Levine on Wall Street: Culture and Retaliation

Plus: S&P vs. U.S., Jack Bogle vs. ETFs, Warren Buffett vs. some random commodities trader.

What even is culture?

This is so great: Regulators think banks might have bad "cultures," and they want every bank to emphasize having a good "culture." But nobody -- not the regulators, not the banks -- knows what that means. So everyone is trying to find out. With, like, metrics:

Academics have examined and tried to measure corporate cultures for decades, but “nobody has cracked the code in the way the banks are trying to do now,” said Sydney Finkelstein, a management professor at Dartmouth College’s Tuck School of Business. 

And rules:

Ideas floated by regulators and industry experts include putting banks on a driver’s-license-like “point system” where their licenses to do business could be pulled for bad performance.

And consultants:

The Clutch Group, which is consulting for two banks it wouldn’t name, found that informal happy hours led more often to harassment issues than those planned as corporate events, said Brandon Daniels, Clutch president. It also found that there was a 75% greater chance of employees going around internal controls when the word “workaround” was used in their communications.

Aren't you excited about the coming codification of culture rules? Won't it be fun when the Fed places strict limits on informal happy hours? Won't the lawyers enjoy parsing the detailed points system for saying dumb things in e-mails? Won't a lot of effort be invested into gaming those rules? It is hard to win. If you don't define "culture," it's hard to enforce it. If you do, it's going to be gamed.

S&P is settling.

Remember when Standard & Poor's downgraded the U.S., largely because the U.S. government was contemplating defaulting on its debt for no reason? What a strange time.  That story sent weird tendrils out everywhere -- ask an economics blogger about the platinum coin some time -- but one of the weirdest is that the Justice Department later brought a fraud case against S&P, and S&P has adamantly maintained that the fraud case was retaliation for the downgrade. This argument has always sounded sort of insane, but it had one key thing going for it: S&P and Moody's were the two big credit-rating firms whose overoptimistic ratings of mortgage-backed securities arguably fueled the 2008 credit crisis, but only S&P downgraded the Treasury, and only S&P got sued. Was S&P self-evidently worse than Moody's? Mehhhh actually a lot of the government's case involves S&P changing its ratings to match Moody's, which you can read either way but to me makes Moody's look a little worse.

Anyway all of that is apparently going to be resolved soon. S&P is going to settle with the Justice Department, and 19 state attorneys general, in "a $1.37 billion settlement deal expected this week," and as part of the deal "S.&P. has agreed to acknowledge that it never found evidence supporting its accusations of retaliation." Which is a legal formula that allows it to continue to nurse its grievance, while admitting publicly that it's pretty nuts. A fun thing would be if S&P agreed, as part of the settlement, to upgrade the Treasury back to AAA.

Meanwhile, there's a Justice Department investigation of Moody's "for issuing rosy grades on mortgage deals in the buildup to the financial crisis." So Moody's hasn't been entirely forgotten. Though that one is "still in the early stages" and it "isn't yet clear whether it will result in a lawsuit." A quick reminder, the 2008 credit crisis happened in 2008. (Also 2007, whatever.) We're getting on seven years later. Seems odd for an investigation to still be in its early stages. 1  

Elsewhere in debt.

Well there's Greece, which will not see an AAA rating, or AA+, for a long time. (B/Caa1, if you're curious). John Hempton lays out a Greek hardball strategy, which involves Greece's primary surplus, the threat of Vladimir Putin, and "fat often drunk German tourists." I am not sure how realistic a strategy this is, and note that "the new Syriza government is against all-inclusive resorts." Tyler Cowen is considerably less cheery about the Greco-Russian future. 

Meanwhile, Cardiff Garcia writes that "net issuance of sovereign debt from advanced economies that’s available to the private sector will turn sharply negative this year and next," which could keep yields down. And people are confused about how exactly the European Central Bank's asset purchases will work. And here is Matt Klein on China's corporate debts.

Happy Buffettversary.

It's been 50 years since Warren Buffett took over Berkshire Hathaway, and he is celebrating in about the way you'd expect of Buffett. That is, by writing letters to shareholders:

Mr Buffett and his business partner, Charlie Munger, are independently writing their views of Berkshire’s extraordinary journey during the past five decades -- and what they expect for the next five. Neither is changing a word of the other’s commentary. Readers will be able to compare the two sets of reflections and predictions, in addition to the regular annual letter.

That's sweet. The Financial Times feature also has little slides in which a bunch of famous finance-y people -- Bill Ackman, Howard Marks, David Rubenstein, Jamie Dimon, Dan Loeb, etc. -- reflect on Buffett's legacy. My favorite might be the one from Lloyd Blankfein:

He's a great reductionist. He looks at things and they become simpler and not more complex. You wonder, after you listened to him, how could you ever find complexities that weren't there. He can see an opportunity in a commodity that he's never traded before. He'll get on the phone with a desk trader and bypass layers of management along the way.

Imagine being the VP trading soybean futures and one day your phone rings and you pick up and hear "Hi, it's Warren Buffett here, I have a hunch that soybeans are going to be just dandy, and I'd like to buy a whole big mess of them if you please." 

Bogle vs. ETFs.

Jack Bogle does not like exchange-traded funds:

Worse, by turning asset classes into stocks, ETFs have turned even supposedly long-term investors into macro hedge fund managers. Financial advisers have found a ready market for constructing portfolios that pull in commodities and foreign bond markets and other exotica under the guise of diversification.

Matters are only getting worse with the increasing number of so-called “robo-investing” tools that use ETFs as their building blocks and make portfolio changes as simple as playing Candy Crush.

How to tax.

The optimal system of taxation is of course a tax on foreigners living abroad, but I confess that I am a little confused by the notion that "President Barack Obama will propose that U.S.-based companies pay a minimum 19 percent tax on their future foreign earnings." U.S.-based companies, as I understand it, already pay a minimum 35 percent tax on their foreign earnings. This is a tax on foreign-based companies. The idea seems to be that if you're a U.S. company with a foreign subsidiary subject to foreign tax rules, that subsidiary will now also be subject to a 19 percent minimum tax. If it pays more than that in foreign taxes, super, but if it pays less, because it is located in say Bermuda, then it has to pay the difference to the U.S. Treasury. On the plus side, though, that's it: The current rules allow you to avoid taxes by keeping your cash in Bermuda, but then you have to pay 35 percent when you eventually repatriate the money. The 19 percent proposal seems to allow free repatriation.


I think that's right: "Shareholders of the GFI Group, a New York brokerage firm, have rejected a planned acquisition by the CME Group, clearing a path for a hostile bid by a rival firm." The rival firm, BGC Partners, has offered to buy GFI for $6.10 a share in cash, rather higher than CME's $5.85 offer that GFI's board had recommended and that shareholders had rejected. The board announced that it would "explore strategic alternatives" after the CME deal was rejected, but it is in a bit of a pickle: It's hard to say no to a $6.10 deal after you've been pushing a $5.85 one, and management does not love the $6.10 deal. Here is Ronald Barusch on the board's options.

Things happen.

"If you extended a lot of the scenes in the movie, they would naturally lead into hard-core sex," says a sugar-daddy website executive who is producing a porn parody of "Wall Street." Brevan Howard has had a rough few months. There's a strike at U.S. oil refineries and pipelines; on the other hand, "How the Chinese Are Turning Fecal Sludge Into Black Gold." "There is a sense that, if you work with Bechtel, people in Washington will smile and think more positively about your country as a partner." "After researching the topic for the nine months, Svedka’s executives concluded that" they should put out a 100-proof vodka. Queen Elizabeth II is giving up corgis. "The Monday after the Super Bowl looks like any other Monday" for stock market volumes, "unless the New York Giants were playing the night before, or if the game was really close." Your dancing shark gif.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
  1. Also, aren't there statute of limitations issues if you wait that long? One count of the S&P case was brought under FIRREA, the statute that gives the government lots of extra powers if an alleged fraud somehow touches a bank, and FIRREA has a 10-year statute of limitations.

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

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net

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