Seating Plans and Asset Classes
Citigroup has an office building in Tribeca that fits 9,000 employees, and it wants that building to fit 12,500 employees, so it is getting rid of personal offices and going to an open floor plan. I assume that putting an extra 3,500 employees into the same space is a significant cost savings, but open-plan offices always have to be dressed up in ideology rather than cost, so there is a lot of ideology. Here's some from Chief Executive Officer Mike Corbat:
“You’re going to be forced to bump into people,” Mr. Corbat said. “I want people interacting around our business and ideas.”
There are tradeoffs. For instance, if you have a business idea for a colleague, good luck finding her, because nobody knows where anyone sits:
The layout at the new headquarters is minimalist and more egalitarian. Because most desks aren’t assigned, employees must lock up their family photos and personal tchotchkes each night. Everyone gets a window view—but no one gets complete privacy.
I like this vision of a bank as a system of random Brownian motion: Any purposive interaction -- having a meeting, or working quietly, or even just finding a colleague's desk -- is looked upon with suspicion; the only way that anything can be achieved is by accident. All of the best investment banking occurs when randomly bumping into people on the way to the bathroom, why not.
Citigroup implemented unassigned seating for its human-resources department a while back, and I've been obsessed with it ever since; I am a skeptic, but I guess it has worked out well enough for HR to expand to the rest of the bank? "Next to comp, seating is the most important issue on the Street," and I wonder how Citi's investment bankers will like their new setup. I also wonder how much loyalty and stability and long-term thinking a bank can expect from an employee who doesn't even get her own desk. In investment banking, "the assets go down in the elevator every night," and now their tchotchkes will too. "Employees have been told that they’ll adapt by wearing headphones and talking more quietly."
What was good in 2015?
Sorry, the answer is nothing:
In fact, if you judge the past year by which U.S. investment class generated the largest return, a case can be made it was the worst for asset-allocating bulls in almost 80 years, according to data compiled by Bianco Research LLC and Bloomberg. With three days left, the Standard & Poor’s 500 Index has gained 2.2 percent with dividends, cash is up less, while bonds and commodities are showing losses.
"Since 1995, practically every year has seen some asset deliver returns exceeding 10 percent," but 2015 was an exception, unless things really turn around this week. If your boss went on vacation and left you in charge of a massive portfolio this week, consider buying up all the things to try to move the needle on an asset class's annual return. Sure you will be fired, but you will be a hero to asset-allocating bulls everywhere.
Outside of the U.S., though, there was some good news: Italy's FTSE MIB index was up over 12 percent; those gains "were trumped however by the Russian MICEX, which rallied by around 25 percent this year." The Shanghai Composite was up over 12 percent, and "Argentina's benchmark Merval appreciated by just under 40 percent in 2015, making it the top performer of the major indexes across North and Latin America."
One thing that did work in the U.S. was activism:
After decades of being treated as boorish gate-crashers, activist investors are infiltrating the boardrooms of large companies like never before. This year activists launched more campaigns in the U.S.—360 through Dec. 17—than any other year on record, according to FactSet. They secured corporate board seats in 127 of those campaigns, blowing past last year’s record of 107. Activists now manage more than $120 billion in investor capital, double what they had just three years ago, according to researcher HFR.
And "returns for activist hedge funds averaged 3.4% through November, beating the hedge-fund average of 0.3%," which in a pretty bleh year for everything is not terrible. As with open-plan offices, though, the rise of activism seems to be more about ideology -- about who should control companies, managers or shareholders -- than it is about money.
Elsewhere in activism, Carl Icahn is great; specifically, Ronald Barusch is impressed by his proposal to pay 10 cents more for Pep Boys than whatever Bridgestone offers (up to $18.10 per share):
If the ratchet is properly structured, it would be pointless for Bridgestone to match Mr. Icahn’s bid unless it’s willing to come close to the $18.10 cap. (Bridgestone probably doesn’t have to pay the full $18.10 because of first-mover advantage gives it both a timing advantage and more certainty of closing.) A lower bid would just trigger the ratchet and increase Mr. Icahn’s bid, and Bridgestone would still be the low bidder. Mr. Icahn essentially has said to Bridgestone: “Either let me have the company for $16.50 per share or it will cost you close to $18.10 per share.” That isn’t the way the deal-protection provisions Bridgestone — and hundreds of other buyers — negotiated were supposed to work.
Derivatives and stress tests.
Here (via Felix Salmon) is a story by a former oil derivatives trader about losing $200 million on a crude-oil trade with Mexico in 2008, and then making up for it in the time-honored way of derivatives traders:
And on a Saturday morning bike ride up the Hudson, it occurred to me that Mexico might be willing to restructure its deal—selling us back the option it owned, and buying a new one—in a way that would lock in billions of profits for the country, while giving me a much needed windfall too. I dropped my bike in a bush and texted our salesperson about the idea.
The trick is that the bank has a valuation model and the client doesn't; the bank is hedging and the client isn't. So the bank can go to the client and say, you have made a lot of money on this trade, would you like us to give you some of it? And the client will say yes, because who wouldn't. Meanwhile the bank can keep some of the money for itself, as a fee for restructuring the trade, that is, for giving the client some of the money it had made anyway. If you are a bank, a portfolio of derivatives gives you a lot of option value, not only in the obvious literal sense but also because you can always try to make some money by restructuring them.
The rest of the article is about the failings of stress tests -- "I realized once and for all that my models and reports could no longer tell me what to do," that sort of thing -- and while I understand those concerns I am never sure what is supposed to replace the models and reports and stress tests. Gut instinct?
People are worried about unicorns.
Here's the latest in The Saga of Theranos the Blood Unicorn, featuring failed blood tests, manipulated data, an awkward venture capital meeting, a hidden laboratory and Elizabeth Holmes's high-school yearbook. Also a whistleblowerish e-mail to Holmes that she forwarded to Theranos's president, Sunny Balwani, whose reply (to the whistleblower) was wonderful:
He added: “This is product development, this is how startups are built.” The reply ended with an edict that the “only email on this topic I want to see from you going forward is an apology that I’ll pass on to other people.”
Man, that is how I am going to end all of my e-mails from now on.
Meanwhile, at most startups, "Most days are a death march in which you work horrific hours under massive duress waiting for your chance … to join the 80% of start-ups that die off," but at Jet.com things are somewhat more pleasant. And the Financial Times calls the end of the unicorn bubble, or rather, it predicts that "2016 will be the year that unicorns have to prove they are real." It would be great if, in an enchanted forest somewhere, some literal unicorns read the FT and decide to prove to humanity that they are real by coming out of the forest in all of their splendor. And then the humans are like "wait you are just horses with horns, I want a 10x exit from my tech startup."
People are worried about bond market liquidity.
I mentioned last week that the cause of bond market illiquidity these days might just be that everyone is on vacation, so perhaps bond-market-liquidity worries should take a quick vacation too. We can swap in equity-market-liquidity worries:
“In general, concerns around liquidity are very warranted,” said Wouter Sturkenboom, London-based senior investment strategist at Russell Investments. “We are not yet seeing massive issues with trading equities. But market breadth is dropping, which has been happening for a couple of years. That indicates that underneath the surface, liquidity in the equity markets is in decline. We probably won't notice that until we get a shock, and investors try to trade out of” certain stocks.
And then in the new year we have a "baby tantrum" to look forward to in bond markets, according to Deutsche Bank, which predicts that the Fed will keep tightening and markets will freak out a bit.
Last week I wrote about Good Technology, a gored unicorn. One of Good's problems was that employees paid taxes to exercise stock options, but the shares they got ended up worth way less than the taxes they paid. Here is Helaine Olen on that problem, which was well-known at public tech companies in the last boom. Now it is new again, and mostly a private-company issue.
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