Money Stuff

Crossing the Rubicon and Gagging Shkreli

Also: $123.47, trustees, warehouse receipts, TLAC, Twitter and creeps.

The importance of a classical education.

William Cohan has a hilarious and horrifying story about Goldman Sachs Group Inc. alumni in the White House, in which Goldman people lob anonymous and erudite insults at their former colleagues who went to work for Donald Trump. Here, for instance, is a description of Dina Habib Powell:

Powell, one Goldman executive tells me, was always thought of around the firm as “content lite,” when it came to knowledge about finance, which is about as brutal an observation as can be made about someone at Goldman, where intellect and revenue generation are prized above all else.

Oh man, "content lite" is the most Goldman of all insults, a way of saying "dumb" that is both deniable and business-jargon-y. (Also: "intellect and revenue generation" are pretty different things!) But Powell actually comes off quite well in the profile, which is more than can be said for Treasury Secretary Steve Mnuchin, who apparently had to listen to all the mean things that people said about him and then respond to them:

“He’s in way over his head,” says one Washington insider. Another former Goldman partner adds, “I think his homework is being checked by Gary.”

There’s clearly friction between Cohn and Mnuchin. The Washington insider says that Mnuchin seems insecure in his role, is not a team player, and has so far not hired the best possible team at Treasury. Mnuchin dismisses such criticisms.

Steve Bannon, meanwhile, gets written off in just a paragraph as not really Goldman:

In the White House, Steve Bannon is not considered part of the Goldman team. He was at Goldman, in the mergers-and-acquisitions department, but for only four years, in the late 1980s. 

I guess now is the time for my usual disclosure, that I worked for Goldman Sachs for four years and left as a vice president, same as Bannon. So: barely at all? Maybe I should stop disclosing it. Meanwhile here is what a former Goldman director had to say about Gary Cohn:

The board consensus was that Cohn wasn’t well rounded enough to lead the firm. “We’d talk about how we’d ‘crossed the Rubicon’ and he wouldn’t know what we were talking about,” says a former Goldman board member. “But he was unusually bright, knew markets, had huge character, and was straightforward. If you think I’m blunt, he’s right from the brain to the mouth.”

See, kids? Even if you become president of Goldman Sachs, your career will still be held back if you are not familiar with the details of Julius Caesar's. Also, though: What Rubicon had Goldman crossed? I feel like most companies' board-level discussions do not involve the phrase "crossed the Rubicon," due not to a lack of classical education but to a lack of drama. What were they up to over at Goldman? I hope it was like:

Lloyd Blankfein: So it's unanimous: We will package bad mortgages and sell them to customers while secretly betting against them and also controlling all the world's governments.

Board Member: Man, we have really crossed the Rubicon here.

Gary Cohn: What's that?

How's Martin Shkreli doing?

He's fine, really, but the people prosecuting him for fraud are finding the experience pretty stressful and wish he would stop saying mean things about them:

On Friday, during a lunch break at court, he stopped by a room where several journalists were working for an on-the-record chat. He called the prosecutors on the case “junior varsity,” argued that a woman who had testified about her tangled investment in his hedge fund was not a “victim,” asked the journalists how they thought the trial was going and said his critics “blame me for capitalism,” according to CNBC. Only when Benjamin Brafman, his lawyer, entered and said, “Martin, can I see you a minute?” did Mr. Shkreli stop.

In papers filed late Monday, federal prosecutors argued that Mr. Shkreli’s public statements risked tainting the jury. They asked Judge Kiyo A. Matsumoto to restrict Mr. Shkreli from further public statements, and to consider partial sequestration of the jury.

Oh come on! They are trying to put him in prison! And all he wants to do is make fun of them a little, before they do! (Also, he is hitting them right where it hurts: in the micro-hierarchy of prestige in which U.S. federal prosecutors in the Eastern District of New York worry that people look down on them for not being in the Southern District.) Look, that is a reasonable tradeoff: They are trying to use the immense power of the state to lock him in a cage for years, and he is making fun of them. The poor babies! Let him make fun of them. It is probably not helping his case, but that is his problem, not theirs. Fortunately they have not asked for a gag order against me, so I am free to say: This is a junior varsity move.

Elsewhere: Apparently teen trader Jacob Wohl is "already a mini-star in conservative media"? And on Friday the Securities and Exchange Commission "filed fraud charges against the clandestine founder of a purported Bitcoin platform and a chain of co-working spaces located in former bars and restaurants, alleging that he bilked investors in both companies while hiding his connection given his checkered past with regulators in the U.K." 

$123.47

If I told you that Apple Inc., Amazon.com Inc., Microsoft Corp., Alphabet Inc., and a bunch of other prominent tech stocks all closed at exactly $123.47 on Monday, you'd be like, "yeah, that sounds right," right? Like I mean if I told you that every stock closed at $666.66, thousands of birds fell dead out of the sky onto the floor of the stock exchange, all the floor traders started speaking in Akkadian, and the water fountains ran with blood, you'd be like "sure, yeah, that's 2017 for you." We are beyond the point where news can be surprising any more; these days stunning portents of doom don't even move the VIX. But, no, the $123.47 thing was just a data error, and "no actual trades were affected by the glitch." Never mind!

Don't sue the trustee.

The basic way that finance works is that there are pots of money and people with claims on those pots of money. And sometimes bad things happen, and the pot of money gets smaller, and the people with claims lose money, and they feel sad and aggrieved. So they decide to sue someone. Often, if the pot got smaller, it's because someone affiliated with it did something wrong, and the pot of money is legally responsible. So the claimants sue the pot of money. But this is usually a big mistake: If they win, the pot of money will pay them money for their lawsuit, which will reduce the amount of money in the pot, which was their money to begin with. So they are no better off, but they will also have to pay lawyers, so they are in fact worse off. This is so obvious that you wonder why people keep missing it, though I suspect that part of the answer is that the lawyers really want them to miss it.

This describes essentially all shareholder litigation: A company does a bad thing, its stock drops, its shareholders sue, and the company gives them money, which was their money anyway, except that now a third of it goes to lawyers. But there are more complicated versions. Here, for instance, is a story about some residential mortgage-backed securities that lost money in the financial crisis, which led the holders to sue the trustee of the securities, Wells Fargo & Co. You might think that the trustee -- Wells Fargo -- is distinct from the pot of money -- the mortgage-backed securities -- but the trustee is indemnified by the pot of money, so the bondholders suing the trustee ended up sort of suing themselves:

Wells Fargo & Co. surprised investors this week by withholding more than $90 million due to buyers of pre-crisis residential mortgage-backed securities.

The bank said it invoked its right as trustee to hold back funds to cover legal costs. The 20 transactions had a principal balance of $540 million and are among more than 2,000 deals involved in a lawsuit brought by bondholders including BlackRock Inc. and Pacific Investment Management Co. in 2014 to recover losses from the financial crisis.

A good rule of thumb is that you should try not to sue anyone whose legal expenses you are also paying. 

Blockchain blockchain blockchain.

So I have to say that warehouse receipts -- the documents proving the existence and ownership of base-metal stocks in warehouses, which are used to obtain financing for those metals -- seem like a good use case for the blockchain. There is no centralized issuer or repository of the receipts, they are used by a bunch of different parties who have no particular reason to trust each other, and they apparently get forged a lot. So:

There are some signs that the industry is moving toward a distributed database known as a blockchain that would improve the way ownership is verified. In March, Natixis teamed up with commodity trader Trafigura BV and information technology developer IBM Corp. to set up a system backed by a digital ledger. The platform would be open to all users and any attempt to alter an invoice or use a document more than once would be obvious to all participants.

It is not a perfect solution, since you still have the problem of the nexus between the paper/blockchain/whatever receipt and the actual pile of metal. My immutable unforgeable cryptographically secure blockchain record proving that I have 10,000 pounds of aluminum in a warehouse is not much use to a bank if I then smuggle the aluminum out of the warehouse through the back door. Still it is an improvement over a paper-based system, plus eventually you can hook up the doors to the blockchain ("of things"!) and make it physically as well as cryptographically tamper-proof.

Elsewhere!

Everything will be tokenized and connected by a blockchain one day. Scalability is the crux of that journey at the moment. Ethereum is orders of magnitude off from being able to support applications with millions of users at the moment.

And: "Seven signs of over-hyped Fintech."

European banks.

Here is "Equity versus bail-in debt in banking: an agency perspective," from the European Systemic Risk Board, arguing that total loss-absorbing capital of big banks should consist mostly of debt:

We find that, once TLAC is large enough so as to make default on insured deposits relatively unlikely, equity should only represent slightly above one quarter of optimal TLAC (or a little over 4% of total assets), with bail-in debt thus constituting the bulk of the loss-absorbing buffers. This is because, conditional on a large TLAC, private benefit taking is more tempting and socially costly at the margin than risk shifting. Intuitively, once the bailout subsidy associated with insured deposits is negligible, residual risk shifting does not involve large deadweight losses: it has mostly a redistributional impact (from bail-in debt holders to equity holders) which is compensated, in equilibrium, via the pricing of bail-in debt.

The intuition here is that, on the one hand, the difference between equity and bail-in-able debt doesn't matter that much: Either way, the point is that you have private investors who are able and willing to bear a bank's losses without impacting taxpayers or insured depositors. But on the other hand, a bank with more outside equity dilutes the equity incentives of its insiders, and the less they own of the bank the more likely they are to make bad decisions to benefit themselves rather than the bank. This is the opposite of what most people think, that the way to make banks safer is to increase their total amount of equity.

Elsewhere: "Italy Formally Takes Control of Monte dei Paschi." And here is Jonathan Algar on the rescue of Veneto Banca SpA and Banca Popolare di Vicenza SpA ("V&V"; SRB is the Single Resolution Board and BRRD is the Bank Recovery and Resolution Directive):

V&V has set a precedent for banks avoiding SRB jurisdiction in situations where there is not sufficient bail-inable debt to facilitate resolution. The decision reinforces the bank-sovereign nexus that the BRRD was constructed in part to be the first step on the road to severing.

Twenty theses about Twitter.

Here are Eric Posner's, which strike me as good but slightly askew. "People sign up for Twitter for two reasons: to obtain information and to exert influence," reads the first thesis, and I think this is correct. "Twitter serves these functions poorly," begins the second, and this is more debatable but surely mostly true. But I would insert a sort of Thesis 1a: "People actually use Twitter to hang out and waste time with their friends," which renders most of its behaviors more legible than Posner's view does, and moots some of his later theses. 

Also here are Theses 19 and 20:

19. The sense of validation that Twitter provides is as a potato chip is to a meal. A Frankfurt school theorist would say that the tweet is a commodified form of social engagement in Late Capitalism. Its effect is to alienate its users while immersing them in advertisements.

20. But Twitter doesn’t even make money for the capitalist class. It’s a black hole of value-destroying technology for all concerned.

One thing that you see in the Casual Late Marxist school of internet social criticism is this notion of Late Capitalism operating automatically, of capital perpetuating itself without the need for human decisions. That seems to ... inadequately describe Twitter? Some people made a dumb way to hang out with their friends, and some dumb people like me used it to hang out with their friends in dumb ways, and also capital exists. Explaining the social engagement through the lens of capital seems to miss the point.

People are worried that people aren't worried enough.

Goldman Sachs research analysts are so worried that people aren't worried that they're calling for a war:

It’ll take more than central bank tightening to shake volatility from its yearlong slumber, according to Goldman Sachs Group Inc. A large shock such as recession or war is usually required.

They've really crossed the Rubicon with that call.

People are worried about unicorns.

What people are worried about in the Enchanted Forest these days is not whether unicorns are overvalued or whether venture capitalists will have access to liquidity in their investments, but whether those venture capitalists are creeps. The answer is yes, at least some of them are creeps, which you can tell because they write Medium posts with titles like "I’m a Creep. I’m Sorry." It is actually a fascinating development: Powerful men have been credibly accused of sexual harassment before, of course, and it has even led to career consequences for them, but this is the first time I can remember when multiple powerful men were accused of harassment and immediately, publicly, said "ooh, you're right, sorry." It's not perhaps the progress you would want to see on sexual harassment, but it is a sort of progress.

In general I think the desire for power is undertheorized in modern economic life. There is this sort of bland background assumption that people who work in lucrative fields are mostly interested in money, and that anything that they do that doesn't look money-motivated -- sexually propositioning women who come to them for funding, say -- can be explained by personal idiosyncrasy or some vague idea of "industry culture." But if you think that people become venture capitalists, or investment bankers, or financial newsletter writers, or anything, purely for the money, you are missing out on most human motivation. Being a VC is interesting: There is science or whatever, and you get to see a lot of products, and meet a lot of people, and go to parties. But also a central feature of the job is that young people come to you and ask you to make their dreams come true, and you do, or don't, your call. That is power, and an industry that offers power will attract people who are interested in having and using power, and if some of those people use that power for illicit purposes, that is not exactly surprising.

Things happen.

Activist Targets Clariant in Bid to Scuttle Huntsman Deal. Ericsson chairman Leif Johansson to step down under pressure from activist. "To us, the failed Greenlight proposal stands for the proposition that financial engineering for its own sake is not an effective activist strategy." Beware the Wall Street wolf in constructivist clothing. Factor Picking is the New Sector Picking. J.P. Morgan’s Worldpay Move Signals Loosened Curbs on Banks. Bear Market for Oil Caused by 'Fake News,' Says Raymond James. Funds With $10 Trillion Targeted by EU Alert on Letterbox Firms. China changes tack on ‘social credit’ scheme plan. Why Some Men Don’t Work: Video Games Have Gotten Really Good. Baby Armadillo Drinks Milk From Tiny Dish. Baby elephant gleefully slides down hill at rescue center. Combining Diacritical Marks Movie. Whole Foods 'chicken salad' recalled due to being tuna salad. You can now snort chocolate — but should you?

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    Matt Levine at mlevine51@bloomberg.net

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