Bank Strategies and Tech Valuations

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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Deutsche Bank.

A few weeks ago Deutsche Bank gave co-chief executive officer Anshu Jain "primary authority for implementing the bank’s new strategy," which previously, for some reason, was not the co-CEOs' responsibility? It was just some other guy, responsible for implementing strategy? (It was then-chief financial officer Stefan Krause.) Anyway one investor said that it was "the last chance for Mr. Jain to prove that his strategy is right," and that Jain "has to deliver, at the latest," by next year.

At the latest! This weekend Deutsche Bank announced that Jain is leaving at the end of the month, to be replaced as co-CEO by John Cryan; the other co-CEO Juergen Fitschen will step down next May, leaving Cryan in sole command. And presumably responsible for strategy. 

What will the strategy be? "Our future will be defined by how well we deliver on strategy, impress clients and reduce complexity," he says, which is a bit circular. Cryan is an investment banker, but an investment banker investment banker, not a trader; he was a financial institutions banker at S.G. Warburg and UBS before becoming CFO at UBS. During his tenure UBS "eliminated thousands of jobs and reorganized divisions to focus on wealth management," which presumably Deutsche Bank investors find comforting; the stock is up and analysts seem to be thrilled in a very low-key way. "We see John Cryan as potentially an execution-oriented, numbers-focused CEO as he has demonstrated previously at UBS and the right person to deliver on Strategy 2020," says JPMorgan. Others are less convinced:

Mr. Cryan can’t hope to emulate the radical overhaul achieved by his former employer, UBS. Deutsche has always been first and foremost a fixed-income and rates-trading specialist and can’t ditch that easily in favor of private banking with a bit of equities business on the side.

At least he speaks German though. Here is a roundup of recent changes at the tops of European banks.

There are liquidation preferences.

If you invest $100 million in a startup at a $1 billion valuation, but you're first in line to get your money back -- so that as long as the company sells for $100 million or more you'll break even -- then what is the actual valuation at which you invested? It's no more than $1 billion (the point at which you get upside exposure), and no less than $100 million (the point at which you get downside risk), but it's probably not either endpoint? This is sort of a solvable problem -- you can model this thing as a convertible bond, or equity plus a risky put -- though your inputs (volatility, timing, credit) are a little opaque. But a good project would be to look at the liquidation preferences, down-round protections, and other investor protections for various hot unicorny startups and see how much they're worth relative to the headline valuations of those companies.

Here's an article that sort of does that:

The protections, known among investors as structuring or ratcheting, can inflate a unicorn’s indicated valuation 10 percent to 25 percent, according to Rick Kline, a lawyer at Goodwin Procter whose firm does legal work on start-up and initial offering financings. He said the phenomenon has been part of a general “frothiness” in late-stage valuations.

The article refers to this report from Fenwick & West, which "noted that one-third of the companies had valuations at or just above $1 billion, 'indicating that the companies may have negotiated specifically to attain the unicorn level,'" which is gross. My billion-dollar tech idea is a Chrome extension that replaces the word "unicorn" with the words "pre-IPO startup valued at $1 billion or more." 

Elsewhere, "Why tech and public markets can’t and won’t get along":

If public investors give free reign to tech companies to deploy their capital in moonshots, VCs relatively small capital base would be overwhelmed. Apple, Microsoft and Google alone generate $100B in free cash flow per year, the entire VC industry invests something like $50B. By restricting public companies from deploying capital, public investors provide the white spaces for VCs to invest alongside entrepreneurs. I also don’t believe that on net the economy suffers, and likely it actually does better when the investing is done by smaller, entrepreneurial firms. Most studies of innovation would say capital deployed by smaller nimbler organizations leads to better outcomes than in large enterprises.

And: "On a scale of 1 to 10, how much do you feel like a unicorn?" 

Never mind Nedko Nedev.

Last week I told you the story of Nedko Nedev, a Bulgarian stock hoaxer who was bad at stock hoaxes. That story came from the Securities and Exchange Commission and ... might have been fiction? One of Nedev's alleged hoaxes was a fake bid from Bulgarian insurer Euroins for Tower Group, but Euroins has now weighed in and "said its takeover offer last year for Tower Group International Ltd. was real." (Here's Tower's response to that proposal in May 2014; it blew off the Euroins letter because it already had a more certain deal with ACP Re, so Tower never really diligenced the proposal.) 

One lesson here is that you should be skeptical about calls for the SEC to screen its Edgar filing system to weed out fake takeover offers: The SEC, even after investigating the matter for weeks, doesn't seem to be quite sure which takeover offers are fake and which are real. Another lesson is that the SEC's story of catching Nedev may not be all that impressive, and Nedev may not be all that caught. Did the SEC just assume that anything that happened in Bulgaria was part of the same plot?

Elsewhere here is a story about a man day-trading his 401(k):

Tom Geil was still in bed on May 14 when he saw the headlines flash on CNBC: Someone had bid $18.75 a share for Avon Products Inc.

The 66-year-old retiree hustled to his home office, where he logged into his Scottrade account and put in an order for about 300 shares of the beauty-products maker at $8 apiece.

“I said to myself, ‘yes! I got it at $8!,” says Mr. Geil, reached at his home in Oregon City, Ore.

Don't day-trade your 401(k), come on.

Poor Justin Kwan.

Gawker is reporting that the Barclays analyst who sent an amusing e-mail to incoming interns has lost his jobs at Barclays (which he was leaving) and at Carlyle (where he was starting), which is an awful result. His e-mail was obviously a joke, and even sort of a charming one. The message of the e-mail to the incoming interns was something like: You'll work hard here (it's banking), but we have a sense of humor about it, and can make light of it with this ridiculously over-the-top list of banker stereotypes. It's a little fratty, sure, but what do you expect, and it's a nice way to say to the interns: Welcome, now you are in on the joke. But of course when humorless outsiders got hold of the e-mail, all they saw was confirmation of their darkest fantasies about how investment bankers are jerks. 

So now investment bankers can't make jokes, I guess? It does feel like a big thrust of financial reform is to just eliminate the sense of humor from banks, on the theory that if a banker or trader is laughing, it's probably at someone, and the subject of the joke needs protection. Like here are two models for investment banks:

  1. Hard-working, intense, strong sense of camaraderie, funny jokes, culture of intensity.
  2. More relaxed but pretty boring, no jokes, culture of compliance.

To me number 2 sounds pretty unappealing, and it's not a great way to make a lot of money. On the other hand number 1 is a great way to lose a lot of money, and you can see why regulators and the media and the public and even shareholders might prefer the boring culture. Still it seems like something is lost when you can't even send a joke e-mail to the interns.

No one is worried about bond market liquidity.

That seems weird? But I cannot find a single new article about bond market liquidity this morning. There's some bond news -- European governments beat the market by issuing lots of bonds at low rates before last week's bond rout, Warren Buffett beat the market even more handily issuing euro bonds, and investors are betting against the Fed raising interest rates -- but I guess everyone is soothed about liquidity? Give it a day or two. At least in equity markets, people are worried about Dow Theory.

Things happen.

Calpers is getting rid of some outside managers. Lehman and Barclays settled their bankruptcy dispute. Renting is getting expensive. If You Think Greece’s Crisis Will End Soon, Think Again, but also why would you think that? Banks speed up FX reform. Soybean spoofer! "Borrowers who try to appeal to their prospective lenders’ emotional side—by mentioning God, divorce, or the needs of family members, for example—are less likely to fulfill their loan obligations." Interest rate risk in the banking book. American Pharoah Almost Got Repossessed Before Being Born. The executive vice president for regulatory operations at Finra has a NYSE trader's jacket with "rhinestones and a fake fur collar and cuffs." Don't go to law school. Extortion is tax deductibleDadbods. Doubts about the wife-bonus book. Bitcoin mugging

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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