Endless Horror and Business Casual

Also Panama Papers, letters of credit, Martin Shkreli, hedge funds and websites.


There are few better rivalries in banking these days than the one between John Cryan and Tidjane Thiam over who can be more of a killjoy. Cryan, the chief executive officer of Deutsche Bank, goes by the nickname "Mr. Grumpy," hates childhood, fired a lot of people, and "once learned 100 Latin names for trees." But I think Thiam, the CEO of Credit Suisse, might still have the edge:

“Is there a vision. Is there a direction?” Mr. Thiam asked aloud last year in a speech introducing his strategy. “The Germans say that the horrible end is better than horror without end.”

I have questions. Is that really a German saying? Does it sound less ... threatening in German? Is it an appropriate guideline for governance of a public company? Is it an instance of public-market short-termism? Would a long-term investor prefer horror without end? Were "horrible end" and "horror without end" really the only options available? Most importantly, I guess: If you are an employee at Credit Suisse, how should you feel about all the horror?

Bad, seems to be the answer, judging by the Credit Suisse employees who complained anonymously to the New York Times about Thiam. There was a ... misunderstanding? ... about some distressed-debt positions, and a lot of bankers seem to be unhappy about the strategic shift toward "cultivating billionaires in China, Indonesia and Africa" for wealth-management services. The ghost of Phil Purcell comes up:

The culture clash at Credit Suisse recalls a similar dispute at Morgan Stanley a decade ago. Like Mr. Thiam, Philip J. Purcell was a former whiz kid consultant from McKinsey who preferred slow and steady brokers over bankers with big egos and even bigger paychecks. A banker-led uprising forced Mr. Purcell’s departure, since power on Wall Street was then still in the hands of deal makers and traders.

Now perhaps the power has shifted. To wealth managers, I mean. I am still not sure about how comfortable Wall Street is with assimilating consultants.

Elsewhere in European banking gloom, fines from HSBC, BNP Paribas and Standard Chartered have paid for fancy new smartphones and tablets for the New York Police Department. Which I guess is nice, though the European observers who object to U.S. law enforcement's extraterritorial application of U.S. law to European banks might also object to the law-enforcement profiteering from that application. 

Remember the Panama Papers?

The Panama Papers leaks have finally produced a good story about Americans hiding their assets offshore using the services of Panama law firm Mossack Fonseca. It is hard to tell how big a deal it is: It's anecdotal, the law is complicated, and Mossack Fonseca at least asked clients to promise that they had paid all required U.S. taxes, though it's hard to tell from the e-mails if they were winking. No one's reputation is likely to be enhanced, exactly, by appearing in the Panama Papers, but I suspect that some clients were more interested in privacy than in tax evasion. 

But never mind that. The best part of the story is just the language of Mossack Fonseca's e-mails, which are a lot more fun than I remember from working at a law firm. Take this randy little piece of outright pornography:

“At hearing that he can make nearly $8 million per year just on tax savings,” a client from Pennsylvania “was now wide awaken,” a Mossack Fonseca staff member wrote. “I could even detect sweats coming down from his forehead and his cheeks were beginning to blush with crimson excitement. Noticing his interest, I went in for the kill.”

I hope that scene is in the movie version of the Panama Papers, which will then have to be rated R for Mature Tax Content. Or take this e-mail from a client asking Mossack Fonseca for help in buying gold:

“I feel VERY unsettled with this election and how the media is censoring information and spinning the American Public to vote Obama,” she wrote to Mr. Owens at Mossack Fonseca. “It is so obvious to me, that they are setting us up with a Socialist — but most people can’t see it happening before their eyes! It’s like propaganda that is brainwashing Americans to forget the Principles of Hard Work, Ingenuity, Risk and Boundless Success!”

Those capital letters. Boundless Success. It is so lovely. I assume she meant to type that in an internet comment section and accidentally e-mailed it to her lawyers instead.

Business casual.

I feel like the JPMorgan business-casual news might be less than meets the eye:

In a break from tradition, the largest U.S. bank by assets is allowing employees to wear business-casual attire on most occasions, according to an internal memo reviewed by The Wall Street Journal.

The move—trading pinstripes for pullover sweaters—is relatively unusual for a Wall Street bank, in which suits are typically required for men and women due to longstanding industry customs and the etiquette involved in dealing with wealthy clients.

Like, on the one hand, is it true that "suits are typically required" at investment banks? Goldman Sachs was business casual when I was there, and my impression from, you know, walking around Midtown is that that is the norm. You wear a suit to meet clients; you wear wool dress pants, dress shoes and a dress shirt otherwise. (If you're a man! The rules for women are more complicated, and I never really learned them; nor, in my experience, did any other man. If you're a woman on Wall Street you could wear a burlap sack to work and all the men will be like "sure I guess.") 

On the other hand, the Wall Street Journal helpfully provides a diagram and even a quiz about what is now allowed, and it's like, khakis and polo shirts. But I say unto you: Don't wear khakis and a polo shirt to your investment banking job. I don't care what the policy says; you have to live with yourself. If you're a male investment banker, wear wool dress pants, dress shoes and a dress shirt, unless you have a client meeting; then, wear a suit. 

Elsewhere in employee morale initiatives, General Electric "may also scrap the longstanding and much-imitated system of rating staff on a five-point scale," which will almost make up for the fact that it may also scrap annual raises.

Should letters of credit be bail-in-able?

Loosely speaking you can divide a bank's liabilities into functional liabilities that are part of the business of banking -- especially, deposits -- and other sorts of liabilities that are just, like, the bank wants to borrow money to invest it in stuff. Generally speaking it is important to the economy that the functional liabilities be treated as risk-free. On the other hand it is also useful that some bank liabilities -- like, say, senior unsecured holding-company debt -- not be safe. It's good if the people who fund banks' risky activities have some of their own money at risk, and know it. (This is called a "bail-in.") But no one thinks depositors' money should be at risk. It's a question of line-drawing. 

A lot of global trade is underpinned by bank letters of credit that "guarantee a seller will get paid even if the buyer fails to make good, which enables unknown parties in different countries to trade by putting their faith in banks rather than one another." It seems to me that letters of credit are functional liabilities, and that making them riskier would be bad. "Data for trade finance is scarce, but the BIS says banks intermediate between $6.5 trillion and $8 trillion of it a year."

But regulators want bank resolution to be tidy, and one obstacle to tidiness is if a bank's contracts are subject to lots of different legal regimes. So the European Union did this:

All EU bank contracts that fall outside the bloc’s jurisdiction are now mandated to include a clause obliging liability holders to accept the possibility of a bail-in. This regulation, introduced in January, was intended to stop creditors seeking the protection of foreign courts.

A reasonable solution might be to have non-bail-in-able letters of credit subject to E.U. law. But that solution seems to be impossible, both because of the interconnected and international nature of trade credit, and because "these decades-old contracts don’t operate under any specific law." That is sort of magical, to have contracts that don't operate under any particular law. They should put them on the blockchain.

Hedge funds.

Here are two Financial Times stories about McKinsey's $9.5 billion internal investment fund, which invests on behalf of current and former partners (and employee pension funds). The McKinsey Investment Office has "sophisticated proprietary trading strategies and external hedge fund and private equity managers," though it seems to be mostly a fund-of-funds and "does not invest directly in publicly quoted securities." But it is "permitted to make investments in the securities of companies for which McKinsey acted as a consultant," though "its offices and IT systems are separate from those of McKinsey’s consulting business to avoid any possible leakage of information between the two operations." The Financial Times works pretty strenuously to suggest a conflict of interest between McKinsey's consulting business and the investment office, though without pointing to any specific conflicts; if I were a McKinsey client this is not the conflict I'd be worried about. Still, in the great finance vs. consulting rivalry, it is a little daunting to learn that McKinsey has its own secretive hedge fund, or family office anyway, that "has made money for 24 of the past 25 years."

Elsewhere in hedge funds, Mary Childs suggests that the SkyBridge Alternatives conference -- which this year served in part as a fundraiser for a campaign to keep Muslims out of the United States and featured a white man telling a black woman "I did you a great favour bringing you into politics in the 1860 campaign and this is how you repay me?" -- might be bad for the industry's image. 


Here's a civil and criminal insider trading case against two childhood friends, one of whom gloried in the title of "master planner" at Pfizer and was responsible for evaluating Pfizer's "capacity to manufacture drugs being developed by other companies" that Pfizer was thinking about buying. So he allegedly tipped his friend, a financial adviser at Oppenheimer & Co., and then they both allegedly traded. It is not a great idea. The master planner has pleaded guilty.

Elsewhere in insider trading, prosecutors took some money from Diamondback Capital Management when they accused it of insider trading, and are now giving the money back. And elsewhere in securities enforcement, there are new charges against Martin Shkreli:

According to the new indictment, in 2012 Shkreli and Retrophin's outside counsel Evan Greebel divided 2 million of the company's unrestricted shares across seven employees and contractors in such a way as to avoid the reporting requirements of federal securities law.

Shkreli and Greebel also in effect controlled the shares by preventing some of the employees and contractors from selling them but they did not disclose that control to securities regulators, the indictment says.

This is less interesting than the original securities-fraud charges, which themselves were perhaps less interesting than Shkreli's non-criminal but nonetheless controversial conduct involving drug pricing, Twitter feuds, the Wu-Tang Clan, etc. Secretly dividing up ownership among nominees in order to avoid ownership restrictions is a classic move in small-time stock frauds, and it's a bit of a letdown to see Shkreli accused of it now, after he's hit the big time. 

Market structure.

Every modern stock exchange has, among others, at least these two computer systems:

  1. matching engine that keeps an electronic order book and matches orders with each other to create actual trades on the exchange; and
  2. web page that has, like, its phone number, and some links to press releases.

And not just stock exchanges; every computer-intensive financial business has a computer system that does its secret complicated financial business, and another computer system that is a web page. The web page, being public, tends to be less secure than the secret-complicated-business system. So it is amusing that "a group based in the Philippines which is part of the ‘hacktivist’ network Anonymous" may have "taken down the London Stock Exchange (LSE) website for more than two hours as part of a campaign against the world’s banks and financial institutions," because the web page is not, you know, where the stock exchange lives. "Experts say trading was unlikely to have been affected and that no sensitive data was stolen." According to Anonymous, "the incident was one of 67 successful attacks it has launched in the past month on the websites of major institutions," and yet they still haven't figured out that the way to bring down the world financial system is not by bringing down its web pages. Except this web page. Please don't hack this web page, Anonymous. 

Elsewhere: "Could Blockchain Have Prevented Bangladesh’s Central Bank Hack?"

People are worried about non-GAAP accounting.

That title may not fairly characterize the U.S. Securities and Exchange Commission's investigation of Alibaba's accounting practices, but I am putting it here anyway because I really enjoyed Jack Ma's comments on the investigation:

"Alibaba's business model does not have any references in the U.S., so it's not just a matter of one or two days for the U.S. to understand Alibaba's business model," Ma was quoted as saying.

Obviously Alibaba's accounting model is nonetheless required to have the appropriate references in the U.S. Also:

"We want to thank the SEC for giving us an opportunity to interact," Ma said in Friday's interview. 

That is perhaps unnecessarily polite. On the other hand I suspect that approach will work out better for Alibaba than Martin Shkreli's approach will work out for him.

People are worried about unicorns.

"RIP public markets: The steroid era for start-ups is over," writes Tanzeel Akhtar. The co-founder of Nest, which was a thermostat unicorn before it was sold to Alphabet/Google, has moved on. And what's Eduardo Saverin up to?

People are worried about stock buybacks.

Here's Greg Ip on a theory from Carlyle Group economist Jason Thomas that "lower interest rates are actually hurting investment by encouraging companies to pay dividends or buy back stock instead" of investing in their businesses. Like most worries about stock buybacks, this is a worry about short-term-ism in public equity markets, but I found the explanation for the short-term-ism somewhat novel:

In theory, an investment that raises future cash flow also raises future dividends and should be just as appealing as a higher dividend today, irrespective of interest rates. But Mr. Thomas says this assumes investors don’t care whether they get their dividends today or tomorrow. In fact, he says, investors such as retirees have a strong need for current yield and will pay a premium, in terms of the price to earnings ratio, for a company that distributes more of its income today.

Of course the low interest rates are supposed to make investors care less about whether they get dividends today or tomorrow, lowering discount rates and pushing consumption into the future. But the theory here is that public markets are short-term-oriented -- especially in a zero-interest-rate world -- because retirees need to eat.

People are worried about bond market liquidity.

As a fan of financial engineering, I have occasionally written fondly about a proposal (possibly almost sort of Trump-endorsed!) that the U.S. Treasury should buy back off-the-run Treasury bonds (which trade at a discount to on-the-run bonds) and pay for them by issuing new on-the-run Treasuries (which trade at a premium to off-the-run bonds).It is free money, for one thing, but depending how you do it, it could also be good for bond market liquidity: On-the-runs are more liquid than off-the-runs, so concentrating more of the Treasury market in on-the-run issues could be helpful for liquidity. But "Treasury Buybacks: Not So Fast," says Susan Estes of OpenDoor Trading:

The root of the issue with Treasury buybacks lies in the bifurcation of the market, with trading of OTRs dominated by principal trading firms (PTFs). Helping this constituency by bolstering the size of benchmark issues does not add to the stability of the overall market. In contrast, genuine long-term holders of the government’s debt are concentrated in the OFTRs. While these real money investors may use OTRs to adjust duration (or when they need immediate access to liquidity), portfolio re-balancing is often done in cheaper OFTRs.

That is: The liquidity in the liquid on-the-runs is dominated by electronic traders, whom everyone kind of dislikes; taking away off-the-runs will be bad for the kind of liquidity that "real" investors need. I don't know. By the way, it is a tiny tragedy that those two very useful terms -- "on-the-run" and "off-the-run" -- are so hard to abbreviate meaningfully. It should be like "on-the-run" and "not-the-run" or something.

Elsewhere in Treasury market structure, the role of primary dealers in Treasury auctions is increasingly "serving as a backstop, not an underwriter."

Things happen.

Bethany McLean on Valeant. William Cohan on Andrew Caspersen. Switzerland Votes to Reject Basic Income Initiative. Why Housing is About to Eat the US Economy. Rothschild & Company to Acquire Compagnie Financière Martin Maurel. GOP’s Jeb Hensarling Takes Aim at Dodd-Frank, Volcker Rule. U.S. Municipal Debt Draws Rush of Investors. The Land Below Zero: Where Negative Interest Rates Are Normal.  "Against the lively debate on whether a staggered board (SB) of directors hurts or benefits stockholders I present new evidence suggesting that in general, an SB has no significant effect on stock value." The Oil Rally Could Make You Think Twice About Ordering Dessert. "Bitcoin is a largely mature technology, used mostly for evading Chinese capital controls." Inter Milan to Sell Majority Stake to Chinese Retailer Suning. Man appreciates Harvard Business School education. Don't be yourself. The Republican nominee for President said that a federal judge could be disqualified from his job due to his religion. Shelter Island political crisis. "All right, let’s make some ho-hos." Murder-themed engagement photos. STEM for Dogs

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