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Levine on Wall Street: Tough IPOs, Boring Banks, and Tricky Toys

Aug. 12 (Bloomberg View) -- How hard is it to sell the Alibaba IPO?

Here's some interesting speculation about how hard Alibaba's bankers will have to work to place its likely $20 billion initial public offering. For one thing, the banks think they need the book to be about four times covered, which means they need $80 billion of orders, which, I mean, Bloomberg shows $135 billion of global IPOs so far this year so that's a pretty meaningful chunk of orders. And they won't be helped by the fact that Alibaba's weird structure -- Caymans company operating mainly in China and listing in the U.S. -- will keep it out of most of the main indices, losing it index-investor orders. But that's okay, says a guy:

Still, exclusion from the index can be a benefit, too. Dennis Hudachek, senior ETF analyst at ETF.com, which tracks exchange-traded funds, said some fund managers seeking to outperform an index might add Alibaba if they believe it will do well.

Sure! Anyway it does seem like capital markets bankers come in for a lot more public second-guessing than they used to -- after Facebook's flop and Twitter's perhaps excessive pop and the Royal Mail thing -- so it makes sense for them to get out ahead of the story by whining about how hard Alibaba will be. Though obviously if the stock doubles in the first day of trading, the whining won't help much.

Some Kinder Morgan stuff.

Here is Bloomberg News on the reasoning behind Kinder Morgan's decision to abandon the master limited partnership structure that it popularized and become a corporation. And here is Breakingviews on "Richard Kinder's master class in financial engineering"; the two main lessons of this class seem to be (1) form an MLP and then (2) stop doing that. Here is Jim Cramer gloating amusingly. And here is a Wall Street Journal article about how a big chunk of Kinder's tax savings from its de-MLP-ification will come at the expense of unitholders in its MLPs, who will face big capital gains taxes on their conversion into Kinder Morgan shareholders. I mentioned this article in a footnote yesterday but it probably deserved more emphasis: Kinder's $20 billion of tax savings from the deal may come not so much at the expense of the IRS, as at the expense of its unitholders with the IRS acting as a middleman.

How boring are banks?

Here are bankers saying things like "It’s not that the junior guys are working too much. It’s that the value proposition changed," and "It’s a terrible time to be a banker. You are on the road three days a week. You are getting paid substantially less than you were getting paid five years ago." It seems to me that a big question for the next decade is what conclusions people will draw from this. One possibility is, like, ugh, this is terrible, let's just pay each other more and work harder. (That's the traditional answer after downturns over the past couple of decades.) Another possibility is more like, ugh, this is terrible, let's just work less if we're not getting that much money. The point is not so much that the answer matters in itself, but that it matters in terms of who goes into banking. If banking is a reasonably well-paid boring job, it will attract more boring, less risk-seeking people than if the proposition is tons of money and hours and machismo. Very much related: Will fixed-income trading businesses come back when volatility comes back? (Will volatility come back?) Or will regulation, and central bank suppression of volatility, ruin all the fun for traders? (Though: There has been a return to fun in structured credit.) And in other news, "U.S. banks posted $40.24 billion in net income during the second quarter, the industry's second-highest profit total in at least 23 years."

And why's everyone leaving?

I guess because banks are boring, JPMorgan is selling off its private equity arm, One Equity Partners, to two other investment firms. And 60 Barclays quantitative trading employees are leaving to start their own firm.

Prosecutors are tricky.

"Like a child with a new toy" is pretty much never how I want an article about federal prosecutors to begin. This one is about how magical Firrea (it's a statute, it stands for something, but you don't care) is: It lets prosecutors do civil investigations without giving targets some of the protections that they get in criminal investigations, and then they can use those civil investigations to bring criminal charges. What a fun toy. Elsewhere AIG Financial Products popular villain Joseph Cassano "used his Fifth Amendment right about every 38 seconds on average during his interview" with the Securities and Exchange Commission in 2009, and can you blame him?

What's the matter with Kansas?

Apparently its pensions were horrifically underfunded, and it forgot to mention that to investors who bought its municipal bonds. Then the SEC did "a nationwide review of bond offering documents to determine whether municipalities were properly disclosing material pension liabilities and other risks," found that Kansas wasn't, and charged it with securities fraud, which was settled for no money and a promise to do better, both on the pension funding and on the disclosure. Seems ... pretty reasonable? No harm done, more or less -- it's not like the bonds defaulted -- though, still, you'd have to guess that if a corporation, rather than a state, committed this sort of light securities fraud it'd probably have to pay a fine to settle the charges.

How do you count market share of high frequency traders?

If I sell you a share of stock, do we each have 100 percent market share in that trade, or 50 percent? That is a question all right.

Who's good at short selling?

A bit late to this, but here is a study of short sellers ranked by their success. Among big hedge funds, Pershing Square has the best results (average short campaign ends with the target down almost 43 percent), though amusingly it has bad short-term results (average campaign ends its first week up 2 percent), so maybe you'll see that result in its current big famous short. Strangely, among big hedge funds, Greenlight Capital has the worst campaign-length results (up 23 percent), despite David Einhorn's reputation for being able to move stocks by announcing a short position. That reputation is deserved, by the way; his targets are down an average of 11 percent in the first week.

Things happen.

JPMorgan might move to the World Trade Center or Hudson Yards. Apparently Repo 105 was fine. The CFPB is worried about bitcoin. Why not commute across the country for your MBA? "I know I will almost certainly dislike anyone who thinks this describes them." Battle stats for Greek heroes.

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

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