Money Stuff

Dog Leasing and Bank Fines

Also Snap, Dow 21K, Bridgewater, short selling, unicorns and stock buybacks.

Subprime dog leasing.

I am hoping that Bloomberg will spring to have this story engraved on an obelisk so that, thousands of years in the future, when people or aliens find the remains of our civilization, they'll understand what we were all about:

The Sabins had bought their new dog, Tucker, with financing offered at the pet store through a company called Wags Lending, which assigned the contract to an Oceanside, California-based firm that collects on consumer debt. But when Dawn tracked down a customer service rep at that firm, Monterey Financial Services Inc., she learned she didn’t own the dog after all.

“I asked them: ‘How in the heck can I owe $5,800 when I bought the dog for $2,400?’ They told me, ‘You’re not financing the dog, you’re leasing.’ ‘You mean to tell me I’m renting a dog?’ And they were like, ‘Yeah.’ ”

It goes almost without saying that the founder of Wags Lending believes that he is "living in a Postmodern culture while maintaining my old American West roots and Christian values." Also the article contains the perfect sentence "Also this cat is ruining my credit score," which I hope Jon has said somewhere about Garfield. 

Was she renting the dog, though? We talked a while back about how usury laws cap the interest that you can charge on a loan, but don't cap the effective interest that you can charge on a thing that looks like a loan but is called a sale. The same goes for a lease. You go to a store, you sign a contract, you get a dog, and you make monthly payments to Wags Lending for a while. At the end, you make your final payment and keep the dog. Did Wags Lending lend you money to buy the dog, or did it lease the dog to you with an option to buy? The practical difference is small, except for the usury laws: Wags Lending can "charge effective interest rates ranging from about 36 percent to 170 percent on an annualized basis," because they're not technically interest rates, because they're not technically loans. They're leases. Or so Wags Lending claims. Some consumer lawyers disagree. The distinction turns, horribly, on whether Wags Lending will really repossess the dogs at the end of the leases, if the dog owners (um, lessees) don't exercise their option to buy. (It says it will!)

But for most practical purposes you can think of this as oddly structured subprime dog lending at very high interest rates. So go ahead and get your collateralized dog obligationcredit-dog swap, big-dog-short, etc., jokes out of your system now. Also blockchain (dogchain). Will subprime dog lending be the trigger for the next financial crisis? No, it will not, but really it should be. It would serve us right.

Also, as with the subprime mortgage crisis, some of Wags Lending's borrowers (lessees!) appear to be dog flippers:

When she first figured out that she was leasing Tucker, she complained to both Monterey Financial and Bristlecone. She stopped making payments and stopped worrying about the charge, until she and her husband looked into refinancing their home and realized the unresolved lease was marring their credit report. By then, she’d already sold the dog.

What!? Don't sell your dog, come on. There are no sympathetic characters in this story. Anyway the key lessons here are:

  1. Financial regulation is often not about what you do, but about what names you use to describe it.
  2. Adopt, don't shop.
  3. Capitalism is bad.


One theme in the history of finance has been the domestication of different risks. In the beginning, no one has ever heard of or thought about some particular risk. Then people worry about it in vague terms, without doing anything about it. Then they prepare for it in crude ways, with arbitrarily chosen reserves or cautious rules of thumb. Then they develop a statistical understanding of the risk, and build models allowing them to predict the range of damage it might cause, to charge appropriately for it, to diversify against it. Then they build hedging tools to transfer the risk to someone who actually wants to take it.

This is in part a linear progression from ignorance into understanding, but you can also read it as a cyclical process, from complacency back into complacency. In the beginning, you don't worry about the risk, because you've never thought about it. In the end, you don't worry about the risk, because you think that it is fully understood, and that your models and hedging tools can handle it. Then you discover some risks in the models and hedging tools themselves, and the cycle repeats.


Banks globally have paid $321 billion in fines since 2008 for an abundance of regulatory failings from money laundering to market manipulation and terrorist financing, according to data from Boston Consulting Group.

That tally is set to increase in the coming years as European and Asian regulators catch up with their more aggressive U.S. peers, who have levied the majority of charges to date, BCG said in its seventh annual study of the industry published Thursday. Banks paid $42 billion in fines in 2016 alone, a 68 percent rise on the previous year, the data showed.

"As conduct-based regulations evolve, fines and penalties, along with related legal and litigation expenses, will remain a cost of doing business," analysts led by Gerold Grasshoff wrote. "Managing those costs will continue to be a major task for banks."

Ten years ago, paying multibillion-dollar fines was just not a thing that banks really did. Now it is a standard part of the business, included in capital models, hedged with derivative instruments. It has gone from being unthinkable, to being a grave existential threat, to being a cost of doing business.  

Happy Snap IPO day!

Snap Inc., the maker of disappearing-photo app Snapchat, priced its initial public offering at $17 per share last night, above the $14 to $16 marketing range, giving it a market capitalization of something like $20 billion, or almost $24 billion fully diluted. Will that valuation disappear within 24 hours when it opens for trading today? Am I the first person to make that joke? Surely not. I should start a social messaging company whose schtick is that your messages last forever and ever, just so journalists and analysts will be like "MattChat's Valuation: Going to Last Forever and Ever." I guess that company is LinkedIn though. 

Snap's valuation looks pretty rich -- twice as expensive as Facebook, and four times Twitter, on a revenue-multiple basis -- so obviously all the investor complaining about its terrible governance wasn't meant to be taken too seriously. Here's a guy:

It’s a “nosebleed” valuation, but “there’s a nosebleed’s worth of demand,” said David Kirkpatrick, chief executive officer of Techonomy Media.

Is that how ... noses ... work? Anyway, lotta demand. Snap is an odd unicorn, as unicorns go, but unicorns are a suspicious species and always looking for omens:

A successful offering for Snap — a Los Angeles-based start-up famous for its disappearing photos — could entice other so-called unicorns on to the public markets, after a period when many start-ups have achieved valuations of $1bn with private fundraisings.

“If Snap’s deal falters and shares sink below its IPO price that would leave a sour taste in IPO investors’ mouths and would cause hesitation among any management teams that are considering an IPO,” said Michael Underhill, chief investment officer at Capital Innovations, an asset management firm.

But Snap is not just a unicorn harbinger; it's also a governance harbinger. It's (as far as it knows) the first U.S. company to issue non-voting shares in its IPO. Now that IPO has priced above the range into a nosebleed of demand. If it trades well, and you are the founder of another sexy tech unicorn thinking about going public, why wouldn't you follow its example? Why would you want to give up voting control to public shareholders if, as it turns out, you don't have to? If all goes well for Snap, public-company voting rights may be on their way out. 

Meanwhile, in Venice, California, Snap's neighbors protested the IPO with signs saying things like "BEAT IT NERDS!"

Happy Dow 21,000!

"The Dow Jones Industrial Average surged 300 points to top 21,000 for the first time" yesterday, and did you know that the Dow has closed at an all-time high 41 times in the last 12 months? That's about one out of every six trading days. And it's 15 times in 2017 so far, or almost twice a week. New Dow all-time highs are now less noteworthy than Tuesdays. Of course only five of the last year's closes crossed new 1,000-point thresholds (17,000 through 21,000), but still: five. Are you getting a little bored of celebrating new Dow milestones? Are you ... I am sorry ... tired of winning? Anyway here is a story about how 1,000 is 5 percent of 20,000 but 10 percent of 10,000, which is another reason to be bored I guess. We should pick an arbitrary starting point and then celebrate each subsequent 10 percent increase, or just start reporting the log of the Dow rather than the level.


"We mutually agree that he is not a cultural fit for Bridgewater," says Bridgewater Associates founder Ray Dalio about Bridgewater's co-chief executive officer, Jon Rubinstein. There is no shame in that. Most people are not a cultural fit for Bridgewater. It's an unusual place. I'm pretty sure that if I spent five minutes at Bridgewater, we would quickly mutually agree that I am not a cultural fit. But I am not the CEO of Bridgewater. Presumably they spent more than five minutes with him. (They spent 10 months, actually.) On the one hand, you really do have to respect the radical self-reflection that allowed Bridgewater to decide that its co-CEO was not a good fit 10 months after hiring him, and the radical transparency that allowed it to just come out and say that. On the other hand, it always ends up looking a little goofy. 

The other news in Dalio's letter is that he is also stepping down as co-CEO himself. If you're keeping track, Bridgewater is losing two co-CEOs, Dalio and Rubinstein, and gaining one, David McCormick, to go with the one who's staying, Eileen Murray. It lost another one last year, Greg Jensen. Dalio's letter notes that Bridgewater's transition to new management started seven years ago, and "we allowed for this transition to take up to ten years because we knew that getting things right would take some adjusting of the ways we did things and some trial and error." They were not kidding. Again, the willingness to spend years on this, and to publicly admit and correct mistakes, is utterly admirable, utterly in keeping with Bridgewater's professed values, and kind of goofy.

Dalio and Jensen, along with Bob Prince, remain co-chief investment officers. Dalio will also still be co-chairman (along with John Megrue, who replaced Craig Mundie in December), a role whose job he describes as "to make sure the co-CEOs are doing a good job." So it seems like an exaggeration to say that he is stepping down from Bridgewater management. He'll still run Bridgewater's investments, and he'll still be the boss of the CEOs, and he'll always be Bridgewater's spiritual guru and keeper of the Principles. He just won't be a co-CEO, but that seems like a temp job anyway.


This is cute: "Influential short-seller Jim Chanos says that he’s made the most money during Republican administrations." 

Perhaps his most famous short bet was exposing the massive fraud at Enron. He also gained notoriety for shorting Tyco International and WorldCom, and before that Baldwin-United. Enron, Tyco and WorldCom occurred during George W. Bush’s administration. Baldwin-United was a Reagan-era trade.

And of course if you were short subprime mortgages, or banks, or really anything, going into the 2008 financial crisis, you were making your money under a Republican administration.

Perhaps these are coincidences. Another way to think about it, though, is that generically Democrats are more pro-regulation, while Republicans prefer self-reliance and private-sector initiative. Under counterfactual Democratic administrations, perhaps, regulators would have stopped Enron or the financial crisis. (I mean, just go with it for a minute.) Under Republican administrations, though, the job of finding and punishing frauds was left to private industry, in the form of short sellers. Jim Chanos is sort of a private-sector substitute for financial regulation. I guess he has better incentives? And yet there seem to be efficiency losses.

Elsewhere, here is my Bloomberg View colleague Joe Nocera on Bill Ackman's Herbalife short battle.

People are worried about unicorns.

I may have to spin off a whole separate section for People Are Worried About Weird Stuff Happening at Uber. Here is Farhad Manjoo on how revelations about Uber Technologies Inc.'s "culture of sexism and sexual harassment," and the reactions to them, might "be the start of a deep, long-term and thorough effort to remake a culture that has long sidelined women — not just at Uber but across the tech business, too." Maybe? The weird stuff in this column didn't actually happen at Uber:

“This stuff is deeply entrenched,” Ms. Kapor Klein said, relaying a story she had recently heard about a group of programmers at a different tech company. “I heard about this engineer who said that what he and his friends do at work for fun is rate women job applicants according to who they wanted to marry, or who they wanted to kill, and there was a third thing.” Suffice it to say the third thing was not the women’s qualifications for the job in question.

Ooh ooh I bet I know what it was!

Elsewhere in Uber bashing, here is Timothy B. Lee on how Uber solves all its problems with money, which is not a long-term sustainable approach. As a consumer, I kind of hate this approach. Uber "attracts customers by offering them below-cost taxi rides," Lee writes, but that's not how it attracted me. It attracted me with convenience and certainty and the ability to get a car anywhere. I would pay more for that than I would for a regular taxi. Instead I have to pay less, and make up for it with intense feelings of shame and guilt. This seems like a general problem with the current generation of tech companies. They'll give you an incredibly valuable service for cheap or free, but they'll make you feel terrible about it. (Hi, Twitter!) I feel like there is a market niche for more expensive products without the baggage, but perhaps that doesn't scale.

Elsewhere, the chief executive of Hootsuite tweeted something rude at a Bloomberg reporter who wrote that Hootsuite wasn't a unicorn. And here's a tech dude who wants to park a cruise ship in San Francisco Bay and put homeless people on it.

People are worried about stock buybacks.

Over on Kinja, Felix Salmon is bracingly unworried about stock buybacks:

In an environment where there’s more than enough capital to go round, the Buybacks Bad crew have, in general, done a pretty bad job of making the case that companies would be likely to create significant extra economic growth were they to hold on to the money and try to reinvest it, rather than returning it to shareholders. The law of diminishing marginal returns is a strong one, and there’s always some point at which those returns fall below your cost of equity. It seems reasonable to assume that most companies are past that point right now.

What’s more, the whole point of buying a stock, whether it’s on the primary market or the secondary market, is that you hope to get back more money in the future than you’re investing in the present. A company which never returns any money to shareholders is a company which, on a basic DCF calculation, has no value at all.

Things happen.

Bankers Are More Upbeat About Banks. Drug Companies Block Shareholder Votes on Price Transparency Proposals. Wells Fargo: Top Executives Won’t Get Cash Bonus for 2016. Yahoo CEO Marissa Mayer Takes Pay Cut Over Security Breach. "Most discretionary fund managers think Python is a big snake." Donald Trump’s Labor Department Proposes Delaying ‘Fiduciary’ Rule. The private equity party is overcrowded. Business Schools Face Surge in Activism. RIP AIM, one of the few great internet applications, is dyingWormholes. Pizza shoes. Hong Kong beer pong. A new fossil shows ancient penguins were as tall as people for 30 million years. "A sheriff's deputy who was searching for a cow that was spotted on a Minnesota roadway on Monday night unexpectedly found the animal when he hit it with his patrol car."

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    Matt Levine at

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