Bonuses, Bankruptcies and Donors

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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Deutsche bonuses.

This, from Deutsche Bank Co-Chief Executive Officer John Cryan, is charming:

“I feel responsible for basically a €7 billion loss,” Mr. Cryan said. “Personally responsible for all of it. It’s not someone else’s fault.”

But it is also ... wrong? I mean, he might feel responsible. But he isn't responsible. Of Deutsche Bank's 6.8 billion euro loss in 2015, 5.2 billion came from litigation charges, and each of Deutsche's major investigations -- for foreign-exchange fixing (2010 to 2013-ish?), precious metals trading, mortgage-backed securities (presumably pre-2008?), Russian "mirror trades" (2011 to 2015) -- seems to be partly or entirely about conduct that occurred before Cryan joined the Supervisory Board in 2013, and almost entirely before he became co-CEO in 2015. I like Cryan's buck-stops-here attitude, but even assigning him 100 percent of the blame for everything done by his subordinates, he's only personally responsible for, say, half of that loss, tops. The rest is just demonstrably someone else's fault.

It is probably for the best that, as CEO (um, co-CEO), he takes the responsibility on himself. But there's also this:

In a news conference on Thursday, the bank’s co-chief executive, John Cryan, said that the bank’s general bonus pool would be smaller “as a matter of justice” to reflect the impact of the provisions the bank took in 2015, particularly for the legal cases.

“By and large, I think we are underpaying against our international peer group this year, and I hope that many staff understand why,” he said. “The bonus pool this year will be down by a fair amount on the previous year. I think that’s right.”

And this:

"It would be inappropriate vis-a-vis society just to post 5.2 billion of legal provisions in one year and not reflect that in compensation, particularly when the share price has fallen and shareholders have suffered."

Again, these are appealing sentiments. And obviously there is a lot of overlap between the people doing the FX fixing and mirror trading and MBS structuring and whatever in the past, and the people getting "a much lower and sometimes even zero bonus" for 2015. But the overlap is not perfect, and at least some of the people involved in the investigations have, unsurprisingly, been fired already. The moral of the 2015 bonuses might be less "don't do bad stuff at a bank" and more "don't work for a bank that did bad stuff in the past."

There has been a lot of talk, and some rule proposals, about bonus clawbacks, in which bankers who do bad stuff in one year that is discovered in a later year can have their compensation for the first year taken back. Those proposals have an obvious appeal to regulators (they deter misconduct and reduce the "I'll-be-gone-you'll-be-gone" feeling that can lead to carelessness) and to shareholders (better for the bad employees to be on the hook for some of the fines). Bankers, who like to be able to spend their money rather than put it in escrow until the statute of limitations runs out, tend not to be as enthusiastic. Maybe they should be. If the misbehavior is going to lead to bonus reductions anyway, just lagged by a few years, surely it's better to reduce the past bonuses of the people who did the bad stuff than the present bonuses of the people who didn't.

Elsewhere, here is the story of a former Citigroup trader who was "fired on Nov. 20, eight days after Citigroup was fined 225 million pounds ($322 million) for its part in the foreign-exchange scandal," and who sued Citi in an employment tribunal, arguing "that the bank enforced impossible standards of perfection to retrospectively condemn practices it had encouraged in the past." I feel like ... look, I have a certain amount of sympathy, and I think the badness of the FX fixing cases has been a bit overblown. But Citi has paid, by my count, about $2.3 billion, and pleaded guilty to a crime, for those cases. "Impossible standards of perfection" doesn't seem like quite the right description here.

Sovereign-ish debt.

There are sort of two ways to think about bankruptcy. One is: A person, company, country, commonwealth, whatever doesn't have enough money to pay all of its debts. Rather than pay some creditors in full and stiff others, the debtor and the creditors get together and hash out a fair solution where everyone shares in the pain.

The other is: A company doesn't have enough money to pay all of its debts. So the creditors take over the company. The equity is wiped out, the creditors get new equity, and they run the company to make back as much money as they can. Sometimes it's less than their debt. But sometimes, owning the equity turns out to be vastly more profitable than getting paid in full would have been. Sometimes bankruptcy can be great, for the creditors.

That second sort of restructuring tends to work best for companies, because you can give away equity in companies; it's harder to give out shares in people or countries or commonwealths. But you can see why phrasing bankruptcy as an opportunity for creditors, rather than as a shared sacrifice with no upside, would be appealing, at least to the creditors. And so in sovereign debt you do frequently see "GDP warrants" or similar securities, as a way to give creditors a sort of equity in the debtor. That might give them some upside, which is nice for them. It also gives them an incentive to help the debtor succeed: Since the creditors' payoff now varies with the debtor's health, the creditor may not insist on harsh terms and immediate payoffs, but may agree to sustainable debt service and long-term growth.


Puerto Rico plans to propose a debt exchange to investors Friday, offering to swap existing bonds for two new types of securities to help the U.S. commonwealth alleviate its debt burden.

Both classes of debt would delay payments, allowing Puerto Rico time to make fiscal adjustments and spur economic growth, said a person briefed in the matter. One would eventually pay interest at 5%, while the other would carry a value determined by the island’s fiscal health.

The more senior you are, the more of the first (new debt) you get; the more junior you are, the more of the second (GDP warrants or what have you) you get. The junior guys get the equity. We'll see how it works. But in Puerto Rico's weird restructuring limbo, where it can't declare bankruptcy but is bound to pay its debts under U.S. law, it's not easy to persuade creditors to haircut their bonds, and giving them some upside might help. Elsewhere: "The Coming Mess in Venezuelan Debt."


Here is an article about a management team that is running its business inefficiently, falling behind the competition, and spending its investors' money on fancy dinners and management perks. The investors are upset. "They are burning money," says one. "There is no return on investment," says another. It is a classic principal-agent problem: The investors provide the money, but the management team spends it, and the investors have no direct control over how it's spent. They have only indirect forms of control, like selling their shares or voting against the board or hoping an activist comes in to wage a proxy fight.

Wait whoops no this is totally wrong, the story is actually about Jeb Bush's presidential campaign, and the investors have no control rights at all. They aren't even "investors." They are "donors." Still. They didn't get in a position to donate lots of money to Jeb Bush's presidential campaign by ignoring return on investment, or by delegating without demanding accountability.

The tone of the article -- the criticism by the investors/donors, the denials by the managers, the examples of excess -- so perfectly corresponds to stories about investor activism that I kind of want an activist investor/donor to come in and shake up the campaign. (With a proxy fight?) We live in a time and place that is keenly focused on issues of corporate governance and managerial accountability, and it almost feels odd that that focus has not extended to presidential campaigns. It's the donors' money, why shouldn't they demand accountability from the agents they've hired to spend it? Why shouldn't those agents have to answer for their failures? Why should they get to use the money on their own personal luxuries, while pursuing the investors' aims with less than impressive zeal? In the literature, this is called "shirking," and investors typically demand mechanisms -- monitoring, pay structures, control rights, etc. -- to deter shirking. What are those mechanisms in a presidential campaign? (Presumably mostly that the donors can stop contributing if they get fed up.)

And then of course if Bush is elected you'd want continuing control rights for the investors to make sure that he continues not to shirk in accomplishing their objectives. Wait, no, again, that is totally wrong. Corporate governance and regular democracy go together oddly.

In other news, "Trump’s New Pro-Veterans Website Directs All Donations To Trump’s Personal Foundation."

Martin Shkreli. 

Here's a video of pharmaceutical exec/Twitter troll/accused securities fraudster Martin Shkreli engaging in an embarrassing hip hop beef with Ghostface Killah. You can hear a little of the secret Wu-Tang Clan album in the background, maybe? "Every one of my enemies, they try to stay anonymous," says Shkreli. That ... no ... look, the beef with Ghostface is cute, but I could give you a long list of people beefing with Shkreli, publicly, by name, and in ways that are considerably more pressing than the Ghostface thing. Hillary Clinton is on the list, but at this point Shkreli enemy No. 1 has to be U.S. Attorney Robert L. Capers, who was happy to sign his name to Shkreli's indictment. I feel like Shkreli is going to have a tough time finding new lawyers. 

Basic income. 

I am not totally convinced that the day is rapidly approaching when technology abolishes scarcity and humans sit back to enjoy life in utopia, with no need to work and robots to take care of our every need. (Neither is Matt Yglesias.) I do think, though, that might be ... good? (So did Keynes.) But there is a distributional problem to solve if we are to get there: If only a few people own the robots, then those people will have their needs taken care of, and everyone else will be in a bad place. Again, not an imminent worry, but a reasonable long-term worry, and one that we might want to get started on solving well before it becomes pressing.

So Y Combinator, the seed-funding firm, has announced an experiment on the most promising solution, a "universal basic income" that will give everyone enough money to buy adequate need-satisfying robots without the need to work. (I mean, that's what it would do in utopia; I assume the experiment will be somewhat less ambitious.) Dylan Matthews at Vox explains. Matt Buchanan at the Awl, though, objects:

A cheap way to read the startup incubator Y Combinator’s announcement of funding for a researcher to conduct a “a study on basic income—i.e., giving people enough money to live on with no strings attached” is to note that it is coming from a firm in the business of accelerating the creation and growth of the kinds of companies that will potentially put large numbers of people out of work, permanently, through automation, like anyone who drives any vehicle for a living.

No no, that is not a cheap way to read it, that is exactly the right way to read it! The people who are most ambitious and optimistic about the robots are of course the ones who are most concerned about the structure of post-robot society. Possibly because they are visionary thinkers about the future who are building those robots out of a genuine desire to help free mankind from the scourges of scarcity and labor. (Does that sound sarcastic? I don't really mean it to. I suspect that it's most of the explanation.)

Or possibly because, as Buchanan writes, "One can imagine how terrified a self-styled 'manufacturer of economic inequality' must feel, then, at even the remote possibility of millions upon millions people left without work, all those losers fueled by the power of envy left with all the time in the world to plot how they would hunt and eat Paul Graham," the founder of Y Combinator. Buchanan seems to think that is a bad motive. But it's a good motive! If you build a needs-satisfying robot that puts everyone out of work, nothing in our current laws prevents you from just satisfying all your needs and leaving everyone else to starve. But there's a lot of everyone else, and only one of you, or two counting the robot. Laws can be changed. Better get out ahead of them. Fear of revolution is the ultimate check on the capitalist class. This is the system, working!

Elsewhere, "The world's first robot-run farm will harvest 30,000 heads of lettuce daily."

People are worried about unicorns.

The Blood Unicorn hits keep coming:

Walgreens Boots Alliance Inc. said it will stop sending lab tests to Theranos Inc.’s Newark, California, facility after U.S. regulators found severe deficiencies at the lab.

Though "Theranos’s lab in Arizona, where it does the majority of its analysis, isn’t affected." Elsewhere, here is a story of regulatory capture in Philadelphia, where the Parking Authority "has teamed with the taxi industry that it regulates in an effort to ensure that ride-sharing services remain illegal." Spotify is raising $500 million. And: "Seeking the Indicorn."

People are worried about bond market liquidity.

Repo market worries are sort of a niche within bond market liquidity worries, but this guy isn't worried:

Citigroup Inc. had one of its most profitable years in recent history in the repurchase-agreement market, the bank’s global head of fixed-income finance said, countering much of the industry grumbling that regulation is crushing this business.

Greg Markouizos said that “for the first time in many, many years I can see an upward slope of earnings for our business going forward.” Speaking in Luxembourg, he offered a much more optimistic outlook for the repo market, where bonds are used as collateral for short-term loans, than the “doom and gloom” scenario he feared as recently as last year.

Things happen.

The Bank of Japan cut interest rates below zero. China floods banks with record amount of cash. Xerox to Split in Two; Carl Icahn to Get Three Board Seats. Margin loans to chief executives are awkward. Taxing Google and Other U.S. Giants Is Dividing Europe. It would be an amazingly American story if the death penalty is shut down for tax evasion. Elon Musk vs. Warren Buffett on solar power. "Market turmoil is ultimately great for our business because that is when we sow the seeds that blossom into our highest returns." U.S. Junk Defaults Are Outpacing Emerging Markets. Banks Rip Up Oil ForecastsSalmon Prices Scale 30-Year High After Record Sales for Sushi. Securities Class Action Suits Increased in 2015. "College Kids Are Now High Frequency Trading From Dorm Rooms," or at least, trading using computers. These Pictures Of London Traders Are Weirdly Intense"Any stone or rock of any kind is already a hedge fund." Palm Beach hedge fund glitz fails to impress some investors. "Davos is really one of the best places to party." Teen Accused of ISIS Plot to Bomb Cops Using Kangaroo. Hitler's Brooklyn Tenement. "Besides eating, other activities include playing beer pong and corn hole, reading Milton Friedman's Capitalism and Freedom, and bringing your own funk band." "Twitter may be like shouting into the void but at least I am heard and often validated by my peers."

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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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