Consultants, Culture and Speed Bumps

Also a Third Law of Insider Trading, Valeant, blockchain, pretend M&A and edible drones.

Investment consultants.

If you believe that investing skill exists and can be identified in advance, then you will want to hire skilled professionals to manage your money. This creates lucrative employment for the skilled professionals, but also for a lot of other people. You don't just need skilled managers to manage the money; you also need skilled consultants to find the managers, and skilled employees to hire the consultants and the managers. Business schools are needed to train the managers. A whole economic ecosystem exists, predicated on the notion that investing skill is a real thing that can be identified and measured.

This is no different from any other business, of course. If everyone thinks that dentistry is a science, there'll be employment opportunities for dentists, and dental practice managers, and dental insurers, and dental schools, and so forth.

But unlike with dentistry, it is perfectly respectable, these days, to believe that investing skill is worthless or imaginary, and that you should just index. And if you believe that, you can have one guy run a $35 billion pension by just putting it into index funds and hanging up when consultants call.

Those are different approaches! Here's a story about how Cambridge Associates, the investment consultant that is "one of the best-known purveyors of advice to endowments, foundations and the wealthy," laid off almost 50 people, as "the consulting model has faced pressure from increased competition that has driven down fees and from investors’ growing embrace of low-cost, passive index products." (Counterintuitively, "Cambridge Chief Executive David Druley on an internal call last week about the layoffs said Cambridge was increasingly transitioning from a consulting to an investment firm.") Elsewhere: "Asset Manager Deal Wave Has Just Begun."

Bank culture.

Here is David Zaring on the regulatory concern with "culture in financial services":

It is a strange regulatory tool. The Environmental Protection Agency does not spend a lot of time worrying about the ethics of oil refiners or power utilities. It just regulates their emissions. Nor are the country’s workplace safety rules structured around requirements for employers or co-workers to act ethically.

I think there are two things going on here. One is a widespread assumption that finance is distinctively unethical. If you think that "the business model of Wall Street is fraud," that banks are criminal syndicates, but also that we need to have banks, then, sure, you will want cultural changes. This is obviously populist: Most people are not that interested in the nuances of capital regulation, so telling them that you're going to raise capital requirements from 8 to 12 percent and eliminate the ability to rely on internal models for risk-weighting will leave them cold. But making bankers swear an oath not to do fraud any more -- as the Netherlands literally does -- is easy to explain and appreciate. 

But the other thing going on here is what Zaring identifies, which is that a lot of people are just mistaken about what Wall Street does. They think that Wall Street is in the advisory business -- for mergers or retirement accounts -- and therefore should be held to the same sort of professional fiduciary standards that we have for doctors and lawyers, who have to put their clients' interests first. But this is not a completely accurate description of Wall Street:

Banks, after all, do not provide merely services and advice to their clients. They also sell them a product: money, in various bundles, at a price. As salesmen as well as advisers, bankers make uneasy candidates for the sort of ethics rules of the professions. It is pointless to insist on a uniform ethic of client service when bankers sometimes occupy roles as trusted advisers, but at other times act as middlemen who operate between buyers and sellers of products — especially when bankers, like anyone else, are governed by the strictures against fraud and in favor of good faith.

You saw this after the financial crisis, when congresspeople asked bankers if they had a fiduciary business to the customers who bought their bonds. Of course not! You can't have a fiduciary duty to your trading counterparty. You have a duty not to lie to him, sure. But you are in obvious opposition to him on a bond trade: You are selling him the bond because he thinks it's worth more than you do, and every extra dollar that he pays goes directly to you. You don't expect a used car salesman to sell you the used car that best suits your needs, at the fairest possible price. You understand that he's trying to sell you the car he has, at the highest price he can get.

To be fair, this misunderstanding is partly Wall Street's own fault: If you hire a bunch of salespeople and call them "financial advisers" (or "tellers"), people might get the mistaken impression that they're fiduciary advisers.

Speed bumps.

Investors' Exchange LLC runs a stock exchange with a 350-microsecond "speed bump" to try to thwart some high-frequency trading strategies. When IEX filed to become a public stock exchange, NYSE Group Inc. screamed bloody murder, objecting to the Securities and Exchange Commission that IEX's speed bump would be bad for market integrity and would lead other exchanges to "similarly add an intentional delay," which "would be a step backwards in the development of the national market system." The SEC approved IEX anyway.

And so NYSE shrugged and proposed its own speed bump, in its NYSE MKT exchange (which it plans to rename "NYSE American"). I guess it changed its mind? Back in 2015, NYSE said that speed bumps are Bad, and IEX said that they are Good. Since then, IEX's view has prevailed, and NYSE has had a change of heart and decided that speed bumps are Good, or Good Enough anyway.

And then IEX filed a comment letter on NYSE's speed bump. What do you think it said? Hahaha of course IEX opposed NYSE's speed bump:

Ironically, NYSE is now proposing its own version of a speed bump, and it gives as the only justification that it wants to offer more choice in exchanges. But NYSE says nothing about its choices in putting forth the Proposal, how it thinks investors and the quality of the markets will be affected, or how MKT would compare in those respects from the three other exchanges it operates. Especially considering its prior statements, we think NYSE is required to provide a complete explanation to gain approval under the standards set by the Exchange Act.

I mean, I sympathize with IEX's calling out NYSE's cynicism. But IEX looks a little cynical itself, opposing NYSE's proposal to add a speed bump. (If speed bumps are good, why wouldn't you want more of them? If IEX can have a speed bump, why can't NYSE?) One thing that I like to think about equity market structure is that it is about plausible balancing of competing economic interests, and morality doesn't enter into it. A bunch of self-interested economic actors try to figure out how to most profitably serve a client base, and then they snipe at each other in SEC comment letters in the language of deep moral outrage.

Elsewhere: "Chicago Wants to Be a Hub for China Stock Trading."

Insider trading.

Nima Hedayati: not a Money Stuff reader.

The SEC’s order finds that through his work at an independent audit firm, Nima Hedayati learned that Fremont, Calif.-based Lam Research Corporation was making preparations to acquire Milpitas, Calif.-based KLA-Tencor Corporation.  The two companies manufacture equipment used in the creation of semiconductors. 

According to the SEC’s order, Hedayati proceeded to purchase out-of-the money call options in KLA common stock in his brokerage account as well as his fiancée’s brokerage account, and he also encouraged his mother to purchase KLA common stock. 

This violates at least the first two laws of insider trading: Don't insider trade, and if you do insider trade, don't do it by buying short-dated out-of-the-money call options. I would now like to promulgate a Third Law of Insider Trading, which is: If you do insider trade, don't do it in your mother's (father'saunt's, etc.) account. None of these laws of insider trading are, of course, laws, or legal advice. But insider trading with your mom's money is bad form.


Yesterday I wrote about the end of Pershing Square Capital Management's investment in Valeant Pharmaceuticals International Inc. After I wrote that, Pershing Square filed with the SEC about its sale; here are its Schedule 13D amendment, its trading annex, and its Form 4. The numbers are pretty close to my estimates. (Pershing Square sold its stock for $11, but managed to get out of its option combos at $47.35 instead of $49.)

A couple of people pointed out, though, that Pershing Square is not quite done with Valeant: There is still a class-action lawsuit against Pershing Square and Valeant for alleged insider trading in their joint effort to take over Allergan, which could end up leading to damages. I have been pretty sympathetic to Pershing Square's and Valeant's position in that lawsuit -- I think that trading on secret knowledge of your own intentions is obviously not insider trading -- but it's a tough question and they might lose, in which case Pershing Square's Valeant return could be even more negative. 

Blockchain blockchain blockchain blockchain.

Delaware, the state where most big U.S. companies are incorporated, is working on changes to its corporate law to allow companies to keep their shareholder records on the blockchain. The amendments are eye-wateringly boring:

Section 219, which currently requires the corporation to prepare and make a list of its stockholders and specifies the evidentiary effect of the stock ledger, is being revised to add a definition of the term “stock ledger.” As amended, Section 219(c) will define “stock ledger” as “one or more records administered by or on behalf of the corporation in which the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the corporation are recorded in accordance with [Section 224 of the DGCL].”

I guess every great revolution has to define its terms. Meanwhile Dubai is at the buzzwords stage, which I guess comes before the legal-definitions stage?

The initiative, which is part of the Dubai Blockchain Strategy 2020, announced by Dubai Future Foundation, is one of the first of its kind in the world. The strategy is focused on three areas: implementing blockchain technology in government services, supporting the creation of a blockchain industry through empowering startups and businesses, and leading global thinking on blockchain technology.

And here is a story about putting frequent-flyer miles on the blockchain that I found puzzling:

For consumers juggling an array of loyalty programs, blockchain could provide instant redemption and exchange for multiple loyalty point currencies on a single platform. With only one “wallet” for points, consumers would not have to hunt for each program’s options, limitations, and redemption rules.

But ... why ... what? If you put all the loyalty programs on one platform, so that anyone can use any rental-car company's points at any hotel, then how do they ... promote ... loyalty? Why not just use money? ("Thanks for flying with Delta. Here's ten bucks.") I guess the point is you'd have different loyalty consortia -- "Ultimately, we expect to see the development of four to six blockchain-based loyalty networks, each anchored by a major airline, a major hotel chain, or a group of smaller travel companies" -- but, as I find myself saying all the time, if you are building a closed system with a trusted central intermediary, the trusted central intermediary could just keep a list. Of frequent-flyer miles. Like it does now.

Elsewhere, "Bitcoin Price Recovers as True Believers Keep the Faith." And: "Divisive ‘Bitcoin Unlimited’ Solution Crashes After Bug Discovered." And a reader pointed out an issue with the story, which we discussed yesterday, about Brooklyn's artisanal solar-power blockchain: A proof-of-work blockchain, like the one used for bitcoin, might use more power than the solar panels can produce.

Happy Fed Day!

They're gonna raise rates. The drama comes later: "Fed’s Challenge, After Raising Rates, May Be Existential," writes Eduardo Porter, and really isn't that true of all of us? Elsewhere, the debt-ceiling nonsense is percolating again.

Aww, they're playing M&A!

Here is a heartwarming story about how law students who want to be corporate lawyers have long been jealous of competitive moot court opportunities for future litigators, but now they have a dealmaking competition of their own. It's the "Transactional LawMeet, an annual deal negotiating face-off," and it's adorable. Also this quote should be engraved over the doors of every law school in America:

Elizabeth Roberts, a 24-year-old student at University of Southern California Gould School of Law, said she initially wanted to work after graduating with children going through the family-court system. Then she learned more about business and finance, including through the deal competition, and was hooked.

“I went to law school thinking I wanted to help people,” she said. “I’d like to tell myself I’m still going to help people” by becoming a mergers-and-acquisitions and debt-finance lawyer.

Yep, that's what happens!

People are worried about unicorns.

Canada Goose Holdings, the goosicorn -- half goose, half unicorn (narwhal?) -- "is set to price its initial public offering Wednesday afternoon, a person familiar with the offering said, just as the northeastern U.S. digs itself out of a late-winter snowstorm." That is fortuitous timing, if your model of public stock markets is that they can pay attention only to the immediate present. "It is currently snowing," says the stock market, "and therefore it will always be snowing, so demand for expensive snow jackets will always be high." This is a popular model, and difficult to argue with, though what does it say about money-losing Snap Inc.'s successful IPO? 

Also "Buzz Aldrin: Cycling Pathways to Mars" is a virtual reality experience sponsored by Soylent that premiered at South By Southwest, which feels like something I should mention here and never think about again.

Food Stuff.

A year ago, we spent a lot of time in this space discussing the latest trend in modern food-delivery systems, which was: the bowl. "Even if I had the option to eat off a plate, I would eat out of a bowl," is what all the "hot, skinny people" were saying. "A bowl is much more flexible and open to interpretation compared to a plate." These are real quotes. But the bowl is so 2016, and the hot new food-delivery system for spring 2017 is the edible drone, "parts of whose frame could be made of anything from honeycomb to compressed vegetables."

Mr Gifford, a professional adventurer who was part of the logistics team for Richard Branson’s attempt to circumnavigate the earth by hot air balloon, said his drones could deliver supplies within seven metres of accuracy. A fully loaded version could feed 100 people for a day at a cost of £225-£250 each, he said.

I laughed at that paragraph until I choked, though Twitter eventually informed me that that price tag is probably per drone, not per person. (Here is a factsheet.) Obviously this technology should be combined with burrito delivery drones. You can conveniently order dinner for yourself and 50 of your friends: You get a burrito, and they all get to gnaw on an airplane made of compressed vegetable matter. Put it on the blockchain and you've got yourself a billion-dollar idea. 


A Bay Area food-technology startup says it has successfully developed the world’s first chicken strip grown from self-reproducing cells without so much as ruffling a feather.

If only science could find a way to make chicken meat fly.

Things happen.

Trump Paid $38 Million Tax on $150 Million Income, Return Shows. Steve Bannon traces his economic populism to his father's money-losing sale of AT&T Inc. stock in 2008. Kevin Drum points out that that story makes no sense. The Dealmaking State. James Donovan Is Latest Goldman Sachs Executive to Join Trump Administration. U.S. Officials Plan to Unveil Charges Tied to Yahoo Hack. Women in finance work just as hard as men — and are more likely to get fired. The Most Important Player in the AIG CEO Resignation: Carl IcahnSafe assets: a review. Steven Davidoff Solomon on Chevron deference. Konnichiwa Amsterdam: Japan Banks Seek New Home After Brexit. Sports Betting Is Starting to Look a Lot More Like Wall Street. When the Children Crashed Dad’s BBC Interview: The Family Speaks. "Historical memorabilia related to General Douglas MacArthur were used by the participants in sexual acts."

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