What’s going on currently in the Financial World- from Matt Levine – Bloomberg – (Copyright Matt Levine Bloomberg News )
Matt LevineI writes the Money Stuff newsletter at Bloomberg Opinion. You can subscribe at this link, or read the archive at this link.
I am a columnist at Bloomberg Opinion. My daily newsletter is called Money Stuff. I have been at Bloomberg since 2013. Before that, I wrote for Dealbreaker.Before journalism, I was a corporate equity derivatives banker at Goldman Sachs, a mergers-and-acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, a federal appellate law clerk and a high school Latin teacher.I graduated from Syosset High School, Harvard College and Yale Law School.
I wrote a story about crypto for Bloomberg Businessweek. It is called The Crypto Story. Here is a link.
Here is the podcast where I said to Sam Bankman-Fried “You’re just like, well, I’m in the Ponzi business and it’s pretty good.”
I used to write at Dealbreaker. Here is my author page, possibly!
To Buy a Bank, You Have to Be a BankShelf charter
The cheapest way to get into the banking business might be to buy a failed bank. When the US Federal Deposit Insurance Corp. takes over a failed bank, it tries to find a buyer, and buying a bank from the FDIC has some attractive features. For one thing, you get a bank, with a brand name and customer relationships and branches and stuff; building all of that from scratch would take you a lot of time and money. You get it cheap, probably, because it failed. And, critically, you don’t buy the whole bank; you get to pick and choose what you want. You take over the failed bank’s customer deposits, but you can avoid many of its other liabilities (long-term debt, lawsuits, etc.), making it a fairly clean thing to buy. And you can buy most of the bank’s assets, but if it has any particularly hairy assets that you don’t want, you probably leave those with the FDIC.
There is one problem with this approach, though, which is that the FDIC won’t sell you a failed bank unless you are already a bank. This is the flip side of the good things in the previous paragraph: If you buy a failed bank from the FDIC, you are not actually buying the bank, taking over the entire corporate entity with its bank charter.[1] Instead, you are buying some of its assets and assuming some of its liabilities, including particularly deposits: The trade with the FDIC is that you agree to be liable for $X of the bank’s deposits, you agree to pay the FDIC $Y for the assets you want, and the FDIC credits the $X of assumed liabilities against the $Y purchase price.[2]
But only a bank can issue bank deposits; that’s the point of a banking charter. So if I wanted to take over a failed bank, and I showed up at the FDIC and said “look, give me all of that bank’s assets, and I’ll be good for its deposits — if any depositors want their money back, they can come to me and I’ll get out my wallet,” the FDIC would say no. Only a bank, with a banking charter, that meets capital and regulatory requirements, is going to be allowed to take over the deposits.
And so I guess one good way to get into the banking business is:
Get yourself a bank charter.
Wait.
When a bank fails, buy it.
The Financial Times reports:
Porticoes Capital will seek to take over banks closed by the Federal Deposit Insurance Corporation, the US regulator, according to an official filing. The firm’s sponsors aim to attract hundreds of millions of dollars from investors. …
The FDIC takes over US lenders when they fail and brokers deals to sell what remains. The agency typically likes to sell to other regulated banks so the loans and customers of collapsed lenders remain under the eye of regulators. The result has been that private equity firms and other outside investment groups are largely locked out of the bidding.
Porticoes won approval late last year from the Office of the Comptroller of the Currency to buy banks closed by the FDIC. Its so-called shelf charter is a workaround to traditional curbs on private investors. [Founder Leslie] Lieberman’s group was approved to run a bank holding company once Porticoes actually buys a bank. …
More banks would need to fail for Porticoes to be able to use money it has raised — and the list of potential targets is slim.
Despite the turmoil of early 2023, only five banks failed last year and all were resold within weeks.
Yeah, but it doesn’t hurt right? It is a little unclear to me whether Porticoes has raised, or is planning to raise, much committed capital. I don’t see why you’d need to lock up hundreds of millions of dollars to just wait for a bank to fail. The value here is not the money, it’s the charter. Next time a bank fails, you go to private equity firms and say “hey, do you want to buy that failed bank? Well you can’t. But if you give us the money, we can buy it for you.” It’s a good regulatory service.Charter airline regulatory arbitrage
No, wrong, this might be my favorite business origin story of all time:
Wilcox got the idea for the service in what’s possibly the least glamorous business origin story of all time. Combing through US Federal Aviation Administration regulations, he learned that while scheduled flights with more than nine seats have to meet onerous safety and security requirements, on-demand public charters have separate, less stringent rules. Though, they can’t specify flight times or cities or sell single seats.
To get around that, Wilcox decided to create two companies that would work together: One would make a flight schedule and sell tickets, and a second would fly the aircraft on specified routes at set times and dates. In reality, though, it’s one entity working behind the scenes.
“I spent months without sleep, just looking at all the rules, looking for ways why it couldn’t be done,” he said on a clear February day in a hangar at Dallas Love Field. “Every single person we talked to said, ‘No, you can’t do it.’” Then US regulators signed off on his idea. “So we did it.”
That is from a Bloomberg story about JSX, a charter airline that Alex Wilcox started after sleepless nights of reading FAA regulations. He read and read and read the rules until he found an arbitrage.[3] If you have an airline that sells and operates scheduled flights, you are subject to high and expensive safety standards. But if you divide that airline into two bits, one that operates flights and another that serves as a front end to set schedules and sell tickets, each bit is subject to lower standards. If the two bits are owned by the same corporate entity and coordinate together, then the result is something that looks like a single normal airline to customers, but looks like two separate less-regulated entities to regulators.
I guess this is not technically a finance story, but half of what I write about has the form “if you do Thing X it gets Regulatory Treatment Y, but if you divide it into Things X1 and X2, the combination is the same as Thing X but gets better Regulatory Treatment Z.” We have talked about treating loans as purchases, about derivatives to get around stock ownership limits, about special purpose acquisition companies to get around initial public offering rules, about brokered deposits as a way to get around FDIC insurance limits, about slicing up fund investments to get better ratings. I am sure that some of these businesses originated exactly as JSX’s did: Somebody thought, “well, this rulebook is long and boring, so probably nobody has read it all the way through, and if I do, money might come flying out.” Just a great way to find a business model.
Incidentally, we talked last week about a related but slightly different business model. Avid Bioservices Inc. had a convertible bond, and it made a small mistake in its administration of the bonds, and if you read the bond documents very carefully and paid close attention and had a good understanding of convertible market practice, you could have made a fair amount of money for yourself, and caused a lot of trouble for Avid, by calling attention to the mistake. Somebody did. I wrote:
That’s the thing about efficient markets, man. You might quite reasonably find section 4.06(e) of this 2021 convertible bond indenture, the section covering restricted transfer legends, boring, and not want to think about it. Avid quite reasonably found it boring, and did not think about it. But for someone who did find it interesting enough to pay attention, there was $7 million of prize money just lying around for the taking.
That is the small-scale version of all of these regulatory arbitrage businesses: If you read boring rules and think really hard about them, you can win monetary prizes.
Byrne Hobart also wrote about Avid last week, and he made another point:
Right now, it’s suddenly gotten much easier to do this at scale: you can unleash LLMs on indenture agreements, and try to find edge cases that the company didn’t think of or notice. These will all be technicalities in practice; in the Avid case, if the restriction had been a big deal to the note owner, they probably would have noticed right away. But, perhaps coincidentally, they only noticed after the newly-widespread availability of tools that can trawl through vast amounts of text to extract useful information.
I don’t know if the explanation for the Avid situation is really “some hedge fund used an artificial intelligence large language model to look through convertible bond indentures to find profitable mistakes”; as a former converts structurer myself, I would like to think that some former converts structurer found this trade using general market knowledge and connoisseurship. But the larger point is right: An LLM probably can read the boring documents for you and spot the issues. And if “find profitable mistakes in bond indentures” is a useful thing to ask your LLM to do, then maybe so is “find profitable loopholes in aviation regulations and tell me what businesses to start to exploit them.”
Anyway the Bloomberg JSX story goes on:
All that growth might now be the company’s undoing.
The FAA says its review of rules for public charter carriers like JSX came “in light of recent high-volume operations” that “appear to be offered to the public as essentially indistinguishable from” commercial carriers. The “size, scope, frequency and complexity” of public charter operations like JSX has “grown significantly over the past 10 years,” the agency wrote in an August filing.
Ah well. Nothing lasts forever; on to the next business model.
Quants
Another classic way to set up a business is to go work for a big sophisticated financial firm that has built a good business by being the smartest and fastest at applying high-tech methods to squeeze out the last penny in hypercompetitive liquid financial markets, spend some time there learning the techniques, and then leave for a sleepier market where the competition is weaker and spreads are wider. This describes, like, 90% of crypto markets, for better and worse. But here’s a Wall Street Journal article about quant traders in China’s stock market:
The launch of China’s quant industry goes back to around 2010, when a generation of Chinese-born traders returned home after working for some of the biggest U.S. hedge funds. In the wake of the global financial crisis, when China’s economy was booming while the Western world suffered, setting up a fund in mainland China was a natural choice for these traders.
Millennium, a New York-based fund, was a particularly strong breeding ground for talent. Wang Chen and Yao Qicong, who had both worked there, moved to China to help set up Ubiquant Investment in 2012. Ma Zhiyu left to set up Ningbo Lingjun Investment Management Partnership in 2014. The two funds are now among the biggest quants in China, with Ubiquant managing more than $7 billion.
At some level, “we will take the techniques we learned in the most competitive markets in finance and apply them to a sleepy backwater” is an obviously appealing pitch, and it made a lot of fortunes in crypto and also in Chinese stock markets. But “we will apply the statistical techniques we learned in a market with a ton of historical data through various market regimes, and apply them to a less liquid market that started 20 minutes ago” has some obvious flaws, too:
China’s quants had a few problems not shared by their U.S. counterparts.
For one thing, the country’s rapid emergence as an economic powerhouse meant these funds didn’t have decades of data to fall back on, a major failing for firms that rely on data mining to identify trades. The even bigger problem was China’s great intangible: the whims of the government.
The algorithms used by quant funds digest large amounts of historical data and take advantage of repeatable patterns. While China’s stock–market interventions have become more frequent in recent months, they are still not regular occurrences.
“Quants are just really bad at coping when something suddenly changes,” said Phillip Wool, head of research at money manager Rayliant Global Advisors. “If you have a policy intervention that changes the rules of the game, these models just aren’t that adaptable.”
And:
The country’s two biggest stock exchanges and its securities regulator launched a widespread clampdown on quants in late February, tightening the rules governing the sector and temporarily banning two funds from trading altogether.
If you learned your trade at Millennium, you probably did not learn to put that much weight on the risk of regulators banning you from trading when the market goes down, because that was not a regular occurrence at Millennium.
Cat bonds
One more good business model. Learn a real thing about the world; learn to predict weather or something. Then hope that that thing gets ingested into the financial system, so that instead of predicting weather as one of many inputs into some difficult complicated physical business like farming or homebuilding or airline operations, you can just trade concentrated weather derivatives on a computer and get rich directly off your weather-predicting abilities. Here’s a Bloomberg profile of John Seo:
Seo, a 57-year-old hedge fund manager in southern Connecticut, is the reason why millions of people from New Zealand to Chile have financial protection against natural disasters. His fund, Fermat Capital Management, owns the world’s biggest collection of catastrophe bonds — complex financial instruments that insurers issue to cover risks they can’t handle.
Fermat is an oddity in the hedge fund world. Its modest office, in the affluent town of Westport, sits in a former post office across from an auto-repair shop. There are meteorology journals in the reception area and equations scrawled on a whiteboard. Investment decisions are guided by complicated weather-risk computer models powered by large servers that whirr ceaselessly behind a glass window. …
Investing in cat bonds was the most profitable hedge fund strategy of 2023. Fermat delivered a 20% return, beating the average 8% achieved by hedge funds as a whole. While other cat bond funds did well too, Fermat’s $10 billion portfolio — capturing a quarter of the market — made it by far the most prolific investor to take advantage of a bumper year. …
Seo, who has a PhD in biophysics from Harvard University, founded Fermat in 2001 with his brother Nelson, an economics graduate from the Massachusetts Institute of Technology. In a room above Seo’s garage, the two built a science-based model to weigh the probability of a natural disaster against the returns of a cat bond. They named the fund after Pierre de Fermat, a French mathematician who helped lay the foundation for probability theory.
Quantitative financial firms regularly use physical models as metaphors for financial markets — stocks move sort of like particles in Brownian motion, and this profile has a discussion of “one of Fermat’s strategies” that is “inspired by the laws of physics that govern how airplanes fly” — but of course if you can just use physical models to actually predict the weather that probably helps you trade catastrophic weather risk.
Goldman North
How could it possibly be otherwise:
One executive described an Evercore practice at the end of each year where managing directors submitted how much revenue they believed to have personally originated. Every year, the sum of those numbers has exceeded the group’s total revenue.
That is from a Financial Times profile of Evercore Inc. At a big full-service investment bank, I would assume that the ratio of (1) how much revenue the managing directors believe that they personally had originated to (2) revenue has to be at least 2 to 1. If a big bank advises a private equity sponsor on a leveraged buyout of a ball bearings company, there are absolutely going to be a sponsors banker, a leveraged finance banker and an industrials banker who say “oh yeah that was my deal” and claim 100% of the revenue during bonus season. As they should! They all probably worked on the deal, they all probably had relationships that were helpful in winning the business and getting the deal done, it is just a team sport where all the team members think they are the stars.
Evercore is a bit different, though, as it is more of a pure mergers-and-acquisitions boutique. (Though: “Forty per cent of Evercore’s revenues in 2023 came from outside traditional M&A deals.”) If everyone is an M&A banker, it’s probably pretty clear who brought in each deal, though there will be some debates; if a senior banker hands off a smaller longtime client to another MD who then gets a deal mandate, both of them will probably take some credit.
Also, more important, at a big full-service bank everyone understands that there are multiple claims on each piece of revenue, and the bonus pool is allocated in a fuzzy way that reflects that. At Evercore, it is more eat-what-you-kill, so that number that you personally originated matters more:
Insiders say the bedrock of Evercore’s success has been an explicit “eat what you kill” bonus structure, where top bankers expect to keep about a quarter of the deal fees they bring in. Typically, large Wall Street investment banks will pool revenues and then leave it to the boss’s discretion on how to reward employees. …
In an industry where working on one transaction can net tens of millions of dollars in fees, the Evercore approach has appealed to ambitious bankers who see a strong pipeline of deals in the offing.
“The fact that your personal comp is going to be logically derived is a reason why you grow the pie, and different than the ‘black box’ at competitors,” said one Evercore banker.
The trade-off may be a fiercely competitive culture where bankers can become territorial about the projects they are working on, a dynamic that risks becoming problematic as Evercore gets larger. “The model works. But it’s hard to scale,” another banker at the company said.
At a big bank, a lot of scale comes from cross-selling; the industry banker drags the interest-rate-derivatives banker to a client meeting, the client does a derivative trade, and both bankers claim fuzzy credit for the revenue. “You get a quarter of all the fees you originate” makes that a bit harder. What if there are five people at the meeting?
Anyway the story calls Evercore “Goldman North” and draws a contrast with Goldman Sachs Group Inc. (disclosure, where I used to work):
“Evercore is like Goldman was 20 years ago,” said one person familiar with both firms. “It’s very entrepreneurial, they celebrate wins. Goldman [today] is more about lamenting losses.”
Another Evercore banker put it more bluntly: It’s “Goldman without the bull****.”
You could tell a crude, like, 25-year history of US investment banking that would go something like this:
Once, there were “commercial banks,” which made loans, and “investment banks,” which provided advice on mergers and acquisitions, underwrote stock and bond offerings and traded securities.
Over time, the regulatory barriers between them softened, and they tended to blend together. The commercial banks wanted to get into the lucrative investment banking business, while the investment banks needed to get access to bank balance sheets to offer more financing services to their customers.
This culminated in 2008, when the five big independent investment banks (Goldman, Morgan Stanley, Merrill Lynch, Bear Stearns and Lehman Brothers) all either disappeared, were acquired by big commercial banks, or became chartered bank holding companies themselves.
That was the high-water mark though: Everyone looked around and said “huh, this has gone far enough,” and since then the trends have been toward disaggregation, going back to a separation between classic banking and the trading and advisory businesses.
So we talked last week about the increasing importance of prime brokerage divisions at big banks, which lend money to hedge funds and proprietary trading firms. I suggested that one possible interpretation might be that banks — for regulatory reasons, for risk reasons, for reasons of changing culture — do less trading using their own balance sheets than they did in, like, 2008; hedge funds and prop trading firms have picked up the slack, and banks remain in the business of lending money to them.
Similarly, when I was an investment banker, it was taken for granted that having the balance sheet of a big bank was helpful in winning advisory business. Now, though, maybe it is cleaner and simpler to be a boutique, to advise on mergers without having a bank attached, to be Goldman without the bank.
Things happen
Corporate Bond Rush Is Breaking Down a Maturity Wall That Everyone Feared. Basis Trade Is Seen Dwindling as Asset Managers Pivot to Credit. TikTok Plans Legal Fight If US Divestment Bill Becomes Law. How TikTok Was Blindsided by U.S. Bill That Could Ban It. Stripe Says Payment Volume Surged to $1 Trillion Last Year. Argentina’s record bond swap aims to pave way to ending currency controls. Social Capital sacks two partners over ‘ situation’ involving AI investment. Surge in Fake Ozempic Reveals Dark Side of Weight-Loss Frenzy. Ex-Wall Street Banker Takes On AOC in New York Democratic Primary. German military still faxes documents and cannot radio allies, official warns. OpenAI Calls Elon Musk ‘Incoherent’ in Legal Filing. “If you meet [Ye] on an airport, I don’t know what you do. Do you hide? Or what do you do?”
Elon Musk Wanted Control, Not Charity
OpenAI
Here is a partial list of things that Elon Musk has thought are the most important things in the world:
“Solving the environment,” by building electric cars at Tesla.
Making humanity a “multi-planet species,” by building spaceships at SpaceX.
Buying Twitter to prevent the “corrosive effect on civilization” of San Francisco’s “mind virus.”
I want to make a few points about this list. First: It’s a fine list? Stopping climate change, colonizing space, and changing public discourse are all reasonable things to prioritize. There are tech founders who are like “I wanted to solve the problem that sometimes when I order food delivery, it arrives cold”; Elon Musk is not a founder like that.[1]
Second: He has made a lot of progress on these problems. Tesla revolutionized electric cars; SpaceX revolutionized space; I personally do not care for the effect that Musk has had on the conversation at Twitter (now X), but he sure has had an effect, and I assume he’s happy with it. As a founder of companies intended to solve big problems, Elon Musk has been quite effective.
This is obvious stuff. “Elon Musk tackles big problems and is unusually good at solving them” is just conventional wisdom, which is why there are glowing biographies written about him and some days he’s the richest person in the world. The main way to get really rich is by solving big problems successfully.
And that’s the third point that I want to make about this list: When Elon Musk has looked around and identified a big problem and set about trying to solve it, he has done so by founding (or acquiring) a for-profit company that he owns and controls.[2] This is not the only way to (try to) solve big problems. Bill Gates, for instance, got very rich by selling software and then decided to improve the world by donating a lot of money to charitable works. Or various billionaires try to improve the world by supporting politicians who they think will do good things. Musk has dabbled in these approaches, but mostly they are not his preference. “‘Most philanthropy was bulls—,’ Musk told Gates” once, arguing that Tesla did more good for the world than most charities.
And this too is a pretty common view. It is not the only view — a lot of people think that philanthropy is good! — but in Silicon Valley tech circles it is fairly conventional to think that startups are a better way to improve the world than charity, that startups can be more ambitious, more focused on results, have a better alignment of interests and more motivated employees, and can raise and deploy a lot more money than charities. “Technological innovation in a market system is inherently philanthropic,” wrote Marc Andreessen last year, in a “Techno-Optimist Manifesto” laying out this view.
Now, I don’t think that Musk thinks that all profit-seeking companies, or all tech startups, are good; he criticizes lots of them, and had to go and buy Twitter because its previous management upset him. I just think that he thinks the best way to improve the world is generally through a for-profit company that he runs. And even this view — “the highest form of philanthropy is a for-profit company run specifically by Elon Musk” — is pretty widespread. Larry Page has mused about leaving his fortune to Musk, because Musk’s for-profit businesses are more philanthropic than any philanthropies he can think of.
Last week Musk sued OpenAI, arguing that it was founded as a nonprofit organization to build artificial intelligence for the benefit of humanity, that he was a big donor to that nonprofit, and that it has turned into a for-profit company in violation of a supposed agreement not to. What I find strangest about all this is that OpenAI was a nonprofit to begin with: Its founders, people like Musk and Sam Altman, are generally leading proponents and examples of the idea that the best way to do good in the world is with a for-profit tech startup.
At some level I can understand why artificial intelligence is different from electric cars or rockets or social networking: Powerful artificial intelligence could potentially put humans out of work, enslave us, kill us, etc.; Altman has said that AI is “probably the greatest threat to the continued existence of humanity,” terrific. Building AI that enriches its owners but immiserates everyone else would be bad. Still, all of the advantages of startups kind of remain true about AI. People might be more motivated to build AI if it will enrich them than if it won’t.[3] It was always an odd fit for Altman and Musk to start a noprofit together, an awkward choice to jam tech startup ideas and methods into a nonprofit box.
Anyway here’s this:
OpenAI fired back at a lawsuit filed against it by Elon Musk in a blog post Tuesday, using the billionaire’s own emails to show he backed the company’s plans to become a for-profit business and that he insisted it raise “billions” of dollars to be relevant compared with Google.
Here is OpenAI’s blog post, which explains that OpenAI was founded as a nonprofit but eventually decided it needed more money than it could get from donors:
We spent a lot of time trying to envision a plausible path to AGI. In early 2017, we came to the realization that building AGI will require vast quantities of compute. We began calculating how much compute an AGI might plausibly require. We all understood we were going to need a lot more capital to succeed at our mission—billions of dollars per year, which was far more than any of us, especially Elon, thought we’d be able to raise as the non-profit.
Yes, right, it turns out that it is easier to motivate people to give you computing power if you pay them for it, it is easier to motivate researchers to develop artificial intelligence if you give them stock options, and it is easier to get people to give you money if you offer them a share of your financial returns. (OpenAI has raised roughly 100 times as much money from investors as it ever did from donors.) If you want to build a car company or a rocket company or a social network, this is also true, so it seems intuitive to apply the same reasoning to AI.
Elon Musk knows this and, apparently, agreed that OpenAI should pivot to profit. But he took his usual view, that the best way to do good for the world was through a for-profit company that he controlled:
In late 2017, we and Elon decided the next step for the mission was to create a for-profit entity. Elon wanted majority equity, initial board control, and to be CEO. In the middle of these discussions, he withheld funding. Reid Hoffman bridged the gap to cover salaries and operations.
We couldn’t agree to terms on a for-profit with Elon because we felt it was against the mission for any individual to have absolute control over OpenAI. He then suggested instead merging OpenAI into Tesla. In early February 2018, Elon forwarded us an email suggesting that OpenAI should “attach to Tesla as its cash cow”, commenting that it was “exactly right… Tesla is the only path that could even hope to hold a candle to Google. Even then, the probability of being a counterweight to Google is small. It just isn’t zero”.
Elon soon chose to leave OpenAI, saying that our probability of success was 0, and that he planned to build an AGI competitor within Tesla. When he left in late February 2018, he told our team he was supportive of us finding our own path to raising billions of dollars.
And now Elon Musk in fact does have a for-profit artificial intelligence startup that he controls and that competes with OpenAI. The Wall Street Journal reports:
After Musk filed his lawsuit, Altman wrote a memo to his staff: “The implication that benefiting humanity is somehow at odds with building a business is confusing,” he said. “I miss the old Elon.”
No, see, he still thinks that building a business is the best way to benefit humanity, which is why he’s doing it. But the old Elon also liked to make outlandish claims in court; you just can’t take this stuff too seriously.
Celsius
When I worked as a mergers-and-acquisitions lawyer and then as an investment banker, I thought that you could trade stocks in the US from 9:30 a.m. to 4 p.m. New York time, Monday through Friday. Was that completely accurate? No, of course not: There were, and still are, early morning and after-hours trading sessions, and I knew that. But it was close to true: There was, and still is, much more trading during normal market hours than in the extended sessions.
And it was a very useful approximation of the truth. In particular, here are two stylized facts that are sort of true and that work very nicely together:
“The market is closed evenings, early mornings and weekends.”
“Public companies have an obligation to keep their investors informed about material stuff that is going on.”
For example: Public-company mergers and acquisitions tend to be intensively negotiated over the weekend, and are often announced on Monday mornings.[4] Why? Well, because if a public company reaches an agreement to sell itself, that is an extremely material fact, and it should really announce that right away. You do not want people blithely buying and selling the stock at $35 when the company has already signed a merger agreement to sell itself for $50 per share. If you sign that deal at 11:46 a.m. on a Wednesday, first of all, every second that you spend drafting the press release is precious, and second, whenever that press release does come out, it’s going to be disruptive: The stock will spike up, people will make and lose fortunes, people who see the press release a millisecond before everyone else will have a huge advantage, and you will generally have disorderly and unpleasant trading. In fact, if you do find yourself needing to announce a merger at 11:46 a.m. on a Wednesday, you will ordinarily ask the stock exchange to halt trading in the stock first, and reopen it only after the announcement has gone out and everyone has had a few minutes to read it.
But that is stressful and disruptive too, and it’s much better to just get everything buttoned up on Sunday evening, get the press release ready to go, and put it out first thing Monday morning, well before the market opens.[5] Give everyone plenty of nontrading time to digest and understand the news, so that when trading starts everyone is on a level playing field. Also, if for some reason there is a glitch in the system when you hit publish on the press release at 6 a.m., you have time to fix it: If it goes out at 6:20, that’s fine too.
(To be clear, this stylized fact is good and useful from the abstract perspective of the public company, but it was very bad from my perspective as a young M&A lawyer. Terrible hours!)
Anyway, I mostly still think that
“market hours” are 9:30 to 4, Monday through Friday,
you are supposed to put out material news “outside of market hours,” and
it doesn’t matter all that much exactly when you do that, as long as you leave plenty of time before the market opens.
And I think a lot of other people still think that too, in part out of old habit, and in part because it is still sort of true, and in part because it remains very useful.
But there has been some creep toward always-on financial markets — we talked last week about a proposed 23-hour-a-day stock exchange — and I worry that this stylized fact is no longer true. We talked a few weeks ago about a typo in Lyft Inc.’s earnings release. Lyft put out the release right after the market closed on a Tuesday, there was a material typo, Lyft did an earnings call at 4:30 p.m., it verbally corrected the typo, and it filed a corrected earnings release at 5:51 p.m. Absolutely no harm, no foul, on the traditional way of thinking: All of this happened after hours, and by 9:30 the next morning everyone had had plenty of time to digest it.
But in fact $700 million worth of Lyft stock traded in the after-hours extended session that Tuesday, roughly three times as much as Lyft usually trades in the regular trading session. And there were news stories about it, and readers emailed me to be like “is this securities fraud,” and Lyft’s CEO had to go on television to say he was sorry. I forgive him! I wrote:
It is customary to do these things after market hours for — well, not exactly for this reason, but kind of for this reason? You put out the press release just after the market’s regular trading session closes at 4 p.m., and investors have 17.5 hours to think about it before the market opens again at 9:30 a.m. the next day. They can ponder the earnings release at their leisure, update their models, ask questions on the earnings call, and generally take their time to digest the new information and formulate a price view before the market opens and they have to trade on it. If there’s anything ambiguous or surprising in the earnings release — or a typo! — the company and the investors have time to clarify it, and they can trade the next day with well informed views. …
Lyft can’t stop its shareholders from trading after hours, but in some rough sense that’s not its responsibility. If you want to trade in the after-hours market the second the press release hits the tape, the risk of typos is on you.
And then last week Celsius did this:
Celsius Holdings Inc.’s quarterly results were sitting online, waiting to give anyone who looked a sneak peek at the earnings that would set off a 20% rally in the energy-drink company’s stock price.
Not many people, it seems, knew they were there.
The company, which has a market value of about $19 billion, was scheduled to release its fourth-quarter and full-year results at 6 a.m. New York time on Thursday.
But they appeared on Celsius’s website Wednesday night shortly after 7 p.m., with screenshots later circulating on X. The stock edged higher around that time, but on featherweight volumes. Trading picked up right at 6 a.m. Thursday, with shares falling more than 5% premarket before surging during the regular session by the most since August. They ended the day at an all-time high. …
It appears to be the latest blunder of what’s been a fairly gaffe-heavy earnings season, with notable clerical errors in reports from Lyft Inc., Planet Fitness Inc., Mister Car Wash Inc. and Rivian Automotive Inc. …
Of course, even if investors did see Celsius’s report when it became available Wednesday night, they may not have been able to trade on it at the time and would’ve waited until Thursday’s premarket session, said Kenneth Polcari, chief market strategist at Slatestone Wealth LLC.
“I think it’s just sloppy,” Polcari said of the early release. “But I don’t think anyone was disadvantaged.”
It’s fine! This is how it’s supposed to work! There are two sorts of time in the stock market:
From 9:30 a.m. to 4 p.m., people are trading and every millisecond counts.[6]
From 4 p.m. to 9:30 a.m., and all weekend, time stops mattering: That whole stretch of 17.5 or 65.5 hours is effectively a single point, and there is no meaningful difference between 7 in the evening and 6 the next morning.
If you put your earnings up on your website at 7 p.m. and then put them out on a news wire at 6 a.m., that’s fine! Those times are the same time! You did exactly what you are supposed to do; you got the information out there in the quiet time between when the market closed and when it opened again. Except the market was kind of open the whole time.
The board is in charge
The other day I mentioned a lawsuit against Crown Castle Inc., whose estranged co-founder sued over a deal the company struck with Elliott Investment Management. Elliott had run an activist campaign and threatened a proxy fight, and Crown Castle settled by giving Elliott two board seats. The co-founder, Ted Miller, wants to nominate his own board candidates and objected to Crown Castle’s agreement to endorse Elliott’s directors without even considering his. “The affairs of Delaware corporations,” his lawyers wrote, “must be managed by boards of directors, not backroom deals.”
Well, this week Crown Castle and Elliott amended their deal to add a “fiduciary out.” That is: They still have a contract saying that the board will endorse Elliott’s nominees, but now the contract specifically says that the board can change its mind if it decides that that’s in the best interests of shareholders:
If the Board in good faith determines (a “Recommendation Determination”), after consultation with counsel, that the fiduciary duties of the members of the Board as directors of the Company require that the Board (x) change or withhold a prior recommendation that the Company’s shareholders vote “for”, or (y) recommend that the Company’s shareholders vote “against”, the election of a New Director (a “Specified Director”), then: [it can].
That does seem like a fairly straightforward fix. Miller’s objection was a technical point of Delaware law: The board of directors has to run the company in the way that it thinks is best for shareholders, so signing a contract saying “the board will recommend your nominees” might be illegal, if (1) the board later gets other nominees, (2) it decides, in its heart of hearts, that those nominees are better, but (3) it feels bound by the contract to recommend the first, worse nominees. But if you rewrite the contract to say “the board can change its mind,” that addresses the problem. And these outs are not uncommon. In particular, many public-company merger agreements let the target company’s board get out of the merger if, after jumping through some hoops, they conclude that another deal is in the shareholders’ best interests.
Obviously rewriting the contract to say that the board can change its mind makes it a less useful contract. But the point is that, here, the board wanted the deal with Elliott, and probably doesn’t want Miller’s nominees on the board. Rewriting the contract solves the technical problem but probably doesn’t change what will actually happen.
Good honeypot
The internet tells me that there are about 1.2 million people in the US with top secret security clearance. You could imagine a sort of cool spy-movie world in which “top secret” secrets were really top secret and only shared with a few, carefully vetted, highly trustworthy people. But at 1.2 million people, nah. At 1.2 million people, even if your vetting process is 99.99% reliable, you will still have 120 people who forget their top secret documents on the train, or leave their top secret laptops open at the coffee shop while they go to the bathroom, or have loud top secret phone conversations in public places, or are actual spies for the other side. At 1.2 million people, no matter how good your vetting is, the far left tail of the trustworthiness distribution is going to be this guy:
A civilian employee of the U.S. Air Force assigned to the U.S. Strategic Command (USSTRATCOM), at Offutt Air Force Base, was arrested Saturday, March 2, for allegedly conspiring to transmit and transmitting classified information relating to the national defense (National Defense Information or NDI) on a foreign online dating platform beginning in or around February 2022 until in or around April 2022.
According to the indictment, David Franklin Slater, 63, of Nebraska, worked in a classified space at USSTRATCOM and held a Top Secret security clearance from in or around August 2021 until in or around April 2022, after retiring as a Lieutenant Colonel from the U.S. Army. It is alleged that Slater willfully, improperly, and unlawfully transmitted NDI classified as “SECRET,” which he had reason to believe could be used to the injury of the United States or to the advantage of a foreign nation, on a foreign online dating platform to a person not authorized to receive such information.
Yes, somewhere out there, there will inevitably be a guy who (1) has a top secret security clearance and (2) will hand out military secrets to impress obviously fake partners on an online dating site. Allegedly Slater got classified briefings about Russia’s invasion of Ukraine, and he had a fake online girlfriend “who claimed to be a female living in Ukraine on the foreign dating website.” From the indictment:
Co-Conspirator 1 [the fake girlfriend] regularly asked DAVID FRANKLIN SLATER to provide her with sensitive, non-public, closely held, and classified NDI, to which DAVID FRANKLIN SLATER had access as a result of his employment with the United States Air Force. For example, Co-Conspirator 1 stated in 2022: …
On or about March 11, “Dear, what is shown on the screens in the special room?? It is very interesting.” …
On or about March 15, … “You are my secret informant love! How were your meetings? Successfully?”
On or about March 18, “Beloved Dave, do NATO and Biden have a secret plan to help us?” …
On or about April 12, “Sweet Dave, the supply of weapons is completely classified, which is great!”
Did he ever worry that maybe she only loved him for his top secret information and not for his sparkling personality? Did he care? How could this possibly have worked? Well, it only had to work on one guy.
What does Crypto smell like?
Here’s a terrible commercial from Binance. I am dying to know what it smells like, if anyone has a bottle.
Things happen
New York Community Bancorp Seeks Cash Infusion. The traders hunting for power-grid bottlenecks. SEC Scales Back New Pollution-Disclosure Rules for Companies. Bitcoin Volatility Picks Up After Token’s Run to All-Time High. The Believers Who Rode Bitcoin to a Record High—and the Ones Who Missed Out. Citi Reorganization Has Gone Swifter Than Expected, CEO Says. UBS chief Sergio Ermotti hits out at Europe’s ‘ parochial’ view of banks. EV group Lucid admits it cannot rely on ‘ bottomless wealth’ of Saudi owner. China Stock Watchdog Vows Action at Times of ‘Market Failures.’ Dartmouth Players Vote for Union in First for College Sports. Vax-happy 62-year-old gets COVID shot more than 200 times — leaving scientists stunned. “Oblectate, nunc hic sumus.”