Bank Meetings and White-Collar Crime
Where do you go if you have a sense of grievance, a fondness for cliché, and too much time on your hands? The obvious answer is "the internet," but true connoisseurs, and those who prefer to do their shouting face to face, know that the best answer is "corporate shareholder meetings." Nothing particularly happens at these meetings -- all the big institutional shareholders who own most of the shares vote ahead of the meeting by proxy, so the meeting itself is just a formality -- but they're a rare opportunity to show up at a random hotel ballroom and yell at some rich people.
Yesterday Wells Fargo & Co., which has inspired a lot of anger recently with its fake-accounts scandal, had its annual meeting at a Marriott in Florida, and it was everything you could hope for from a bank annual meeting:
Board Chairman Stephen Sanger and Chief Executive Timothy Sloan repeatedly asked Mr. Marks to sit down and wait until the question-and-answer period, and told him he was being disrespectful to the board. When they told Mr. Marks he was out of order, he retorted that “Wells Fargo has been out of order for years.”
Burn! They threw him out of the meeting. I hope he yelled "You can't handle the truth!" as he was being dragged away. "I'm mad as hell and I'm not gonna take it any more!" "What we have here is a failure to communicate!" "Luke I am your father!" Incidentally Bruce Marks "said he has been kicked out of several other bank meetings over three decades of activism." This is a thing he does. I wonder how long he's been working on the "[BANK NAME HERE] has been out of order for years" line.
He's not the only Wells Fargo shareholder who got to trot out a long-treasured zinger:
Take for instance Brandon Rees, the deputy director of the Office of Investment for the American Federation of Labor and Congress of Industrial Organizations, who aired his grievances by colorfully comparing directors to mushrooms that are "kept in dark and fed horse manure."
The directors were all re-elected. Sanger got the votes of only 56 percent of the shareholders, and Enrique Hernandez, the head of the board's risk committee, got only 53 percent, "a stinging rebuke rarely seen in corporate elections," but still a majority. The directors will keep their positions, despite failing to stop the fake-accounts scandal. The stinging rebuke, like so much of shareholder democracy, was purely symbolic; shareholders' principal mechanism to discipline directors is not to fire them or cut their pay, but to embarrass them.
There is a lot of talk about the role of incentives in improving banks' behavior, but it always seems to take a narrow view of what counts as an incentive. Basically: money, and prison. The idea is that you shouldn't pay bankers for taking risks, and you should take money back from them if their risks turn out poorly, and if the risks turn out very poorly you should put them in prison. Fine. But humans are complicated, and draw motivation from many confusing sources. We talked yesterday about how employees of failed banks are weirdly proud of it; even ones who lost their life savings have warm feelings toward their banks, not despite their failures, but because of them: The experience of all being in it together, of going down with the ship, was itself positive.
Meanwhile nothing bad happened to Wells Fargo's directors except that they had to sit through a shareholder meeting. But they had to sit through a shareholder meeting! It's not nothing. Amazingly, Marks's out-of-order suggestion was this, according to Wells Fargo spokesman Oscar Suris:
“He was basically dictating to the audience, and the rules he was dictating was that each of the board members stand up and explain how we got to the retail sales practices matter,” Mr. Suris said. “That’s not what the plan for the meeting was. That’s not according to the rules of the meeting.”
But it's actually a great idea! If bank bylaws required directors to stand up one by one and explain their role in a scandal to wild-eyed heckling shareholders, that could have powerful incentive effects.
Elsewhere in banks and incentives, here's the Bank for International Settlements on "How post-crisis regulation has affected bank CEO compensation":
Second, the analysis shows that the affected banks have made the variable elements of CEO compensation less responsive to measures of short-term performance, while more negatively correlated to measures of risk. Third, we find that CEO compensation in investment banks has became much more sensitive to risk measures than in the case at commercial banks.
White collar crime heat map.
Here's a very cute project from The New Inquiry: a block-by-block heat map of where white-collar crime is committed. It comes with an extremely deadpan methodology white paper. "Fig. 4: Example of features in a landscape that create unique behavior settings for white collar criminal activity," reads the caption on a stock photo of skyscrapers. It is a parody and reductio of real-life predictive policing efforts that use machine learning technology to try to predict street crime, one that highlights the racial and class issues in many of those efforts.
If you zoom out on the heat map to look at the U.S. as a whole, you get what looks like a population density map; Boca Raton and Long Island don't have any particularly white-hot intensity. But the fun comes from looking at the granular data. My neighborhood, for instance, is painted pretty red; I am apparently at grave risk for breach of fiduciary duty, failure to supervise, or failure to report or incorrect reporting. Bloomberg's offices are in a high-risk zone for defamation, employment discrimination based on age, and failure to supervise. The Lipstick Building also seems to have a high risk of defamation, whereas I would have thought that the fear there would be of Bernie Madoff.
Most of these things are not ... crimes? The model used "data provided by the Financial Regulatory Authority (FINRA) to compile incidents of financial malfeasance dating back to 1964"; Finra is not a criminal law enforcement agency, and most of the malfeasance that it tracks is not, in the normal sense of the word, "crime." (Also: defamation?)
But that is the point. The deep message is that if you define criminality based on your negative perception of some disliked group, then your criminals are going to look like that group. If you assume that rural white people with guns are hunters and urban minorities with guns are gang members, then your predictive policing efforts will look for guns in cities rather than forests. If you assume that Wall Street is an industry whose business model is fraud, then your predictive policing efforts will look for fraud in midtown Manhattan. In both cases, it is at least plausible that the group perception leads to the definition of criminality, rather than the reverse. What makes you a criminal is not doing a certain objectively defined sort of act; it's being a certain sort of person.
The white paper goes on:
Crucially, our model only provides an estimate of white collar crimes for a particular region. It does not go so far as to identify which individuals within a particular region are likely to commit the financial crime. That is, all entities within high risk zones are treated as uniformly suspicious. Recently researchers have demonstrated the effectiveness of applying machine learning techniques to facial features to quantify the “criminality” of an individual. We therefore plan to augment our model with facial analysis and psychometrics to identify potential financial crime at the individual level. As a proof of concept, we have downloaded the pictures of 7000 corporate executives whose LinkedIn profiles suggest they work for financial organizations, and then averaged their faces to produce generalized white collar criminal subjects unique to each high risk zone. Future efforts will allow us to predict white collar criminality through real-time facial analysis.
It is a joke, but it's a good joke!
Dole is back.
It seems like just yesterday that I was writing about the litigation over Dole Food Co.'s leveraged buyout, though actually it was two months ago. That buyout closed in 2013, but it had an exciting afterlife: In 2015, a Delaware court ruled that David Murdock, Dole's chief executive officer, had sandbagged shareholders about the value of the company so that he could buy it on the cheap, and ordered him to pay more than $148 million in damages. And then this year everyone came back to the court to discuss the fact that Dole somehow had more shares than it had, and to figure out what to do about that. And they figured it out and now, boom, Dole has filed for yet another initial public offering. I'm sure someone will sue about that too. The new corporate life cycle is: Go public, remain public until you can settle your IPO-related lawsuits, go private, remain private until you can settle your LBO-related lawsuits, repeat forever.
Murdock takes the "repeat forever" part pretty seriously; he took Dole private in 2003 and 2013, and took it public in 2009 and now. It is a fascinating approach to being a public company: Theory would suggest that the CEO should go public every time public markets overvalue his company, and go private every time they undervalue it, but most CEOs just don't have the energy to devote to constantly timing the market like that. As an admirer of efficiency, I am impressed that Murdock does, though I suppose as a shareholder you might be less impressed. (Why give money to a CEO who is a constant market timer, and who last time was found by a court to have underpaid his shareholders in going private?) Though his timing has not been impeccable: The 2003 buyout was for $2.3 billion, the 2009 IPO was at a $1.1 billion valuation, and the 2013 buyout was for about $1.6 billion. He's been buying high and selling low. This time looks better, though: He bought the company at a valuation of about 10 times adjusted earnings before interest, taxes, depreciation and amortization of about $160 million, and it is going public with around $215 million of adjusted Ebitda, so he seems to have done well out of it.
Alpha and profit.
Here's Greenlight Capital's first-quarter investor letter, which warns of a bubble driven by a belief "that traditional valuation metrics no longer apply to certain stocks," but never mind that, gaze on these two wonderful sentences:
Our longs were profitable, though they went up a bit less than the market. Our shorts generated losses but added alpha, and gold gave us a small profit in macro.
So Greenlight provided profits, but not alpha, from its longs, and alpha, but not profits, from its shorts. It was good at picking stocks to go down, though they went up, and bad at picking stocks to go up, though they also went up. The most interesting thing about the asset management business is that performance evaluation is hard. It shouldn't be! It is the most quantifiable industry, the one with the most data points and the most easily observable benchmarks. And yet it is a perpetual mystery trying to figure out who adds value, and how much.
Here's a Farhad Manjoo article about Facebook Inc.'s fake-news problem that includes this blandly terrifying quote from Mark Zuckerberg:
“There’s a social infrastructure that needs to get built for modern problems in order for humanity to get to the next level,” he said. “Having more people oriented not just toward short-term things but toward building the long-term social infrastructure that needs to get built across all these things in order to enable people to come together is going to be a really important thing over the next decades.”
What if ... what if the current level of humanity is the right level? What if I don't want to get to the next level? What if human history isn't a video game at all?
People are worried about unicorns.
"Investors have cut the price they’re willing to pay for Uber stock on the secondary market by about 15% in recent months to a level that values Uber at around $50 billion," reports The Information, "according to a broker, a sign of how the recent onslaught of negative news has affected the company." Uber Technologies Inc. is my favorite example of the fact that private markets are the new public markets: Now you can be a massive multinational corporation with global name recognition and raise billions of dollars from institutional and retail investors while still remaining, technically, a private company. But some of the negatives of being public still creep in. For instance, if you have billions of dollars of stock outstanding and an active trading market, and are constantly in the news, your stock price is going to start reacting to news. And then people are going to start using it as a measure of how you're doing.
Elsewhere, Cloudera's down-round initial public offering might not be quite as down-round-y as it seems. And "Palantir settled a lawsuit brought by the Department of Labor last year alleging a pattern of discrimination against Asian-American job candidates," agreeing to pay $1.66 million and hire eight people who were involved in the lawsuit. And some startups actually have human-resources departments. And despite some misgivings, "technology has flourished more under Mr. Trump than any other industry, save banking."
People are worried about stock buybacks.
Josh Brown points out that buybacks are down 30 percent from last year, without any obvious consequences. If your theory was that buybacks were all that was propping up a stock market that had gotten away from fundamentals -- well, that seems to be wrong. If your theory was that buybacks were a symbol of short-termism and the American corporation's lack of ambition -- well, do you feel better now? I have to say that I feel like I'm reading more about flying cars now than I was a year ago. Maybe there is some correlation.
People are worried about bond market liquidity.
Oh hey another bond trading platform:
After more than two years of work, the startup she runs is set to go live Tuesday, with the goal of directly connecting buyers and sellers of older Treasuries and Treasury Inflation-Protected Securities.
The company is targeting a massive but thinly traded segment of the U.S. government-bond market, in which liquidity has suffered as post-crisis regulations dimmed dealers’ appetite for acting as middlemen. While off-the-runs represent about 98 percent of the $14 trillion in Treasuries outstanding, transactions in the debt constitute just about 30 percent of the market’s $500 billion in daily turnover.
My instinct on this stuff tends to be that it's hard to fix a lack of dealer liquidity by setting up an all-to-all electronic trading platform. If lots of people wanted to buy and sell Thing X, then it would be profitable for dealers to connect them. The fact that the dealers aren't acting as middlemen suggests that there just aren't many natural trades to get in the middle of.
This is nominally a newsletter about finance, but I have a longstanding interest in food trends, because the most important sociological facts in modern America are found on the menus of fast-casual restaurants. But there has been an alarming convergence with my other interests, because the food trend of the moment is not sauce or bowls or whatever -- not things that are actually food-related -- but rather unicorns. Not, that is, venture-backed private technology companies with valuations of at least $1 billion. And not, as far as I can tell, mythical horned horses, either. Just, like, pastel sparkly gunk. Here is an Eater list, "Behold the Plague of NYC Unicorn Foods," which features a glitter cocktail, a mermaid bagel, a unicornolli, and an assortment of other horrors. And here is an anonymous Starbucks worker on the Unicorn Frappuccino:
What is so amazing is that the mania around the drink actually turned in into a unicorn. A dream. A promise. An unreal thing. Because, for the majority of customers, the unicorn didn’t exist. They saw pictures and heard talk of it — but when they showed up to witness (and ingest) it, there was nothing to be found.
That was probably for the best, for them.
Credit Suisse to Raise $4 Billion as Swiss IPO Plans Dropped. Standard Chartered shares climb after bank nearly doubles profits. Trump has a plan to change the tax code to make himself much, much richer. Obama's $400,000 Wall Street speaking fee will undermine everything he believes in. GOP Bid to Gut Dodd-Frank Renews Debate Over Breaking Up Banks. Banks Get Serious About Moving Jobs to Frankfurt as Brexit Looms. European Bank Executives Push Back at Regulators. Why do asset prices move? Derek Jeter and Jeb Bush Are Said to Move Closer to Purchase of Marlins. Johnny Depp Says Former Business Managers to Blame for His Financial Woes. America’s Rich Get Richer and the Poor Get Replaced by Robots. "A 2015 case study of an unnamed, high-profile consulting firm found that rather than ask for formalizing flexible schedules, men at the firm simply made their own schedules without telling their bosses or coworkers." United Airlines Reviewing Death Of Giant Rabbit. "How exactly the golf balls found their way into hash browns is still a mystery." "It’d be nice to leave a legacy somewhere—you know?"
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