Gardening leave
If you quit your job at Bank X to move to Bank Y, you will probably have to spend some period of time on gardening leave, during which Bank X will pay you your salary and in exchange you won’t do any work for either bank. (This is to reduce the chances that you bring useful inside information from Bank X to Bank Y, and also to make it less attractive generally for Bank Y to hire you.) It is arguably a little unclear, though, what “work” means. Like you probably shouldn’t be lead adviser on a merger while you’re on gardening leave, or put on a suit and show up at Bank Y’s offices every day.
But a lot of the real work of an investment banker consists of having dinner with old friends who happen to be chief executive officers of public companies. It is a relationship job, and if you are good at it it hardly feels like work, and it probably wouldn’t look much like work to a court either. So I am sure that lots of very senior bankers keep in touch with their old clients during their gardening leaves, not to pitch deals or sell the capacities of their new employers or anything as mercenary as that, but just because they have spent their professional lives developing a social group that happens to include a lot of clients. Staying in touch with those friend-clients seems perfectly natural, and is also good for business.
I didn’t quite know how to feel about the news that Andrea Orcel’s falling-out with Banco Santander involved a dispute about whether he should go to Davos:
In recent years, Ana Botín, executive chairman of Santander, has been the sole executive representing her bank at the elite gathering in the Swiss mountain resort. Mr Orcel had also been a regular fixture representing UBS, where he was head of the investment bank until September when his appointment as chief executive of Santander was announced.
Mr Orcel offered to attend in a low-key capacity and said he would not take part in any panels or television appearances, instead using the gathering as an opportunity to catch up with clients, one of the people said.
But Santander counselled against his participation given that he was still on six months of gardening leave at UBS, another person said, and Mr Orcel reluctantly agreed not to attend.
Conferences like Davos are of course hugely useful for investment bankers, who get to meet with lots of very powerful people in a short time, and also to signal their own importance to those powerful people. At the same time … if as the result of some wizard’s curse I became the sort of senior banker who went to Davos every year, and if I quit my job to go to a new bank shortly before Davos one year, I am pretty sure that not having to go to Davos that year would feel like a huge perk. “So sorry, of course I would love to go to Davos this year, but can’t, gardening leave, oh well,” I would say while suppressing whoops of joy. Obviously this is one reason why I did not make it all that far in banking, while Andrea Orcel did. Imagine! He wanted to go to Davos, not as part of his job—he was between jobs in a legally enforceable way—but because all of his friends were there.
Anyway, yes, I feel like if Orcel went to Davos as a Santander representative, even just to ski with his old buddies, that would probably count as “work,” but I can see how he thought it was debatable.
By the way, the Orcel/Santander/UBS story just keeps getting weirder. Initially it seemed like Santander was willing to hire Orcel and make up a lot of the deferred compensation that he was leaving behind at UBS, but expected UBS to let him keep some, and when UBS declined and Santander learned the whole amount it would need to make up, it balked. There is some truth to that, but now it seems Santander knew all along roughly how much money it might have to pay, and agreed, and Orcel actually agreed to give up some money when UBS was unhelpful (“and did not see the reduction in pay as a deal-breaker”), but ultimately Santander backed out mostly because it came to understand how embarrassing the big number would be:
The Madrid-based bank said it had decided it could not hand him such a large sign-on package due to the political environment in Spain, where the centre-left Socialist party governs with the anti-establishment party Podemos.
The dramatic U-turn has prompted Mr Orcel to consider taking legal action against the bank.
On the one hand, yes, I can see how handing tens of millions of euros to a newly hired bank CEO might be awkward under a Socialist government. On the other hand, I can sympathize with Orcel’s view that they should really have figured that out before he quit his old job to come work for them.
Bill Gross
There are two competing stories of Warren Buffett’s talent as an investor. One stresses his knack for finding good companies at good prices; this is a story of Graham-and-Dodd securities analysis, of reading 10-Ks all day, of investing in companies that he can understand. This is all stuff that anyone could do, with sufficient hard work and dedication, but no one who analyzes Buffett this way concludes that he’s nothing special. Lots of people work hard all day and look for companies with deep moats and good management teams; the fact that Buffett has had decades of sustained outperformance by following this simple obvious strategy suggests some sort of preternatural talent for it.
The other story stresses structural advantages that Buffett has that you don’t. Buffett has locked up lots of long-term patient capital and gets cheap leveragefrom running an insurance company. Stocks often go up just because he announces that he has invested in them, which is a very easy way to juice your returns. And he gets offered very attractive deals—to acquire whole companies or to make minority investments—because his counterparties are, in effect, paying him for the Buffett halo. In these stories, Buffett’s pure skill as a stock-picker is overrated or past its prime; Buffett gets his outperformance by carefully and aggressively exploiting his rather technical advantages.
I think that there is obviously some truth to both of these stories—much of the second one depends on decades of success with the first one—but I am naturally predisposed to prefer the second. As a derivatives guy I just find stories about well-structured preferred-plus-warrant deals more interesting than stories about finding undervalued companies, though your tastes may differ. And as an efficient-markets guy I also find it a bit more plausible: Outperforming the market by giving people an extra service that they want (the Buffett halo), or by taking on additional risks (leverage), or by getting overpaid for some particular thing that no one else noticed, is just a bit easier to reconcile with general market efficiency than outperforming the market by being wise and folksy in your stock selection. One story involves Buffett doing specific things that other people don’t do, while the other is just that Buffett does the same thing as everyone else but with mystically better results.
Anyway Bill Gross, another legend, retired last week, and Mary Childs at Barrons had an appreciation of his career this weekend. It seems to me that you could tell the same two stories about Gross. One story is that Gross was good at predicting whether interest rates will go up or down, which is very helpful for a bond trader, and he made his money by betting right on rates. There is a mystical-skill element to this—lots of bond trader are in the business of betting on rates, but he just happened to be really good at it—though you can, if you want, discount it as luck. As Childs puts it:
Was he a great investor, or just the beneficiary of a four-decade rally in the things he happened to trade, a lucky sailor on a current of declining rates and credit expansion? Put differently, if a golden retriever had overseen a portfolio of bonds over the same period, some wonder who would have performed better. This forgets that there were plenty of money managers who had the benefit of the same rally. But they didn’t win.
But the other story is that Gross found specific trades that other people didn’t, read documents carefully, pushed his edge aggressively, and used the mammoth size of Pacific Investment Management Co. (his former employer) to his advantage:
Ask a friend over 60 about the 1983 Ginnie Mae derivatives trade, when Pimco exploited a pricing fluke no one else saw, and forced physical settlement of the underlying contracts, catching counterparties totally off guard. … Other trades were less glamorous but more reliable, like selling volatility, or buying short-dated corporate bonds that were as good as cash but yielded a bit more—or buying higher-yielding debt like mortgages or international bonds in a fund benchmarked against an index that doesn’t include those things. …
Gross called such “structural alpha” trades the keys to the Pimco kingdom. Get the rate call right, add these pretty reliable streams of extra basis points, combined with, as Trosky puts it, “at the margins, boneheads like me chipping away on a bond-by-bond basis,” and let the outperformance roll in.
And:
He was a fan of an exemption in the 1940 Act that allowed cross-trading between funds in the same family under certain circumstances. Former Pimco employees say that cross-trading can help protect a portfolio’s holdings against the deleterious effect of sudden redemption requests.
The use of the exemption shows another Gross/Pimco personality trait that helped fuel their success: They were willing to be more aggressive. More aggressive on risk-taking, more aggressive at sales coverage on Wall Street in the name of better execution, but also in the gray areas of terminology, mandates, regulations.
Gross’s performance suffered after he left Pimco for Janus Henderson Group Plc. If you subscribe to the simpler interest-rates-savant theory of his performance, then this is evidence that he lost his magic, or that it didn’t work in the new market regime, or that the magic always belonged to someone else. But if you like the second theory—“structural alpha,” tough demands on sell-side counterparties, etc.—then the story could be as simple as Gross’s structural advantages going away once he ran only a single small fund. Pimco’s “huge pool of money meant he was the market,” wrote my Bloomberg Opinion colleague Brian Chappatta, “which explains why bond traders used to hang on his every word,” surely an advantage for a trader. And you can’t cross-trade between funds without lots of funds, you can’t push Wall Street around without lots of money, etc.
And to the extent Gross relied on finding weird specific trades that other people missed, well, his legend inspired later generations not to miss them. Here’s Robert Armstrong on “the decline of the investing genius”:
A money manager once used a metaphor to describe this change to me. Investors are always seeking unfair bets — coins that land heads more often than tails. Some of these coins are bigger and more valuable than others. In the early part of Mr Gross’s career, when investing giants walked the earth, some of these coins were very large indeed. Think of George Soros’ monumental 1992 bet against the pound.
Today, as more and more smart investors use more and more technology to identify inefficiencies, the remaining uneven coins grow smaller and smaller. You have to find and flip lots of them to achieve good results. Doing so is less about individual brilliance than teams, processes and systems.
Getting the interest-rate call right is about as valuable now as it was in the past; perhaps it is harder, though that is not obvious. But all the other stuff—noticing frictions in the market and positioning yourself to take advantage of them—might genuinely be harder and less valuable as other people learn to notice them too.
Everything is securities fraud
If you are a mining company and you build a structurally unsound tailings dam to hold your mine waste, and it collapses and kills 157 people, is that securities fraud? Sure, everything is securities fraud!
Mining giant Vale SA had denied owning the sort of mine-waste dam that collapsed in January and killed at least 157 people at one of its old mines in Brazil, underscoring the industry’s reluctance to disclose information about such structures.
Vale’s denials to investors and the news media came after another so-called upstream tailings dam, known as Fundão, failed in 2015, killing 19 people in what was then considered Brazil’s worst-ever environmental disaster. That dam was co-owned by Vale and Australia’s BHP Group Ltd.
Despite the two accidents, many large miners have declined to give information about the tailings dams they manage and their exposure to upstream structures. This leaves investors and the public with little chance to gauge the risks of such structures, even those built near their homes.
To be fair the phrase “securities fraud” doesn’t actually come up in the story. (Vale is Brazilian, and no other country has quite as finely honed a system for turning everything into securities fraud as the U.S. does.) But there is an unmistakable implication that, if there’s a tailings dam near your home, and you call up the mining company and ask “is this dam going to fall down or what,” the company will ignore you, while if you are located thousands of miles from the nearest mine but own stock in the mining company, you are entitled to know if the dams will fall down. Because if they do you will lose money:
There will be “a lot more questions from investors regarding these facilities, and significantly greater demands for reporting on them,” said Anthony Sedgwick, who invests in miners for Abax Investments in South Africa.
“There is definitely not sufficient disclosure at the moment,” he said.
Did the Volcker Rule work?
Sure, says this Federal Reserve staff working paper by Antonio Falato, Diana Iercosan and Filip Zikes, titled “Banks as Regulated Traders.” The gist is that before the Volcker Rule went into effect in 2014, U.S. banks’ net trading profits had a lot of sensitivity to various risk factors, but especially equity returns: “even a 5% drop in stock market returns would have led to material aggregate trading losses for banks in the pre-Volcker period, as large as about 3% (1.5%) of sector-wide market risk weighted assets (tier 1 capital).” After the Volcker Rule banned proprietary trading at banks, their sensitivity to equity prices went down. (This is not just a matter of equity trading, by the way; the authors find that rates, credit and foreign exchange trading desks also seem to have been correlated with equity prices before Volcker and less so after.) Intuitively, when banks could own a lot of securities for their proprietary purposes, they tended to end up exposing themselves more to general market risk; once regulators cracked down, their trading desks became more market-neutral—“in the moving business, not the storage business,” as the saying goes—and so the risks were reduced. This “indicates that the Volcker Rule was an effective financial-stability regulation.”
“I’d be happier with the dollar.”
I really appreciated the simple elegance of this Financial Times story idea, which is: A reporter went to a dollar store in Tennessee to ask customers what they thought about a New York hedge fund’s plan for the store to raise its prices. (To more than a dollar.) Wouldn’t it be amazing if they gave, like, the wrong answers?
“The low prices here on discount groceries are the only way I can feed my family,” says single mother of five Karen Jones, “but I suppose I’d be happy to skip a meal if it’s really important for enhancing shareholder value.”
“Raise prices so that a New York hedge fund can make more money? That seems pretty fair to me,” adds out-of-work truck driver Dave Smith. “Have you seen the prices for luxury real estate in Manhattan? They need that extra nine cents more than I do.”
No, no, I just made those quotes up, come on. Here are the real ones:
“They’d lose a lot of business,” reckons Vicky Lewis, 37, laden with bags in a Dollar Tree car park. “We need more affordable stores, not less.”
And:
Back in Tennessee, Dollar Tree regular Noman Abdullah says it is the chain’s simplicity that attracts him: he knows everything will cost $1. “It’s the whole purpose of Dollar Tree.” Asked about Starboard’s “multi-price point” plan, he adds: “Honestly, that’s not a good idea.”
By Matt Levine
Non Prototype Language... 