Levine on Wall Street: Bankers Versus Consultants

A consultant caught StanChart doing bad things, but on the other hand a business book taught Wells Fargo how to dream. Also: VBL IPO, HFT order cancellations, dogs enjoying popsicles

Some bank consultants are tough.

The story of Standard Chartered is that it did some money laundering, got caught, hired Deloitte to write a report on its misdeeds, got Deloitte to tone down the report, got caught doing that, and settled the case by paying $667 million in fines. As part of that 2012 settlement, Standard Chartered had to hire a different consultant -- or "independent monitor" -- to keep track of its practices and report directly to the New York Department of Financial Services. The new monitor was Navigant, and Navigant was not impressed:

In connection with the implementation of its transaction monitoring system, SCB NY had created a rulebook ("SCB Rulebook") with procedures to aid it in detecting high-risk transactions. The SCB Monitor gathered information and attempted to test the SCB Rulebook. After that review, the Monitor determined that the SCB Rulebook contained numerous errors and other problems, resulting in SCB's failure to identify high-risk transactions for further review.

So Standard Chartered was caught again: The Department of Financial Services is fining it another $300 million and barring it from doing dollar clearing for certain "high-risk" clients. This is sort of the flip side of the conflict we talked about the other day, where the consultant works for the bank. There, the problem was that the consultant has incentives to please its client by under-reporting problems to the regulator. Here, the consultant found "numerous errors and other problems" in Standard Chartered's anti-money-laundering procedures, but its job wasn't to fix them. Its job was to write them up and send them to regulators to generate fines. But: If the monitor knows so much about anti-money-laundering procedures, shouldn't it have just designed the procedures? Isn't the goal to have less money laundering?

Wells Fargo read a management book.

And now it plans "to double the size of its asset-management unit to $1 trillion over the next decade through acquisitions and more aggressive sales to big investors." Banks love asset management -- steady revenue, low existential risk, not much capital required to trade someone else's money -- though one could question whether it's a good idea for all the banks to become asset managers. But Wells Fargo's plan is different! Wells read a book!

Internally, Wells Fargo's growth plan is known as the company's "Big Hairy Audacious Goal," borrowed from the business book "Built to Last: Successful Habits of Visionary Companies." Though the goal's time frame may not be considered audacious by some, Wells Fargo is known for being methodical and often slower-moving than its peers.

Good lord. I hope when they have breakfast meetings about this goal someone keeps moving John Stumpf's cheese. I feel like one habit of visionary companies is coming up with their own names for things.

More regulatory stuff.

Here is a story about payday lenders suing regulators for pushing banks to stop doing business with the payday lenders. So right there that's a little amusing, but also: "Regulators said the guidance they issued was nonbinding," which I suspect is something of a surprise to the banks. Here is a story about prosecutors charging FedEx with money laundering to try to bully it into settling its drug trafficking case, which is a nice illustration of corporations being people. I mean, that's kind what prosecutors do to human drug defendants too. "FedEx is a drug trafficker?," you might reasonably ask, and the story is that it's been charged with drug trafficking for shipping packages for online pharmacies. In a nice instance of regulation by secrecy, "FedEx has said government officials have declined to provide a requested list of illegal online pharmacies so it can stop doing business with them." You're not allowed to know what the law is! We'll just tell you if you've broken it! And here is William Cohan with the usual thing about how bank mortgage settlements aren't tough enough etc.

What happened in that Vascular Biogenics IPO?

The Wall Street Journal has the story of how the underwriters got away with pulling Vascular Biogenics's initial public offering even after it had traded for six days: Jide Zeitlin, a director and major shareholder, had failed to buy the shares he had committed to buy, as disclosed in the prospectus:

But the banks worried that Mr. Zeitlin's failure to purchase shares as noted in the offering prospectus would have been poorly received by other investors and could have exposed the banks to litigation because of potentially misleading offering documents, the people familiar said.

So it's not that the banks were worried about stumping up the money to buy Zeitlin's shares; it's that they were worried that other investors would feel misled when they found out that Zeitlin wasn't buying the shares he said he'd buy. (See footnote 6 here.) They'd look bad if they pulled the deal, and they'd look bad if they let it close, and they seem to have correctly figured that they'd enrage fewer people by pulling it.

Why do HFTs cancel so many orders?

People who are suspicious of high-frequency trading are often bothered by the fact that high-frequency traders cancel many more orders than they execute. Surely if they're submitting so many orders that never trade, they're up to no good, right? Well, no, not especially:

For example, an HFT firm might be willing to buy shares of stock XYZ at $32.45214 and thus place a buy order (bid) in the market for $32.45. One of the many different data sources may then update (such as the price in an associated stock changing by a few cents or a change in the US 10-Year Treasury note), causing the HFT firm to price the stock at $32.44735; the result is a cancellation of the previous bid and a placement of a new bid for $32.44.

The updates in data sources leading to such a change occur frequently throughout the trading day and HFT firms often change their prices as they happen. The data sources are real time and the markets are real time, so the HFT firms’ decisions and price changes also occur in real time. Changes in the inputs to the pricing models happen hundreds of thousands of times a day – if not more — across many, many data sources. Not every update in the input leads to a change in price, but many do.

Junior bankers are loving their new free time.

"The luxury of free time is new to young and aspiring investment bankers, from whom 100-hour workweeks were once commonly expected. It turns out there’s little nostalgia for those days," says Bloomberg Businessweek, and I dunno, there's actually quite a bit of nostalgia in banking for 2006. Those were good days! It's just that the analysts don't remember them. But if it's money you want, you could always be a deckhand in Port Hedland.

Things happen.

Allergan wants to buy Salix to avoid being bought by Valeant. The actual tax cost of the Kinder Morgan deal. Goldman vs. Libya. Ending the fun for shareholder activists. Alan Greenspan assists with ice bucket challenge. Broker cuts back on contrast-collar shirts. Dress Normal. Bigger weddings lead to happier marriages. Data scientists do more data wrangling than data civilians appreciate. Unpoppable bubble wrap. Twitter is getting more horrible. "Harvard does not exist." The Upshot on police militarization. Matt Yglesias on police impunity. Jia Tolentino on Ferguson and ice buckets. Dogs enjoying popsicles.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    To contact the author on this story:
    Matthew S Levine at mlevine51@bloomberg.net

    To contact the editor on this story:
    Toby Harshaw at tharshaw@bloomberg.net

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