Mental Games and Libor Blame

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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Sports psychology.

Is it weird that the asset management business is so invested in fine-tuning and micromanaging its workers' psyches? You have the goofball cult that is Bridgewater, and now the news that Point72 Asset Management, Steve Cohen's once and future hedge fund, is hiring a sports psychologist to be its "head performance coach." Apparently he has helped a lot of golfers play better golf, which has an obvious relevance at a hedge fund, but I assume his role at Point72 is to help with "the mental game" of investing.

I sometimes wonder if, like, architects employ sports psychologists. Why hedge funds? What makes a business susceptible to the idea that it needs to monitor and regulate its employees' inner lives? Hedge funds are not alone in this; other industries that seem to spend a lot of time thinking about psychology and motivation include the Internet advertising business and, you know, sports. Two possible models come to mind:

  1. The tournament-like nature of these businesses, in which the best players get a disproportionate share of the rewards, makes them extra stressful, and makes it particularly important that their players remain in top mental shape.
  2. The essentially abstract and meaningless nature of these businesses makes it extra weird to work there, and requires a psychologist to keep players mentally focused. Certainly if I was paid millions of dollars to knock a ball into a hole with a stick I'd be giggling too hard to hit the ball straight; maybe it is similar at Point72.

Libor and friends.

Here is a story about how Carsten Kengeter, the chief executive officer of Deutsche Börse and a former executive at UBS, was investigated by the U.K. Serious Fraud Office as a possible conspirator in Libor manipulation after Tom Hayes, the former UBS trader and convicted Libor manipulator, accused him of being involved. Kengeter's alleged participation in the conspiracy seems to have consisted mostly in listening to it:

Mr. Hayes told SFO investigators that when Mr. Kengeter came to Tokyo to visit UBS’s offices, he participated in 11 a.m. meetings where Mr. Hayes and his colleagues routinely discussed their plans to nudge Libor up or down to suit their trading positions, according to transcripts of some of Mr. Hayes’s interviews. The informal meetings, which usually lasted about 15 minutes, took place on the trading-room floor, and Mr. Hayes told the SFO that he remembered seeing Mr. Kengeter in the huddle on multiple occasions.

Mr. Hayes also told the SFO that Mr. Kengeter was on a conference call during which an executive in Tokyo expressed his frustration that UBS colleagues weren’t fully cooperating with Mr. Hayes’s requests to move the bank’s Libor submission in helpful directions, according to the transcript of Mr. Hayes’s interviews with the SFO.

I suppose that, if you were a relatively new senior executive (Kengeter came to UBS in 2008 after working at Goldman Sachs, a non-Libor-panel bank), and you showed up at a trading huddle and your traders were discussing their plans to make a profit by murdering their competitors and selling their organs, you would be like, hang on chaps, let's talk about that one a bit more. Though even there, if they said "well this is how we've always done it, and we've been number one in the organ league tables the last three years running," you might have a tough time standing up to them.

But if you just showed up at a Libor-submitting bank as a senior executive without a background in Libor, and people went around saying "well we're going to submit Libor in a way that makes us a profit," would you have spoken up? I don't know. How would you know that you're not supposed to submit Libor in a way that makes you a profit? Doing things to make a profit is kind of how banks operate. It was not necessarily intuitive, to a new observer, that Libor submission was meant to be an impartial pursuit of truth rather than a profit-maximizing endeavor. Especially because everyone was so casually talking about the profit-maximizing:

“My mind boggles that these people like Carsten” haven’t been blamed, Mr. Hayes told the SFO. “Of course they knew about it…It was so open and prevalent.”

Libor is such a strange scandal. Libor demanded that banks make up numbers, and so people made up numbers in ways that made them money, and then they were I think genuinely shocked to learn that their motivation and purity of heart in making up the numbers had potential criminal relevance.

The FCIC document dump.

On Friday, the National Archives released a portion of the "approximately 250 cubic feet of paper records and 13 terabytes of electronic records" accumulated by the Financial Crisis Inquiry Commission between 2009 and 2011. The documents are ... long? I guess? They shed a certain amount of very hazy light on some big financial-crisis questions, like why there were so few high-level prosecutions relating to the crisis, or what Robert Rubin was up to. Here is some analysis from the Wall Street Journal. And here is the transcript of a very Buffett-y interview with Warren Buffett, whom the FCIC wanted to talk to about his investment in Moody's, which was spun off from Dun and Bradstreet:

MR. BONDI: Okay. What kind of due diligence did you and your staff do when you first purchased Dun and Bradstreet in 1999 and then again in 2000? 

MR. BUFFETT: Yes. There is no staff. I make all the investment decisions, and I do all my own analysis. And basically it was an evaluation of both Dun and Bradstreet and Moody’s, but of the economics of their business. And I never met with anybody.

Dun and Bradstreet had a very good business, and Moody’s had an even better business. And basically, the single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.

I think a lot about the advantages that investors get by meeting with management teams, and surely any management team would be happy to show Warren Buffett around. But, nah.  He reads the annual reports, thinks about the business, applies a folksy aphorism, and he's in, no meeting -- and certainly no investing staff -- required.

Valeant!

Tomorrow is an exciting day for Valeant, which will hold a call "to discuss preliminary fourth quarter 2015 financial results and update 2016 financial guidance." Analysts are stoked:

“We haven’t seen a financial statement out of the company in almost five months, and during this period there was a lot of turmoil,” said David Steinberg, an analyst for Jefferies. “So the company needs to show their employees and the investment community that the wheels haven’t fallen off.”

Another analyst says: "We don’t really have a clear idea of who this company is anymore." So it should be a fun call? (The Financial Times calls it "a watershed moment," and John Hempton has some questions.) I suppose that any tension will be mitigated a bit by the fact that Valeant has already had lots of private calls with individual analysts, though it has assured everyone that it does not "selectively disclose material non-public information," so the new financial results and guidance will be a surprise for everyone. Hopefully not too much of a surprise:

“There is no other big shoe to drop that I am aware of,” Pearson told attendees at the March 2 meeting, according to a person who participated in the session. “To the best of my knowledge we are not sitting on any other big issues.”

And here is a story about how Valeant's board thought about replacing CEO Michael Pearson when he was out on sick leave, but didn't, because "no one, he told the board, could match his close ties to benefit managers, insurers and doctors, and few shared his grasp of what drug discounts Valeant could afford," and because his deferred compensation was too embarrassingly large to fire him.

In other news, I missed this last week, but Valeant settled the lawsuit with R&O Pharmacy that set off all of its current troubles. Meanwhile, on the other side of Bill Ackman's portfolio, "Herbalife Ltd. came under a fresh attack from a New York state senator, who called the company a pyramid scheme and said he’s found more victims of its 'shakedowns.'"

Fannie and Freddie.

Here is Bethany McLean arguing for some form of "recap and release" of Fannie Mae and Freddie Mac, in which they "would operate as utilities, much like your electric utility, with a cap on the return they are allowed to earn, and regulated as such by a competent regulator with real teeth," and would (in Josh Rosner's words) be "countercyclical providers of liquidity." My long-held view on Fannie and Freddie has been that:

  1. The conservatorship status quo -- in which Fannie and Freddie operate as government agencies, implement government policy, subsidize mortgage rates and earn profits that accrue to the government -- is pretty good: There is no constituency in the government, and few constituencies in the market (other than disgruntled Fannie/Freddie shareholders), that would prefer a re-privatized system to the status quo.
  2. The status quo is embarrassing, sure -- the government is not supposed to own the housing market! -- and could eventually run into problems, which is why everyone in the government has to periodically pay lip service to the idea that it is temporary and one day the mortgage market will be re-privatized.
  3. There is no particular reason to think that will be soon.

So far I am pretty smug about how that has turned out. Fannie and Freddie were nationalized seven and a half years ago! And they've only gotten more nationalized since! To be fair, there have been risk-sharing deals that have brought some private capital back into the mortgage market, but I am not holding my breath for recap and release in an election year.

People are worried about unicorns.

Last April, messaging unicorn Slack announced that it had raised $160 million at a $2.8 billion valuation, and CEO Stewart Butterfield gave an amusing interview in which he said that he had no particular use for the money but:

This is the best time to raise money ever. It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians. It’s certainly the best time for late-stage start-ups to raise money from venture capitalists since this dynamic has been around.

I don't think that marked the top, exactly, but the intervening year has seen a series of disappointing initial public offerings, down-round financings, and startups cutting free meals to three times a week. The Nilotic flood of venture money has receded, leaving the tech industry to face seven years of famine. How's Slack doing? "Slack, a 2-year-old messaging platform, is raising $200 million at nearly a $4 billion valuation led by Thrive Capital." At least at Slack they are still partying like it's the 18th dynasty.

Elsewhere in unicorn partying, here is a Vanity Fair investigation into how much sex was had in the stairwells at Zenefits. And here is Business Insider on the Zenefits story, which was a mix of partying and hard-charging sales culture and ... not partying and no sales culture? "Nobody was hitting their quota," says one person, "and most of the team members weren't even closing a deal. The majority of the sales team had a 'zero' on the board month after month." Elsewhere in sales cultures, Instacart is trying to find a way to get paid for providing free delivery; inevitably, it seems to have settled on advertising. "It's like AdWords for groceries," of course. 

And here is a funny article about how the best venture capitalists are venture capitalists and not stock pickers. Or, in the modern vernacular, the best venture capitalists tend to be "early-stage investors," meaning that they invest in companies in the pre-unicorn stage, rather than later-stage venture capitalists like, you know, Fidelity and BlackRock. "Later-stage investing is more like a stock bet," says one successful early-stage investor. "You’re along for the ride.”

People are worried about stock buybacks.

One reason to worry about stock buybacks is that if the only buyers for corporate America's stock are corporate America itself, then eventually corporate America will vanish into itself in a puff of financial engineering. That is not, like, an imminent worry, but things are a bit weird:

Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.

Another reason to worry about stock buybacks is that, if you buy back stock, and then your stock goes down, you look dumb. There is something odd about this worry. The main point, I would think, of buying back stock is to return money to shareholders. You could do this via a dividend (you give money to shareholders, you get nothing), or you could do it via a buyback (you give money to shareholders, you get shares). On a value-for-money basis, the buyback seems strictly preferable: Even if you buy back stock at $45, and then it falls to $22, at least you got $22 worth of stock for your $45. A $45 dividend gets you $0 worth of stock. Still intuitively it does feel kind of dumber to pay $45 for $22 worth of stock. At least with the dividend, getting nothing was your plan all along. And certain inherent features of stock buybacks (management confidence, the fact that companies have money to do buybacks when times are good) mean that companies tend to be particularly bad at market-timing their buybacks. Anyway here is Gretchen Morgenson on a company that bought back stock and then the stock went down.

People are worried about bond market liquidity.

The new "Merle Hazard" song about low interest rates begins with a "Hee Haw"-style joke about bond market liquidity that, frankly, would be a pretty good excuse for me to retire "people are worried about bond market liquidity." But how can I, when people are so worried about bond market liquidity? One thing to worry about is a rising fail rate in the 10-year Treasury market. A bigger thing to worry about is whether bond market liquidity will constrain the European Central Bank's program of buying corporate bonds. A thing that I worry about, just on sort of general principle, is BlackRock's plan to solve bond market liquidity using millennials:

It pairs young workers who are more adept at using technology with more experienced hands who know how to do things the old-fashioned way. Together, they look for new solutions to problems like shrinking market liquidity.

On the other hand: "Financial Market Liquidity Isn’t That Important for the Economy as a Whole."

Things happen.

ECB’s Cheap Loans Highlight Rift Among Europe’s Banks. CoCo Turmoil Forces Europe to Act on Surprise Coupon Loss. Bank Employee Pleads Guilty to Conspiring to Work as Secret Russian Agent. (Earlier.) Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales. Pimco's $18 Billion Question: What Should Count as New Assets? Pimco May Have to Face Gross’s Suit After Stormy Exit. As Americans Take Up Populism, the Supreme Court Embraces Business. China Burns Hedge Funds as $562 Million Yuan Bet Turns Worthless. Buy gold. So long, and thanks for all the tuna bonds. Donald Trump's ideology of violence. Go Champion Beats AlphaGo Software on Fourth Try. Ferrante speculation. Opening antelope horn. Lawn-mowing dog. Congrats Devon!

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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:
James Greiff at jgreiff@bloomberg.net