Tesla Tweets and Bank Crimes
I mentioned yesterday morning that it would be fun to be a securities lawyer at Tesla, and then Tesla's securities lawyers ended up having a pretty fun day. First, chief executive officer Elon Musk's tweet promising a new "Top Secret Tesla Masterplan" seems to have done the trick; the stock closed up about 3.7 percent. (Morgan Stanley's Adam Jonas thinks that the secret plan "could be an on-demand mobility service that complements Tesla’s skills in electric and autonomous vehicles.")
Then, the Wall Street Journal reported that "the Securities and Exchange Commission is investigating whether Tesla Motors Inc. breached securities laws by failing to disclose to investors a fatal crash in May involving an electric car that was driving itself." On the face of it, that is a weird thing to investigate -- imagine if Ford had to put out a press release every time a Ford crashed! -- and Musk has said (tweeted) that it wasn't material to the company. On the other hand, Musk sold hundreds of millions of dollars worth of stock between the time the accident happened and the time Tesla disclosed it, which is perhaps not the best of all possible looks.
One weird thing here is that Musk apparently felt that he didn't need to share the news of the autopilot crash with investors, but that he did need to share the existence, but not the details, of his new Masterplan. But that wasn't, like, a securities-law judgment; that was just a judgment about what is good Twitter. I am like that on social media too; we all curate our images to emphasize our accomplishments and gloss over our failings. Of course my Twitter is not of much interest to the SEC. In some ways it's a shame that Musk's is; the world is more fun when eccentric billionaires can be themselves, or at least their curated optimized selves, on social media. But obviously the SEC's mission is about shareholder protection, not fun.
Another weird thing is that, as Felix Salmon pointed out, the securities-regulatory angle on the Tesla autopilot crash is about the least interesting possible thing about it. They built a self-driving car! And it crashed! The comprehensibility of our world, the ethical choices of our new robot overlords: These are the important issues. The timing of the disclosure to shareholders is not. And yet it is not surprising; these days, anything that is important comes with a side of securities law, because it is often easier to regulate the securities stuff than the substantive stuff. I have complained before that, "in a world of dysfunctional government and pervasive financial capitalism, more and more of our politics is contested in the form of securities regulation." It will be worrying if that's true of self-driving cars too.
But there is still more weird Tesla disclosure stuff to talk about. Here's a Reuters article from yesterday:
Tech billionaire Elon Musk's acknowledgement that, over the years, he had "bandied about" with some of his biggest shareholders the idea of combining Tesla Motors Inc (TSLA.O) and SolarCity Corp (SCTY.O) is rare public recognition of the access and insights large investors get.
"Has this idea been bandied about with our larger shareholders, institutional shareholders? Yes, there have been discussions and I think some of them see it as a natural thing to do," Musk said during a June 22 conference call after announcing the $2.8 billion deal to the market.
Obviously, if you are the CEO of a public company, you work on behalf of your shareholders, and if you are going to do a controversial and sort of shareholder-unfriendly-looking move like combining two public companies that you founded, you might want to take some big shareholders' temperature on the idea first. On the other hand, telling some shareholders about your merger plans before you publicly announce them is sort of a no-no. This is a genuinely hard problem that securities regulation addresses with a bit of a shrug; you're not supposed to tell some shareholders "material" information before you tell others, but I don't envy any securities lawyer -- never mind Tesla's -- who has to figure out how to police that.
Too big to jail.
The basic story about criminal prosecutions of big banks -- banks, not bankers -- for money laundering and sanctions violations and currency rigging and whatever is:
- Everyone thought that charging a big bank with a crime would destroy the bank and cause a financial crisis.
- So they didn't.
- Eventually regulators figured out a way to let banks plead guilty to crimes without destroying them.
- So they did.
It is a fairly straightforward story, though also an odd one; prosecutors are not notably solicitous about the collateral consequences when they bring drug charges against poor people. But it is a story that unfolded over time, and back when government officials really believed that criminal charges against big banks would cause a financial crisis, they really did try to stop prosecutors from bringing those charges:
U.S. Justice Department officials overruled their prosecutors’ recommendation to pursue criminal charges against HSBC Holdings PLC over money-laundering failings, according to a House committee report prepared by Republicans that sheds new light on the bank’s 2012 settlement.
HSBC paid $1.9 billion but did not plead guilty to a crime, "because senior DOJ leaders were concerned that prosecuting the bank ‘could result in a global financial disaster,’" said the report. Those senior leaders were factually mistaken, though their mistake was understandable and widely shared; past prosecutions of big companies really had destroyed them, and recent bank failures really had resulted in a global financial disaster. But, no, it turned out that you could get guilty pleas out of banks without doing too much damage. The trick is that you have to remove all of the consequences of the guilty plea, so that, say, Credit Suisse's and BNP Paribas's later guilty pleas are hard to distinguish from HSBC's earlier deferred prosecution agreement. (It's not like Credit Suisse, the bank, went to prison after its criminal conviction.) Given that, I am not sure why House Republicans -- and a lot of other people -- care so much about whether the banks plead guilty or just pay big fines without pleading guilty. But they do.
By the way, guess what the lead prosecutor on the HSBC investigation is up to now? That's right, she "now works in the compliance department at HSBC." The revolving door works. Of course, "her team had recommended prosecuting HSBC." As I've mentioned before, my general view is that the prospect of future private-sector employment makes regulators and prosecutors tougher, not more lenient, and this is a pretty good example. "Hire me to fix your compliance, otherwise you will face criminal charges" is a more compelling pitch than "hire me to fix your compliance, otherwise the Justice Department will look very sad when it announces that it isn't bringing criminal charges against you."
Are there quiet, unobtrusive professional short sellers? Many of the biggest long investors in the stock market -- Vanguard and BlackRock and so forth -- tend to follow an investment strategy of (1) buying a stock and (2) quietly hoping that it will go up, though there are of course famous and successful long investors whose approach is instead (1) buying a stock and (2) shouting at it until it goes up. The shouting strategy makes obvious sense: If you buy a lot of a stock, it's because you think it is undervalued, that is, that the market doesn't properly recognize the stock's virtues. That undervaluation is useful to you, before you buy (you can buy cheap), but once you have bought it stops being useful, and you want the market to recognize your stock's virtues as soon as possible. Shouting about those virtues might help.
That is equally true, mutatis mutandis, for short sellers, but is it more true? Obviously the point of short selling is to find a stock that is overvalued, short it, and then hope that the market quickly recognizes the stock's flaws and its price comes down. But for temperamental or financial reasons, short sellers tend not to do their hoping quietly; if you care enough to short a stock, you probably care enough to publish research and go on television and send snarky e-mails to long investors making the case that it's overvalued.
Anyway here is a profile of delightful short-seller John Hempton of Bronte Capital, who has
posed as part of a gay couple trying to buy a home beyond their means to build a case for short-selling Australian banks. You’ll find him in Bangkok, talking to prostitutes about the hair dye they use. Or squaring off against billionaire investor Bill Ackman, who says Hempton is nuts.
"My wife thinks I’m weird. My son thinks I’m weird," adds Hempton, who once "sent Ackman a taunting e-mail, saying he wanted to say just one word: Philidor." (That was shortly before news about Philidor Rx Services tanked the stock of Valeant, which Hempton was short and Ackman was long.) But while the weirdness is mostly -- mostly -- on the short side, Hempton is mostly a long investor:
“We’re far longer than we’re short, and over time I expect to make more money on the longs," Hempton, 49, said in an interview before going for a body surf. “But our shorts are really quite unusual, and they are a lot of fun.”
He is not alone in that asymmetry. Investors as a whole are mostly long, and long investing makes the most money, but the shorts do tend to be more fun.
Did you know that, if you are a junior investment banker, you get to help choose which data room provider to use for merger due diligence? Did you know that this is lucrative enough for the data room companies that they will take you out partying to try to influence your decision? ("They also have sushi nights, buy bottles at clubs, and give out tickets to Beyonce concerts and San Francisco Giants games.") Does that sound like something you might enjoy? It does? Really? Come on. After work, I like to go home; I don't want to go to the club with people who are trying to sell me a data room. I am too old to be enticed by that vision of investment-banking perks, never mind this one:
To start off, every investment banker at Goldman Sachs gets an American Express corporate card for meal and travel expenses, Li said. They get $25 for dinner if they stay late enough, and another $25 for every four hours they spend working past that point:
"We get one at midnight, 4 a.m., 8 a.m., and it continues on depending on how long you stay."
That's from a Business Insider write-up of a podcast by Alan Li about the joys of being a junior investment banker, and I have to say he does not make it sound all that joyful. (Disclosure: I used to work at Goldman, though I think I was too senior ever to use, or frankly know about, the 4 a.m. Seamless allowance.) But you can see how this might appeal to young people just out of college. People keep buying you food and taking you to the club! For free! What a glamorous lifestyle, compared to, you know, being in college. And the banks probably get more bang for their buck with this cheap glamour than they would from just paying more.
Speaking of college, here is a claim that Wharton students "are taught to embrace humility and diversity." Elsewhere in banking culture, "Bank of America Denies Existence of Alleged ‘Bro’s Club.’" And JPMorgan is giving its lower-paid U.S. workers a raise.
Here's a gloomy Boston Consulting Group report on the asset management business:
In 2015, the asset management industry recorded its worst performance since the 2008 financial crisis. Growth in assets under management (AuM) stalled, and net new flows of assets, revenue growth, and revenue margins all fell. Fee pressure on managers continued to rise.
Tepid markets and turbulence, which persist in 2016, are today’s reality.
BCG thinks that "market-driven asset growth is in the rearview mirror," and that "it will become increasingly clear that competence in advanced data and analytics will define competitive advantage in the industry in the not-too-distant future." It also describes "four business models that are best positioned for success in the future:" "Specialized alpha shops," "Beta factories," "Solution providers" and "Distribution powerhouses."
Meanwhile here is Bloomberg's Luke Kawa on Vanguard, the original beta factory, which "is giving other actively managed mutual funds a blueprint of how to compete amid an ongoing shift towards lower-cost passively managed funds or ETFs." Sadly for other managers, the blueprint is mostly just cutting costs.
Collective ownership of the means of production.
I am generally fond of the theory that widespread ownership of companies in the same industry by a small group of diversified mutual fund complexes reduces competition and violates antitrust law. I'm not saying I believe it, necessarily -- I kind of do? -- but I am fond of it. It is so radical, yet so obvious. And if it is true, it has identified a huge conflict at the heart of modern capitalism: On the one hand, competition between firms is essential for business efficiency; on the other hand, diversification is essential for sensible retirement planning. We want two big things -- competitive consumer-friendly businesses and efficient investor-friendly mutual funds -- and it is surprising to find that they might not be able to coexist.
Anyway we talked a little about this yesterday, and I liked this tweet from Jared Selengut: "Better yet, diversified mutual funds -> collective ownership of the means of production -> dictionary definition of socialism." If all of us own all of the stocks through a few big mutual funds, has the socialist paradise already arrived? If you think of modern diversified mutual funds as an unnoticed form of socialism, I guess it is not too surprising that they have reduced competition.
The S&P 500 Index closed at a record high yesterday. But: "Can We Ignore the Alarm Bells the Bond Market Is Ringing?" (Maybe! "There are reasons to think that current prices are reflecting idiosyncrasies in the supply and demand for safe assets, rather than a conviction among global investors that very bad times are ahead," though those idiosyncrasies are themselves to some extent driven by worries about bad times ahead.)
People are worried about unicorns.
Apparently some members of Congress are so worried about unicorn employees that they want to change the tax code to subsidize them:
The bill, dubbed the Empowering Employees through Stock Ownership Act, would let employees defer paying all of the taxes on unrealized stock gains for up to seven years, unless the company goes public, is sold or lets employees sell on the secondary market in the meantime. The bill would also require companies to withhold extra taxes from employees who defer, essentially forcing employees to save money for the inevitable tax bill.
I kid, a little; it's not much of a subsidy, and it really is rough to have to pay taxes when you exercise stock options without being able to sell the stock. Still, receiving a pile of illiquid unicorn stock is not the worst problem to have. Elsewhere, did you know that there are startups outside of the Bay Area? And "Uber Is Experimenting With a Service in Manhattan That's Cheaper Than the Subway." Also: Uber for 911.
People are worried about bond market liquidity.
Good news: Average daily trading volume in the bond market was up 2 percent year-over-year last quarter, with corporate-bond volumes up 13 percent even as corporate new issuance fell by 3 percent. Yesterday I made a little fun of Treasury's latest blog post on bond market liquidity, because it says basically the same thing as every other government report on bond market liquidity: Numerical indicators suggest that liquidity is good, even as market participants have unquantified doubts. But it does keep being true. I suppose that as the stock market moved from being intermediated by dealers and specialists to being intermediated by electronic all-to-all platforms, people worried that the platforms wouldn't be as good at providing "real" liquidity as the old specialists were. (They still worry about that!) But people eventually got used to the new structure, and no one today exactly mourns the fact that big banks don't keep massive inventories of stocks. Maybe the bond market is heading the same way. Inventories will creep down, and volumes will creep up, and investors will trade with each other, and everything will be more or less fine until one day everyone will wake up and realize that they don't miss the old model of dealer-provided liquidity all that much.
Meanwhile Treasury market liquidity has gotten weird and nocturnal:
Global risks such as China's slowdown or the U.K.'s historic referendum to leave the European Union have turned Treasury traders into night owls, according to fresh research from JPMorgan Chase & Co. At the same time, they say, a decline in the ease of trading in the market for U.S. government debt is encouraging investors to use derivative contracts to place their overnight bets, rather than exchanging the underlying securities.
Fresh From Record Default, Puerto Rico Plots Bond-Market Return. UBS Said to Impose Partial Wealth-Management Hiring Freeze. J. Christopher Flowers was hit hard by Brexit. LendingClub’s Newest Problem: Its Borrowers. China's South China Sea Claims Dashed by Hague Court Ruling. China’s Zombie Companies Stay Alive Despite Defaults. European Government Opposition Mounting to Possible New Banking Rules. Regulator sounds new alert on banks’ property lending. Xerox in Talks to Merge Copier Business With R.R. Donnelley. The Profit Motive Behind Financial Complexity. Alexandra Scaggs on IEX. An SEC action against Bitcoin Investment Trust and SecondMarket. Congressional Republicans — and everyone else — should take Trump’s authoritarianism seriously. Court ruling finds sharing passwords for subscription sites like Netflix is a federal crime. Don't Eat Your Weed.
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