Valuing Analysts and Hedging Death

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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Hi -- This is Matt Levine's Money Stuff, a daily newsletter from Bloomberg View with links and commentary about Wall Street, business and other stuff. If you'd like to get it in your inbox, please subscribe at this link if you haven't already. Or find it on the web here. Thanks!

How much is your research analyst worth?

High finance operates on basically a gift economy, in which many goods and services -- sports tickets, strategic advice, jobs for relatives, investment banking research -- are given away to create goodwill in the recipient. The recipient is then supposed to reward the donor with lucrative merger mandates or trading commissions, but not in a straightforward transactional way. That would be crass. This is about relationships, not a mechanical balancing of accounts.

But where I say "relationships," you say "corruption," and regulators dislike many things about this model. Here's a story about new European Union rules that "will require investment managers, such as those at hedge funds, to pay specifically for any analyst research or services they receive," instead of the genteel old system where the investors got the research and then decided after the fact how much to reward the analyst's bank with commissions. That sort of explicit recognition of costs, like yesterday's foreign-exchange thing, is very modern and transparent and maybe a little sad, if you liked the old subtlety. But also:

In response to the proposed new rules, UBS AG has started to offer research and direct access to analysts for fees that depend on the analyst’s popularity and the fluctuating demand for his or her area of expertise. The most popular analysts at UBS can command prices that are four to five times higher than their UBS peers, said Barry Hurewitz, chief operating officer of UBS’s investment research division.

Ugh can you imagine conducting a daily auction to set your worth as an employee? Especially after years in the old system, in which your value was always relationship-based and vague and intentionally hard to quantify. This is like the Uberization of UBS research. Also, "Such changes are controversial, raising the prospect that some influential analysts, whose comments can move stock prices, give advanced access to the clients who pay the most," duh. But that's what happens when you have to pay for research: You get what you pay for.

Executive pay.

I'm basically sympathetic to executive 10b5-1 stock plans. The idea is, you write down a table of like "if the stock gets to $X, I will sell Y shares," and then you give it to your broker and forget about it. If the stock gets to $X, you sell automatically, even if -- as executives tend to -- you have inside information at the time of the sale. It's probably the safest way for executives to sell stock. And while it's always a little disfavored for executives to sell stock at all -- they should be investing in their companies! -- you know, come on. Executives need to buy houses and send their kids to college and diversify their portfolios.

So if the chief executive officer of DuPont Co. set up a 10b5-1 plan in which she would sell $37.5 million worth of DuPont stock if and when the stock hit $70 -- a level it had not seen in 14 years -- it is hard to really fault her for that. That's a pretty bullish plan! She only gets any money if she gets the stock up to a multi-year high! Except that then Nelson Peltz's Trian Fund Management announced an activist stake in DuPont, pushing the stock up above $70 and triggering her automatic sales. And then Trian -- which, as an activist, has to position itself as a defender of shareholders against a management that doesn't care about them -- went around criticizing her for it, saying that her sales "were inappropriate and betray a lack of confidence in her 'plan to deliver higher growth and higher value to shareholders.'" It all seems a little unfair. "It’s either dumb luck or dumb bad luck, depending how you look at it," says a pay consultant.

Elsewhere in pay, the Securities and Exchange Commission announced proposed rules that "would enhance corporate disclosure of company hedging policies for directors and employees," with the idea being that shareholders want to know not only if the CEO is selling her shares but also if she's hedging them. And here is an opinion piece from the president of the AFL-CIO urging the SEC to finalize rules requiring disclosure of the pay ratio between CEOs and average workers. It makes the claim that "large pay gaps between chief executives and their workers severely weaken companies and put investments in those companies at risk," and really the SEC should finalize the rules just so we can test that claim. It seems non-obvious to me.

And banker pay.

Speaking of pay ratios, banks are paying their junior investment bankers more to try to keep them from leaving for private equity or blogging or just not being a banker any more. "Some Barclays junior employees are set to receive an increase of 20 percent to 40 percent in salary and bonuses." But at some banks -- at least, at BNP Paribas -- "the bump for juniors has also led to friction with some mid-level bankers," which is understandable. The mid-level bankers actually wanted to be bankers, made a career of it, and accepted relatively low pay earlier (I mean, relatively) for the payoff of making more down the line. Now, their pay keeps getting cut or deferred, and meanwhile the kids who just started a year ago are getting big raises just because they're whiny and disloyal.


The California Public Employees' Retirement System is a giant investor, a pension administrator for California public employees and municipalities, an advocate of good corporate governance, and a general all-around 800-pound gorilla. Here is Kristi Culpepper on how Calpers plays hardball in California municipal bankruptcies, and how the judge in the city of Stockton's bankruptcy got fed up with Calpers. It is a pretty amazing story! Calpers administers municipal pension plans, for a fee. It argues that any reduction in pension benefits -- pretty common in bankruptcy, alas -- would require termination of its pension-administration contract. But when that happens, "Calpers moves the municipality’s plan assets from Calpers’ general investment pool to a special termination pool," which is invested more conservatively, even though Calpers bears no financial risk on the pension. But because of the more conservative investments, the pool is valued more conservatively, creating a giant actuarial hole for the municipality: "Stockton’s pension liabilities would balloon from $211 million on an actuarial basis to $1.6 billion under the termination methodology." This creates a "poison pill" to prevent any impairment to pensions in a California municipal bankruptcy -- unless, as here, the court finds that Calpers's lien to enforce those pension liabilities does not survive bankruptcy. Then Calpers is out of luck.

Here's a story about Mark Zuckerberg's neighbor.

Guy buys lot behind Mark Zuckerberg's house, threatens to build house overlooking Zuck's bedroom, demands large payoff for not doing it, receives small payoff, claims that small payoff came with promise that Zuck would help guy's business, does not receive said help, sues. Here's his complaint; a sample:

Voskerician asked Zuckerberg directly if he wanted a discount on the Property. Zuckcrberg said "yes" and that he could not pay $4,300,000. Zuckerberg stated that he built Facebook on relationships and connections and that in exchange for a discount, he, Zuckerberg, would introduce Voskerician to his friends, clients and associates and promote Voskerician's real estate business by giving him referrals for new business and written references for Voskerician's real estate development business. Zuckerberg stated that he did not want construction in his backyard for fourteen months and told Voskerician that he would refer him business and make introductions if, in exchange, Voskerician would help him secure his privacy. Zuckerberg stated that he would help to grow Voskerician's real estate business. He indicated that he would help Voskerician build the product that had been planned for the Property at a different location. He also stated that Voskerician could meet with him whenever Voskerician needed to do so to go forward with the referenccs and promoting Voskerician's business.

I mean sure, Mark Zuckerberg couldn't pay $4.3 million but had limitless time to hang out with this dude and introduce him to people? Imagine if a court ordered him to actually do that. Awkward. The moral of the story is maybe don't move to a fancy neighborhood in Silicon Valley because, you know, the neighbors.

Death Swap.

Here's a story about longevity swaps, which are also called death derivatives, and I guess saying "I sell death swaps" is more fun at parties than, you know, "I sell basis swaps." The idea is that companies with pensions are selling the longevity risk in their pension to life insurers, who are naturally long longevity (longer lives = fewer life insurance payouts) and so are happy to get short longevity (longer lives = more pension payouts) as a hedge. But: "Demand for such pension risk transfer deals eventually will eclipse the insurance industry’s capacity and provide an opening for investment banks to sell securities known as 'death derivatives,' some experts say," and this is where my financial thriller starts. Consolidated Amalgamated Bancshares has amassed a giant portfolio of longevity risk: The sooner people die, the more money it makes. And lately the Director of Special Projects has been buying even more death swaps, and concocting a plan to make them pay out in a big way. Will his newest employee, a superstar hired just out of Harvard Business School, be able to stop him in time? Seriously "Death Swap" would not be at all a bad name for a financial thriller.

Things happen. 

Nick Dunbar on the S&P settlement. J.W. Mason on Greece, the ECB, and the payments system. RadioShack and the decline of leisure time. Apple is selling Swiss franc bonds, and "the 2024 bond is being offered to investors at an implied yield just shy of 0.3%." Wolf Pack Activism. A new divestment campaign. A Tesla is an Uber and an Airbnb (via). Buy The Cadillac 80-Something Warren Buffett Knows Without Question 16-17 Year Old Warren Buffett Would’ve Bedded Some Buxom Young Milkmaids In. Men Spend an Average of $7 on Their Pets’ Valentine’s Gifts. "Dominique Strauss-Kahn, the disgraced former head of the International Monetary Fund, claimed he rarely attended sex parties because he had 'political ambitions' and 'other things to do.'"

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

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Matt Levine at

To contact the editor on this story:
Zara Kessler at