Levine on Wall Street: Payday Surprises and Broker Lawsuits

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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Payday lending is a rough business.

I mean, it's a simple business: You give people money, you charge a lot of interest for a two-week loan, and you have direct access to their bank accounts to take back your interest and principal. If they close the account then you're probably out of luck -- what are you gonna do, sue them? -- but your interest on the winners should more than cover your losses on the losers. The problem is getting customers in the first place; there are a lot of indistinguishable online companies fighting to provide payday loans. You can buy leads -- lists of customers who've expressed interest in payday loans -- but it's expensive, and you can't be sure the leads will pan out. So two payday lenders came up with a clever solution (allegedly!): They'd buy leads and then just make payday loans to those people without being asked:

The operations bought personal data about people who were researching loans at other websites, deposited unsolicited money in their accounts and debited finance charges that exceeded the amount of the deposits. ... When some consumers tried to stop their banks from debiting the money, the companies produced fake loan documents testifying to the debt.

Obviously the next step in refining this idea would be not making the payday loans, and just debiting the money anyway, which would be less capital intensive.

If you sue your broker, he might sue back.

The story here is that some people buy risky private placements that go bad, and then they sue their brokers for recommending unsuitable investments, and then the brokers countersue for legal fees because the private placement agreements contain indemnification provisions and representations that the investors are sophisticated and able to handle the risks. There's a part of me that sympathizes with the brokers here; like, I want to sue the guy who bought a private placement that he found on "the convention floor of the annual World Money Show in Orlando, Fla." Just index, bro! But I cannot get behind this logic:

The firm, though, said it was entitled to legal fees and other compensation because the investors had lied when they signed a document saying that they were sophisticated and understood the product. They did that “with the intent to trick Berthel Fisher,” the firm said in responses to two investor claims.

No, look. If you sell people a stupid investment -- and obviously that is a disputed factual point etc. etc. -- and they sign a document saying "I am sophisticated," you can't say you were tricked. You were selling them a stupid investment! Obviously they were unsophisticated! Obviously you knew that! Their representation that they were sophisticated doesn't make it so.

More on the doom of hedge funds.

Dan McCrum looks at how much pension funds pay for hedge funds, and how much they get in return, and it is grim. There are a lot of assumptions here but the conclusion is that "public sector pensions paid about 72 cents for every dollar of investment gain they got back from hedge funds over the last six and half years." And if Calpers is quitting hedge funds will it also quit private equity? No, says Dan Primack, because Calpers can more easily achieve scale in private equity; I might put it as "private equity is really an asset class while hedge funds sort of aren't," though that perhaps overstates things. And here is a Securities and Exchange Commission case against a former hedge fund manager who "began indiscriminately withdrawing money from the hedge fund" for his personal use.

Some Alibaba miscellany.

It opens on Friday, are you excited? The New York Stock Exchange is, and is amusingly reassuring everyone that Alibaba will have as long as it needs to get the opening auction right, unlike some giant internet initial public offerings on some other exchanges that NYSE could name but won't. Also excited are the "swath of early investors" in Alibaba who, unusually, won't be subject to a lockup and will be able to sell their stock pretty much as soon as the IPO prices. (Not everyone, I mean -- like Jack Ma is locked up -- but it's a goodly swath.) Alibaba's governance continues to cause consternation, or at least posturing; Senator Bob Casey sent a letter to the SEC demanding that it Do Something about Chinese variable interest entities. And CNBC goes inside a Taobao village; this Planet Money show from a few weeks ago is also a good way to learn what Alibaba actually, you know, does.

Some nonsense about Twitter.

Yesterday Peter Thiel accused Twitter of being badly run because its employees smoke too much pot, and isn't that sort of sociologically interesting? Like, ten years after broad marijuana legalization, when smoking pot is more normalized, will people still say stuff like that? (Would they have said it before broad legalization, when it would have been an accusation of a crime?) And do people go around on CNBC saying "oh company XYZ isn't meeting its quarterly targets because the executives are all drunks"? They don't, right? Why not? Surely more executives are drunks than stoners? Elsewhere there's an "innovation space" at the San Francisco Airport with the horrifying name #Converge@flySFO, and whoever came up with that probably took a bunch of horse tranquilizers first. And a grumpy man on the internet has some rules for finance Twitter.

The problem with Wall Street is that we're not paying whistleblowers enough.

So the Justice Department wants to pay them more. I always get annoyed when prosecutors say that accused insider traders or whatever were acting out of "Wall Street greed," like only "Wall Streeters" want money and the prosecutors are supporting the mass-incarceration state out of purely selfless motives. But if you believe that the Justice Department believes its hype re: Wall Street greed, what should you think about paying whistleblowers more? On the one hand, I guess you use the incentives that work on the population you're trying to incentivize. On the other hand, why increase the rewards for greed? Elsewhere Tony West is going to Pepsico, which really makes more sense than a bank.

Things happen.

"Warren eats a full meal, let me tell you." Not everyone is amused by the Olive Garden story. Family Dollar rejected Dollar General's tender offer, unsurprisingly. The fact that banks have to get their systems in order will probably be good for the companies that make those systems. Occupy Wall Street says it has has spent $100,000 to abolish $3.8 million of debt. Buybacks vs. dividends. People Are More Selfish and Dishonest After Doing Math.

  1. If I'm ever put in charge of financial regulation I will make a rule saying

    • if you want to put more than, say, 20 percent of your assets into a single investment that is not a broad mutual fund or ETF or insured bank deposit, fine, you can do that, it's a free country; and
    • if that investment loses all its value or turns out to be a Ponzi or whatever, fine, you can sue the people who sold it to you, they're probably crooks; but
    • if you complain about it to the media you forfeit your right to sue and go to prison.

    That, to me, is how you do investor education.

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