Citi Is Still Mad About That $500 Million
Citi wants its $500 million back
Ahahaha this is adorable:
Citigroup Inc. is punishing investment firms that kept payments the bank accidentally sent to Revlon Inc. lenders by blocking them from certain new debt offerings led by the bank, according to people with knowledge of the matter.
The bank is choosing to not invite these money managers, who hung on to over $500 million, to its new-issue debt deals, the people said, asking not to be identified discussing a private matter. Firms targeted include Brigade Capital Management, HPS Investment Partners and Symphony Asset Management, the people said.
We talked about this case last month. Citi wired the Revlon lenders $900 million by mistake; some of them returned the money but others kept $500 million of it because they were in a dispute with Revlon (and Citi, the administrative agent on the loan) over a debt restructuring. Citi sued and, surprisingly, lost; the lenders have a legal right to keep the money. But Citi has a legal right to be in a snit about it and refused to let them into new debt deals.
Well, it doesn’t really. When Citi leads a new debt deal, it is working for a client—the issuer of the debt—and has to put the client’s interests first. Citi can’t really go to an issuer client and say “hey we tried to syndicate this loan for you but we came up short so you’re not getting your money; we could have gotten the deal done with the orders from Brigade, HPS and Symphony, but we’re not talking to those jerks.” And in fact:
These firms and others tangled in a lawsuit with Citigroup can still participate if an issuer specifically requests for them to be able to join their offering, one of the people added.
Also of course excluding distressed-debt investors from new debt offerings is, uh … the new offerings usually aren’t the distressed ones?
It’s not clear how big of a blow Citigroup’s actions will be for the targeted firms, some of which focus on buying discounted assets in secondary trading rather than new offerings.
Still I appreciate Citi’s pique here. Mistakes like this happen in high finance; generally they get corrected and are not a huge deal. If a bank sends a hedge fund money by accident, the hedge fund will generally send it back. Partly this is a matter of law: In general, if you get a payment that wasn’t meant for you, you have to give it back; what happened in this case is a somewhat odd exception. But it is also a matter of repeat-player relationships. If you’re a petty jerk to Citi on one deal, Citi is going to be a petty jerk to you on the next deal. You will generally do the sensible, helpful, pro-social thing, because you are all part of a mutually beneficial ecosystem and you depend on each other for information and access and deal flow.
Unless Citi sends you $500 million by mistake to pay off a loan that you were in a huge fight about; then you keep it and say “meh, deal flow, I’d rather have the money.”
I don’t have any particular insight into the collapse of Greensill Capital, but I must say that I admire Greensill, from a safe distance, for its commitment to the weird shuffling of money. What Greensill does—did, maybe—is “supply chain finance.” Big companies buy stuff from smaller companies, and have to pay for the stuff within, say, 90 days after delivery. Greensill pays the suppliers, say, 30 days after delivery, but at a discount; the big company now owes the payment to Greensill. It pays the full amount, to Greensill, 90 days after delivery. Greensill has effectively loaned money to the big company; the difference between the discounted price that Greensill pays and the full price it receives is effectively interest on that loan. Greensill would package these loans into notes that it would sell to investors, including some funds run by Credit Suisse Group AG and others run by GAM Investments.
Fine, whatever, big companies sometimes like to borrow money to meet their working-capital needs. Supply chain finance is arguably preferable to other ways of borrowing the money—like having a revolving credit agreement—because it doesn’t show up on the big company’s balance sheet as debt; it shows up as “accounts payable.” When the big company owes the money to the supplier, it’s an account payable; when Greensill pays off the supplier, it buys the receivable, and the big company still owes an account payable to Greensill.
A basic dumb rule of thumb for big companies is that investors (1) do not like debt (ooh, scary debt), but (2) love accounts payable (ooh, you’re so powerful and so efficient with your cash, you can get your suppliers to wait a long time for payment so you can hang on to your cash). So transforming “debt” into “accounts payable” is a good accounting trick; it makes a company look more valuable, without actually changing anything of substance.
Good accounting tricks are worth money, to big companies, and Greensill could profitably sell this trick.
The trick reached its pinnacle with Vodafone Group Plc. Here’s a description from 2019:
In 2016, GAM and Greensill launched the Luxembourg-domiciled GAM Greensill Supply Chain Finance fund. … Lex Greensill was particularly close to Vodafone’s treasurer, Neil Garrod, according to people familiar with the matter. Soon, Vodafone’s payables made up a significant chunk of the underlying assets in the new fund, and Vodafone became a major investor in the fund too – the investment vehicle was nicknamed the “Vodafund” by some people working close to it. As of December 31, 2018, Vodafone had invested almost $1bn in the fund, according to people familiar with the matter.
I wrote at the time: “Vodafone gets financing by selling its payables to the fund, and then invests its cash in the fund? Why not just use the cash to, uh, pay the payables?” But you can figure out the answer! It is a good look for Vodafone’s balance sheet to (1) have a lot of cash (ooh, it’s rich) and (2) stretch its payables out as long as possible (ooh, efficient user of cash and powerful purchaser). So rather than just pay the payables, and have less cash and lower payables outstanding, it would have Greensill pay the payables so it could keep the cash. And then it would park the cash in Greensill funds to earn interest. Effectively it was lending itself the money to pay the payables, but in an accounting-efficient way. Not an economically efficient way, probably, since Greensill takes a cut for facilitating the trade. But, again, good accounting tricks are worth money, and presumably this one was worth Greensill’s cut.
SoftBank Group Corp.’s Vision Fund injected at least $400 million into Greensill Capital at the end of last year, according to people familiar with the matter, deepening the potential losses the giant tech investor faces in the startup’s collapse.
The infusion of cash was in addition to the $1.5 billion the Vision Fund had invested in Greensill in 2019. The money, not previously reported, was used as a financial backstop when another Vision Fund company, construction startup Katerra, came close to defaulting on a loan to Greensill, the people said. …
Another Greensill borrower from the Vision Fund was U.S.-based Katerra, a factory-assembly building contractor. In December, SoftBank put $200 million into the construction startup to help it avoid bankruptcy. Katerra’s chief executive told the Journal at the time that Greensill also had forgiven $435 million in financing in exchange for a roughly 5% stake in the company.
It wasn’t clear how Greensill would absorb the loss from forgiving the loan.
SoftBank’s $400 million injection into Greensill was made in the form of convertible debt, one of the people said. The money was earmarked to make up for Katerra’s inability to pay back Greensill, and would protect Credit Suisse investors against taking a loss on any notes tied to Katerra, said some of the people familiar with the matter.
So, loosely speaking:
- Katerra was borrowing money from Greensill to pay suppliers.
- Katerra ran out of money and couldn’t pay Greensill its $435 million.
- Katerra was partly owned by the SoftBank Vision Fund.
- So was Greensill.
- Katerra went to Greensill and said “hey we don’t have any money, would you like some of our stock instead?”
- Greensill was like “not particularly, no; we run money market funds; what would we do with 5% of a near-bankrupt private construction company?”
- Katerra and Greensill went to SoftBank and were like “any ideas?”
- Katerra gave Greensill the stock it didn’t want.
- SoftBank gave Greensill the money it did want.
- Greensill sort of passed the Katerra stock along to SoftBank, very loosely speaking; SoftBank got an increased ownership interest in Greensill (the convertible debt), which in turn was now a 5% owner of Katerra.
It’s not quite a wash, because both Greensill and Katerra have other investors, and Greensill has other assets, so a convertible bond on Greensill is not quite an ownership interest in Katerra. Still shuffling feels more complicated than the economics. Why not just have SoftBank give Katerra the $400 million to pay Greensill, in exchange for stock of Katerra? Well, I mean, SoftBank did some of that too; it put $200 million directly into Katerra to get a majority stake when Katerra ran into trouble. But it is more fun to use every part of the animal in your financial engineering.
Elsewhere in Greensill news:
JPMorgan Chase & Co. is making a play for some of Greensill Capital’s customers, according to people familiar with the matter, upending a bid by Apollo Global Management Inc. APO -3.56% to buy the finance startup’s core business.
The largest U.S. bank by assets is teaming up with Taulia Inc., a technology platform that was a main source of customers to Greensill. JPMorgan would provide $3.8 billion to fund deals to the former Greensill clients on Taulia’s platform, the people said.
Other banks are expected to take part in the effort and add more funding later, the people said.
The entry of JPMorgan has complicated talks between Apollo, Greensill and its insolvency administrators, according to people familiar with the talks. An Apollo deal is now unlikely, the people said. Apollo had been in talks with Greensill to buy its core business for around $100 million, The Wall Street Journal reported last week.
The thing about Greensill’s business is that it doesn’t sound that … hard? Like, once you have introduced a customer to the idea of supply chain finance, I am not sure why the customer should be particularly loyal to you. Anyone who offers a better rate, or the same rate but a better promise not to blow up, should be fine. Greensill’s advantage was a web of relationships, with customers and funds and insurers and SoftBank, but none of those relationships are worth what they used to be: Some of the customer underwriting seems to have gone wrong, and other customers seem to have come from “a technology platform” that will sell them to anyone; the funds are closing, the insurers have abandoned Greensill, and SoftBank is no longer exactly a name to conjure with. Why take over Greensill when you could just take over its (good) customers?
On the one hand, oh come on:
Robinhood Markets Chief Executive Officer Vlad Tenev said investing in financial markets should be as common as shopping on Amazon.com, defending his brokerage against watchdogs, lawmakers and critics.
“Investing should be as ubiquitous as shopping online,” Tenev said in an interview with Bloomberg Television’s Emily Chang. “It should just be something that people do.” …
“This is what I signed up for,” said Tenev, 34. “Any time you’re causing change in society and kind of upending the status quo, it’s probably not going to be the most comfortable process.” …
“I reject the idea that investing in the U.S. capital markets is gambling,” Tenev said in the interview. “We’d be happy to have the conversation, but of course we understand that investing is a serious thing.”
In fact, more people should tap financial markets, Tenev added, saying that he’d like to see the share of American households investing rise to 95% from roughly half.
Robinhood is widely criticized, and is being sued by Massachusetts regulators, for encouraging inexperienced young retail investors to gamble on the stock market by day-trading volatile meme stocks and single-stock options. Is “investing in the U.S. capital markets” gambling? Well, it depends on what you are doing. If you are buying a sensible portfolio of low-fee diversified exchange-traded funds and holding them until retirement, that does not seem very much like gambling. Certainly it isn’t that exciting. Is trading options on GameStop Corp. common stock gambling? Yes, I’m sorry, one billion percent yes, that is gambling gambling gambling gambling gambling.
On the other hand, the story that I would want to tell, if I were Robinhood, is some combination of:
- Well, most of our customers are buying and holding sensible ETFs; and
- YOLOing out-of-the-money GameStop options is a gateway drug into a program of sensible retirement saving.
I don’t know how true either of those things are. (Tenev told Congress last month that 13 percent of Robinhood customers trade options, which struck me as astonishingly high.) But the deep point here is that Robinhood’s confetti-strewn gambling game is not exactly competing—or not just competing—with opening a boring account at Vanguard and buying cheap ETFs. Robinhood is also competing with literal sports gambling, and with movies and videogames and other sorts of consumption. Robinhood appears to be better at competing with other fun things than other brokerages are, and those other fun things might be even worse for your retirement security than Robinhood is.
If Robinhood can make investing—or “investing”—fun, then it will probably make many customers better off, specifically the customers who would have done other fun things if Robinhood hadn’t come along. It will probably make other customers worse off, specifically the ones who would have invested anyway, but in less fun ways, if Robinhood hadn’t come along. To the extent that YOLOing options on Robinhood is a substitute for buying index ETFs, it is probably mostly bad for its customers. To the extent that YOLOing options on Robinhood is a substitute for buying, like, weed or lottery tickets, it is probably good for its customers’ financial health. Especially if they get bored with options trading when pandemic lockdowns end, return to their everyday lives, and keep buying boring ETFs on Robinhood out of habit.
This is a general pattern in consumer finance. A lot of consumer finance stuff is … kinda bad. It is needlessly complicated and expensive and you’d be better off putting your money in a low-fee index fund and forgetting it for 30 years. But because the low-fee index fund has low fees, no one is getting rich selling it, which means that no one is coming to your house and pounding on the door and climbing in the window and saying “hey wanna buy a low-fee index fund?” Whereas people will cheerfully come to your house and sell you universal life insurance or variable annuities or other more controversial expensive stuff that pays them fat commissions. You might be better off with the index fund, and if you’re reading this you probably know that and bought the index fund, but most people aren’t reading this, and a lot of them wouldn’t know to buy the index fund without someone coming to market it to them. If you build a good system for marketing a bad financial product, you might make people better off than if you build a bad system for marketing a good financial product.
Blockchain blockchain blockchain
Here you go:
[Blockchains LLC]’s CEO, Jeffrey Berns, envisions building a city that uses blockchain — the decentralized, network-based digital technology that underpins cryptocurrencies such as Bitcoin — for business transactions and various government functions, such as personal identification and sales tax collection. In 2018, Berns purchased 70,000 acres of industrial park land outside of Reno, and in July the company released plans for “Painted Rock Smart City and Innovation Park” that describe a settlement of more than 36,000 residents, with 15,000 homes, 11 million square feet of commercial space and an economic output reaching $16 billion within 75 years of development. …
Yet Berns insists that his vision is anti-corporatist. In a city, using blockchain technologies to facilitate personal identification, taxation and other services would eliminate the need for intermediaries such as banks or government agencies, he said.
“I want to create a place where blockchain is the foundation for creativity, honesty and transparency, and then build a smart city to serve the people who live there,” he said. “That’s ultimately the goal — to democratize democracy. I don’t believe we’ll have a democracy 20 years from now if we don’t do something new.”
I feel like you get a lot less of this “the future of democracy is on the blockchain” stuff than you did a few years ago, but I guess it takes time to get a whole city together. I hope it works, and he gets his city, and people move there, and they do whatever they’re gonna do on the blockchain, but this all happens like 10 years from now when “blockchain will replace government” has become a quaint forgotten notion, and the town becomes a sort of old-timey tourist attraction, like Colonial Williamsburg, where people will make day trips from Las Vegas to gawk at reenactors in 2010s clothes doing blockchain things. “Daddy why is she holding her phone up to that banana?” “Son, she’s scanning a QR code to tap into the blockchain to see if the banana is organic.” “But daddy isn’t there a sticker on it that says ‘ORGANIC’?” “Yes, but back before sticker technology was developed people used QR codes on the blockchain.” “Ooh that sounds like a lot of work.” “It was, son, it was; life was hard back in the blockchain era.”
There is a lot of pressure these days on public companies to have diverse boards of directors, and this pressure is particularly strong on big U.S. companies in the S&P 500 Index. In fact, as of mid-2019, there were no S&P 500 companies with all-male boards. That changed last month when the index was rebalanced; a previously non-S&P-500 company, which got a little less public attention and had an all-male board, was added to the index. Also here is its name:
The reshuffling of the S&P 500 last month brought lighting supplier Monolithic Power Systems Inc., which has six men and no women on its board, into the Index for the first time. The last all-male board — Copart Inc. — added a woman in July 2019. The gender disparity comes even as the broader index topped 29% women on boards for the first time last month. …
“You cannot be a company with a board of all men on the S&P 500 for long,” said Davia Temin, founder of New York City crisis consultancy Temin and Co. “It’s really pretty difficult in this day and age to go against the march of history.”
Yeah, I don’t know, if anyone is going to go against the march of history it might be Monolithic Power Systems? “What kind of monolithic power systems do you offer?” “Well, we have this nice system that will power your electric lights; also the patriarchy, that’s a real monolithic power system.” “Monolithic Power Systems, which does have Asian male directors, has retained a search firm and is actively seeking to add a female director,” adds Bloomberg.
You know what’s a good thing to steal? Diamonds. If you walk into a good jewelry store and steal all the diamonds in it, you will walk away with sort of a manageable backpack full of diamonds and they’ll be worth millions of dollars.
Even better? Money. Electronic money. Hack into the payment system that powers international banking, transfer a few million dollars to an account you control, move it quick to another account, launder it at a casino, pop it back into a different account, and poof, you have millions of dollars, in reasonably portable form, for a few hours’ work.
Also people seem to enjoy stealing Bitcoins.
I want to be clear that I am not an expert in any sort of heist business, this is neither legal nor heist advice, do not do a heist and do not blame me if your heist goes awry. I’m sure like a dozen people are already typing emails like “actually diamonds are easily traceable and hard to fence” or “actually casinos in the Philippines have really improved their anti-money-laundering controls in recent years” or who knows what about Bitcoin. But the point is you want something compact and portable and fungible, so you can steal a lot of it quickly and walk away whistling innocently.
I wrote once about some thieves who stole “a massive 100-kilogram (221-pound) gold coin worth millions of dollars,” which is not particularly compact or portable or fungible (until you melt it down), but which is very funny and classic. “A ladder was found by nearby railway tracks,” reported the AP. “I hope they wore striped shirts and burglar masks and handlebar mustaches, and carried the coin in a big bag with a dollar sign on it, and escaped down those tracks on a hand-cranked rail car accompanied by jazzy piano music,” I wrote. “I hope they used the coin to buy gum and get change.” I would not personally want to steal a 221-pound gold coin but I appreciate that they did.
You know what would be low on my list of things to steal? Enormous quantities of copper:
Commodities trader Mercuria Energy Group Ltd. struck a deal last summer to buy $36 million of copper from a Turkish supplier. But when the cargoes started arriving in China, all it found were containers full of painted rocks.
The saga unfolds like a gangland thriller, with the Swiss trading house saying it’s been the victim of cargo fraud. Before its journey from a port near Istanbul to China even began, about 6,000 tons of blister copper in more than 300 containers were switched with jagged paving stones, spray-painted to resemble the semi-refined metal. …
Last June, Mercuria agreed to buy copper from Bietsan, a Turkish supplier it had done business with before, according to Sinan Borovali, the trading house’s lawyer in Turkey. It appears that copper was initially loaded into the first shipment of containers, before being surveyed by an inspection company. Seals used to prevent fraud were then affixed to the containers.
But under the cover of darkness, it is alleged the containers were opened and the copper replaced with paving stones, Borovali of Istanbul law firm KYB said in an interview. The fraudsters switched between fake and real container seals in an effort to avoid detection.
As ships left Marport terminal in the port of Ambarli every few days, the same thing happened: the copper was secretly unloaded at night and replaced with painted rocks. “This was how they did it,” Borovali said. …
Okay so $36 million for 6,000 tons is $6,000 per ton, or $3 per pound, making bulk copper less valuable by weight than a turkey sandwich. But you don’t just have to transport 6,000 tons of copper from the ships—eight different ships!—where you stole it to wherever you want to sell it; you also have to transport 6,000 tons of paving stones to the ships. Really you’re getting $1.50 per pound transported. You have to paint the paving stones! Paint is expensive! You have to buy a lot of it! Or steal it I guess. You have to transport the paint!
It seems like a lot of work. I realize that mining copper is even more work, and yet lucrative; I realize that there is a thriving business of copper theft. Still it is not how I would like to spend my time if I were doing crime. The point of financial crime, surely, is to become wealthy without excessive hard work. Getting a huge team together to lug rocks all night hardly seems worth it.
By the way there was apparently also some regular old financial crime involved:
Normally, in such cases of non-delivery a trading house could make a claim against a cargo’s insurance policy. But Mercuria found that just one out of seven contracts used by the Turkish company to insure the cargo was real. The rest had been forged.
If you’re going to steal the copper, sure you’ll pay for paint to conceal the paving stones that you swap for the copper, but you won’t pay for cargo insurance.
Tonight at 8 p.m. ET I’ll be talking with Joe Weisenthal and Tracy Alloway, who host Bloomberg’s Odd Lots podcast, on Clubhouse, the social network for … audio panel discussions? I am pretty new to Clubhouse. We’ll be talking about SPACs, Robinhood, GameStop and whatever else is on our minds. Here’s the link to join in on our conversation. It will also probably be released as a regular Odd Lots episode, if you are not on Clubhouse.
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