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The Popularity of the Big Bank Print

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When relative performance is more important than whether you're actually making or losing money.

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During my days as a convertible hedge-fund manager, one of the humorous, though important, regular events was the pricing of a new deal. I say humorous because a remarkably small amount of the time spent discussing the new deal went into the deal's actual merits.

Far more important -- if you were a convertible manager -- was how the deal was going.

"Oh, it's 3 times oversubscribed already, let me put you in for $100 million if you really want $10 million." That was the mantra of the convertible salesman.

"But I don't want $100 million. I only want $10 million."

"Everybody else is going in for 10 times what they really want."

"Not me."

Other calls would be something like, "Oh, this one's really going well. Lots of buyers. Lots of outright buyers." Rarely did they go, "This is cheap. This is a good credit. This company has a good plan for using the money to grow and pay off more expensive debt."

Of course, in the heyday of convertible hedge funds, one of the big misconceptions was that if a deal was "placed" with outright funds -- funds that were buying the convertible as a way of playing the stock's upside, not trying to isolate relative value between the convertible and the stock the way hedge funds do -- the convertible issue would be less susceptible to "flipping." Flipping is, as you probably know, when someone buys a new deal and immediately looks to re-sell it for a quick and nearly risk-free profit.

Hedge funds, according to the general lore, were more inclined to flip for quick profits. In my experience, the opposite was true: The supposedly long-term outright accounts took advantage of their benign reputations (which helped them get the best allocations on the most desirable new issues) and flipped like cooks at a crowded IHOP on a Sunday morning.

Anyway, the recent flurry of bank issues -- think of Wells Fargo (WFC), Morgan Stanley (MS), Goldman Sachs (GS), or JPMorgan (JPM) -- made me think of all this.

It's no mystery that lots of people have been short, or at least under-invested in the bank names, leading to the violent upward gaps.

If you're short something or are under-invested in it, a big print where you can buy at the same price as everyone else is manna from heaven. (Note: the rules won't let you cover a short within the past week by buying newly issued stock, preventing you from trying to run ahead of a deal. But an old short is okay).

You don't have to close your eyes and put in a market order knowing you'll probably get a horrible fill. You get the same price as everyone else, and you probably get close to what you really want. You don't have to worry about getting a worse execution than your competition. In this sad world, where relative performance is often more important than whether you're actually making or losing money, that's an important benefit to your garden-variety money manager.

The popularity of these big bank prints, then, should surprise no one. As long as we live in a world where performing in-line with benchmarks is more important than how you really do, where people in theoretically fiduciary roles funnel money to Bernie Madoff and take pride in not knowing how he generates his returns, then being comfortably surrounded by your peers is more important to job preservation than actually deciding whether this is the right time to be buying.

This process is central to my forthcoming book, The Undoing of Cowardice. Keep an eye out for updates.
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No positions in stocks mentioned.

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