October 31, 2016
What We’re Reading This Week
As Chase is realizing the front line staff (tellers) are no longer just people that count cash and give it to people, they have been increasing compensation for their branch employees. The job now requires a more nuanced interpersonal skillset and therefore demands a higher wage. That makes economic sense to me. Before I upset any tellers that read this blog let me clarify something. I’ll use analogy with small numbers to keep things simple. Let’s say 100 people use a bank branch in a year…and the year is 1982. In 2016 80 of those people now use an ATM instead. The 20 people that still use the branch are either people that will never adopt ATM technology or have a financial issue. Either way, 100% of branch customers need “extra help” while in the past, 20% of Branch customers needed that same kind of help. It’s not that tellers didn’t need interpersonal skills before, it’s just that now it’s sort of obvious to the bank. Anyway…other banks are doing something different. Bank of America and MasterCard have turned to ChatBots. Once, when I was young and naive I believed that self-driving cars were the epitome of technology that no one really wanted. Now we have financial ChatBots. The first iteration of this software will be able to answer questions about balances and transactions but the bank is hoping to turn the bots into “”full-service automated financial assistants.” No. No one wants this. Stop building this and use the savings to pay me more interest. If I want to know my balance, and I am online, I will just check my balance online. If I want my balance from someone who only understands 60% of what I am saying I will go into the branch. I actually think that people are more likely to get in a car driven by a computer than they are to let a robot handle financial transactions. Sure, this is potentially more cost effective for banks and they probably will never have to worry about ChatBots drinking hand sanitizer, or maybe they will? I actually don’t really know what robots eat. But again, that savings is only effective if people adopt the technology.
Not Wells Fargo
I am committed to not writing about Wells Fargo. Seriously. But this was inevitable. See, the first layer of the onion was the accounts Wells Fargo opened for people that weren’t aware of the accounts. Definitely illegal. The second layer of the onion was aggressive sales tactics. Not quite as illegal; in fact, not illegal at all. Just rude. The third layer of the onion is “what about the accounts people knew about but didn’t really want?” This is a much bigger issue and also not really an issue at all. Let’s talk about why it’s not an issue first but the reason it is an issue is more fun. See, if a banker explains to a customer that they need an account for: (needs are ordered from most normal to least normal) their bills, their emergency savings, a vacation fund, a new car, their neighbor, or a dog they saw, and then convinces them that they need these to all be separate accounts and the customer agrees, there has not been a crime. The customer still agreed and signed all the paperwork. To turn around and say, “but I didn’t like it” seems more than a little childish. Just as the bankers had an option to say “no” to illegally opening accounts for people, customers had the option to say “no” to accounts they didn’t want. Now, let’s talk about why it IS a problem. A fake account or an account someone is not aware of generally doesn’t get used and therefore probably doesn’t really have a lot of fees. An account you know about and are sort of forced to begrudgingly use does have fees, probably more than normal, because you don’t really like to look at the account or deal with it. When you think about closing the account you have some sort of PTSD flashback to when you got the account and opt to never go to the bank again. This is maybe a bigger story than the first one because of the revenue these accounts generate. But it’s also not really a story at all because sales people are supposed to sell things to people and it’s not really illegal. Its more distasteful when sales involves people’s finances but banks don’t really have a fiduciary standard. What kind of conflicts of interest do they need to disclose? If a financial advisor sells someone an annuity so they can have health insurance (depressing) or go on a special vacation (slightly less depressing) it’s important for the customer to know that. If a banker sells a credit card because they don’t want to talk to their manager about it later is that really a conflict of interest? The first two sort of imply that I wouldn’t want the annuity if I know someone was trying to win a prize. The 3rd one is more of a pain avoidance. Like, “If you don’t open this checking account I will drink an entire bottle of hand sanitizer.” I think I might be more likely to open the account out of guilt. It’s not great but also not illegal. In regards to the article I am not really sure what hurts me more. The fact that government agencies (Office of Comptroller of the Currency, House Financial Services Committee, the Senate, etc) are looking into salespeople selling things or that other banks are sort of side stepping the review. “Bank of America Chief Executive Officer Brian Moynihan said he’s “comfortable” with his company’s practices and hasn’t found anything comparable to the situation at Wells Fargo.” “JPMorgan is conducting a “deep dive” review of its sales practices, Chief Financial Officer Marianne Lake said Oct. 14 in a conference call with journalists. While it’s found a few lapses, the review isn’t turning up any systemic problems, Lake said.” This is laughable. Anyone that has used a JP Morgan branch in the past 6 years knows this isn’t true. You can visit YouTube to see videos disgruntled employees made to parody bank sales scripts. The regulators won’t find anything because they don’t want to find anything. On the other hand, if they did find something, what would they really be able to do?
There are very few places where Britney Spears and investment banking collide but this blog post will exist in that strange venn diagram. TMZ reported that Adam Kluger is under pressure from Britney’s attorney because of a he deal he brokered (sort of) with Bumble on her behalf (sort of). Apparently Kluger went to Bumble and told them he had the authority to represent Ms. Spears; he then convinced Bumble to pay $800,000 to put their name all over her new music video. Then he made a deal with RCA, to pay them $450,000 for the product placement. Kluger received $200,000 up front and ultimately $350,000, or a 43% markup. Pretty neat huh? Well, Britney’s people say this is fraud. Is this illegal? Sometimes in finance this is called bond trading. For retail clients it looks like this. A company or a municipality will issue a bond for $100. A bank or firm will buy large quantities of them for, say $95, then sell them to clients for $96. This is considered fair and reasonable. Sometimes the bank or firm will buy them for $95 and then sell them for $102. For a long time this was just considered profitable…or sleazy, depending on whether you worked at the firm or were a client of the firm. Lately it’s been considered illegal. But only sometimes. Jesse Litvak is a bond trader that worked at Jeffries selling mortgage backed securities (they are like bonds). Litvak lied to his customers about the prices he paid for the bonds. He disclosed the price he was willing to part with them for, and the investor would assume the difference was his markup. Litvak was sentenced to two years in prison but appealed and won (he won the right to another trial, which is like kissing your sister I guess…still beats prison?). His argument is based on two principals. One, the buyers knew what Litvak was willing to sell the bond for, they agreed to the price and the historical price was irrelevant. And two, bond traders lie all the time so people should have known he was full of it. See, fraud is only fraud if the individual is lying about something materially important to the investor. Bernie Madoff was arrested because he told people he wasn’t going to steal their money but then he did steal their money. That’s fraud. If Bernie Madoff ran a legitimate investment company but lied to people about how many cats he had, he’s just a weirdo. No fraud. So is Litvak right? Is Kluger right? See how the stories are related? When you buy something, is the price the owner paid for it a material fact that affects your decision? When I buy stock in General Electric, I buy it from a person. What that person paid for it never enters into the equation. GE closed today at $29.22 per share. If I bought it at that price and later got an email from “Tom”, in New Jersey, saying, “Hey, I paid 29.62 for this on September 30th” it wouldn’t change my mind. I would maybe have some questions for my broker, but I wouldn’t give Tom any more money. See, Litvak kind of has a point. I’m not crazy about the second argument, bond traders always lie, but we’re not talking about unsophisticated investors that don’t know how to price a mortgage note. These buyers were institutional clients, they really should have entered the meeting knowing what the security was worth. Further, when you really take time to consider the second argument you have to sort of come around to Litvak’s point. Regardless of how creepy it is, the “everybody lies” argument is valid. There are certain circumstances where you don’t really listen to the person selling you something. This is the used car salesman defense. If a salesman at the car dealership told me he paid $10,000 for a 1992 Honda Accord and I buy it for $10,500 I am the idiot. The problem here is that while Litvak’s defense works for him, it’s doesn’t really work in retail. See, the average investor doesn’t have an advanced computer algorithm to tell them what a debt security is worth. They have to rely on the valuation from the selling firm. They also don’t know that the person selling it them “always lies.” Unfortunately the rules aren’t built for that, they are built for Litvak. No, wait, that’s not even really true. One of the issues with the Litvak case is that there is no real rule. The courts have ruled that sometimes it’s ok to lie to bond investors and sometimes it isn’t. Sometimes you can lie to Bumble and sometimes you can lie to Britney Spears (but her lawyer doesn’t like it). Even with the Spears case, her attorney wrote a threatening letter! He didn’t sue, because the case is weak. If there was a rule it would be easy…and the rule could go either way. If the rule was “no lying about bonds” then bam! Now everyone knows what is and isn’t allowed. If the rule was “you can lie about bonds” then everyone would know not to listen to a bond salesman. Right now the approach reminds me of a summer camp from an 80’s comedy film. The campers (bond salesmen) know not to sneak across the lake and TP the rival camp (customers I think?) and the camp staff (regulators) know the campers do it anyway. Sometimes the campers go too far and are too obvious about it and the camp director has to make an example of them but you can tell he doesn’t really want to. I guess the rule is, don’t screw people too badly and try not to get caught. That’s not really great for investors.
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