Gladiators, Blockchains and Structured CDs

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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How's life at JPMorgan?

Here is some advice for junior investment bankers on eFinancialCareers, by a writer who goes by the name "The ibanker." It is illustrated with a photograph of a man who is half naked and half in plate armor, and the tone of the article matches the illustration:

I have breathed, fought and eaten in the den of financial gladiators. I have stood in the arena shoulder to shoulder with fellow bankers, many of whom perished early in their careers and went on to practice lesser arts.

During that time I carefully observed the most senior and influential members of the audience above, in order to discern their tastes and motivations. Do not forget, it is they who bestow upon you the gift of life, death and the bonus.

This is all a bit embarrassing, but I quote it here to make this point: Some people think like that. I mean, not quite like that, that is exaggerated for effect, but a lot of junior bankers get pretty close. "Gladiatorial combat in pursuit of a bonus? That is literally what I signed up for, where is my sword?"

Here is an article in the Wall Street Journal about a new banker lifestyle initiative at JPMorgan. It is illustrated with a photograph of Jamie Dimon and Carlos Hernandez in polo shirts, and the tone of the article matches the illustration:

The firm launched an effort on Thursday to encourage its investment bankers to take their weekends off, as long as there isn’t a live deal in the works.

Carlos Hernandez, J.P. Morgan’s head of global banking, announced the policy Thursday on an internal call, saying the rules applied to everyone from analysts to managing directors, the firm said.

This is still investment banking, so the project has a codename, but the name is "Pencils Down." It is one of a series of initiatives, at JPMorgan and its competitors, to make life more chill and happy for junior bankers. "Mr. Hernandez said the policy is designed to get people out of the office and back home, or wherever they choose to relax."

Where do you think they'll choose to relax? Where do you think the gladiators relax? 

These chill-out-junior-banker initiatives are probably driven mostly by humanitarian considerations (bank executives don't want their analysts working themselves to death) and by competitive recruiting needs (Pencils Down is "realistic to what this generation wants," says Hernandez, and the lure of startups is strong). But I suspect there is at least an implicit regulatory component to them: The young people who are attracted by five-day weeks, relaxing at home, and bosses in polo shirts are just different from the young people who are attracted by stories about gladiators. You could imagine a lot of circumstances in which the gladiators would be useful, but if you are building a culture of compliance in a low-return-on-equity, banking-as-utility world, you might prefer the relaxers.

In other news, Jamie Dimon got a 35 percent raise

The bank awarded Dimon, its chief executive officer and chairman, $27 million for 2015, up from $20 million a year earlier, according to a regulatory filing Thursday. The package includes $20.5 million in performance share units, a new pay element tied to future targets. Proxy advisers had complained last year that the company lacked concrete goals for its executives. Dimon also got a $5 million cash bonus and a $1.5 million salary.


If you have to keep track of a bunch of securities, you need a database to do it. If your old database is out of date, you should replace it with a new database. Ideally the new database would be good. It would be nice if the new database is fast, has good security, and gives your customers a convenient way to find out in real time exactly how many securities they own.

That's basically the case for the blockchain in finance: It's a good, secure, quick-to-update, easy-to-access database of securities transactions. It's a good case! It's fine. It seems totally reasonable to me, though I am not an expert in database architecture, and there are skeptics about the actual functionality of actually existing blockchains. But there is also a lot of babble about how the blockchain will revolutionize the world that seems to be based on not knowing what the blockchain is. Computer databases have existed for a long time; the question is not "could this securities thing be better with a database?" but rather "would an encrypted distributed database be better than a traditional database for this securities thing?" (Also: "Why isn't there already a database for this securities thing?") And I feel like the blockchain articles I read are usually too visionary to bother with that question.

Anyway Blythe Masters's blockchain startup, Digital Asset Holdings, "raised $52 million from investors and won a contract to radically speed up settlement in Australia’s stock market." Here is an interview with Masters, and while the headline attached to the video is "Blythe Masters Raises Cash to Reshape Finance Industry," the actual interview is far more reasonable, and maybe the most convincing statement of the case for the blockchain in finance that I've heard. Blythe Masters: good salesperson! "Really you can think of it as a form of database technology," she says. "Most people know what a database is." And then she argues the advantages of blockchain database architecture over traditional database architecture, and explains why the Australian stock exchange -- which was replacing its old database anyway, and put the new system out to bid -- is a perfect place to build a blockchain. It is just low-key and straightforward and evidence-based and plausible. "These are big strategic issues for financial firms today. They're C-suite issues," she says at one point, which has perhaps an air of protesting too much, but compared with a lot of blockchain rhetoric it is pretty calm.

Structured products.

Here is a Bloomberg story about "How Wall Street Finds New Ways to Sell Old, Opaque Products to Retail Investors." The particular products are structured notes based on proprietary indexes. Or rather, they were, but with the Securities and Exchange Commission becoming more skeptical of structured notes (quite reasonably!), they have migrated into structured certificates of deposit and annuities, which unlike notes are not SEC-regulated. The way these products work is basically that a bank formally specifies an investment strategy -- it's called a "proprietary index," but all that really means is a list of rules for how to invest and how to calculate the value of the product -- and then sells it to investors wrapped in a note or CD or annuity or whatever. The investors tend to pay big fees, and the product tends to be a counterparty to derivatives trades that the bank otherwise wants to do. And in marketing the strategy, the bank tends to highlight backtested results to reassure customers that the product will work:

Banks often projected their rules-driven formulas back through time, a common practice known as "backtesting." While they did disclose which periods of the charts showed such results, "the only indexes being brought to the market in the form of new products are the ones that have done well in backtest periods," said Joel Dickson, head of investment research and development at Vanguard Group Inc. "It’s pretty easy to run a good backtest."

Past performance was not, in many cases, a good predictor of future returns. But my favorite part might be that Dickson was not strictly correct: Some indexes were brought to the market that had lost money in backtests. Here's a chart:

I count five red dots! I suppose some of these could be contrarian/bear/black-swan strategies, but I do like the idea of banks trying to get retail investors to buy a certificate of deposit based on a proprietary trading strategy that had lost money in the hypothetical past. Elsewhere in structured products: autocallables.


Sarah Meyohas's art exhibition -- paintings of the results of her stock trades -- opened Wednesday night; I mentioned it in Money Stuff the other day, and I really hope a lot of you went. I couldn't make it, which I regret; it sounds fun. Here is a New York Times review, which notes that Meyohas "studied finance at Wharton." And here is a version of Meyohas's remarks from the show, which she describes as being "like a TED talk turned incantation":

It is visual purpose that unhinges a painting’s value from its material. It is visual purpose that will guide the literal value of the line that I will draw on these paintings. If value emerges from the relationship between perceptions, then seeing the mark on canvas as both literal and representational -- as the stock that it simultaneously depicts and abstracts -- is generative. And this is where I am tonight. I value. I see. I mark.

Honestly she could write a textbook on technical analysis. On the other hand, did anyone from the Securities and Exchange Commission go?

I began by trading Paradise Inc. In fact, the broker called me up to tell me I was the only person in paradise. I made the stock move by fully one third of its market cap. It was the smallest company I moved.

Umm. Nothing in this column is either legal or artistic advice, but in my circles people try not to brag about moving the prices of illiquid stocks.

When I placed the trades, at certain times, and with certain volumes, I expect a specific movement. But oftentimes, the market surprised me. And of course, that my paintings are now embedded in a historic moment is the ultimate interplay between chance and intentionality. Because when I started this show, I intended to wreak a little havoc.

I feel like that would be a great defense in, say, Igor Oystacher's spoofing case. "Of course, that my trades are now embedded in a historic moment is the ultimate interplay between chance and intentionality."


Here is Bloomberg's Max Abelson on the financial industry's reaction to the rise of Donald Trump and Ted Cruz. "'Hold on, hold on, hold on,' billionaire investor Ken Langone said this week when asked if the success of the Republican front-runners upset him." Langone is not bothered by thoughts of President Trump:

“The cockeyed optimist that I am, maybe, just maybe, he might turn out to be one of the greatest surprises America ever had,” he said. “You got to be optimistic.”

Outside of Wall Street, some Republicans are less sanguine, and have resorted to a manifesto. Meanwhile on the Democratic side, there's "Clinton Team Attacks Sanders’s Socialist Views" and "Hillary Clinton’s Paid Speeches to Wall Street Animate Her Opponents":

In Iowa on Wednesday, Mr. Sanders went even further, seeming to mock her sizable speaking fees as borderline bribes from a powerful industry. “You got to be really, really, really good to get $250,000 for a speech,” he said.

It's a reasonable point. Elsewhere, Eater reviewed Donald Trump's food.


Davos is where rich people go to congratulate each other on being rich, and then discuss deals. That describes lots of other places too, though. One thing that distinguishes Davos is a strange journalistic tradition of legitimizing its self-congratulation in the form of mildly arch articles. Here is the New York Times on Kevin Spacey going to a party in a piano bar. "It’s so incredible to be here the past couple of days and realize that change can happen and that ideas are extraordinary," said Spacey, before he "crooned a short tune a cappella, honoring a longtime tradition of the piano bar." The piano bar is in Davos.

Felix Salmon wrote his usual post reminding everyone that Davos isn't important, which is why he goes every year; after publishing this year's post, though, he seems to have lost access to the conference wifi. "Pointing is a really big thing at Davos," points out John Carney. Here is an interview titled "John Green on Chewbacca, Stormtroopers, Personhood, Bankers, Finance, Potatoes and Horses," which I guess are all topics of conversation at Davos. Here is an article titled "Facebook's Sheryl Sandberg: 'likes' can help stop Isis recruiters," and you'd better believe she said that at Davos.

People are worried about unicorns.

Here's William Cohan on the coming unicorn extinction:

It appears that a reckoning is coming in the tech world. The combined value ascribed to the 173 unicorns by their investors is a stunning $585 billion—an especially astonishing figure given that so many of them aren’t even close to profitable. Sky-high valuations—driven in part by unicorn mania and an influx of money from nontraditional (and less disciplined) venture investors—have limited the number of potential acquirers for a lot of the buzziest companies. (For more, read “Three Unicorns to Bet On.”)

The parenthetical is a bit jarring, and I suspect Cohan didn't write it. The article is more about perceived unfairness in the initial public offering process than it is about unicorns, but the image on top is of a bunch of unicorns running for (or at least, prancing near) an exit, so I'm pretty sure it counts as unicorn worrying.

Elsewhere in unicorns, Uber is losing a lot of money:

Over the first three quarters of 2015, Uber lost $1.7 billion on $1.2 billion in revenue. For perspective, during’s worst-ever four quarters, in 2000, it lost $1.4 billion on $2.8 billion in revenue. CEO Jeff Bezos responded by firing more than 15 percent of his workforce.

Fortunately it has an essentially limitless ability to raise more money.

People are worried about stock buybacks.

Actually, no, here is an article about the "corporate savings glut" that kind of goes the other way:

Leading firms have been maintaining their pole position by investing heavily in research and development, relative to peers. As a result, they remain on the cutting edge with respect to new technologies in their respective sectors, observes Macquarie.

I thought that big companies were slashing R&D to return all their cash to shareholders?

People are worried about bond market liquidity.

Not to be outdone by Davos's bond market liquidity worrying, Basel's Bank for International Settlements released two different "reports on the structure and liquidity of fixed income markets" yesterday. One is on "Electronic trading in fixed income markets" (pdf):

Electronic and automated trading overall tends to have a positive impact in terms of market quality, but there are exceptions. There is a risk that liquidity may have become less robust and prices more sensitive to order flow imbalances. Electronic trading, in particular automated and high-frequency trading, also poses a number of challenges to policymakers, including the need to monitor its effect on market liquidity and functioning and to ensure appropriate governance of automated trading.

The other is, more generically, "Fixed income market liquidity" (pdf):

Thus far, the effects of diverging trends in the supply of and the demand for liquidity services have not manifested themselves in the price of immediacy services but rather they are reflected in possibly increasingly fragile liquidity conditions. Key drivers of current trends in liquidity include the expansion of electronic trading, dealer deleveraging, possibly reinforced by regulatory reform, and unconventional monetary policies. Given the transitional state of fixed income markets, regulators appear to be facing a short-term trade-off between less risk-taking by banks and more resilient market liquidity. Yet, in the medium term, measures to bolster market intermediaries' risk-absorption capacity will strengthen systemic stability, including through a more sustainable supply of immediacy services.

It is all a bit inconclusive.

Things happen.

Blackstone Gains From Banks’ Financial-Crisis Pain. China’s Vice President Seeks to Reassure Investors Over Economic Slowdown. Google Paid Apple $1 Billion to Keep Search Bar on IPhone. Big Merger in Cable Faces Rising Opposition. Boutiques Ride M&A Surge to Record Year. Commodity Rout Prompts Moody's to Put 175 Ratings on Review. "Just how much of America’s debt does Saudi Arabia own?" Acquisition Financing: the Year Behind and the Year Ahead. Shkreli plans to remain silent at congressional hearing: Letter. SEC Charges Utah Real Estate Investment Company and Its Principals With Operating a Ponzi Scheme and Obtains Order Freezing Assets. Startup Pays Cash to Buy Homes, Flip Them. Infinite Financial Intermediation. Too Good to Be True. Why Doesn’t Silicon Valley Hire Black Coders? Nell Diamond is very particular about sheets. "The client has reached out in regards to some of the messaging. They would really love to have 'bratz molly and get trampled at the Bratzadamus EDM set' edited out." Expensive haggis. Self-driving strollers. New York City Council May Ease Enforcement of Laws on Public Urination. Bushwick bar has in-house accountant.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Matt Levine at

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