Deutsche Bank's New CEO Was There
(Bloomberg View) -- Deutsche Bank.
A well-known problem in corporate governance is that public-company chief executive officers tend to be the sort of people who become public-company chief executive officers, if you know what I mean. They are ambitious, driven, hard-charging people; they demand a lot of their subordinates; they never want to hear that anything is impossible; they are strategic thinkers who are always looking ahead to think how they can expand their business. That is often what you want in your CEO. But not always! Sometimes you want someone to lead a dignified retreat. Not every company should grow indefinitely; sometimes what is best for shareholders is to harvest the profitable businesses, prune back the unprofitable ones, and not waste any money pursuing ambitious new projects with uncertain prospects. Sometimes you want a CEO who, when his subordinates say "this is impossible," says "oh well never mind then." This is not exactly a hard quality to find -- ahem, here I am -- but it does seem to be a hard quality to find in a CEO.
Anyway poor Christian Sewing:
Deutsche Bank AG replaced its British chief executive, John Cryan, with the senior German head of its retail bank, a switch that signals a less ambitious future after years of grim financial results and sputtering attempts to regain a spot among global investment-banking powerhouses.
"Sewing may not necessarily have been the top candidate but he was there and stood ready," Hans-Peter Burghof, a professor of banking at the University of Hohenheim in Stuttgart.
Having joined Deutsche as an apprentice in the homely Westphalian town of Bielefeld, Sewing marks a contrast with globe-trotters such as former CEOs Josef Ackermann and Anshu Jain. ... Sewing burnished his standing within the bank in recent years by managing the downsizing of its domestic operations, and by curtailing the excesses of its investment bankers. He notably cut 188 branches and about 4,000 jobs from the German retail unit without provoking a strong backlash from German media, for whom Deutsche is a favorite punching-bag.
Really he does sound like the perfect candidate to manage a retreat, but it is all faintly embarrassing. "'Our start to the year was solid but "solid" cannot be our ambition,' Sewing said in a letter to staff published Monday," which rings a bit false; surely "solid" is exactly what he was brought on for? As for the investment bank, here are some buzzwords that I think mean "we're going to keep cutting it unless we decide not to":
“We’ll thoroughly analyze how we want to position this pillar of our bank in a difficult market environment,” he said. “The priority is to leverage our strengths and to allocate our investments accordingly. And at the same time we will look to free up capacity for growth by pulling back from those areas where we are not sufficiently profitable.”
And my Bloomberg Gadfly colleague Lionel Laurent notes that Deutsche Bank's strategy now seems to be "more Deutsche, less Bank," with a smaller global footprint and reduced ambition.
There's a fairly straightforward way to do a stock scam. You found a company, you take it public, you keep control of most of the stock, you issue press releases saying that you've discovered a cure for cancer or whatever, people get excited, the stock goes up, you sell a bunch of it at the inflated price, you go to Belize. This is a good and popular scam but there is an important weak point in the procedure. When you sell stock to the public, as the controlling shareholder of a public company, you generally have to do a registered securities offering and deliver a prospectus to potential buyers. The prospectus has to have a lot of disclosure, and audited financial statements, and might be reviewed by the Securities and Exchange Commission.
And even beyond the details of the prospectus, there is a simpler problem, which is that if you tell public investors simultaneously that (1) you have discovered a cure for cancer or whatever and (2) you are selling a bunch of your stock, they are going to get a little suspicious. Why are you selling now?
So if you want to do this scam without attracting the attention of the SEC or of investors, it is awfully tempting not to do a registered securities offering. You find a broker who doesn't know that you're an affiliate of the company and just quietly sell your shares on the exchange, or you find a friend who will sell your shares for you while pretending that they don't come from the company. This is illegal, of course, but it does improve your chances of cashing out and getting to Belize.
We have talked before about Longfin Corp., a vague fin-tech-ish company that went public, almost immediately announced that it had acquired an even vaguer blockchain-ish company called Ziddu, and watched its stock soar until at one point it was worth more than $6 billion. Longfin's founder and chief executive officer was described in its offering circular as a "financial wizard," and it is perhaps useful to know that wizards aren't real. If a company is describing its CEO as a wizard, what else isn't real?
Well, Friday the Securities and Exchange Commission "obtained a court order freezing more than $27 million in trading proceeds from allegedly illegal distributions and sales of restricted shares of Longfin Corp. stock involving the company, its CEO, and three other affiliated individuals." The SEC's complaint expresses skepticism about Longfin's, and Ziddu's, business:
Prior to Longfin's acquisition, the Ziddu.com website had no ascertainable value. The website produced no revenue, and Longfin did not acquire any physical facilities, employees, market distribution systems, or production techniques. By the acquisition, Longfin acquired only the rights to use the Ziddu website and trade name. As of the date of acquisition, Longfin assigned a value of zero to Ziddu.com.
But it doesn't really matter what the SEC thinks of Longfin's, or Ziddu's, business. The SEC is not accusing Longfin of deceiving investors about that business -- and, to be fair, Longfin's press release didn't make too many falsifiable claims about that business. Instead, the accusations are purely about unregistered stock sales: Various Longfin insiders (the broker who took it public, affiliates of its wizard-founder, etc.) are accused of selling stock in unregistered transactions that should have been registered. The SEC's burden here is simpler: It doesn't need to prove that investors were deceived or that Longfin published any lies; it just needs to show that these insiders were illegally selling stock.
A lot of advocates for cryptocurrency think that the old-style SEC rules hold back innovation, that there are too many formalities and too much red tape. And that's not entirely wrong; the rules can be complicated and cumbersome. But you see here how they can be useful in investor protection. Proving fraud is hard, especially in a much-hyped new area like blockchain, where it can be hard to tell whether the promoters actually believe in what they are saying, or whether investors bought due to false claims or just general optimism. But registration requirements are a good way to stop fraud without having to prove that it's fraud, to force promoters to demonstrate honesty rather than requiring regulators to prove dishonesty.
How's Mike Novogratz doing?
I laughed out loud multiple times in the first two paragraphs of this Gary Shteyngart profile of Michael Novogratz:
Michael Novogratz was in a good mood. It was the thirtieth reunion of Princeton’s class of 1987, and the on-again, off-again billionaire was getting a lot of respect. “I want to hit you up about something,” a two-star general said. “Those are the freshest kicks,” a young bro in a dressing gown observed, complimenting Novogratz’s black patent shoes with orange piping and matching tassels. (“It’s all about peacocking,” Novogratz later told me, of his sartorial extravagance.) He huddled with Joseph Lubin, a former roommate and one of the co-founders of the hit cryptocurrency platform Ethereum. It was a warm June day, last year, and the Princetonians were amiably crushing cans of Bud amid chants of “Tiger, tiger, tiger, sis sis sis, boom boom boom, ah!”
The alumni parade, known as the P-rade, started to wind through the neo-Gothic campus, its mob of participants marching past signs for a symposium entitled “Can America Still Lead?” As we joined the P-rade, we heard shouts of “Novo! Novo! Novo!” He stopped by a gaggle of young wrestlers, all of whom seemed monumentally drunker than the rest of Princeton’s population—a notable distinction. Novogratz, formerly the captain of the college’s wrestling team, slapped a half-naked man on the back so hard that he left a red palm print. “I five-starred a guy!” he shouted as we continued down the P-rade, men running up to him as if he were the mayor of a small Sicilian hill town. “Mr. Novogratz! I’m Goldman corporate trading!”
There are many other delights. There is this encapsulation of the rise of the buy side: "Around Manhattan, 'investment banker' now carries the same sad also-ran cachet as 'doctor' or 'lawyer.'" And there's a terrific case of the adage that "when bankers get together they discuss Art; when artists get together they discuss Money," this one about Novogratz's guru, Krishnaji:
Krishnaji and Novogratz travelled across India in January of 2015, looking for distressed properties owned by India’s Central Bank in which to invest. During the trip, Novogratz told me, all he wanted was to meditate with Krishnaji, while all his business-minded guru wanted to do was work on their private-equity deals.
But much of the story is about Novogratz's efforts in cryptocurrency, which included starting a crypto hedge fund but never launching it because Bitcoin prices got too high, and then moving on to "a publicly traded merchant bank solely for cryptocurrencies, which, with characteristic immodesty, he described as 'the Goldman Sachs of crypto,' and was calling Galaxy Digital."
“Goldman Sachs can make money if the stock market goes up and if the stock market goes down,” Novogratz said. “That’s what we’re trying to build. Right now, we’re still going to be way correlated to the way the market goes for at least the first year or two,” he conceded. “But we’re trying to build enough diversity into the business that we can withstand hurricanes.” He told me that Galaxy Digital would combine his considerable crypto holdings with an asset-management operation, a trading business, a venture that would invest in new initial coin offerings, and an advisory arm that would counsel companies.
Here's the thing. Let's not say "Goldman Sachs can make money." Let's say "Goldman Sachs can do useful things for clients if the stock market goes up and if the stock market goes down." I happened to be at Goldman Sachs in 2008, and I recall companies being very interested in our services, or at least, in the services they wanted us to provide. (We couldn't always provide them.) Companies always need money, and when the stock market is down, that need is more acute. Investment banks are in the business of intermediating the supply and demand for money, and that business has its ups and downs, but it never goes away.
Is crypto there yet? When there is a crypto boom, people want to buy cryptocurrencies, and other people happily oblige them by selling cryptocurrencies. (Or by setting up hedge funds to buy cryptocurrencies, etc.) When there is a crypto bust ... are there still crypto transactions that need to get done? Is there a financial economy that relies on cryptocurrencies, that is about financing real activities rather than speculating on price moves, that will keep going whatever the price does? Does the concept of a "merchant bank for crypto" make sense through the cycle?
Ray Dalio invented the Chicken McNugget.
I ... did not know this. From an interview with Stephen Dubner for Freakonomics Radio:
DALIO: Well, okay — I graduated from business school in 1973, and I traded commodities, and I love to trade commodities, and I love the mechanics of it. There was something about — you can grow a chicken and it’s so many pounds of this and that that makes the chicken come around and blah blah blah. And I had two clients at the time: McDonald’s and a chicken producer. And McDonald’s wanted to come out with the McNuggets. But there was a lot of volatility in the chicken market at that time and they were worried that if they set a menu price and the price of chicken then went through the roof that they would get squeezed or they’d have to raise the prices and it would be unstable.
DUBNER: And were they worried that their introduction of the product was going to spike demand or spike price because of their action because they’re that big? Or orthogonal to that.
DALIO: They were just worried that the cost of the chicken would go up. But there was not a way for them to hedge that, because there was not an adequate chicken market. But the producer of the chickens — since a chicken is mostly a little chick and then it has a lot of grain that’s added, and you could use the futures market — what I did is I showed him how we can hedge his cost and that he could provide a fixed price to McDonald’s for chicken McNuggets.
DUBNER: He could hedge his costs by buying corn or buying or selling corn and soybean futures then, is that the idea?
DALIO: Yeah, corn and soybean meal futures because that was where his volatility was. He could lock it through. And so by doing that we engineered that. I don’t know how interesting it is, but it was an engineering exercise.
It reminds me a little of a well-known passage from Dalio's "Principles" for operating Bridgewater Associates:
For example, when a pack of hyenas takes down a young wildebeest, is that good or evil? At face value, that might not be “good” because it seems cruel, and the poor wildebeest suffers and dies. Some people might even say that the hyenas are evil. Yet this type of apparently “cruel” behavior exists throughout the animal kingdom. Like death itself it is integral to the enormously complex and efficient system that has worked for as long as there has been life. It is good for both the hyenas who are operating in their self-interest and the interest of the greater system, including those of the wildebeest, because killing and eating the wildebeest fosters evolution (i.e., the natural process of improvement).
If you think about things from the chicken's perspective, then you might be sad about the whole, you know, being turned into nuggets thing. But if you see the life and death of the chicken as a series of commodity interactions, a system of equations involving corn and soybean prices and blah blah blah, then you might see the chicken's death as "integral to the enormously complex and efficient system that has worked for as long as there" have been commodity futures markets, anyway. You can abstract away from the chicken to the economic machine; you can view life and death as just inputs and outputs of "the greater system"; you can view "the interest of the greater system" -- evolution, in the wildebeest story, but really the financial system -- as being an end in itself.
Ted Chiang wrote a fascinating essay about how fears of artificial intelligence run amok are really just sublimated fears of financial capitalism:
Consider: Who pursues their goals with monomaniacal focus, oblivious to the possibility of negative consequences? Who adopts a scorched-earth approach to increasing market share? This hypothetical strawberry-picking AI does what every tech startup wishes it could do — grows at an exponential rate and destroys its competitors until it’s achieved an absolute monopoly. The idea of superintelligence is such a poorly defined notion that one could envision it taking almost any form with equal justification: a benevolent genie that solves all the world’s problems, or a mathematician that spends all its time proving theorems so abstract that humans can’t even understand them. But when Silicon Valley tries to imagine superintelligence, what it comes up with is no-holds-barred capitalism.
That Chicken McNuggets anecdote is basically a smaller-scale, or rather chicken-scale, version of that fear: financial capitalism as a self-perpetuating, self-referencing engine of life and death, as an abstraction that becomes real, with uncomfortable consequences for the chickens.
Blockchain blockchain blockchain.
Here, from Kai Stinchcombe, are some very entertaining sentences about blockchain. Such as:
In fact, I would assert that there is no single person in existence who had a problem they wanted to solve, discovered that an available blockchain solution was the best way to solve it, and therefore became a blockchain enthusiast.
People treat blockchain as a “futuristic integrity wand”—wave a blockchain at the problem, and suddenly your data will be valid. For almost anything people want to be valid, blockchain has been proposed as a solution.
You actually see it over and over again. Blockchain systems are supposed to be more trustworthy, but in fact they are the least trustworthy systems in the world. Today, in less than a decade, three successive top bitcoin exchanges have been hacked, another is accused of insider trading, the demonstration-project DAO smart contract got drained, crypto price swings are ten times those of the world’s most mismanaged currencies, and bitcoin, the “killer app” of crypto transparency, is almost certainly artificially propped up by fake transactions involving billions of literally imaginary dollars.
The deep point here is that "trust" is not an easy problem to solve through technology. With sufficiently advanced technology, you can demonstrate that a blockchain keeps, say, a tamper-proof accurate ledger of share ownership or voting results or whatever. But demonstrate to whom? Is everyone who uses the system going to read and audit the source code themselves? Or are they going to trust some external trusted third party to audit and certify the source code? Or are they just going to fall back on faulty pre-digital systems of trust, like reading the marketing materials and deciding if they're persuasive? The world is complicated, and trusting other people or institutions makes life simpler: Instead of auditing all the code yourself, you can rely on other people to know what is going on. To the extent that the crypto vision means abandoning trust as a lubricant of commerce, it is both dystopian and impractical.
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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.
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