Fiduciaries, Rules and Progressives
The fiduciary rule.
Ignoring some subtleties, the basic goal of the Department of Labor's fiduciary rule is to prevent brokers who give retirement advice from giving bad, conflicted retirement advice. Everyone can agree that good retirement advice is better than bad retirement advice. The main objection to the rule is -- again ignoring some subtleties -- that bad retirement advice is better than no retirement advice, and that the rule might push people who would otherwise get bad retirement advice to instead get no retirement advice. That objection strikes me as moderately compelling, but it is hard to say with a straight face. It just sounds dumb. So the Trump administration found an analogy that ... honestly makes it sound even dumber?
“We think it is a bad rule. It is a bad rule for consumers," said White House National Economic Council Director Gary Cohn in an interview with The Wall Street Journal on Thursday. “This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”
It's like putting only careful sensible retirement advice on the menu, because dumb risky advice is more exciting but you shouldn't take it because you might run out of money and have to die younger. I hope firms seize on his metaphor. High-Fructose Corn Syrup Capital Management. Special-Occasion Indulgence Investments LLC. Anyway, one thing about America in 2017 is that a successful populist presidential campaign resulted in the former president of Goldman Sachs announcing plans to make it easier to rip off retirement savers.
Just plans, though. Donald Trump's "Presidential Memorandum on Fiduciary Duty Rule" doesn't actually repeal the rule; it instructs the Secretary of Labor to "examine" the rule and see if maybe it should be delayed or repealed. Presumably the memo will be waiting on the Secretary of Labor's desk when he arrives. The nominee, Andrew Puzder, "has submitted none of the paperwork required by the Senate committee overseeing his confirmation," has had his confirmation hearing rescheduled four times, and "has now twice taken the awkward step of issuing public statements confirming that, yes, he still wants the job." But he -- or someone -- will eventually arrive at his desk, read the memo, read between the lines and, everyone expects, delay or repeal the fiduciary rule. For now, though:
Financial institutions, many of which have been undertaking massive overhauls in their business models relating to retirement investors to comply with the rule by its applicability date, will not truly have any certainty until the rule is officially delayed or rescinded.
I tell you, there is a lot of news these days. Remember when we talked about small-time fraud enforcement actions in Money Stuff? Now it is hard to even get to all the presidential proclamations totally reshaping the U.S. financial system. It is exhausting, and not all that fun. Also sometimes the news overtakes me. My column in the most recent Bloomberg Businessweek pointed out that Trump hadn't yet repealed the fiduciary rule, and so of course he went and repealed it on Friday. Sort of. A little.
Meanwhile in small-time fraud enforcement actions, just for old time's sake, here's a Securities and Exchange Commission case charging "an investment adviser representative with stealing approximately $5 million from client accounts" and using the money "to rent a home in suburban Las Vegas and pay for a country club membership and private jet service." See, isn't that soothing? Don't you want to hear more about him, and less about ... most other things? He was a fiduciary, by the way.
Also, by an executive order issued Friday, the Dodd-Frank Act will go away, somehow. Or that is how people seem to be interpreting this frankly pretty vague executive order on "Core Principles for Regulating the United States Financial System." The order instructs the Secretary of the Treasury to review existing laws and regulations with an eye to whether they "empower Americans to make independent financial decisions," "prevent taxpayer-funded bailouts," "foster economic growth and vibrant financial markets," "enable American companies to be competitive," "advance American interests in international financial regulatory negotiations and meetings" and "rationalize the Federal financial regulatory framework."
Sounds great! Davis Polk & Wardwell LLP calls it an "elegantly written Executive Order," designed "to rebalance the goals of financial regulation to include jobs and economic growth in addition to financial stability." Some of those principles are code, though; for instance, the phrase "prevent taxpayer-funded bailouts" is usually used to mean "get rid of the provisions of law designed to prevent taxpayer-funded bailouts." (It's weird!) And do you think most Americans want to be "empowered to make independent financial decisions"? That sort of empowerment sometimes ends in Trump University degrees.
In any case, there's not a lot here ... about ... Dodd-Frank? And of course, Dodd-Frank is an act of Congress that can't be repealed by executive order or regulation; all the Treasury Secretary can really do is come up with a list of laws that don't meet these principles, and then try to persuade Congress to repeal them. Congress, though, seems to be amenable; on Friday, the Senate voted to repeal a small part of Dodd-Frank, a rule that "requires oil companies to publicly disclose payments made to governments when developing resources around the world." That doesn't have much to do with any principles, core or otherwise, of financial regulation, though I suppose "it should be easier for companies to make undisclosed payments to government officials" could be a core principle of some sort.
Anyway Simpson Thacher & Bartlett LLP tries to guess what it will actually mean:
Although the order does not specifically identify any existing laws or regulations that the administration considers to be inconsistent with the core principles, areas that the mandated agency report may ultimately identify for reform include the Volcker Rule, private equity adviser registration, any “fiduciary” standard applicable to investment advisers and broker-dealers, Dodd-Frank’s orderly liquidation authority and resolution planning requirements, as well as the powers, structure and funding arrangements of the FSOC, the Office of Financial Research, the prudential bank regulators, the SEC, CFTC, and CFPB.
There is a lot of hand-wringing about this, which is perhaps premature -- nothing has happened yet! -- but understandable. Trump's statement that he wants to roll back Dodd-Frank because his "friends" can't get loans does seem suspect: "Commercial and industrial lending has risen to an all-time high since 2010." And making it easier for banks to return capital does seem to increase the probability that they might fail -- making bailouts more, not less, likely. But I have never been a believer in a pure quantity theory of bank regulation: It's possible to make regulations not "stricter" or "laxer" but just smarter, and it's always possible that that's what will happen. We'll have to see, though.
The interesting question is whether rolling back Dodd-Frank will also undo the cultural changes that followed in its wake. The Volcker Rule didn't just forbid proprietary trading at big banks; it also caused them to get rid of their prop traders. What will happen if the rule is repealed? One possibility is that the banks will decide that they're better off without prop trading, and not bring it back (while perhaps being a bit more flexible in market making). Another possibility is that everyone will rush out to hire back their prop traders and go back to exactly where they were in 2006 -- which, given what happened after 2006, would seem like a strange choice. A third possibility is that the post-Dodd-Frank banks have reduced, not just their risk, but also their risk-taking abilities -- and that if the rules are opened up to let them take more risk, they'll be even worse at it than they were last time. Anyway, here is "How Big Banks Want Donald Trump to Change Regulation."
Wall Street progressives.
I made a little fun, above, of Gary Cohn's first awkward foray into folksy populism on behalf of Trump's policies. (Delicious sugary conflicted retirement plans!) Cohn, the former president of Goldman Sachs Group Inc., has an interesting role in the administration:
Gary Cohn, a Democrat and former president of Goldman Sachs who is chairman of Trump’s National Economic Council, has helped bring a more progressive Wall Street sensibility to the administration. He worked to prevent CNBC commentator Larry Kudlow, a longtime Trump economic adviser, from joining the administration and has tried to sideline Peter Navarro, a vocal China critic and hard-liner on trade inside the White House, according to someone with knowledge of his moves.
Keeping fringe economic theories out of the White House is an important, though unusual, role for a National Economic Council chairman, but obviously the funny phrase there is "progressive Wall Street sensibility." I tweeted it, and people made fun of it, but it is plainly correct. Everyone used to think that there was a divide between "liberals" and "conservatives," and that Wall Street, with its "bro culture" and fondness for low taxes and deregulation, was on the "conservative" side. But those categories turned out to be totally wrong. In the western world in 2017, it turns out, the important divide was between cosmopolitan technocrats and nativist populists. And Wall Street is full of cosmopolitan technocrats who benefit from trade and immigration and education, interact with people from around the world, and tend to be socially progressive. Also it is hard to run a major bank on fringe economic theories. Gary Cohn is a rare cosmopolitan technocrat in the Trump White House, and his "more progressive Wall Street sensibility" really is distinctive. Though not unique; here's a story about how Elon Musk is bringing his, I guess, progressive Silicon Valley sensibility to business-leaders' meetings with Trump. All the cosmopolitan technocrats are doing what they can.
Here's a profile of Cohn:
“Every day you are competing and every day you are playing to win,” he told Kogod’s graduating class eight years ago.
“So remember, wake up every morning and figure out how to win.”
Elsewhere in Goldman news, its economists are getting worried about Trump:
"Following the election, the positive shift in sentiment among investors, business, and consumers suggested that the probability of tax cuts and easier regulation was seen to be higher than the probability of meaningful restrictions to trade and immigration," Goldman Sachs Group Inc. economists led by Alec Phillips wrote in note published late last week. "One month into the year, the balance of risks is somewhat less positive in our view."
(Disclosure: Like so many Trump administration officials, I used to work at Goldman Sachs, though I didn't really know any of them there.) And: "Hedge Fund Investor Letters Show Managers Are Stumped by Trump."
There's a popular perception that Finance Is Hard, or particularly that some areas of finance -- high-frequency trading! -- are impenetrable to mere mortals. This perception strikes me as mostly wrong; you don't need a Ph.D. in physics to understand in general terms what Citadel Securities is up to, though it probably helps if you're going to be the one getting up to it. On the other hand! Finance is not pure hand-waving cliché either. You can't just put on some cufflinks and shout "synergies!" and watch the money roll in. There is intellectual content. It helps to know things. Specific things. Finance-y things.
The title of this Bloomberg Businessweek article is "Why Citadel’s Ken Griffin Can’t Keep His Star Hires," but I'm not sure that's fair to Griffin. It's about why Kevin Turner lasted only seven months as the chief executive officer of Citadel Securities, and it doesn't exactly sound like that was Griffin's fault:
Turner often speaks of businesses “creating clarity” to “separate the urgent from the important” to “generate energy.” A voracious reader of business strategy books, he seeks out the famous authors. At Walmart he brought in Jim Collins to help his executives learn how to go from Good to Great. Deepak Chopra got the call to discuss The Soul of Leadership with Turner’s Microsoft colleagues. Within his first few days at Citadel Securities, he gave Carol Dweck’s Mindset: The New Psychology of Success to senior executives. “One leadership guru doesn’t fit everyone,” he said in November.
Turner’s unfamiliarity with the world of finance came out at client meetings, where his repeated use of clichés and catchphrases from the business books he constantly read made for uncomfortable encounters, according to people familiar with the matter. One Citadel Securities executive would warn customers before meeting Turner not to expect any details from him, according to another person.
I want to believe that the clients and the junior Citadel people were, like, solving heat equations on a whiteboard while Turner irrelevantly blurted "growth mindset!" and "great vision without great people is irrelevant!" and "attention and intention are the mechanics of manifestation!" Bankers and traders probably shouldn't read too much into this; if you are selling mergers, you're a salesman just as much as if you're selling vacuum cleaners or encyclopedias. Still, if you want to smirk condescendingly at non-finance executives for a few weeks after reading this article, I won't object.
Snap Inc., the unicorn formerly known as Snapchat, filed the papers for its initial public offering Thursday afternoon. There are only two years of income statements, which show Snap's revenue growing by almost 600 percent from 2015 to 2016, while its costs merely doubled. The costs are still way more than the revenue, but, you know, just extrapolate out a few years:
Do you ever think that that might be how internet companies are actually valued?
Anyway the prospectus is full of interest! For instance, Snap informs us that smartphones "are personal in a way that other forms of media will never be—we eat, sleep, and poop with our smartphones every day." And -- critically for old people like me -- there is a long section that explains how to use Snapchat. With helpful diagrams:
I wish that diagram had labels for "dog tongue" and "dog ears," but all in all it is admirably clear. If you want to fit in with the cool teens these days, there's no one better qualified to help you than a team of securities lawyers.
Also of course Snap won't give its shareholders any voting rights. That's weird! In fact it is unprecedented, at least in an IPO:
Although other U.S.-based companies have publicly traded classes of non-voting stock, to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange. We cannot predict whether this structure, combined with the concentrated control by Mr. Spiegel and Mr. Murphy, will result in a lower trading price or greater fluctuations in the trading price of our Class A common stock as compared to the market price were we to sell voting stock in this offering, or will result in adverse publicity or other adverse consequences.
And there are weird securities-law implications:
Because our Class A common stock is non-voting, significant holders of our common stock are exempt from the obligation to file reports under Sections 13(d), 13(g), and 16 of the Exchange Act. These provisions generally require periodic reporting of beneficial ownership by significant stockholders. Our directors and officers are required to file reports under Section 16 of the Exchange Act. Our significant stockholders, other than directors and officers, are exempt from the “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Since our Class A common stock will be our only class of stock registered under Section 12 of the Exchange Act and that class is non-voting, we will not be subject to the proxy rules under Section 14 of the Exchange Act, unless a vote of the Class A common stock is required by applicable law. Moreover, holders of our Class A common stock will be unable to bring matters before our annual meeting of stockholders or nominate directors at such meeting, nor can they submit stockholder proposals under Rule 14a-8 of the Exchange Act.
I guess it is obvious that if you don't let your shareholders vote, you don't have to send them a proxy statement. And certainly they don't get to submit advisory shareholder proposals on social-justice matters. Still it is a bit jarring. Snapchat's founders, Evan Spiegel and Bobby Murphy, are not selling voting shares in this offering because they want to keep tight control of the company for themselves. Their interest is substantive: They don't want the risk of a hostile takeover, or a big shareholder overruling them on an important strategic decision. But they have in passing also gotten rid of a lot of the symbolic baggage of shareholder democracy, the stuff -- advisory say-on-pay votes and shareholder resolutions -- that has little practical effect but that makes shareholders feel loved and included.
Here is Steven Davidoff Solomon on the share structure, which he calls "the most shareholder-unfriendly governance in an initial public offering, ever." I suppose that is right, though I still laugh sometimes about the private-equity firms that went public with no fiduciary duties to their shareholders. The shareholders got votes (usually!), but disclaiming fiduciary duties seems particularly unfriendly.
Elsewhere, it is expensive for firms like Snap to compete with internet incumbents. And Facebook is stealing Snap's moves. Here is Christopher Mims on "Why Snapchat Is the New TV." And here is my Bloomberg Gadfly colleague Shira Ovide on the IPO:
The issue is Snapchat is going public with serious, unanswerable questions about its business. The company's financial model requires a leap of faith, and it has an unproven strategy to concentrate on a smaller audience than the typical highly valued internet company. That puts pressure on Snapchat to professionalize and grow its digital advertising business fast to compensate for its weaknesses.
And because Snapchat is going public relatively young, investors are bearing the risks -- and the potential reward -- of Snapchat figuring all this out. Investors' margin for error is slim, too: Snapchat has the valuation of a company that has figured all this out, and then some.
People are worried about unicorns.
Well, Snap is a unicorn, and people are worried about it. Though Snap's governing metaphor involves ghosts, not unicorns: The sample contacts listed in the S-1's explanation of how to use Snapchat include Wraith Hill, Meryl Creep, LL Ghoul J and Matt Demon.
People are worried about bond market liquidity.
I am not sure that worries about the Federal Reserve's unwinding of its $1.75 trillion of mortgage-bond positions fit exactly with the spirit of "people are worried about bond market liquidity" but, you know, why not:
Unwinding QE “will be a massive and long-lasting hit” for the mortgage market, said Michael Cloherty, the head of U.S. interest-rate strategy at RBC Capital Markets. He expects the Fed to start paring its investments in the fourth quarter and ultimately dispose of all its MBS holdings.
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