Money Stuff

Boring Banks and Silly CDs

Also SecDB, Exxon, politics, whistle-blowers, sexual health products and bond market liquidity.

Banking is boring. 

Here is a big article about how boring banking has gotten, how much it is just a business of dumb pipes, and how, in the words of Sir Philip Hampton, formerly of Royal Bank of Scotland, "banks look increasingly like competitive utilities":

“Banks aren’t yet economically regulated,” says Sir Philip, pointing to the pricing caps imposed on many utilities. “But there is a form of that through stress tests. Regulators can be assertive on a bank’s mix of business.

“If they see an ultra-high return operation, they worry about the potential for stressed losses. They can get muscular about high-risk, high-return businesses that they don’t think you should be in.”

Generally, a lot of bankers think this is bad (Jamie Dimon: "There is nothing about banking that remotely resembles a utility"), while a lot of regulators and bank critics think it is good (Neel Kashkari: "Turn large banks into public utilities by forcing them to hold so much capital that they virtually can't fail"). But what you see less of -- not none -- is calls for banks to be true utilities, meaning not only that they're safe and boring and that their returns are capped, but also that their returns are more or less guaranteed. After all, the phrase "competitive utilities" is a bit of a paradox; the reason your gas company's prices are capped is that it's the only gas company in town, and if the rates weren't regulated it could charge as much as it wanted.

Obviously banks do have some sort of monopoly-franchise rights -- they get to issue insured deposits, for instance, and borrow from the Fed -- but a lot of the same people who think they should be utilities are also skeptical about those rights. (Kashkari, for instance, is a sworn enemy of "too big to fail," but you could sort of read the too-big-to-fail premium, and the possibility of a Fed bailout, as forms of monopoly franchise value for big banks.)

The essential thing, I think, is to remember that modern banking is by its nature a public-private partnership; the point of banking is to issue risk-free liabilities (deposits, etc.) and use the money to finance risky activities (business loans, etc.), and while diversification and risk management and so forth are helpful, the only failsafe way to do that is to have some guarantee of ultimate support from the people who print the money. It is perfectly reasonable for the public to demand strict conditions -- high capital levels, prudential regulation, even caps on pay and shareholder returns -- in exchange for that ultimate public support. It is even reasonable to want to sever the public-private partnership and make banking a purely private business like any other, subject to the usual laws of bankruptcy. (That's how banking worked for hundreds of years, with mixed results.) It is weird to want both, to both think that banks should be public utilities and to be skeptical of any public support for banks.

On the other hand.

Structured certificates of deposit! Come on:

Mary Bailey, a 79-year-old widow in Arlington, Mass., made a big deposit for her grandchildren at her Citizens Bank branch when a financial adviser there sold her on a newfangled $100,000 certificate of deposit. It would, he said, double her savings in six years, according to a later state enforcement action.

So she was irate when her first statement showed the CD’s value had fallen to $95,712, thanks to upfront fees. “This was not a CD as I know a CD,” Ms. Bailey says.

The CD was the "GS Momentum Builder Multi-Asset 5 ER Index-Linked Certificate of Deposit Due 2021," linked to a Goldman Sachs proprietary index. ("Proprietary index" is just a strange way of saying "exotic derivative.") The documents "run to 266 pages and feature calculus, hypothetical backtested data and flowcharts." ("Ms. Bailey says she didn’t read the documents.")

I feel like if you read those two stories -- banks as utilities and derivatives as CDs -- you'll have a pretty good sense of the state of banking in 2016. On the one hand, events and regulators have conspired to make it boring, to push banks back to the core franchise of taking deposits and intermediating transactions. On the other hand, that core franchise still presents lots of opportunities for fun and profit! For instance, it allows you to sell exotic derivatives to widowed grandmothers in the form of deposit-insured CDs not subject to Securities and Exchange Commission regulation. (They're just bank deposits!) You even get to practice your calculus a bit. I bet the guy who invented that thing isn't bored.


A good general way to think about an investment bank is that it is a giant pile of positions -- stocks and bonds and loans and derivatives and so forth -- and its essential business is to maximize the value of those positions, subject to risk constraints and the needs of clients. (This is not especially the bank-as-utility model, but whatever.) If you were designing a hypothetical investment bank, you'd assume a big computer that knows all the positions, and how much they're worth, and how much their value would change if the yen goes up or gold goes down or the Fed changes interest rates. And that computer would let traders know their daily profit and loss, and let risk managers know who was running up against risk limits, and let executives know the bank's overall positioning on interest rates, and let the bank model the impact of the Fed's stress tests, and generally provide a unified picture that makes thousands of trades tractable as a meaningful system rather than a set of disconnected points. And honestly it would be weird if a bank didn't have that sort of computer. Like, what else is it doing with its time? What could possibly be more important than knowing what you have, and being able to look at it in one place, and being able to turn some dials to test some scenarios?

My general (biased) impression is that the state of all-knowing bank computers is poor, though, with the famous exception of SecDB, Goldman Sachs's boringly named but beloved computer system. Here is an article about SecDB called "Goldman Sachs Has Started Giving Away Its Most Valuable Software," and the news hook is that Goldman is giving clients access to some SecDB pricing and trading functions via client-facing apps with names like Marquee, Simon and Athena, but all of that strikes me as inessential. If you are selling derivatives, in a world that is moving gloomily but inexorably toward pricing transparency, sure, you are eventually going to give clients access to your pricing tools.

But SecDB's essence is not that it will price up a new structured note for you; its essence is its comprehensive view of Goldman's positions and the factors that drive their prices. The article is at least as much a loving history of SecDB as it is a story about Marquee or whatever. And the competitive advantage of SecDB is not the client-facing stuff:

What made it the envy of Wall Street, though, was its ability to scale up to include new classes of securities, new trading desks, even whole businesses. And the data it harnessed was all in one place. Megamergers left rivals with a hodgepodge of different systems and different factions of employees loyal to each of them. Goldman avoided big acquisitions, evading issues that would slow its ability to track risks.

Disclosure: I used to work at Goldman Sachs, and I have fond memories of SecDB. In other Goldman news, it commissioned a survey of its interns from this summer, which you can read if you like infographics about millennials' media consumption. Disturbingly, only 16 percent of Goldman's interns get their news from e-mail. Ahem, ahem, ahem, ahem, ahem, ahem.


I have expressed some skepticism about investigations by New York Attorney General Eric Schneiderman and other state attorneys general into ExxonMobil's allegedly misleading past statements about climate change. Schneiderman's theory seems to be basically that Exxon knew that fossil fuels were causing climate change, and told shareholders that they weren't, and therefore harmed shareholders by artificially inflating Exxon's stock price. Even if it is true, this strikes me as a bit of a silly theory: Surely the reason to worry about man-made climate change isn't that it will hurt oil company shareholders. It seems to me that Exxon's climate advocacy is political speech, and that pursuing it as securities fraud is a way to get around the First Amendment rights that would otherwise protect it. 

Here is a pretty gruesome article about the Exxon controversy that doesn't exactly change my mind about that -- it makes it pretty clear that Schneiderman's main concern is not in fact for Exxon's shareholders! -- but that does make me more sympathetic to Schneiderman. Good lord:

In mid-May, the House Committee on Science, Space, & Technology began investigating what it called “a coordinated attempt to deprive companies, nonprofit organizations, and scientists of their First Amendment rights.” The only company the panel mentioned by name was Exxon. Committee staff members and Exxon’s McCarron say that despite the company’s widespread lobbying of Congress, it didn’t ask the panel or its chairman, Lamar Smith (R-Texas), to begin the probe.

Smith has since subpoenaed Schneiderman for refusing to cooperate with his investigation. Obviously it is bizarre -- though not actually surprising -- that the science committee has set itself up as the champion of the right to lie about science. The bigger issue is that so much of U.S. political debate is now conducted by investigations, subpoenas, and threats. You don't calmly argue the evidence and try to convince voters that you're right. You find a center of power and issue subpoenas to people who disagree with you, trying to intimidate them into silence.

Goldman and politics.

Goldman Sachs has now banned all of its partners from "engaging in political activities and/or making campaign contributions to candidates running for state and local offices, as well as sitting state and local officials running for federal office." The idea is that there are Securities and Exchange Commission "pay to play" rules that prohibit banks from serving as municipal bond underwriters if they have given money to municipal officials, and those rules take a pretty broad view of what could look like a bribe. (Goldman has violated them in the past.)

What I like about these rules is that they treat campaign donations and other political activities on behalf of candidates as bribes -- they assume that the only reason you'd donate to a politician's campaign is because you want her to do you a favor -- but then only apply that logic to municipal bond underwriting and related activities. It's just the most straightforward quid pro quo: You give money to a politician's campaign, and in exchange she gets you a lucrative government contract. More imaginative quid pro quos -- say, you give money to her campaign, she gets you more favorable regulation -- are not covered by the rules.

And since muni bonds are a state and local issue, the upshot is that donations to federal candidates are fine. (Unless they are also sitting state politicians, with the weird result that Goldman allows contributions to the Clinton/Kaine but not the Trump/Pence campaigns.) Giving national politicians campaign contributions isn't a problem -- even though the SEC rules presume that campaign contributions are corrupt -- because national politicians don't hand out bond underwriting contracts. 


Here is a fun article about how the Securities and Exchange Commission's whistle-blower program has been "a game changer for the agency," and I just want to focus on two bits of it. First, "even a violator can receive an award, but it may be reduced or denied based on the person’s level of involvement in the violations." And second, "companies objected that there was no requirement for an employee to report wrongdoing internally before providing information to the agency," though most internal whistle-blowers do report their concerns to management. But if you take both of those things literally, it suggests a possible approach:

  1. Go work at a company.
  2. Do terrible things.
  3. Keep the terrible things secret from everyone else at the company.
  4. Tell the SEC about them.
  5. Claim a whistleblower reward when the SEC punishes your company for the terrible things you did.

It is not legal advice -- in fact I suspect that the SEC will see through it and it will not work out well for you -- but I would, for my own selfish reasons, like to see someone try it.

Empowered Products.

Here is a Securities and Exchange Commission case charging "the CEO of a sexual health products retailer and a paid promoter with orchestrating fraudulent promotional campaigns to tout the company’s stock." It's fairly standard as these things go, but the details are solid. For one thing, the chief executive officer, Scott Fraser, allegedly wrote newsletters touting the stock under a fake name, "Charlie Buck," which manages to be a great name both for a stock promoter and for the CEO of a sexual health products retailer. Also, in one newsletter, he said "I have known the founder, president, and CEO of Empowered Products, Scott Fraser, for many years" -- true! Best of all, though, the newsletter went out under the name "Contrarian Press," which is just such a wonderful name for an (alleged) penny-stock-touting newsletter. There is nothing more popular than contrarianism. Everyone wants to be contrarian; everyone thinks that they are. So of course they will be susceptible to an e-mail from Contrarian Press seriously. It is instantly, insinuatingly flattering: Finally, a newsletter that gets them, that understands that they're not like everyone else buying penny stocks, that they're contrarians. (Like everyone else buying penny stocks.) 

People are worried about unicorns.

If you're not worried about Theranos, the Blood Unicorn (Elasmotherium haimatos), you should be, because things are bad. This Nick Bilton story about Theranos and founder Elizabeth Holmes is ... well, the Theranos story started as "this is a company that will change the world"; then it moved into a stage of "the technology might not quite work as promised"; and now we are fully in the mode of -- as Bilton says of the Federal Bureau of Investigation -- "trying to put together a time line of what Holmes knew and when she knew it."

There is also an unflattering description of Silicon Valley as "one big confidence game in which entrepreneurs, venture capitalists, and the tech media pretend to vet one another while, in reality, functioning as cogs in a machine that is designed to not question anything—and buoy one another all along the way." I feel like that is an assertion that I see a lot, but I never quite understand it. Every industry is a little like that; if you run a packaging-materials company, or invest in packaging-materials companies, or work in the packaging-materials trade press, presumably you have some affinity for packaging materials. What makes tech uniquely uncritical? (Is it the lack of short selling?) Also, if I am constantly reading critiques in the press about how uncritical the tech press is, what should I make of that?

People are worried about stock buybacks.

Uh oh: "Pressured by a year-and-a-half of weakening profits and splurges on buybacks and dividends, the once-towering piles of money at American companies have started to topple." It is "hardly a portent of mass insolvency," but still.

People are worried about bond market liquidity.

Here's a story about Henkel AG and Sanofi SA, each of which sold zero-coupon euro bonds at a premium to par yesterday, marking the first negative-yield new-issue bonds sold by non-government-backed corporates in the modern low-interest-rate environment. They are getting paid to borrow money, though I prefer to think of it as: They are being paid to take on the challenge of finding somewhere to invest the money with a greater than zero expected return.

I guess this is not really a liquidity story, but it's sort of a liquidity story. One general thing you can say is that in a world of 10 percent interest rates, when you buy a bond, a lot of your return comes from sitting around and receiving interest payments. In a world of zero or negative interest rates, when you buy a bond at a yield of negative 0.05 percent, less than none of your return comes from receiving interest payments. The only way you can possibly make money on that bond is by selling it, prior to maturity, if interest rates get still more negative. So you really care about being able to sell it. "Therefore managers (and their clients) would like potential recourse to markets far deeper than those which historically existed, much less those which exist today when regulatory strictures on large financial intermediary risk have reduced market-making depth," writes reader Paul Isaac in an e-mail. On this view, worries about bond market liquidity aren't driven just by reductions in the supply of liquidity; they're driven by increases in the demand for (potential) liquidity: If the only way to make money on a bond is by selling it in the secondary market, you need to be sure that that market will be there.

Things happen.

Ackman Sets Sights on Beleaguered Chipotle and Insular Board. (Here is the 13D.) There's an Apple thing today I guess. The myths behind Apple’s manufactured tax crisis. Elon Musk’s Solar Vision, Up for a Dicey Vote. Cargill Hedge Fund in Chaos as Fat Salary, Feud Sink Sale Plan. U.S. judge cuts back $2 billion mortgage bond case against UBS. Ermotti Says UBS Could Move 30% of London Staff on Brexit. Collateral and market stress: what are the risks? Robot macroeconomics. Dalton Strategic's new CEO is a real prince — literally. U.A.E.’s Planned Bankruptcy Law to Apply Only to Companies. U.S. Considers HSBC Charge That Could Upend 2012 Settlement. "Ms. Levitt recommended that the same stigma that is associated with crimes like rape be attached to economic crime." ITT Technical Institutes Shuts Down, Leaving a Hefty Bill. Izabella Kaminska on the tuna blockchain. RIP Hiddleswift. Bipartisan diapers. Adjective order.

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

    To contact the editor responsible for this story:
    James Greiff at

    Before it's here, it's on the Bloomberg Terminal.