Rhetoric and Disclosure

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.
Read More.
a | A

Dear Twitter Followers.

Carl Icahn's letters about Apple are a great study in financial rhetoric. Letters about Apple, mind you: You might expect that, as an activist shareholder urging Apple to increase its share buyback program, Icahn would write to Apple's management (he has), or to its board of directors, or to his fellow shareholders. But his letter yesterday was addressed to his Twitter followers, who don't, just by virtue of following him on Twitter, get a vote on Apple's capital return plans. 

But at this point getting Apple to buy back even more stock is not the main point of the letter. The point is just old-fashioned book-talking; Icahn's goal is to convince other investors to pay more for Apple stock, so that the value of his shares will go up. This is traditionally done on television, but I guess now the most influential and/or attentive and/or gullible audience is on Twitter.

How's his case? There's a minor argument about effective tax rates, but the bulk of the letter is a complaint that Apple trades at a price/earnings ratio of about 10x, versus a market average of about 17x. "It seems to us the market is somehow missing a very basic principle of valuation: when a company’s future earnings are expected to grow at a much faster rate than that of the S&P 500, the market should value that company at a higher P/E multiple." So he slaps a 20x P/E on Apple. If you just double the multiple that you put on Apple's earnings, without changing any facts about the world, then you more or less double the stock price, so Icahn says Apple should be worth $216, and adds a rhetorical flourish: "This is not a future price target. $216 is what we think Apple is worth TODAY." That's a $1.26 trillion market cap, and Apple just crossed $700 billion this week.

Like Icahn's last letter to Apple, this one is curiously empty: Icahn has no information that the market doesn't have, and proposes nothing that Apple could do to increase its value. (He talks fondly about the prospects for an Apple TV without ever actually demanding one, and even his share-buyback case is based purely on valuation, not on any financial benefits of the buyback itself.) Icahn is trying to create half a trillion dollars worth of stock-market value through rhetoric and personality alone. Which is a pretty fun project.

Disclosure is bad.

Here is Jesse Eisinger on the failures of disclosure, citing one of the best-titled recent books about law, "More Than You Wanted to Know," by Omri Ben-Shahar. It's perhaps worth pairing with recent arguments that financial-literacy education is a failure. Telling people things does not help them make better financial decisions. There are just too many things, and the decisions are too hard.

So what to do? Eisinger comes to this brusque conclusion: "Hard and fast rules. If lawmakers want to end a bad practice, ban it. Having them admit it is not enough." But that is of course totally unhelpful. Most practices aren't either straight-up Good or Bad, but differently suitable for different situations. His previous paragraph is about how mortgages are complex and mortgage disclosure is confusing. Should we then ban mortgages?

I don't know the answer either. One thing that I think about finance is that it is overly democratized. Dentistry is not practiced by selling people dental equipment with voluminous instructions and hoping that they'll be good at repairing their own teeth. You go to a dentist, you know nothing, and you trust the dentist to do a good job. The dentist, meanwhile, is sophisticated, and can read the literature on what dental equipment he should buy or how he should repair your teeth or whatever. A regime focused on disclosure to professionals, and fiduciary responsibility of those professionals to regular individuals, might work in finance too. But the rhetoric that finance should be a level playing field for amateurs -- that retail hobbyist stock investors should be able to trade as fast as high-speed trading firms, and be as informed as sophisticated hedge funds with teams of analysts -- makes that regime harder to achieve. 

Central bankers have opinions.

Here's a speech that outgoing Dallas Fed president Richard Fisher gave yesterday about ... well, at some meta level, about the importance of strenuous folksiness in monetary-policy rhetoric. There's a worm in whiskey and a tied-up camel and a Mae West quote and an extended discussion of literal ship-steering; the 1990 Gerard Depardieu romantic comedy "Green Card" is cited to illustrate the dangers of groupthink. Fisher proposes more transparency and clearer communication from the Fed -- "we at the Fed need to learn to speak English, rather than 'Fedspeak,'" but if this is English I might prefer Fedspeak. At a substantive level, the speech is about devolving power away from the centralized Federal Reserve Board and the New York Fed and to the regional Feds, and a warning about the inflationary dangers of withdrawing monetary stimulus too late.

On the other side of the world, here is Guy Debelle of the Reserve Bank of Australia talking about foreign exchange benchmarks. (Disclosure: and quoting me.) Debelle is co-chair of a Financial Stability Board committee of international regulators in charge of reforming the FX fix process. We talked the other day about how some dealers are moving from guaranteeing "free" trades at the benchmark rate, to charging for that service; this is something that Debelle's group has advocated, because:

The arrangements for fix-related orders mean that the price risk on the transaction is transferred entirely from the client to the dealer without any compensation. The dealers then have to manage the risk associated with this flow.

The trades conducted as a result of this process can generate optics of dealers trading ahead of the fix, even if the dealer is simply seeking to manage the risk. But these dynamics can also create an incentive for dealers to manipulate the fix rate to generate profit from what would otherwise be potentially a loss-making exercise.

Progress is slow, though:

While a number of banks have started to discuss this with their customers and are in the process of moving to charge for this service, this recommendation is not being adopted universally at this point. Not surprisingly, there has been push back from some customers against paying for something that had been previously offered for free (at least notionally).

There are other interesting suggestions, including "initiatives to create independent netting and execution facilities for transacting fix orders," to reduce the quantity of orders that dealers need to trade at the fix, and thus the need or temptation to manipulate.

Elsewhere, Sweden has negative rates now, and London bookies think Greece will stay in the euro. And some hedge funds made a lot of money trading FX in January.

Goldman is still an investment bank.

Disclosure, I used to work at Goldman, so maybe that biases me to agree with this:

“We’re different from everybody else now,” says Goldman Chairman and Chief Executive Lloyd Blankfein. “But everybody’s different from everybody else now.” At an investor presentation Tuesday, he described the company as “unabashedly an investment bank.”

That's sort of my thesis too, that post-crisis banks have stopped aiming at universality and decided to try to find themselves. Morgan Stanley turned out to be a wealth-management firm. Goldman turned out to be, you know, Goldman. Apparently investors prefer the Morgan Stanley approach to the Goldman one, but why should that matter? For Goldman to pivot to be Morgan Stanley would be as dumb as all the banks that pivoted to be Goldman before the financial crisis, and burned themselves doing it. Also:

In a poke at critics who claim Goldman is no longer the envy of Wall Street, Mr. Blankfein said the company hired only 3% of roughly 267,000 job applicants last year. Nearly 90% of those offered a job took it.

A model for this might be that investment-banking careers no longer have the all-purpose cachet that they used to (did they?), so only people who actually want to be investment bankers, and who are not scared off by the industry's evil reputation, are applying. And if you really want to be an investment banker, and don't mind a little evil, why wouldn't Goldman be your first choice?

Elsewhere in investment banking, here's an interview with the whistleblower who cost JPMorgan $13 billion in mortgage settlements.

Proxy access is a placebo.

If you've owned three percent of General Electric for three years, now you can nominate a candidate to be on the board of directors, but you haven't, so you can't. Tinkering with shareholder democracy always ends up looking like a silly exercise. Shareholder democracy is (1) ineffectual complaining and (2) proxy fights; there is not much middle ground.

Things happen. 

John Malone, bless his heart, is up to something with Lionsgate. Kyle Bass is using inter partes review to fight drug companies. Eike Batista is down a yacht, three jet skis and a speedboat. Whitney Tilson charges a lot of stuff on his credit card. Matt Klein on size and junk, and Dan McCrum on investing skill. How fast can high-speed trading be? "We find that, in the majority of cases, filings are available to private paying subscribers of the SEC feeds before they are posted to the SEC website, with an average private advantage of 10.5 seconds." Lost Comment Letter Triggers (Another) SEC Dissent. By Age 40, Your Income Is Probably as Good as It's Going to Get. Book publishers will miss Jon Stewart. 9 Sentiments We Agree With Because They’re On Cardboard Signs. There Are Risks to Mindfulness at Work.

If you'd like to get the Money Stuff newsletter in your e-mail every morning, please subscribe at this link

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:
Matt Levine at mlevine51@bloomberg.net

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