Deregulation and Proxy Recounts
(Bloomberg View) -- Regulation.
There have been a lot of stories recently about how the U.S. government has kind of given up on financial regulation. This week the Senate moved to limit strict Fed oversight (and stress tests) to just the dozen biggest banks. Here is a story about how the Office of the Comptroller of the Currency has gotten much laxer on a range of mostly consumer-protection-type regulations. (Its interim head "declared that the agency was returning to what he called its natural state.") Yesterday Richard Cordray announced that he will step down as the head of the Consumer Financial Protection Bureau, presumably to be replaced by an ashtray or a block of wood or Eric Trump. And: "Justice investigation into Russian laundering through Deutsche Bank gone quiet." None of these things feel like blockbuster structural changes to the U.S. banking system, but together they represent a pretty big lurch of the regulatory dial toward deregulation.
My question is of course: What does it mean for me? You know, I sit at my desk and watch banks and hope they do something beautiful or stupid so that I can praise or make fun of them. There was a time when banks did lots of beautiful things and lots of stupid things and lots of simultaneously beautiful and stupid things. Now they seem to do less of all of that, probably in large part because of the regulatory environment. After the financial crisis, regulators set out to make banking more boring, and to a remarkable degree it worked. Working at a big bank seems less exciting than it used to be; there are fewer opportunities or incentives to build magnificent edifices of financial engineering, but then there are also fewer opportunities to blow yourself up in stupid ways. The value of this tradeoff for society is hotly debated: The risk of a new crisis is probably lower, but it might come at the cost of reduced economic activity; the risk of banks ripping off customers is probably lower, but it might come at the cost of less access to credit. But for the purposes of entertainment it's not even a tradeoff: The beautiful stuff is entertaining, and the stupid stuff is entertaining, but the boring stuff that replaces them both isn't entertaining at all. "For what do we live," asks Mr. Bennett, "but to make sport for our neighbours, and laugh at them in our turn?" I realize there are other purposes to the banking system but here we are.
Now you can turn the dial on regulation, but the open question is whether you can turn the dial on culture. Did nearly a decade of grinding post-crisis repentance and regulation change how the banking industry operates, deep in its bones? Did all the clever financial engineers leave to build advertising platforms in Silicon Valley? Did all the swaggering proprietary traders decamp for hedge funds? Did all the swaggering capital-committing market makers get replaced by computerized agency matching platforms? Did Goldman Sachs Group Inc. become an online consumer lender? Did banks start paying employees less and working them less hard and generally transforming into normal companies with normal jobs for normal people? Will the banks look at the new regulatory environment and say "meh, maybe we'll dial up the consumer fraud a little bit, but the days of us totally rewiring the financial system with aggressive engineering are over, we'll leave that to the bitcoin people now"? Did the effort to make banking boring succeed permanently? Or is there a deep reserve of animal spirits that will come flooding back once regulators open the gates?
Look, to be fair, in the 2000 U.S. presidential election, 105,421,423 votes were cast, roughly 6 million of them in Florida, and it took a month, a Supreme Court case, and a still-sensitive controversy to conclusively declare a winner. Procter & Gamble Co.'s shareholder vote last month to elect new directors, in which activist investor Nelson Peltz of Trian Fund Management ran a proxy fight to try to win a board seat, had about 20 times as many votes to count. So it's not surprising that the vote-counters are having a hard time:
After the most expensive proxy fight in history, an independent firm’s count of the roughly 2 billion votes that were cast found Mr. Peltz had 42,780 more votes than a P&G director he ran against, the company said. That is a margin of 0.0016% of the shares outstanding.
Mr. Peltz quickly claimed a victory Wednesday and called on P&G to concede the contest and let him into its boardroom. But the Cincinnati giant didn’t admit defeat, saying Mr. Peltz “is leading” but that the tally was still preliminary and subject to a challenge period. P&G is still deciding whether to contest the results, a person familiar with the matter said.
Last month P&G had said that Peltz had lost by about 6.2 million votes, which is two orders of magnitude bigger than his (apparent) actual winning margin (and bigger than the entire 2000 U.S. presidential vote in Florida), but still pretty small for P&G: only 0.31 percent of the votes cast (and 0.24 percent of the shares outstanding). "P&G will disclose the final results after receiving the Independent Inspector of Elections’ final certified report, which we expect in the weeks ahead," it announced yesterday, and I suppose things could still be sliced more finely.
What if Peltz ends up losing by, like, six votes? It just seems like there would be a margin for measurement error here, where if the official count ends up being 1,000,000,000 for Peltz and 1,000,000,006 for management's candidate, then the best you can say would be "there is a slightly greater than 50 percent chance that the management candidate actually got more votes." It is epistemologically a tie. I am kind of with Peltz in thinking that a tie should go to the activist. "If 49 percent of your shareholders are unhappy, it is probably better to appease them than to just count on the other 51 percent," I wrote last month, and that's even more true if the numbers are 50/50.
Last month, when we discussed Peltz's (now vindicated) refusal to admit defeat, I grudgingly forced myself to type the words "this problem could all be solved with the blockchain!" That is grudgingly still true. I mean, you don't have to use the b word. This problem could all be solved by having a single central computerized voting system run by some trusted intermediary that provided clear voting instructions and kept a secure auditable electronic record of votes that could report its results in real time. This is not, like, Star Trek-level sci-fi at this point. People keep records on computers these days. We have the technology for it, and honestly we had the technology for it long before blockchains were invented.
And the financial world -- unlike the political one -- is so generally infused with technology that it is weird to find places where it isn't. Robots compete to buy stocks microseconds faster than other robots. People build artificial-intelligence-based systems that can figure out which stocks to buy better than humans can. And then you have a proxy fight and someone dumps two billion paper ballots on the floor of a warehouse and starts counting them up with an abacus and a clay tablet. It is a bit incongruous.
We live in an exciting time for incredibly boring financial innovation. Someone is going to invent much better ways to keep lists of shareholders and count their votes than the current fractured multi-level ownership- and vote-tracking structure, and then, more interestingly, people are actually going to pay attention and perhaps even implement those better cleaner smarter more automated methods. The time is ripe for them, in part because the word "blockchain" has so utterly captured the imaginations of people at the highest level of finance, and the blockchain is one plausible better method. But the time is also ripe because dumb stuff like this keeps happening, and seems increasingly unnecessary.
One vague thought that I have had about Saudi Arabia's planned initial public offering of its state-owned oil company is that it is a way for Saudi Arabia to diversify away from oil through formalism. If Saudi Aramco goes public by selling a 5 percent stake at a $2 trillion valuation, then the government will have $100 billion to invest in other countries or industries or whatever. But it will also have a $1.9 trillion remaining investment in Saudi Aramco, which will remain a mostly-state-owned oil company. But the government's position will have subtly changed. It won't just own "oil," or "an oil company." It will own "stock." It can plop those shares of stock into a fund and say "we have a $2 trillion diversified sovereign investment fund," even if 95 percent of that fund is invested in a single oil company. It is a first step to real diversification, but it is an important one. It will have transformed oil assets -- reserves, wells, refineries -- into financial assets.
Anyway it's a little funny that "SoftBank Group Corp. plans to invest as much as $25 billion in Saudi Arabia over the next three to four years," after "raising $45 billion from the country's Public Investment Fund" for SoftBank's own Vision Fund. There is a certain circularity. For instance: "The Japanese company’s Vision Fund also plans investments of as much as $10 billion in state-controlled Saudi Electricity Co. as part of efforts to diversify the utility into renewables and solar energy." There are probably simpler ways for the Saudi state to invest in a Saudi state-owned business than by routing the money through SoftBank! But you can see the appeal. It creates at least the idea of external validation. SoftBank isn't an arm of the Saudi state, and if it is investing in Saudi Arabia (even in state-owned companies) then you can at least hope that it is doing so based on clear-eyed economic considerations (even if it is also trying to build a relationship in which the Saudi state invests right back in SoftBank). It is a sort of a gentle step into privatization, in which the money comes from the government but is funneled and diluted through an outside investor.
Elsewhere, "Saudi Arabia’s sweeping anti-corruption purge should be viewed 'very positively' by potential investors in Saudi Aramco as a sign the kingdom is committed to economic reform, according to the state energy giant’s chief executive." Is that right? A crackdown on corruption should be viewed positively; an arbitrary purge of investors who have fallen out of favor with the government should be viewed negatively. Transparency and the rule of law make it easier to tell which is more likely; with an absolutist government you can never be quite sure.
Blockchain blockchain blockchain.
Here is a strange story in which the chairman of the Securities and Exchange Commission notes in passing -- in off-script remarks during a speech -- that basically the entire wave of initial coin offerings is illegal, because they are all unregistered securities. (To be fair, some ICOs actually avoid selling to U.S. retail investors in order to avoid violating U.S. securities laws, but many don't seem to care.) I agree with him! The strange part is that the SEC has done nothing about it: The ICOs go on, and the SEC comments that they are illegal, but it doesn't take any action to stop them. I assume it eventually will, but it does seem like the time is ripe now.
Elsewhere, "This is exactly what the bitcoin futures naysayers have been warning about: One of the exchanges which CME Group Inc. would use to price the contracts is having serious issues," because remember the core function of all bitcoin exchanges is to be hacked. And: "Square Is Letting You Buy Bitcoin on Your Phone."
And in cool cryptocurrency news, here is a program that will mine cryptocurrency on your computer and donate the proceeds to bail funds:
100% of the currency your computer generates is used by the Bronx Freedom Fund to post bail for low-income people detained in New York effective immediately. Beginning in January 2018, funds will be routed to The Bail Project, which will over the next five years post bail for people detained in more than three dozen cities nation-wide.
People are worried that people aren't worried enough.
One somewhat strange thing that people are worried about is that stock-market volatility is low now, which means that it will be high later. But the New York Fed's Liberty Street Economics blog has another post on "The Low Volatility Puzzle" that examines that question empirically and finds that, nope: "On average, extremely low volatility today predicts low volatility in the future, not higher." (And: "We find no evidence that being in a low volatility environment raises the probability of jumping to a high volatility state.") Stock-market volatility just isn't all that Minskyan; low current volatility is not necessarily a sign of "complacency" that will lead to higher volatility later.
But here is an even more interesting piece of evidence on "complacency": The Fed's authors chart "the term structure of market-implied volatility" based on longer-dated options, and find that "the forward curve indicates that the market is pricing implied volatility of around 19 percent in one to two years’ time." Volatility of 19 percent is somewhat above historical averages, and "this level contrasts with the pre-crisis period when the term structure of implied volatility was relatively flat."
So normally low volatility today predicts low volatility tomorrow. But now, unlike in the past, market participants see low volatility today and nonetheless expect -- and prepare for -- high volatility tomorrow. (High-ish, anyway.) That does not really suggest "complacency," does it?
People are worried about unicorns.
WeWork Cos. "has purchased a large stake in Wavegarden, a maker of wave pools," because of course it has:
It isn’t clear how Wavegarden—whose technology creates artificial waves up to 8 feet high for surfing at giant water facilities—would fit with WeWork, which takes on long-term leases for offices and remodels them into common spaces with a hip, millennial-conscious vibe.
Oh come on. It's clear. "WeWork, which takes on long-term leases for offices and remodels them into common spaces with a hip, millennial-conscious vibe and also wave pools." It makes perfect sense. Why wouldn't you want a wave pool in your hip, millennial-conscious office? I am getting a little angry right now that my sit/stand desks is not a sit/stand/surf desk. "I have a ton of respect for WeWork acting as irresponsible as their valuation warrants," tweeted Conor Sen.
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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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