(Bloomberg Opinion) -- Are banks Marxist paradises?
I have often suggested that the modern investment bank is a socialist paradise run for the benefit of its workers, but according to the New York Times’s new “Marx Ratio,” their socialism is only so-so:
The Marx Ratio, as we’re calling it, captures the relationship between a company’s profits — the return to capital, on a per-employee basis — and how much its median employee is compensated, a rough proxy for the return to labor.
Companies with high Marx Ratios offer particularly strong rewards to their shareholders relative to workers. For example, the pharmaceutical company Pfizer had a Marx Ratio of 2.64, meaning the per-employee earnings captured by shareholders were about 2.6 times as high as the compensation a typical employee received. Numbers below 1 signal the reverse: a more favorable return to labor. …
Wells Fargo has a Marx Ratio of 1.4, and JPMorgan came in at 1.2. By contrast, Goldman Sachs’s number was only 0.9 and Morgan Stanley’s was 0.8.
Each Goldman Sachs Group Inc. worker makes more money for herself than she does for Goldman’s shareholders, but only a little more. The true Marxist paradises—the big companies where employees make much more money for themselves than they do for shareholders—are … hmm … Amazon.com Inc. (0.19)? Walmart Inc. (0.22)? Two companies with fabulously wealth billionaire owners and very low ($28,446 and $19,177, respectively) median wages?
Something seems off about this measure of Marxism. You could imagine some alternate Marx Ratios. One approach—call it the Marxian approach—would be to measure how much of a worker’s surplus value goes to the worker and how much to the firm. You might find some crude measure of a worker’s basic necessities, subtract that from the median worker’s pay to get her excess pay, and then compare that to the profits per worker. At a place like Walmart, where the pay is barely (or not) sufficient to cover necessities, all the surplus value goes to shareholders and the Surplus Marx Ratio would be very high; at a place like Goldman, where the pay is … ample … much of the surplus goes to the workers and the ratio would be lower.
Another approach—call it the residual-claims approach—is to assume that there is some cost of hiring workers and firms basically pay it, so the ratio between pay and profits per worker is not very informative. What is informative is how that ratio changes as profits change. In modern corporate theory shareholders are often said to be the “residual claimants” on a company’s income: It pays a bunch of fixed or unit-based costs (to lenders, to suppliers of materials, to workers), and what’s left over goes to the shareholders. This seems roughly true of, say, Walmart; if Walmart has a good year its store employees might get a nominal holiday gift, but not a bonus of 100 percent of their salaries. They get paid what they get paid, no matter how profitable Walmart is. It is not obviously true of investment banks, where variable pay (still) makes up a big chunk of the compensation of senior employees.
If a company pays workers a medium (or, sure, large) amount of money in mediocre years, and vastly more money in great years, then that is I think a decent sign that it is run partially for the benefit of the workers—that the workers think of themselves as residual claimants on the firm, entitled to help themselves out of the profits in good years. (Of course in bad years the employees still get paid—still get bonuses, even—so it is not a perfect measure.) A Residual Marx Ratio that tracks, say, the correlation between pay per employee and profits per employee—with a higher correlation indicating that workers get more of the residual profits of the firm—might show that Goldman Sachs workers have it better than Walmart workers. Which seems true.
Here is a story about how banks are reckoning with the growing threat of cyberattacks by setting up fancy man-caves, giving them cool names (“fusion centers”), filling them with former spies and Special Forces operators, and stocking them with high-tech electronics:
“You can’t have a fusion center unless you have really cool TVs,” quipped Lawrence Zelvin, a former Homeland Security official who is now Citigroup’s global cybersecurity head, at a recent cybercrime conference. “It’s even better if they do something when you touch them. It doesn’t matter what they do. Just something.”
Security pros mockingly refer to such eye candy as “pew pew” maps, an onomatopoeia for the noise of laser guns in 1980s movies and video arcades. They are especially useful, executives concede, to put on display when V.I.P.s or board members stop by for a tour. Two popular “pew pew” maps are from FireEye and the defunct security vendor Norse, whose video game-like maps show laser beams zapping across the globe. Norse went out of business two years ago, and no one is sure what data the map is based on, but everyone agrees that it looks cool.
Jason Witty, the chief information security officer at U.S. Bank, admits that the blinking map he breaks out for customer briefings is mostly for show. But it serves a serious purpose, he said: making the command center’s high-stakes work more tangible.
“If you show customers the scripts you’re actually running, it’s just digits on a screen,” Mr. Witty said. A big, colorful map is easier to grasp.
I mean, don’t get me wrong, read the whole article, the banks are actually doing real things too. (And giving the real things cool code names like “Quantum Dawn” and “Sheltered Harbor,” but what are you gonna do.) It is just that the real things are … you know … computer systems engineering. The fake things generate quotes like “it’s even better if they do something when you touch them.” The fake things are way more fun.
We talk a lot around here about the blockchain for banking, and one obvious thing about the blockchain for banking is that it goes pew-pew. You can bring senior executives into a room and tell them that you’re upgrading the infrastructure that you use to reconcile trade settlement data with counterparties, and their eyes will glaze over and they will start nodding off, and you can shout “blockchain! blockchain! blockchain blockchain blockchain!” and they will perk up and hand you a stack of money. The blockchain is exciting in ways that improving database architecture is not. (For reasons that are obscure to me, frankly. I get the pew-pew maps! It is cool when you can move things around on giant wall-mounted touch screens. “The blockchain” lacks that sort of tangible sci-fi experience.)
But the point is that in a modern economy, actually making stuff work is only part of the job. The other part of the job is performing that making-stuff-workiness to customers and executives. If your goal is to hire engineers to write code to protect your accounts from hackers, first you have to hire different engineers to build maps that shoot lasers, and show the laser maps to executives, to convince the executives to give you money to hire the real engineers to do the real work. (It's easy to hire the laser engineers because, one, fake laser maps are fairly commoditized, and two, if you go to your CEO to ask “can I hire an engineer to build a laser map” of course she will say yes because laser maps are awesome.)
It suggests something about the future of work, doesn’t it? Eventually, robots will do a lot of the real work of, like, producing goods and performing services and writing computer programs to spot hackers. And humans will do the overlay of performative meta-work; we’ll put on little plays to convince each other to use a particular robot’s goods or services. For all the high technology of the laser maps, they respond to a particularly human need: The robots would be perfectly happy just to get on with protecting the servers from hackers, or improving the settlement processes, but the humans need a little razzle-dazzle.
Meanwhile in the opposite of pew-pew, here is a profile of cryptocurrency exchange Coinbase that argues that its success comes from spending relatively little time on philosophical crypto-blather and relatively more time on making sure that its computers work and that it follows the law:
Coinbase’s secret sauce isn’t a fancy algorithm or a data-driven advertising business. It’s a calculated bet that as the rest of the financial system begins to catch on to cryptocurrency, investors and regulators alike will want a fully licensed partner that undergoes routine audits and complies with all the policies that a typical brokerage does. Its brand, carefully cultivated, is one of trust and legitimacy, in contrast to what it says are “fly-by-night” exchanges that freely operate in a legal gray zone in other parts of the world.
It's a good brand! “Not blatantly illegal,” I mean. In a lot of industries that would not be much of a differentiator, but then again in a lot of industries it would be.
Still doesn’t this feel a little weird?
Only four coins — bitcoin, bitcoin cash, ethereum and litecoin — are traded on its platform, although hundreds exist.
Getting listed on Coinbase is like being accepted into a top university, said Zavain Dar, a partner at the venture firm Lux Capital. And with so much money flowing into the exchange, that has important implications for the industry as projects vie for visibility and funding.
“They essentially play the retail gatekeepers for what’s legitimate in crypto,” Dar said of Coinbase. “The more selective they are, the better their brand is.”
But Coinbase plays a more active role in shaping the environment, too. This year, it launched Coinbase Ventures, an investment arm that pours funding into early-stage cryptocurrency initiatives. And many former Coinbase employees have gone on to start virtual currency companies and investment funds, some of which Coinbase Ventures has said it will support financially. This group of ex-Coinbase entrepreneurs is so large and influential that it has become known informally as the “Coinbase mafia.”
You know, if you were reading about a medical-marijuana company, this would all be totally straightforward. Yes, sure, in a new industry with a lot of regulatory sensitivity, it is good to be careful about regulation and to work hard to run a grown-up operation. And if you succeed in doing that, you’re going to build a strong brand and become an arbiter of legitimacy in the space, and your name on a resume will confer legitimacy even unto the third generation.
But the dream of crypto was in part about getting rid of arbiters of legitimacy. There was a utopian dream of replacing trust in institutional gatekeepers—many of whom, after the financial crisis and political upheavals, were not all that trusted any more—with open-access, democratic systems; in this world, you’d trust something to work because you could see the code and prove that it worked, not because it was imposed by a regulator or a big bank. But at Coinbase, meh, whatever:
The company now has fewer hardcore believers who are steeped in bitcoin’s founding ideology — one that envisions cryptocurrency supplanting traditional banks and similar institutions — and more who simply believe in creating a financial system that functions faster and more smoothly using blockchain technology.
It is striking how quickly the crypto world is setting up new trusted institutional gatekeepers. They are new, some of them, and that’s not nothing: If Coinbase can join (or supplant) the New York Stock Exchange as an arbiter of legitimacy, then that is a genuinely interesting development. But it is not quite the development that cryptocurrency was supposed to promise.
Should index funds be illegal?
We talk sometimes about the theory that diversified institutional shareholders may be bad for competition among public companies. These shareholders, the theory goes, care about maximizing the profits of an industry (or of corporate America generally), not about maximizing the market share of any particular company, since they own all the companies. Therefore they will frown upon managerial decisions like cutting prices and adding capacity: Those decisions might be good for one firm but bad for the industry overall, and modern shareholders own the industry, not the firm.
The opposite of diversified institutional shareholders are concentrated founder-CEO-shareholders. Elon Musk doesn’t care so much about high and sustainable profits for the electric-car industry overall; he wants Tesla Inc. to win. He identifies with the firm, not the industry: His wealth is concentrated in one firm (and not its competitors), and also he goes to work there (and sometimes sleeps there) so he has an emotional attachment that a BlackRock Inc. index-fund manager cannot match.
If you believe, or half-believe, the diversified-shareholders-are-anti-competitive theory, what policy implications does this difference have? Should you support dual-class share structures that entrench founder-CEO control , on the theory that founder-CEOs, whatever their disadvantages, at least probably aren’t conspiring with their competitors to keep prices up? Should you be suspicious of “good” corporate governance, because good governance tends to give more power to shareholders (who are normally diversified) and less to managers (who care particularly about one firm)?
Ant Financial Services Group, a financial-technology juggernaut controlled by billionaire Jack Ma, is preparing to close a $10 billion private fundraising round that would value the Hangzhou-based company at $150 billion, according to people familiar with the matter. As part of the deal, investors putting money into Ant have to agree not to invest in or raise their stakes in companies controlled by major rivals such as social-media giant Tencent Holdings Ltd. and online retailer JD.com Inc., the people said.
Such severe investment restrictions are rare, investors and lawyers say, because investors are normally the ones who set conditions for companies before ponying up cash.
Ant’s ability to dictate its investment terms shows how the company and its affiliate Alibaba Group Holding Ltd. wield significant market power. It also reflects high demand for Ant’s shares: Some investors who wanted to take part were rebuffed because they weren’t offering enough money or had backed Tencent-linked companies, according to people familiar with the matter.
On the other hand I am not sure there are any lessons for public companies here. For fast-growing private companies, financing is an element of competitive strategy: If you can raise a lot of money and your competitors can’t, then you can invest more and grow your user base by underpricing your product; control of financing sources—getting a lot of money yourself, and preventing your competitors from getting money—is a path to victory. For mature public companies, I mean, what even is financing? Public markets are places for companies to return money to shareholders; those companies have no reason to care about preventing shareholders from investing in their competitors, and no mechanism to do so. If you never sell stock, you can’t dictate terms in a stock sale.
CBS v. Redstone.
“CBS Directors Play a Subtle Game in Viacom Battle,” argues Ronald Barusch, pointing out that CBS Corp.’s ridiculously over-the-top effort last week to get rid of its controlling shareholder Shari Redstone really had a more modest goal that it completely achieved: After last week’s nonsense, there is no way that Redstone will be able to force through a merger between CBS and Viacom Inc. over the board’s objections, including by using her voting rights to fire the board and install a new one.
To be able to pass legal muster, a merger between CBS and Viacom will likely need to meet what is known as the “entire fairness” standard. That means a judge must find that the deal is both fair financially and a result of a fair process.
The independent committee of CBS has all but ensured that if NAI decides to fire the directors to get a deal done, it will be an uphill battle to establish that the process was fair. Plus, by aggressively fighting for their position, even at the risk of being fired, if the independent directors do ultimately negotiate a deal they like, the process looks robust.
As I wrote last week, “presumably the special committee has hauled out this bazooka”—going to court to try to remove Redstone’s voting rights—“to try to force a negotiated solution that it really wants—something along the lines of a standstill on the Viacom deal and some guarantees of board independence.” Even if it doesn’t get any formal guarantees, at this point, the Viacom deal seems pretty dead and the board’s independence seems pretty secure, since anything Redstone does to consolidate her power is going to get reviewed carefully by a court, and will look like revenge on the board for trying to protect shareholders. Which, I mean, she deserves some revenge! But I am not sure a court will see it that way.
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