CFOs, Microwaves and the Mystery of the Law

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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Ruth Porat.

Ruth Porat used to be a tech investment banker at Morgan Stanley, advising big tech companies on acquisitions and other financial decisions. Then she became chief financial officer of Morgan Stanley. Then Google's CFO called in rich, and now Porat will replace him. This seems like a good move for her! Being the CFO of an investment bank is a terrifying exercise in liquidity management and regulatory negotiation, and you're always one repo run away from disaster. Being CFO of Google is, like, you hear about a company with a funny name, and you say "that's a funny name, we should buy them," and everyone's like "sure why not," and then you show up at the company's office with a cartoon bag of cash and everyone greets you as a hero and you play foosball and negotiate a deal. I don't spend a lot of time in Silicon Valley but I'm sure that's how it works. Also I bet the pay is great.

So, right, good for Porat, but it is possible to read too much into this. For instance I'm not really sure this is what a CFO does:

“A dose of increased discipline could certainly serve Google well,” said Colin Gillis, an analyst with BGC Partners LP. “The key to this job is going to be the person that rationalizes the expenses of the company. Google is full of people who want to pursue big ideas.”

No, see, she's a former investment banker. Investment bankers don't rationalize expenses. Investment bankers do mergers. This is a good fit because tech companies don't rationalize expenses. Tech companies do mergers. (Fine, fine: Mature tech companies, and investment bankers, sometimes also do capital return.)

Or there is the generalization from Porat's decision to some sort of Silicon Valley Versus Wall Street fight for the soul of America, which I don't quite get. Neil Irwin argues that finance is "essentially a back office function for the entire economy," and that the economy will be stronger if more bankers move into tech. On the other hand, Tim Fernholz argues that bankers moving into tech will make tech worse, and that "the financialization of its most dynamic and innovative industry isn’t a necessarily a step forward either." I feel like both of these claims overstate the difference between "tech" and "finance" as generic categories. A lot of both industries, in their modern incarnation, are about finding clever ways to use technology to intermediate transactions and create two-sided markets. Uber is kind of a back office function for cab drivers. High-frequency traders are building microwave towers. Plus, it's not like Google didn't have a CFO before. 

Meanwhile at Morgan Stanley, financial-institutions banker Jonathan Pruzan will be the new CFO, and here is a guy who knows what a CFO does:

“In the old days, it was a left brain, mechanical financier that would be CFO, but not today,” U.S. Bancorp CEO Richard Davis, a client of Pruzan’s, said in an interview. “The really good financial institution group folks know how to work through the social and the financial issues. ‘‘And social issues have a lot to do with the skill-set now of a CFO working with regulators or the Street.’’

And who is on the list to succeed James Gorman as chief executive officer of Morgan Stanley?

Speaking of financial discipline.

Slack Technologies, which makes a pretty good instant messaging system, "is in talks with investors to raise financing at a valuation of more than $2 billion," even though it has "a lot of money and not a lot to spend on." Dan Primack's guess is that Slack co-founder and CEO Stewart "Butterfield is buying himself some bubble insurance" by locking in cash now, and obviously if he is buying bubble insurance then someone else is selling it. Meanwhile in, like, go ahead and raise your eyebrows at these signs of a tech bubble if you like:

Omnicare.

Yesterday the Supreme Court decided a case about whether it can be securities fraud to say "We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws," when, in fact, federal regulators later sue you for violating anti-kickback laws. The short answer is ... mmmmaybe? Your incorrect opinion can't itself be the basis for a suit, but the opinion has to "rest on some meaningful legal inquiry -- rather than, say, on mere intuition, however sincere," and if it doesn't then maybe it's fraud. Here at Bloomberg View, Noah Feldman parses the philosophy of this distinction, but I got sort of hung up on this passage in the opinion:

The two sentences to which the Funds object are pure statements of opinion: To simplify their content only a bit, Omnicare said in each that “we believe we are obeying the law.”

Is it not strange that the Supreme Court thinks that obeying the law is a pure matter of opinion? That it is impossible to know for certain that you are obeying the law? That is surely correct, at least for corporations, but as a rule-of-law matter it is troubling. How can you expect people to obey the law when the Supreme Court has said that the law's requirements are an unknowable mystery?

Elsewhere in Supreme Court news, there's a big lien-stripping case coming.

High-frequency traders are building microwave towers.

I guess I said that earlier, but the point here is not that they're building them -- really they've already built them -- but rather that they're joining forces to form a microwave dream team:

KCG Holdings Inc., a brokerage with roots in high-frequency trading, and World Class Wireless LLC will unite their networks of microwave towers, connecting major market centers around the globe, according to a statement released last month. WCW, which is owned by ECW Wireless, has the same address and senior managers as high-frequency trader Jump Trading LLC. 

One complaint that you used to hear a lot about high-frequency trading was that it poured lots of resources into a socially useless rent-seeking arms race to be a few nanoseconds faster than the other high-frequency traders. You can debate whether building faster communications infrastructure is really socially useless, but never mind that: The reason you don't hear that complaint so much any more is that the arms race is largely over. Everyone's approaching light speed asymptotically, and it's just exhausting to keep building new generations of microwave towers and whatnot.

And in comp.

Here's a horrifying Bloomberg News story and New York Fed staff report about the differences in pay between top male and female executives. It's not just that men get paid more, or that they're more levered to the upside when their firms do well. It's that they're less levered to the downside when they don't. From the Fed staff:

A 1% increase in firm value generates a 13% rise in firm specific wealth for female executives, and a 44% rise for male executives, while a 1% decline in firm value generates a 63% decline in firm specific wealth for female executives and only a 33% decline for male executives. We also show that there is no link between firm performance and the gender of top executives.

So, roughly, it's heads men win, tails women lose. The authors take this as evidence against optimal contracting and for connections and social capital doing a lot of the work of setting executive compensation.

Gambling for redemption.

A well-known stylized fact about capital markets is that managers of distressed companies will often "gamble for redemption," taking excessive negative-NPV risks as they approach insolvency: If the risks pay off, the managers make money, and if they don't, the managers don't do any worse than they would have playing it safe. (Asymmetric incentives, etc.) Here is a paper applying that model to Eurozone governments, which seems novel (to me):

The need to sell large quantities of bonds every period leaves the government vulnerable to self-fulfilling crises in which investors, anticipating a crisis, are unwilling to buy the bonds, thereby provoking the crisis. In this situation, the optimal policy of the government is to reduce its debt to a level where crises are not possible. If, however, the economy is in a recession where there is a positive probability of recovery in fiscal revenues, the government may optimally choose to “gamble for redemption,” running deficits and increasing its debt, thereby increasing its vulnerability to crises.

It strikes me that it might be a good idea for governments to keep spending to keep their countries out of recession. Elsewhere, Ukraine is telling private creditors to expect a principal write-down.

Other people news.

Former Fed board member Jeremy Stein is going to work as a consultant for BlueMountain Capital Management. One of the managers of "Chocfinger's" hedge fund is "stepping back from day-to-day management." This guy is leaving trading just to not do that any more. And it's time to fill out your Name of the Year bracket. Bloomberg's own Zeke Faux has a tough first-round matchup against Beethoven Bong, so your support is important.

Things happen.

Nontraded REITs have somehow become a worse investment. Apparently you can fill oil tanks a bit more. Hank Greenberg's lawsuit against the government over AIG is still going on. Here's a New York Fed staff report on "The Rescue of Fannie Mae and Freddie Mac." Credit Suisse Says Planned Asset Cuts Will Hit Revenue This Year. Financial crisis, US unconventional monetary policy and international spillovers. Brad DeLong vs. the idea of a bond "bubble." Bitcoin's lien problem, and something about stock exchanges and bitcoin. Business school is expensive. Toward a Theory of Normcore Food. Chicken Fries emojis, and Taco Bell's "terrifying breakfast dystopia." Cops Find Suspect Hiding in Cabinet After He Posts Snapchat Story of Himself Hiding in Cabinet. 

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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