Money Stuff

Performance Reviews and Bank Historians

Also marijuana vending machines, fake scams, long headlines, rich people and unicorns.

Perpetual performance reviews.

A consensus has developed over the last few years that annual performance reviews are terrible. This consensus is entirely correct. But the human-resources industry seems not to have drawn the obvious conclusion (get rid of them), but rather the Peter-Thiel-Pyrrhonian-skeptical conclusion: What if the problem with performance reviews is not that they're terrible, but that they're not terrible enough? So JPMorgan Chase & Co. is augmenting its annual performance reviews with continuous performance reviews: "Moments after a meeting or project is completed, a manager can ping participants for reactions on how a specific employee performed," and "workers can also request written critiques or give unsolicited reviews about their colleagues."

Executives at the bank found many workers, especially millennials, crave constant feedback instead of a traditional once-a-year performance review.

“By listening to you, we learned that our employees want to know where they stand at all times,” Donnelly said in the memo. The web-based application will allow employees “to request and receive feedback from anyone, anytime.”

No, millennials, on this you are wrong. The correct approach is to put your headphones in, stare at your computer, and assume that everyone loves you until you are fired, or retire. You can see why I don't work at Bridgewater Associates. Or JPMorgan I guess! Anyway they'll keep doing the annual reviews. ("Annual evaluations will now be broken into four categories," blah blah blah.) This is strictly additive. What if Bridgewater is right about the future of work? What if the future of labor is entirely emotional labor? What if, pretty soon, the computers will do all of the economic activity, and we'll just sit around evaluating each other? 

Elsewhere in miserable workplace experiences, "It's OK to Cry at Work -- Sometimes." And "American International Group Inc. Chief Executive Peter Hancock, apparently having lost the faith of the insurer’s directors, quit at a board meeting Wednesday where his future was being discussed." Doesn't that sound wonderful? Imagine doing that in the middle of your performance review.

Boss: You've had an outstanding year, you got the top rating in every category, people love you and we're giving you a big raise.
You: Thanks.
Boss: Now I am going to turn to a few minor constructive comments that a few people had to make your performance even better.
You: I quit, bye.

This is what I don't understand about Bridgewater: Isn't the point of having a lot of money that it frees you from the need to sit around and listen to people evaluate your performance? 


What if, instead, the future of work is money-center banks hiring doll historians to craft family narratives? Hahaha all of those words are real. Here's a story in which I learned that:

  1. American Girl Brands, a unit of Mattel Inc., employs a historian to make its dolls more historical.
  2. Abbot Downing, the ultra-high-net-worth division of Wells Fargo & Co., employs "a team of 13 family governance and education consultants and historians," I guess to make its financial advice more historical.
  3. The doll historian is joining the high-net-worth history team.

Wells Fargo "said in a release that Mr. Speltz’s experience is key in crafting narratives to engage children and their families." Is that like ... "we've traced your lineage back through 12 generations of e-commerce royalty"? Do the families come in and say "you know what, we're rich enough that we should be dukes, can you make that happen?" Will he use dolls in the narratives? I suppose that flattering rich people has always been a core function of private wealth management. And better to engage the children with history than with, like, sports cars.

Elsewhere in Wells Fargo and historical memory, "some senior executives within the retail bank were demoted or had their responsibilities curtailed" this week, "even as the firm continues digging into the causes of its sales-practices scandal."

Fake weed sales.

A good thing about 2017 is that a company that claimed to sell marijuana vending machines got in trouble with the federal government for (allegedly) not selling marijuana vending machines:

According to the SEC’s complaint, Medbox provided marijuana consulting services and claimed to sell vending machines known as “Medbox” devices capable of dispensing marijuana on the basis of biometric identification.  The SEC alleges that Vincent Mehdizadeh created a shell company called New-Age Investment Consulting to carry out illegal stock sales and used the proceeds from those sales to boost Medbox’s revenue.  Medbox allegedly issued press releases headlining the phony revenues as record earnings to legitimize itself as a viable commercial operation when in fact nearly 90 percent of the company’s revenue in the first quarter of 2014 stemmed from sham transactions with New-Age.

I appreciate the effort that Medbox, Inc., allegedly put in here. The classic pump-and-dump scheme is like:

  1. Make false claims about how good your company is so people will want to buy the stock.
  2. Sell stock.
  3. Trouser money, flee to Belize.

According to the Securities and Exchange Commission, Medbox's scheme was more like:

  1. Give stock to a disguised affiliate.
  2. The affiliate sells the stock to the public.
  3. The affiliate gives the proceeds of the stock sale to the company.
  4. The company books the proceeds as sales revenue, pretending that it sold marijuana vending machines or whatever to the affiliate.
  5. The company announces the revenue, which makes people want to buy the stock.
  6. Go to step 1 I guess?

It is financial engineering, of a sort. "Financial engineering" can of course be fraud, but it's a classier fraud than just making up numbers in a press release. (It's more likely to fool an auditor, for one thing, which is alleged here.) I also appreciated the effort that Mehdizadeh, Medbox's founder and majority shareholder, and Bruce Bedrick, its chief executive officer, allegedly put into documenting their fraud via email and text message:

As Mehdizadeh put it in a text message to Bedrick, “the only thing we are really good at is public company publicity and stock awareness. We get an A+ for creating revenue off sheer will but that won’t continue.”

In many contexts "an A+ for creating revenue off sheer will" would be an entirely good thing -- you want salespeople like that! -- but an SEC fraud action is not one of them. Also, for an alleged fraud, Medbox seems to have had a fairly humane workplace culture, one that was respectful of work/life/prison balance:

Mehdizadeh offered to pave the way for Bedrick to leave the company in June 2013, writing in an email, “Sometimes creative financing is necessary to fund start-ups and I am at peace with that. On the other hand, you have a wife and kids to contend with so for you these matters take on a different meaning and may simply be too much for you to reconcile.”

Meanwhile, the SEC filed an amended complaint in its case against two men accused of running a Ponzi scheme involving "Hamilton" ticket reselling, which we've talked about before. I mention the amendment only because the SEC refers to the case as "Scam-ilton," which seems like something you should know about.

Tie color.

We talked yesterday about a fake scam that the Alberta Securities Commission pulled off as part of an investor-education program, in which every detail -- down to the front man's "bio and the colour of his tie -- was extensively researched." I guessed that the tie was red. Alison Trollope, the ASC's Director, Communications & Investor Education, informs me that it was blue. Blue is, "based on 'the psychology of colour,' the colour of trust." I clearly have a lot to learn about scamming.

Nonetheless, I said yesterday that it would be fun to run fake scams like this on a freelance basis, and several readers suggested that I set up a Kickstarter to fund the costs of renting a room and catering a breakfast. (I would supply my own blue tie.) I should do this. It would be hard to find a better late-capitalist art project than crowdfunding fake securities frauds. 

Investors can't read.


Using a database of company-earnings-announcement press releases, I find that markets underreact to news with more complex headlines, with title complexity leading to less turnover, lower volatility, and underreactions. These effects are stronger on days when the benefits of reading news may be perceived as relatively lower, such as slow-news days and when the VIX is low, and when investors are more tired, such as press releases released in the afternoon or on Fridays.

That's from a paper called "Complexity Aversion when Seeking Alpha" by University of Chicago Booth Ph.D. student Tarik Umar (summarized here), who also found that Seeking Alpha readers were more likely to read reports with shorter titles. None of this is exactly a surprise if you've worked in journalism (catchy headlines are good! Friday afternoons are for news dumps!), but you'd like to hope that market efficiency means that investors will sit still and read even boring information, even on a Friday. But, nope. "These results suggest that cognitive effort affects market behavior," writes Umar, "even for investors in a high-stakes setting with strong interests in stock specific news."

It's a reason to feel good about artificial intelligence in investing. Complexity and nuance are challenges for both humans and algorithms, but if natural-language-processing algorithms are reading the news to make investing decisions, they probably won't be turned off by sheer headline length. They might prefer it: "Consolidated Widgets Beats Estimates on Higher Asian Revenues and Gross Margin Expansion" is a more boring headline than "Widgets Good," but it gives a computer a lot more to work with. Certainly the computer won't lose focus and start thinking about its weekend by lunchtime on Friday. 

Family offices and private markets.

I wrote yesterday about family offices and the "hollowing out of the investing middle class," in which wealthy individuals and families are increasingly buying whole companies, even as regular investors are increasingly choosing passive index funds. "Nobody buys stocks any more," I exaggerated: "Now, either you buy an index, or you buy a whole company." This connects to another favorite notion of mine, that private markets are the new public markets. Here is a draft paper called "Unicorns, Guardians, and the Concentration of the U.S. Equity Markets," by law professors Amy Deen Westbrook and David Westbrook, along similar lines:

In recent years, in conjunction with rising inequality in the United States, there has been a decisive shift from broad-based ownership of firms to much more concentrated forms of ownership in both private and public markets. Private equity markets are concentrated by legal definition: relatively few people are qualified to participate directly. Yet private equity has become the preferred method of capital formation, epitomized by "unicorns," firms valued at over $1 billion without being publicly traded. Public equity markets are dominated by funds with trillions of dollars under management, and small staffs, who are in effect "guardians" for the portfolios that ensure long-term stability for individuals and institutions, notably through retirement and endowments. The governance of the U.S. economy has to a surprising degree become a matter of grace: the nation now relies on a small elite to make good decisions on its behalf about the allocation of capital, the governance of firms, and the preservation of portfolio value. This consolidation of ownership rivals that of the late 19th century, and may challenge the law to address the equity markets in new ways.

A pseudonymous Twitter user also had the following thoughts (which I've slightly edited for the non-Twitter format):

Firms go public for a lot of different reasons, but a major reason to choose public vs. private is size -- the former are big and liquid. Some projects need capital that exceeds the capacity of private wealth. Not to mention coordination issues in private markets. But if an economy has extreme wealth concentration, there the collective firepower of millions of savers in mutual funds, pension funds and exchange-traded funds can be less than that of a few high-net-worth families. You already see that in emerging markets -- especially in Asia where wealth inequality is high, there are fewer public firms.

High-net-worth families faced the intergenerational issue -- passing wealth to kids may not be easy, and some may want more liquidity, but people are having fewer kids. Wealth concentration plus fewer intergenerational wealth coordination issues are likely to lead to fewer public firms over time, even in the West.

More generally, you need stocks to trade wealth for middle-class people without much wealth. The rich can just trade companies. If your wealth exceeds the minimum viable size for a firm, why do you need other shareholders? And if you do, go to the other rich guy!

What if broad direct public ownership of corporations -- the "upper-middle-class financial capitalism" that I referred to as "the foundational story of the American financial system" -- is historically anomalous, and in decline? 

People are worried about unicorns.

How great is the unicorn economy? If you invest money in WeWork Cos., it will give some of your money to some other startup. Not invest it in the other startup, just give it away:

Unlike most startups, WeWork Cos. doesn’t seem to struggle with raising money. Soon it’ll start spreading some of its cash around to smaller startups, partly in the hopes of luring them to become WeWork customers.

The New York-based co-working giant said it’ll give away $20 million in cash prizes to entrepreneurs and small businesses in a series of competitions called the Creator Awards. 

We've talked before about how Slack Technologies Inc. self-consciously raises too much money, and then invests the excess in other startups. That is plausibly an arbitrage: Fundraising is too easy for Slack, and too difficult for other startups, so it intermediates their fundraising and pockets the spread. But WeWork is raising money at -- let's assume -- easy terms and then investing it at no terms. It's not pocketing a spread there. Presumably it's mostly advertising -- there's a reason business-to-business startups like Slack and WeWork are the ones giving money to other startups -- but it is fun to imagine it as a sort of Enchanted Forest communism, in which fundraising is from each according to its abilities and to each according to its needs.

Elsewhere, RideAustin is a ride-hailing startup (in Austin, Texas, where Uber is banned) that is a nonprofit, donates to local charities, pays drivers well and "is moving close to profitability." And Airbnb Inc. is apparently an untriginticorn.

People are worried about bond market liquidity.

"The board of the International Organisation of Securities Commissions (IOSCO) has rejected industry claims that liquidity in secondary corporate bond markets has declined," so that's good news.

Things happen.

Individuals Tiptoe Further Into Long-Running Stock Rally. Corporate Insiders Haven’t Been This Uninterested in Buying Stocks Since Ronald Reagan Was President. UBS Reduces Bonus Pool, Ermotti Pay in 'Challenging Year.' AmEx’s Lending Push Goes Beyond Cards. Oil Traders Are Having Some Fun Again as Price Bubble Bursts. Benefits and Risks of Central Clearing in the Repo Market. More evidence in the case against Luxembourg. How Creditors Affect Resource Allocation at Firms in Technical Default. RadioShack Successor Enters Bankruptcy After Revival Sputters. Aswath Damodaran: Why Good (Bad) Companies can be Bad (Good) Investments. Ten Things to Know About Companies That Don’t Pay Taxes. Pay-to-stay jails. A profile of genius Bloomberg designer Steph Davidson. "Buffy the Vampire Slayer" is 20 years old. Florida mountaineering. Miami lawyer’s pants erupt in flames during arson trial in court.

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