The Sovereign Debt Reminiscences Edition

Summary

Podcast Summary: Slate Money – "The Sovereign Debt Reminiscences Edition" (April 14, 2018)

Episode Overview

In this "super nerdy" edition of Slate Money, host Felix Salmon is joined by Anna Szymanski and special guest Matt Levine (noted Bloomberg View columnist and financial expert). The trio dives deep into the world of business and finance, focusing on U.S. sanctions on Russian companies, the economics of law versus banking careers, and the mechanics and manipulation of credit default swaps (CDS). The tone is lively, intellectual, and sometimes tongue-in-cheek, with banter between the financially savvy hosts.

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Key Discussion Points

1. U.S. Sanctions on Russian Companies—The Rusal Case

[01:30 – 13:11]

• What is Rusal and Why Does It Matter?

  • Rusal (often mispronounced "Rusel" by Felix) is one of the world's largest aluminum producers and is now subject to strict new U.S. sanctions.
  • These sanctions go far beyond previous measures—unlike before, they target not only individuals but entire companies, and apply to both new and secondary market trading.

  "This means that US holders of Rusal debt or equity have to divest. And that’s why this is a bit more significant." — Anna, [03:45]

• Market Shockwaves

  • The sanctions also impact non-US financial institutions (e.g., Euroclear, Clearstream) that form the "plumbing" of global debt trading.
  • These organizations refuse to process payments connected to Rusal, risking technical bond defaults—even if the company wants, and is able, to pay.

  "We have the willingness to pay and we have all of the money... but it looks likely that we're going to have what a series of significant bond defaults out of Russia now possibly." — Felix, [05:17]

  • The compounded effect: possible supply chain disruptions (especially in aluminum and alumina), spooked investors, and fears of knock-on sanctions affecting more Russian or state-connected companies.

  "[Rusal] is outside of China the biggest supplier of aluminum... If all of a sudden you have a tremendous amount of supply that's being taken off the market... prices will rise." — Anna, [06:24]

  • The London Metals Exchange (LME), which typically sources a significant portion of its aluminum from Rusal, faces sourcing challenges as Rusal is blacklisted.

• Wider Implications

  • Concern spreads that any Russian company, or even the sovereign itself, could be the next target.
  • The tone is wary about the Trump administration’s uncoordinated approach with the EU, potentially aggravating economic and geopolitical tensions.

  "If you don't want to take the risk of Donald Trump waking up one morning and imposing some new sanctions... you just kind of say, that's a don't touch this country." — Felix, [08:52]

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2. The Law vs. Banking Career Track

[13:11 – 28:45]

• Matt Levine's Career Arc

  • Matt recounts his journey: law school → big law firm (Wachtell, Lipton, Rosen & Katz) → investment banker at Goldman Sachs → financial columnist/blogger.
  • Discussion of perennial status differences and the stereotype that bankers boss lawyers around, especially during deals.

  "The bankers all really desperately want to believe... senior partners at law firms take orders from the junior analysts at banks. It's a very important part of the banker's self-esteem. There's truth to that..." — Matt, [14:17]

• Who Makes More, and Why?

  • Bankers are compensated based on risk and deals completed, leading to higher, variable earnings; lawyers, traditionally, receive steady hourly rates, regardless of outcome.
  • The rise of big bonuses and "eat what you kill" culture in some law firms is eroding the traditional, lockstep salary model.

  "Law has never been a bonus culture... It’s not at all the approach that banking takes, and it’s increasingly not the approach that law firms take with partners." — Matt, [19:01]

  "Eat what you kill... just like, you would not hear that phrase spoken without a large amount of distaste in an august institution like Cravath, Swain and Moore." — Felix, [19:52]

• The 'Value of the Seat' vs. the 'Value of the Person'

  • The top law firms’ profitability often rests on their brand equity, not just the performance of individual rainmakers; this enables the lockstep system.
  • There’s debate about how much law firms need “the best talent,” or whether the institutional seat (firm reputation) brings in business regardless.

  "If you're the government bond trader at Goldman Sachs, you're going to make a lot of money. And it's not because you're a genius. It's because you're trading government bonds at Goldman Sachs ..." — Matt, [23:34]

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3. Credit Default Swaps & Manufactured Defaults—The Hovnanian Saga

[29:01 – 38:53]

• What Happened with Hovnanian?

  • Hovnanian, a junk-rated homebuilder, executed a complex bond transaction with GSO (part of Blackstone): refinancing, buying back some of its own bonds (via a subsidiary), then defaulting—deliberately—on those held internally.
  • This manufactured default triggers CDS payouts, benefiting GSO, who held CDS protection.

  "They’ve manufactured just enough of a default on their debt not to piss off any of their bondholders, but enough to trigger this credit default swap, which means that these credit default swaps will pay off." — Matt, [29:58]

• The CDS Market: Gameable Loopholes

  • This isn’t the first time these mechanics have been exploited; previous examples discussed include the Spanish company Codere and concerns during the Greek financial crisis.
  • The group speculates on how such loopholes undermine trust in CDS as genuine hedges, prompting ISDA (the derivatives trade association) to look at fixes; but patching these contract games is challenging.

  "If you see a bunch of these, then you’re just much less confident in buying CDS or in writing CDS as the investment it’s meant to be..." — Matt, [37:12]

  • Matt notes there may be real-world marginal benefits (easier financing for struggling companies) but warns about the wider market integrity risk.

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4. Numbers Round: Geopolitics, Tax Bills, and Trading Glitches

[38:57 – 45:27]

• Felix's Number: $1 Billion

  • John Paulson, famous for shorting subprime before 2008, now pays $1.5 billion in deferred income tax due to a closed loophole.
  • Quip: IRS can’t accept $100 million checks, so he’ll write at least 11.

  "It’s an impressively large income tax bill. The Wall Street Journal story about it mentioned that the IRS won't take checks for $100 million or more..." — Matt, [40:54]

• Anna's Number: $11 Billion

  • Saudi Arabia rushed an $11B bond issue, likely to pre-empt a Qatari issue—an example of regional geopolitics bleeding into sovereign debt markets.

  "It’s more to me just like, like a kind of jerk move." — Anna, [42:18]

• Matt's Number: 37

  • Samsung Securities mistakenly gives employees massive stock dividends (by a factor of 38,000x), which some sell in the 37 minutes before the error is fixed. The "ghost shares" are later "poofed" away.

  "If you came to work, you were expecting to get $100 dividend on your shares, you got a $3.8 million dividend on your shares. 37 minutes is the number of minutes between when they did this and when they stopped it." — Matt, [43:08]

  • Bids for a blockchain solution discussed, with humor on money in pockets or casino chips.

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Memorable Quotes & Moments

• “This is going to be a super nerdy edition of Slate Money. It’s going to be loads of fun…” — Felix [00:39]
• “We have the willingness to pay and we have all of the money, but... it's likely... we'll have significant bond defaults out of Russia.” — Felix [05:17]
• “Eat what you kill... you would not hear that phrase spoken without a large amount of distaste in an august institution like Cravath, Swain and Moore.” — Felix [19:52]
• "They've manufactured just enough of a default on their debt... to trigger this credit default swap." — Matt [29:58]
• “If you see a bunch of these [engineered defaults]... then you’re much less confident in buying or writing CDS as the investment it’s meant to be...” — Matt [37:12]
• "If you came to work... expecting to get $100 dividend, you got a $3.8 million dividend... 37 minutes between when they did this and when they stopped it." — Matt [43:08]

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Timestamps for Key Segments

• U.S. Sanctions on Rusal / Russian Markets & Global Impact: [01:30–13:11]
• Law vs. Banking: Status, Pay, and Career Culture: [13:11–28:45]
• Credit Default Swaps and Hovnanian's Manufactured Default: [29:01–38:53]
• Numbers Round (Paulson tax, Saudi bond, Samsung ghost shares): [38:57–45:27]

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Tone and Closing

The episode delivered its "super nerdy" promise, blending wit, historical finance knowledge, contemporary events, and incisive analysis. If you’re interested in the intersection of global finance, regulatory mechanics, and the sometimes bizarre market outcomes, this episode is a must-listen—though probably best appreciated by fellow "finance nerds."

Transcript

[A]

The following podcast contains explicit language.

[B]

Hello, and welcome to the Sovereign Debt Reminiscences edition of Slate Money, your guide to the business and finance news of the week. It is a very, very special week this week because we have not only Anna Shymowski and myself, Felix Hammond, talking about things, but we have managed to rope in the one and only Matt Levine. Hello, Matt.

[A]

Hey, Felix.

[B]

Matt writes the world's best newsletter for Bloomberg View, and Matt knows everything there is to know about being a lawyer, being a banker, credit default swaps and all these, and, oh, and also overnight financing rates. This is going to be a super nerdy edition of Slate Money. It's going to be loads of fun and we are going to talk about all of this stuff and we're going to ask Matt just how much money he could possibly have made had he stayed a lawyer instead of becoming a journalist. And Matt is going to tell us in Slate plus all about overnight financing rates. And we are, Matt, are we not in a post Libor era now? Kind of.

[A]

Not really. We're at the beginning of the end of the Libor era, beginning of the post Libor era.

[B]

This is gonna be. There's gonna be like a whole new libel. We're gonna talk about that in Slate Plus. That's coming up in a minute. But before we do that, we are going to talk about Russian aluminium companies. Yes, Anna Shymansky, what has happened to Rusel? And what is Rusel? And why should I care about Rusel?

[C]

Well, it's Rusal.

[B]

Rusal. Yes, my Russian pronunciation.

[A]

Also aluminum. I know, we're never gonna.

[B]

Yeah, okay. So it's either either Rusel is an aluminium company or Rusal is an aluminum company or something like that. Either way, it seems to have wound up on the sanctions list.

[C]

Yes, and this is a much more significant sanction than previous U.S. sanctions that have come down. So if we're looking at where Russia was a little over a week ago, the Russian markets, they weren't so bad. You know, ruble was fairly stable. The many of the companies are being helped by higher commodity prices. But then you had U.S. sanctions come down and U.S. sanctions that it appears were significantly more strict than the market thought. And one of the biggest companies or the biggest company that was involved is this massive aluminum company called Rusal.

[B]

So, weirdly, just to make this clear, for those of us who haven't been following along in great detail, Vladimir Putin's best friend, Donald Trump is being much harsher on Russia than Obama ever was.

[C]

Yes. And there, for two reasons, is why these sanctions are actually much more significant. One is that it is involving not only individuals associated with important Russian companies, but the companies themselves. And this is important because this is now affecting not only new issuances, but secondary market trading. Why this is important is previous sanctions, if they sanctioned like spare bank, you could still trade spare bank equity. You just couldn't be involved in a new issuance of spare bank. This is different. This means that US holders of Rusal debt or equity have to divest. And that's why this is a bit more significant.

[B]

And it doesn't just affect US Holders, it also affects. And this is where we're going to really start getting nerdy. And this is going to be a nerdy issue of Slate Money, Matt, and my favorite two companies in the world, Euro Clear and Clear Stream, that you. If you know Euro Clear and Clear Stream, you're like, you're a financial nerd. And if you're like, who on earth. Wait, what? Then you're a normal person. Matt, who are Euroclear and Clearstream?

[A]

I'm not sure I could tell the difference between them, but they're clearing companies that if you trade debt of companies in Europe, they are the sort of plumbing that keeps the debt for you, essentially. And so that moves the money around.

[B]

Basically, if you receive a bond coupon on any kind of global bond, there is a pretty much 100% chance that bond coupon is going to go through one. And they're both Belgian, right? I think, yeah, one of these Belgian companies. And these Belgian companies are saying, well, America has put sanctions on Russell, Spare bank, whoever. We're not going to deal with that company. Which means that they can't pay bond coupons.

[C]

Yes, because the language of these sanctions included, language that would affect, you know, not only these clearing companies, but a lot of foreign banks in general that they can't engage in significant transactions with, with Roussal. So, yes, you're correct. Roussal is not going to be able to right now. It looks very hard for them to pay their, like, dollar coupon on their Eurobond.

[B]

So this reminds me, and I'm sure, Matt, as well, of nothing so much as the famous Judge Grise injunction on Argentina, which, which, you know, we have talked about many times on Slate Money, where a federal judge basically enjoined Americans and Euroclear and Clearstream and everyone else from clearing coupons that the debtor wanted to make. And we have exactly the same situation here. We have the willingness to pay and we have all of the money, presumably the Cash flows which make it possible to make the coupon payment. But it looks likely that we're going to have what a series of significant bond defaults out of Russia now possibly.

[C]

And Rusal is a blue chip Russian company. This is a company that is highly integrated into the global commodities market and a lot of EM investors are going to be holding Rusal. So this is a much bigger deal than. This is why this is a much bigger deal with, than previous sanctions. And it also suggests that the US is looking at sanctioning companies that are not just kind of small offshoots, but that companies that could actually impact U.S. investors.

[A]

So if you Rusal do hand bondholders envelopes of rubles in Moscow.

[C]

So there was one thought about them trying to pay in euros because they're not using the dollar system but the banks aren't going to clear it. So it'll be interesting to see what happens. I think previously when you've had sanctions, what ends up happening is the companies kind of rely on the Russian state to help them in different ways. I don't know if they're gonna be able to make these coupon payments. I really don't understand that, how that's going to work. But I do think that that's actually not the biggest story when you're talking about Rusal and why this is important. I mean, I think the two slightly bigger stories are the fact that Rusal is outside of China the biggest supplier of aluminum. And we're already talking about a market, at least in the US where manufacturers that use aluminum are going to be dealing with higher prices because of the tariffs. And now they could be looking at significantly higher prices. If all of a sudden you have a tremendous amount of supply that's being taken off the market, it will probably find its way through Asian markets, but it's not going to be as frictionless as it would have.

[A]

So if I see another aluminum tariff, right. It's like it's in addition to being a Russia sanction, it's, it's a sort of aluminum.

[C]

It is, yeah. That is most, most going to affect us.

[B]

So if I'm Boeing, say and I buy a lot of aluminum then now and I'm putting out a request for aluminum companies to supply me aluminum, I'm no longer allowed to accept aluminum from Russell, I have to accept it from someone else. And so now all of the other aluminum companies are no longer competing with Rusal and they can raise their prices accordingly.

[C]

And what's also interesting is the LME London Mercantile Exchange, like a Third of the aluminum that they would normally have on their markets is from Rusal. And they've now said they're not taking Rusal. So that's a big deal as well, because now they're going to have to be sourcing that from other companies.

[B]

So the wonderful seamless global fungibility of financial market seems to be falling apart at the seams.

[C]

Well, and I think what's important here is that, as I probably keep kind of reiterating is that Rusol is a major company and I think this is spooking a lot of investors to think if they're, they're potentially targeting Rusal, then any commodity producer in Russia could be at risk because you are not a big Russian company or without ties to the state, whether they're official or unofficial.

[B]

Or for that matter, any Russian company.

[C]

Yes.

[B]

Or even potentially the Russian sovereign.

[C]

Yes.

[B]

So, yeah. So basically, if you don't want to take the risk of Donald Trump waking up one morning and imposing some new sanctions for whatever reason, then you get out of Russia and you try and effectively, what you do is you just kind of say, that's just a don't touch this country kind of country for the time being, for the foreseeable future.

[C]

Correct. I think that this is interesting because the last time we had major sanctions on Russia, Russia was actually in a worse place in terms of, you know, their reserves and in terms of inflation and a number of other things, and frankly, because oil prices were declining. So Russia is actually better positioned now, but they could actually be hurt a little bit more by this because under previous sanctions, many investors could actually make a decent amount of money by continuing to invest in Russia while all of this was going on because a lot of investors were pulling out because there wasn't necessarily the threat that these, that secondary market trading was going to be sanctioned. Now that that threat exists for not just Rusal, but for potentially any Russian company that could have a more dramatic impact on Russia. Now, Russia is a small part of global economy, this is certainly true, but Russia is also very closely integrated to many EU manufacturers, Germany in particular. And I think this also just raises potential risks down the line. If we start to see the type of geopolitical tension that we've been seeing in this kind of heightening, then you could potentially have a company like. I mean, I think it's unlikely that you're ever going to get to like Gazprom because they supply like a third of the EU's gas. But, I mean, you're talking about Gazprom Rosneff, Lukoil. Like, these are companies that the EU relies on. So that's why this could eventually become a much bigger deal.

[B]

So how. How has Europe reacted to this?

[C]

I think right now it's been muted, although just doesn't appear that this was anticipated. And I would imagine, as I've said, at this point, I find it very hard to believe that any US administration would want to anger the EU as much as they probably would. However, I mean, from what we've seen, obviously with the uk, there is a lot of anger right now at Russia. And I don't think that means that, like, tourism is going to want to stop Europe from getting supplied by Gazprom. But I do think that there is at least a bigger risk right now in the commodities market than there was previously. I think previously it appeared a little bit more like this was just a lot of noise. This is real. So that does change things.

[A]

Yeah. I mean, the US did just effectively impose aluminum tariffs on Russian aluminum in Europe. Right?

[C]

It's true.

[A]

Which is a sort of.

[C]

No, it's true. And it's very likely that if things.

[A]

Bit of an assault on sovereignty. Right. Like to say that you have to pay more for aluminum.

[C]

No, I mean, it's true. And I mean, to a certain extent, that's the case with almost any set of sanctions that, I mean, normally. Although I will say sort of.

[A]

Right. Because, you know, it's a question of, like, how much the sanctions apply not just to US participants, but to, like, the financial system and how much they, like, flow to Europe.

[C]

Right, correct. And also previously, when the Obama administration was increasing sanctions, they were doing it along with the eu. It was very clear that they were doing it in, you know, they were not going to put through sanctions, even when the Congress wanted them to, that were stronger than what the EU wanted. I don't know if we're seeing that right now with the Trump administration.

[B]

We're not seeing, like, close coordination between. Between the House and Europe. European Union. Shocking.

[C]

Can I also just have one other little nerdy fact that we can probably move on? So, nerdy fact, Aluminum prices have increased. I think it's something like 10, 15%. But alumina with an A, prices have increased like 30%. That's actually like the powder you use to make aluminum. And why this is interesting is because aluminum, at least interesting to me, Aluminum, there actually was a lot of supply in the market. There was actually already not enough supply of alumina. So that means that that could actually kind of through and Be another thing to really increase prices. The reason that supply was low because there was this Brazilian company that had to shut down because of environmental issues. But the point is that this could be a, like a real issue for us manufacturers.

[B]

Okay, let's talk about lawyers. This is, this is the Put Matt Levine on the spot segment of Slate Money. Matt, you are a lawyer.

[A]

I was a lawyer for a year and a half at a big law firm. I've been a columnist for seven years. I was an investment banker for four years. But you go to law school, you go to a law firm for like a minute, it stays with you for the rest of your life.

[B]

It really does. When everyone says what percentage of members of Congress are lawyers or whatever, they're not actually lawyers, they're members of Congress, but they still count. Once you have a law degree, you are a lawyer. And you left law school and became a sort of big law lawyer. And then you left big law to become a banker at Goldman Sachs. We may have heard of them. And then you left Goldman Sachs to go become a blogger. Blogger, which is a very common career track, a natural career progression. But you know. But what. Tell me about the relative standing of lawyers and bankers and what they think of each other.

[A]

It's so hard. There's a stereotype where the bankers all really desperately want to believe this, that the senior partners at law firms take orders from the junior analysts at banks. It's a very important part of the banker's self esteem. There's truth to that. When you're working on a deal, you have a law firm that represents you. And the junior bankers will sort of be giving, will be often interacting with the law firm. But I worked at a nice law firm. I worked at Wachto, Lipton, Rosen and Katz, you may have heard of them. And we didn't have that. We just sort of were kind of parallel strategic advisors to the bankers. And we tried to be as important and central to the deal as the bankers were.

[B]

Were you hired by the companies or by the bank?

[A]

You were hired by the company representing principals. I think that bankers have this misconception because the bankers will hire law firms to represent the banks and then those law firms will in fact take orders from the banks. But in big time ma, the company will hire a bank and the company will hire a law firm or multiple banks. And multiple law firms will take advice from both of them and we'll see them as sort of potentially see them as equals in advising the company on different specialties.

[B]

And historically, is it fair to Say that the bankers have made more money than the lawyers.

[A]

Oh, yeah.

[B]

So why is that?

[A]

Well, just two sort of obvious reasons. One is that the banker's compensation is more at risk. Classically, lawyers bill by the hour. Bankers do not bill by the hour. They bill by the completed deal, typically a percentage of the amount of the completed deal. If you're a banker, you basically spend all your time running around and pitching deals and you execute a couple of deals and you have to get paid for all of the work that you spent pitching and all of the deals that you didn't get done. You have to get paid on the deals that you did. So you have just more volatility and more risk. And so you have to get paid more for the ones that actually go through. Lawyer. You work on a deal for six months and it doesn't go through. You just send them a bill for your hourly rate, which is $1,000 an hour. You might give them a discount, but you're still billing them a lot. That's one reason. The other reason is that this is not always true, but it is a pretty big part of big time MA right now and for the recent past is that banks have money and their money is often involved in the transaction. So they do financing of the mergers the companies have a bit more interest in. Companies need the banks a little more than the lawyers because they can dispense with advice, they can't dispense with money.

[B]

So in any case, the reason we are talking about this now is because there was this article in the FT about how the world of lawyers is becoming much less genteel than maybe it once was and a little bit more mercenary and that. And we started seeing rather large numbers being thrown around, like $10 million a year for lawyers, which sounds to me more like a pretty impressive income even for a banker.

[A]

Yeah. I mean, so this FT article starts with an anecdote about Scott Barchay, who's a big time mergers and acquisitions partner at Cravath, who left for Paul Weiss. Paul Weiss. And it starts with just some numbers. He brought in $100 million of fees to Cravath, advising on $300 billion of deals, which is like big numbers. He made like three basis points on his deals, which is a lot of money. But the bankers on those deals probably made 10 times that as their fee. So it's. He's doing well personally, but it's still. The banks still get paid more.

[B]

So you think that even if he's making $10 million a year at Paul Weiss he's still kind of being underpaid.

[A]

No, I mean, depends on how you count. Right. He brought in $100 million to Cravath. Right. So he got 10% of that.

[C]

Yeah. And we'd have to obviously know exactly what he was getting paid before. But I think part of the issue in this article was bringing up is that Corvath is one of these firms that has this kind of strict lockstep system where you're really only paid on seniority, and so you don't get the types of performance bonuses that you can now get at other firms like Paul Weiss.

[A]

Yeah. I mean, law has never been a bonus culture. You get bonuses, but it's not like your pay is based on your performance for that year and is highly variable and handed to you in the form of a bonus at the end of the year. When I was at a law firm, every associate who started in my class got the same bonus every year. So if you did a good job, you get the same bonus as you did a less good job. Which is great, by the way. It's great. It's really. They'll talk a big game about how it fosters camaraderie and teamwork and everything, but it really does. It's nice to not be competing against your. Your coworkers, but it's just not at all the approach that banking takes, and it's increasingly not the approach that law firms take with partners.

[B]

So now law firm partners, who used to just make a percentage of the profits as partners, as the word implies, are moving more towards this lovely phrase, eat what you kill, which it's just like, you would not hear that phrase spoken without a large amount of distaste in an august institution like Cravath, Swain and Moore.

[A]

Yeah, it's kind of gross, right? And it's like a law firm. So if you're like Cravath, right, you have M and A partners who bring in M and A deals, and they bring in tons and tons and tons of money. But to do an M and A deal, you need a tax lawyer who knows about M and A tax and who can get the sort of tax aspects of the transaction done. And that person isn't killing anything. That person is potentially. They're bringing in separately tax stuff that people want to. Companies will be like, oh, I need some tax stuff. And they'll go to the Carvath tax lawyer. But frequently the Carvath will be like, we need an M and a tax lawyer who can do the tax stuff on our MA deals. And that person's phone doesn't ring except when it's the M and a partner calling. You get sort of the sort of client facing ma people who bring in the deals, and then you get the people who actually kind of do the work and sort of make sure the lawyering gets done. So I was a lawyer, then I was a banker. And in banking, there are people whose job is basically to bring in deals, and then when the deal has been brought in, they just go away and someone else does the deal.

[B]

And do these people normally have a chairman title?

[A]

Yeah, but even kind of like, yeah, the guy named chairman is there to schmooze with clients. But even kind of lower down, there are people who. A lot of the work of executing deals is done by relatively junior people. And the senior people spend a lot more time trying to find the next deal. In law, there's much more of a culture of a senior lawyer is doing law stuff is actually giving legal advice. They're not necessarily drafting the merger agreement, but they're trying to give law advice on the deal. That is happening. But that culture has changed too, and it's much more commercial.

[B]

Have we reached a point at which senior lawyers pitch deals in the way that bankers do?

[A]

They don't pitch deals in the sense of like, I mean, not usually. They don't pitch deals in the sense of going to a company and saying, you should do this deal. But they conceive of their job as being bringing in business more than doing legal advice or giving legal advice.

[C]

And I do think there's a.

[A]

They're pitching themselves.

[B]

Well, I mean.

[C]

Okay. Yeah. And I would say that there is a spectrum between the, like, really old school, pure lockstep and full just eat what you kill. I mean, I do think a lot of firms now are kind of in the middle where there is still a bit of that former structure. But there is also a sense of if you do have certain lawyers who are just bringing in a lot more revenue, it does seem like it makes sense that they should be paid a little bit more.

[A]

Yeah. I mean, the other thing is that if you notice the lockstep firms are the most profitable firms for the most part. And there's a.

[B]

What's the causality there?

[A]

Well, they are. They're lockstep because they're profitable.

[B]

Okay. And explain that. What is it about profitability which causes lockstep?

[A]

Well, so there is a bit of causality both ways. I mean, what is it about profitability that causes lockstep is people complain less if they're getting paid a lot, right? You can keep a star partner, not every star partner, but you can keep most of your star partners if they're just getting paid more than they would be getting paid elsewhere, even if your less star partners are still getting paid more. The causality, it's not causality either way, but in finance you talk about the value of the seat versus the value of the person. If you're the government bond trader at Goldman Sachs, you're going to make a lot of money. And it's not because you're a genius. It's because you're trading government bonds at Goldman Sachs and just people need to trade with you. Being a partner at Kravath has some of that element too, where you're going to get credibility. You're going to be able to bring in clients because you say, I'm a partner at Kravath. The old school, or not even necessarily old school because Wachtel is relatively young, as these things go. But the big name blue chip firms have enough value in the seat that they can make the argument to their partners, look, you didn't bring in $100 million of business because you're a genius. You brought in $100 million of business because you sit at Cravath or Wachtel. So that helps keep the lockstep culture. And then you have the sort of, these firms are old and they have, they can say the august tradition of Cravath is what brings people in. And that august tradition includes being lockstep.

[B]

I have to say I like the idea of an august tradition. I like the idea of, of. I mean, since we're obviously in, you know, sovereign debt reminiscence mode this week. I like the idea that you can have someone like Lee Bukai to Cleary Gottlieb who just kind of writes interesting, awesomely fabulous things on, you know, in public. And I don't know how much business he brings in, you know. Yeah, he's been around forever. I'm sure he makes lots of money.

[A]

In investment banking there's this nostalgia for the days when it was more of a profession of advising trusted clients whom you've known forever and less of a mercenary public company run business. Having gone from a lot of banking law is more like that. The bankers miss that or some of the more senior bankers miss that and wish they were back in the days of private partnerships. The law firms are private partnerships and some of them want to be more mercenary and commercial and kind of public.

[C]

Company like and also want to continue to be able to attract talent that if you have, you know, people considering what direction they're going to go in and you're looking at compensation. And yes, although it's true that you're almost always going to make more money in investment banking than you are in law, there is still, there is still a range. And you.

[A]

That's not true, by the way.

[C]

Well, I mean, that's true. I mean, I guess you're true. That's. You are correct about that.

[A]

And there is just less, less variance in law.

[B]

Right.

[A]

Like you can, you can do quite well and you keep doing quite well and it's less.

[B]

And there's certainly no shortage of people who are capable of doing those law jobs.

[C]

It's true. I'm just saying that if you're thinking about attracting the best talent now, you have, you know, a few different paths people are considering. I mean, also, obviously, like consulting, tech, finance, law.

[B]

But I don't.

[C]

But wait, wait.

[B]

I mean, I want to stop and just interrogate this a little bit. Why is it important, you know, this, this, this idea of attracting the best talent and the idea that you want the very best talent to be at your law firm, you know, in, in a sort of ultra competitive way. I think that's exactly what Madmeyer talking about. In this kind of more genteel old world, that it's not actually necessary in a world where the value of the seat is so high to attract the very best talent. You can have just. There's a lot of extremely good people and you can pick them more or less at random. It doesn't matter if you pick the very best and you will be fine.

[A]

I don't think they see it that way.

[C]

Yeah, no, I mean, I'm sorry, they.

[A]

Might see it that way commercially, but like, you know, they're in this intellectual profession where they have to come to work every day. They want to be able to say and think and believe that they hang out with like the very smartest people and not with like some schmo who can do a deal.

[C]

Yeah, I would just say that I don't think that there's no difference in talent between one lawyer or another. I do think that it is probably true that a lot of these firms that are trying to attract like stars are probably going to end up overpaying because I think, as you say, the seat probably generated a lot of those fees, not just the person. And yes, that's probably true. But I think right now when you're looking at law firms, banks, whatever, that want to be the most competitive. I do think part of that is who they have on staff. I think that that matters. And I think that there is not a just limitless pool of individuals who have the skill set to do all of these jobs. And so if you're looking where I'm going to be spending, you know, 90 to 100 hours in this role, I'm just spending 90 to 100 hours in this role. Which one am I probably going to do a little bit better in? If law firms can't compete by offering, you know, bigger bonuses, they're going to be at a disadvantage.

[A]

I miss them. I miss banking for a minute, but law is nice.

[B]

Okay, so this is the moment we've all been waiting for. Matt, how do you pronounce this company? Hoven.

[A]

I pronounce it Hovenanian, which I think is about right.

[B]

Hovenanian. Okay. All right, tell us the saga of Hovnanian.

[A]

Hovnanian is a company. They build homes and they're kind of a mediocre credit. They're junk rated. They're like triple C rated kind of company. They have some bonds, they have a lot of bonds. Some of them are due pretty soon. They're facing a little pressure on refinancing their bonds. They are refinancing those bonds in this weird way where they're getting a lot of money from a company called gso, which is part of Blackstone Group. And they are exchanging some bonds, doing some stuff, but they're also buying back a few of their bonds and putting them in a subsidiary of Hovindian. And then they're defaulting on those bonds. They're just not going to pay interest on those bonds to their own subsidiary, to their own subsidiary.

[B]

The left hand refuses to make a payment to the right hand.

[A]

And they've not only refused, they've signed a contract with GSO or they've signed a commitment to. To not pay those bonds which they owe to themselves. What that does is that it puts them in default, probably not on their other bond contracts, but it puts them in default for purposes of their credit default swaps that are outstanding on hovindanium, which are just derivatives that pay off if Hovnanian defaults on its debt. So they've manufactured just enough of a default on their debt not to piss off any of their bondholders, but enough to trigger this credit default swap, which means that these credit default swaps will pay off. It so happens that GSO owns a lot of these credit default swaps and will get paid off when they default. There's one more aspect of this that is by the way, GSO has been involved in trades like that before. There was one for a Spanish company called Codere that became famous enough that Jon Stewart talked about it a couple years ago. He was sort of horrified by this juice. I have done this stuff before. What's interesting in Hovnanian is that not only are they defaulting, but Hovnanian's bonds actually Hovnia has done a lot of financing in relatively recent times when they're in not great financial shape. All of their bonds have 10% coupons. All basically trade above 100 cents on the dollar. So the way CDS works is that you trigger it, you default or whatever and then there's like an auction. But basically it's like you get paid on your CDS $0.100 on the dollar minus whatever the bonds are worth. So if the bonds are worth like 40 because it's in default and it's a disaster, then you get paid 60 cents on the dollar.

[B]

So to just explain, there was a bond default by Fannie and Freddie during the financial crisis. They both defaulted on their bonds. Technically there was a technical default. Bondholders didn't get hurt in any way. There was a CDS auction. The CDS auction basically took place at par. And so basically no money changed hands and everyone kept on going happily so long as the bonds keep on trading at par. This is the idea behind why it shouldn't matter if Hovnanian refuses to make a payment from its left pocket to its right pocket so long as it's paying the rest of its debt and the rest of its debt is trading at par. No harm, no foul, right?

[A]

But what they did, what Hovninian did is they did some refinancing of their debt. They did some shuffling around and basically one thing they did is they offered if you have some of these old bonds you can exchange them for some new bonds and you get two different kinds of new bonds. You get one half of the other. One of them is a normal bond that's actually worth more than 100 cents on the dollar. The other one is this weird bond that has a very long term and pays 5% interest. If you plug that into the math, it's worth about 50 cents on the dollar. They've manufactured this new bond that's worth 50 cents on the dollar. You're fine if you do this because you get you in exchange for a package. So you get a bond that's worth more, you get a bond that's worth less, you get some cash, you're fine, but you have this bond that's worth less and then they default and then there's a CDS auction and then you go to the CDS auction and you're like, I have this bond that's worth 50 cents. The theory is you get paid 50 cents on the dollar in your CDS and you sort of make all this money even though the regular bonds are trading at par.

[B]

So this is GSO and Blackstone gaming the CDS system. And as you say, not for the first time, I remember vividly the Greek default because obviously this is the reminiscing about sovereign debt default edition of Slate Money.

[A]

And Greece had the opposite.

[B]

And what Greece did was they used these things called collective action clauses which basically they did a bond swap and they sucked in all of the old bonds which would have been trading at low prices and issued new bonds which could easily have been trading at par.

[A]

Right. They would suck in $100 worth of old bonds trading at 30 cents on the dollar and they'd give you back $30 worth of new bonds trading. Trading at par.

[B]

Yeah, exactly. And then, and then the people who bought credit protection were like, I need to get paid off on my insurance here. But they can't because the only bonds which are trading are trading at par. That was a worry in the end, more or less more by luck than judgment. It kind of worked out. But it does seem that something is kind of broken in the CDS world. And when the whole Greek thing happened, people including myself were saying, are people even going to still use CDS if this kind of craziness can happen? And evidently the answer is yes. I mean, who is rating single names, credit default swaps, if this kind of thing is even possible?

[C]

Well, it's a much smaller market now, obviously than it used to be. And I think this particular example is fascinating, but it's also a very small part of the market. And I don't know if I think that there's a huge risk that all of a sudden a lot of completely financially healthy companies are going to start engaging in opportunistic defaults to pay out CDS holders.

[A]

Yeah, but there's a range between completely financially healthy companies and kind of spivvy companies where the spivvy companies are the ones where you're buying a lot of CDS because you're worried about them. There's a lot of homebuilder cds, you're worried about them and then they're worrying and then someone pitches a deal to them and they cheat a little. To answer your question, who's writing the cds. Well we know Goldman is because they're constantly in these news articles about it and we know a company called Solis Capital is because they sued to try to block this deal. There's some other big banks are always intermediating these trends.

[B]

It's hard to feel sorry for people who write credit to full books.

[C]

Well, and this is the possible, this is the other issue is that I mean you're talking about like single name cds. This is a market of like only sophisticated investors. So it's really just you have essentially extremely wealthy individuals on both sides who are. One is trying to one up the other. I mean I'm not saying that I don't think this is sketchy and it's possible that ISDA will eventually change the CDS contracts but I don't think this is going to completely like throw the entire CDS market.

[A]

I think it's great. I love it, it's wonderful. I'm totally for people gaming it. I do think though that if you kind of take this case to its logical extreme then this is a way to manufacture, to change CDS from an instrument that pays off when a company defaults, pays off the amount of loss on the default to an instrument that pays off when a company wants it to and pays off as much as the company wants it to. So there it's like a very arbitrary instrument. And if you see a bunch of these and there have been like three of these, if you see a bunch of these then you're just much less confident in buying CDS or in writing CDS as the investment it's meant to be, which is some sort of credit investment. You can see why ISDA is in fact worried about it. ISDA is the agency, the trade group that figures out CDS terms. They're worried about it and they're trying to fix this. I think it's not obvious how to fix this. I think the first step that everyone's talking about is if you default on debt to yourself, that probably shouldn't count. So you fix that, you kind of get part of the way there. You'd fix this particular case but the broader case of how to figure out the gaming of how much the CDS pays off is a little harder.

[B]

In terms of the real world, like beyond the CDS world, it looks like probably the effects are positive. Right? I mean Hovnanian at the margin is getting slightly cheaper financing than it would otherwise be able to get as a result of CDS shenanigans.

[A]

Yeah, I mean the way I think about it is like if you write CDS on Hovnanian you're taking credit risk on Hovnanian, you're like investing in its credit, but you're not investing in its credit by lending it money, which is the normal way to invest in its credit. You're doing this weird zero sum derivative with some weird hedge fund. What GSO has done is find a way to transmute that zero sum side bet on Hovnanian's credit into actually lending to Hovnanian. So it is kind of like it's turning abstract finance into actual money for companies. That's kind of cool.

[B]

Win.

[C]

Yeah.

[B]

Okay, I think it's time for a numbers round. This is a rare. This is one of the rare times on Slate Money that we actually have a predetermined number. Normally the numbers come as a complete surprise to everyone else. But I am going to start off this numbers, numbers round by saying $1 billion, which is the amount of money that John Paulson, not particularly impressive hedge fund manager who's based on the Upper east side of New York, is going to have to pay an income tax this year. This is on top of half a billion dollars that he paid late last year. So call it $1.5 billion in taxes that he's paying 2017, 2018, 10 years after the financial crisis. Why is he paying so much income tax, you might ask? And the answer is because he made lots of income. No, in fact, his fund has been dreadful and it's been significantly negative for the past few years. The reason he's paying so much income tax is because he made a lot of money in 2008 when mortgage backed securities imploded. And somehow he's managed to defer all of that income until today and now it's coming due.

[C]

Yes, because it's. After that there was a loophole that allowed a lot of hedge funds that had money overseas and people got really upset about this after 2008. So then that loophole was closed. But as part of that, they had essentially a decade to pay this tax.

[B]

So, Matt, is this basically the final chapter of John Paulson? He has to pay a billion and a half dollars of income tax and then now we can just stop worrying about this guy anymore.

[A]

I don't think anyone's worried about his.

[B]

Income tax bill, but it's an impressively large income tax bill.

[A]

It's an impressively large income tax bill. The Wall Street Journal story about it mentioned that the IRS won't take checks for $100 million or more. And so if he's going to be paying it by check, which for Some reason he might want to do, he's going to have to write at least 10, I'd say at least 11. If it's really a billion dollars, the 11th could be just for 10 cents or whatever.

[C]

But he really should just write as many checks as he can.

[B]

Anna, what's your number?

[C]

So My number is 11 billion, I guess. Continuing with the sovereign debt theme, thought this was just kind of a slightly interesting story of kind of how geopolitics is perhaps factoring into sovereign debt. So Qatar is going to be coming forward with their own bond and Saudi Arabia appears to have tried to kind of front run them a little bit. So Saudi Arabia was going to be coming to market with a bond, but they really rushed it, apparently didn't have a roadshow and some people think so that they could come in front of Qatar. So the Saudi Arabia came to market with, it was like $11 billion, three different bonds, and now Qatar is going to be coming. Will it have a huge impact on pricing? No, probably won't. It's more to me just like, like a kind of jerk move.

[B]

So, so, but this. So basically Saudi Arabia rushes to market $11 billion of new debt just to sort of queer the pitch for Qatar, perhaps.

[C]

I mean, it's not as though they weren't going to come to market with this debt, but it does seem like maybe the timing was somewhat based on that. So I thought it was interesting.

[A]

Well, you know, Qatar is. Did you read the Ben Walsh article in the Intercept, I don't know, like six months or a year ago about these sort of buffoons who concocted a spy caper at which they were somehow going to mess with Qatar's CDS prices in order to somehow prevent it from hosting the World Cup. And it was like they had a pitch deck that included the phrase control the yield curve, control the future or something like that. It's really an astonishing, just dumb spy caper.

[C]

Yes. I think we actually talked about that when there was the kidnapping involving the.

[B]

Yeah, I'm telling you, man, all of the best finance stories come out of Doha. What's your number, Matt?

[A]

My number is 37, which is the number of minutes between when Samsung securities accidentally paid its employees. It was supposed to pay them a dividend of 1,000 won, which is about 94 cents per share that they owned. And someone pressed the wrong button and it paid them a dividend of 1,000 shares per share that they owned. Their shares were trading at 38,000 wonder. So they paid them 38,000 times more than they were Supposed to. So if you came to work, you were expecting to get $100 dividend on your shares, you got a $3.8 million dividend on your shares. 37 minutes is the number of minutes between when they did this and when they stopped it and turned off the ability to sell these shares. During those 37 minutes, 16 employees sold something like $200 million worth of stock.

[B]

Oh my God.

[A]

Are now in trouble. But presumably knew they'd be in trouble and spent those 37 minutes thinking about it and decided they'd rather have the money and got it done.

[B]

Are they all still in the country?

[A]

I don't know. I think as far as I know, they still are technically employed at Samsung securities, although suspended. I don't know exactly the mechanisms that they have to get the money back or get the shares back, but these shares are referred to as the ghost shares because I don't know the mechanism by which they were issued, but they were apparently not validly issued and they've all been poofed.

[B]

If I bought one of these shares, do I own anything?

[A]

I think if you bought the shares, they've been poofed away and Samsung securities is going to give you your money back. But if the employees sold the shares, the money hasn't been poofed away now perhaps someone will be able to recover it. But if you ask me, there's only.

[B]

One solution to this problem, which is we should put all share trading on the blockchain.

[A]

People say that the shares can be wherever you want them. The money is in their bank account.

[C]

Right.

[A]

And hopefully in their pocket in large bills or diamonds on the way out.

[B]

Of the country or in Filipino casino chips.

[A]

Yes.

[B]

Yeah. On which note, I think we're going to wrap up the free portion, you might say, a Slate money. We are going to have a little chat in Slate plus about secured overnight financing rates because that's awesome. Dan Schrader is very excited about that. But for everyone else, thank you very much for listening to Slate Money and keep those emails coming. Slate moneylate.com Many thanks to Dan Schrader for producing and we will talk to you next week on Slate Money.