Secret Summits and Muppet Ventures
Apparently a small group of men and women, who collectively own a large percentage of the stock of America's biggest public companies, meet periodically in secret to decide how those companies should run themselves. It sounds a little odd when you put it like that? But it's about good governance and long-term-ism, so it's okay:
The world’s largest asset managers have held secret summit meetings to hammer out proposals for improving public company governance to encourage longer-term investment and reduce friction with shareholders.
Jamie Dimon, chief executive of JPMorgan Chase, and Warren Buffett convened the sessions with the heads of BlackRock, Fidelity, Vanguard and Capital Group to work on a new statement of best practice that would cover the relationship between US companies and their investors.
Here is Andrew Ross Sorkin on BlackRock's Larry Fink, whose contribution to the long-term-ism cabal is to ask companies "to stop providing quarterly earnings estimates" and instead focus on laying out longer-term plans:
Of course, some companies in fast-moving businesses like technology might argue that it is impossible to present a multiyear road map without telegraphing plans to rivals.
Mr. Fink dismissed that possibility. “I don’t think a public discourse on how a company’s C.E.O. sees their position is going to result in proprietary secrets being revealed.”
You know that I am fond of the Azar-Schmalz-etc. theory that diversified mutual funds are secretly an antitrust conspiracy, because diversified owners prefer that their companies not compete too hard against each other: If you own shares in every company in an industry, you don't benefit if one company slashes prices to gain market share. I try not to take this theory too seriously, because it's not like managers of diversified funds are meeting in secret trying to influence the behavior of the companies they own.
Except that they are? If you were to take the theory completely seriously, you might interpret long-term-ism in a sort of ominous way. You might even imagine that the investors' focus on (publicly disclosed!) long-term plans, rather than current earnings, would discourage managers from a certain kind of intense competition. "I don't need to worry about selling more widgets than my competitors," the manager might think, "I need to design a whole new kind of widget where I'll have no competitors." Or it might go the other way; maybe slashing margins is bad for short-term managers but gets you market share in the long run. But "short-term-ism" is, in this sort of discussion, often conflated with a kind of brutal efficiency on costs, and you could perhaps construct a story for why large diversified shareholders would be less interested in that sort of efficiency than concentrated shareholders are. That story would be pretty speculative, and might make you sound like a conspiracy theorist. But the secret meetings are real enough.
Speaking of long-term-ism, when Google reorganized itself as Alphabet last summer, I worried that the changes might make it harder for Google to spend time on "moonshot" projects like human immortality, as Wall Street would demand more discipline and focus on the core business. I don't think that came true? I guess it is a little early to tell. Yesterday Alphabet reported its first results as Alphabet, beating expectations and putting it "on track to overtake Apple Inc. as the world’s most valuable company." The moonshots seem to be thriving expensively:
Alphabet’s “Other Bets” category had an operating loss of $3.57 billion for 2015, widening from $1.94 billion in 2014, while revenue -- mainly from the Nest smart thermostat, Fiber fast-Internet access and health technology -- was just $448 million in 2015, up 37 percent. Spending on those bets “may be uneven in the near-term,” Porat said, stressing that the financial community should evaluate them on an annual basis, rather than quarterly.
And while the stock may be up on a quarterly earnings beat, the rhetoric is a bit more sweeping:
In a call with investors, Ruth Porat, Alphabet’s chief financial officer, sought to put in context the company’s investments in other bets. ”In many ways, some of Alphabet’s biggest moonshots are in Google itself,” Porat said. “From driving the next wave of computing through Machine Learning; capitalizing on the shift to the Cloud by enterprises, building platforms like Virtual Reality, and pursuing the opportunities we see with the Next Billion Users in emerging markets, you should expect Google to continue to invest in efforts to improve life for billions of people.”
"The science projects still matter because ambition is the essential fuel of the technology business," writes Bloomberg Gadfly's Shira Ovide. Also now they have that Go-playing computer, maybe it can tell them where to invest.
Here's Puerto Rico's proposal for its debt restructuring, which involves giving investors new "base bonds" with a 5 percent yield and a par amount equal to the market value of their old bonds as of last week, and new "growth bonds," which will start paying off in 2026 if Puerto Rico's economy grows, for the rest of their claims. It's a good enough sales pitch, given what's available to Puerto Rico, but since what's available does not include bankruptcy protection this seems unlikely to be the final answer:
“I’m sure they’re not going to outright agree to this,” Fitterer said. “What happens to all the retail bondholders if they don’t consent to it? They’re probably going to need to have some legal means of getting this accomplished rather than some sort of consensual agreement, because I would think there’s going to be a lot of arguing amongst bondholders.”
Obviously no one was buying bonds last week with the hope of getting this particular haircut, so there'll probably need to be some sweetening of the deal if anything will get done voluntarily, but it's a first step I guess.
Speaking of long-termism, yesterday Dan Davies tweeted that "the decimation of investment banks is the clearest example of short-termism," and you can see a little of that in UBS's results. UBS was a success story among post-crisis European banks for shrinking its investment bank and focusing on the safe, stable business of wealth management. But that business isn't as stable as everyone hoped:
Shares in UBS Group AG tumbled 8% after the Swiss bank reported that its flagship wealth-management unit was drained of billions of dollars in assets during the fourth quarter of last year.
UBS blamed the lackluster performance from wealth management on a continued slowdown in activity among clients, and a need among clients in emerging markets to pull money out and put it to work elsewhere amid challenging markets.
Elsewhere, "banks across Europe are instituting hiring freezes in key areas or across their entire operations," and Barclays had to override its freeze to hire a new chief risk officer, which is probably safer than just doing without. Here is a story about how much four "platform companies" -- Valeant, Altice, Platform Specialty Products and Nomad Foods -- pay in investment banking fees (over $1 billion over three years), and how beloved those companies were by banks and hedge funds until the second half of last year. Here is a story about JPMorgan buying a portfolio of Lending Club loans from Santander at a premium. ("A premium sale is generally considered a positive indicator for the loans.") And here is a story about Goldman Sachs bankers who regret donating to Jeb Bush. "It’s like buying a stock and watching it fall," explains a former partner, unhelpfully.
If you are interested in financial markets, the art market is irresistible, a more arcane, colorful and aristocratic version of the bond market. Here is Sam Knight on the story of Yves Bouvier, who was like an interdealer broker, but for art:
Within a few years, Bouvier was buying and selling pictures on a serious scale, interacting almost solely with other dealers. “When you buy, it is always to sell,” he said. “You always have the buyer before you have the seller.”
But Bouvier took on a private client -- "Dmitry Rybolovlev, a Russian oligarch" -- which is a more intimate relationship, and one that ultimately landed in litigation. "The dealer is mentor and salesman," writes Knight, and while bond dealers wouldn't necessarily go quite so far, they might recognize the sentiment. They might also recognize this:
When a deal with the seller was in sight, Bouvier would then agree on his own price with Rybolovlev, which was often tens of millions of dollars higher. He conducted these negotiations via e-mail, in French, with Mikhail Sazonov, Rybolovlev’s adviser. Over the years, these e-mails became increasingly familiar, but Bouvier always maintained a crucial legerdemain—suggesting that he was acting on the Russian’s behalf to secure the best deal possible from the seller, rather than that he was the one selling to Rybolovlev.
In the bond market that is rather explicitly frowned upon, though there, as here, much turns on the nuances of what you say and what you just allow the customer to assume.
We talked about naked shorts briefly yesterday, but somehow I missed last week's announcement that Overstock.com had settled its long-running naked-shorting-conspiracy lawsuit with Merrill Lynch. The end of the lawsuit, like so much of it, was appropriately bombastic:
Commenting on today’s settlement, Overstock.com CEO Patrick Byrne said, “Lao Tzu wrote, ‘In war’s victory keep to funeral ceremony.’ Though I am under no obligation to say so, I want to make clear that Bank of America had nothing to do with the behavior documented in this case. Even with Merrill Lynch, the individuals at issue are no longer employed there. I do not feel like bayonetting any more of Wall Street’s wounded today. Because we fought long and hard to get so many of the documents public, the true story of this decade-long battle can and should be told by an objective journalist. Res Ipsa Loquitur.”
I would probably read that.
People are worried about unicorns.
You know a bull market is ending when the shoeshine boys are giving out stock tips, but what does it mean when muppets are handing out venture-capital checks? Not muppets in the Greg Smith sense of unsophisticated investors, but actual, furry, trademarked Muppets? Anyway, "Sesame Workshop, a preexisting nonprofit arm of the Sesame Street organization, is partnering with Collaborative Fund to create Sesame Venture," which "will provide early-stage startups with up to $1 million." I look forward to seeing new Sesame Street muppets like Eustace the Unicorn and Clara the Code Ninja. "Sesame Street was the original disrupter in kids' media," the chief executive officer of Sesame Workshop actually said. The new HBO Sesame Street is getting off to a rollicking start.
People are worried about stock buybacks.
Those long-term-ism guys sure are. Sorkin:
Mr. Fink’s call comes at a time of stepped-up chatter among big investors and other business leaders to try to encourage companies and investors to be less focused on short-term efforts to lift earnings. Critics of buybacks question whether the purchases are a productive use of profits, rather than investing in their businesses and creating jobs.
People are worried about bond market liquidity.
One classic bond-market-liquidity worry is that investors will ask to redeem out of bond mutual funds, the mutual funds will have to give them their money back immediately, but the funds won't be able to sell the underlying bonds quickly and everything will spiral into chaos. This is less of a worry with hedge funds, which unlike mutual funds tend not to offer daily liquidity to their investors. But you never know:
Barclays says that since 2008, hedge funds have been shortening the amount of time it takes for their investors to redeem their money.
At the same time, however, hedge funds are increasingly in a position where they can't sell assets quickly to get that money to return to their investors.
Etc. Elsewhere: "Looser capital won’t ease bond liquidity – SNB’s Rime."
I wrote about the Credit Suisse and Barclays dark pool settlements. So did Michael Regan at Bloomberg Gadfly, and Scott Patterson at the Wall Street Journal. And apparently these settlements "are unlikely to be the last as regulators continue to pursue abuses in electronic trading." In other market-structure news, IEX has some criticisms of the New York Stock Exchange.
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