Goldman Ads and Too-Big-to-Fail Banks

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

Marcus ads!

Hey America: Did your dog chew up your sofa? Did a baseball hit your windshield while you were watching a Little League game? Are you mired in unsustainable credit-card debt as a result of the relentless societal pressure to maintain a lifestyle of showy consumerist consumption in the face of stagnant real wages and deep insecurity about the future? Do you know who can help? You will not guess. I mean, Money Stuff readers will guess. But most of America has no idea what's coming for them.

That's right, Goldman Sachs Group Inc. is rolling out consumer ads! They "will appear on Facebook, Hulu, Pandora and YouTube," and they "depict debt as an unavoidable nuisance of modern life, not shameful overspending on unaffordable luxuries." A "head of brand management" is involved:

Dustin Cohn, the head of brand management for Goldman’s new consumer lending arm, Marcus by Goldman Sachs, said the bank’s aim was to “destigmatize debt and help consumers explore new ways of managing their debt.”

Here, you can watch them. You can watch Goldman Sachs ads. For a consumer debt-consolidation product. The future is amazing. Disclosure: I used to work at Goldman Sachs. I left in 2011. I did not see this coming. 

The ads are ... fine? Like, they would make me want to run out and get a Goldman Sachs loan to consolidate my high-interest credit-card debt, if I had credit-card debt. My favorite is the one about how Goldman's consumer lending product, unlike credit cards, has no embedded optionality for Goldman: The interest rate is fixed for the life of the loan, and won't go up for late payments or credit-score changes. Goldman's branding push, in its move into consumer banking, is simplicity. Goldman! Its advantage in most of its activities comes from smarts and structure, from mastering complexities that others shy away from. Here it went the other way. I like to imagine that Goldman got a bunch of credit-derivative structurers in a room and asked them to figure out consumer lending, and they looked at some credit-card agreements and were like "holy cow this is too complicated." So they thought real hard about it and were like "what about a fixed-rate no-fee loan where we just make money by charging interest?"

It's lovely, more power to them. Remember the last financial crisis, when Goldman executives were hauled before Congress and asked about their subprime lending practices? And they looked bewildered and said, you know we don't actually lend to consumers, right? Next time they won't have that excuse!

Too big to fail (1).

Yesterday Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, released the "Minneapolis Plan to End Too Big to Fail." That was poor timing! Kashkari's plan would significantly raise bank capital requirements to push the big banks to break up, and would tax shadow banks' debt. Higher capital requirements and a tax on financial borrowing do not seem like easy sells in a new presidential administration run by a real-estate mogul who "loves debt," especially when the plan, by Kashkari's own calculations, would reduce U.S. gross domestic product by 1.4 percent per year. "We're going to have much slower economic growth, but it's worth it to significantly reduce the risk of a financial crisis over the next 100 years" might be an attractive pitch to some presidents, in some circumstances, but now does not quite feel like the time. 

So even though Kashkari has some obvious financial-regulatory clout -- he's a Fed president! -- it seems a little silly to examine his plan too closely. It would be like criticizing his model train setup. Let the man have his hobbies; he's not hurting anyone. The plan is worth a read -- if nothing else, I enjoyed the odd precision that it puts on chances of a bailout over the next 100 years under various scenarios -- and has some interesting elements. (Here's Kashkari's speech presenting it, and the slides, and a summary, and the full plan, and a Bloomberg report.) For big banks, the plan would raise the risk-weighted capital ratio to 23.5 percent, and the leverage ratio to 15 percent, all in common equity. Then the plan would "call on the Treasury Secretary to certify that each covered bank is no longer systemically important." If he doesn't sign off on any bank, its capital requirements go up by 5 percent a year until they hit 38 percent. The goal is to push banks to break up and become unsystemic, but if you want to be a systemically important bank, you can be; you just need to have 38 percent common equity capital. (For comparison, JPMorgan Chase & Co. is currently at 12 percent.) 

There is also a "shadow bank tax," in which some non-bank financial firms (real estate investment trusts, broker/dealers, hedge funds, mutual funds, etc.) would pay a tax of 1.2 percent (2.2 percent if they're systemically important) on their debt. The idea here is to equalize funding costs between banks and shadow banks, so that there's no advantage in pushing risky activity from a debt-and-equity-funded bank to a debt-funded shadow bank. Equity-funded shadow banks -- like money-market mutual funds? -- are, I guess, fine? 

It all seems a bit blunt? I don't know; I feel like most of the careful thinking about financial crises these days focuses on short-term debt, liquidity, maturity transformation, information insensitivity, "money-like claims," that sort of thing. The thinking is that those liabilities are run-prone, that they're essential to the functioning of the financial system, and that imposing losses on them is very bad, so we need to make sure they are carefully regulated and as risk-free as possible. The Kashkari approach is much broader: It treats all financial-firm debt as, essentially, systemic, and imposes huge costs to make that debt as uncommon and risk-free as possible.

The advantage of that is a certain gruff cynicism: The careful tinkerers can promise that "total loss-absorbing capital" bonds will absorb losses, but Kashkari can scoff that "there is little historical domestic evidence to support the notion that bank debt holders will absorb losses." The disadvantage is that it costs 1.4 percent of GDP per year. The promise of the tinkerers is that they can get you a safe financial system, but cheaper.

Too big to fail (2).

I'm kidding a little about Kashkari's bad timing. I mean, I am not betting on his plan being adopted wholesale by the Trump administration and pushed through a Republican Congress. But he is not wrong to say this:

“There is probably more appetite today to take a fresh look at our regulatory system than maybe we had expected a few weeks ago,” he said. “If I had said it a few weeks ago, I would have guessed people would have looked at incremental changes to the path that we are currently on. Maybe now there is an opportunity to say, let’s step back and let’s just do a complete, fresh look at, are we headed the right way.”

I mean, we are rewriting all the laws anyway, why not slip in 38 percent bank capital requirements while we're at it? Representative Jeb Hensarling seems to be the guy in charge of overhauling the Dodd-Frank Act, and his preferred overhaul, the absurdly named Financial CHOICE Act ("Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs"), has some overlap with Kashkari's plan. Not much. But it does essentially call for a 10 percent leverage ratio -- higher than current requirements, lower than Kashkari's 15-plus percent -- to allow banks to escape from Dodd-Frank regulation, and at least pays lip service to the idea of getting rid of "too big to fail" banks. There does seem to be a vague political consensus around:

  1. Raising the leverage ratio; and
  2. Saying that "too big to fail" is bad.

That's something. Hensarling's plan calls for less regulation of shadow banks, not more -- it would withdraw the Financial Stability Oversight Council's ability to designate non-banks as systemically important -- but you can't expect complete agreement. In any case, "Hensarling said he’s willing to tweak his plan to overhaul the Dodd-Frank Act before reintroducing it to Congress early next year."

Too big to fail (3).

Yesterday the Commodity Futures Trading Commission released a report on its stress testing of major derivatives clearinghouses. They all did great. Here's the report. The basic idea here is that in the last financial crisis, a lot of problems were caused when one firm (Lehman Brothers Inc.; American International Group, Inc.) ran into trouble and couldn't pay off its derivatives obligations, putting its counterparties at risk and spreading contagion. So since the crisis there has been a push to put more derivatives into clearinghouses with strict margin requirements and reserve funds, so that if the next Lehman Brothers can't pay off its derivatives, the losses will be smaller (because of margin) and absorbed by the clearinghouses (because of reserve funds). The counterparties will just face the clearinghouse, and will be unaffected by any one firm's failure. So failures are less likely to spread contagion.

On the other hand, if they do spread contagion, it could be much worse: If the clearinghouse fails, then all the counterparties suffer, not just the ones who traded with the risky firm. So it's very important that the clearinghouses be robust enough -- collect enough margin, have enough reserve funds, etc. -- to survive a pretty big crisis. Some people are skeptical about this. But the CFTC took a look and decided that things are fine. You are free to remain skeptical.

By the way, this stuff is a reason to distrust blunt solutions to "too big to fail." The leverage in the financial system isn't perfectly measured by banks' leverage ratios, or by hedge funds' debts, or whatever; derivatives make up a lot of the leverage. And systemic risk is not just about the size of the biggest banks; it's about the connections in the system, and the utilities that manage them. There are quite respectable people who think that derivatives clearinghouses are a huge systemic risk, but they're never going to get as much Fed and congressional attention as the biggest banks do -- unless they actually fail.

Too big to fail (4).

That's a stretch, but really isn't Jamie Dimon too big to fail? Anyway, he was back in Treasury Secretary speculation yesterday for some reason. Fox Business anchor Charlie Gasparino tweeted that Donald Trump "is lusting" to make Dimon Treasury Secretary, but it seems like Dimon has said no:

Surprisingly, Dimon feels he’s not suited to serving as the nation’s top ranking economic official, according to sources familiar with the situation. It may be that he had reckoned that serving in the Administration would require curbing the blunt, outspoken style that has served him so well in the financial world. J.P. Morgan shareholders will be relieved; the bank’s shares dropped 2.5% on the rumor.

Has he noticed the communication style of the Trump administration? Does he know that he can probably keep his "blunt, outspoken style," and start tweeting

Some Trump.

Let's see, we have, "China couldn’t have invented global warming as a hoax to harm U.S. competitiveness because it was Donald Trump’s Republican predecessors who started climate negotiations in the 1980s, China’s Vice Foreign Minister Liu Zhenmin said," that's cool. There's: "Trump’s chief strategist Steve Bannon suggests having too many Asian tech CEOs undermines ‘civic society.’" There's this letter to banking trade organizations asking them to oppose Bannon's appointment, signed by vocal congressional bank critics Sherrod Brown and Maxine Waters: "This moment is a test of the moral leadership of the banking and finance community." Here's "How Trump Can Make Money Off the Secret Service"; he's already made about $6 million. I could go on, but probably let's not.

Instead, let me point you to this speech given yesterday by Rick Fleming, the Investor Advocate of the Securities and Exchange Commission, on "Examining the Dodd-Frank Act and the Future of Financial Regulation," a timely topic given Republican plans to roll back vast but unspecified swathes of Dodd-Frank:

First, I want to point out that a few of the lesser-known sections of the Act are, in my humble opinion, masterful works of legislation.  In particular, I am a fan of Section 915, which created the Office of the Investor Advocate and established my current role ...

I feel like we're going to start seeing a lot of speeches like that from financial regulators, though they won't all be quite as explicit. Elsewhere, hedge-fund managers think that Trump's presidency will be good for hedge-fund managers.

People are worried about unicorns/vampires.

Yesterday's Money Stuff contained two regrettable errors of startup cryptozoology. First, I quoted a reference to Canopy Growth Corp. as "Canada's first marijuana unicorn." I quibbled that because Canopy Growth is a public company, it can't be a unicorn. But I forgot that it also can't be a unicorn because it is Canadian, and billion-dollar Canadian startups are "narwhals." Or so this infographic says, whatever.

Second, I quoted a reference to vampires in connection with Theranos Inc., the Blood Unicorn (Elasmotherium haimatos), but I neglected to link to our previous discussions of Silicon Valley vampirism, or to Madeleine Schwartz's Theranos vampire fan fiction, "Thanatos."

The latter omission is particularly regrettable in light of this John Carreyrou story about one of his sources, Theranos whistle-blower Tyler Shultz. That story is amazing, but it is amazing in a specifically vampire-fiction way. Shultz was introduced to Theranos through his grandfather, a man with a powerful and mysterious past (former Secretary of State George Shultz) who was on the Theranos board of directors. He went to work at Theranos, but soon noticed irregularities that troubled him. He e-mailed Chief Executive Officer Elizabeth Holmes, and got back an angry reply from her deputy suggesting that his relationship to his grandfather was the only thing protecting him. He quit, and "got a frantic cellphone call from his mother, who told him Ms. Holmes had just called the elder Mr. Shultz to warn that his grandson would 'lose' if he launched a vendetta against the blood-testing startup." You can almost hear the creepy music in a later scene:

Seven months later, he and his parents showed up for Thanksgiving dinner at his grandfather’s house. Ms. Holmes was there with her parents. Over turkey and stuffing, they discussed California’s drought and the bulletproof windows on Theranos’s new headquarters as if nothing had happened.

Yes sure it is corporate/family intrigue, but it also just writes itself as vampire fiction. The elder Shultz could be a powerful vampire lord, with Holmes as his young protégé, building the infrastructure to feed a vampire army one finger-prick at a time. He recruits his beloved mortal grandson in the hopes of indoctrinating him into the vampire army. But the grandson resists, and after some ominous attempts to bring him back into the fold -- one of which involves hiding lawyers upstairs -- the grandfather is forced to choose between his mortal son and his dreams of a conquering vampire army. He chooses the vampires.

Peter Thiel could have a cameo. Really the California drought is the only false note: If this was happening in the "Twilight" universe, it would have to rain all the time. Anyway, I have not read a news article that made me feel better about Theranos in the last year or so; have you? 

Elsewhere in things teens love: "Snap IPO: Why Is the Most Secretive Company in Such a Hurry to Go Public?" And: "Snap’s IPO Will Test How Much Unicorn CEOs Are Actually Worth."

People are worried about bond market liquidity.

There it is!

The global bond selloff has revived concerns about the ease of trading in bond markets, pushing investors to re-examine their strategies.

Post-financial-crisis regulation forced banks to retreat from their traditional role as market makers. That has sapped some bond markets of liquidity, research and many investors suggest, making it more expensive to trade and helping to spur the sort of steep price moves hitting bond markets since Donald Trump’s election victory last Tuesday.

I said the other day that bond-market-liquidity worrying had gone a bit quiet, which I've noticed in previous periods of stress: "When things are actually happening, you're too busy trading bonds to worry about how you can't trade bonds." But now people are finding time to worry about the lack of liquidity, though at this point they seem to be nuisance worries -- it's expensive to optimize portfolios -- rather than systemic-crisis ones. Still, we are apparently overhauling Dodd-Frank these days, so get your liquidity-enhancement requests in now.

Elsewhere: "SEC Approves Rule Amendment to Create a New Academic Corporate Bond TRACE Data Product," so expect more papers about corporate bond liquidity in 2017 or so. 

Things happen.

These Professors Make More Than a Thousand Bucks an Hour Peddling Mega-Mergers. Donald Trump vs. AT&T: A Signal Test of How Business Will Fare in New Washington. DraftKings and FanDuel To Merge. Yellen Says Fed Interest Rate Hike Could Come ‘Relatively Soon.’ Yuan’s Slide May Have More to Do With Economics Than Donald Trump. In Trump’s China, Industrial Subsidies Loom Large. Hedge fund stars on track for big pay days: Glocap report. Senator Pushes Finra to Expedite Reviews of Wells Fargo Employee Dismissals. DryShips Docked After Spectacular Share Surge. Best Business Schools 2016. What is the Expected Return on a Stock? Fired LendingClub CEO Sets Up Rival Lender Nearby. TITANPOINTE: The NSA’s Spy Hub in New York, Hidden in Plain Sight. Helen Rosner on well-done steak. Jia Tolentino on "Arrival." Chairs Of The Future Will Be Made Of Mushroom. For the Super-Rich, the Bathroom Must Have a Stunning View, Too. 'I love digging': 89-year-old man digs his own grave.

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