If FIFTY BANKERS ever arrive at your office all at once...

July 7, 2022 11:50 AM

... (1) you have done something terrible but (2) it is absolutely their problem, not yours. from Matt Levine's delicious dissection of a Bloomberg story about Big Shot [Archive versions 1, 2]
posted by chavenet (24 comments total)

I receive Matt Levine's newsletter. He's clearly fascinated by finance but often flabbergasted by it as well. ("Suppose your return is 72 cents on the dollar. Not financial advice!") It's been delightful to read his takes on cryptocurrency and NFTs.
posted by SPrintF at 12:04 PM on July 7, 2022 [3 favorites]

Matt Levine's newsletter is consistently great and well worth the subscription.
posted by dismas at 12:07 PM on July 7, 2022 [3 favorites]

There's an old saying that goes something like, "If you owe the bank a million dollars, the bank owns you; if you owe the bank a billion dollars, you own the bank." Adjust for inflation as needed.
posted by Artifice_Eternity at 12:09 PM on July 7, 2022 [9 favorites]

Boy does this make me want to grab a torch and/or a pitchfork, but I'm not sure what building I should be storming and it's not likely to be in Omaha anyway.
posted by Ipsifendus at 12:19 PM on July 7, 2022 [8 favorites]

The point here I guess is that being responsible and well capitalized and correctly predicting the market price is fine, in financial markets, but it is distinctly second-best. Being irresponsible and undercapitalized but giant is much better. Then you can just tell the market what the price is.

I think that "supported by the state" is a key point here, as he mentions. I'm sure that somebody at the Kennedy School will be by to explain how this is itself some sort of market failure, maybe means it's not even really "a market" per se, but as usual that doesn't matter to anyone playing to win.
posted by mhoye at 12:19 PM on July 7, 2022 [7 favorites]

That's some "too big to fail" going on right there.
posted by rmd1023 at 12:40 PM on July 7, 2022 [5 favorites]

So I was a floor trader in Chicago for many years. This particular story took place circa 1987. I had a clerk who found a new product and a way to arbitrage them. Essentially, a stock was broken into its two components, price appreciation (or devaluation) and the dividend cash flows. Primes and Scores. Buy one of each and you have the underlying stock. Buy one prime and one score and sell the underlying stock for more than the sum of the parts and you have an arbitrage. The problem is tendering for reconsitution. The first day these primes and scores were being issued, my clerk and I started buying the two components and sell the stock. That night we tendered the two components and asked for the stock itself which would close out our sale of the stock. The arbitrage was relatively large. Especially for an individual trader like myself. The idea was so new that not even my clearing firm knew how to tender the prime and score and get a full share. Plus, they did not think it should be margined as a true arbitrage. (Very little margin.)

So after the market closed I head to the Cubs game that started at 3:00 central. Business man's special. I was in the bleachers drinking beers then off to the Cubby Bear after the game. I finally get home and I am pretty well lit. There is a message on my answering machine (pre cell phones) that I owed my clearing firm $5 million and I needed to make it right immediately. I call the back office. Then I call the head of the firm. I told him I could write him a check for the $5 million but it would be worth the paper it was written on. After much back and forth and research through the night including a phone call with the OCC and another with the SEC, it turned out that my clearing firm did not know what it was doing, that my clerk knew more about the product than they did and that not only did we not have to put up the $5 million, they owed us around $100,000 in arbitrage profits. There was no margin call.

At the point in the conversation when they thought I owed them a lot of money, they were trying to work with me on how to address it. When I finally figured it all out, mostly after the beers wore off, and they owed me, they sheepishly said something along the lines of sorry to have bothered you, we will address your money tomorrow or the next day when the trades clear, have a good night, and then they hung up.

They were much nicer to me and much more on the defensive when I owed them way more than I had than when they owed me.
posted by JohnnyGunn at 12:44 PM on July 7, 2022 [76 favorites]

Yeah, that line made me chuckle out loud, too. Sure, it's something of a rephrase of a well-known aphorism, but so vivid in the detail!

He's clearly fascinated by finance but often flabbergasted by it as well

Not flabbergasted. He used to work at Wachtell (as a lawyer working on transactions) and then moved to Goldman (to work on transactions). Had the common sense to get out at a relatively early age. Transitioned to media via what was once the great industry gossip blog, Dealbreaker. Now writes a funny newsletter for what's essentially an industry rag. I have enjoyed his work for years, but he's very much got insider sympathies and I know at least one person who read him for the "clevernesses" he describes admiringly that might get worked up into securities fraud or similar cases.
posted by praemunire at 1:46 PM on July 7, 2022 [6 favorites]

The SoftBank Vision Fund is not exactly a huge failure — it seems to have made money, though it has underperformed public equities — but it is definitely huge ($100 billion), and it definitely had some high-profile investment failures. And if you were involved with those failures then oh man have you learned some lessons! Who wouldn’t want to take money from a venture capitalist who had an inside seat at the Vision Fund? Like, for instance, Adam Neumann, the WeWork founder who is now doing venture capital with some of the immense wealth that he extracted from SoftBank; here’s a Financial Times profile from March:

His family office, now a staff of more than 50 people in New York and Miami, has quietly invested in 49 other start-ups, from a mortgage provider to a company applying artificial intelligence to in vitro fertilisation.

"Like WeWork, but for mortgages! Like Theranos, but for IVF!"

Boy does this make me want to grab a torch and/or a pitchfork, but I'm not sure what building I should be storming and it's not likely to be in Omaha anyway.

Would you rather fight a banker-sized duck, or 50 duck-sized bankers?
posted by mandolin conspiracy at 3:10 PM on July 7, 2022 [9 favorites]

Levine is a joy; I've been following him since he had such great coverage both of Musk's effort to buy Twitter and also the TerraLuna fiasco. His writing is the perfect combination of dry humor, a deep understanding of how financial transactions work, a broad survey of what's going on, and some really excellent snark.

This nickel deal he talks about is just nuts. There's just so much massive systemic fraud at the high levels of finance. I'm still wondering why the Libor scandal didn't result in more people going to jail and a larger systemic overhaul of how interest rates are set. There was some response, but not enough.
posted by Nelson at 3:16 PM on July 7, 2022 [8 favorites]

I started reading Levine not long after I read Flash Boys by Michael Lewis, which is about high frequency stock trading. I felt a little grumpy that Levine wasn't more opposed to the whole concept of front-running trades; it still comes up occasionally when he talks about people buying "order flow" from retail brokers. Anyway, file that under the "insider sympathies" that praemunire mentioned.

His Laws of Insider Trading, always open to additional updates, are a national treasure.
posted by sockshaveholes at 4:50 PM on July 7, 2022 [2 favorites]

I hadn't gotten as far as the bit about Neumann. I just read "The Cult of We," the book written by WSJ reporters who covered the WeWork mess. After reading it I don't think I'd trust Neumann to walk my dog, never mind invest in my company or manage any money. And I don't even have a dog.
posted by fedward at 4:56 PM on July 7, 2022 [2 favorites]

w h o a
posted by rrrrrrrrrt at 4:59 PM on July 7, 2022 [1 favorite]

There's just so much massive systemic fraud at the high levels of finance.

If I had a nickel for every time I've said that . . . Well I guess I'd owe the LME $11 billion, or something? I'm not exactly sure.
posted by The Bellman at 5:03 PM on July 7, 2022 [10 favorites]

I felt a little grumpy that Levine wasn't more opposed to the whole concept of front-running trades; it still comes up occasionally when he talks about people buying "order flow" from retail brokers.

Those are two totally separate things -- front-running trades (which Matt Levine is sufficiently opposed to that he describes it, correctly, as "illegal") is looking at the cards before you deal them; payment for order flow is comping a free room to a high-spending gambler who isn't very good at cards.

But in any case, golly is Levine a skilled writer; he covers something incredibly specialized and intricate in a way that is not only broadly accessible, but often hilarious. One favourite passage on insider trading:

You know the easy way that regulators catch insider traders, right? It goes like this. When a big merger is announced, the Financial Industry Regulatory Authority puts together a list of people who traded the target’s stock in potentially suspicious ways. Then they send the list to all of the banks and law firms and companies involved in the deal and tell them to circulate it to their deal teams, asking everyone who worked on the deal, “do you know anyone on this list?”

If you did work on the deal, and you tipped your buddy about it so he could trade and you could split the profits, getting this list might ruin your day. Obviously you can shrug and hand the list back and say “never heard of them,” but that makes it look even more suspicious if you are caught. Plus it is not always plausible. There is the notable case of a former Evercore Partners Inc. banker named Frank Perkins Hixon, Jr., who shared inside information with his father, Frank Perkins Hixon, Sr., who then traded on that information. When Evercore got the Finra list and sent it to young Hixon, he looked at it and said, nope, don’t recognize any of these names. When Evercore pressed him on the fact that one of the names was his father, who has the same name as him, he was like, oh that Frank Perkins Hixon. He got out of prison a couple of years ago.

posted by Superilla at 9:31 PM on July 7, 2022 [16 favorites]

payment for order flow is comping a free room to a high-spending gambler who isn't very good at cards

No, it's comping a free room to the guy who gets the gambler on the plane to Vegas.
posted by praemunire at 10:29 PM on July 7, 2022 [2 favorites]

No, it's comping a free room to the guy who gets the gambler on the plane to Vegas.

Fair enough, we can extend the metaphor; the travel agent also gets a comped room in addition to the gambler.
posted by Superilla at 10:43 PM on July 7, 2022 [1 favorite]

The travel agent may or may not pass on part of the value of their own comped room to the gambler. These days, they often do, but it's not guaranteed! (I.e., payment for order flow is to the broker, not to the buyer.)
posted by praemunire at 8:23 AM on July 8, 2022 [1 favorite]

I love reading Matt Levine, but he is comically credulous about taking every explanation given as good faith. Unless a government agency has filed charges against someone (usually with "look at all the crimes we are willfully committing" text messages as proof), Levine will brush aside any cynical read of a situation with "what do these guys really have to gain from misbehaving here?" The answer is usually "money," and no, maybe no one needs the extra money, but no one gets finance-gossip-rich without chasing way more money than they could ever need. Actually, Levine did exactly that in this situation -- back in March he was defending the LME. I don't care about a bunch of traders getting screwed over, and Levine is worth a read anyway, but it's worth keeping in mind that his default assumption is that everyone is fairly honest all the time.
posted by grandiloquiet at 8:59 AM on July 8, 2022 [2 favorites]

I think Levine is careful to avoid actually saying "these guys are crooks." After all, "these guys" have money and lawyers. So adopting a pose of "I assume everyone is fairly honest all the time" is Levine's defensive strategy.
posted by SPrintF at 11:01 AM on July 8, 2022 [3 favorites]

but it's worth keeping in mind that his default assumption is that everyone is fairly honest all the time.

I don't read Levine, but that is not a bad assumption. The alternative is draining and makes you a cynic. As a trader who spent a lot of years on the floor making trades worth tens and hundreds of thousands of dollars across a chaotic pit via hand signals, I cannot recall but one time I was purposely screwed. There are times when you both think you are buyers (or both sellers), but that is simply because of the chaos of the situation not because someone is lying or purposely screwing you. And, almost every time I had a DK (Don't Know) or QT (Questioned Trade) me and the counter party would end up splitting it.

Your most valuable asset on the floor is your reputation. If you reneg on trades or make trades and then not clear them, no one will trade with you if that becomes a habit. During the pep talk my backer gave me before my first day on the floor, he made it very clear that I was NEVER to trade with XXX even if he was the best bid or the best offer. Even during the crash of 87 or 89, people were honoring large trades that effectively put them out of business.

I remember helping out a retail broker who made a mistake and would have been fired if he would have had to put the trade in his error account. I took the other side of the trade the next day because I wanted to help him out and help him keep his job. Granted, it was selling puts at much lower prices than the current price, but I was long them at even lower prices so I forgo profits. Some would say there is honor among thieves, but I think almost everyone I encountered in my decades long trading career was a standup person. I have no idea what they were like off the floor, but as far as trading, honest.

There are certainly traders who are bad people. I think what happens is that the really bad people, the people who try to steal millions are the ones that get the publicity. It sells papers. The millions of trades that are made each day on the honor system go unreported. It is like working on a help desk. Rarely do you get the call that says, "Hey thanks, my software worked perfectly today" But, it did work perfectly for thousands of people. They get the call, "You bastards cost me $50,000 because your data was delayed by a milisecond."
posted by JohnnyGunn at 11:02 AM on July 8, 2022 [9 favorites]

Levine is often literally "comically credulous," for comic effect. His rhetorical shtick is often to say exactly what the finance guys are saying directly but in a context that is intended to mock them. E.g. when he says something like

Arguably Chastain (allegedly) invented NFT insider trading; how could have he have known it was wire fraud

the subtext is of course Chastain knew it was wire fraud. But he pretends like it's not because it's in the new world of NFT magic beans and now it's up to regulators to catch up to the new scam.

It's not traditional finance reporting; it's intensely snarky, from a guy who used to work on the inside and knows all their bullshit. That's part of why I love reading what he writes.
posted by Nelson at 11:21 AM on July 8, 2022 [7 favorites]

Walking up to the self-described Smartest Guys in the Room with an air of credulous admiration seems like a great way to get self-incriminations.
posted by clew at 11:50 AM on July 8, 2022 [4 favorites]

That nickle shorting story made many rounds on Weibo when it seemed like Tsingshan Holding Group stood to lose billions and billions and billions of dollars, and there was much much much schadenfreude, but there wasn't any follow-up. (Presumably the company paid to get those posts scrubbed from Weibo.)
Quite an eye-opener to see how this got resolved.
posted by of strange foe at 11:14 AM on July 11, 2022 [1 favorite]