Missing Chats and Soul University

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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Oops Deutsche Bank.

Deutsche Bank, like a lot of big banks, had a culture in which it was viewed as okay to manipulate Libor submissions to help its derivatives positions and/or to make itself look healthier. And so it manipulated Libor a lot, as documented in many contemporaneous dumb electronic chats that it archived and turned over to authorities, and was duly fined $2.5 billion. You might think that that fine would be for the Libor manipulation, or for the culture of noncompliance that led to it, or for the economic harm that it caused, or for the illicit economic benefit that it brought to Deutsche Bank. But it looked a little to me like the size of the fine was more closely related to the number and dumbness of the electronic chats than it was to any particular economic analysis.

Anyway now Deutsche Bank is in trouble again for accidentally losing some of its chats, which means that, if it paid $X million per embarrassing chat, it probably underpaid. Of course, lots and lots and lots and lots and lots of bad conversations are never preserved electronically, because they happen in person (or on unrecorded phone calls), and it seems weird to worry too much about these lost chats. I mean you can have a conspiracy theory in which Deutsche Bank found the smoking gun chats laying bare its Libor manipulation and then sneakily deleted them, but the problem is that the chats it turned over include traders saying in all capital letters "COULD WE PLS HAVE A LOW 6MTH FIX TODAY OLD BEAN?" and led to a $2.5 billion fine. If this is a cover-up it is not a very good one.

Oops Rand Paul.

The Nation has a story about how, while he was helping to lead the Senate fight against raising the debt ceiling, Rand Paul owned some undisclosed shares of the ProFunds Rising Rates Opportunity Fund (RRPIX), which bets on rising long-term Treasury rates. Arguably "a default would cause his holdings to skyrocket; even the threat of default has the potential to roil markets and boost Paul’s RRPIX investment." Which makes it awkward that he was threatening default. And in fact RRPIX was up about 12 percent between May 17 and October 15, 2013, roughly the time of that debt-ceiling drama; it fell almost 3 percent on October 17, when the crisis was resolved. 

On the other hand, it was not a priori obvious that a U.S. default would have hurt Treasury bond prices; certainly at the time many people thought that a default would cause a flight to safety, with "safety" still meaning Treasuries. Plus, like, who knows what Rand Paul thinks. One thing he claimed to think was "that United States wouldn’t actually default if the debt limit were breached." And if you think that runaway borrowing will lead to hyperinflation and growing borrowing costs -- as debt-ceiling proponents tend to think, or say they think -- then, I mean, sure, hedge that by shorting the long bond, why not.  

Soul University.

In many ways SoulCycle's planned initial public offering -- it filed its S-1 yesterday -- is kind of boring and traditional. SoulCycle is growing, has revenue, and even made a profit of $25 million last year. The IPO is to pay down debt and run the business; early investors aren't cashing out. On the other hand, it is arguably "a megacity workout fad," so if you think that this IPO is about cashing out at the top, you would have some company. And there is a ton of very silly language in the prospectus -- "SOULccolade" and "Soul University" and "emotional journey" and an "immersive culture of inspiration and empowerment" and "ANYONE can be an Athlete, a Legend, a Warrior, a Renegade or a Rockstar" and "the place people come, regardless of their age, athletic ability, size, shape, profession or personality, to connect with their best selves" -- that has led Gawker and others to brand it a "cult." That is, of course, a deep misunderstanding of modern capitalism. That stuff doesn't meant that SoulCycle is a cult. It just means it's a brand. "A rapidly growing lifestyle brand that strives to empower our riders in an immersive fitness experience," but that's how brands work these days.

There is no word yet on exactly how athletic clothing and/or exercise were incorporated into the investment bank pitches for this IPO (which is being led by Goldman Sachs), but I am confident that it happened. Elsewhere in culty startups, Uber is good, concludes Felix Salmon. 

Taxes.

When Burger King agreed to merge with Tim Hortons and move to Canada, it emphasized the business reasons for the deal, but obviously moving to Canada would save it some taxes. Some people found this outrageous, though I didn't: Burger Tim is a mostly non-U.S. company, and it seems perfectly reasonable for it not to want to pay U.S. taxes on all its non-U.S. income. One person who agrees is Senator Rob Portman, who is holding hearings on the tax code and who is using Burger Tim as an example of a company moving abroad for the tax savings -- not to criticize the company, but to criticize the tax code. Here's the Senate report on the matter, which includes some heavily redacted Burger Tim presentations pitching the tax savings of the deal, which it rather downplayed in its public statements. 

Elsewhere in taxes, "Asset managers are generally evaluated on a pretax basis" is just a good thing to remember, particularly if you're planning to adjust capital-gains rates and holding periods to influence asset manager behavior. 

Theology.

Bill Gross's latest Investment Outlook for Janus is concerned primarily with Biblical exegesis, as he traces the difference between the Lord's Prayer in Matthew 6:12, which petitions to "forgive us our debts (οφειληματα), as we also have forgiven our debtors," and which is used in many Protestant services; and that in Luke 11:4 to "forgive us our sins (or trespasses) (αμαρτιας), for we ourselves forgive everyone who is indebted to us (παντι οφειλοντι ημιν)," the traditional Catholic version. Gross in this matter is staunchly Catholic -- "Given a chance, I thought I would infinitely prefer forgiving a trespasser as opposed to a debtor" -- and it is interesting to contrast his Catholicism on this point with Weber's well-known story of Calvinism as an influence on the rise of investment wealth. Of course αμαρτια is something more than "trespass" in the modern sense, and debt and guilt are intimately bound up with each other in ancient thought, as the language in Luke itself suggests, and as Nietzsche famously argued ("the major moral principle 'guilt' [Schuld] derives its origin from the very materialistic idea 'debt' [Schulden]," and "punishment developed entirely as repayment," though he arguably had his own linguistic biases, as there is no etymological relationship in the Greek). Gross is aware of this, saying that "they are meant to convey one and the same thing," which perhaps overstates matters. Certainly it is difficult to understand the current relations between Greece and Germany without giving some weight to traditional intuitions about the moral dimension of debt, intuitions that are largely absent in modern economic thought outside of Bill Gross. (David Graeber's "Debt: The First 5,000 Years" has revitalized modern discussion of these conflicting intuitions.) Gross is almost pre-modern here: "Debtors didn’t necessarily belong in a prison but then they didn’t belong in a prayer either, where forgiveness was akin to abrogation, default, and not getting your good old fashioned money back!" That "necessarily" is ominous. It is both entirely understandable (he wants to get paid back!) and also very odd that a modern bond fund manager would have such an explicitly moral understanding of debt obligations. Also he thinks the Fed will raise in September.

Crime.

This, from Matt Kaiser, is about the lion dentist, but it is important and applicable to finance:

Why do people reflexively think that whenever something bad happens someone should go to prison?

This reflex is exactly why we have a mass incarceration problem. We incarcerate people at rates wildly in excess of what the rest of the world does because there is something loathsomely American about using punishment as our knee jerk reaction to a policy question.

We’re herd animals, and when someone yells “Crack is bad” the whole country jumps on sending people to prison for decades for drug crimes. Enron makes the news and everyone wants executives and accountants in other companies to face prison and a longer time in prison to boot.

People are worried about bond market liquidity.

But not Paul Volcker, who says there are "people that want to buy oddball securities, and think they can sell them the next day at the same price or a very close price, and that shouldn't be the real world." I sympathize, though of course Paul Volcker has a dog in this fight: If you're worried about bond market liquidity, Volcker's eponymous rule, and the reduction in dealer inventories that it's driven, is one of the things you're worried about. And if the next financial crisis really is caused by the Volcker Rule, that will be awkward for him.

Things happen.

U.S. banks are the best banks. Yanis Varoufakis is no fan of shirt austerity. Paul Singer is cracking down on people forwarding his investor letters. Michael Pearson has done well at Valeant. Cargill is shutting some hedge funds. Heinzkraft is eliminating free cheese sticks. Bats Wants Permission to Crack Down on Spoofing Faster. Overstock.com is announcing something about its crypto-initiatives next week. Drone-enabled fintech. Cone spaghetti approved. "It’s not just bling and flashy cars that today’s rappers like to name-drop." "I think that the voice of ClickHole is that of a lunatic. It’s an insane person." Merrill Lynch Barbeque Branding Iron (via).

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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