Brexit, Stress and Video Interviews

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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Programming note: There will be no Money Stuff for the next two weeks, since I'll be on vacation. Have fun and be safe; I'll see you in July.


Well this is depressing. "The world of hope, the world of ever-closer union among countries which for centuries would kill each other by the million—came to a shattering end on Thursday," says Felix Salmon. Also the market crashed:

The world’s bond markets (and, even more, its foreign-exchange markets) tell you everything you need to know about the financial implications of this vote: recession in the UK, quite possibly recession in Europe, and extremely nasty spillover effects in the rest of the world, including the U.S. The small-minded burghers of rural England have managed to destroy trillions of dollars of value globally, including to their own investments, pension plans, and housing values.

On Monday, George Soros predicted that Brexit would cause a devaluation of the pound that was worse than the one he caused on "Black Monday" in 1992; that immediately came true. S&P Global ratings is preparing to downgrade the U.K.'s credit rating. Stocks fell around the world, with European bank stocks particularly hard hit. "This is not such a good day for Europe," said John Cryan, Deutsche Bank's "Mr. Grumpy," which in the circumstances makes him sound downright cheerful. The U.S. economy will probably be hit hard too. "This is quite probably the most significant event in British history since the second world war," writes Martin Wolf.

The economic consequences are bad, and the consequences for freedom of trade and movement around Europe are bad, but what is most depressing is the gloomy outlook for liberal democracy. Sometimes bad things happen, but there is something very wrong when millions of voters actively choose to have bad things happen. "The Brexit referendum has become a trial balloon for the health of western democracy," writes Edward Luce. Soon-to-be-former Prime Minister David Cameron had predicted that voting to leave the European Union would cause "what he referred to as the world’s first 'DIY recession,'" and markets seem to agree; voters chose recession. Cornwall "is seeking urgent reassurance money allocated to it" by the European Union won't be cut off; it voted to leave. "Modern democracies operate within a framework of rationalism," writes Philip Stephens, and that framework is looking precarious. "We now live in a post-factual democracy," writes a Financial Times commenter. "I don't want a future in which politics is primarily a battle between cosmopolitan finance capitalism and ethno-nationalist backlash," tweeted Chris Hayes.

Meanwhile Donald Trump, whose economic plans for the U.S. seem to involve crashing the economy so he can default on the debt, is of course pleased:

“It’s an amazing vote because the voters are angry,” Trump said after he landed by helicopter. “They took back their country and that’s a great thing.”

Stress tests.

The stress tests were yesterday. Everyone passed! Really the stress tests are today, because there is actual stress in the markets caused by an enormous and unexpected geopolitical event with massive economic ramifications. We'll see if everyone passes. But so far, I mean, it's been a bad day for U.K. banks, but the financial system seems to be basically keeping it together. The banks' "substantial capital and huge liquidity gives banks the flexibility they need to continue to lend to U.K. businesses and households, even during challenging times,” said Mark Carney of the Bank of England. And the Bank of England and the European Central Bank have pledged to support markets. The system -- banks, regulators, central banks -- has gotten much better at handling crises than it used to be, and just in time, too.

But anyway, in purely hypothetical stress testing, yesterday the Federal Reserve released the results of the Dodd-Frank Act stress tests, and each of the 33 banks tested passed. "Since 2009, these firms have added more than $700 billion in common equity capital," the Fed points out, giving them a much better shot at surviving a crisis. That extra capital is the point of the stress tests; the realism of the Fed's hypothetical stress scenario is less important. (After all, capital is good against a whole range of crises, not just the ones dreamed up by the Fed.) Still, John Carney points out that this year's test was "unexpectedly less stressful":

The Federal Reserve released the results of its stress tests on 33 large banks Thursday. Despite the Fed’s hypothetical “severely adverse” scenario being harsher than last year, the declines in the four capital ratios tested by the Fed were less severe, ranging from 2.6 percentage points to 3.9 percentage points. Last year’s test produced a range of declines from 2.9 percentage points to 5.2.

Perhaps banks are better at avoiding hypothetical losses in hypothetical crises than they used to be. That too is a skill.


Wait, what

Goldman announced on Thursday that it would no longer conduct first-round, face-to-face interviews on elite college campuses, and instead would interview students remotely on video.

That sounds ... awkward. ("Undergraduates will have to use a video-recruiting software program to answer prompts," and "the footage will be reviewed by a human.") The goal is to be "school agnostic" and rational, rather than the usual process of sending a bunch of Wharton alumni back to Wharton to hire the coolest guys from their frat.  

The bank will then record interviews that will then be watched by a recruiting executive and scored on certain traits or characteristics.

The firm also will use a technology-based resume screening tool to try and identify traits such as grit, or life circumstances, that executives believe will better predict career success and longevity.

My insufferable disclosures are that I am an alumnus of Harvard, Yale and Goldman Sachs, so you can guess where I stand on school agnosticism. I grew up with the model of investment banking as a finishing school for graduates of elite colleges, a way to get an intense training in finance after completing your degree in classics or art history. De-emphasizing connections and elite degrees, and looking for "grit," might help Goldman pick better bankers while also devaluing its prestige and attractiveness for applicants and even clients.

(Also, as someone who did a lot of interviewing, I am inclined to trust bankers more than human resources executives to pick the best future bankers, though I bet the HR people would disagree. Who will ask the "tell me how to build a DCF model" questions now?)

I don't know, though. With the financial crisis, popular distrust of banks, increased regulation, decreased compensation, the rise of the tech industry, etc., there has been a long slow move away from that model of investment banking as the default Ivy League post-graduate experience. Now investment banking is a bit more like a ... job. You get some weekends off. You can wear polo shirts. If being an elite subcultural experience no longer works as a model for investment banks, they might as well just decide that it's a job, and get serious about hiring the right people to do the job.

Elsewhere in investment banking as an elite subcultural experience, JPMorgan is opening a Vineyard Vines pop-up store in its Park Avenue office. Linette Lopez is not impressed:

If JPMorgan is telling its employees that this style is "appropriate" for work, then it's telling its employees - whoever they are and wherever they're from - that this is the kind of lifestyle they should emulate at work. It's telling them that the bank isn't changing with its workforce, it's telling its workforce to bow down to the awkward tradition of who runs the bank.

Mergers and acquisitions.

Yesterday I praised Tesla's decision to require its (unpopular) offer for SolarCity to be approved by votes of both Tesla's and SolarCity's disinterested shareholders. (Meaning especially shareholders who aren't Elon Musk, Tesla's chief executive officer, who owns more than 20 percent of both companies and is the deal's main advocate.) If you think, as many people do, that Tesla's bid to buy a small troubled company that is also affiliated with its CEO is an example of bad corporate governance, then this seems like a nice move, a good way to check the bad governance by leaving the final decision to the shareholders.

It is also not strictly required, though yesterday I overstated the extent to which it is not required: Even though the deal doesn't involve Tesla issuing much stock, Nasdaq listing rules nonetheless require a vote of Tesla's shareholders, because that stock would be issued to a company that is more than 5 percent owned by an officer and substantial shareholder of Tesla. (It's Nasdaq Rule 5635(a)(2).) So both companies' shareholders do have to vote to approve the deal, though I suppose if Musk really had wanted to jam this one through he could have demanded a Tesla vote of all shareholders (including him) rather than just of the disinterested ones. That would probably be a mess in the inevitable lawsuits, though.

Ronald Barusch is unimpressed by the corporate governance at Tesla and SolarCity:

The fact that Messrs. Musk and Gracias have committed to recuse themselves doesn’t do much if that just means abstaining from the votes. It seems clear that Mr. Musk is behind the deal and pushing for it rather than ceding responsibility to independent directors since he is acting as chief spokesman for Tesla’s proposal and not standing on the sidelines. Meanwhile, Mr. Musk’s cousin who is the CEO of SolarCity has already been on a conference call with Mr. Musk and reporters announcing that he was “very excited” about the deal, although he too has said he will recuse himself. But the bosses’ message has undoubtedly been heard in the board rooms at both companies and by both sets of shareholders.

If your model of corporate boards is that they tend to defer to visionary founders -- a reasonable model -- then Barusch is right to worry that Musk's recusal doesn't mean much in the boardroom. But you still have the shareholder votes, and it's not obvious that public shareholders defer to visionary founders on merger decisions. But they could. Particularly, if you are a Tesla shareholder and think that Musk is good at running Tesla, you might worry that if you vote down his deal he will sulk and become less good at running Tesla. And that implicit threat might be enough to push some shareholders to vote for a deal they don't like.

Elsewhere: "Wall Street’s Enthusiasm for Tesla Cools." And here is Barusch on the bizarre Energy Transfer/Williams Cos. situation, and what it means for Energy Transfer's lawyers at Latham & Watkins:

On Tuesday, the Delaware Court of Chancery concluded a two-day trial on the issue of whether Latham’s hesitation to issue a tax opinion required for the deal to move ahead is in good faith or is part of an ETE plan to scuttle the deal. A ruling is expected by the end of the week.

Regardless of the result, this litigation is bad news for Latham. To mix metaphors, it appears it was thrown under the bus by its client even as it fell on its own sword.

People are worried about unicorns.

Are you worried about a disconnection between public and private tech company valuations, where the private market is so bubbly that it has outstripped public valuations, and any initial public offering would probably be a down round? Then you'll love the story of Twilio, a tech unicorn that not only went public at $15 a share, above its last private funding round of $11.31 per share, but which also closed up 92 percent on its first day of trading yesterday. It turns out that, at least for some unicorns, the path out of the Enchanted Forest is clear, and the villagers at its edge are a welcoming bunch. 

So welcoming that this happened:

Twilio will bring three developers to the NYSE floor, where they’ll be trying to build as many apps as they can using the company’s voice and text messaging platform.

Three people doesn’t quite add up to a full hackathon (the company’s calling it a “code jam”), but hey, it sounds a lot more interesting than just ringing the bell. Plus, it’s pretty on-brand for a developer platform like Twilio — in fact, developer evangelist Rob Spectre told me via email that “cutting code is the way we celebrate everything at Twilio.”

Imagine if people traded stocks on the New York Stock Exchange floor! Those coders would totally get in the way. Anyway here is a fun story from Fred Wilson about the time that Twilio gave him "the best seed pitch I've ever gotten." (Some code jamming was involved.)

People are worried about stock buybacks.

Jeff Sommer is a little worried about U.S. public companies' "epic share-buying spree":

This is a bit of a puzzle because many studies have shown that using cash for buybacks generally doesn’t improve a company’s operations or add to its intrinsic value. But spending money on buybacks is much better than wasting it on money-losing projects, when corporations don’t have other good uses for the cash. And by reducing the number of shares on the market, buybacks make earnings per share look better. That helps executives to big paydays as they more easily reach their compensation targets, and it often nudges up short-term share prices, returning money to rank-and-file shareholders.

Of course buybacks don't improve a company's operations. But, as is often the case in buyback worrying, Sommer's lead example is Apple, the biggest user of buybacks ($116.6 billion) over the last five years. You can object to aspects of Apple's operations -- the stupid headphone jack thing! -- but it seems unlikely that Apple's problem is not enough money for operations. There is some natural set of investment opportunities for most companies, and giving money back to shareholders is often a better alternative than expanding beyond that natural set.

People are worried about bond market liquidity.

I was intrigued by the headline "Asia Catches Junk-Bond Liquidity Flu Even After Market Doubles." No bond market liquidity news is so good that you can't find, lurking underneath it, worries about bond market liquidity.

Me yesterday.

I wrote about two odd Merrill lynch derivatives trades: One with a fund called Lycalopex, which is suing Merrill over some tax arbitrage trades, and one involving leveraged conversions, which led to a $415 million fine from the SEC. 

Things happen.

Blockchain Upstart Wades into World’s Leading Mobile-Payment Market: China. Airbnb hit by unfair competition complaint from French hotels. Angola Lines Up $1 Billion of New Loans. A Russian Oil Company Is for Sale — Again. The Value of Creditor Control in Corporate Bonds. Activist Investors and Target Identification. Jury finds Led Zeppelin did not steal intro to 'Stairway to Heaven.' My four months as a private prison guard. Tronc's Data Delusion. Barnes & Noble will serve alcohol. LeBron James played Steve Jobs's commencement address to inspire the Cavs during the NBA Finals. All dogs are beautiful really. Ouroboros.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Matt Levine at

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