Kitten Hugs and the Blockchain Heart

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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You're never too big to need a hug.

I've told you before about the sitcom I'm developing in which a character based on Steven A. Cohen, barred from the hedge fund industry after an unfortunate misunderstanding involving insider trading, moves his family office to a charming small town and gets into a series of misadventures with his quirky neighbors that ultimately cause him to learn a lot about himself and embrace his softer side. One character that I was really excited about was the touchy-feely sports psychologist whom Cohen would hire to improve his employees' performance, but who would turn out to be the sort of guy who hangs posters of kittens in his office and walks around the office hugging everyone. Imagine the comedic possibilities! My Steve Cohen character -- a hard-charging hedge-fund guy who terrifies employees, watches the markets on seven screens, owns a shark in formaldehyde -- gritting his teeth and going in for a hug! Steve Cohen, popping into the office down the hall to talk to his performance coach, only to come face-to-face with a motivational poster featuring a teddy bear and a kitten! And smiling tightly, and nodding, and screaming silently to himself: "This is fine. This is what I wanted." I realize it is all a little far-fetched, but it is my sitcom and I can take a few liberties.

Anyway that subplot basically happened:

Dr. Gio, as he's often called, must now contend with an employee assistance program on steroids for 1,000 staff. "Nobody calls me when things are going well," explains Valiante, whose office has a poster of a teddy bear embracing a kitten above the caption "You're never too big to need a hug." Employees come to him when they're performing poorly and can't think their way out, says the psychologist, who is known for dispensing hugs liberally at Point72.

Dr. Gio is Giovanni Valiante, a sports psychologist who is now the performance coach at Point72 Asset Management, Cohen's family office. In real life, I mean. 

Blockchain blockchain blockchain.

Here's a new report on the impact of the blockchain (or "distributed ledger technology") on financial services. It's from the World Economic Forum, and it is written in a dialect of Davos-ese that I struggle with; there's a lot of this sort of thing:

But the report is nonetheless a delight, boldly imagining a financial system that has been fully penetrated and completely transformed by distributed ledgers, as opposed to the more usual financial-services approach of, like, let's chuck some databases onto a blockchain. "Rather than to stay at the margins of the finance industry blockchain will become the beating heart of it." So for instance people often talk about using a blockchain to settle syndicated loan trades, because right now it takes a long time to send around all the paperwork to transfer a loan. The WEF's "deep dive" on syndicated loans doesn't focus on paperwork. It's not even about loan trading; it goes straight for the bigger prize of loan origination, which it imagines like this:

  1. A corporation requests a loan from an FI acting as the lead arranger
  2. Leveraging the corporation’s digital identity, the lead arranger performs KYC activities in real time through the DLT’s record‐keeping functionality, which also provides regulators with a transparent view of activity
  3. The investor’s financial records and risk tolerance stored on DLT automates the selection process, reducing the time it takes to form a syndicate
  4. Leveraging the corporation’s financial information and project plan data accessible through the DLT, diligence activities are automated via a smart contract
  5. Key attributes from the diligence process are populated into the underwriting template, streamlining the process and reducing time through the DLT’s transfer of value capability
  6. Smart contracts eliminate the need for a third party to fund the loan, disperse funds and facilitate the loan servicing process
  7. Embedded regulation facilitates the review of financial details to ensure AML procedures are followed appropriately

All of this sounds faintly ridiculous now, and no current bank-consortium blockchain project for syndicated loans is anything like that ambitious. But as a vision of blockchain-for-banks actually doing cool stuff, as opposed to just storing a centralized database in a different way, it is fascinating, a total rethinking of how a financial system could work. It's also terrifying, of course -- everyone's identity and financial information will be in one database easily accessible by governments and financial institutions, great! -- but what did you expect from the World Economic Forum about the blockchain?

Elsewhere: "In this paper, we present DDoSCoin, which is a cryptocurrency with a malicious proof-of-work." And: "This ASCII of Carlton in Fresh Prince is hidden in the code for a financial software still used by big banks."

Valuation.

The mystery of Platinum Partners is that it was for many years one of the best-performing and most consistent hedge funds in the world, but is nonetheless shutting down amid investor redemptions and an alleged bribery scandal. Why? Why would you take your money out of an incredibly successful and consistent hedge fund? Well there is this:

Before federal agents raided the offices of Platinum Partners in June, the $1.2 billion hedge fund had been reporting robust returns, thanks partly to oil fields it owns in California.

Platinum counted the oil fields as its most valuable asset, worth many times what it paid for them, according to its most recent audited financial statement. But the project was a flop that never produced much oil and wasn’t worth nearly as much as Platinum said, according to three people who were involved with the operation and who asked not to be named discussing the private business.

I see! I enjoyed this defense of the oil project's valuation, from an engineer who consulted on it for a while:

“Oil prices are going to go back up and it will be hugely valuable,” said Lieberman, the engineer. “You wouldn’t develop it economically right now at current prices, but you’d never sell it.”

Presumably Platinum will sell it, given the liquidation. But you see the problem; I am not sure that accounting is an advanced enough science to deal with an asset that cannot economically produce any revenue but that is too valuable ever to sell. 

Elsewhere in investigations, the Securities and Exchange Commission knows how to write a news release:

The Securities and Exchange Commission today announced fraud charges against a San Francisco man and his investment advisory firm accused of pretending to manage millions of dollars in assets and then stealing money from the first client who invested with them based on their misrepresentations.

I mean, to be fair, if you pretended to manage millions of dollars in assets and then managed to attract some actual business, you wouldn't wait to steal from the tenth client who invested with you. Like, this would be an inefficient plan:

  1. Attract clients by pretending to be a successful hedge fund manager.
  2. Run a hedge fund normally for a while.
  3. Eventually steal from clients.

If you're planning to do steps 1 and 3, there's really no reason for step 2. This is, it goes without saying, not legal advice; it is just sort of aesthetic commentary. Elsewhere, here's a new insider trading case, and you'd better believe it involves short-dated out-of-the-money call options.

Taxes.

Loosely speaking, there are two main kinds of income: income from labor, like salaries, and income from capital, like dividends and capital gains. In the U.S., the former is taxed more heavily than the latter, with a top marginal rate of 39.6 percent on ordinary income, versus 20 percent on capital gains and dividends. There are a number of efficiency and fairness arguments in favor of a lower tax rate on capital gains, but there are also those who suspect that an important reason for the difference is that (1) rich people tend to get more of their income from capital than poor people do, (2) rich people tend to prefer to pay lower taxes, and (3) rich people tend to get their preferred policies enacted. 

But there is also a third category of taxable income, which is basically: labor income, but fancy labor income, so fancy that it is taxed like capital income. Right now that category is fairly small, and consists mostly of "carried interest." This is: You work at a private equity or venture capital or real estate fund, and you are compensated in part by a share in the appreciation of the fund's assets, which counts as capital gains for tax purposes. It's really compensation for your labor, but it is taxed like capital gains because -- well, again, the "because" is hard. I suspect the main explanation is just: because it is mechanically difficult for the tax code to distinguish this sort of income from regular capital gains, so it has never bothered. (It's hard to write a tax code!) But there are other possible explanations. Perhaps a lower tax rate on carried interest really does encourage investment and entrepreneurship. Or maybe it is just that working in private equity, while it is work, nonetheless seems closer to the aristocratic ideal of living off your rents than it does to the grubby labor of working in a factory or writing on the internet, so it is taxed like capital rather than like labor.

Anyway here is an amazing story about Donald Trump's tax plan, which would supposedly "end the special tax treatment attached to so-called 'carried interest,'" but which would much more importantly do this:

Trump has proposed to tax individuals’ income from partnerships, limited liability companies and other so-called “pass-through” business entities at a 15 percent rate -- down from a current top rate of 39.6 percent.

But "the campaign has become concerned that people with high wage and salary income could attempt to reclassify their earnings as investment income and route it through a pass-through entity -- cutting their tax rate." 

Get it? The effect of this provision would be to vastly expand the category of "fancy labor income." If you go work in a factory, you get a salary, and it's taxed highly as labor income. But if you form an LLC with your name on it, and you go to work in a factory, and the factory sends your paychecks to your LLC, and your LLC sends them on to you, they're taxed at 15 percent as pass-through business income.

Except a factory is just never, ever going to do that. If you're a high-powered lawyer or consultant or other professional with the ability to negotiate the terms of your compensation -- or, let's be fair, a self-employed plumber -- you can call yourself a business and have your compensation sent to your LLC, where it will be taxed less. If you're a private equity manager, your carried interest is already income from a partnership or LLC, so you don't even have to do anything to get the new lower 15 percent tax rate. But if you're just a regular salaried worker, you're stuck with the higher tax rate on labor income. The effect is that fancy labor income, like income from capital, will be taxed less, and regular labor income for regular employees will be taxed more. It is not what you would call progressive, and yet there is a certain logic to it. Anyway, apparently Trump's advisors are "preparing to tweak" the plan to make this all less obvious.

Elsewhere: "How Much Does Donald Trump Pay in Taxes? It Could Be Zero."

Come on. 

Don't do this:

During Ruby Tuesday's second quarter earnings call, an unidentified caller posed as Bud Fox, Charlie Sheen's character from the movie "Wall Street," and asked CEO JJ Buettgen if the burger chain's business had been impacted by the death of the gorilla Harambe.

If you're going to make jokes on earnings calls, do what analysts covering Barclays used to do and ask penetrating questions about the company's financials:

As a joke, analysts covering the bank would sometimes ask Mr. Jenkins tough questions about numbers at the bank that they knew he couldn’t answer, according to one analyst. 

Asking questions about the earnings on an earnings call is real comedy.

Congrats everyone!

I never know what to say about trivia like this:

On Thursday, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite all rose to highs on the same day, an alignment that hasn’t occurred since Dec. 31, 1999.

Good work? December 31, 1999, is not exactly the most auspicious date -- the last tech bubble popped a few months later, and 2000 was not a great year for the stock market -- but you could just name other dates instead. "The last time we’ve seen levels like this consistently was in 2013, which went on to be one of the best years for stocks," says a guy. The nice thing is that stock prices are a Markov process and they don't remember 1999 any more than you do. 

Elsewhere yesterday, I guess Bill Miller picked a good day to leave Legg Mason after 35 years:

The stock picker, famed for beating the S&P 500 Index for 15 straight years when he ran the Legg Mason Value Trust, will buy Legg Mason’s stake in LMM, an investment adviser that he and the company jointly own, according to a statement released today.

People are worried about unicorns.

This is in some ways a high-level aerial view of the Enchanted Forest, and it's not that pretty:

Venture capital was the worst performer for the California Public Employees’ Retirement System among its private-equity investments.

Returns for VC holdings at the nation’s largest public pension fund were 7 percent over the last five years and 5.6 percent over the last decade, according to a presentation prepared for the board. The investments lagged behind all other private-equity assets for Calpers, partly due to “modestly decreased” activity in venture-backed initial public offerings, the presentation said.

The unicorns need to find their way out of the Enchanted Forest so they can carry California public employees to the promised land of a well-funded retirement.

People are worried about bond market liquidity.

The high-level way to think about money-market fund reform is that it has encouraged investors to move out of prime money-market funds that provide unsecured short-term funding to banks, and into government money-market funds that provide short-term funding to banks secured by Treasuries. This has had weird effects on Libor, which is a measure of banks' short-term unsecured borrowing cost, and which has been going up. But it's been good for the tri-party repo market, where banks do their borrowing secured by Treasuries. And, you know, liquidity:

The growth in such deals is significant because it hints at a revival in the repo business that may grease the wheels of trading in the $13.4 trillion Treasuries market. Liquidity in Treasuries -- the ability to trade without substantially moving prices -- has drawn scrutiny since the events of Oct. 15, 2014, when the government-debt market convulsed with no apparent trigger.

Elsewhere: "Goldman Sachs Says Concerns Over U.K. Bond Scarcity Are Overdone." And: "Buy side backs call for US Treasury new-for-old scheme." That scheme is the one where Treasury would "conduct regular exchanges of off-the-run government bonds to ease liquidity constraints in the market"; we have talked about it a few times before, including as a possible adjunct to Donald Trump's plan to undermine the creditworthiness of the U.S. so he can buy back Treasuries at a discount. But it also probably works on its own.

Things happen.

For Top Banking Talent After Brexit, London Loses Some Allure. Deutsche Bank Is Adding More Staff to Offices Near Florida Beach. Wall St. banks ask Fed for five more years to comply with Volcker rule. Wall Street Can’t Agree on When to Halt the U.S. Stock Market. Goldman up against JPMorgan in gold battle. Investors Have $100 Billion to Spend on Oil Assets No One Else Wants. Home Equity Loans Come Back to Haunt Borrowers, Banks. Investing in Venezuela Could Be Hugely Profitable or Potentially Lethal. UBS: China's Already Started Bailing Out its Banks. IBM's Watson won Jeopardy, but can it win business from banks? The Eccentric Billionaire Who Ignores Investors to Get Them Rich. JPMorgan to Liquidate Japan Fund After ‘Significant’ Redemptions. "A ragtag group of strays in a Chicago park 'threateningly' surrounded a jogger before interrogating her, to her lasting mortification, about corporate tax avoidance." "It’s a lot more exciting than a running race." Judge Forbids Man From Ordering Pizza After Restaurants Report Harassing Phone Calls. Why it pays to be grumpy and bad-tempered

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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:
Brooke Sample at bsample1@bloomberg.net