Voting Mistakes and Financial Choice

Also CDO trading, Libor manipulation, teen traders, Warcraft tickets and Theranos vampire fan fiction.


Dell did a management buyout in 2013. Some shareholders objected to the deal, arguing that the buyout group -- led by Michael Dell and Silver Lake -- was getting the company too cheaply. So they voted against it and sought appraisal in a Delaware court. Last week the court agreed with them, finding that Dell was worth $17.62 per share rather than the $13.75 that the buyout group paid for it. So everyone who sued for appraisal will get an extra $3.87 per share plus interest. 

Or not quite everyone. In particular, T. Rowe Price accounts holding about 31 million shares had sought appraisal, but won't get anything, because they voted for the deal, which, under Delaware appraisal law, is disqualifying. These funds opposed the deal, and vocally criticized it, and planned to vote against it, and then just sort of ... forgot. They hit the wrong button, or, rather, didn't hit the right button. Proxy voting is complicated. This is a bit of an embarrassing error for T. Rowe to make with its clients' shares, and yesterday it announced that it would "pay up to approximately $194 million to compensate certain clients" for the mistake. That is nice of it.

But in a sense T. Rowe is not the only fund manager that made a mistake by voting for the deal. Any fund manager that voted for the deal, instead of seeking appraisal, cost its clients the $3.87 per share plus interest that they could have gotten in appraisal. (This is not entirely true -- if too many  shareholders had voted against the deal, then it wouldn't have gone through and there'd be no appraisal rights -- but it's true enough for any one fund manager.) BlackRock, Vanguard and State Street -- all of whom owned more shares than T. Rowe just before the deal closed, according to Bloomberg data -- didn't get appraisal either, but there's been no suggestion that they might, or should, compensate their clients. The difference is that they meant to vote for the deal.

Isn't that worse, though? Like, T. Rowe was right -- in some legal sense, at least -- that the deal undervalued Dell. So it fought on behalf of its clients to get a higher price, and it won, or would have won but for a technicality. The other funds were wrong; they voted for a deal that -- again, legally speaking -- undervalued their clients' shares. Their error was substantive; they made mistakes of financial analysis and corporate governance. T. Rowe's error was hitting the wrong button. Or: Its error was taking its clients' interests too seriously, getting the analysis right, and then hitting the wrong button.

There are lessons here, though they are well-known lessons of fund management. It is much better to be wrong the same way as everyone else than it is to be wrong in a different way. T. Rowe was less wrong than everyone else, but it was differently wrong, which will cost it $194 million. The people who were more wrong had the good sense to be wrong together, so they will be fine.

Elsewhere, here is Andrew Ross Sorkin on the Dell appraisal case, which "is sending shudders all over Wall Street and the boardrooms of corporate America, because the court, in effect, overruled 'the market.'"

Financial Choice.

I used to build derivatives, and for derivatives builders of a certain era, coming up with the perfect acronym was just as important as getting the economics right. Structurers of my generation talked in tones of hushed awe about the giants who came before us and dreamed up names like -- this is true -- "FELINE PRIDES." ("PRIDES" stands for "Preferred Redeemable Increased Dividend Equity Securities"; I always assumed that "FELINE" was just a meaningless flourish, the signature of a master, but in fact it's apparently "Flexible Equity-Linked Exchangeable.") But, for complexity and euphemism and all-around smarm, none of us could hold a candle to the true titans of acronym, Congress. Take Representative Jeb Hensarling's proposal to overturn Dodd-Frank:

The Financial Choice Act, which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs, builds on longstanding efforts by House Republicans to roll back or repeal major elements of the law, and would strip financial regulators of significant authority to oversee some of the country’s largest financial institutions.

The sheer art of naming something "Choice," but "Choice" is an acronym that resolves to include "Hope"! Imagine if you could create hope by adjusting bank capital requirements. It is daring, inventive, impressive stuff. It's no USA Patriot Act -- what is? -- but it is an achievement in acronyming that would make the financial industry proud. (Presumably the industry had some input in writing it!) But it is only the second-most-impressive name in the article; get a load of this:

The legislation would also restructure the Consumer Financial Protection Bureau and remove some of its powers. The plan would replace the agency’s single director with a bipartisan commission, which would be called the “Consumer Financial Opportunity Commission.”

See, the CFPB is about giving consumers protection. "Protection" is itself a euphemism; it means that the CFPB prevents consumers from getting financial products that it thinks might hurt them. But the CFOC is about giving consumers opportunity, which is a euphemism for making sure that consumers can get financial products that might hurt them. It's an opportunity! 

All political discussion of financial regulation is terrible, but there is a certain rigor to its terribleness. Politicians may not quite understand, say, capital requirements or single-point-of-entry resolution or proprietary trading, but their manipulation of the abstract symbols of financial regulation is so artful and committed that you can almost forgive them the lack of substance. Anyway the Financial Choice Act would also repeal the Volcker Rule, prevent the designation of non-bank systemically important financial institutions, replace "orderly liquidation authority" with a new kind of bankruptcy, and exempt banks with a 10 percent leverage ratio from all other capital and liquidity regulation.

Elsewhere in regulation: "Banks are stepping up opposition to looming capital standards, with one of the financial industry’s largest lobbying groups warning that regulators risk slowing the global economy with a clampdown on lenders’ ability to judge the health of their own borrowers." And Anat Admati blames everyone for "the persistence of a dangerous and distorted financial system and inadequate, poorly designed regulations." (Seriously the title is "It Takes a Village to Maintain a Dangerous Financial System.")


You know, we talked above about the well-known lesson that it is better to fail in the same way as everyone else than it is to fail in your own way. But even succeeding in an out-of-consensus way can get you funny looks. Here is a story about how Citigroup became a powerhouse in collateralized debt obligation trading through the simple method of actually deciding to trade CDOs in 2007, when everyone else was fleeing the market. The Citi desk, led by Mark Tsesarsky, "notched almost $2 billion in revenue" over the last three years "by buying billions of dollars of debt, holding it as values rose, and trading with customers." That is in a broad sense the purpose of a market-maker: When the market panics and prices fall too far, a well-capitalized bank should step in to buy assets and then profit as prices return to normal. But since the Volcker Rule, that sort of market-making activity is viewed with suspicion, and "while Citigroup says the inventory buildup meets client demand, other banks may have shied away for fear of violating the letter or spirit of the rule." Plus, in 2007 and 2008, Citi wasn't exactly well capitalized:

The success of the unit and its unusual mandate stuns Ronald Colombo, a law professor at Hofstra University and former counsel to Morgan Stanley. “The theatrics are horrible,” he says. “It’s impossible to imagine. You’re being bailed out with one hand, and you’re pouring money into the very same assets that precipitated the bailout with the other.”

Really those theatrics ought to be fine. The point of a bank bailout isn't just to make sure that bankers continue to lead comfortable lives; it's to support markets that were dislocated by banking panics. But I take his point; it's an awkward thing to talk about. In any cases it's a good business:

While it isn’t clear how much Citigroup made from marking up inventory, one thing is certain: By 2015 the bank had full control of the CDO market. It traded about $6 billion of the securities with roughly 150 customers that year, according to a person with knowledge of the operation. That amounted to about $700 million of revenue, or 80 percent of the market, says another person.

If you can get $700 million of revenue on $6 billion of trades, you should take that all day long, no matter the theatrics.


Peter Henning wonders whether it will be hard to prosecute the Deutsche Bank traders accused of Libor manipulation after last month's Second Circuit decision finding that Countrywide's dishonest breach of contract -- in its mortgage "hustle" program -- was not fraud:

Each bank’s Libor submission carried an implicit assertion that it was an accurate figure at which it could borrow if it so desired. But whether that implication, which can result in a “false impression” about the true borrowing costs of a bank, constitutes wire fraud is an open question when a knowing breach of contract itself was insufficient to prove a violation by Bank of America.

When we talked about the Countrywide decision, I mentioned the parallels to Libor, though I am not sure that the cases are exactly analogous. In general, though, I struggle with the idea that Libor manipulation was wire fraud. Like: The Libor people (at the time, the British Banker's Association) call you up, and you say a rate, and you are perhaps -- more or less -- representing to the BBA that you could borrow at that rate, but if you are lying you're not really defrauding the BBA. The BBA doesn't care, it's just compiling a list. Your borrowers and derivatives counterparties might care -- in fact, all borrowers and derivatives counterparties might care, whether or not they have any contracts with you, since they all use Libor -- but it's not like you're lying to them. You're lying to the BBA, which isn't harmed; you're harming the derivatives counterparties, who aren't lied to. It certainly feels fraud-y, but I'm not sure it's an easy case exactly.

Elsewhere: "Saudi Arabia Said to Tell Lenders to Stop Lowballing Rates."


I feel bad calling attention to this video of two teen traders -- one of whom, Jacob Wohl, we've discussed before -- talking about their trading. They are very young. When I was their age, YouTube didn't exist, and the embarrassing things that I said to my friends stayed between us rather than being disseminated on the Internet. (Also I wasn't running a commodity trading adviser, but de gustibus.) But, in my defense, they seem to want the attention. Also the video is very funny. If you have limited time, maybe start at around the 10-minute mark, where the teen traders criticize spelling bees and academic finance, compare themselves to "Stevie" Cohen and Paul Tudor Jones, and discuss their favorite trading products before spiraling into Spinal Tap-level absurdity with a save-the-world-or-make-money-by-short-selling hypothetical. Highly recommended.

Elsewhere in The Kids These Days, "Goldman Sachs attracted more than a quarter of a million applications from students and graduates for jobs this summer, suggesting fears of a ‘brain drain’ in the sector may be exaggerated as banks introduce more employee-friendly policies." You could sort of imagine three types of undergraduate investment banking applicants:

  1. The person who wants to work 100 hours a week on front-page deals while making piles of money.
  2. The person who likes the idea of getting 36 hours off every weekend.
  3. The person who applies for banking jobs because it's sort of what is expected in certain Ivy League majors and sports teams. 

The declining compensation and increasing leisure in banking may be attracting more applicants of Type 2 and fewer of Type 1, which might change the culture a bit. But Type 3 should be pretty unaffected by the changes, and might be the dominant type.

Equity offering documents.

Here is a press release from T-Mobile announcing a new plan to give T-Mobile stock to customers, and while I like to think I have a pretty good handle on how equity offerings work, I cannot understand a word of this one. There are hashtags, and exclamation points, and an incongruous level of cheer:

“Get ready for a gratitude adjustment, America! This Un-carrier move is all about giving you a good thanking! No strings. No gotchas. Just ‘thank you for being a customer!’” said John Legere, president and CEO of T-Mobile. “At T-Mobile, we already wake up every day working for our customers—so I’ve decided to make it official and turn T-Mobile customers into T-Mobile owners by offering them stock. And we’re thanking customers every week with cool stuff from brands people love. For free. Every Tuesday!”

You apparently can get a free share of stock by being a customer, and another share for each new customer you refer. But that's not all:

Finally, someone will win a truly epic prize every Tuesday. Tomorrow, one lucky person’s going to win a trip on a party bus to a private screening of Warcraft along with 40 of their closest friends with all the candy, popcorn and soda they can handle. Every week, you’ll have a chance to win something truly mind-blowing.

I wish more regular-way underwritten equity offerings came with random "epic" prizes too. Like, everyone who buys shares in an initial public offering should be entered into a drawing to see a weird movie with free popcorn. It would make IPOs so much more fun. "Bad news, Jim, I was only able to get you allocated half the shares you put in for. But you won tickets to 'Warcraft'! Take your whole desk!"

People are worried about unicorns.

I kind of can't believe that no one has written Theranos vampire fan fiction before. Theranos is perhaps the biggest business story of the year, and vampire fan fiction is our century's only viable literary genre, and Theranos is a company that takes your blood for possibly nefarious purposes. Also the turtlenecks. It is all, in hindsight, so obvious. Anyway here is "Thanatos":

Just a single prick. That’s all Jane Watson needed. But in recent weeks at Stanford, the young students, delicious and full of blood, had been harder and harder to come by. At first, she had no trouble finding a fix. A late night, a flip of her golden hair, a coy glance, and they’d yield, flip-flops and all, to her cool embrace. “Let me tell you about my start-up idea,” she would whisper as she sank her fangs into their juicy necks.


  • Speaking of viable literary genres, "a new venture from publishing juggernaut James Patterson is being sold as the 'Uber of books.'" As far as I can tell it has nothing at all to do with Uber, or technology, or on-demand service, or anything. It's just books, but the books are shorter.
  • "Why the momentum won't stop for these elite start-ups" (it's because they're disruptive).
  • "SMS Assist, a No-Glamor Start-Up, Becomes a Unicorn."
  • "Wheezing unicorns catching breath of fresh IPO air."
  • Soon there might be jetpacks.

People are worried about bond market liquidity.

"Morningstar Research Examines High-Yield Bond ETFs and Questions Their Presumed Role in Market Instability" is the headline here, and it's not much, but it counts.

Things happen.

Suspected Fat Finger Sends Pound Surging in Twitchy Market. National Amusements Alters Viacom Bylaws to Stymie Sale of Paramount. SEC Moves to Curb Leveraged ETFsGoldman Probed Over Malaysia Fund 1MDB. Deutsche Bank Abandons Digital Bank Plan in Strategy U-Turn. Goldman Sachs sells stakes in 5 hedge funds to AMG. Auction for Warren Buffett charity lunch starts slow. "Mutual-fund board members are getting older and staying longer, raising questions about whether extended tenures improve or harm the oversight of trillions in savings." China warned over hostility to foreign business. IRS Says Fines Paid to Finra Aren’t Tax-Deductible. Billionaire hedge fund manager Steve Cohen tore down $62 million mansion. Izabella Kaminska on naked shorting. Hedge-Fund Exile Trades Graphs for Grapes to Challenge Champagne. Dewey & LeBoeuf musical. Law-firm salaries are going up. "The dowdy prince was surrounded by an entourage of private security guards as he schlepped into the nightspot favored by Manhattan’s elite." Gold chicken nugget. World shin-kicking championship. Guy Fieri eating to "Hurt" by Johnny Cash. Alexander Camelton. Poor KVIIIlyn. Mark Zuckerberg reportedly used "dadada" as his password on LinkedIn, Twitter and Pinterest. 

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