Bubbles and B Corporations

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

Are we in a tech bubble?

Don't ask me, I just work here, but here's Nick Bilton with a pretty emphatic yes. ("The biggest of all losers will be anyone who has borrowed money to invest in private companies," Mark Cuban tells Bilton, but ... do people do that?) You know things are serious because Aileen Lee pops up with a unicorn-related portmanteau:

“We basically doubled the number of unicorns in the past year and a half,” says Aileen Lee, the founder of Cowboy Ventures, who has herself become a mythic creature in the Valley after coining the term. “But a lot of these are paper unicorns, so their valuations may not be real for a while.” Others, Lee acknowledged, may never see their balance sheets add enough zeros to justify the title. They will be given a new sobriquet: “unicorpse.”

I feel like real proof of a bubble would be if Uber gave Aileen Lee a billion dollars worth of stock for coining a customized unicorn portmanteau for them. (Though, Uber, if you're reading, I'd do it for $100 million, and already have some ideas. How does Ubercorn strike you? Or quinquagintacorn?)

One of the most interesting and under-theorized developments in modern business journalism is its increasing epistemic humility: Driven by the complexity of the markets, the academic dominance of the efficient markets hypothesis, the failure to predict the global financial crisis, competition from informed and opinionated working financial professionals with blogs and Twitter, etc., the media seems much less interested than it used to be in telling people why markets did what they did and what they'll do next. As I once put it, "the deep-EMH, lol-nothing-matters view of markets has utterly conquered markets journalism." This has good and bad points and probably deserves more analysis. Here is Myles Udland.

But tech-bubble-calling is one of the few remaining places in business journalism where it is still respectable to make specific, falsifiable(ish) claims: It is always appropriate to gaze upon the glut of laundry startups and say, "there's something wrong here." You could have a cynical model where that alone proves that there's no bubble.

B Lab lobbying.

I love this story about how "Americans for Tax Fairness wrote to B Lab, the nonprofit organization that determines the B Corporation certification for socially responsible companies, arguing that Etsy’s tax arrangement should disqualify it for the designation." Some companies want to be B Corporations, because that makes them appealing to investors and workers and consumers who want to be socially responsible. And "B Corporation" is a designation made by a private group that decides which companies are and are not socially responsible.

But of course no one could coherently declare what makes a company "socially responsible." If you fly refugees to safety, but you do it in really polluting planes, are you socially responsible? Was Mother Teresa socially responsible? If you help hobbyist knitters sell their wares online, but also reorganize your Irish subsidiary as an unlimited liability company so you don't have to publish that subsidiary's financial results, are you socially responsible? 

Those are basically just things you argue about: Every company does some things it brags about and some other things that critics carp about, and the investors/workers/consumers can make their own evaluations of which are more important. But when there's a private certifying agency, it becomes a high-stakes binary: It puts all the things into an algorithm, and the answer comes out, and you either are a B Corp or you aren't. And so B Lab, which is just a private nonprofit -- albeit one "governed by a dynamic process of broad, transparent multi-stakeholder engagement" -- gets lobbied and pressured to change its criteria in ways that get outcomes that different people want. 

Markets were down.

Yesterday the New York Stock Exchange again invoked Rule 48, its controversial rule allowing designated market makers to open stocks late, and not to distribute price indications before the open, when the market is especially volatile. I have to say it is hard to find too many outside defenders of Rule 48, but there are a bunch of critics:

"For the New York Stock Exchange to publicly defend turning off transparency at the most volatile time for the market is an absurdity," Chris Concannon, chief executive of BATS Global Markets, the second-largest US equity market and a rival to NYSE, told Business Insider.

And:

"It is not helpful to a market maker when we are trying to provide two-sided liquidity on ETFs, and do not have an opening price from the primary venue on a significant portion of the components of the ETF," Doug Cifu, chief executive of electronic trading firm Virtu Financial, told Business Insider.

On the other hand, NYSE has a pretty good zinger in defending against BATS's criticism:

The NYSE spokeswoman defended the exchange’s approach by contrasting it with a notable failure a rival experienced with its own initial public offering.

“As BATS experienced with its IPO, relying exclusively on technology for opening stocks and IPOs can have disastrous consequences,” she said, referring to BATS’ decision to cancel its IPO in 2012 because of a glitch in its trading system.

Elsewhere, "The S&P 500 is Wall Street’s indicator. Main Street’s indicator is the Dow." And in China, that big military parade, for which stocks are supposedly being propped up, will be fairly intimidating. Here is Michael Pettis on China's balance sheet. And here is Tyler Cowen's "simple primer for understanding China’s downturn."

Governance and accountability.

Here is law professor Steven Schwarcz on "Corporate Risk-Taking and Public Duty":

To avoid another devastating collapse, most financial regulation since the crisis is directed at reducing excessive corporate risk-taking by systemically important firms. Often that regulation focuses on aligning managerial and investor interests, on the assumption that investors generally would oppose excessively risky business ventures.

Schwarcz thinks "that assumption is flawed," because "the law inadvertently allows systemically important firms to engage in risk-taking ventures that are expected to benefit the firm and its investors but, because much of the systemic harm from the firm’s failure would be externalized onto other market participants as well as onto ordinary citizens impacted by an economic collapse, harm the public." I think that this is so obvious as to hardly be worth mentioning, but Schwarcz is right that some people still think that the way to regulate banks is to better align bankers' interests with those of shareholders, because shareholders will want the right thing. Shareholders won't.

Here is a story about how Senate Democrats want the Securities and Exchange Commission to pass new rules requiring companies to disclose their political donations:

The argument in favor of mandating political spending disclosure by corporations is that it would provide a way for shareholders to manage their risk and would provide greater transparency into the connection between corporations and political figures. 

The dream seems to be that if shareholders know that their money is being spent on lobbying, they will demand that managers cut it out. But shareholders won't. Shareholders are the owners of the equity in a company. Their interests are not automatically aligned with those of society as a whole, or of the politicians urging these rules. Relying on shareholders to implement societal or political goals is a non sequitur. Consider the first meta-rule of executive pay, that all executive-pay rules have the effect of increasing executive pay: The dream of politicians is that, say, pay-ratio disclosure rules will cause shareholders to cut down on executive pay, because that's what the politicians would do if they were shareholders. But the shareholders are shareholders, and their concerns are different.

Elsewhere, various people really don't want Brian Moynihan to be both chairman and chief executive officer of Bank of America. And Jean-Claude Trichet on "Getting Bank Culture Right."

Bill Gross Investment Outlook!

Here's a pretty convoluted leer:

Size does matter you know. There are basketball players, NFL linemen, and the more popular but unmentionable allusion to the bedroom that makes my point, although the older one gets, the more irrelevant playing basketball and football become, if you get my drift. 

Then there's a lot about the distortions caused by artificially low yields. And don't miss Gross's list of reasons why someone might want to kill charismatic megafauna (being named Captain Ahab, running "a safari company under the name 'The Great White Hunter'").

People are worried about stock buybacks.

Though this one is sort of a niche worry: that there aren't enough stock buybacks to stop the market's decline. Goldman Sachs's corporate agency desk "received record orders from clients for repurchases in the five days ended Friday." But "While the repurchases may have helped limit losses, they also show that companies alone don’t represent sufficient buying power to prevent every selloff in equities." It would be weird if they did, although the market was up on the week. But the stereotype is that companies tend to buy back their own stocks when things are good and prices are high, and then retrench when markets feel risky, so I guess it's impressive that companies actually tried to buy the dip.

People are worried about bond market liquidity.

I mean, probably they are somewhere. One interesting fact is that yesterday was the 10th day with no new U.S. corporate investment grade bond issuance, which "matches the record in the days post the Lehman collapse." We talked the other day about a Bank of England piece on bond market liquidity that found that the bond market now is more responsive to changes in demand than it was before the crisis, perhaps due in part to reductions in dealer inventory that make it harder for dealers to cushion changes in asset-manager demand for bonds. This responsiveness shows up in price volatility, but also in new issues: "Reflecting the larger increases in spreads that now follow falls in asset manager demand, we also find a greater decline in issuance resulting from these shocks." 

Me yesterday.

I wrote about Blythe Masters and blockchains for banks. Here (via John Carney) is a paper on "Bitcoin and the Uniform Commercial Code."

Things happen.

Puerto Rico’s Power Authority Reaches Deal With Bondholders. There's deflation in Zimbabwe. Just the Mechanics of the Fed's Exit Strategy Could Boost the Dollar. Uber Drivers Suit Granted Class-Action Status. Bank of America Crunches the Numbers on Summer's Quant Storm. The Evolution of Scale Economies in U.S. Banking. Teen Chef Opening $160-Per-Person Tasting Restaurant In West Village. "I love stand-ups, and I feel it’s the one thing I know about that I could actually judge, besides people’s morals." Stephen Colbert "can flawlessly pronounce the name of the Mesoamerican deity Quetzalcoatl." Meet the Former McKinsey Analyst Now Herding Goats. "Until I began spending basically every day at Soho House, I really didn't know what it was." "Any evidence confiscated would not be turned over to sausage vendors."

If you'd like to get Money Stuff in handy e-mail form, right in your inbox, please subscribe at this link. Thanks! 

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

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

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