Money Stuff

Bad Interns and Generous Unicorns

Also Alibaba, Volkswagen, Trump, Greece and so much bond market liquidity.


"I wish there was a law against referals," wrote Charles Li in an e-mail when he was chairman of J.P. Morgan China, and … there kind of was? I mean, not exactly, but there is the Foreign Corrupt Practices Act, which arguably made it illegal for JPMorgan to hire the children of foreign government officials in order to win business or benefits from them. But Li "played a key role managing both client relationships and personnel decisions during his tenure at the Wall Street bank," and so he sent a lot of e-mails where those relationships and decisions seem to have intersected. For instance:

“This is a candidate referred by Huang Hongyuan of CSRC and I need to make it work,” Mr. Li explained in an email to his colleague about Mr. Huang’s prospective employee, who was given an internship in 2007 and a one-year contract in 2008. “Huang wanted us to give a genuine interview process so that she appreciate how it works. Could you organize to have three person interview her, yourself included?”

“Make her feel that we are moving mountains so that she is grateful,” Mr. Li later instructed. “We do need to make this hire in HK though.”

CSRC is the China Securities Regulatory Commission, a government agency, which makes this all awkward. (Huang is now the president of the Shanghai Stock Exchange, and Li himself is now the head of HKEx, the Hong Kong stock exchange.) It is hard, for me at least, not to sympathize with Li. Client service is a hard and terrible job of turning business relationships into friendships and friendships back into business. And really what are one or two or eight internships among friends?


The Internet is an incredible engine for scaling, which means that a fairly small group of people can in a fairly short period of time make an Internet thing -- a crowdfunding platform or a cab-hailing app or a social network -- that millions or billions of people use and love. A plausibly sufficient incentive for doing that is just the satisfaction of improving the lives of others, or the minor goofy celebrity that comes from building a cool Internet thing. But more often these days that is swamped by the much more straightforward incentive of, then you can go public and sell ads against the cool thing and become a billionaire. But here is the rather sweet story of Kickstarter, whose co-founders

announced on Sunday that Kickstarter was reincorporating as a “public benefit corporation,” a legal change they said would ensure that money — or the promise of it — would not corrupt their company’s mission of enabling creative projects to be funded.

"We don’t ever want to sell or go public,” said Mr. Strickler, Kickstarter’s chief executive. “That would push the company to make choices that we don’t think are in the best interest of the company."

Hey good for them, that's super. I can think of one or two other companies that I wish had done that. Kickstarter's venture capitalists are putting a brave face on it ("When the time is right, I’m confident that Kickstarter will return cash to their loyal shareholders"), and it may not even hurt with recruiting: "The Kickstarter co-founders said the company’s stance had attracted like-minded people — those more focused on the overall mission and less on the value of their equity."

On the other hand, here is the Economist on Coase and Uber. It's sort of a well-known oddity that people use the term "a Coasean world" to refer to one with no transaction costs, even though poor Coase himself certainly never thought that described our world. As he said in his Nobel lecture

Stigler argues that the Coase Theorem follows from the standard assumptions of economic theory. Its logic cannot be questioned, only its domain. I do not disagree with Stigler. However, I tend to regard the Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transaction costs. The significance to me of the Coase Theorem is that it undermines the Pigovian system. Since standard economic theory assumes transaction costs to be zero, the Coase Theorem demonstrates that the Pigovian solutions are unnecessary in these circumstances. Of course, it does not imply, when transaction costs are positive, that government actions (such as government operation, regulation or taxation, including subsidies) could not produce a better result than relying on negotiations between individuals in the market. Whether this would be so could be discovered not by studying imaginary governments but what real governments actually do. My conclusion; let us study the world of positive transaction costs.

The Economist argues that it doesn't matter if Uber drivers are contractors or employees: "A corollary to Coase’s theory is that when transaction costs are low" -- like, apparently, in the U.S. health insurance market? -- "there is no need for a firm."

Also, I'm late to this, but here is Fortune with a whole techno-cryptozoological taxonomy of startup horsies, from "My Little Pony" ($10 million startup) through "centaur" ($100 million) and "unicorn" (you know) all the way up to "quinquagintacorn" (Uber). "Honest, we didn't make these up," says Fortune, but I feel like I made up "quinquagintacorn"? Like, people don't actually call Uber a "quinquagintacorn," do they? Everyone knows that the "corn" means "horn," right? Because in mythology a unicorn is a creature with oh you know what never mind. Elsewhere: "sharing unicorns."


"The lockup on 63 percent of Alibaba shares ended Saturday, freeing up the biggest shareholders to sell stock starting Monday," and one of the biggest and antsiest of those shareholders is Yahoo, which is now free to sell or spin off its Alibaba shares. The year since Alibaba's initial public offering has not otherwise been kind to Yahoo's plans to spin off the shares, though, as the IRS recently more or less killed the idea of doing that tax-free. Even sadder, the stock is down from its post-IPO peak, to the point that Yahoo would have done better by selling at the peak and paying the taxes than it would have by doing a tax-free spinoff now. But of course it couldn't do that, because of the lockup.


I don't really have much to say about this Volkswagen story except that it is nuts. We talk a lot about bank misbehavior around here, and imagine if a bank had programmed its computers to deceive regulators about its dangers. Like, when the regulators come in for the stress test, your computers say you own only Treasury bonds and loans to mom-and-pop companies, but then as soon as they leave it's prop trading of risky derivatives as far as the eye can see. I have so many questions. Who was the person at Volkswagen who thought it was a good idea to program the car to be clean during emissions tests and dirty on the road? And: If you can program the car to drive cleanly, why not program it to drive cleanly all of the time? And: How exactly did the car know that it was taking an emissions test and needed to be on its best behavior? Here is the story of the two people -- aptonymically named Mock and German -- who figured out the deception. The stock "plunged as much as 23 percent," and "the best case for VW is probably still a multi-billion dollar fine."

Congrats Syriza!

If I understand Greek politics correctly, and I do not, Alexis Tsipras's "emphatic election victory" this weekend means that he will immediately leave politics and enter a monastery. Because last time he won a vote against a creditor-imposed austerity program, he immediately went and agreed to that program, is the joke here. I suppose if he stays it will be easier for him to implement the program with, what, his third electoral mandate? (Bloomberg points out that "Say what you will about the Greeks and their country’s reputation for inefficiency, but they know how to run an election"; I suppose they get a lot of practice.) "In less than a year, Greece has gone from electing an anti-bailout firebrand to re-electing a pro-bailout incumbent," says Megan McArdle, and the joke is it's the same guy. To pile on the paradoxes:

“On the one hand, the Greek electorate voted in exactly the same government: In short, nothing changed,” said Stathis Kalyvas, a professor of politics at Yale University. “On the other hand, the electorate brought in a party promising to implement a completely different set of policies. In short, everything changed. The Greek political saga is set to go on.”

A "saga" is a Scandinavian genre; I think you're obligated to say "Odyssey" here, or perhaps "tragedy."

Meanwhile in political comedy, here is a story from the U.K.!


Jeffrey Sonnenfeld of the Yale School of Management went to interview Donald Trump and fell hard for him:

Going to his office, you can feel his authenticity. Sure his name and photos are everywhere, but the energy and identification are palpable in Trump Tower. You can feel it in the building and see in the people that work with him that they’re all proud to be there. His staff carry themselves with a sense of mission, and Trump makes them all feel important.

And Josh Barro read Trump's 1987 book "The Art of the Deal" and found it surprisingly public-sector-oriented. "He has repeatedly said it’s the best-selling business book of all time, a claim that isn’t true but might be an example of what he terms 'truthful hyperbole.'" An intriguing fact of our political culture is that the idea of "authenticity" is entirely separated from the idea of "truth." You can be totally authentic without ever saying anything true!

People are worried about bond market liquidity.

Remember that one day when they weren't, and I was all "I'm retiring this section ha ha ha," like an idiot? And then literally the next day an actual central bank official literally said "I would like to provide Matt Levine with some more material" about bond market liquidity? This Wall Street Journal headline is "The New Bond Market: Bigger, Riskier and More Fragile Than Ever," and it is "the first in a series of articles exploring the new bond market that has taken shape since the financial crisis," and all of this feels like a bit of a rebuke to me for suggesting that we could stop worrying about bond market liquidity. Keep worrying! Rate increases are coming! "Bond mutual and exchange-traded funds now own 17% of all corporate bonds, up from 9% in 2008," increasing liquidity risk. "Regulators worry that many investors may not know what is in their funds." And "bonds appear vulnerable as never before to price reversals and trading disruptions that could spill over and threaten financing for businesses and individuals." It's liquidity worries as far as the eye can see.

And it's not just that article. Here is Jason Zweig on run risk in high-yield bond funds:

A new Wall Street research report argues that long-term investors in high-yield or “junk” bond mutual funds could take a hit if too many others yank their money out during a market downturn. While the results would probably be much milder in all but the worst markets, the research is still a reminder that the less liquid the investments a fund holds, the more careful you should be in evaluating it.

Elsewhere, "JPMorgan's Dimon Says Violent Moves in Treasuries Are Possible," though I suppose that's arguably a volatility worry and not a liquidity one. And far to the north, a new liquidity worry is gathering, as "The Canadian Securities Administrators is proposing trading data on all corporate-debt securities be made public by 2017." And you know what that means:

Dealers, through their industry body, the Investment Industry Association of Canada, have said more transparency could make it harder to trade corporate bonds because it might be more difficult to use their own balance sheets to facilitate trades.

“If the information is disseminated too soon, it might jeopardize market positions and take away from liquidity,” Jack Rando, managing director at the Investment Industry Association of Canada, said by phone from Toronto.

Things happen.

Gretchen Morgenson on this week's Bank of America vote. Robey Warshaw, the tiny bank at the heart of a mega-merger. Treasury Seeks to Curb “Cash-Rich” and  REIT Spin-Offs. Stephen Lubben on "a flexibility in 363 sales that might not exist in traditional reorganization plans." Fiduciary Financial Advisers and the Incoherence of a 'High-Quality Low-Fee' Safe Harbor. Could negative rates be next on the Fed's policy menu? Bondholders "react negatively to the appointment of a female CEO and positively to the appointment of male CEO." Book recommendations from Goldman Sachs. Kareem Abdul-Jabbar wrote a novel about Sherlock Holmes's brother Mycroft. Yale Law School students "lean toward selfishness and efficiency more than the average American." (Related?) Have donut holes gotten smaller?

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