The short sellers’ money men

One scoop to start: The Federal Trade Commission is preparing to launch an investigation into anti-competitive practices at Microsoft’s cloud computing business, as the US regulator continues to pursue Big Tech in the final weeks of Joe Biden’s presidency.

And another scoop: The founder of Grubhub said he twice attempted to buy back the food delivery business from Just Eat Takeaway for more than $1bn, making the revelation days after the Dutch group announced a deal to sell its US subsidiary at a huge loss for just $650mn.

In today’s newsletter:

• Short sellers’ secret financial backers

• Goldman Sachs’ adventures in China

• The ‘cable cowboy’ predicts M&A wave

How to make a killing from short sellers

Activist short sellers are some of the most divisive figures on Wall Street.

To their proponents they’re a necessary part of the financial ecosystem who increase the efficiency of markets and sniff out fraud. But to their detractors they’re seen as profiting from the misery of others.

While short sellers may be the ones in the spotlight, the real money is being made elsewhere: by secretive hedge funds that fund the trades and avoid the limelight entirely.

These arrangements, often referred to as balance sheet lending or profit-sharing agreements, allow short sellers to be paid for their research by giving hedge funds early access to their findings and getting a slice of the winnings if the trade is successful.

How much the short sellers make varies, though most market participants that the FT’s Ortenca Aliaj, Harriet Agnew and Kaye Wiggins spoke with said it was somewhere between 15 per cent and 35 per cent, depending on their record.

The one thing the arrangements often have in common is that they’re not supposed to see the light of day.

The hedge funds providing balance sheet don’t want to be known for it because it can adversely affect their relationships on Wall Street — helping to fund a trade against a large company doesn’t put you in good stead with banks and many fear they will be “cut off from the street” if they’re seen as being in bed with short sellers.

At the same time, these arrangements are almost vital to the survival of activist short sellers. It’s almost impossible to get a counterparty — ie the entity on the other side of the transaction — because of their size or infamy, or both.

Despite the hush-hush nature of the business, details of the contacts have started to seep through to regulators.

A wide-ranging investigation into short selling launched by the Department of Justice and the Securities and Exchange Commission three years ago hasn’t turned up a whole lot. Though it has ensnared one short seller and one hedge fund.

Short sellers are nothing if not resolute. Most have continued going about their business and you can bet that behind every great short seller idea there is a hedge fund willing to bankroll them.

Goldman Sachs’ saga in China

When Hank Paulson travelled to China in the early 2000s to cut a deal giving Goldman Sachs access to the country’s financial markets, most executives back home believed the arrangements he brokered would be temporary.

The thinking was that an alliance with Fang Fenglei, a mainland investment banker with peerless connections to the Communist party elite, would last only a few years until the Wall Street institution was permitted to directly own its China business.

But the arrangement ended up lasting nearly two decades, during which time the economic benefits of the tie-up flowed mainly to Fang, leaving Goldman desperate to unwind the deal.

“We rented his name but we chose someone who tried to screw us in the end,” said one former Goldman banker of a man whom Paulson had lauded as “extraordinary” and a “preternatural networker in a country of networkers”.

Today Goldman stands on the brink of acquiring a futures broker, the last piece of its China business. It is the culmination of years-long negotiations with Fang, during which the US bank has handed over far more than originally envisaged.

Through interviews with dozens of bankers and people close to Fang, and reviewing hundreds of pages of documents, the FT has pieced together a full account of Goldman’s misadventure in China.

And the largely untold saga serves as a cautionary tale for the plethora of foreign investors that have tried to hitch themselves to China’s economic miracle.

The incoming wave of media mergers

John Malone has a lot of thoughts about the media landscape. Namely, the billionaire “cable cowboy” doesn’t see why Big Tech and Elon Musk should be allowed to dominate market share, while media companies sit on the sidelines.

The Liberty Media founder thinks the consolidation wave could be coming. He’s betting on a surge in merger activity in the media and technology industry, anticipating a rollback of regulations with Donald Trump’s incoming administration.

Charter Communications, the cable television and broadband company he backs that has just agreed to acquire Liberty Broadband, should be allowed to merge with rival cable operators Comcast, Cox or T-Mobile, he told investors on Thursday.

“The idea that Charter should be limited to 30 per cent of the US terrestrial footprint while Big Tech has the globe, and even Elon [Musk] has the globe, is silly,” Malone said.

That wasn’t all: “Tying an industry’s hands behind its back and allowing Big Tech to run wild in every direction that they choose to run in, I think is inappropriate.”

Malone is also shaking up his perennially shape-shifting media empire.

This week he also unveiled plans to slim down his group by spinning off event ticketing company Live Nation and events specialist Quint from Liberty Media into a separate public company. It joins a long list of such moves from Liberty — SiriusXM and Warner Brothers Discovery — to name a few.

The remaining Liberty Media will focus on sports, after buying Formula One in 2017.

Malone, 83, will step in as interim chief executive after the departure of prolific dealmaker Greg Maffei, who said he would step down as CEO after nearly 20 years.

Job moves

• LVMH has chosen Alexandre Arnault as deputy chief executive of its wine and spirits division. The 32-year-old son of Bernard Arnault will take up the role at Moët Hennessy in February after four years at Tiffany.

• Private credit investment firm 5C Investment Partners has hired Alissa Grad to lead fundraising and client solutions, a source tells DD. Grad was previously vice-chair of Golub Capital.

• Jay Clayton, who was chair of the SEC during Donald Trump’s first term, will be nominated as the US attorney for the Southern District of New York. Clayton has worked as an independent chair for Apollo Global Management and as a senior adviser for Sullivan & Cromwell.

Smart reads

BNPL billionaire The Swedish entrepreneur Seb Siemiatkowski has gone from flipping burgers to becoming a prospective billionaire, as his buy now, pay later start-up Klarna gets ready for a public listing, the FT writes.

‘Flood of money’ Investors are clamouring for significant risk transfers, Bloomberg reports. Wall Street’s veterans are worried trouble could be ahead.

TSA lines Soon, you might not need your driver’s licence to fly, The Wall Street Journal writes. Enter: the fastest airport security line you don’t know about yet, which is being tested in nine airports across the US.

News round-up

Jane Street invested in start-up turning China’s noodle shop sales into securities (FT)

Reeves tells regulators to dial up risk in UK financial services (FT)

The Onion to acquire Infowars out of bankruptcy (FT)

Berlusconi family company steps up campaign against Germany’s ProSieben (FT)

Ben & Jerry’s claims Unilever ‘silenced’ it over support for Palestinian refugees (FT)

Ex-BDO auditor banned for 20 years for faking signatures and documents (FT)

Collapsed London Capital & Finance was Ponzi scheme, court rules (FT)