Research Prices and Artisanal Energy
Macquarie Group Ltd., like a lot of banks, is experimenting with research unbundling:
The Australian bank introduced a service this year that helps solve two problems facing asset managers: they have to trade a lot before getting access to research from big brokers; and regulations taking effect next year will prohibit that kind of arrangement. The new a la carte system, called “Macquarie Dimension,” provides access to research reports, corporate meetings and phone calls with analysts on a pay-as-you-go basis alongside its usual equity-research offerings.
Fine, yes, that is the probable future of research. But this troubled me:
Fees will be in line with booking time with consultants and lawyers. Pricing won’t be “the $10,000 for a call” that’s been reported.
As a former lawyer, I will say that many lawyers view hourly billing as the original sin of the legal business. Banks are smart: If you charge clients based on the size of their transaction, rather than the amount of time you put into it, you can both charge them more and make them feel better about paying you. Your bill is psychologically linked to value ("look at this big deal we did for you!") rather than drudgery ("look at how long we spent drafting this contract you didn't read!"). And the incentives are better: You get paid for creating a lot of value quickly, rather than for creating a lot of work slowly.
Research has always been more ethereal than either. Analysts charge neither for their time nor for their value; they charge nothing, in exchange for an expectation that the clients will send trading business to their bank. I've called that "hardly a business at all," and it is, but still. Sometimes a call will be worth $10,000 to a client, or much more, and if you charge $500 for it you're going to feel a bit silly. The old system -- where analysts gave their calls away for free, but gave the $10,000-value calls to the clients who'd do at least $1 million of commission business -- probably handled that issue better than flat hourly billing will. (To be fair, Macquarie Dimension is aimed at "mid-tier clients" who wouldn't be getting the $10,000 calls anyway.)
Also: a la carte corporate access? Oversimplifying, here's the current U.S. system:
- Company invites research analyst to meet with management.
- Research analyst writes nice things about company.
- Research analyst brings investor to meet with management.
- Investor sends lucrative trading business to analyst's bank.
There is a flow of value there. The company has something the investor wants: management's time and insights. The bank obtains that valuable thing in exchange for favorable research coverage. The bank then gives the valuable thing to the investor in exchange for trading business. There are exchanges at each stage. But when I describe it like this it sounds laughably cynical, and indeed this description of what companies are giving and getting is too cynical. The system works because the exchanges are implicit and intangible. Analysts don't say to companies, "we will give you favorable research coverage if you will meet with our clients." (Sometimes companies do say that they won't meet with clients of banks who give unfavorable coverage, though.) And they don't say to investors, "we will bring you to a meeting with this company if you pay us a million dollars." An economy exists, but it is a gift economy, one in which it is crass to ascribe precise dollar values or to demand quid pro quos too explicitly.
But if you abandon that gift economy, you end up in a weird place. If an analyst brings an investor to meet with a company manager, and then sends the investor a bill for the meeting -- shouldn't the company get a cut? If banks are directly, explicitly selling access to corporate managers, why shouldn't the companies sell that access themselves? And if there is a direct, explicit price placed on corporate access, and big investors pay that price, what does that tell you about securities regulations that prohibit "selective disclosure by issuers of material nonpublic information"?
Artisanal energy trading.
This story about the "Brooklyn Microgrid," a local solar-energy trading collective, has all the things: twee Brooklyn small-batch-ness, solar power, modern "smart grid" energy, "peer-to-peer" trading, the blockchain. Most of all, though, it is about whether and how modern computer and financial technologies can replace trust in institutions:
The idea is to create a kind of virtual, peer-to-peer energy trading system built on blockchain, the database technology that underlies cryptocurrencies like Bitcoin.
The ability to complete secure transactions and create a business based on energy sharing would allow participants to bypass the electric company energy supply and ultimately build a microgrid with energy generation and storage components that could function on their own, even during broad power failures.
If you have bitcoin, you don't need banks for payments. If you have peer-to-peer lending, you don't need them for loans. If you have a "virtual, peer-to-peer energy trading system built on blockchain," you don't need utility companies. I mean, you do! (Personal rooftop solar panels probably aren't supplying all of the microgrid's electricity all of the time. Sometimes it rains in Brooklyn.) But you can talk like you don't. "It takes a central procurer — in this case, historically, the utility — out of the mix," says a former regulator, "and really sets the market where they’re not buying and selling to the utility but they’re identifying each other’s need and willingness to buy and sell."
I don't know. The bull case for all this peer-to-peer blockchaining is that it recreates the capitalist virtues on a local, tangible scale. You trade energy or loans or bitcoins with your neighbors directly, without the intermediation of all-powerful institutions, and you learn to trust and rely on them. Commerce is stripped of its bureaucratic facelessness and becomes what it once was, a way to build community bonds. You get all the social benefits of a small-business economy -- trust, reputation, local knowledge, customization, warm feelings -- with all the efficiency of modern technology and blockchains.
The bear case is that institutions are actually useful, and that trust in institutions -- not just in direct transactions with your neighbors -- is valuable. A bank is not just an annoying rent-seeking middleman between lenders who want to lend and borrowers who want to borrow: By turning the lenders' loans into "deposits," it makes them safer; it turns trust in institutions into economic value. (The banking system, with a central bank and deposit insurance, is what makes deposits safe and allows us to overcome the collective action problem of making risky investments.) A utility company is not just an annoying rent-seeking middleman between people whose roofs are too sunny and people whose roofs aren't sunny enough. It also runs big power plants! The reason I can use more electricity than I generate is not that I can borrow my next-door neighbor's extra electricity; it's that we as a society have enough trust in collective action that we create the corporate structures and government regulations that allow big utility companies to build big power plants.
Elsewhere: "SoFi's Loan Losses Pile Up as Even Wealthy Borrowers Default."
BlackRock Inc. is going "to put new pressure on companies to explain themselves on issues including how climate change could affect their business as well as boardroom diversity":
Michelle Edkins, set to oversee the outreach effort as head of a 30-person team, said BlackRock might want to hear from companies about how they are assessing the risk that climate change may pose to their operations. Edkins cited the example of how rising ocean levels could swamp a real estate company's valuable beachfront property.
One well-known issue in asset management is the problem of specialization. (Harvard's endowment wrestled with it recently.) You're a big firm and you want to be able to invest in a bunch of different asset classes. So you hire experts in all of them. But then you have a problem, which is that each expert wants to do more of the thing you hired her to do, because that is good for her influence and job security. If you hire someone to be the U.S. tech equities analyst, then gosh darn it she is going to find you some U.S. tech equities. Maybe U.S. tech equities are not a great investment right now, but that's not her concern: Her concern is to make sure that you're buying U.S. tech equities, because if you're not, what are you paying her for?
Similarly, if you hire a 30-person governance team, and you ask them "what's up with governance?," they are not going to reply "it's fine." They are going to do governancey things: It's their job, for one thing, and they're the sorts of people who chose governancey jobs, for another. Are they going to do the governancey things that you want, and that are good for your overall investment portfolio? Quite possibly! Larry Fink, Blackrock's chief executive officer, does seem genuinely committed to good governance, environmental and social goals, and "long-term sustainability." More generally, though, there seems to be a separation between the notions of "good governance" held by portfolio managers (who tend to like stock buybacks and limited takeover protections) and those held by governance teams at large asset managers (who tend to be more interested in environmental and social issues). I wonder if some of the modern consensus about governance comes less from the economic desires of investors and more from the professionalization of the governance teams.
Everything is seating charts.
To figure out where its employees should sit, the mobile payments startup Square is hiring a full-time employee.
The “capacity coordinator,” as Square calls the job on its website, “focuses on workplace seating management.”
The job listing is a wondrous thing; the capacity coordinator's duties include:
Manage Office Space: maintain seating records; communicate with external and internal partners; facilitate new hire seat assignments; perform periodic audits.
Manage physical seating: facilitate departure desk cleanups; plan, coordinate, and execute all team seating moves.
Act as a resource on seating management and Office Space for Square’s global Office Management team.
Imagine performing the periodic audits. You'd wander the office with a clipboard, finding people who are in the wrong seats and telling them to move. Then you'd go back to your desk to type up the audit report. "We achieved 97.3 percent seating-chart compliance this quarter, up 4 percentage points quarter-over-quarter, driven by the new 'It's Your Seat -- Sit In It!' compliance initiative in the Sales department." And a tech company offers so many opportunities for innovation:
You: What if we let people choose their seats, but charged them for good ones?
CEO: Go on.
You: You want to sit near the window? Fine, but you have to bid for it with a reduced salary.
CEO: Like surge pricing, but for desks.
You: I've already built an app.
I am working on my novel about someone who is hired as the seating coordinator at a tech company and then, through Machiavellian manipulations and keen insight into the psyche of the modern business person, ruthlessly consolidates power, disposes of her rivals, facilitates their departure desk cleanups, and ends up as the CEO.
Elsewhere in office space.
Goldman Sachs Group Inc.'s capacity coordinator is re-coordinating capacity:
The Goldman Sachs Asset Management unit is poised to move about 500 employees from desks scattered across three floors to one with a new layout, seating them shoulder-to-shoulder so they can more easily interact, according to Andrew Williams, a spokesman. The move at the firm’s 200 West St. headquarters will be completed by the end of April.
I hope "shoulder-to-shoulder" is literal, though it probably isn't. (GSAM's three floors, high up in the headquarters, are each smaller than its new space on the third floor.) I used to work at Goldman, and before we moved into 200 West Street all anyone could think or talk about was whether we'd lose any personal space on the new trading floor. When you spend 14 hours a day at work, and work is a six-and-a-half-foot stretch of indistinguishable desk space, losing six inches of that space can be devastating. I guess there are compensating amenities:
The new space will feature a coffee bar, two pantries and a bank of phone booths for holding private conversations, the presentation shows. It also will include a 70-person conference room, where chief investment officers will hold a morning meeting, and eight other client conference rooms.
I like that modernity, in the form of the cell phone, killed the phone booth, but postmodernity, in the form of the open-plan office, will bring it back.
Private markets are the new public markets.
Well here is a perfect headline: "Buyout Firm Buys $800 Million of Assets From Itself." The firm is Investindustrial, a European buyout firm, and it's raising a new fund to buy assets from its old fund. The problem is that the old fund had a 10-year life, and the firm wants to hold the assets for longer. Fine, yes, that makes sense. There are obvious conflict-of-interest problems -- the more the new fund pays, the higher the old fund's performance fees, for one thing -- but I suppose they are manageable, and "investors representing 55% of the money in the original fund have returned to the new fund."
But there's something a little strange about perpetual buyout ownership. Investindustrial is rolling over its funds "as it responds to greater competition for assets from institutions such as sovereign-wealth funds, which don’t have restrictions on how long they can own companies." Well yes but. Nobody has restrictions on how long they can own companies, except private equity funds. You can just go buy Alphabet Inc. stock and hold it forever. Once, perpetual public ownership was the norm, and buyout funds staged brief interventions to restructure companies and prepare them to be sold again. ("Historically, buyout specialists took pride in their ability to turn around the fortunes of ailing companies and sell them for a big profit within five years.") Now private equity firms aspire to a perpetual horizon, because the difference between public and private markets has eroded. Similarly, venture capital funds used to finance tech startups for a few years before selling them to the public. Now companies stay private longer, and eventually you're going to see a venture capital firm raising money to buy its unicorns from itself.
Yes, there's a euro ETF.
Yesterday, in talking about whether a bitcoin exchange-traded fund is really necessary, I said "there's a reason that no one has invented a 'euro ETF' that just buys euros and chucks them in a vault." Many, many emails later, I am now intimately familiar with FXE, the Guggenheim CurrencyShares Euro Trust. I suppose it's not technically an ETF (it's a grantor trust rather than an investment company), and it doesn't put the euros in a vault (it puts them in a bank account at JPMorgan), but sure, it undermines my point that a euro ETF doesn't exist because it doesn't make sense. It does exist! This will teach me to argue nonexistence from uselessness. (Also I'm sure it's useful!) It has about $264 million in assets; by comparison, one estimate about the bitcoin ETF was "that at least $300 million would come into any approved ETF in the first week, as a convenient door to bitcoin opens up to investors."
People are worried about unicorns.
"Uber has produced 18 episodes of a podcast warning drivers about the dangers of joining a union," which sounds ... so boring?
“As I’m sure you know,” says Brooke Steger, the general manager for Uber in the Pacific Northwest, in episode 18 of Uber’s podcasts, “We at Uber do not believe the Teamsters can serve as a fair and effective representative for drivers.”
“Brooke, I agree,” responds a driver who is identified only as “Frederick” and uses the flat, steady tone of someone who is reading a script. “As a small business owner…I don’t want to hand over my flexibility and freedom to anybody, especially an organization that has fought so hard to keep Uber driver partners off the streets of Seattle.”
I guess if you are driving an Uber all day you're going to run out of episodes of "Odd Lots" and need something to listen to, but there really is a whole world of podcasts out there. Have you tried Mike Duncan's "Revolutions"? It may have some relevance to disgruntled Uber drivers. Elsewhere: "Intel Buys Mobileye in $15.3 Billion Bid to Lead Self-Driving Car Market."
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