Goldman's Bank and Attractive CEOs

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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Goldman Sachs, Main Street bank. 

GE Capital is sort of the paradigm of shadow banking, that is, of financing of long-term assets via short-term, highly-rated, money-like liabilities that look sort of like bank deposits but aren't, because GE Capital is not technically a bank. But in fact it does own some actual banks, including one called, conveniently, GE Capital Bank. And those banks take actual deposits. If you're a shadow bank for long enough, eventually you grow a real bank. But now General Electric is getting out of the shadow banking business, and selling off chunks of GE Capital, including, now, GE Capital Bank, whose deposits and employees are going to Goldman Sachs. Goldman has apparently also been a shadow bank for long enough to grow a bank. (Disclosure: I used to work there, back when it was more shadowy.) I mean, I know Goldman already technically had a bank, but this just seems uncharacteristic:

This year, Goldman began hiring employees to build an online lending business, aimed at consumers interested in taking out small loans. The bank has said it will look for new sources of deposits to fund these loans, and the deposits from GE Capital could help fill that need.

The $16 billion that Goldman is acquiring is a tiny sum compared with the overall holdings of Goldman, which has assets worth around $860 billion. But the deposits represent an interesting new direction for the bank, which has generally avoided smaller consumer businesses.

GE Capital Bank is an "online bank that accepts deposits ranging from $1 to $1 million." In other news yesterday, "Goldman Sachs Group Inc. sold a Colombian mining operation to Murray Energy Corp. at a steep loss, marking the bank’s exit from the coal business and Murray’s international expansion." If you want a paradigm of how the U.S. financial industry is changing in the wake of the financial crisis and new regulations, it's hard to beat Goldman getting into the online retail banking business and out of the physical coal business on the same day.

Though for some throwback news, "Goldman Sachs Group Inc will pay $272 million to settle a lawsuit that claimed the Wall Street bank defrauded investors about the safety of about $6 billion of residential mortgage-backed securities they bought in 2007 and 2008." That also happened yesterday.

Greece, etc.

"The first phase of a tough, painstaking process closes today," said Alexis Tsipras during "an all-night debate in Athens" after which "Greek legislators approved a bailout package that may unlock as much as 86 billion euros ($96 billion) and help the nation avoid a default next week." The first phase? If you were reduced to baseball metaphors, what inning would you say the Greek bailout process is in? At least, like, the seventy-fifth, right? The debate "began at 2 a.m. and lasted until 9:30 a.m. on Friday," and the fact that Greece started its debate two hours after midnight is a pretty good metaphor for the whole process. 

Elsewhere, Tyler Cowen asks "Which country is most likely to have the next financial crisis?" He goes with Russia and Belarus, with Brazil as runner-up; Ukraine, Venezuela and Argentina are not eligible, while Greece is eligible but "unlikely to win this particular tournament." Speaking of Argentina, "About a quarter of the country’s $33.7 billion of foreign reserves are now denominated in yuan," which is not going great for it this week. And speaking of Brazil, "The combined annual profits of Brazil’s four biggest banks have grown more than 850 percent to just over $20 billion, from $2.1 billion, in the 12 years of Workers’ Party rule," in part thanks to average interest rates for some types of consumer credit of 58.6 percent.

Executive pay.

Here's some unsurprising news: JPMorgan has reacted to the new European bonus restrictions by increasing fixed pay. Or by adding "a cash fixed allowance payable bi-annually," whatever. "This is an example of government actions and unintended consequences," says a guy, and of course it is. Remember the first meta-rule of executive compensation, that all executive-pay rules have the effect of increasing executive pay. 

CEO attractiveness.

Here's a funny little article about how 900 random people's impressions of a company's chief executive officer are predictive of the company's valuation in an initial public offering:

The study found that for the average CEO, a 5% higher rating on perceptions correlated to an IPO price roughly 11% higher than the price that would be expected based on fundamentals alone.

These perceptions are based on "30-second video clips of the presentations" made by the CEOs, "which obscured what the person was saying." So they're not based on substance:

A high rating on a CEO’s competence was the best predictor of a higher IPO price, followed by attractiveness. Trustworthiness was the least important factor, though it still mattered.

And "companies run by CEOs with higher impression scores still had better-performing shares a year after the IPO."

I don't know how seriously to take this study; results like this are sometimes just a function of what you're controlling for ("... expected based on fundamentals alone ...") and how, rather than of facts in the world. But if we take it 100 percent seriously, what conclusions can we draw? For one thing, you might conclude that CEOs really should get paid tons of money, if their attractiveness and body language alone are enough to increase their companies' stock prices significantly. (Though perhaps they should be selected differently?) For another, I always refer things like this to the law of insider trading and materiality. Companies meet with their investors. They're not supposed to disclose material nonpublic information in those meetings, but they're certainly allowed to bring the CEO. So big investors get to meet CEOs of public companies, observe their body language, and get an up-close sense of their attractiveness. Which is predictive as to price. Maybe that's why investors who meet with management outperform those who don't. If you have a level-playing-field-based view of insider trading law -- if you think no one should have unfair trading advantages based on contact with company insiders -- then where does this leave you?

Donald Trump, MLM marketer.

I think the way it probably works is that there's a gene that allows people to process multilevel marketing firms and treat them as at least potentially legitimate business opportunities. Most people -- the Federal Trade Commission, Warren Buffett, etc. -- have that gene, but a few people don't, and the people without the gene probably should never write about multilevel marketing. I suffer from this affliction, but I will nonetheless point you to this article about Donald Trump's ties to multilevel marketing firm ACN Inc., because it is funny. "It is a substantial amount of money, even if you’re rich," is how Trump describes his speaking fees, which is a good goal for all of us. Elsewhere, here is Gawker on the Trump false-flag conspiracy theory.

An Interview with Chief Justice Strine.

In addition to his mastery of the folksy metaphor, Leo Strine is the Chief Justice of the Delaware Supreme Court and pretty good on corporate governance. Some excerpts:

For example, at the federal level, there’s nothing about the banking crisis that’s connected to some of the mandates around activism. It’s actually fairly implausible. Frankly, the risk taking that companies were engaged in was, well, it tended to be favored by the investment community. And so you would think, if anything, the policy response would be to make people focus more on issues of substantial risk and long-term durability. But you get a response that actually, in some ways, makes companies more, not less, accountable to the immediate whims of short-term traders. 

And:

Most people in the United States—that is, ordinary people—do not own individual stocks. You own through a 401(k) program. Your 401(k) program only allows you to buy mutual funds. Most Americans’ equities are held by institutions. We increasingly have institutions that are not just being passive investors, they’re actually proposing things that have long-term implications for the companies that they are proposing. And these proposals have long-term implications for the other stockholders of those companies.

And so, part of what we’re trying to get at—we’re all struggling with this—is what is the new dynamic? We’ve tended to obsessively focus on the fiduciary duties of people who are directors of public companies and without any urgency around the real power dynamics of current corporate governance in which the direct fiduciaries of most American investors are institutional investors.

People are worried about bond market liquidity.

You know that I wake up every day in a panic about this, right? "What if today's the day that no one is worried about bond market liquidity?," I meta-worry. I am rarely disappointed, but the streak always feels precarious. So it's a relief to read, especially in the dog days of late August, that "on Monday, August 17, the Federal Reserve Bank of New York’s Liberty Street Economics blog will launch a blog series that discusses different aspects of the evolving nature of market liquidity." I'm covered for a whole week! (I mean, plus today.) I think of bond market liquidity as two almost unrelated issues -- corporates don't trade enough, while Treasuries trade too much -- and the Fed's series, understandably, seems to be mostly about Treasuries, though the last post will be on "Dealer Balance Sheet Stagnation." Get excited; I certainly am.

Elsewhere: "In High-Yield Energy Debt, Contrarian Sees Value Where Everyone Else Sees Defaults." The contrarian is the Loomis Sayles Bond Fund. This is, of course, a liquidity story. If your worry is that falling bond prices will lead to bond-fund redemptions which will lead to falling bond prices, in a vicious cycle that cannot be broken by fundamental buyers because the buyers herd and lack permanent capital, then energy bonds are a good test case, and here is a partial answer.

Things happen.

The yuan was up on Friday. "China’s Renminbi Devaluation May Initiate New Phase in Global Currency War." Tracy Alloway on yuan structured products. Matt Klein on "People's QE." Dan Davies on Buy/Sell/Hold research recommendations. Bill Gross is doing better now that he's actually short bunds and U.S. equity volatility. Julian Robertson's return to fund management is not going so great. A non-Qualified Mortgage securitization. Edward Jones to Pay $20 Million to Settle SEC Municipal Bond Charges. The guy who owns .xyz will only get $8 from Google every year. A Poem by Laura Kolbe. Ryan Gosling’s Dog Debuts Major Style Makeover. Meet The First-Ever Ned Flanders Themed Metal Band, Okilly Dokilly.

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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