Babies, Hashlets and Yahoo

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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Congratulations to Mark Zuckerberg and Priscilla Chan on the birth last week of their daughter Maxima, which, like all births of all babies, they announced on Facebook. They also announced -- in a letter purportedly written to little Max, although at a surprisingly high reading level for a one-week-old -- that they'd be giving away 99 percent of their Facebook stock to the "Chan Zuckerberg Initiative," a charitable organization whose "initial areas of focus will be personalized learning, curing disease, connecting people and building strong communities." When completed, this giveaway could leave them only twice as rich as Mitt Romney.

But it will take some time to get there. Unlike most birth announcements, Max's came with a Securities and Exchange Commission filing, in which Facebook reassured investors:

Mr. Zuckerberg has established a new entity, the Chan Zuckerberg Initiative, LLC, and he will control the voting and disposition of any shares held by such entity. He has informed us that he plans to sell or gift no more than $1 billion of Facebook stock each year for the next three years and that he intends to retain his majority voting position in our stock for the foreseeable future. 

You can actually see the moment where Facebook investors thought that Zuckerberg might be relinquishing control: The stock dipped sharply, then rebounded. It turns out that Zuckerberg's personal control of Facebook's voting stock is worth billions of dollars to other investors. Apparently they think he's good at connecting people and building strong communities.

One hipster criticism of this massive donation is that it is a tax avoidance scheme: By donating the money to his foundation to be spent on pet causes (or even for-profit investments), Zuckerberg avoids having that money taxed and spent on causes that we as a society have agreed are priorities, like wars in the Middle East. But this is sort of a naive view of the tax system. Zuckerberg's money isn't taxed now! It's in Facebook stock, which doesn't pay a dividend, and unrealized capital gains aren't taxed. The only times that Zuckerberg would ever pay taxes on his massive pile of Facebook stock are (1) if he sells it or (2) when he dies. Presumably he doesn't need billions of dollars for living expenses, so (1) will not be a material source of tax revenue any time soon, and since he is young and healthy and rich and weirdly survivalist, (2) is probably a long way off as well. He's not exactly going to hand the money over all at once to GiveDirectly, but there is a time-value advantage to him giving away a billion dollars a year, or even less, over the next few years, compared with the government taxing his wealth many decades from now.


Meanwhile on the Old Internet, should Yahoo sell Yahoo? Right now Yahoo is pretty diversified insofar as it owns both:

  1. Shares of Alibaba and Yahoo Japan, which are publicly traded and have discernible positive value, and
  2. Its "core business," which looks for all the world like it has negative value.

That apparent negative value is mostly an artifact of tax law: The market doesn't value the Alibaba and Yahoo Japan stakes at their full pretax value, in part because Yahoo seems to be running into some trouble in its efforts to spin off the Alibaba shares tax-free. Still you might think that some of the negative value is actually inherent in the core business; this article quotes Yahoo's senior vice president for communications products, Jeff Bonforte, saying "I just try to ship products that I’m not ashamed of." That's ... that's not a great sales pitch to whoever is buying the core business?

Anyway, "Yahoo Inc.’s board is planning a series of meetings this week to consider selling off the company’s flagging Internet businesses." The lure of this plan is that if Yahoo could sell its actual business for a (positive, taxable) amount of money, then Leftover Yahoo would be just a shell holding stakes in two publicly-traded companies, and could function like a tracking stock with, perhaps, a reduced discount to the underlying value of those stakes. But that theory only really works if you think that Leftover Yahoo could itself one day monetize those stakes in a tax-efficient way. There is an obvious tax-efficient buyer for Leftover Yahoo.

Bitcoin Ponzi 9/11 fraud!

Here is a Securities and Exchange Commission case against two bitcoin mining companies that sold "Hashlets" to investors. A "Hashlet" was supposedly sort of a derivative investment in bitcoin mining capacity, but according to the SEC it was really just a Ponzi scheme. From the complaint, though, it sounds like a relatively nice Ponzi scheme, in that most of the money taken in was actually paid out to investors. "Most Hashlet investors never recovered the full amount of their investments, and few made a profit," says the SEC, which ... doesn't sound that terrible? The scheme allegedly started in August 2014 and shut down at the end of January 2015, to be succeeded by the even more nonsensical-sounding "HashStaker." Over that same period, bitcoin itself lost about 60 percent of its value, so you'd probably have done better investing in this alleged Ponzi scheme than you would have investing in bitcoin. Of course the Ponzi seems to have paid off in bitcoins, so you got the worst of both worlds.

Anyway there's also this:

On or about September 11, 2014, GAW Miners announced the creation of the limited edition “Remember” Hashlet with the logo of “9/11” to commemorate those whose lives were lost in the terrorist attacks of September 11, 2001. Garza announced that GAW Miners would only sell 500 Remember Hashlets, and would donate all of the proceeds (approximately $10,000) to “the 9/11 memorial fund.” He specified that “GAW will in no way be profiting from any sales related to the cause.” After selling approximately 2,290 Remember Hashlets for a total of approximately $48,000, GAW Miners donated only $10,000 to a 9/11 related charity. 

Don't buy 9/11-themed bitcoin-mining-derivative nonsense, come on.

Meanwhile, over on the blockchain, "On November 19, the United States Patent & Trademark Office (USPTO) published Goldman, Sachs & Co.’s patent application 20150332395 or 'Cryptographic Currency For Securities Settlement.'" The currency is called "SETLcoins," which is arguably a worse name than "Hashlets."

The Vanguard Effect.

Here is a story about how Vanguard is driving down fees across the financial industry, by sucking money out of high-fee actively managed funds and into low-fee index funds, by trading less and so generating fewer commissions, and by forcing other funds to lower their fees to compete with Vanguard. For instance:

Vanguard’s assets now stand at $3.1 trillion, which effectively means that this year alone it will have removed more than $16 billion from the financial industry just through fees. That figure is based on the average asset-weighted fee of a Vanguard fund of 0.13 percent, compared with the 0.66 percent average asset-weighted fee of an active mutual fund.

I wonder about second-order effects here: Does indexing strictly reduce revenue to the financial sector, or does it facilitate a rise of financialization that leads to a bigger revenue pool over all, even as it compresses margins on mutual-fund stock-picking? Also, don't forget that a big part of Vanguard's cost advantage is its possibly illegal tax structure! (Disclosure: I'm a Vanguard investor and, thus, part-owner.)

Whistleblowers gonna whistleblow.

I am always fascinated by whistleblower stories, because they come with the inevitable dramatic tension of whether the whistleblower is just a normal principled person put in an unbearable situation who stands up for what is right, or just a complainy crank who finds himself in the vicinity of fraud for a reason. Anyway here is the story of two former employees of the National Whistleblowers Center who, being well-trained in the use of whistles, blew them on the National Whistleblowers Center itself, claiming that they had been fired for trying to organize a union. I would not want to be in charge of human resources at the National Whistleblowers Center.

Limits of arbitrage.

Michael Platt's BlueCrest Capital Management is the latest hedge fund to announce that it is returning outside investor money to focus on running its own partners' money. Generically, these decisions seem to be driven by an ideal mix of success and failure. BlueCrest has had massive success and made its partners massively rich, such that running their own money seems like a plausible scalable business, but on the other hand it's been a rough few years:

“BlueCrest has not been delivering compelling returns for several years, and investors started to react,” said an institutional investor who previously held money with BlueCrest.

“For someone who has made as much money as [Platt] has it must get tiring having all your investors ring you up and complain about you not actually being that great in terms of performance,” the investor said.

Bloomberg Gadfly's Lisa Abramowicz argues that BlueCrest's pivot is a sign of a broader shift away from debt-market arbitrage, but you could read it the other way. When people worry about the death of arbitrage -- e.g. in this piece by Bloomberg's Tracy Alloway from a couple of weeks ago -- they tend to attribute a lot of the trouble to the declining availability of leverage for hedge funds, as banks scale back their balance sheets and make it harder for hedge funds to lever up to exploit anomalies. But BlueCrest is going to keep doing its credit trading, and it plans to take on more leverage once it gets rid of outside investors, presumably because it still sees arbitrage-ish opportunities. Platt told the Financial Times that clients have limited BlueCrest's leverage, and that "We have felt that this level of risk is not levered enough to generate the returns we want." 

People are worried about bond market liquidity.

Here is how the chief investment officer of Prudential Fixed Income deals with bond market illiquidity:

“So don’t buy things that you don’t like. We think that’s the secret right now,” Lillard said at the presentation in New York. “If you buy good stuff, you’re OK with holding it.”

I suppose the other secret is to make sure that your funding structure will let you hold on to those assets that you like so much. In related news, "U.K. Asset Managers Should Be Subject to Stress Tests, BOE Says." And in other news that might be of interest to fans of bond market liquidity, "Citadel Hires Zeng From Citigroup to Start CDS Market Making."

Things happen.

Citigroup Bonus Pool for Traders, Bankers Said to Stay Flat. Morgan Stanley Investors Pushed for Cost Cuts. Puerto Rico Avoids Default by Redirecting Revenue From Bonds. JPMorgan plans lending venture with OnDeck Capital. The CEO Paying Everyone $70,000 Salaries Has Something to Hide. Bank of England Declares U.K. Lenders Are Healthy. Harvard's Sick of Losing to Yale and Has a Plan to Fix Endowment. Vodafone's Rebuffed Bonds Show Investors Are Learning to Just Say No. Nasdaq to Take Fresh Look at Shareholder Merger Voting Requirements. The Bogeyman of Union Shareholders. "A well-designed bonus system is like a fully-fit Arsenal squad - a theoretical possibility rarely observed in the real world." Meet the New Currency Arbitrageurs: Corporate Treasurers. The gold standard is bad. "In this paper we study the financial repercussions of the destruction of two fully armed and operational moon-sized battle stations ('Death Stars') in a 4-year period and the dissolution of the galactic government in Star Wars." Guy Who Invented The “Ultimate Porker” Sandwich Finds Wall Street Too Gross To Deal With. How to exit a conversation. Skadden fashion.

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

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Matt Levine at

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