Mr. Grumpy and a Case of Latour

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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How's John Cryan doing?

Here's a Handelsblatt profile of Deutsche Bank Co-Chief Executive Officer John Cryan, who seems charming, in a charmless sort of way. "He once learned 100 Latin names for trees, simply out of curiosity." His underlings call him "Mr. Grumpy." Here's Cryan on his formative years:

“My childhood? Who would want to read about that?” he answers. It was deadly boring, he says. He spent every evening and weekend doing schoolwork. Not an answer you would expect from someone brought up by a jazz musician single father.

A perspective on financial technology:

He speaks of the bank’s history, of its digitalization and of a recent visit to Silicon Valley, where he met with very peculiar men in nylon shorts. Then the punchline: But at least they kept their shorts on! Laughter fills the room.

A contrast between Cryan and his predecessor, Anshu Jain:

Another ex-colleague puts it like this: Mr. Jain had an “almost North Korean mentality. No one would dare to criticize him or the bank. That made a kind of artificial bubble. Cryan popped that bubble. He is the anti-Anshu.”

Also there is Cryan's, I don't know, protectiveness of grape juice?

It was his unenviable responsibility to lay off 9,000 employees, close shop in 10 countries, slash bonuses and erect more robust controls against illegal activities. The bank slammed the brakes on spending so hard that Chief Financial Officer Marcus Schenck recently wanted to forbid the purchase of expensive grape juice from executive board meetings.

But that was too much for even his hyper cost-sensitive boss.

One sometimes gets the sense that Handelsblatt realized halfway through that Cryan might not quite work as a profile subject: He works a lot, listens to people, cuts costs, likes music, isn't a socialite, tries to stay out of trouble. "He has the pale skin of a workaholic and a frequent flyer." He is a conscientious boring banker for our new age of boring banking. But he "essentially inherited his strategy from his predecessors. In principle, there’s not much different from Mr. Ackermann’s vision of creating a broad-based universal bank." Deutsche Bank will be smaller and grumpier and more boring, but unlike a lot of its European competitors it may remain a more or less universal bank. Also a pretty levered one. Elsewhere: "Deutsche Bank’s Problems May Be ‘Insurmountable,’ Berenberg Says."

A perfect interdealer broker story.

The basic facts are that "ICAP, the interdealer broker, will rebrand itself as NEX Group once the sale of global broking business to rival Tullett Prebon is completed" and it becomes "a largely electronic trading and markets infrastructure business." But the real meat of the story is this:

ICAP chose the name and new black and white logo after sifting through more than 300 suggestions. It even ran a competition open to the public, offering a case of vintage wine to the winner. The preferred idea from BlackRock employee Mark Johnson, “Quantum”, ran into copyright problems but ICAP still awarded him a case of 1990 Château Latour.

Okay, one, is it possible to imagine a more generic financial-services-whatever name than "Quantum"? Except maybe "NEX"? Or "ICAP"? (Formerly "Intercapital"?) These names are ... I don't want to say that they're bad, exactly, but if I had known that you could get a case of 1990 Latour just for telling a financial company to rename itself "Quantum," I'd be expensively drunk all the time.

And, two, is there a more interdealer-broker move than buying someone a case of Bordeaux in exchange for a service? Remember when ICAP was fined $88 million for helping to manipulate Libor, in part based on an e-mail from an ICAP employee to Tom Hayes allegedly suggesting that "an annual champagne shipment, a few piss ups with Danny and a small bonus every now and then" were sufficient compensation for Libor rigging? You might think that the currency of money dealers would be money, but apparently it's fancy wine. 

Rate rigging.

Oh speaking of rate rigging, the Australian Securities and Investments Commission has accused Westpac of manipulating a benchmark rate, the bank bill swap rate, and has filed the transcript of an alleged 2010 conversation among Westpac traders that is, in hindsight, awkward:

In the conversation, "our biggest concern" about the "reputation" of the bank among corporate borrowers and other market participants was expressed, as opposed to the "professional" inter-broker dealers, who  "know what they were doing" and probably "spend half their life trying to stitch people up."

"The unprofessional, unknown random you know with $50 million of debt that's getting stitched up by his bank… that at some point wakes up and has a dummy spit and quite deservedly so".

I don't know what all those words mean but I think I have the general idea. One thing to consider -- and of course this isn't legal advice -- is that, while gloating and bragging about how you stitched people up feels very different from worrying and repenting about how you might be stitching people up, when it comes up in court years later, the latter won't really look any better than the former. Probably best to keep both off of recorded lines. 

Asset management.

The drumbeat of stories about how hedge funds are a mirage, active management is for chumps, alpha is impossible, and everyone should just put all their money in index funds has become so insistent that I've started to consider getting out of stocks and into cash. I don't know, once we are all 100 percent long the index, and stock buybacks stop, what's left to push stocks up? This is of course not investing advice.

Anyway Fidelity "is making a push to sell more index-tracking funds," which seems like a bit of a capitulation. (No, no: "'We still strongly believe in the power of active management,' the Fidelity spokesman said.") Peter Kraus of AllianceBernstein criticizes "closet benchmarking" and calls for active managers to "to invest with high conviction, concentrating capital in the ideas they think are most likely to deliver strong long-term returns," and to "strictly limit the capacity of their funds to avoid diluting their best ideas." And here are some staggering facts about fees:

According to Morningstar, the investment-research firm, only 7.3% of U.S. stock funds charge 0.5% or less in annual expenses; 56.7% charge more than 1%.

In 1960, more than three-quarters of all stock funds charged no more than 0.5% in annual expenses, and fewer than one-tenth charged more than 1%.

Since 1960, stock trading commissions have come down, technology has improved, mutual-fund competition has increased, and domestic equity mutual fund assets have grown from $16 billion to over $6 trillion. And fees have gone up? Come on.

On the other hand, 401(k) plan expenses are going down. Meanwhile in hedge funds, Stephen Foley argues that investors should "seek out funds that have a larger proportion of locked-up or permanent capital" to avoid the risk of forced selling to meet redemptions.Here is some worrying about hedge fund lobbying. And here is a Vice article titled "We Asked An Expert Why Hedge Funds Still Exist." Apparently one of Vice's main objections to hedge funds is that they employ people who went to Princeton and didn't even take a class from Toni Morrison. 

Fintech.

One of my themes in thinking about financial advice, robotic or otherwise, is that an adviser's deep understanding of each investor's unique circumstances is probably overrated. People talk about it a lot, but as far as I can tell every investor is in more or less the same circumstances -- she has some money, wants more, and doesn't want to lose any -- and the rest is details. In that vein, Frankie Evans pointed me to this EY report, which surveyed wealth management advisers and clients and found that "clients place significantly higher emphasis on transparency in fees and portfolio performance while downplaying the role of advisor interaction":

Financial advisers think that their job is to have quality conversations with clients and really understand those clients' needs, and then charge them inscrutable fees for that understanding. The clients just want their stocks to go up. My assumption is that neither a robot nor a human can really guarantee that, but the robots tend to be better about (1) charging transparent fees and (2) not talking to you.

Elsewhere in financial technology, people are really mad about LendingClub. Gretchen Morgenson complains that, "in contrast with traditional financial companies, Lending Club's disclosures are thin," with limited disclosure on its proprietary credit-rating algorithms and "scant details on borrower performance by type, product or vintage." David Dayen says that the industry "cannot put back the curtain now that the dodgy nature of marketplace lending to the public has been revealed." And Kadhim Shubber points out that some of LendingClub's loans were made from its balance sheet, and funded by the sale of unsecured promissory notes of LendingClub -- meaning that some lenders have credit exposure not only to LendingClub borrowers but also to the company itself. (We talked about that a while back.) Also here is the International Financing Review on the downfall of departed LendingClub CEO Renaud Laplanche:

Laplanche certainly had a flair for marketing. During a keynote speech last year, he flew a so-called “loan drone” over the gathered crowd, which then proceeded to drop “hundreds of mini-dollar-bills” over attendees.

Yeah that would be a little tacky even without the subsequent scandals. 

What's Warren Buffett up to?

Why would Berkshire Hathaway want to buy Yahoo? Well, it wouldn't, but it has apparently signed on to finance a bid by Dan Gilbert of Quicken Loans. ("The role of Berkshire in the Gilbert bid would be financial, with Mr. Buffett’s conglomerate collecting interest from its financing with the opportunity to convert those holdings into an equity stake in the company.") That leads to a second question, which is: Why would Dan Gilbert want to buy Yahoo? And why would Warren Buffett think it's a good idea? I don't quite understand Yahoo's business, so I don't quite understand who might bring synergies to it. Perhaps there's value in teaming up Buffett's old-timey charm with Yahoo's old-timey internet portal. I don't know. Former Yahoo executive and current Berkshire director Susan Decker:

"I hope the next owner can do something to revitalize the spirit of the core things that made Yahoo very, very unique and create a distinction in consumers' minds about why they love Yahoo still. It will be helpful if it is private or part of a much larger corporation to achieve that," she said on CNBC in an interview on April 29.

My suspicion is that "very, very unique" means "I don't know what Yahoo does either." Elsewhere: Berkshire Hathaway bought a billion dollars worth of Apple stock last quarter. 

Money Monsters.

Did you see "Money Monster" this weekend? (I did!) Did you know that it's about high-frequency trading? Sort of? I did not, so that was a pleasant surprise. Elsewhere in noisily alliterative stock-market shows, two Wharton students analyzed Jim Cramer's Action Alerts Plus portfolio from inception in 2001 through March 2016, and found that it slightly underperformed the S&P 500 index with slightly higher volatility.

Legal marijuana.

Here's a great and infuriating article by Amanda Chicago Lewis about something that is obvious once you think about it, but that had never occurred to me:

Even though research shows people of all races are about equally likely to have broken the law by growing, smoking, or selling marijuana, black people are much more likely to have been arrested for it. Black people are much more likely to have ended up with a criminal record because of it. And every state that has legalized medical or recreational marijuana bans people with drug felonies from working at, owning, investing in, or sitting on the board of a cannabis business. After having borne the brunt of the “war on drugs,” black Americans are now largely missing out on the economic opportunities created by legalization.

It seems crazy to ban someone from the business of selling marijuana just because he previously sold marijuana! (Lewis: "For most jobs, experience will help you get ahead.") And yet. One conclusion is: Occupational licensing is usually bad

People are worried about unicorns.

Here's a New York Times article about the Securities and Exchange Commission's new crowdfunding rules that might sort of miss what crowdfunding is?

But are the 230 million adult Americans who aren’t millionaires really that interested in becoming do-it-yourself venture capitalists? While supporters cheer the new rules as a democratization of high finance, potentially opening up to the masses deals once reserved for the rich, skeptics worry that regular investors might get only the leftovers.

They may dream of discovering the next Facebook. But the most promising companies — the high-growth ventures delivering the monster returns that keep the entire venture-capital industry afloat — may also be the ones least likely to bother raising money in small dribs from the crowd, they fear.

I mean, yes, clearly. But venture capital and crowdfunding really do seem like different models. Venture capital is, you have a lot of money, and you invest in a portfolio of big bets, and most of your big bets fail, and one becomes Facebook. It is a unicorn hunt, and you are doing it for money. Crowdfunding is, you like potato salad, so you give a guy a few bucks to make more potato salad. It is a lark. Or, more usefully, you like buying clothes from "an online marketplace of African fashions," so you kick in some money to help its founder expand her business, in exchange for a small cut of the equity. (That is the example in the Times article.) It is a profit-seeking investment, I suppose, but there are also community and product-enjoyment elements that make it less important that you get back 10 times your money. This is not investing advice or anything, but if were going to contribute to (is the phrase "invest in"?) a crowdfunding campaign, I would not be hoping for a 10x exit.

Elsewhere, some startups are disrupting class-action lawsuits by requiring arbitration of employment disputes. 

People are worried about stock buybacks.

But now the worry is that there may not be enough of them:

After snapping up trillions of dollars of their own stock in a five-year shopping binge that dwarfed every other buyer, U.S. companies from Apple Inc. to IBM Corp. just put on the brakes. Announced repurchases dropped 38 percent to $244 billion in the last four months, the biggest decline since 2009, data compiled by Birinyi Associates and Bloomberg show.

In the simplified model of the stock market in which the only participants are index funds and corporate treasurers, this would seem to be bad news.

In odder stock-buyback worries, the other day I foolishly addressed the question: Can a company buy itself? The answer is no, but you can get arbitrarily and amusingly close to yes, and people keep sending me examples. Here's a good one: Biglari Holdings Inc., which was formerly known as Steak n Shake Co. but which was renamed after its chief executive officer and controlling shareholder, Sardar Biglari. Here is what's fun about Biglari Holdings for our present purposes:

  • It is 50.6 percent owned by "The Lion Fund II, L.P., a private investment partnership of which Mr. Biglari controls the general partner."
  • "The Company and its subsidiaries have invested in The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively, 'the investment partnerships').  The investment partnerships operate as private investment funds.  As of December 31, 2015, the fair value of the investments was $734.7 million.  These investments are subject to a rolling five-year lock-up period under the terms of the respective partnership agreements." 

So Biglari Holdings invests in The Lion Fund II, which is controlled by its CEO, and which then invests in ... shares of Biglari Holdings. The Lion Fund gets to vote those shares (they're not treasury shares; they're shares owned by an outside hedge fund), and it can charge Biglari Holdings fees. It is not exactly Biglari Holdings owning itself, but in some ways it's even weirder. 

People are worried about bond market liquidity.

You know, when the Treasury released a blog post on Treasury market liquidity earlier this month, it said it was "the first of a series on fixed income markets," and I was counting on that series to fill this ever-yawning hole in Money Stuff. But, 10 days later, that's still the only post in the series. Whatever, Treasury; I guess you just aren't that worried about bond market liquidity. Anyway here's something:

Banks' diminished market-making capacities and shrinking inventories are taking their toll on liquidity, particularly in the ABS and structured credit markets. However, a lack of clarity over valuations may also have a role to play in the liquidity debate.

"Ultimately what the industry has to figure out - both for the good of the buy- and sell-side - is to improve pricing transparency in order to create liquidity," says Ron D'Vari, md at NewOak Capital. "Sellers need to know where assets can be sold and buyers need to be confident on the price. Lack of confidence on the price is making the market much less liquid and hence more volatile."

Me Friday.

I wrote about shareholder meetings.

Things happen.

Two-Minute Plunge Roils China H Shares as Futures Volume Soars. Lure of the Irish: Dublin Ready and Waiting for Post-Brexit Bankers. If rates are negative, should banks pay borrowers? Goldman Sachs emerges as growing natural gas player. Nomura Blames Biggest-Ever Loss on ‘Incompetent’ Bond Trader. Details Emerge on Global Bank Heists by Hackers. Matt Klein on the Greek debt burden. Brainard Sways U.S.-Centric Fed to Think Global in Rates Debate. Research cutbacks hit oil groups’ ability to invest. Google Plans to Map the Interior World in 3-D. Trash banking. What Golf Can Learn From Online Dating. William Cohan says that Erin Callan's "message is saccharin but powerful." Anthony Scaramucci supports Trump because he thinks that Trump is lying about his policy proposalsName epic. Tortoise walked. Bison house-trained. "After all, despair is a condition inherent to being a squirrel."

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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