Accidental Payments and Quiz Cheating

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!

Here's a story about how Deutsche Bank's foreign exchange desk accidentally sent a hedge fund client $6 billion, because the payment was "processed by a junior member of the bank’s forex sales team in June while his boss was on holiday" and he used gross instead of net values, resulting in "too many zeroes" in the payment. Deutsche "recovered the money from the US hedge fund the next day," and of course it did! We live in a society! I joked on Twitter about how I'd have run off with the money, but come on. The hedge fund has agreements with Deutsche; it's entitled to the money it's entitled to under those agreements, not whatever Deutsche happens to wire it. Accidental wires happen, and we have a legal system that allows them to be fixed. Typos don't bind everyone forever. Mistakes get corrected in good faith. This story is really not a big deal. Deutsche Bank had some money out overnight uncollateralized. Not great! But it was obviously going to the get the money back.

People reeeeaaaalllllllly want it to be the other way though. The magic-words theory of finance, the idea that there's some simple trick that can make you billions of dollars if you just know the password, is irresistibly appealing. The financial industry is about allocating capital, which means that its secret essence is about making money without labor. In practice that requires a lot of labor, but of course deep down everyone dreams of running off with a big mistaken wire transfer.

Banks are boring.

I mean, other than Deutsche Bank living dangerously with that $6 billion, what is even going on? Morgan Stanley is the latest big bank to announce disappointing earnings "thanks to weakness in trading and a hit to private-equity investments in Asia." "We had an unusual hiccup in the merchant bank, which is highly unlikely to repeat itself," said Chief Executive Officer James Gorman. The results are a little weird insofar as Morgan Stanley has been pretty consistent about reducing its reliance on volatile trading businesses, yet those businesses are still driving the headlines. "The latest quarter delivered a jarring reminder that even in its more balanced incarnation, Morgan Stanley remains beholden to Wall Street’s ups and downs."

Meanwhile in Europe everyone is just giving up:

Deutsche Bank AG announced sweeping management changes on Sunday, less than two weeks before co-CEO John Cryan will present his plans to scale back the trading empire built by his predecessor. On Wednesday, Tidjane Thiam will probably reveal a strategy to prune Credit Suisse’s investment bank in favor of wealth management. Barclays Plc, BNP Paribas SA and Standard Chartered Plc are also trimming operations.

I guess the real test of whether banks succeed in becoming boring, besides my own subjective sense of boredom, will be when the headlines about their earnings stop being primarily about how their trading businesses did.

Internal quizzes.

I mentioned this yesterday, but Business Insider has more information about why those Goldman Sachs analysts were fired for cheating on an internal test, and it's kind of interesting:

The cheaters, who were spread across different rooms, used their Goldman-issued computers to search terms that came up on the exam, according to people familiar with the matter. They took their test on a computer and used that same computer to use Google to search for some of their answers.

Goldman was able to trace the activity, and on the day the bank reported weak earnings, the careers of 20 or so analysts were cut short.

Okay kids, gather round and listen up. If you work at a bank, that bank is tracking what you do on your computer. They told you that when you started, but you are so used to clicking through terms of service that you didn't pay any attention. "Yeah, yeah, the bank reserves the right to monitor my computer, blah blah blah," you said as you signed a bunch of forms. Now 20 of your analyst classmates are gone. Are you paying attention now?

The key compliance challenge of the modern investment bank is to convince employees that their electronic communications are being monitored. The big bank fines and scandals of the post-crisis era are about stupid e-mails and electronic chats. The conduct was vague, ambiguous, hard to prove; the proof of nefarious intent came from all the dummies chatting with each other to the effect of "bro lets ilegally manipoolate libor lol." 

You'd think it would be easy to convince people not to create a permanent searchable record of their misbehavior on computers monitored by their employers and regulators, but the death wish is strong. And combating it calls for subtlety. Goldman would probably add "Don't put it in writing" to its list of business principles, except -- and this is important -- it can't put it in writing.

So what does it do? Well, it bans swear words in e-mail and chat. You want to swear, the system blocks you, and you come up with a folksy euphemism; more importantly, though, you internalize the idea that the system is watching you. Ideally, when you want to type illegal stuff, instead of swear words, you remember that the system is monitoring you, and walk over to talk it out in person instead. (Or don't do the illegal stuff, sure, whatever!) 

People who use their monitored work computers to cheat on a dumb training test are the people who are least likely to learn this lesson, and are therefore a grave risk.

Unicorns.

Here is a story about how (1) public markets may not be willing to value hot tech startups as richly as private markets, but (2) private markets will cheerfully value them very, very richly:

Within a few days, three investors made separate offers that valued Zenefits at $3 billion or more. Mr. Conrad was about to sign a deal with a $3.5 billion valuation when his mentor, Lars Dalgaard, a general partner at venture-capital firm Andreessen Horowitz, urged waiting until the end of the day. Mr. Dalgaard later called it a “feeding frenzy.”

An hour later, Fidelity offered to make an investment that valued Zenefits at $4.5 billion, a staggering nine times the price investors paid just 11 months earlier. “We could have raised infinite amounts with a $3 billion valuation,” Mr. Conrad says.

If your model is that private markets have largely replaced public markets as the source of financing for growing businesses -- and that public markets are just for cashing out earlier investors -- then this makes a kind of sense. Like, if only early-stage companies raise private money, and then need to go to public markets to scale, it makes sense that those early private investments will be at low valuations. But if you can raise "infinite amounts" at multi-billion-dollar valuations in the private market, then they're basically equivalent to the public markets. And in public markets, prices go up sometimes, but they also go down.

Oops!

Here is a $17.5 million Securities and Exchange Commission settlement with two UBS investment advisory firms "arising from their roles in failing to disclose a change in investment strategy by UBS Willow Fund LLC, a closed-end fund they advised." The story is that UBS Willow Fund invested in distressed debt until about the fall of 2008, at which time it got short distressed debt via credit default swaps, "continued to perform poorly due to the change in strategy and was liquidated in 2012," all without telling its investors that it was now a short-credit fund rather than a long-credit fund. That is bad! You should tell investors if your strategy is the opposite of what you advertised! Also, though, being long credit through the fall of 2008 and short thereafter is just terrible, terrible trading. 

Dewey mistrial.

The endless trial of former executives of failed law firm Dewey & LeBoeuf, who were "accused of plotting to manipulate financial records in an attempt to defraud bank lenders and insurance companies during the financial crisis," finally ended. In a mistrial. So maybe it'll have to start all over again. The case was always a bit vague, and Manhattan district attorney Cyrus R. Vance Jr. has a pretty terrible record in recent high-profile white-collar trials, but this irritated me:

One juror, Skylar Schur, a high school English teacher, said while she did not feel overwhelmed, some members of the panel seemed “uncertain as to what our role as jurors was.” She said some jurors were “looking for a smoking gun” to convict the defendants, even though the prosecutors had cautioned jurors at the beginning of the proceedings not look at the evidence that way.

But that's the only way to look at the evidence! The prosecutors were asking the jury to find beyond a reasonable doubt that these people knowingly committed crimes and should go to prison! If you don't have, you know, actual clear proof of that -- if all you have is some dicey-looking transactions and a vague sense of unease about what they were up to -- then you can't convict! I remain skeptical of the idea that it is unusually hard to prove white collar crimes, but you do need some proof.

People are worried about the debt ceiling.

House Republicans "will spend several hours over the next three days behind closed doors, trying to settle on a strategy to avoid a debt default and chart a path for their party." Of course the strategy to avoid a debt default is just to raise the debt ceiling, which is a purely imaginary number; there is literally no obstacle at all to avoiding a debt default. And yet the Republicans seem to be having trouble with it. Meanwhile, there is incredible demand for short-term Treasury bills, leading to negative secondary yields and zero yields at auction. If Treasury was interested in selling bonds to investors for more than their face value -- that is, raising some extra money not subject to the debt ceiling -- it would be pretty easy to do that! Debita impendiorum maximorum vendenda sunt, as they say.

(Incidentally I made up that spaghetti-Latin tag yesterday, following Cato the Elder, to mean "The super-high-coupon bonds must be issued." But I originally said "venenda": I was going for "vendenda," the future passive participle of vendo, "to sell," but got it wrong based on veneo, "to be sold," otherwise used as the passive of vendo. Thanks to Evan Rose for pointing out the error. I do not claim that the Latin is otherwise right though.)

People are worried about bond market liquidity.

Here is the story of Algomi Ltd., which has a system that "lets banks give access to their private data to fund managers who want to discreetly identify who owns corporate or government bonds that are not widely traded." Which will, of course, improve liquidity in those bonds:

“The bond-market liquidity problem is real and well-documented,” Taylor, Algomi’s chief executive officer, said in an interview at the Fixed Income Leader Summit last week in Barcelona. The company “seeks to address the issue with proper pre-trade information. None of this data appears on websites and terminals. This is why we are different.”

Elsewhere in bond market liquidity: "In Credit, Low Liquidity Can Spell Opportunity," says AllianceBernstein

Things happen.

The Tri-Party Repo Market Like You Have Never Seen It Before. The Man Accused of Spoofing Some of the World's Biggest Futures Exchanges. Community bank subordinated debt CDOs are back. Junk bond yields are up. Good luck harmonising European bank capital! Blackstone Leads Deal to Buy Stuyvesant Town Housing Complex. Shares of Weight Watchers Jump as Oprah Winfrey Takes a Stake. JPMorgan Plans Africa Expansion Even as Regulators Block Entry. Hedge fund performance fees decline sharply. How Not to Be Replaced by Robots: Better Brush Up on Your Social Skills. How are your mouse-clicking skills? The Republic of San Marino is looking for a central bank president (via). Truck Hero filed for an IPO. Teen says he hacked CIA director’s AOL account. "If you look at the bill and turn it over, there's more than 1-square-inch of a bill to work with to make changes." The story of the kebab cat tweet. "Gilmore Girls" is coming back. Also "Star Wars."

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(Also boring banks, tech unicorns, a secret strategy, a mistrial, and some Latin grammar.)

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