22: The Unbearable Brightness of Being a Shadow Bank

Tracy Alloway (0:06)

Welcome to Odd Lots, I'm Tracy Alloway, executive editor of Bloomberg Markets.

Max Abelson (0:10)

I'm Max Abelson of Bloomberg News.

Tracy Alloway (0:12)

Max joins me today because Joe is still off, but I think we're going to have a good show. Max, have you been watching that new TV series, Billions?

Max Abelson (0:22)

You know, a little known fact about me is that my girlfriend, Annie and I, do not own a television.

Tracy Alloway (0:28)

Really?

Max Abelson (0:29)

So no billions for us.

Tracy Alloway (0:30)

All right, then you're going to find this interesting. It's a show basically about a high-flying hedge fund manager who's dealing with regulators. Let's put it that way. Most of it is him wheeling and dealing in stocks, shorting things, making short-term directional bets, going long or short.

Maybe it's easier if we just play a clip.

SPEAKER_1 (0:49)

Who said this deal is going to close?

Tracy Alloway (0:50)

Ben said it would this morning.

SPEAKER_1 (0:52)

Me. Everyone's saying it.

Who is this?

Tracy Alloway (0:54)

My new analyst.

SPEAKER_1 (0:56)

Well, if we hired you, you must be a genius.

Yale? Stanford, then Wharton. Okay, Stanford, Wharton. And Electric Sun is controlled by Kazowitz. He also owns 19.3% of LumaTherm backdoored through his stake in Southern Wind.

You see that block trade last Thursday come out of Merrill? Yeah.

Tracy Alloway (1:14)

That was Fortress cashing out their shorts before the merger. Wasn't it?

SPEAKER_1 (1:18)

Trade was a 12.52 when everyone was at lunch, which tells me they wanted it to be missed. You guys caught it, which is something, I guess. But you're looking at it backward.

Electric Sun's offer was just a ploy to temporarily prop up LumaTherm. Typical Kazowitz played a bail on a loser. He's an animal. The block trade was Kazowitz getting out of Southern Wind, getting out of LumaTherm.

He wrote the story, now he's out, which means you need to be out. In fact, short, it'll slide to 32 and change after word breaks.

Max Abelson (1:47)

Is today's episode gonna be your review of Billions?

Tracy Alloway (1:51)

No, I will spare you all my opinions of Billions. I actually wanted to bring it up for two reasons.

Mostly because our guest today is Dan Zwirn, and he's a really well-known hedge fund manager. But he's never actually done the type of stuff that most people seem to think hedge funds do based on clips like the one we just heard. In fact, he made his career providing capital to thousands of companies with a few other financing options, basically going where banks fear to tread.

Max Abelson (2:22)

Well, at least up until recently, banks were pretty brave about that kind of thing. So what he does must be interesting.

Tracy Alloway (2:29)

Yeah, and we're going to talk about how that opportunity came up.

And one of the reasons it is really interesting is because we often hear regulators and lots of other people talking about non-bank financial institutions or providers of credit, which sometimes go by the label shadow banks, right? And as soon as you hear the term shadow banks, you think, oh, this is a bad thing, it's risky, there's something nefarious about it. But actually, as we're going to hear, shadow banks can fill a gap, and sometimes that gap needs to be filled.

Max Abelson (3:02)

I still get a small shiver up the small of my back, up my spine when I hear shadow banking, so I feel like I'm going to need a little bit of convincing from Dan and from you that it's not as shadowy a thing as its name implies.

Tracy Alloway (3:18)

All right, well, we'll see if we could do that. But before we do, there's one other reason I brought up billions, and that is because Dan had his own run-in with regulators just before the financial crisis.

Max Abelson (3:29)

Right, and I remember that because of the wonderful Bill Cohan, my friend, known to listeners and readers as William D. Cohan, his byline. He wrote a really long and detailed and beautiful story about those travails not too long ago in Bloomberg.

Tracy Alloway (3:46)

Right, and I urge all our listeners to go read that story, but in the meantime, I'm going to summarize very quickly, basically, it's about how Dan's hedge fund ran into some accounting problems, and then investors started pulling out money. Dan eventually closed it down. It used to have $12 billion worth of assets. Eventually, however, he was cleared of all wrongdoing by the US securities regulator, and since then, he's been busy rebuilding a different fund, and we're going to find out today what exactly he's doing. Let's get started.