Is the Repo Market Fixed?: DealBook Briefing



To get the state of play in the repo markets, we checked in with Darrell Duffie, a finance professor at Stanford, who has followed securities markets closely since the crisis. Much has happened that should have made the repo markets stronger, he said, pointing to several improvements.

Wall Street firms are borrowing less overall. After the crisis, banks had to increase their capital levels, which means they have to get more of their financing from shareholders, not potentially flighty creditors, like repo lenders. A bank doesn’t have to give back shareholder money, which makes it a far more stable source of funding than, say, short-term repo loans, which have to be rolled over frequently.

Liquid assets. International rules introduced after the crisis require large banks to hold a set amount of easy-to-sell assets, like Treasury bills, that will most likely hold their value even in a crisis. These , in theory, can be sold to raise the cash needed to pay back clients withdrawing their business. Of course, an aim of the liquid asset pools is to prevent runs preemptively. Clients, knowing the bank have access to cash, will be less likely to flee.

Repo cleanup. Sudden doubts about the value of collateral — subprime mortgage securities in 2008, for instance – can cause the repo market to seize up. The amount of risky collateral in the repo market is lower than it was before the crisis. But as this page run by the Federal Reserve Bank of New York shows, equities, perhaps the riskiest repo asset, make up around 8 percent of volume, a not insignificant amount.

Panic on the streets of London. In the lead up to the crisis, investors who wanted to borrow more against securities could do so out of London subsidiaries of United States banks. By trading with the London subsidiaries, investors and banks could skirt a Securities and Exchange Commission rule that aims to protect customers, but may also put a tighter limit on secured borrowing. Mr. Duffie says that European rules introduced since the crisis appear to have somewhat tightened securities-based lending out of London.

Have investors wised up? Mr. Duffie said, after the crisis, fund managers took the step of spreading their business over a number of Wall Street firms, rather than concentrating their trades at one bank. This, in theory, reduces the risk of one bank being hit by an investor exodus. But as time passes, employees at investment firms may become complacent. “Over time, investors tend to forget about crises, or get replaced by younger folks with no direct experience to crises,” Mr. Duffie said in an email, “The risks are theoretically known, but become less salient over time.”

—Peter Eavis

What’s on deal-maker’s minds in the Big Easy

NEW ORLEANS — Twenty-eighteen has gotten off to a great start for the business of buying companies, and the mood at one of the most prominent M.&A. conferences around is optimistic. But look at the margins, and you’ll find some worry.

To be clear, the consensus is that deal-making will keep going. Here’s what Michael Carr, one of Goldman Sachs’s global co-head of mergers, said in a presentation yesterday:

“Our theory is that we are in an environment where entire industries are changing structure, and that is causing M.&A. to happen. Sometimes you have to do something because your neighbor is doing it.”

Yet here are the things that people here have worried about:

Politics and deals: The blocking of Broadcom’s $117 billion bid for Qualcomm has raised the specter of Washington intervening in M.&A. situations in unpredictable ways and potentially chilling deals. Leo Strine, the chief justice of Delaware’s Supreme Court, expressed concern about how the national-security review of the deal played out. “This didn’t come out of Cfius at the end of the process. That creates suspicion.”

And Mr. Carr acknowledged, “The relationship between the White House and Beijing is far from great.”

Macroeconomic factors: Rising interest rates and volatile stock markets can put something of a damper on deals, though few think there’s something serious to worry about.

Mania: Mr. Carr acknowledged that the rush to strike takeovers could eventually lead to errors. “This is going to continue until people do stupid deals,” he said.

— Michael de la Merced


Christian Hansen for The New York Times

The next great M.&A. fight is ready to start

From Monday, the Federal District Court in Washington will play host to a legal battle that could determine how Americans watch “Game of Thrones” and CNN: the Justice Department’s lawsuit to block AT&T’s $85.4 billion bid for Time Warner.

It will also determine what kind of deals pass muster during the Trump administration. More from Brent Kendall and Drew FitzGerald of the WSJ:

The ruling could affect major pending health care mergers and may have ramifications for the tech economy. If the deal is allowed, AT&T argues, it could act as a bulwark against the power of digital media giants such as Alphabet’s Google and Facebook. Or it could create an entertainment behemoth that holds consumers hostage, as the government insists.

As the media analyst Amy Yong of Macquarie told Cecilia Kang of the NYT, “This court case is so important it is hard to know where to start.”

The presiding judge expects the trial to last six to eight weeks.


Graham Walzer for The New York Times

Qualcomm won its Broadcom fight. Its battles aren’t over.

The hostile takeover bid is dead, killed by President Trump. But the other major threat to Qualcomm’s business is still around — and buying chips from it.

More from Jim Stewart of the NYT:

Apple has traditionally been one of Qualcomm’s biggest customers, along with Samsung and every other major handset company. But the two technology giants are also embroiled in an epic battle over licensing fees for Qualcomm’s patented technology, with profound implications not only for Qualcomm’s business model and Apple’s profit margins, but for the future of wireless communication.

The Qualcomm talker: At the Corporate Law Institute in New Orleans, a top forum for deal-makers, Leo Strine, the chief justice of Delaware’s Supreme Court, had this to say about the blocking of Broadcom’s bid (via Michael):

“This didn’t come out of Cfius at the end of the process. That creates suspicion.”

Other Qualcomm news: The company’s former chairman Paul Jacobs has spoken with investors — including SoftBank, where Qualcomm is an investor in the Vision Fund — about taking the company private, unnamed sources tell the FT. And Hock Tan, Broadcom’s C.E.O., was confident of prevailing in Washington because of his November meeting with Mr. Trump.


Jeenah Moon for The New York Times

How Toys “R” Us shows the failure of private equity

Toys “R” Us’s private equity backers had saddled it with $5 billion of debt. That classic buyout strategy might not work so well in the digital era, when spending on interest payments rather than innovation can mean handing your customers to Amazon.

More from Michael Corkery of the NYT:

Consumer demands are changing so quickly that heavily indebted companies have trouble reordering their business to adapt and compete with better-funded rivals.

A wave of buyouts has collapsed in recent weeks, felled by digital competition.

Two recent bankruptcies that fit the pattern: the radio company iHeartMedia and the New York grocery chain Tops.

And an alternative reason Toys “R” Us gave for its collapse: not enough babies. Here’s a map of its U.S. stores, too.

The political flyaround

• The Dodd-Frank overhaul that passed the Senate may not pass Representative Jeb Hensarling, head of the House Financial Services Committee. He wants more changes. (Politico)

• President Trump has decided to remove H.R. McMaster as his national security adviser, unnamed sources tell the WaPo. Others — like John Kelly, Ben Carson and Jeff Sessions — may be on thin ice as well.

• Steven Mnuchin is the latest cabinet secretary being scrutinized for spending: The bill for his military flights comes close to $1 million. (Politico)

• Robert Mueller has subpoenaed the Trump Organization in recent weeks to turn over documents, including some related to Russia. (NYT)

• The Trump administration accused Russia of engineering a series of cyberattacks against American and European nuclear power plants and water and electric systems, saying hackers could have sabotaged or shut off plants at will. (NYT)

• The White House imposed sanctions on a series of Russians and Russian organizations in retaliation for interference in the 2016 presidential election and other cyberattacks. (NYT)

• Russian elites have been buying up London property through secretive shell companies for years. With tensions high, British leaders may crack down. (NYT)

• How a libel lawsuit against BuzzFeed could give Stormy Daniels a chance to talk more about Mr. Trump. (Politico)


Roy Rochlin/Getty Images for Spotify

What to expect from Spotify’s April 3 market debut

Potential investors who watched the streaming service’s three-hour webcast yesterday learned a lot about the company as it prepares to list directly on the N.Y.S.E. (A highlight: its focuses on podcasts, ads and video as new sources of revenue.)

But others still had plenty of questions. Shira Ovide of Gadfly asked whether Spotify could sustain itself on its 25 percent gross margins. And Peter Kafka of Recode asked whether the company could ever raise prices with Apple on its tail.

More on how to value Spotify from Dan Gallagher of Heard on the Street:

Pandora, the company’s closest publicly traded peer, trades about 0.9 times trailing sales while video-streaming stalwart Netflix trades at nearly 12 times. Spotify clearly prefers comparisons with the latter. But investors would be wiser to set a lower bar early on. The best songs sometimes take a while to catch on.


The changing of the guard, Wall Street edition

Lloyd Blankfein has announced his successor at Goldman Sachs. Jamie Dimon has started to outline who would replace him at JPMorgan Chase. And so the two top bankers of their generation are set to ride off into the sunset sooner rather than later.

More from Hugh Son of Bloomberg Businessweek:

Dimon and Blankfein had a good run. They began as chief executive officers within six months of each other in 2006, with the global mania in financial assets nearing its peak, and emerged from the crisis that soon followed with their reputations not just intact but burnished — at least among fellow Wall Streeters.


Faisal Al Nasser/Reuters

Is M.B.S.’s mother involved in Saudi palace intrigue?

Saudi Arabia’s crown prince, Mohammed bin Salman, has garnered praise for expanding rights of women in the country, allowing them to drive and attend sports events. Yet his own mother may not be benefiting from that openness.

More from Carol E. Lee and Courtney Kube of NBC News:

U.S. officials interviewed for this story believe, based on several years of intelligence, that MBS took action against his mother because he was concerned that she opposed his plans for a power grab that could divide the royal family and might use her influence with the king to prevent it. The officials said MBS placed his mother under house arrest at least for some time at a palace in Saudi Arabia, without the king’s knowledge.

Elsewhere in Saudi Arabia: The crown prince told CBS News that if Iran developed a nuclear bomb, the kingdom would too.


Xtend is a Monsanto brand of genetically modified soybean.

Brandon Dill for The New York Times

The deals flyaround

• Bayer hasn’t satisfied U.S. officials who are worried that its acquisition of Monsanto could hurt competition. (Bloomberg)

• TheSkimm, the popular newsletter service, has raised $12 million from investors like Alphabet’s GV and the Spanx co-founder Sarah Blakely, to build more subscription services. (Recode)

• Campbell’s takeover of the snack company Snyder’s-Lance is drawing plenty of skepticism from investors. (Bloomberg Gadfly)

• Meredith has hired bankers to explore a sale of Time, Fortune, Money and Sports Illustrated, unnamed sources say. (Reuters)

• U.S. investors aren’t that excited about an Aramco I.P.O. (Bloomberg)


Drew Angerer/Getty Images

Why did John Skipper leave ESPN abruptly?

Based on his extraordinary interview with The Hollywood Reporter, it was because of an extortion plot by someone he bought cocaine from.

More from The Hollywood Reporter:

“They threatened me, and I understood immediately that threat put me and my family at risk, and this exposure would put my professional life at risk as well. I foreclosed that possibility by disclosing the details to my family, and then when I discussed it with Bob, he and I agreed that I had placed the company in an untenable position and as a result, I should resign.”

Unanswered questions: Were the police brought in? And are there more shoes to drop from this case?


Jennifer S. Altman for The New York Times

The misconduct flyaround

• Nike said it was reviewing improper conduct at the company as one of its top executives stepped down. (Bloomberg)

• Coutts & Co., the three-century-old private bank where Queen Elizabeth II keeps money, investigated allegations of physical and verbal harassment against a star banker, Harry Keogh. He was disciplined but remains at the bank. (WSJ)

The speed read

• Tesla is entering a make-or-break period: The financial consequences if it fails to boost production of the Model 3 could be severe. (WSJ)

• Li Ka-Shing, Hong Kong’s richest man, is retiring. (NYT)

• The cities shortlisted for Amazon’s second headquarters are starting to hear other companies demand the same hefty tax breaks. (WSJ)

• What will happen when the U.S. unemployment rate falls below 4 percent? Cities that already have such low joblessness rates may offer clues. (Bloomberg)

• Investors are starting to conclude that Softbank’s Masa Son can never have enough debt. (Gadfly)

• A single social media post by Rihanna appears to have erased about $800 million of Snap’s market value. (MoneyBeat)

• A look inside the coming auction of more than 2,000 objects from the collection of David and Peggy Rockefeller. (CNBC)

• The E.U. is a considering a 3 percent tax on the digital revenues of large tech companies. (Reuters)

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