Banks Try to Do Less Pointless Work

(Bloomberg View) -- Banking culture.

Here's William Cohan's profile of new Goldman Sachs Group Inc. heir-apparent David Solomon, who has been closely involved in Goldman's efforts to become kinder and gentler. Here is what that means:

Of all of our many discussions over the years, Solomon seemed to be at his most passionate when talking about his efforts to change the Goldman culture from the high-powered sweat shop to a place where a healthy work-life balance can be achieved by making sure people are working, at most, around 70 hours a week—still a lot—when not in the middle of a deal. As one of the heads of investment banking before becoming a co-president with Schwartz, Solomon tracked closely the hours worked by the firm’s young bankers and instituted the program by which only those bankers in deal heat could be working from 9 P.M. Friday to 9 A.M. Sunday. Under Solomon leadership, Goldman forced its senior bankers to put outlines together before just willy-nilly assigning work to their teams. He monitored just how many hours bankers were working. He appointed one of his senior bankers to think about the experience of the junior bankers at Goldman and how that experience needed to change. He instituted boundaries around junior bankers at Goldman in a profound effort to change the culture. He calls analysts and associates who he can see are working too many hours and tells them to stop. If they don’t, he tells them, it will hurt their career. It’s a powerful message.

On the one hand I am mostly on board with Cohan's (and Solomon's) view that this is "a profound effort to change the culture," that the culture of endless work is bad and should be changed, and that a key step in changing the culture is for very senior bankers to tell juniors that endless work is not only unnecessary but also bad for their careers. (Disclosure: I used to work at Goldman, where one thing that I never did to hurt my career was work too many hours.) 

On the other hand 70 hours a week "when not in the middle of a deal" is a lot of hours. That's 9 a.m. to 9 p.m., Monday through Friday, plus 11 a.m. to 9 p.m. on Sunday. Doing that every week won't kill you, but it also won't leave a ton of time to develop the interesting hobbies that seem to be expected of a senior Goldman executive. And then, you know, sometimes there will be deals! Then, it is just assumed, endless work will be the order of the day. The deals might kill you.

There are two aspects of banking work culture that are bad for junior bankers. One is the culture of work for work's sake, of endless revisions to pitchbooks, of lazy confused last-minute assignments that keep analysts at the office all night because their vice president couldn't be more organized. Goldman, and the industry generally, seem to be taking real, though incremental, steps to change that.

But the other aspect is the culture of work for the client's sake, of treating live deals as all-consuming all-important emergencies. Sometimes they are, of course; if you were working on the Bear Stearns acquisition 10 years ago time really was of the essence. Other times ... you know ... companies want to negotiate and announce mergers quickly ... but lives do not exactly depend on it. A merger next week is almost as good as a merger this week. This aspect is much harder to change than the culture of makework, because it actually makes commercial sense: Clients want their deals done quickly, and if you are not willing to do that then they'll go to someone else. Telling the client "it'll get done when it gets done, but I'm not available this weekend because I'm bingeing 'Jessica Jones'" is perfectly acceptable to the extent that investment banking is a high-status aristocratic profession in which clients revere and defer to the professionals (try it if you're a brain surgeon), but it's much less possible to the extent that investment banking is an always-available service profession where clients demand total dedication and are happy to go to a competitor if they don't get it. The deep problem of cultural repair is about shifting the status of the profession, and it may be too late for that.

CDS.

We have talked from time to time around here about creepy cool stuff that people sometimes do with credit default swaps. By "people" I mean mostly Blackstone Group's GSO Capital Partners unit, and by "creepy cool stuff" I mean striking deals with troubled companies in which (1) GSO lends those companies money, improving their financial situation and allowing them to avoid default and bankruptcy, and (2) in exchange those companies do quickie fake-ish defaults on their debt, triggering CDS contracts that GSO owns and making a quick profit for GSO. (The classic of the form is Codere; a recent and lovely example is Hovnanian.)

A lot of outside observers, and pretty much everyone who sells CDS to GSO, find this stuff extremely distasteful and think that it violates the spirit of the credit-default swaps market. I am not so sure: Certainly GSO seems to spend a lot of time sharpening its elbows and doing stuff that CDS sellers didn't anticipate, but the spirit of the CDS market is a nebulous thing, and arguably GSO isn't so much violating that spirit as it is perfecting and elevating it. CDS is a way for an investor to bet on the creditworthiness of a company. The traditional way to bet on the creditworthiness of a company is to lend it money, and selling CDS is in some sense a less socially productive alternative: Instead of betting on the creditworthiness of a company by lending it money to pursue business opportunities, you bet on its creditworthiness in a zero-sum derivative with your hedge-fund buddies. GSO's essential innovation is to transform those unproductive zero-sum bets back into loans to companies: It took money from the CDS sellers who bet on the companies' credit, and used that money to subsidize actual loans to the companies. It is not necessarily the use for which CDS was intended, but there's an argument that it's an even better use.

But really that is a pretty tentative view of the goodness of GSO's maneuverings, and I seem to be alone in it. Even GSO doesn't really believe it: Bennett Goodman, who runs GSO, said last week that maybe the rules should be changed to prevent this sort of thing. ("If people want to change the rules that are written in black and white because they think it makes for a more effective market structure, we are all for it," is what he told Bloomberg Television.) And now some CDS participants are working on doing that:

Elliott Capital Management and Apollo Global Management are among firms working on closing loopholes that have allowed investors to profit from engineering defaults on a company’s debt, according to people with knowledge of the matter. CQS and Anchorage Capital are also part of the group, the people said. ...

The group is being shepherded by law firm Milbank, Tweed, Hadley & McCloy, the people said, asking not to be identified as the discussions are private. There’s no set deadline to come up with solutions, they said, and the negotiations are likely to be complicated by the fact that a number of the firms have found themselves on the opposite side of such situations.

I think this will be harder than it looks. You can close some of the obvious loopholes that led to the Hovnanian and Codere situations -- in particular, you can revise the rules so that CDS isn't triggered when a company defaults on debt to itself, as Hovnanian did -- but I suspect it is hard to capture in print the intuition of a company "engineering" a default. All corporate debt defaults are to some extent intentional, planned, structured, and financed, while even the fake-y Hovnanian and Codere defaults came from a place of real credit pressures. Distinguishing real defaults that should trigger CDS from fake defaults that shouldn't is a subtle problem, and writing down one set of distinctions in the rules may just shift how the game is played.

Murder startup!

Here is the story of Nectome, a Y-Combinator-backed startup that will hook its customers up to a machine "in order to pump its mix of scientific embalming chemicals into the big carotid arteries in their necks" until they are dead. Honestly ... it has ... a certain ... appeal. Like if you could interact with only one tech company's products, and your choices were Twitter or Nectome, it wouldn't be insane to choose Nectome. (Incidentally I hope the etymology is "neck" + "tomb.") Co-founder Robert McIntyre points out that Nectome's procedure is "100 percent fatal": "That is why we are uniquely situated among the Y Combinator companies." It's a great marketing pitch! Sure lots of hot startups will probably kill you, but with Nectome death is certain (and anesthetized!). Who else can promise that? 

Oh fine also Nectome will upload your brain to the cloud or whatever so that when the singularity arrives you can live forever in a simulation, if that appeals to you. If that appeals to you, though, you probably think that we are already living in a simulation, so why spend any of your precious simulation cycles uploading your brain to an in-simulation simulation? But then, why do people use virtual-reality headsets to put themselves into an immersive experience of sitting at a desk using Microsoft Word? Why does anyone do anything? Really the startup that kills you by pumping embalming fluid into your neck is probably not the stupidest startup you'll read about this week.

Elsewhere in tech and comedy, Elon Musk has hired a bunch of writers from the Onion to work "on a secret project financially backed by Musk," and I hope it is The Boring Company. The Boring Company is Musk's apparently-real-ish company that wants to drill holes in the ground to build new transit options; it has a second-hand drill named Godot that is operated by "interns and people doing it part time," it is funded in part by flamethrower sales, and it is named The Boring Company. Surely Musk is getting a little help from comedy writers on that project? And what an irresistible project for a comedy writer: Not only can Musk probably pay you more than the Onion can, but also if you go work for Musk you can write comedy that will then happen in real life. At the Onion, you can sit around imagining hilarious absurd things for tech companies to do and then write headlines about them. Working for Musk, you can sit around imagining hilarious absurd things for tech companies to do and then go do them. I hope Musk and his comedy team are behind Nectome. 

National security.

Here is one way of characterizing how Broadcom Ltd.'s proposed hostile takeover of Qualcomm Inc. ended up getting blocked on national-security grounds:

In December, Qualcomm’s leaders, reeling from a year of battles with customers and regulators in the U.S. and abroad, faced the prospect of losing the company to a hostile takeover by Broadcom Ltd. in what would be tech’s biggest-ever takeover.

One potential hurdle to the bid, Qualcomm executives discussed, was a protracted national-security review, according to people familiar with the matter. Qualcomm lawyers reached out to Covington & Burling LLP, which suggested filing unilaterally and proactively for review of a possible deal by the Committee on Foreign Investment in the U.S. to understand the risks, the people said.

They reached out "to understand the risks." In the disinterested exercise of their fiduciary duties, Qualcomm's board wanted just to innocently ask CFIUS whether it might block the deal. If the answer was no, then great, that was one obstacle removed and the board could focus on other things. (Like its view "that Broadcom’s proposal dramatically undervalues Qualcomm.") If the answer was yes, then obviously it should warn shareholders about that risk before they voted in the proxy fight that Broadcom was running to try to get the deal through. It was just a matter of getting all the relevant information to help inform the shareholders' decision.

Presumably there are different ways to reach out to CFIUS, different aspects of the industry and the transaction that you could choose to highlight. A friendly merger target who really wants to get the deal done will pitch the deal to CFIUS one way; a hostile merger target who really wants to fend off a bidder will pitch it another way. The understanding of the risks that you get out of CFIUS will depend at least in part on the understanding that you put in.

Another way to characterize the process here might be: Qualcomm reached out to Covington to see if it could block the deal on national-security grounds, and Covington recommended filing unilaterally with CFIUS in order to make its best national-security case against the deal. And Qualcomm did that and it worked. As a matter of takeover defense tactics, this turned out to be very effective -- more effective than it would have been in previous administrations, and possibly an example for future takeover defense efforts. 

That seems more ... psychologically plausible? The board thought Broadcom's offer was insufficient, wanted to reject it, and did reject it. Surely its CFIUS efforts were part of that defense, rather than just a neutral effort to understand CFIUS's position? (Possibly relevant: "Qualcomm Outspent Broadcom About 100 to 1 in Washington Lobbying.") But of course as a board of directors you can never say that. In a world driven by shareholder value, a board's duties are to its shareholders; talking to CFIUS can be justified as a way to inform the shareholders of the closing risk of a transaction, but not as a way to prevent a transaction that the board doesn't want but that shareholders might.

The crypto.

Cameron and Tyler Winklevoss, "who run the Gemini exchange for trading Bitcoin and Ether, have submitted a proposal to create the Virtual Commodity Association, a self-regulatory organization meant to police digital-currency markets and custodians," which you can read here. Look, I get it: The U.S. stock exchanges are run as self-regulatory organizations, and there is a lot of value to having market participants get together to set the rules of their own markets with oversight from government regulators. But no one who has seen my email inbox would suggest a self-regulatory organization for cryptocurrencies. There are just too many frauds and loonies in the space, too many people who think that the whole point of crypto is that no laws apply. In theory the SRO would be a way to clean that up a bit, but first you'd have to fill the SRO with calm regulatory-minded people, and then how representative would it be?

Speaking of crypto-garbage in inboxes, "Google will ban online advertisements promoting cryptocurrencies and initial coin offerings starting in June, part of a broader crackdown on the marketing of a new breed of high-risk financial products." So, you know, if you get Money Stuff in Gmail, don't freak out if Google starts giving you big red warnings or sending it to your spam folder. It's just that we seem to talk a lot about crypto around here. I don't like it any more than Google does.

Elsewhere: 

• Playboy Enterprises is pivoting to crypto.
• The Securities and Exchange Commission is looking into crypto hedge funds, "asking how they price digital investments and seeking information on their compliance with rules meant to prevent the theft of investors’ cash."
• "Coincheck Inc., a Japanese cryptocurrency trading platform operator that was hacked in January, said Tuesday that it has completed compensating customers affected by the hacking and resumed some exchange services."
• Here is an argument that Ether is a security, because it is an investment in an enterprise (the Ethereum community) rather than just a payment medium (like Bitcoin). I think that is ... plausible? There's I think a reasonable view that (1) the Ethereum people are basically good people and (2) the Ethereum-is-a-security ship has already sailed, so it would be unproductively harsh for the Securities and Exchange Commission to get involved now and declare it a security; the SEC should limit itself to regulating new security-like tokens and/or obvious frauds. But I think if Ethereum launched today its lawyers might worry about it being a security.

People are worried about bond market liquidity.

"Not a Single Japanese 10-Year Bond Traded Tuesday," is the headline here, and you think you have it bad in U.S. corporate credit!

Happy Bear Stearns Day!

To me the real anniversary of the global financial crisis will always be September 15, the day in 2008 when Lehman Brothers filed for bankruptcy and Merrill Lynch was bought by Bank of America, but March 14, the day in 2008 when the tottering Bear Stearns was acquired by JPMorgan Chase & Co. in a deal subsidized by the U.S. government, is not a bad alternative. Here are some reminiscences of that time under the headline "Ten Years After the Bear Stearns Bailout, Nobody Thinks It Would Happen Again."

Things happen.

How Amazon Became Corporate America’s Nightmare. Merrill Lynch Bolsters Business Serving Richest Clients. China’s Sovereign Fund Sells Out of Pre-Crisis Blackstone Investment. Measure of US borrowing costs flashes amber. Liquidity Crises in the Mortgage Market. New York financier Lynn Tilton puts Zohar funds into bankruptcy. United Continental Holdings Inc. is murdering dogs now. Stephen Hawking, Who Examined the Universe and Explained Black Holes, Dies at 76. Happy Pi Day.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.

To contact the author of this story: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net.

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