Mortgages, Traders and Fiduciaries
Here's a quiz: In what year did a 25-year-old Calvin Klein salesman turned mortgage broker say this about how he got into the subprime mortgage business?
“I knew a mortgage was a loan for a house,” said Mr. Boyd, who was recruited by his boss, Jon Maddux, after selling him a Calvin Klein suit at a local outdoor mall. “I came in just a blank slate.”
If your guess was "2006, that is the most 2006 thing that anyone could ever say," I see your point, but nope, it was now, it's happening now:
Mr. Boyd, a 25-year-old account executive at FundLoans in a beach town outside of San Diego, is at the cusp of efforts to bring back an army of salespeople who once powered the mortgage industry and, some say, contributed to the housing crisis.
There's a popular belief that you can tell a bubble by the amateurs involved: The longer a bubble has gone on, and the closer it is to popping, the less sophisticated the players will be. "You know it's time to sell when shoeshine boys give you stock tips," but also, you know it's time to short the mortgage market when strippers are taking out five mortgages. But we are at the very beginning of the subprime recovery -- sorry, they are called "nonprime" loans now, and they totaled about $22 billion in 2016, versus about $1 trillion in 2005 -- and already the outdoor suit salesmen are flocking to it.
Which is fine. You can think, a little bit, about the 2008 crisis as being the shoeshine-boy story in reverse. The problem was not so much that the strippers were getting mortgages as that those mortgages were then packaged into securities and used as references for synthetic collateralized debt obligations. Mortgage brokering may not require much more knowledge than that a mortgage is a loan for a house; the fact that salespeople came into that business as blank slates -- in 2007 or 2017 -- isn't a problem. The problems came when the more sophisticated players got involved; as long as subprime mortgage brokering stays at the "it's a loan for a house" level, there's only so much damage it can do.
If you voted for Donald Trump because you were hoping that he would roll back post-crisis financial regulations, well, that was maybe a little bit at odds with his public messaging, but I'm sure you had your reasons. But you must be a little bit disappointed now? For instance, Trump's Treasury Department is about to release a report on banking rules that will call for some regulations to be cut, but that will preserve the Volcker Rule, which forbids proprietary trading at big banks. Meanwhile, the Department of Labor's fiduciary rule for retirement advisers went into effect on Friday, even though no one in the Trump administration seems to have wanted it to, mainly because they just sort of forgot to do anything about it:
The resilience of the so-called fiduciary rule is partly attributable to delays in appointing senior officials at the Labor Department, the rule’s creator, who would be capable of unwinding a major regulation so close to its implementation, according to industry representatives and consumer advocates involved in the process.
It is still early going, but it's starting to seem like a lot of the big controversial post-crisis rules might survive, whether for reasons of philosophy or of incompetence.
Or they might not. But both of those rules have some self-fulfilling properties. A lot of financial rules can be adjusted just by turning the dial, requiring more or less capital or allowing more or less leveraged lending. But the Volcker Rule and the fiduciary rule are not aimed at quantities; they are intended to change the culture of the industries that they cover. People worried that banks were too risk-loving, that they were dominated by traders who got outsized rewards for taking on big risks, so they banned proprietary trading and those traders slowly seeped out of the banks. People worried that retirement brokers were too conflicted, that their commission-based economic model encouraged them to recommend bad expensive products that paid them kickbacks, so they banned those kickbacks and the brokers are already changing their business models.
Eventually those rules might be repealed, but changing the culture back won't be so easy. (Not that repealing the rules will be especially easy!) The longer the banks go without brash proprietary traders, the harder it will be to hire them back; the longer brokers operate on a fee-only model, the harder it will be for them to switch back to commissions.
Jessica Pressler profiles Gary Cohn, current head of Donald Trump's National Economic Council and former right-hand man to Lloyd Blankfein at Goldman Sachs Group Inc., whose preparation for working in Washington includes having friends who say stuff like this:
“After Gary arranged for Lloyd to get cancer, things seemed to be looking up for him,” observes one former colleague, in arch reference to the Shakespearean drama that had been playing out in the Goldman C-suite. “But unfortunately, he bounced back.”
Yes, right. Cohn of course knows his own way around incongruous quiet menace:
“I solve his business problems,” he told me during a 2011 interview (the last time I spoke with him), in which he juggled a baseball bat between his thighs.
I imagine him using his thighs to juggle the bat so he could keep his hands free to make air quotes -- "I 'solve' his 'business' 'problems'" -- though I suppose it probably didn't go down like that. Anyway that sentence was about Blankfein, not Trump, but now Cohn is tasked with solving Trump's business and economic problems. Trump does not make it easy for him, and actually neither does Blankfein these days:
A source close to Cohn suggests that his view of his opportunities within the administration have been evolving. “As with others in the West Wing who hoped to become moderating influences, it’s becoming increasingly clear that the president is utterly uncontrollable,” this person said. “At this point, are you helping? Or are you just enabling these highly controversial policies?” Or, no policies at all. “Just landed from China, trying to catch up … How did ‘infrastructure week’ go?” Blankfein trolled him on Twitter after a week of Comey testimony had blown up his agenda.
Ahahaha Blankfein still has fewer Twitter followers than I do, but he's already much better at it.
Elsewhere in Shakespearean drama, and trolling, and banks, and politics, Bank of America Corp. dropped its funding of Shakespeare in the Park's production of "Julius Caesar" because Caesar dies in it.
IEX Group Inc. is very easy to understand as a business. It offers investors some useful tools to trade stocks without being picked off by certain high-frequency trading strategies. It also has great marketing: Even beyond the usefulness of the tools, it has been fairly successful at positioning itself as the exchange that keeps investors safe from high-frequency traders, as opposed to the other exchanges with their maker/taker fees and colocation and so forth. If you sell people a product that they want, and do a good job of advertising that product, then you can make a lot of money.
But if you try to understand IEX not as a business but as a revolutionary vanguard that is changing how U.S. stocks are traded, you run into the difficulty that it isn't:
Nearly a year after winning approval to become an exchange, it is struggling to become more than a niche player.
Made famous by Michael Lewis’s 2014 book “Flash Boys,” IEX hasn’t made a dent in the businesses of the New York Stock Exchange, Nasdaq Inc. and Bats, each of which handles roughly one-fifth of U.S. equities volume. In May, it had a market share of 2.2%.
It turns out that being the nice exchange is rather a niche business. It's a perfectly respectable niche business -- 2.2 percent of the U.S. stock market is still billions of dollars of trading per day -- but as a revolutionary vanguard it is a bit disappointing. Also there is one obvious problem with the niche:
IEX argues it shouldn’t be judged by its displayed prices. It says it is more important to offer quality executions to long-term investors, a core group that IEX says other exchanges have forgotten.
In IEX's telling, stock exchanges cater to high-frequency traders and ignore long-term investors. You can understand why they might! High-frequency traders trade with high frequency. Long-term investors invest for a long time. Whatever you think about the moral or economic virtues of those two activities, you have to remember that stock exchanges are selling trading. The more you trade, the bigger a customer you'll be. A giant index fund that buys stocks once and holds them forever might be good for your portfolio, but it is not all that interesting to a stock exchange. And even if IEX corners the market on long-term buy-and-hold investors, while leaving flighty high-frequency traders to other exchanges, then you'd still expect it to have a pretty small market share. The high-frequency traders just trade more often than the long-term investors.
People are worried that people aren't worried enough.
“The price of constructing hedges against a fall in equity markets are at their lowest levels ever, while equity markets are trading at all-time highs,” said Deepak Gulati, chief investment officer of Argentiere Capital and former head of equity proprietary trading at JPMorgan Chase.
“Historically low levels of volatility in options markets are providing the opportunity to construct long volatility positions with completely asymmetric pay-offs.”
Next time someone tells you that markets are complacent, try responding, "no, markets are providing the opportunity to construct long volatility positions with completely asymmetric pay-offs." Those two claims mean almost exactly the same thing! That is how it usually goes, in markets. If a thing is too high, that is worrying for all the people who own it, but good for you if you want to short it. If implied volatility is too low, that is worrying for all the people who have organized their lives around an expectation of continued low volatility, but good for you if you happen to be in the market for a long volatility position with a completely asymmetric pay-off.
People are worried about unicorns.
A big worry at uber-unicorn Uber Technologies Inc. has been rather a dearth of talent at the top: It lacks a chief operating officer, chief financial officer, general counsel and other important positions, and sometimes seems to be run at the personal whim of oddly immature Chief Executive Officer Travis Kalanick. So of course the solution might be to get rid of one a senior executive, and also to give Kalanick a time-out:
Uber Technologies Inc.’s leadership crisis intensified Sunday as the board of directors met to weigh issues including a possible leave of absence for Chief Executive Travis Kalanick and the potential departure of his closest lieutenant.
To be fair, the time-out was Kalanick's idea:
Mr. Kalanick, 40, proposed the idea of taking time off after a boating accident last month that killed his mother and sent his father to the hospital. Given those circumstances, Mr. Kalanick, who has worked nonstop since Uber’s founding in 2009, had told people he might need a break. Still, if he were to take leave, it could be perceived as a repudiation of the aggressiveness that he has brought to Uber.
Doesn't it seem like a great idea? Everyone understands that Uber needs some change, needs some adults in the room to rein in Kalanick. But it's hard to find someone who wants to waltz in, shake Kalanick's hand, and say "hi, I'm your adult." Presumably Kalanick would give that person a wedgie and retire to his room to sulk. But what if Kalanick weren't there? What if Kalanick took a few months off, Uber hired some adults, they set to work doing adult things, and then by the time Kalanick got back Uber was a well-oiled non-controversial profit-making (why not?) machine? He'd walk in, refreshed and ready to go, and say "hey guys, let's write a sex-party memo." And the COO would say "no that is not appropriate," and the general counsel would agree, and the head of human resources would give him a stern talking-to, and they'd all have each others' backs and the support of the board. The central problem with rebooting Uber's culture is that the culture comes from Kalanick, and he is the boss; the central problems with getting rid of Kalanick are (1) he has super-voting shares and a pretty good lock on the board and (2) he is the visionary behind Uber and might actually be necessary to its success. But getting rid of Kalanick temporarily and voluntarily might give the company time to fix itself and bring Kalanick back as a regular CEO, ensconced in a regular structure of regular corporate behavior.
Meanwhile, here is a Recode story about Uber that features this grim description of former executive Eric Alexander:
“He’s coin-operated,” said one person who has worked with Alexander, using a term often attributed to those sales- and deal-focused employees. “You put money in and he spits it back out with contracts and revenue and whatever you need.”
Said another person: “He’s a Tasmanian devil and lives out of suitcases. I don’t think he ever gets off a plane.”
People are worried about bond market liquidity.
This is about monetary liquidity, so it doesn't really count, but I cannot resist the headline "Bond Bull Market Bolstered By ‘Liquidity Supernova.’" I wouldn't want to be bolstered by a supernova; that sounds dangerous.
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