DealBook Today's Top Headlines - June 29, 2016: Banking in the Time of 'Brexit' | Airbnb Seeks Funding While Battling Lawmakers | The Need for a New Silicon Valley Pay System
WEDNESDAY, JUNE 29, 2016
TODAY'S TOP HEADLINES
BY AMIE TSANG
BANKING IN THE TIME OF 'BREXIT' Asian and European stocks rallied on Wednesday as the immediate effects of Britain's vote to leave the European Union eased a little, Reuters reports. The pound continued to slide before steadying later in the day.
Market sentiment was improved by assurances of support from central banks, but uncertainty meant that haven assets like gold and the yen continued to advance.
European Union leaders are gathered for the second day of a summit meeting in Brussels to discuss Britain's withdrawal and leaders were keenon Tuesday to make sure that Britain and any others tempted to follow in its path knew that leaving would carry a heavy price, as Andrew Higgins and James Kanter report in The New York Times.
Shares in banks like Deutsche Bank, Credit Suisse and Barclays recovered some ground on Tuesday, but fears about their ability to sell billions of dollars of derivatives, securitized mortgages and other hard-to-value and sell securities have not waned, Landon Thomas Jr. reports in DealBook.
One of the best ways to assess a bank's broad risk profile is to look at itsexposure to Level 3 securities, which are so opaque and complex they trade rarely, if at all. Risk managers have to literally guess how much a Level 3 asset is worth.
According to their annual reports in 2015, Barclays, Deutsche Bank and Credit Suisse are sitting on the largest piles of Level 3 assets. Reflecting investor concern about the risky assets they own, these three banks trade at a steep discount to their book value. And there are few signs that the selling will let up, as hedge funds have increased their bets against European banks.
Concern about Britain's future in Europe and its place as a financial hub has made it even harder to offload these securities. "All this Brexit uncertainty is drying up the markets," Jan Riepe, a finance professor at the University of Tübingen, said. "And because many of these assets are traded over the counter in London, it is even more difficult to value them. It's very dangerous for the banks."
Credit default swaps tied to the creditworthiness of European banks do provide some reassurance, Peter Eavis writes in The Upshot. The cost of insuring against defaults by large banks is still far lower than it was during the financial crisis and when European debt markets were plunging. Of course, the cost of the swaps is still much higher than the was the day before the referendum.
But it is not Europe's Lehman Brothers moment, Neil Irwin writes in The Upshot. After Lehman's bankruptcy, banks hoarded cash and became reluctant to lend to anyone. There are few signs of that happening in response to Britain's vote to leave the bloc.
The premium that banks charge to lend to one another rose much more after Lehman's collapse than it has done in Britain since last week. Banks still face huge costs as they consider whether to relocate from London to Europe, but it appears that investors still believe that they will weather the storm.
In the United States, the Federal Reserve will tell the nation's largest bankson Wednesday whether they passed or failed their annual stress tests. All banks proved their resilience in the first round of results, Gina Chon writes in Breakingviews.
And as lenders have become better at passing these exams, their payouts have improved. They may be able to continue that this year, but not as much as might be suggested by improved economic conditions, Ms. Chon writes. Britain's looming exit from the European Union adds another layer of caution.
AIRBNB SEEKS FUNDING WHILE BATTLING LAWMAKERSAirbnb is in talks about a new round of investment that would value the company at about $30 billion, Leslie Picker and Mike Isaac report in DealBook. It plans to use the financing to further expand internationally, according to people briefed on the matter.
Under the terms of the new fund-raising, Airbnb will have tripled its valuation in two years. A $30 billion valuation would make Airbnb the second-highest-valued start-up in the United States behind Uber, which is now valued at $62.5 billion, according to a list compiled by CB Insights.
The equity funding comes in addition to a $1 billion debt facility that Airbnb has secured, according to a Bloomberg report this month.
It has expanded into new markets in the last two years, with a 700 percent increase in business from Chinese travelers, and opened operations in Cuba last year.
Yet even as it has charmed lawmakers around the world into allowing it to operate in their communities, Airbnb's hometown, San Francisco, and New York, its largest United States market, have been less amenable, Katie Benner reports in The New York Times.
On Monday, Airbnb sued San Francisco over a decision to fine the company $1,000 a day for every unregistered host on its service. If Airbnb does not comply, it could face misdemeanor charges.
New York lawmakers voted this month to heavily fine anyone who uses Airbnb to rent a whole apartment for fewer than 30 days, a practice that has been illegal in the state since 2010.
A showdown in the two cities could push thousands of illegal listings off Airbnb - a rare speed bump for a company that has shown little signs of slowing down.
"Airbnb is in a real bind," said Bradley Tusk, the campaign manager for Michael R. Bloomberg's 2009 mayoral campaign who has helped start-ups like Uber navigate New York's political landscape. "It must choose between making their markets dramatically less valuable and getting rid of a cloud of regulatory uncertainty."
ON THE AGENDAData on personal spending and income in May will be published at 8:30 a.m. The Federal Reserve will release its stress test report, the Comprehensive Capital Analysis and Review, at 4:30 p.m.The Brookings Institution will hold a discussion on the fallout from Britain's vote to leave the European Union.
THE NEED FOR A NEW SILICON VALLEY PAY SYSTEMThe $225 million offer by Palantir Technologies to repurchase its employees' privately held shares hints that Silicon Valley is starting to make some fundamental changes in the way it compensates its workers, Steven Davidoff Solomon writes in Deal Professor.
It is offering $7.40 a share to buy back up to 12.5 percent of an employee's shares (and in some cases, those of former employees), or $500,000 worth of shares, whichever is lower.
The offer comes at a time of great debate in Silicon Valley over employee compensation. Traditionally, workers received options on a four-year vesting schedule. When they left a company, they had 90 days to exercise these options or forfeit them.
This was not much of a problem when companies backed by venture capital went public quickly, but now, the average venture-backed company waits about eight years to go public. Some Palantir employees have been with the company since its founding 11 years ago and are still waiting for the initial public offering.
Employees who leave their jobs now must exercise their options almost immediately, but they need cash to do that. Once former employees exercise their options, the stock they receive is often illiquid and not sellable. A private secondary market for these types of shares grew up around pre-I.P.O. Facebook stock, but many companies place restrictions on the ability of employees to sell the stock they receive in an option exercise until their is a liquidity event like an initial offering or sale.
Palantir did not impose restrictions on employees or stockholders selling shares in the private market. Perhaps as a way to get current and former employees to participate, Palantir's repurchase offer threatened to make it harder to resell the company's stock in the private market.
Scott Kupor, a managing partner at Andreessen Horowitz, recommends extending the vesting period to conform with the longer time it takes for a company to go public. He also suggests a longer period for employees to exercise options after they leave, up to 10 years. Palantir gives departing employees three years to exercise their options.
Employees also need to consider taxes. Not only must employees put up cash to exercise their options, they must pay taxes, which can be an extraordinary amount if the private company has a high valuation.
The Palantir repurchase and discussion of the issue by Andreessen Horowitz highlight the point that compensation at venture-backed companies needs to be rethought in an age when many of these companies are staying private longer and employees face sale restrictions that only their companies can lift.
Energy Transfer Equity Calls Off Deal for Williams CompaniesThe agreement was valued around $38 billion, including debt, when it was reached in September, but falling energy prices have weighed on negotiations.
'Brexit' Vote Could Curb Asian Buyers' Appetite for British AssetsBankers and lawyers say they expect Asian bidders to take a wait-and-see approach to acquisitions in the coming weeks, while some deals in the works could get delayed.
Allergan Seeks Smaller Mergers and Acquisitions Allergan, the maker of Botox, is hunting for smaller acquisitions to bolster growth after its planned $160 billion merger with Pfizer fell through this year.
I.P.O. of Warehouse Developer Attracts Anbang and Sino-OceanThe developer, China Logistics Property Holdings, attracted cornerstone investors including Anbang Life Insurance to buy more than half of its Hong Kong initial public offering, which is seeking as much as $433 million.
Review: 'Chaos Monkeys' Is a Guide to the Spirit of Silicon ValleyUnderneath the braggadocio and evisceration of professional nemeses in "Chaos Monkeys," by Antonio García Martinez, lies the beating heart of a formidable teacher.
Senators Press for Answers After Prepaid Debit Cards FailThe inquiry, by Senator Sherrod Brown and Senator Robert Menendez, follows reports that holders of Walmart MoneyCards were denied access to their accounts.
To Compete Better, States Are Trying to Curb Noncompete PactsMany American workers are hobbled by the contracts, but some states want to untangle them from the agreements to compete with states that limit the clauses.
VW's U.S. Diesel Settlement Clears Just One Financial HurdleThe carmaker agreed on Tuesday to pay up to $14.7 billion to settle claims in the United States, but the final financial toll may well be far higher.
Judge Orders McKinsey to Disclose Confidential Client RosterThe corporate turnaround guru Jay Alix has accused McKinsey of failing to follow bankruptcy rules by keeping secret the client relationships that could create conflicts of interest in its work advising bankrupt companies.
In 'Brexit' and Trump, a Populist Farewell to Laissez-Faire CapitalismThe vote in Britain to leave the European Union was driven by a sense among older white workers that they have been passed over. The same frustration fuels the candidacy of Donald Trump, Eduardo Porter writes in the Economic Scene.
Donald Trump Vows to Rip Up Trade Deals and Confront ChinaReading from a script for the second time in two weeks, Mr. Trump hammered away at familiar economic grievances in Pennsylvania, a state crucial to his election chances.
First-Quarter G.D.P. Revised Up to 1.1%, but Still Shows SlowdownFirst-quarter G.D.P. growth has been revised higher by 0.6 percentage point since the first estimate was published in April, but the economy still slowed.