Oh well.

This is a little disappointing:

On June 7, 2018, Altaba Inc. (the “Fund”) commenced a tender offer to purchase up to 195,000,000 (approximately 24%) of the Fund’s issued and outstanding shares of its common stock, par value $0.001 per share (the “Shares”), that are properly tendered in the Offer (as defined below) and not properly withdrawn. For each Share accepted in the Offer, stockholders will receive: (i) 0.35 American Depositary Shares (“Alibaba ADSs”) of Alibaba Group Holding Limited, a Cayman Islands company (“Alibaba”), which are held by the Fund in its investment portfolio, less any Alibaba ADSs withheld to satisfy applicable withholding taxes and subject to adjustment for fractional Alibaba ADSs (the “ADS Portion”), and (ii) an amount in cash equal to the Alibaba VWAP (as defined below) multiplied by 0.05 ….

I
had such high hopes
for Altaba. Altaba, you might remember, is the husk of the company that used to be called Yahoo! Inc. It
sold all of its Yahoo stuff
, and what was left was just a big box full of Alibaba shares. (Also some Yahoo Japan Corp. shares.) The point of that maneuver—I thought, Yahoo/Altaba’s shareholders thought, everyone thought—was to make that box nice and tidy in preparation for the obvious next transaction, which was to find a way to break the Altaba shares out of the box in a way that would not incur taxes. And the obvious way to do that would be for
Alibaba to buy the box
: If Alibaba acquired Altaba in a merger in which it issued new Alibaba shares to Altaba shareholders, that could probably be done in a tax-free way. Alibaba would be left owning a box full of its own shares, and breaking those shares out of the box would still incur taxes, but Alibaba wouldn’t need to break the shares out of the box: Just keeping them in the box forever would be enough to retire them for accounting purposes, and Alibaba would never need to sell them since, if it needs to sell Alibaba shares, it can just print more. 

But instead Altaba has just sort of puttered along, being a box. (The problem with the plan of selling the box to Alibaba is that Alibaba would have to agree, and the two sides would have to agree on a fair discount to allocate the tax benefits.) It currently owns about 384 million shares of Alibaba stock, worth about $78.1 billion as of yesterday’s close, plus about 2 billion shares of Yahoo Japan stock worth about $7.1 billion, for a total net asset value (including some little bits of cash, etc.) of about $85.7 billion, or $107.09 per Altaba share. Altaba shares closed yesterday at $79.75, or about a 26 percent discount to net asset value. If Altaba just handed shareholders the Alibaba and Yahoo Japan shares (and the cash, etc.), then they would have stuff worth $107.09 per share instead of their current $79.75. (The Alibaba stake alone is worth $97.57 per Altaba share.) But it can’t do that, because just handing its shareholders the Alibaba shares means breaking them out of the box, and breaking them out of the box means paying taxes on them.

But it’s doing that anyway: It’s handing (some of) its Alibaba shares to (some of) its shareholders, and paying taxes on them. (It will pay for the taxes by selling more Alibaba shares—something “in the low 30s million” of them.) The tender offer involves giving Altaba shareholders 0.35 Alibaba shares (worth about $71.27), plus cash equal to the value of another 0.05 Alibaba shares, for a total value of about $81.45, or about a 2 percent premium based on yesterday’s close. (Altaba calculated a 3.8 percent premium based on Wednesday’s close.) That premium is barely worth mentioning, since it is also a 24 percent discount to net asset value; for practical purposes what’s happening here is that Altaba is letting some of its shareholders throw in the towel and get their Alibaba shares at the current discount. If you want to give up on the dream of a tax-free monetization of old Yahoo’s Alibaba stake, now you can. Or you can hold onto your Altaba shares and hope they work it out. They make no promises:

Essentially, all options are on the table, including additional exchange offers or tender offers, the sale of Yahoo Japan and/or Alibaba stock, share buybacks and the adoption of a plan of liquidation and dissolution.

Something will happen to those Alibaba shares, but a lot of the options seem pretty … taxable.

There is some tax-efficient maneuvering going on in this transaction. From Altaba’s tender-offer filing:

The disposition of Alibaba ADSs pursuant to the Offer and the Alibaba Resale will be taxable to the Fund for U.S. federal income tax purposes. With respect to the Offer, the Fund will generally recognize taxable gain equal to the excess of (i) the fair market value of the Alibaba ADSs distributed pursuant to the Offer on the date of the exchange over (ii) the Fund’s adjusted tax basis in such Alibaba ADSs.

For purposes of measuring Altaba’s taxable gain, the valuation of the Alibaba ADSs to be distributed pursuant to the Offer is uncertain. In general, the trading price of publicly traded stock is normally presumed to be its fair market value for tax purposes. However, courts and the Internal Revenue Service (“IRS”) have recognized that it may be appropriate to apply a “blockage discount” in valuing a large block of stock that cannot be sold in a reasonable time without depressing the market. Due to the large number of Alibaba ADSs to be distributed pursuant to the Offer, the Offer could support a position that the distributed Alibaba ADSs should be valued after the application of a blockage discount that takes into account the size and illiquidity of the block. If such a position were sustained, it would benefit the Fund and its remaining stockholders by reducing the Fund’s corporate-level tax liability compared to a transaction in which the Fund sold the distributed Alibaba ADSs at their current market price and distributed the cash proceeds to stockholders.

You might naively think that the Alibaba shares are worth whatever their trading price is. But Altaba’s Alibaba shares might be worth less—because there are a lot of them, and selling them would depress the price. How much less? Who knows, but “the Offer could support a position that the distributed Alibaba ADSs should be valued after the application of a blockage discount.” I think that means: Well, if we hand out our Alibaba shares to our investors at a 24 percent discount, then for tax purposes we should value the Alibaba shares at a 24 percent discount. (This is some sleight of hand, because the discount in the tender offer probably comes mostly from the tax liability, not from a liquidity discount, and “these shares are worth less because we have to pay taxes on them” is not really a good argument for reducing your tax liability.) That doesn’t quite get you to a tax-free distribution, but it helps. 

Volcker.

We’ve
talked
a few times
recently
about the Volcker Rule, which prohibits banks from doing “proprietary trading” but allows them to do “market making.” My view is that it is not necessarily easy to tell those things apart, or to write a rule that distinguishes between them—because in both “market making” and “proprietary trading,” the bank is using its money to buy and sell securities for its own account—but that there is some clear enough conceptual difference between them. In market making, you are making two-sided markets, buying at the bid and selling at the offer, and generally trying to manage your book so that you’re not taking too much directional risk for too long. In proprietary trading, you decide to buy a thing and go out and buy it: You’re on only one side of the market, you might cross the spread to buy the thing you want, and your goal is to have an exposure rather than to stay roughly flat.

And while I have been skeptical that the Volcker Rule is particularly well-constructed to reduce banks’ risk—because market making, and lending for that matter, is risky—I think it could be perfectly rational for legislators and regulators to decide that market making (like lending) is a socially useful activity that banks should do, because it helps customers and adds liquidity to markets and so forth, but that proprietary trading is a less useful activity that banks shouldn’t do. It’s not socially useless, exactly—any hard-working informed trader makes markets more efficient—but it’s not a core function of a bank, and so should be done elsewhere, away from the insured deposits and too-big-to-fail-ness of the banking system.

People sometimes push back on this. The argument against it is, roughly, that a certain amount of proprietary trading makes market-making better. In its narrowest form this argument is obviously true: Market making is proprietary trading in the most basic sense, and no market-making desk will ever be perfectly neutral 100 percent of the time. You’ll buy and sell stuff, and hold it for some time, and so you’ll take market risk, and presumably your decisions about what market risks to take will be informed by your views about markets rather than just by what clients want to do. If clients want to sell you a billion dollars worth of bonds at par, you will buy them if you think they’re worth more than par and not if you don’t, etc.

But there are much broader forms of this argument. For instance, one reader pointed out that having a full-blown proprietary trading desk around makes a bank better at risk management in its market-making business: If you are considering whether to take a big position as a market maker—because, say, all your clients are selling and they want you to buy—it helps to have traders whose job it is to evaluate and take market risk to advise you on your decision. If everyone is just a flow trader or a salesperson—if everyone is in the client-service rather than risk-taking business—then your risk-management decisions will be worse.

This seems right! But it is too broad; any form of risk-taking will make a bank better at evaluating risk in its core business, but that doesn’t mean that banks should be allowed to take unlimited risks. (Running a commercial real-estate operation might make a bank better at evaluating commercial real-estate loans, but the latter is a core banking function while the former isn’t.) It can still be sensible to try to distinguish core banking and market-making functions from non-core directional market bets.

Sensible, but hard. Here is Hugh Son on the nuances of Volcker practice:

A handful of senior traders at global investment banks have the ability, if an opportunity is identified and approved by risk committees, to be allowed much greater leeway to take directional bets, according to people with knowledge of the industry. Sometimes, only a small fraction of the original trade is offloaded to clients to justify the trade as market making, while the rest is held for gains, said the people.

The riskier, more lucrative bets are seen as helping keep trading desks open for clients, since pure market making has become less profitable amid relatively placid markets and tight spreads between what sellers and buyers will agree to.

“If you’re a market-maker and you don’t take an opportunity to strap on risk when you see an asymmetric payoff, why are you paying a guy who can do that to not do that?” said a trader at a major Wall Street firm who declined to be identified speaking candidly. “You’ve got to use your information and expertise to do stuff like that occasionally when you have good risk-reward.”

That all strikes me as completely correct. If you have a market-making business, and the information and expertise that you develop in that business allows you to have an advantage in making directional bets, why not sometimes make those bets? And, yes, those bets can help subsidize your client-service business; making money on price moves can allow you to provide more and cheaper market-making services to customers. It does not seem like what the authors of the Volcker Rule intended. And yet it is not entirely not what they intended. Any market-making desk is going to make market judgments, and if those judgments help it do more market making, then, well, the Volcker Rule was supposed to preserve that business, wasn’t it?

Elsewhere, Bank of America Corp.’s
new motto is apparently
“We’re not going to do anything crazy to the customer—and we’re not going to do anything crazy for the customer,” which is just an absolutely terrific motto. I mean those things are not the same. You definitely shouldn’t do crazy stuff to the customers! They don’t like that. But I think most banks, most of the time, would say “oh yeah we love our customers, we will do crazy stuff for them,” though of course in practice they may not do anything especially crazy, and will charge a lot for it. But Bank of America’s explicit parallelism is so charming. “We won’t help our customers too much, but we won’t hurt them too much either.” Thanks! 

By the way, that article is about how “the firm’s reluctance to take risks has contributed to defections of dealmakers this year,” and do you think they are leaving because they want more opportunities to do crazy stuff for customers, or to them?

Regulatory entrepreneurship.

Here is a story about a company that comes to town, violates local ordinances, refused to get the required permits, gets in trouble with the authorities, blithely writes off the fines it pays as a cost of doing business, and complains that the democratically-enacted rules are “old” and “arcane” and restrict “entrepreneurship,” all while minimizing its own exposure by operating through independent contractors (many of whom barely break even, or don’t, after accounting for expenses) whom it treats as entrepreneurial small-business owners rather than classifying them as employees.

Did you assume I meant Uber Technologies Inc.? I hope you did, because that pretty exactly describes Uber’s business model of “regulatory entrepreneurship”—basically, keep openly doing illegal stuff until you can convince people that it should be legal—but, no, in this case I am talking about CountryTime Lemonade:

Popular lemonade brand CountryTime said Thursday that it is “taking a stand for lemonade stands” and pledging to help kids cover the costs of city permits when young entrepreneurs get their lemonade stands shut down. 

“Around the country, kids across the country are getting busted for lemonade stands,” the company said in a video posted to its official Twitter account Thursday.

The brand is launching a new fund called Legal-Ade, “a crack team ready to straighten out lemonade stands permits and fines.”

If a lemonade stand gets shut down or ticketed by city officials for not having proper permits or licenses, CountryTime said it will reimburse the kid or their family up to $300.

Honestly the video is cute, I like it. But, like Uber (and Bird, good lord, somehow we have avoided talking about Bird scooters here, let’s keep it that way), it is a symptom of a certain (probably justified!) despair about the possibilities of democratic governance. People—in Silicon Valley, at Big Lemonade—just can’t imagine that their democratically elected governments can be trusted to make good rules, or that the agents of those governments can be trusted to enforce those rules in reasonable ways. I don’t think they’re necessarily wrong—New York’s taxi rules are notoriously ridiculous, and sure yes kids should be able to run lemonade stands—but the idea of reasonable compromise, of working within the democratic process, of persuading the agents of the law rather than ignoring them, has been largely abandoned. Now you just do what you want and hope that you turn out to be bigger than the law.

I realize I am reading too much into CountryTime’s tongue-in-cheek commercial but, you know, Uber. Bird.
Initial coin offerings
! It’s a real thing, even if CountryTime is kidding about it.

The crypto.

The way this newsletter works is that I gather up pieces of financial news and then try to say something funny and/or insightful about them. That approach is utterly defeated by this story about how Dennis Rodman is going to go to Singapore to “provide ‘moral support’ to President Trump and Kim Jong Un” at their summit while also representing marijuana cryptocurrency PotCoin in “an elaborate marketing campaign on the sidelines of a high stakes summit between two nuclear-armed adversaries.” Insight is impossible, humor is superfluous, but how can I not mention it? It is just such an absolute fact. There you go, a marijuana cryptocurrency is sending Dennis Rodman to help out in a nuclear summit between Kim Jong Un and Donald Trump. Eventually I will wake up, and I won’t even be able to begin to explain the dream I am having right now. 

Elsewhere: Picks and shovels (and tax accounting) for the crypto industry. And tokenizing an initial public offering, why not.

Investing advice.

If you give your investing advice in the form of haikus, I really have no choice but to write about it and make fun of you. Here’s a roundup of
advice from the heads of university endowments
, which includes these things-formatted-like-poems from Andy Golden of Princeton University’s $23.8 billion endowment:

“Look beyond long term;
Bet only where advantaged;
Whole is more than sum.

Preserve real value;
Optimizing discomfort;
Forever is far.”

Counting syllables
Doesn’t make it poetry;
Stick to your day job. 

Things happen.

“Deutsche Bank AG Chairman Paul Achleitner has spoken with top shareholders about
merging with cross-town rival Commerzbank AG
as Germany’s largest lender struggles with its turnaround plan.” SocGen executives ordered Libor rigging, US prosecutors believed. IMF, Argentina Agree on $50 Billion Bailout Deal. Banks Don’t Share Wells Fargo’s ‘Systemic’ Account Problems, Regulator Says. Goldman, Morgan Stanley Left Out of Banks’ New
Lobbying Powerhouse
. Ant Financial valued above Goldman Sachs in $14bn funding. “Hey, what building is Wall Street in?” A Very Big, Fluffy Dog Got Tired On A Hike And Had To Be Carried Down A Mountain.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:

Matt Levine
at mlevine51@bloomberg.net

To contact the editor responsible for this story:

James Greiff
at jgreiff@bloomberg.net

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