Money Stuff: Sell on eBay to Buy eBay

Sure, sure, sure:

GameStop Corp. Chief Executive Officer Ryan Cohen said his eBay Inc. account was suspended following a publicity stunt in which he listed a raft of personal items — including a pair of socks — to fund his $56 billion bid for the online marketplace.

Cohen shared a screenshot of a notice from eBay saying his account had been suspended. He previously said he was raising money on the platform to help pay for the deal. His account racked up scores of bids totaling tens of thousands of dollars for a hodgepodge of items. …

Earlier this week, GameStop offered $125 per share in cash and stock for eBay. GameStop secured an initial, non-binding “highly confident letter” from TD Bank to provide about $20 billion of debt financing for the deal, but Cohen has still been peppered with questions about how he’ll manage to pay for a deal. ...

Beyond the socks offered on Cohen’s eBay account, other sought after items include a pair of GameStop signs and what appears to be a life-sized Halo 2 statue, both of which are going for more than $10,000. Among the other goods for sale are vintage baseball cards including Willie Mays and an unopened package of Windows 2000 software.

Sure! One thing that I sometimes think about is that there is a continuum between “real” takeover offers and “fake” ones. Quite a lot of very real takeovers — including most private-equity buyouts and also Elon Musk’s purchase of Twitter Inc. — begin with an acquirer who doesn’t have the money. A private equity firm, or Elon Musk, will approach the target and say “hey we’d like to discuss acquiring you for $10 billion,” and the target will say “okay do you have $10 billion,” and the buyer will say “no, of course not, we don’t just keep $10 billion lying around in the bank, but if our discussions go well and we decide to move forward, we’ll easily be able to raise the money.” [1]  And the target might say “oh, yes, fair, you are [a giant private equity firm][the world’s richest person], no problem,” and proceed to negotiate a deal. Or the target might instead say “prove it,” and the buyer will find some way — a debt commitment letter, audited financial statements, a guarantee from Dad — to demonstrate to the target that the money will eventually be there. 

Or sometimes a potential buyer will lob in a bid without the money, and the target will say “okay do you have the money,” and the buyer will say “no, but if our discussions go well and we decide to move forward, we’ll probably be able to raise the money.” Like, abstractly, eBay is financeable — people own its debt and equity now! — so Ryan Cohen should be able to finance it. “I can find people to pay $56 billion for a company with a current market value of $46 billion” is not an insane thing to think, especially if — like Ryan Cohen — you have some track record of getting people to pay surprisingly high prices for the shares of companies. 

But sometimes a potential buyer will lob in a bid without the money, and the target will say “okay do you have the money,” and the buyer will say “yes I have a quadrillion dollars in my account at the Vatican Bank,” or “yes I have plenty of money in ancient Mesopotamian bearer bonds,” or “no but I know where Yamashita’s gold is buried and if you finance my expedition I can dig it up,” or “I can turn lead into gold with my mind,” or “money isn’t real man,” or “what? I can’t hear you, I’m going through a tunnel,” or — and I cannot stress this enough — “I’m going to sell my socks on eBay to finance the takeover.” These situations are usually what you would call fake takeover bids. Often — particularly when the bidder first buys shares of the target and then sells them at a profit when the fake takeover is announced — this might be considered securities fraud, though that is a matter of intent and genuine delusion might not qualify.

And then sometimes a bidder will show up with a $56 billion half-cash half-stock bid, and will have $9 billion of actual cash and a $20 billion highly confident letter from a bank in Canada, which is a bit less than $28 billion of actual cash but a lot more than “I have drawn a treasure map to Yamashita’s gold on this bar napkin.” And the bidder will be a publicly listed company that can in theory issue a lot of stock to finance the stock portion, though in practice (1) that would dilute the existing holders down almost to nothing and (2) it doesn’t have enough authorized shares anyway.

And then the target will ask “wait is this a real takeover offer” and the buyer will be like “it’s half cash, half stock” and the target will say “that’s not quite what I” and the buyer’s CEO will say “I have listed my socks on eBay to firm up the financing” and the buyer will say “ah I see.” If you do publicity stunts to pretend to finance your takeover bid, that might suggest, to the casual observer, that your takeover bid is itself a publicity stunt.

Also, before putting in its bid, GameStop bought almost 5% of eBay’s stock (via derivatives). That stock is up a bit since the takeover bid, though it’s not up that much because, you know.

I was, for a while, a junior mergers-and-acquisitions lawyer at a fancy law firm. M&A lawyers at fancy law firms get a lot of material nonpublic information in the course of their jobs: You tend to find out about mergers before the market does, when you’re writing the merger agreement. This information can, in a fairly straightforward way (buying short-dated out-of-the-money call options on the target), be turned into money. It shouldn’t be — that’s illegal insider trading and you can go to prison for doing it — but it can be. M&A lawyers have occasionally succumbed to this temptation, and so fancy law firms, including the one I worked at, tend to have training sessions to teach their young lawyers not to do that.

The content of this training is fairly straightforward — don’t trade on the firm’s deals and don’t tell anyone else about them — but what I remember most was the sense of incredulity that anyone would do this. As a junior associate, I was making what seemed to me an unbelievably large amount of money. The partners teaching the training session were making what still seems to me an unbelievably large amount of money, and as a junior lawyer I had some ambition to become one of them. Everyone in that room was on a straight path to making a lot of money in a respectable way. What was the point of insider trading?

The typical story of M&A lawyer insider trading is that the lawyer tells his buddy about an upcoming merger, the buddy trades on it, the buddy makes a nice profit, and the lawyer gets either nothing or a small thank-you gift (of cash) from the buddy. My firm was traumatized by a former partner who went to prison for an insider-trading scheme in which he made no money. It seemed to me, and to the partners teaching the training session, and to everyone else I have ever talked to about this, that it would be insane to throw away a respectable and lucrative career and go to prison to make, like, $20,000.

Is the explanation “you think you are smarter than everyone else and will get away with it”? Is the explanation “your buddy is really insistent and you can’t bear to let him down, so you give him some merger tips”? Is it “people who become M&A lawyers are adrenaline junkies and love danger”? (No.) Is it “people sometimes give themselves painful electric shocks just because that is an option that’s available to them”? 

Bloomberg’s Chris Dolmetsch reports:

Lawyers from top mergers and acquisitions firms provided tips on some of the biggest deals of the last decade to an insider trading ring that made tens of millions of dollars in illegal profits, federal prosecutors said.

Two indictments charging 30 people were unsealed Wednesday in federal court in Boston. None of the firms from whom information was allegedly stolen were identified by prosecutors, but detailed descriptions of the relevant deals indicate they included Wachtell Lipton Rosen & Katz, Latham & Watkins and Goodwin Procter.

According to the indictments, as well as a parallel suit filed by the Securities and Exchange Commission on Wednesday, Nicolo Nourafchan, a 2011 Yale Law School graduate who worked at three large firms, including Goodwin and Latham, from 2013 to 2023, misappropriated confidential deal information from those employers. He allegedly conspired with a college classmate, Robert Yadgarov, to recruit other corporate lawyers to provide tips.

Here are the announcements from the Justice Department and the SEC. The Justice Department says they made “tens of millions of dollars in illicit profits,” while the SEC has a chart (page 43) listing total profits of about $5.8 million. [2]  The lawyers involved didn’t do any trading in their own accounts, for obvious reasons. (They would have gotten caught immediately.) Instead, they allegedly tipped people who traded, and they got kickbacks (via Zelle?) from the people who traded. Sometimes the traders apparently paid under 1% of their profits to the tippers [3] ; other times they paid more than 50%. [4] The criminal indictment alleges that, between 2014 and 2019, one of the traders “made a stream of payments, including cash payments and other payments designed to conceal their nature, to or for the benefit of YADGAROV, totaling more than $6.3 million, some of which YADGAROV then paid to or for the benefit of sources of the MNPI, including NOURAFCHAN.” As M&A lawyer insider trading schemes go, this one was pretty high-dollar. Latham partners made an average of $8.7 million last year, though, and rarely go to prison, though it’s hard to make partner. Still seems like a bad trade.

Anyway there are various funny quotes in the SEC complaint and the two criminal indictments, as these guys mostly communicated in code but sometimes slipped:

Beginning on or about June 16, 2022, and continuing through on or about July 8, 2022, SILVERSTEIN and S. FENSTERSZAUB exchanged the following messages:

S. FENSTERSZAUB: We cannot miss this boat!!

S. FENSTERSZAUB: How's the rabbi??

SILVERSTEIN: He's stable

S. FENSTERSZAUB: Is he still scheduled for surgery?

SILVERSTEIN: We are still waiting for the Dr to check if it's still needed

S. FENSTERSZAUB: Now I'm confused and worried at the same time

...

S. FENSTERSZAUB: Find out if we should bail

S. FENSTERSZAUB: So what should I advise ppl

SILVERSTEIN: Are they even

S. FENSTERSZAUB: I could find out but based on the current price I would assume so

SILVERSTEIN: So pull. But we might go back at it shortly.

S. FENSTERSZAUB: I have to remember to tell people tomorrow. Had the deal died? Or can we still be hopeful? Any way to find out

“Has the deal — I mean, the rabbi — died?” Ah well. (Later: “We need that damn rebbe already,” just a good line.) Also this is not a great look:

In late August of 2020, Nourafchan followed up with Silverstein to obtain a kickback for the insider trading tip Nourafchan had provided to Silverstein regarding the acquisition of Momenta. On August 26, 2020, Nourafchan messaged Silverstein: “Call me bro. You can run but you can’t hide. ...” Silverstein responded: “Haha. Give me 20,” to which Nourafchan replied: “to life[.]” Silverstein then responded: “I hope not[.]”

Don’t joke about your potential prison sentence when you are texting about crimes! They’ll definitely quote that in your indictment.

Hear me out:

Blue Owl Capital is preparing to launch a debut credit secondaries strategy and is in early-stage talks with prospective investors for the fund, according to a person familiar with the matter. ...

The bustling private credit-secondary market allows investors to buy or sell stakes in private-asset funds, often at a discount. …

Blue Owl Capital Co-Chief Executive Officer Marc Lipschultz endorsed the secondaries market in August as a “great business to be had being a really thoughtful buyer when you have more sellers today than you’ve ever had in the past.”

Blue Owl runs a publicly traded business development company — essentially a listed private credit fund — that trades at a discount to net asset value. It also runs several non-traded business development companies. Those don’t trade, and so can’t trade at a discount, but they have faced a lot of withdrawal requests, and Blue Owl has limited redemptions. Boaz Weinstein’s Saba Capital Management has been trying to buy some of those BDCs’ shares at big discounts, on the theory that (1) shareholders of these funds want their money back, (2) they can’t get all of it back right away, and (3) some of them might prefer 65 cents today to 100 cents in the indefinite future. (This theory has not really worked out so far, but he’s working on other tenders, so who knows.) I have suggested that this situation is annoying for Blue Owl and other big private credit firms in the same boat: They think their assets are good, their investors are rushing to sell them, but for legal and other reasons they can’t buy them back at a discount. Blue Owl’s non-traded BDCs can only redeem shares at net asset value, not at a discount.

But if Blue Owl raises a separate secondaries fund, could it buy shares of Blue Owl’s non-traded BDCs at a discount? Get a good deal for Blue Owl’s more optimistic clients, while providing desirable liquidity to its more panicked clients? Give everyone what they want? Or, for that matter, buy shares of other private credit managers’ BDCs at a discount? I wrote in March:

A very funny trade would be if Blackstone tendered for some Blue Owl BDCs at a discount, and Blue Owl tendered for some Blackstone BDCs at a discount, but it is not hard to see why that won’t happen.

But we’re getting a little closer!

(Disclosure: I own a little bit of a Blue Owl non-traded BDC, not the one that Weinstein bid for but another one that he’s planning to bid for.)

Private credit firms raise money from long-term investors and use that money to make loans to businesses; they also borrow from banks to get more money to lend to businesses. A private credit fund might raise $100 from investors, borrow another $100 from banks, and make $200 of loans. I have argued that:

1. Private credit firms, with their long-term locked-up funds, are structurally less risky than banks, with their deposit funding.
2. Of course the banks are taking some risk on private credit — in my example, half the money for the private credit loans comes from banks — but they are taking the senior risk. “The banks are re-tranching.” If some of those loans go bad, the private credit fund’s long-term investors take the first $100 of losses; the bank only loses money if the loans lose more than 50% of their value.

In the abstract, there are two ways you could imagine this sort of “re-tranching” working:

1. A private credit firm might raise a $5 billion fund, borrow another $5 billion from a bank, and make $10 billion of loans. The bank lends against the fund, and has all of the fund’s loans as collateral. If some of the loans default, the fund takes the losses, up to $5 billion. The bank only loses money if the fund has more than $5 billion of total losses.
2. A private credit firm might raise a $5 billion fund, and then negotiate with 50 borrowers to make 50 loans, each for $200 million. Each loan is funded with $100 million from the private credit fund and $100 million borrowed from a bank. The bank lends against each loan, and has one private-credit loan as collateral for each of its loans. If any individual loan goes to zero, the bank loses $100 million, even if the other 49 loans are fine.

That is: In the first model, the bank gets the benefit not only of seniority (the private credit fund takes the first loss) but also diversification (its collateral is a bunch of different loans). In the second model, the bank makes a series of individual bets, and if one of them doesn’t work out it loses money.

In general the first, diversified model seems to be the norm, but there are exceptions. Here’s this:

HSBC has taken a $400mn “fraud-related” charge tied to collapsed UK mortgage lender Market Financial Solutions, hitting quarterly profits at Europe’s biggest bank and sending its shares down more than 5 per cent.

The bank said on Tuesday that it had “indirect exposure” through a financial sponsor, which people familiar with the matter identified as Apollo’s asset-backed lending unit Atlas SP.

“We have an exposure to a financial sponsor who has an exposure to the company,” HSBC’s chief financial officer Pam Kaur said on a media call, without naming the group.

Here are HSBC’s earnings release and investor presentation. “A $0.4bn fraud-related, secondary, securitisation exposure with a financial sponsor in the UK,” is how it describes the loss in the earnings release. And the presentation describes HSBC’s private markets exposure, including “Securitisation financing”:

Private securitisation facilities backed by portfolios of receivables, including mortgages, consumers loans, auto loans, equipment finance and SME loans.

Transactions that include equity from larger financial sponsor clients

Senior non-recourse lending against diverse portfolios of receivables

The Financial Times explains:

Atlas funds held £1bn of debt across two lending vehicles created by MFS, according to insolvency documents. But the firm stated that its net economic exposure was £400mn. A person familiar with the exposure said the lower figure took account of risk transferred to other parties. 

HSBC had funded 80 per cent of the value of the loans in the SPV tied to MFS, with the rest coming from Atlas itself, according to people familiar with the matter. Lending 60 to 70 per cent of a portfolio’s loan value would be more typical in the sector, according to people familiar with the matter.

That is: What happened here is not that Atlas SP raised a big fund and made a lot of loans to a lot of borrowers and got some fund financing from HSBC. What happened here is that Atlas made a loan to MFS, and got financing against just that loan from HSBC. When the loan to MFS turned out to be more or less worthless, and allegedly fraudulent, HSBC lost money. “Because an MFS unit allegedly double-pledged its collateral, there may be little for HSBC and the other lenders to recover in the insolvency,” says the Wall Street Journal. HSBC didn’t get any diversification. (It also didn’t get that much seniority, lending at an 80% loan-to-value ratio.) 

Though you could characterize things differently. “Senior non-recourse lending against diverse portfolios of receivables,” HSBC says. HSBC was, in some sense, financing a diverse portfolio of loans — “around 525 property loans,” says the Journal — rather than a single loan. It’s just that the diverse portfolio of loans were made by MFS, and the risk was not so much “some of MFS’s borrowers might not pay back their mortgages” but rather “MFS might be a fraud.” It was a three-level transaction:

1. MFS made mortgage loans.
2. Atlas SP loaned MFS money against those mortgages.
3. HSBC loaned Atlas money against its MFS loan.

Diversified at the MFS level, but not at the Atlas level: HSBC was backing one private-credit loan against one borrower that turned out to be bad.

This is reminiscent of other recent credit problems, which have often had a similar three-level structure. Some company is in the business of lending money to people to buy houses or commercial property or structured settlements or cars or car parts. That company itself borrows some of the money from private credit firms, which in turn borrow some of the money from banks. The private credit firm, and the banks, think of their investment as essentially diversified: “I am lending against 525 loans to different borrowers secured by different properties,” “I am lending against thousands of separate receivables from a diversified group of auto retailers,” etc., rather than “I am putting all of my money into one company that might steal it.”

We talked last year about First Brands Group Inc., the car-parts lender, which also went bankrupt amid accusations of double-pledging; one Jefferies fund had a quarter of its money in First Brands receivables. If you sit down and ask “should I put a quarter of my loan fund into one borrower,” you’ll probably answer “no.” But if you sit down and ask “should I put 0.01% of my loan fund into each of these 2,500 receivables from retailers like AutoZone and Walmart,” you might think “ah that’s fine.” But if the receivables are fake or double-pledged, it’s not fine.

Crudely speaking, the way the banking system works is that everyone puts their money in banks, but the banks don’t have all the money. They lend it out, and if everyone asked for all their money back at once, (1) they wouldn’t get it, (2) the banks would fail and (3) there would be widespread general disaster. This used to happen, occasionally, and it was bad; people have learned from the experience. Now we have stuff like central banks and deposit insurance and swap lines to prevent it from happening.

More broadly, we have a banking system that knows this. At some level, if you run a bank and your biggest competitor fails, that might be good for you: You can buy their assets cheap, you can grab some market share, etc. But mostly it is terrible for you, because it is hugely beneficial for any particular bank that people trust banks generally. You can be like “sure those guys failed because they took dumb risks, but we have careful risk management and a fortress balance sheet so we would never fail.” But that is fundamentally wrong. You are a bank; ultimately you depend on confidence. Confidence is not zero-sum. The more confident people are in your competitors, the better off you are.

And so a big robust bank will sometimes step in to rescue a small collapsing bank, partly out of altruism and partly out of straightforward desire to own its good businesses, but also partly out of collective self-interest. It is good for banks if other banks don’t fail.

You might expect the crypto industry not to have quite this problem, because crypto was built in part in reaction against leveraged fractional reserve banking and trusted intermediaries, and in theory there is no reason that everyone couldn’t take their crypto out of a crypto exchange at once. In practice:

1. The crypto industry fully recreated banking, and now consists largely of levered firms that really would collapse if there was a bank run; and
2. Not to be rude, but, it’s crypto? It also depends on confidence: Each token is valuable because people have confidence in it, and can go to zero if that changes. 

A few weeks ago hackers stole a bunch of crypto, deposited it on decentralized finance lending platform Aave, used it as collateral to withdraw a bunch of other crypto from Aave, and left a huge gap in Aave’s balance sheet. This caused a run on Aave for normal bank-run reasons (holes in balance sheets are bad). And then the rest of crypto stepped in to help. The Financial Times reports:

On April 18, North Korean-linked hackers stole roughly $290mn worth of a token linked to a coin called ethereum from KelpDAO, a venue that allows users to earn higher rewards by lending their tokens without locking them up. Thieves used that as collateral to borrow from Aave.

The ploy left Aave with up to $230mn in bad debts and led high-profile crypto figures, including the co-founder of Ethereum Joseph Lubin and crypto billionaire Justin Sun, as well as infrastructure companies LayerZero and Mantle, to orchestrate a recovery in order to prevent a cascading crisis. 

Stani Kulechov, founder and chief executive of Aave, said the sector suffered “a substantial stress test”, adding that the bailout “was about restoring the whole state of DeFi, avoid[ing] contagion and ensuring that the whole ecosystem overcome[s] this incident, not solely Aave”.

That’s the nice way to put it. Here is the equally correct — honestly synonymous — other way to put it:

The bailout revealed these companies are “feigning decentralisation”, said Adam Morgan McCarthy, senior research analyst at crypto analytics company Kaiko.

“It’s realistically 12 to 20 men who have been in crypto for 20 years who have a vested interest in keeping each other’s thing alive so the price of theirs doesn’t go down,” he added.

Right I mean the bull case for crypto is “enough people have a vested interest in keeping the price up that it will stay up,” but that’s sort of the bull case for all of finance, all of society really.

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