Baseball Cards and Bangladesh

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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Bridgewater.

Here is a fascinating interview with Ray Dalio about, basically, how weird Bridgewater is:

Feloni: What do you consider to be the public's most glaring misconception about Bridgewater's culture?

Dalio: That it's a crazy and cruel place rather than a sensible and caring place.

When people only get little pieces of what we do here — things like looking at all mistakes and weaknesses openly, recording all of our meetings, having "baseball cards" for our people — without the higher-level goals behind these things, it's understandable that we seem strange.

Frankly, this is the most wonderful way of operating for people who want to be as effective as possible, so I wish it were better understood.

But I didn't quite understand this part:

As Harvard developmental psychologist Robert Kegan, who has studied Bridgewater, says, in most work places everyone is working two jobs. The first is whatever their actual job is; the second consists of managing others' impressions of them, especially by hiding weaknesses and inadequacies — which is an enormous waste of energy. In our culture, the idea is that everyone can just be comfortable being themselves, which is way more efficient in the long run.

I am on the outside, of course, but that is not how I would describe Bridgewater? The rest of the interview is about how only certain personality types thrive at Bridgewater, and of course there is all the stuff about the baseball cards and being quizzed on Dalio's "Principles" and having to record and review tape of internal meetings. That does not sound like a culture of "just be yourself and don't worry about others' impressions." Rather, I might describe it as: Most people elsewhere work two jobs, one their actual job and the other a sort of furtive and informal job of managing others' impressions. But at Bridgewater, everyone works two jobs, one their actual job and the other a rigid, formal, time-consuming, carefully monitored and evaluated job of managing others' impressions. Maybe that is actually better! Perhaps formalizing the interpersonal part of the job makes it less stressful or more productive. But it doesn't get rid of it. Bridgewater doesn't eliminate office politics; it just devotes a lot of strange and explicit attention to them.

There is a further, more cynical reading, in which Bridgewater's 1,500 employees, only about 10 of whom "have a full view of the hedge fund's investment process," are mostly devoted to the interpersonal job -- the self-examination and baseball cards and tape review and so forth -- because the computers take care of the actual job of investing. 

Bangladesh.

Whose fault is it that hackers stole $101 million from the Bangladesh central bank's account at the Federal Reserve Bank of New York? I mean, at one level, the answer is clearly that it's Bangladesh's fault. Here is a story about how the hackers "had been remotely monitoring activity at the South Asian nation’s central bank for several weeks and may have breached as many as 32 computers at the bank," installing malware and keyloggers "to steal Bangladesh Bank’s credentials for the Swift system" that the Fed uses to transfer money. The Fed has a system, and foreign banks get credentials, and they're supposed to keep their credentials safe; if they're just handing them out to any random hacker, well, you can't blame the Fed for that. Keep an eye on your password!

Brussels-based Society for Worldwide Interbank Financial Telecommunication, a cooperative owned by some 3,000 global financial institutions and known as Swift, said Monday that it would ask customers to review their internal security in light of the breach of Bangladesh’s central bank.

On the other hand, Google is pretty gung-ho about getting me to use two-factor authentication to log into my Gmail account, and I can't wire anyone $101 million from my Gmail. Maybe the Fed should turn on two-factor authentication too? Turns out it did, for Bangladesh, but only after the theft:

The New York Fed “also insisted upon a security clearance protocol to be signed to smoothen future operations" that was executed on Feb. 15, the document said. The agreement between the two banks “put in place a multi-tiered payment authentication system."

There were also communications breakdowns all around: The Fed let through transactions "which they subsequently flagged for due diligence review," according to Bangladesh, and "bank officials also called the New York Fed on a phone number that appeared on its website, but couldn’t connect with anyone." E-mails (and a fax) to the New York Fed, and "stop payment" Swift messages to various banks, also seem to have worked less well than you'd hope. People -- even central banks -- get hacked, or forget their passwords, or whatever. You'd sort of hope the global financial system would have better backup security measures than, you know, a fax machine that nobody monitors.

Energy.

Oil prices used to be high, and now they are low. Basic economics would tell you that prices tell companies what to invest in, and companies are slowly starting to listen. Slowly:

A wave of projects approved at the start of the decade, when oil traded near $100 a barrel, has bolstered output for many producers, keeping cash flowing even as prices plummeted. Now, that production boon is fading. In 2016, for the first time in years, drillers will add less oil from new fields than they lose to natural decline in old ones.

About 3 million barrels a day will come from new projects this year, compared with 3.3 million lost from established fields, according to Oslo-based Rystad Energy AS. By 2017, the decline will outstrip new output by 1.2 million barrels as investment cuts made during the oil rout start to take effect. That trend is expected to worsen.

I don't know what "worsen" means there, exactly. If it turns out that the world values oil at $40 a barrel, it would be weird to spend $100 a barrel to get it.

Elsewhere in price signals, "investors have suffered losses of at least $150bn in the value of oil and gas company bonds." And airlines have cut back on fuel hedging:

“We don’t need to hedge that risk like we used to,” said Gerry Laderman, acting chief financial officer of United. “That doesn’t mean that hedging is off the table. We are looking at formulating…a different way of thinking about it.”

I mean! Sure, you don't need to hedge fuel price risk when fuel prices are going down. You need to hedge it when fuel prices are going up. Or, rather, ideally, you need to hedge it before fuel prices go up. That is the trick. My crude model for corporate hedging is that hedging has the potential to reduce risks from, but companies (airlines and also oil companies) are not always great at meta-hedging the risks of their own hedging decisions. When oil prices are high, it is so tempting for oil companies to cash in their hedges; when fuel prices are low, it is so tempting for airlines to stop hedging their fuel costs. "Hedging" is not an automatic magic smoother of risks: You have to make specific choices about how to hedge, at what prices, over what time period. And if you get those decisions wrong, you'll feel doubly dumb. Here is Craig Pirrong on airline fuel hedging. 

What's Erin Callan up to?

Erin Callan was briefly the chief financial officer at Lehman Brothers in 2008, which was maybe the worst job in the history of the modern financial industry, but she got better, and wrote a book:

Years later, Callan is happily married to Anthony Montella, a retired firefighter, and living a quiet life on Shelter Island and in Florida. After years of trying, they had a baby girl last year. Callan considers herself very lucky. The cover of her book, which she says she chose to self-publish rather than subjecting herself to the marketing gauntlet that would have come with a traditional book deal, shows the author cuddling her plump-cheeked daughter Maggie. It seems to be the image of a life fulfilled.

The book is called "Full Circle: A Memoir of Leaning In Too Far and the Journey Back," a title that might possibly have been improved by just the tiniest exposure to a marketing gauntlet. Anyway it contains the following metaphor for her first earnings call as Lehman's CFO:

Later, Mr. Montella would tell her that rookie firefighters, known as “probies,” would never be sent into a blazing building first, much less alone.

“Well, looked at in this light, the March earnings call was my first burning building. I definitely qualified as a probie. And Lehman wasn’t the FDNY, unfortunately. It was every man for himself,” she writes.

In general I tend to think that financial-industry employees should resist lurid analogies like this. No, getting paid millions of dollars to talk on a conference call from your comfortable office is not quite the same as running into a burning building. Usually. But for Lehman's March 2008 earnings call, I'll allow it.

Enforcement.

Here is a strange little Financial Industry Regulatory Authority action against Wedbush Securities for allowing a client to do some innovative naked shorting of exchange-traded funds. Unlike regular naked shorting -- in which you sell shares without owning or borrowing them, and then don't have enough shares to deliver at settlement three days later -- this case involves naked redemptions of the ETFs: Wedbush's client, Scout Trading, would basically short the ETF shares to the ETF itself (in exchange for the underlying basket of securities), but then wouldn't have enough ETF shares to deliver three days later. (Last year's enforcement action against Scout explains that "it was financially more beneficial to do so due to the economic decay associated with such funds as a result of certain asymmetric fee biases associated with the ETF market whereby it was economically more advantageous to maintain a short position versus a long position," which is perhaps not a full explanation.)

Elsewhere in market-structure enforcement, the Massachusetts securities regulator fined Bank of New York Mellon $3 million for having trouble calculating net asset values of 1,200 mutual funds on August 24. And in enforcement more generally, "Hedge fund manager Leon Cooperman said regulators are considering taking action against him and his firm Omega Advisors over trading in certain securities," specifically trading of Atlas Pipeline Partners in 2010, though it is unclear what the supposed misbehavior was.

The Internet.

Twitter observed its tenth birthday yesterday, and Bloomberg Businessweek celebrated the occasion with a profile that reminded me that Twitter doesn't quite understand its product:

Moments has been met with disdain and ridicule. Having invested the time and effort into figuring out how to extract value from Twitter for themselves, the last thing power users want is interference from a bunch of human editors to help the newbies. Despite the backlash, Dorsey says he’s optimistic, though he allows that Moments needs refining. The menu for navigating among subjects will be improved, he says. The range of topics will get richer and more personalized. “We’re still experimenting with it,” he says. “It’s a great storytelling medium, but there’s certainly work to do to make it better for more people.”

When people at Twitter say that Moments is a great storytelling medium, I always wonder if they've ever actually clicked on a Moment. Meanwhile, the New York Times talked to Twitter users, who unlike Twitter employees seem to understand what it's for (activism, comedy, flirting, outrage, harassment). None of them mention Moments. Elsewhere: Delete your account.

Elsewhere on the Internet, "Yahoo and its advisers argue that this time is different, and the company is serious." That particular sentence is about Yahoo's plans to sell itself, but honestly it could be Yahoo's motto for everything. In addition to trying to sell itself -- or parts of itself, or its Yahoo Japan stake, or I guess even its Alibaba stake -- and trying to turn around its business (while also selling it), Yahoo has the added distraction of a possible proxy fight with activist fund Starboard Value. 

People are worried about unicorns.

What I like about unicorn worrying is the wealth of animal metaphor (and vivid illustration!) that it enables:

Edison Investment Research, a London-based team of more than 100 researchers, wrote: “It is the startups that involve pick-ups or drop-offs of an asset that have got into trouble as the unicorn disguises are already slipping, revealing the true colours of the donkeys underneath.”

Elsewhere, it seemed like Chelsea Clinton was going to hold a Hillary Clinton fundraiser at the Theranos, the embattled Blood Unicorn, because I guess someone thought that was a good idea, but the event ended up happening at a private home.

People are worried about bond market liquidity.

Yesterday in this space I linked to a Financial Conduct Authority occasional paper finding that U.K. corporate bond market liquidity is fine. The methodology there was based mostly on reported trade data (price impact, realized bid-ask spreads, turnover, etc.) -- it couldn't really be based on much else -- and people who are really worried about bond market liquidity will reject that data, because it only covers the transactions that actually got done. The real problem of illiquidity, the argument goes, is that many trades aren't getting done at any price, because dealer inventories and risk appetite are low. (While trades that do get done are mostly just low-risk agency trades, so observed bid-ask spreads and price impacts are low.) Here is Chris Bowie on that FCA paper:

Transactional data misses the key point that we observe: what about the transactions that never happened because of illiquidity? Trades that never happened because either the quantity was too large, or the quoted prices for the actual trade were so far away from the screen quotes that no fund manager could evidence best execution being achieved? The authors do attempt to sense check their data using quoted bid/offer spreads from corporate bond index data later in the analysis, and to be fair they do conclude that using this data the costs of trading have increased since 2008. But even this misses our earlier point – the reality is that screen prices are simply not that reflective of where you can actually trade in an over the counter market these days. Some days they are – but many days they are not. Just last week, I had a broker offer me 509,000 bonds of an insurance company we like, at a price 1 whole point higher than the best screen offers. I contacted three other brokers who had lower offers on their screens, to ask if they could sell me just 500,000 bonds. All replied saying “flat – can’t offer” meaning they do not own that bond so cannot sell me any, as to do so would take them short. So as a Portfolio Manager, do you buy from the only bank who has inventory, but then report an immediate 1.5pts loss compared to the mid-priced mark that will used on the portfolio valuation? Or do you pass on the trade? This is the reality of life at the coalface, and this is not even considered in the FCA’s Occasional Paper 14.

Me yesterday.

I wrote about Valeant. So did Bloomberg Gadfly's Max Nisen. Elsewhere in Valeant, Howard Schiller's refusal to resign from the board will make things weird, Schiller "may be forced to pay back some of the $26.1 million in incentive compensation he received as chief financial officer in 2014," Moody's warned collateralized loan obligation investors about their potential Valeant exposure, and ValueAct might be less jazzed about Valeant's governance and compensation structures than it used to be.

Also, in Money Stuff yesterday, we talked about the oddity of poker players selling equity stakes in their tournament performance at, as it were, par. (That is: I pay 10 percent of your buy-in, I get 10 percent of your winnings.) Several readers have assured me that in fact good players normally sell stakes at a premium to par, meaning that investors of poker capital compensate poker players for their skill and labor. My faith in the poker financial system is restored.

Things happen.

More Trouble in Bonds Backed by Peer-to-Peer Loans. Goldman-1MDB Probe Zeroes In on Bond Deals. Gold Trader at Heart of Turkey Graft Scandal Charged in U.S. Analysts Urge Citigroup Split. RBS Repays $1.71 Billion Owed to U.K., Retires Preferential Dividend. China likes margin lending again. Starwood Agrees to Sweetened Merger Bid From Marriott. Stephen Lubben on Norske Skog. Can Securities Regulation Solve Social Problems? Meet the Former Porn Marketer Who Did Crisis PR for Martin Shkreli. "There’s just not even the semblance of a relationship between a group of undergrads who get together to eat hummus and write nice things about people, and the CIA."

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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