long-term investors, but you don't lock them up forever. They get to vote for directors, usually, but the big IPO investors don't generally get their own representatives on your board. And in particular, the trend in tech unicorn IPOs in recent years has been to minimize the power and input of public investors. Lots of tech unicorns go public with dual-class stock so that investors can't really vote for directors; the founders' goal in going public is to raise money (or at least get liquidity for early investors) but keep control of their companies for themselves. They are not looking for a marriage partner; they are looking for a transaction, for money, while keeping their independence.

Which is fine too! Some companies stay independent, some merge, some want something in between, a powerful outside shareholder who can give them advice and support. My point here is just that if you are a tech unicorn founder, and your goals are (1) to go public without giving up any control to outside public shareholders and (2) to go public without going through the vagaries of the IPO process, you may have to make some tradeoffs. 

Keynesian Beauty Robots

I guess, why not:

The site that tracks trading activity at retail brokerage Robinhood has attracted the attention of Wall Street.

Hedge funds and other traders are looking to aggregate data that shows how many accounts own any given stock, according to the site's founder, Casey Primozic. The stats provide real-time insight into where amateur stock pickers are sending their money, potentially useful information for professionals who build fancy models to make their own bets.

"There are some patterns, and I definitely know people have at least looked into creating some kind of algorithms using this data," Primozic said Thursday in a Bloomberg Television interview. …

"I've gotten plenty of emails from hedge funds, prop firms, other financial institutions who are interested in the data," Primozic said. "There's definitely a lot of interest from these larger firms trying to get a feeling for what the broader market is doing."

If a lot of people are buying a stock it will probably go up. Maybe you should buy that stock too, because probably people will keep buying it and it will go up and you will make money. Can't really argue with that. Primozic is charmingly modest:

As far as using the data for trading strategies, "it's definitely not going to be enough to create a killer strategy on its own," Primozic said. "But that being said, there's definitely some kind of value in it, I feel like. There wouldn't be that much attention if there wasn't."

One view of quant trading is that, on sort of a black-box statistical basis, it increases market efficiency. Your algorithm notices that when Signal X goes up, Stock Y goes up a week later, so it starts to buy Stock Y whenever Signal X goes up. There's probably a reason? Maybe Signal X is some fundamental economic driver that affects Stock Y's results, though if that was obviously true then everyone would have noticed it and the value of the signal would be driven to zero. Or maybe Signal X is some sentiment indicator—mentions of Stock Y on Twitter, say—and your algorithm trusts that the sentiment means something, that people talk more about Stock Y on Twitter when there is some fundamental news that matters to the stock. 

Or maybe Signal X is some unintuitive weird thing that reflects a long complicated chain of reasoning that you cannot even observe. Maybe there is some effect where a butterfly flapping its wings in China causes storms in Kansas, so Signal X is like "Chinese butterfly population" and, when it goes up, your trade is to get long wheat futures and short Kansas property insurers. Not because you have figured out this meteorological mechanism, I mean; just because your algorithm has noticed a correlation between those data series. The statistical patterns in the data reflect real-world fundamental effects that no one has directly discovered; the market is smarter than any particular human, and your algorithms reflect and take advantage of the market's distributed genius. 

Another view of quant trading is that it reinforces market inefficiencies: Your algorithm notices some correlation, everyone else's algorithm notices the same correlation, you all pile into the correlation, the correlation increases, and the original reason for the correlation goes away, or was spurious to begin with. The butterflies and the wheat prices were just a coincidence, but now all the hedge funds are buying wheat whenever they see butterflies, so wheat prices correlate with butterfly populations for no good reason. Wheat prices get further away from fundamentals, but eventually the fundamentals reassert themselves and the trade collapses.

I don't know. One view is that Robinhood users—newcomers to the stock market who are trading on their phones in a pandemic—know what they're doing, on an aggregate basis, so you might as well do what they're doing. Another view is, well, whether or not they know what they're doing, they're doing it and it's moving prices, so you might as well do what they're doing. The first view would be nicer! I don't know.

Anyway if you did just download Robinhood this week to start dabbling in the stock market, and if your first move was to buy the five most popular stocks on Robinhood because that seemed easy, maybe it's nice to think that sophisticated hedge funds are pondering your trades and altering their own strategies to track what you're doing.

Or to fade it I guess? It's not totally clear that the algorithm is "buy what Robinhood buys," though it seems like that would mostly have worked well so far; maybe it's "sell what Robinhood buys."

Due diligence

The Wall Street Journal has an amazing story about the time after time after time that (1) invested in some small startup out of its Alexa Fund venture capital business and then (2) duplicated that startup's technology in its own business, crushing the startup and expanding its own enormous reach. The small startups, understandably, all tell this as a story of cunning nefarious Amazon having an evil plan to get inside information by investing in them, then stealing their technology and customer lists and trade secrets:

"They are using market forces in a really Machiavellian way," said Jeremy Levine, a partner at venture-capital firm Bessemer Venture Partners. "It's like they are not in any way, shape or form the proverbial wolf in sheep's clothing. They are a wolf in wolf's clothing."

Amazon, understandably, denies this, and suggests that it is just a series of unfortunate coincidences; it was going to develop all those technologies anyway. In fact it paints it as a story of bumbling Amazon, sort of, though in a humblebraggy way. After all, if Amazon was going to develop all those technologies anyway, it was a waste of money to invest in all the startups that it crushed. But it can't help itself, it is just so innovative:

Former Amazon employees involved in previous deals say the company is so growth-oriented and competitive, and its innovation capabilities so vast, that it frequently can't resist trying to develop new technologies—even when they compete with startups in which the company has invested.

I just like to imagine that Amazon's story is completely true, and the Alexa Fund people work diligently and independently to find the best startups, acquire stakes in them, and help them grown, and then every time Amazon crushes the startups and the fund loses money, and the Alexa Fund people have terrible performance and are like "man I can't believe our bad luck." It is hard, when you are a venture capitalist investing in small companies in the voice-technology space, to compete with Amazon; there is a constant risk that Amazon will come in and kill the companies in your portfolio. It's awkward when you work at Amazon too!

Things happen

Carlyle Co-CEO's Abrupt Exit Caps a Long, Awkward Power Struggle. Fannie-Freddie Risk Bonds Threaten Big Losses for Fund Managers. China Fortifies Hong Kong's Role as Financial Powerhouse. Wirecard Probe in Philippines Focuses on Two Bankers Who May Have Forged Documents. Tesla Prepares for Hiring Boom as Elon Musk Targets Manufacturing Expansion. Ann Taylor Owner Files for Bankruptcy, Plans to Close Up to 1,600 Stores. Bankrupt Brooks Brothers Gets Rescue Takeover Bid. How Carlos Ghosn Escaped Japan, According to the Ex-Green Beret Who Snuck Him Out. Pandemic puppies. Zoom bris

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