Goldman’s Bankers Are Coming Back
(Bloomberg Opinion) -- Goldman people moves.
Goldman Sachs Group Inc.’s incoming chief executive officer, David Solomon, has been picking his senior executive team, and it is hard not to notice that they are investment bankers. This marks a change from Lloyd Blankfein’s leadership team, who tended to come from sales and trading. “Goldman Sachs Group Inc.’s investment bankers are completing a takeover of their own firm,” writes Bloomberg’s Sridhar Natarajan.
I sometimes think that too much is read into these things. The way you get to the top of a firm like Goldman is by being aggressively commercial, prudent at managing risk, and trusted by clients, whether from a sales and trading seat or an investment-banking seat. (Disclosure: I used to work there but did not get particularly near the top.) Also it helps to figure out where the money will come from in the future, and then to park yourself there. “Attach yourself to revenue” is the standard advice. People who are good enough at that for long enough, and who end up rising to the top, tend not to be all that parochial: Their skill set is not “gold sales” or “leveraged finance” or “media merger advising,” but more broadly figuring out how to make money at an investment bank. And that skill, more than their personal background, tends to inform what businesses grow or contract under their leadership.
Every so often Goldman needs to make some sort of choice between investment banking and trading, but mostly it doesn’t. Mostly the traders come in and trade and the bankers come in and bank. Their normal daily activities just don’t interfere with each other that much, and their relative status and power in the firm comes not so much from the CEO’s nostalgia for his youthful days of trading bonds or making deals, but from how much money they are currently making. If the securities division triples its revenue next year, David Solomon won’t be sad just because he’s a former investment banker.
One interesting personnel move is that Stephen Scherr (who most recently ran Goldman’s consumer bank initiative) will become the chief financial officer, replacing Marty Chavez. Chavez is a “strat”—Goldman’s word for a quant/technologist—who was the firm’s chief information officer before becoming CFO, and he will now become co-head of the securities division. The balance of power between securities and investment banking might be largely a result of market conditions, but the balance within the securities division between old-school voice-based balance-sheet-intensive traders and capital-light electronic app-based quants might be more of a choice. And putting Chavez (partly) in charge of securities might mean something:
Back in the trading division, Mr. Chavez is expected to help Mr. Solomon cut costs and move more of its client interactions onto apps and other digital pipelines. Wall Street banks are leaning heavily on coders as more trading goes electronic, and Mr. Chavez has been a champion of Goldman’s push to open up its internal technology to clients.
Do you want your bond traders to be the last bond traders on the Street willing to take bold balance-sheet risks to intermediate client trades themselves, or do you want them to be the first bond traders on the Street willing to jump into new all-to-all electronic platforms to give clients the tools to trade directly with one another? Both choices have their merits, and personnel, here, might really be policy.
Tomorrow is the 10th anniversary of the bankruptcy of Lehman Brothers Holdings Inc., and the analyses and reminiscences keep coming in. But what about, like, next Tuesday? Do you think there will be any Lehman anniversary takes then? Or does the statute of limitations run out after 10 years? “Memories in finance are short” is a thing that I (and everyone) used to say a lot, but the global financial crisis of 2008 still seems fresh—and interesting and instructive and important and contested—10 years later. As I said earlier this week, there’s even a decent argument that it’s still going on.
But mostly it doesn’t feel like that. The economy is growing, unemployment is low, the stock market is up 143 percent in the 10 years since Lehman’s bankruptcy, and while there is a lot to worry about, bank funding models and mortgage securitization are not at the top of most people’s lists. Will next week be the start of an era in which the financial industry does not operate under the shadow of the 2008 financial crisis? No, probably not, not really, but it still feels like a moment to mark.
But today there’s still a lot of Lehman! Bloomberg’s #WhenLehmanCollapsed hashtag has collected a lot of stories of that time, and Bloomberg Opinion has another batch of articles looking back at the crisis, including contributions from Aaron Brown, Stephen Carter, Jared Dillian, Stephen Gandel, Joe Nocera, Cathy O’Neil, Shuli Ren, Barry Ritholtz and Mihir Sharma. And at FT Alphaville, here is Peter Doyle on a recent conference of “crisis firefighters”; it includes this anecdote:
And the conference provided a personal pleasure when Janet Yellen came and sat next to me for the duration. She is evidently taking her woefully premature forced retirement seriously, spending most of my day alongside her playing word and space-invader type games on her phone neatly concealed by the ﬂap of her handbag.
Short and distort.
We talked yesterday about a Greek Orthodox priest and hedge fund manager whom the SEC accused of running a “short and distort” campaign against a public company, in which he shorted the company’s stock and then published reports on investing sites making allegedly false claims about the company’s problems. “Frankly the alarming thing is that it could work so easily,” I wrote: The guy published some not-especially-compelling-on-their-face short reports on some websites that do not particularly vet the bona fides of their contributors, and he was able to significantly move the stock price of a billion-dollar public company. It was not the finest moment for efficient markets.
But here is a fun recent paper by Joshua Mitts of Columbia Law School, titled “Short and Distort,” finding that it’s even worse than that. For one thing, it happens all the time, and it works. For another thing, not only can any random person do it, you don’t even have to sign your name to it for it to work:
Pseudonymous attacks on public companies are followed by stock price declines and sharp reversals. I find these patterns are likely driven by manipulative stock options trading by pseudonymous authors. Among 1,720 pseudonymous attacks on mid- and large-cap firms from 2010-2017, I identify over $20.1 billion of mispricing. Reputation theory suggests these reversals persist because pseudonymity allows manipulators to switch identities without accountability. Using stylometric analysis, I show that pseudonymous authors exploit the perception that they are trustworthy, only to switch identities after losing credibility with the market.
Of course I do not give investing advice, and I suppose that one upshot of this paper is that trading based on the recommendations of random pseudonymous people on investment websites can actually work, at least in the short term. But just, like, aesthetically, I can understand why you might scrutinize the writings of Warren Buffett or Ray Dalio or Bill Gross or Goldman Sachs equity research for investing wisdom, but it seems weird to hitch your wagon to the star of BuffettFan69 on Seeking Alpha.
Anyway the stylometric analysis is sort of hilarious:
As pseudonymous authors write more articles, they become far more similar to authors who had published their final article. The specifications with indicators for the author’s 5th or 10th article show that pseudonymous authors are significantly more likely to write in a style similar to former authors after the first few articles.
These stylometric findings shed light on an additional mechanism by which pseudonymous authors persuade the market to view their initial article as trustworthy. By adopting a writing style distinct from prior identities, new pseudonymous authors reinforce investors’ belief that they are unrelated to prior manipulators. However, after establishing credibility under a new identity, pseudonymous authors no longer find it necessary to write unnaturally. Instead, they can exploit their existing credibility to engage in profitable market manipulation.
I love that analysis: People who have burned one message-board identity (by falsely predicting that a company will go bankrupt or whatever) will switch to a new one and take pains not to write like the previous one, so that no one suspects them. But then once they’ve got a following they can let their guard down and go back to writing like themselves. I suppose alternative analyses are possible. What if there are many ways to write regular posts on investing sites, but only one way to write your final frothing sell-now-because-this-company-is-going-to-zero post? What if just writing pseudonymous articles on investing sites naturally drives you to the one true final style? I bet it involves a lot of “nay” and “shall.” “XYZ Widgets must, nay, shall decline to zero! Goodbye!”
Once every quarter, big U.S. investment firms file their Schedule 13F with the Securities and Exchange Commission, disclosing what stocks they owned 45 days ago, and reporters and investors and analysts duly scour those reports to see what the smart money is doing. Was doing. Forty-five days ago. You know, it’s a thing, but it is conventional to sneer at it a bit: It might give you some general sense of how big investors think and what they are doing with their money, but it will not give you anything like a real-time sense of their decisions or their fund flows.
Meanwhile Bitcoin is kind of nuts:
Speculation mounted that a major holder of cryptocurrency with an electronic wallet that dated back to 2011 -- long before anyone had heard of HODL -- was moving to sell. His or her wallet had once had as many as 111,114 Bitcoins, which at their peak would have been worth about $2 billion. The rumors that began two weeks ago were that this whale -- as big holders are known -- was looking to cash out after this year’s plunge in prices. …
According to Chainalysis Inc., which provides cryptocurrency tracking tools to companies and law enforcement, 50 transactions involving a total of 50,500 Bitcoins originating from that whale’s wallet were moved between Aug. 23 and 30. …
“This is actually really interesting because of the Reddit detective work that’s been happening and just people making these assumptions that this whale is cashing out,” said Kim Grauer, senior economist at Chainalysis in New York. “It leads to conspiracy theories that someone’s trying to sabotage Bitcoin -- just from someone doing an administrative move of their funds for security purposes, or we don’t even know why they have done it.” ...
The narrative is also complicated by the fact that while the 50,500 Bitcoins originated from the whale (address: 1933phfhK3ZgFQNLGSDXvqCn32k2buXY8a), most were scattered in 2014 to various wallets that might all be controlled by the same person -- or not -- and later moved to one wallet again.
On the one hand, you get specific account-level real-time information about Bitcoin flows. On the other hand it is anonymous, and there is no particular reason to assume that a move between accounts represents a move between persons. You get more information than you’d get in the stock market, but somehow less understanding.
One tension that comes up a lot in financial markets is the one between the desire to know what everyone else is doing and the desire to be able to do stuff secretly. Many people intuitively think that hedge funds should have to disclose their positions promptly, that short sales should have to be disclosed, that acquiring a toehold before announcing a merger offer ought to be illegal, etc. Many people also worry about high-frequency traders “front-running” them, in the extremely loose sense of seeing a trade execute and then copying it; they worry that they won’t be able to buy a lot of stock without moving the price, because other people can see their trades happen.
Many people have both of those sets of worries, even though they are contradictory: If everyone knows what everyone is doing instantly, then they’ll instantly be able to copy the smart people’s trades. The actually existing U.S. stock markets have struck a balance—a 10-day window for disclosure of big positions, no requirement of short-selling publicity, instantaneous reporting of trades with the occasional speed bump here and there—that is sort of random and ad hoc and uncoordinated; it works okay, but lots of people gripe about it. It is interesting to watch a new system grow up and strike the balance differently. If you distrust regular financial markets because the high-frequency traders are always front-running your orders, how do you feel about all transactions on the Bitcoin blockchain being effectively public, and people trading based on what they see? Or if you distrust regular financial markets because they are controlled by shadowy forces, is it good to be able to see everything that happens on the blockchain? Or is that frustratingly shadowy too?
Here is a story from Simone Foxman about how wealthy investors increasingly prefer “direct investing” in private companies over investing through hedge funds or private-equity funds. We have talked about this trend before; I once wrote that it is “about, as it were, the hollowing out of the investing middle class”:
Nobody buys stocks any more: Now, either you buy an index, or you buy a whole company. More people are using the most generic budget form of investing, and more people are becoming institutions themselves and getting involved directly in dealmaking and corporate management.
This makes a kind of intuitive financial sense: If you’re pooling your money and outsourcing expertise, it is tempting to pool as broadly as possible and to outsource not to the expertise of some guy but to the expertise of the market as a whole; if you are rejecting market efficiency and striking out on your own, you might as well strike out entirely on your own. But it is also apparently a bit of a vanity project. Here is Foxman:
“Some wealthy people don’t like being in investment pools where they don’t have a say,” said Felix Herlihy, a managing director at Cascadia Capital, which specializes in the kinds of middle-market transactions family offices favor. “The thinking is by going direct their performance over time will be superior. In a way, it’s saying, ‘I’m a little bit smarter.’”
Of course, the fact that you invest based on the thesis that you’re a bit smarter than everyone else doesn’t mean that that thesis is true. Here’s another wealth manager:
“There’s a ton of money out there still waiting to be deployed,” he said. “If the deal has reached your desk, and it is not an industry that you were an operator in, chances are it has been looked over and passed on by those who know much more about the competitive landscape than you."
Well but. That’s not very good marketing! Obviously if you are a direct-investing zillionaire family office, you want your desk to be the most attractive desk. If your thinking in going direct is that you’re a bit smarter than everyone else, then you don’t want to be told that you only see the deals that the smarter people passed on.
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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 Opinion columnist covering finance. 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 3rd Circuit.
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