Fiduciaries, Reporters and Inversions

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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Fiduciaries.

The interesting conflict over the Department of Labor's fiduciary rule is between those who think that retirement investing advice is so important that people should have access to bad advice, and those who don't. The rule, loosely speaking, requires advisers who deal with retirement savings to put their customers' best interests first, and to avoid or at least disclose conflicts of interest. Obviously it would be nice if the result is that everyone who currently gets investment advice will keep getting investment advice, but now it will be better. But we live in a world of scarcity, and good advice is a scarce resource like anything else, so the likely outcome is that some people who currently get investment advice will stop getting investment advice. Some of that investment advice was subsidized by hidden payments that created conflicts of interest; some of it was provided by brokers who can't afford the compliance costs of serving small investors under the new rule. So the bad news is that some small investors will probably be unable to afford retirement investing advice. The good news, I guess, is that a lot of the advice they were getting was pretty bad and conflicted anyway.

On balance, is the news more bad or good? Allison Schrager is skeptical that even those who'll still get advice will be better off. The rule, she argues, and the White House economists who advocated for it, "seem to define good advice as simply investing in low-cost index funds." (She is clearly correct about this, though I should say that the final rule is less biased toward low-cost index funds than the original proposal.) Schrager disagrees:

I’d define good advice as a strategy that provides you with the same security people once had when their employer offered a traditional pension: one capable of paying you a predictable income in retirement. It is possible, but it takes an advisor who is able to create a strategy that fits your unique needs and risk appetite, and is both discerning about and open to new products and strategies. The fiduciary standard makes it hard for advisors to provide this service because it encourages them to avoid lawsuits, not provide good advice. When the standard is so vague, the easiest way to avoid being sued is to invest client money the same way every other advisor does. That way no one can claim anything irregular was done.

I'm a low-cost index fund guy myself, and I have never quite understood why understanding an investor's unique needs is that important. (Everyone needs as much money as possible, but without losing any. No adviser can guarantee that. No one knows their own risk appetite.) But certainly the new rule will tend to encourage herding and indexing and one-size-fits-all robo-advising. That is not the worst possible result! Honestly it's, like, the fourth-best possible result. But it is surely not the best.

Here is a Vox post on the rule that points out that a similar rule in the U.K. led to (1) a reduction in the number of financial advisers, (2) an "advice gap" in which middle-class investors had trouble getting financial advice, and (3) an increase in total fees and commissions charged by financial advisers, which is not an entirely promising set of outcomes. But here is an argument from Josh Brown that the rule won't actually change much:

Mutual fund families, retirement plan architects, broker-dealers, insurance companies and the registered reps in the trenches will all sleep easily tonight. Virtually all of the products they sell, where conflicts are a given, will still be allowed under the new rule so long as additional disclosures are made and a “Best Interest Contract Exemption” or BICE is signed off on by the client. This will be no trouble at all: Just picture the speed with which you click “Agree” everytime iTunes does a software update, and you can imagine how little of an impediment this sort of thing represents.

That sounds like an argument of cynicism, but it isn't really; the rule may not be much of a change, but the industry is changing anyway. Brown goes on:

And here’s what I think is the main point: The market has already been moving in this direction for the better part of the last decade. Consumer preference, advisor choice and the power of the internet have been driving many of the reforms needed, way in advance of what the Department of Labor released today. The new rules just speed up several industry mega-trends–the move toward pay-for-advice instead of pay-per-transaction, the mass exodus from expensive funds into cheap index products, the growth of the independent advisor versus the shrinkage of the brokerage channel.

The investment advice industry sells people a product that they don't understand and charges them fees they can't see, so it's understandable that market forces and competition work slowly to improve the product and reduce the fees. But they do work. Though it helps sometimes if the government gives them a nudge.

Elsewhere, Greg Smith, of "Why I Left Goldman Sachs" fame, was briefly the fiduciary of a New York Times reporter (he saved him $775 a year in fees). Here's a quantitative environmental/social/governance investor. And is WebMD conflicted?

The journalists and the mad punter.

Every financial journalist who is not too stupid or too full of himself to notice what is going on knows that this allusion is morally indefensible, but also that sources aren't talking to him just out of the goodness of their hearts. Iraj Parvizi, the "Mad Punter" on trial in the U.K. for alleged insider trading, explained to a jury:

“The way it works is, I need information, they need information,” Parvizi explained on his first day testifying in a London courtroom. “If I bought today and the Mail writes something tomorrow, the share price goes up 2 percent to 5 percent.” He said he could tell from the discussions they had and what they were asking what they were likely to print.

"I was there to help myself," he said of his conversations with reporters at the Daily Mail and the Financial Times. The similarities between reporting and a certain kind of fundamental investment research are pretty obvious; in both, you are trying to get people to tell you something that no one else knows, and that they're probably not supposed to tell you, so that you can use it for your own purposes. Reporters publish it, investors trade on it, but otherwise the processes are pretty similar, so you can see why there might be synergies if they work together.

Elsewhere in journalism, "dozens of journalists at oil-price reporting agency Argus Media are set to become multi-millionaires when a deal to bring an investor onboard goes through later this year, potentially valuing the firm at as much as $1.3 billion." So that should be a floor for the valuation of Money Stuff, no?

Inversions.

The U.S. Treasury's anti-inversion rules may have been aimed at the Pfizer/Allergan merger, but their effects will extend beyond that deal, and beyond inversions generally. ("Secretary Lew has finally made his mark," says a guy.) Bloomberg Gadfly's Brooke Sutherland explains that "earnings stripping" -- in which a U.S. subsidiary borrows from a foreign parent, then deducts the interest on that debt to reduce its U.S. taxable income -- is a normal practice not just in inversions but also in real multinational companies with U.S. operations. So the new rules limiting earnings stripping could make it less attractive for real foreign companies to invest in the U.S.: "If you're not sure that inter-company debt used to pay for a new plant in the U.S. will actually be treated as debt, then maybe you think about building that plant somewhere else." And Bloomberg View's Leonid Bershidsky argues that "U.S. investors would rebel if faced with such a rule change in any country where they operate." 

But the most immediate effect of the rules was to kill the Pfizer/Allergan deal -- making it the biggest terminated merger ever, congrats! -- and plenty of people are plenty sad about that. For instance, here is an op-ed by Ian Read, the chairman and chief executive officer of Pfizer, arguing that the new rules will mean "more foreign acquisitions of U.S. companies resulting in fewer jobs for American workers." And then of course there are the bankers, who on one estimate will miss out on "more than $200 million in fees" now that the deal has fallen apart. But it's not just Pfizergan; inversions are a meaningful chunk of the mergers-and-acquisitions market -- "Fees on inversions since 2011 have amounted to $1.3 billion" -- and bankers will be sad to see them go. It is, in a sense, their own fault though: As Bloomberg Gadfly's Max Nisen points out, big pharma's love for massive serial inversions is probably what killed the inverted golden goose. "The size of these deals, along with the dismal reputation of the industry over drug-pricing shenanigans, made targeting them politically expedient."

On the other hand, some people will still get paid for Pfizergan:

Three Pfizer Inc. executives will each receive $1 million cash awards tied to the drugmaker’s combination with Allergan Plc even after that $160 billion deal was terminated.

Mikael Dolsten, president of worldwide research and development, and John D. Young, group president of global established pharma business, were granted retention awards tied to the deal because the board believed they “would have an important role in consummating the combination with Allergan and successfully integrating the two businesses,” Pfizer said in a March 15 proxy statement. Those awards pay out even if the deal is canceled, the filing shows.

I tend not to get too worked up about executive-pay stuff, but on the other hand I often think that it is basically random. In that vein, here is a story about Foxtons's chief executive officer getting a 19 percent raise because the company "identified a need to significantly improve the competitiveness of its CEO remuneration," and here is a story about Co-operative Group's CEO getting a 60 percent pay cut, at his own request, because the "rescue is complete, and the rebuild of the group is well under way."

In other grim news for M&A bankers yesterday, the U.S. Department of Justice sued to stop Halliburton's acquisition of Baker Hughes, a move that was perhaps foreshadowed by its antitrust suit against a Baker Hughes shareholder earlier this week. The Justice Department, it seems safe to say, does not love this deal. ("Bill Baer, the head of the Justice Department’s antitrust division, said the deal is 'unfixable' and assailed the companies for proposing 'the most complicated array of piecemeal divestitures and entanglements' that he has ever seen." And: "There are some deals that are so antitrust-risky that they never ought to make it out of the executive suite or the corporate boardroom.") There is a $3.5 billion breakup fee in it for Baker Hughes; both stocks were up yesterday.

Panama.

Paul Ford, the poet laureate of databases, is characteristically excellent on the Panama Papers:

This is the first time that a data leak has been treated like a product. It’s surreal and a little like any product launch—except instead of a man from Apple standing on stage in a bright purple shirt, stroking gorilla glass, or Samsung insulting all womankind, it’s a global consortium of journalists and some rather well-thought-out home page work: A leak, a plan, and a brand: The Panama Papers. Brought to you by Journalism.

There’s a weird message here—throw away your garbage State Department telegrams, your stupid Ashley Madison databases, and get yourself some Panama Papers, 2.5 terabytes of pure raw corruption.

And here is Kadhim Shubber on the Panama leaks and the value of privacy. In Iceland, where the prime minister has fallen due to the Panama papers, the Pirate Party is polling at 43 percent support. You can see why disillusionment with the government would lead to an increase in support for non-traditional politicians, but Dan Davies points out that it's "kind of ironic that one of the big Pirate Party issues is people's right to secure communications." Elsewhere, my Bloomberg View colleague Megan McArdle points out that "The Panama Papers Actually Reflect Pretty Well on Capitalism." And Jürgen Mossack defended his firm's services, more or less:

“We’re not going to stop the services and go plant bananas or something,” the 68-year-old Mr. Mossack said. “People do make mistakes. So do we, and so does our compliance department. But that is not the norm.”

Blockchains, etc.

Apparently you can trade credit-default swaps on the blockchain now, or at least, some banks (along with Markit and Depository Trust & Clearing Corp.) ran a successful test:

DTCC will now discuss whether the results are strong enough to warrant using the technology for live trades or across a broader swath of credit-default swaps, a market with trillions of dollars in outstanding contracts.

“The ink is still drying on the results, but they are positive,” said Chris Childs, chief executive of the DTCC unit that oversees over-the-counter derivatives.

Wait hang on you used ink in your blockchain? I know some people mine bitcoins using pencil and paper, but still that is perhaps not the right metaphor. The ... blocks ... are still ... hashing ... or something.

Elsewhere in bleep bloop fintech: "Ripple Aims to Put Every Transaction on One Ledger." "Circle’s Future Looks Like Less Bitcoin And More Banking." "Max Levchin wants to revolutionize the $2.6 trillion consumer credit market." "For Fintech Start-Ups, Efforts to Rethink Rules That Cramp Innovation." "‘Fintech’ Loses Some of Its Attraction for Investors." "From Wall Street Banking, a New Wave of Fintech Investors." And of course: "Fintech Firms Are Taking On the Big Banks, but Can They Win?"

Basketball.

Is the success of the Golden State Warriors about the talent and hard work of the people who play basketball for the Warriors, or is it about the managerial savvy and capital-allocation decisions of the venture capitalists who own the team? It's probably both, in some proportion, but I suspect it is more fun to watch Steph Curry play basketball than it is to watch principal owner Joe Lacob make contrarian investing decisions. Anyway, here is a very good Wall Street Journal feature on how "Team executives saw the 3-point line as a market inefficiency and unleashed Stephen Curry to exploit it," which follows a very good New York Times Magazine cover story on how "the team’s owners — most of them from Silicon Valley — think their management style deserves some of the credit" for the Warriors' success. I found both of those stories very good and enjoyable and probably right (management matters! Capital allocation decisions are important!), but there is perhaps more to be said about a culture whose business leaders also want to be its sports heroes, and sort of pull it off.

People are worried about unicorns.

I guess I worried about unicorns when I read this BuzzFeed story titled "This Venture Capitalist Is Lecturing About Corporate Finance On Snapchat," but mostly I worried about me. I may just be too old for this. I have more or less figured out Twitter, late in life and at much cost to myself, but that may be my last thing. Anyway, if you've got a good idea for a unicorn, snap that guy up, or whatever one does. Elswhere, here is a Slack chat with Slack founder Stewart Butterfield; there is some discussion of the nature of happiness, but none of the venture capital economy in Bronze Age Egypt. And here is a brain-melting story about young people who use Snapchat and Instagram.

People are worried about bond market liquidity.

A Q-and-A from Jamie Dimon's annual letter to investors:

Are you worried about liquidity in the marketplace? What does it mean for JPMorgan Chase, its clients and the broader economy?

It is good to have healthy markets – it sounds obvious, but it’s worth repeating. There are markets in virtually everything – from corn, soybeans and wheat to eggs, chicken and pork to cotton, commodities and even the weather. For some reason, the debate about having healthy financial markets has become less civil and rational. Healthy financial markets allow investors to buy cheaper and issuers to issue cheaper. It is important to have liquidity in difficult times in the financial markets because investors and corporations often have a greater and unexpected need for cash.

I don't exactly know what he's referring to when he suggests that the bond market liquidity debate "has become less civil and rational," though I like to think that down here, in this corner of Money Stuff, I try to keep that debate rational, though maybe not always civil. Dimon's views on the subject strike me as pretty rational; he is measured on high-frequency trading -- "It appears that traders add liquidity during the day in liquid markets, but they mostly disappear in illiquid markets. (I should point out that many dealers also disappear in illiquid markets.)" -- and worries that one source of illiquidity and volatility is "lower availability and higher cost of securities financing" due to higher capital requirements. Anyway, here is more on Dimon's letter.

Things happen.

Fed Sends Signal That April Rate Hike Is Unlikely. While Draghi and Yellen Jawbone, Swiss Central Bankers Play It Old School. Steve Cohen is spending $275 million on a veterans' mental health nonprofit. In This Market Environment, Not Even A Former College Lacrosse Player Who Can Trace His Lineage To Peter Stuyvesant Is Safe. "Yahoo has shifted around everything so much that it is not easily clear what is making money and what is not." Why Facebook And Mark Zuckerberg Went All In On Live Video. Ackman Defends Pershing Square’s Large Stake in ValeantWall Street Is Edging Toward Win on Derivatives Capital Rule. Biggest Banks to Face Tougher Debt Limits to End Too-Big-to-Fail. Malaysian Parliament Inquiry Calls for Criminal Probe of 1MDB Fund Executives. Fed Warned Goldman on Malaysia Bond Deals. Former U.S. coal CEO gets prison time for blast that killed 29. Ivanka Trump scarves made in China recalled. A fleet of trucks just drove themselves across Europe. Economic possibilities for us. Russia's Communists Want Red Star Symbol Copyrighted. A.Word.A.Day: banksterSubway math. Rule 34. Eggplant emojis. "Owners of well-known dogs say they often field pitches directly from brands or ad agencies and discuss pricing." Sausage Spat Erupts as Daimler Shareholders Battle at Buffet.

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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