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.

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]

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]

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.

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.

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]

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]

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."