Bank Identity and Hedge-Fund Culture

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.
Read More.
a | A

Deutsche Bank earnings.

A bank's net income is just an arbitrary point on a distribution hopefully centered around some number greater than zero, and it isn't quite fair to talk about year-over-year percentage changes, but still you never want it to fall by 98 percent:

Deutsche Bank AG said Wednesday that its second-quarter net income fell 98% from a year earlier, hurt by weaker performances in trading, investment banking and other core areas.

The German lender said net income fell to €20 million ($22 million) from €818 million a year earlier, while net revenue dropped 20% to €7.4 billion.

Because it is Deutsche Bank, the earnings come with a dose of Weltschmerz:

At its heart, Deutsche Bank is still trying to find a new identity, nearly eight years after the collapse of Lehman Brothers spurred a global financial crisis.

John Cryan, the soft-spoken chief executive, was welcomed as a much needed change from his brasher investment banker predecessors when he took charge a year ago. But employee morale is sagging, and he is under increasing pressure to show that he can create a bank that is profitable yet not a danger to itself and others.

Investment-banking identity is a cyclical thing: When business is good, you can just do whatever, but when business is bad, you need an identity. Deutsche's strategy for a while -- much longer than the other big European banks -- seems to have been to muddle around as a universal bank and hope the market would come back before it had to define itself. Cryan marked the end of that strategy and the beginning of a painful period of self-examination. "The worst is yet to come," adds Bloomberg Gadfly's Lionel Laurent. Also: "Deutsche Bank in settlement talks with DoJ over mortgage probe."

Bridgewater culture.

Speaking of painful self-examination, here's a story about a guy, Christopher Tarui, who claimed that he was sexually harassed by his supervisor at giant weird hedge fund Bridgewater Associates, and that Bridgewater did not take his complaints seriously:

After he complained last fall, Mr. Tarui said, several Bridgewater top managers confronted him and sought to pressure him to rescind his claims. One manager, he said, accused him of lying and said that he was “blowing this whole thing out of proportion.”

That is the sort of thing that you normally find in sexual harassment complaints. I don't know if it's true. ("These and other allegations in the complaint could not be independently verified," and the complaint was later withdrawn by mutual consent.) But then there is this:

Mr. Tarui said he remained silent for many months about the harassment out of fear the incident would not remain private and would impede his chances for promotion at the firm, which is based in Westport, Conn. “The company’s culture ensures that I had no one I could trust to keep my experience confidential,” he said in the complaint, which was filed in January.

You can see his point! At a normal company, if your boss sexually harasses you, you can go to his boss, or to human resources, and talk to them about it in confidence. Bridgewater's famous "Principles" would seem to make that more difficult:

Employees aren't allowed to talk critically about someone unless the person is present. Principle No. 11: "Never say anything about a person you wouldn't say to him directly. If you do, you are a slimy weasel."

It would be awkward to talk to HR about sexual harassment with your harasser present. As it happens, Tarui did complain to HR and a senior manager without his alleged harasser present; I wonder if he felt like a slimy weasel for doing it. But at Bridgewater, all meetings are recorded for everyone to listen to. So when Tarui met with HR and management to complain about "the repeated sexual harassment by the supervisor," "the meeting was recorded," and Tarui claimed that it was "'widely shared' with managerial employees at Bridgewater." Which is also awkward.

The point of Bridgewater's culture of "radical transparency" is to (keep the humans busy while the computers invest and also) abolish hierarchy and force everyone to communicate openly and honestly, not only so that Bridgewater will make the right investing decisions but also so that people will be happier and more fulfilled at work. It is not just a productivity strategy; it is a life philosophy. And it seems to mostly work for most of the people there, most of the time. But abolishing formal hierarchies can have the effect of reinforcing informal ones. If you are the junior analyst who feels empowered to speak up in an investing meeting and disagree with Ray Dalio, hey that's super, but if you are the mid-level investor-relations guy who feels harassed by your supervisor, the public-confrontational approach may feel like it's designed to silence you. Even if transparency and openness and direct confrontation work more often than most people think, they don't always work. "While it is difficult for our management team to independently judge the merits of this claim, we are confident our handling of this claim is consistent with our stated principles and the law," says Bridgewater.

Point72 compliance.

Here's a story about how Point72 Asset Management is the least-insider-trading-est hedge fund (fine, family office) in the world, since its head of compliance, former federal prosecutor Vinny Tortorella, has at his command "an investigative team of more than 50 staffers, including ex-federal agents who track any potential rumors of wrongdoing – both at Point72 and at competitors." "This can't ever happen again," Point72 founder Steve Cohen told Tortorella when he hired him in 2014, about, you know, the unpleasantness. I believe him that it won't. I feel like every couple of months I read a new story about the million former FBI agents swarming Point72's Stamford office, monitoring everything that every analyst does. I get it. No more insider trading. Phase 1 of Point72's public-relations comeback strategy -- getting everyone to talk about how it doesn't insider trade -- seems to be complete. Now maybe move on to Phase 2, and get everyone to talk about something other than insider trading.

We talk sometimes about revolving-door incentives around here. I also think sometimes about the curious over-enforcement of insider trading law, relative to its importance, and prosecutors' unusually aggressive approach specifically to insider trading at hedge funds. (As securities fraud goes, insider trading is among the less harmful kinds, compared to, like, Ponzi scheming or even asset mis-marking, but it results in a ton of prosecutions.) When a giant wealthy hedge fund (fine, family office) gives a former prosecutor a blank check to look for insider trading -- a necessarily resource-intensive monitoring job that requires hiring lots of other former federal agents -- what message does that send to other securities prosecutors about the sorts of cases that will help their future employment prospects?

Elsewhere in Steve Cohen:

Steven A. Cohen is betting as much as a quarter billion dollars that mechanical engineers and nuclear scientists can come up with market-beating mathematical models in their spare time.

The investment of as much as $250 million will go to a hedge fund launched by Boston investment firm Quantopian. That fund provides money to do-it-yourself traders who come up with the best computerized investing methods, giving a share of any profits to the creators.

What if ... the algorithms ... use inside information? Like, isn't seeding a bunch of managers he barely knows exactly what Cohen shouldn't be doing?

State Street.

"State Street, the Boston-based custody bank led by chief executive Jay Hooley, is paying $530m to settle allegations that it overcharged clients by adding secret mark-ups to foreign exchange trades," with $382.4 million of that going to federal agencies (the Securities and Exchange Commission, the Department of Justice and the Department of Labor) and the rest to private class-action plaintiffs. Here's the SEC's summary:

As part of its custody bank line of business, State Street safeguards clients’ financial assets and offers such services as indirect foreign currency exchange trading (Indirect FX) for clients to buy and sell foreign currencies as needed to settle their transactions involving foreign securities.  An SEC investigation found that State Street realized substantial revenues by misleading custody clients about Indirect FX, telling some clients that it guaranteed the most competitive rates available on their foreign currency exchange trades, provided “best execution,” or charged “market rates” on the transactions.  State Street instead set prices largely driven by predetermined, uniform markups and made no effort to obtain the best possible prices for these clients. 

The Justice Department announcement notes:

In the settlement State Street represents that it now makes and will continue to make detailed disclosures to its customers with respect to its FX pricing and that it now refrains and will continue to refrain from making representations regarding its FX pricing that are not accurate. 

We talked a little about this last year, when Bank of New York Mellon settled a similar case. The essential issue is that no bank is actually in the business of providing commission-free no-markup instantaneous foreign-exchange execution at the best available price to clients. Why would it be? There's no money in that. So the choice is, you can offer the client instantaneous best execution and charge a big commission, or you can offer the client ... something less than that ... in a way that makes you money with no outright "fee." So if you batch all of your clients' trades in one currency, and cross them all at the worst price of the day (that is, clients buy at the highest price of the day and sell at the lowest price of the day), then you can make a lot of money, and your clients are in a sense fine, because, you know, they got price that the currency traded at that day, and they don't know any better, and they didn't pay an explicitly labeled commission. 

But of course if you call this "best execution" that is not really honest, and the SEC and DOJ and class-action lawyers won't like it. And so State Street has settled. But notice that going forward State Street won't have to change its execution practices; it will just have to change its representations. The problem here is not with the substance of how State Street executed currency trades for customers, but just with how it advertised.

Goldman and Malaysia.

Disclosure, I used to work at Goldman Sachs, and I think that the Goldman 1MDB thing looks really bad. Goldman sold billions of dollars of bonds for 1Malaysia Development Bhd., a Malaysian state investment fund, but much of the money disappeared and was "allegedly used for the personal benefit of Malaysian public officials, their relatives and associates." The U.S. Justice Department is trying to get it back. "We helped raise money for a sovereign wealth fund that was designed to invest in Malaysia. We had no visibility into whether some of those funds may have been subsequently diverted to other purposes," said a Goldman spokesman, which is not an entirely reassuring thing for a bond underwriter to say. You're supposed to have visibility into what the money will be used for! That's what due diligence is for! (And: "Without assigning any blame to the bank, the prosecutors’ complaint indicated that the documents circulated by Goldman prior to the bond sales were misleading.") It does not exactly help that "In 2012 and 2013, Goldman Sachs handled three 1MDB bond sales totaling $6.5 billion that yielded fees, commissions and expenses of $593 million, or about 9 percent of the money raised, well above the industry norm." 

But this seems a little silly:

The New York-based bank, already under scrutiny by regulators over its fundraising for the embattled 1Malaysia Development Bhd, is now accused in a lawsuit of selling out a client to curry favor with Prime Minister Najib Razak, who controlled the billion-dollar state fund.

Goldman and former managing director Tim Leissner allegedly betrayed their duties as financial adviser of EON Capital Bhd, which was taken over by Hong Leong Bank Bhd. for $1.7 billion in May 2011. Goldman used EON’s confidential information to help the bank buy EON on the cheap knowing that Najib’s brother served as a board member and another brother chaired the investment firm advising the bank, Primus Pacific Partners 1 LP said in the complaint.

That's just a boring regular investment-bank-M&A-conflicts lawsuit, no? Like, obviously a bank that is selling a company has some incentive to curry favor with the powerful board members of the buyer. It is a relationship business. But that most generic of conflicts -- that banks want potential future clients to like them -- isn't usually enough to win a lawsuit; you have to show that Goldman actually did something wrong in running the deal. "Primus Pacific, EON’s biggest shareholder after buying a stake of more than 20 percent in 2008, unsuccessfully sued twice to block the sale" already; now it is suing again because, I guess, Goldman's Malaysia ties are back in the news. 

Blockchain blockchain blockchain.

Oh, wonderful: Ethereum did a hard fork to solve the DAO hack, but of course there are dissenters, and of course they now have their own blockchain.

A new open-source project called Ethereum Classic arose, "The main goal of the project is to ensure survival of the original Ethereum blockchain," the website reads. "We will strive to provide alternative for people who strongly disagree with DAO bailout and the direction Ethereum Foundation is taking their project. Anyone opting to remain on the original chain should have such opportunity."

What is the equilibrium for blockchains? There are obvious network effects; blockchains work sort of like currency, and universal acceptability is a good feature in currency. But they are also anarchist collectives prone to fighting and drama. Perhaps the future will be that each person will have her own blockchain; no one's blockchain will communicate with anyone else's, or be of any use to anyone, but they'll all, in their separate ways, be perfect.

Elsewhere: "Bitcoin 'not real money' says Miami judge in closely watched ruling." 

Don't put your cocaine in the mail.

You know what, what the heck: Let's just go ahead and make that legal advice. Don't put your cocaine in the mail. It's not just me; no less a (practicing) lawyer than U.S. Attorney Preet Bharara will tell you that:

US Attorney Bharara @PreetBharara
US Mail is for post cards, letters and packages, not for cocaine. https://t.co/hBCkFKpwU7
Twitter: US Attorney Bharara on Twitter

Also, if you do put your cocaine in the mail, and it doesn't arrive at its destination, don't e-mail the Postmaster General about it. It probably got lost for a reason:

RODRIGUEZ also contacted the USPS multiple times for information on the status and location of certain parcels that contained cocaine. In communications with the USPS, including in an email RODRIGUEZ sent to the U.S. Postmaster General, RODRIGUEZ falsely asserted that one of the parcels, which he believed had been lost, contained the cremated ashes of his purportedly deceased father. In fact, that parcel had been seized and found to contain approximately two kilograms of cocaine.

That's how the sting works: They find the cocaine, they wait for you to claim it, then they arrest you. That's from the indictment in a federal criminal case against nine people, one of them a Postal Service employee, accused of mailing cocaine from Puerto Rico to New  York for distribution. Do you think they'd have gotten away with it if they'd used the Postal Service blockchain

People are worried about bond market liquidity.

No they're not. Sorry. Here's Bloomberg Gadfly's Lisa Abramowicz on insurance companies buying junk bonds, though.

Things happen.

Abe Plans Stimulus Package of More Than 28 Trillion Yen. Stress Tests May Force Rapid Fix for Banca Monte dei Paschi. Santander Profit Down on Restructuring and Bank Fund Charges. Pimco’s New CEO Will Battle to Escape the Shadow of Bill Gross. Hedge funds suffer $20.7bn net outflows in June. Twitter, Grappling with Anemic Growth, Tries to Bolster Its Advertising Business. "This combination of Linear Technology and Analog Devices has the potential to create a combination where one plus one truly exceeds two." Redemption on Offer as Disgraced Executive Sam Waksal’s Startup Launches IPO. $1 Billion for Dollar Shave Club: Why Every Company Should Worry. KKR Engineers a Loan Deal, and a Dividend. BOE Flirts With Dating Website Algorithms to Sort Housing Data. Deutsche Börse Shareholders Approve London Stock Exchange Merger. Turkey Strategist Stripped of License for Post-Coup Analysis. "Last July, 51.5% of Buffalo Wild Wings customers purchased boneless wings instead of traditional bone-in wings on National Chicken Wing Day." You missed the Four Seasons auction. 21 Young New York Socialites You Should Know. Is time real? "Even calling Trump a con artist seems an injustice, for a con artist has an ulterior motive. Trump has no motive other than to be the conman, not the conned." Bullish news for Spanish banks

If you'd like to get Money Stuff in handy e-mail form, right in your inbox, please subscribe at this link. Thanks! 

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