Argentina sold 100-year bonds barely a year after settling a protracted legal dispute tied to a $95 billion default, Bloomberg News reported yesterday. With the $2.75 billion sale, the government of South America’s second-largest economy joins Mexico, Ireland and the U.K. in issuing debt that matures over a century, which is often particularly attractive to insurers and pension funds seeking to lock in long-term returns. Argentina, for its part, is taking advantage of historically low borrowing costs to finance the budget and pay off debt that’s maturing in the next few years.
A recent decision by the U.S. Supreme Court that curbed the government’s enforcement powers over Wall Street could hurt efforts to penalize private-equity managers over fees that the government considers poorly disclosed to investors, the Wall Street Journal reported today. The opinion, handed down last week, said that the SEC has just five years to order firms to give back profits that it says were wrongfully taken. That means the regulator can no longer object to fees received long ago, significantly reducing the amount it could force a buyout firm to give up. Before the decision there was no limit to how far back the SEC could go in seeking “disgorgement” of fees. The SEC is investigating private-equity managers Carlyle Group and Silver Lake over large one-time fees from companies they sold or took public. It settled milestone cases over disclosure of similar fees against Blackstone Group LP and Apollo Global Management LLC in 2015 and 2016, respectively. The decision in Kokesh v. SEC affects the private-equity industry in particular because private-equity funds usually last 10 to 12 years — meaning the five-year statute of limitations imposed by the Supreme Court’s ruling prevents the regulator from objecting to fees taken or expenses charged during the earlier years of a fund’s life.
As U.S. officials and bank executives scrambled to save the global financial system after Lehman Brothers’s bankruptcy in the fall of 2008, Citigroup Inc. traders were doing what traders always try to do, Bloomberg reported today. "Ringing the register, homey,” Thomas Giardi, a trader in the bank’s credit derivatives trading unit, said in a chat message on Sept. 17, two days after Lehman’s bankruptcy. His gleeful boast — along with at least a dozen from others — came as Citigroup’s top traders were furiously trying to deal with thousands of derivatives terminated by Lehman’s collapse. Contained in chat messages and recordings from that turbulent September week, the exchanges are the most colorful, if not potentially damaging, evidence so far in a civil trial on allegations that Citigroup inflated its $2 billion bankruptcy claim related to those derivatives. At the time of bankruptcy, Lehman Brothers Holdings Inc. and Citigroup had entered into more than 30,000 derivatives trades tied to an estimated $1.18 trillion of wagers on everything from interest rates to corporate and sovereign debt. Lehman’s bankruptcy gave Citigroup the right to determine its damages.
Investors are as sanguine about the stock market as they have been in almost a quarter of a century, according to one indicator, despite months of global political turmoil, showing comfort in strong corporate earnings and signs that the jobs market is humming, The Wall Street Journal reported yesterday. Sunday’s election in France of centrist candidate Emmanuel Macron as president helped remove a major market overhang and gave investors confidence that stocks are unlikely to face a big selloff anytime soon. The relative calm drove a widely watched measure of anxiety, the CBOE Volatility Index, or VIX, to its lowest level since 1993 on Monday. On Friday, the S&P 500 and Nasdaq Composite both hit new highs and were little changed Monday. Some investors interpret the VIX’s decline as a contrary indicator of where the market will go. Their view is that the VIX’s slumber suggests investors have grown too complacent. Some say that investors are turning to other financial instruments to protect against a downdraft in stocks. Former Federal Reserve Gov. Kevin Warsh warned that market risks haven’t vanished. “I would not take comfort; I would take fear,” he said of the VIX’s low level. The VIX, which typically moves opposite from stocks, fell to 9.77 Monday, the lowest close since Dec. 27, 1993. The index at one point Monday dropped as low as 9.67.
The City of Chicago, Jefferson County, Ala., Riverside, Calif., and a school district north of San Diego have lost millions of dollars by using creative municipal finance, and if citizens around the country aren’t vigilant and outspoken, their city, county or school district may become the next victim of an unnecessarily complex bond deal, The Fiscal Times reported today. Perhaps the worst victim of municipal financial “innovation” was Jefferson County which filed for bankruptcy after its interest rate swaps blew up. After suffering a series of rating downgrades, the City of Chicago paid $270 million to close out swaps and convert its variable rate debt to fixed. Why bother with such complicated deals in the first place? Bankers who promoted interest rate swaps argued that municipal issuers would have lower interest costs overall by borrowing at variable rates. But fees banks collected for arranging the swaps offset these savings. Also, because bankers are more knowledgeable about swaps than politicians and government finance staffers, the terms and conditions of these deals often protected banks at the expense of borrowers.
Almost a decade after the global financial crisis, the fate of another $2 billion from the wreckage of Lehman Brothers Holdings Inc. is about to be determined, Bloomberg reported on Friday. The failed investment bank is seeking to recoup the cash from Citigroup Inc. Lehman alleges Citigroup created “phantom transaction costs” in order to justify a bankruptcy claim that would allow it to keep $2 billion in cash Lehman had deposited on the trades. Citigroup contends it did nothing wrong and used reasonable practices. The trial opens a rare window into the frenzied weekend before Lehman’s bankruptcy filing on Sept. 15, 2008. Lehman, which first sued over the $2 billion in 2012, claims that Citigroup efficiently hedged its risks, but went on to inflate its claim by marking its books to its benefit. The adversary suit is Lehman Brothers Holdings Inc., et al. v. Citibank NA, 12-01044, U.S. Bankruptcy Court, Southern District of New York.
Adam Savarese was looking to make a splash in his new job as Goldman Sachs Group Inc.’s top distressed-debt trader last year, and found it in Peabody Energy Corp., Bloomberg reported today. The coal miner was hurtling toward bankruptcy. Savarese snagged its unsecured bonds for pennies on the dollar and rode them up for one of 2016’s most successful trades. It was risky: Some peers at other banks played it safer with secured bonds, which offered greater protection, though a smaller upside. But Savarese’s blockbuster Peabody move helped engineer a rebound on a desk buffeted by losses and the departure of senior leaders. Now that same rescue play is inflicting pain. Though the trade is still a winner over its lifetime, it reversed course in the first quarter to contribute to a fixed-income trading performance at Goldman Sachs that was so unexpectedly soft that the stock tumbled as much as 5.8 percent on April 18. While currencies and commodities trading left an even bigger dent, the performance by Savarese — and the bank’s entire credit desk — has attracted attention because it contrasts with better results at rivals.
Hedge funds first starting buying Puerto Rico debt in the summer of 2013 because they liked what they saw: A government that was paying high, tax-free yields that couldn’t go bankrupt. Nearly four years later, the Caribbean island has defaulted on most of its bonds and Governor Ricardo Rossello, who took office in January, says it can pay less than a quarter of what’s owed over the next decade, assuming he can slash the budget and increase the island’s revenue, Bloomberg News reported. Some of the securities are trading near record lows. And, thanks to the U.S. Congress, Puerto Rico and its federal overseers can use bankruptcy-like proceedings to have some of its $70 billion debt written off in court, something investors once assumed it couldn’t ever do. Read more.
In related news, the Financial Oversight and Management Board for Puerto Rico responded to an inquiry to Sens. Thom Tillis and Tom Cotton. Click here to read the letter.
