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What We Read This Year

Typically I write about what I’m reading this week. Truthfully, this week I’ve been looking back at what I’ve been reading this year.  Here are my favorite excerpts from 2016:

This is from a time when no one thought Trump had a shot at winning the election.  We can now look back at our naiveté! It was a different time.  

The Wall Street Journal recently wrote an interesting piece on Donald Trump’s business dealings. Of particular interest is misadventures at the Taj Mahal casino in the 90’s. 

“Mr. Trump bought a class of shares that gave him just a slice of Resorts’ equity, but voting control. From that perch, he pushed through a service contract that would have the company pay him $108 million over five years. He told casino regulators the company could raise the cash needed to finish its casino only by assuring lenders Mr. Trump would remain involved, which this contract did.

Upon news that funding was uncertain, Resorts’ stock plunged. Mr. Trump then told investors the only way to finish the Taj Mahal was for him to buy Resorts at just above its reduced share price. Construction lenders, he said, were put off in part by the high cost of his service contract.”

This type of transaction isn’t exclusive to Trump but like most of what he does, there is a special “Trumpiness” to it.  

When the US became a tax haven:

Bloomberg wrote a story about how the US is shunning new global disclosure standards and becoming a new market for wealthy foreigners to move their money to. Peter A. Cotorceanu, a lawyer at Anaford AG, a Zurich law firm, had this to say, “How ironic—no, how perverse—that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour.” Foreign banks and financial institutions feel better about it. Rothschild, for instance, opened a trust company in Reno, NV and is moving clients’ money from exotic locales to avoid the international disclosure requirements. And while the firm is quoted as saying the US “is effectively the biggest tax haven in the world” their spokeswoman also says, “We do not offer legal structures to clients unless we are absolutely certain that their tax affairs are in order; both clients themselves and independent tax lawyers must actively confirm to us that this is the case.” I guess that puts my mind at ease: before moving massive fortunes to secretive US-based trusts the company is at least asking the clients if their taxes are in order. I also have to wonder how independent said lawyers are…I mean someone has to pay them right? I assume that either the institution or the client is fronting money for this service and while I hope for the best that’s not really how conflicts of interest work.

When Yahoo found itself in a seller’s market:

Yahoo launched the sale of its core business in February this year, prompted by urging from shareholders. The move was seen as largely positive and pushed shares up following the announcement. It has now been more than 3 years since Marissa Mayer took the helm as CEO. Most recently, Yahoo bankers have been giving a “book” to prospective buyers and the consensus is not good. Re/code got access to the book and while they were not able to publish its contents they did share their impressions. According to sources, the book is “unusually confusing and perhaps purposefully so.” The situation at Yahoo has not been good for some time and it appears that the firm is scrambling to make this auction work. The article cites conversations with buyers where it has been expressed that Yahoo is shifting things around so much it has become impossible to tell what is making money and what is not. The article closes with a final comment, put very well, “It’s like a dilapidated house in Silicon Valley — you walk in and are overwhelmed by the work that needs to be done and how bad it has gotten…But then it’s in a good neighborhood, the market is nuts and there’s not many like it anymore, so you have to hope you can fix it.”

When hardly anyone noticed banks were doing bad things:

The Consumer Financial Protection Bureau took action against Citibank for lying about how much debt people owed the bank when the debt was sent to collections. The infractions took place in New Jersey, but that didn’t work in Citi’s favor. Citi was required to pay back $11 million that the debt collection firms (the ones that falsified documents) collected and had to agree to forgo collection on another $34 million in debt they were trying to collect. I know I have stated this before but in consumer finance, two wrongs sometimes make a right. This also reminds me of playing Monopoly, “Bank error in your favor, collect $200.” As a child I was always puzzled by this, as I never remembered making a transaction at the Monopoly bank. The theoretical nature of the windfall was lost on me. Like a good consumer though, I took my $200 and shut up. Sure, lying about the amount of money people owe you is bad, really bad, but shouldn’t people have to pay back their debt…even if the bank’s law firm wrote down incorrect information? 

When Freddie and Fannie shareholders threw a fit:

After the housing and banking crisis Fannie Mae and Freddie Mack were taken over by the government as part of the federal bailout. In order for the government to feel ok about giving them money, they felt that the institutions should be placed into conservatorship and run by the Federal Housing Finance Agency (FHFA). In recent months many private shareholders have pushed for the government to relinquish its hold over the two companies. The most popular argument is also the dumbest. Marsha Blackburn (R., Tenn.) introduced a bill in March of 2016 that would suspend the government’s involvement in both companies under the argument that undercapitalization “threatens to put taxpayers on the hook for another bailout.” The reason this is so frustrating is that Fannie and Freddie send all profits to the federal government. Let’s look at this differently. You are in financial trouble and I agreed to help you as long as you give me all your net income. In 2015 you give me $20,000. In January of 2016 you are short on money and I give you $5,000 of your own money back. That’s not a bailout. When (if) this happens to Fannie or Freddie, it doesn’t mean taxpayer funds will be used to provide relief.  Looking at it from the government’s perspective, they have already taken $130 billion in profits. Should there be another housing downturn, Fannie and Freddie may need to recoup say…$100 billion? Then the government would have $30 billion left! It’s a good thing Marsha Blackburn is available to stand up for the poor, defenseless government. I’m sure that it’s a total coincidence that her bill was proposed the day after Timothy Pagliara, head of Investors Unite (a Fannie and Freddie shareholder group) donated $5,000 to her campaign (her 1st donation since 2009).  

This article will always have a special place in my heart:

In China, banks are doing more than just monitoring employee emails. A motivational trainer was filmed beating eight bank employees with a stick after they performed poorly on a training weekend. After that he shaved the men’s heads and cut the women’s hair. Is this an example of a glass ceiling? I know women are often treated differently than their male counterparts in business but in this case it seems like they are being treated better? Maybe the women feel like their heads should have been shaved too. According to the trainer, Jiang Yang, “Spanking was a training model I have been exploring for many years.” Honestly, the whole thing reads like satire. The bank’s chairman and a deputy governor were fired, which feels like the obvious outcome. However, the article is silent on if the bank will continue using the training company. Probably not, right? I’m not surprised that people were outraged but I am surprised it happened at all. Not that a trainer would beat people with a stick. I have often wanted to beat an employee with a stick, but the trainer told the employees to line up and prepare to be beaten. And they did. I assume they also held still while he cut their hair, too. I like my job but I would never let Jeff hit me with a stick. I also wouldn’t let him cut my hair, but only because I think he’d do a bad job.

Finally, high frequency trading:

I have written about high frequency trading and what it means for investors before and this issue is starting to gain momentum in the courts. Basically, the issue at hand is the idea that a company executing trades has access to two sets of data. The high speed, very accurate, market prices it receives from the exchange and the old, somewhat stale prices it tells clients it received from the exchange. The firm then has the ability to execute trades for clients after executing trades for themselves, conceivably at a profit or net neutral position. If it sounds like they can make pennies, it’s because they can. It’s just that they do hundreds of thousands of these trades every day. It’s a lot of pennies. FINRA fined E*Trade for doing just that, with the exception that E*Trade wasn’t paying a market maker, they were the market maker. E*Trade was ordered to pay $900,000 for trades executed between 2011 and 2012 because it’s “Best Execution Committee” turned out to be just an “OK Execution Committee.” The BEC at E*Trade was meant to be its internal control but they did not really do their job. It seems that the BEC focused on making sure the order routing system was doing what E*Trade and G1X (it’s market maker) wanted but didn’t really address what it meant for the clients.  Frequently, G1X would change the execution priority of trades to favor E*Trade and this went unnoticed by the BEC either through lack of oversight or something more nefarious. How you interpret the data depends on your perception. Was E*Trade hoping to make markets more efficient by making better trading choices for clients that are relatively uninformed or where they positioning their own trades ahead of client orders to make more money?

Conspicuously missing from this list are self-driving cars, robo advisors, and insider trading. Indeed, a lot of great things have happened this year but to include them all would take a lot time and would also be very boring. Thank you for reading my blogs and I’m looking forward to another year of financial follies. If nothing else, Donald Trump and America’s banks will give me plenty to write about.




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Categories: Industry Ideas, News, The Market

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