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What We’re Reading This Week

Funds and Anti-Trust 


Some people believe that mutual funds and ETFs should be banned because of anti-trust laws. The idea is that if I own a bio-tech fund that invests in companies across the industry my investment doesn’t encourage free market capitalism. Put differently, I don’t want competition in the industry, I want all of bio-tech to do well. This always seemed silly to me until you consider that the intermediaries that sell these funds are limited to a handful of companies, investment firms like BlackRock, Vanguard, and State Street. These funds have the ability to vote on corporate issues at firms of which their funds have shares. A great example of this is the SABMiller/AB InBev deal. Essentially, two of the largest beer companies in the world are merging together while a portion of their assets will be sold to Molson Coors. The deal will likely be approved because several of the companies’ largest investors are financial companies. From an anti-trust perspective this is a little odd. These investment companies own shares of all three beverage giants and the deal is structured to be good for everyone. On the surface it seems like a win. All three corporate parties get what they want and investors get to shift their assets into a (potentially) more efficient structure. This is great, except maybe for people that consume the products. Less competition generally does not encourage price compression and lower margins. It usually means price gouging and inferior products. Full disclosure, I don’t really care for Budweiser and a part of me feels like if you drink Budweiser then you deserve price gouging and are already experiencing an inferior product because of the choices you have made. But that’s just me. 


Why blockchain, why?


So, the good people at Accenture have found the answers to the world’s blockchain problems. For the uninitiated, blockchain at its core is a public ledger maintained and authenticated by the persons using said ledger. Its use does not require administration nor an administrator. I have been known to postulate that bit coins and blockchains are the financial equivalent of giving birth at your home.  Enthusiasts have essentially taken a few things that they don’t like about the current system and used it as an excuse to start from scratch, essentially ignoring hundreds of years of wisdom manifested in our current monetary policies. It has also made present day financial institutions scramble to figure out if they will be put out of business. The answer is: probably not. But never mind that! Back to Accenture. They are “patenting a technique for editing information stored” in the blockchain! I love it! Remember, the foundation behind blockchain is that it is built and maintained by the users, without the oversight of a central administrator that can edit the data. “By allowing a central administrator to amend or delete information stored on a blockchain, the consultancy says that its prototype — to be unveiled on Tuesday — will make the technology more attractive to the financial services industry.” So, essentially, Accenture will keep a ledger maintained and updated by Accenture. Guess what? If you want Accenture to maintain and modify records you can just hire them to do that, no “blockchain” needed. The problem of how to create a ledger run by a central administer was solved when they invented…well, the ledger. That’s what a ledger is. 


Wells Fargo


I’ve tried to avoid writing about Wells Fargo’s banking scandal again despite the senate hearings and threats of compensation claw back. I mean, obviously, everyone hates banks (people still hate banks right?) and when they screw up people want to vilify an individual by trying to expose their evil misdeeds so there will definitely be senate hearings. And inevitably there will be insults and dressing down. There will also be calls for financial penalties for management but then everyone will forget and low level bank employees, and bank customers for that matter, will go back to getting screwed once the dust settles. However, at the end of the day the Wells Fargo scandal did not transpire as a result of malevolent schemes from upper management, it was the result of stupidity. Maybe it’s my post-traumatic stress from working in JP Morgan Chase’s retail banking division for 5 years but I just didn’t find this particular version of stupidity worth writing about. Until I read this and this. First of all, the vintage ad at the top of the article is incredibly racist but also why is that woman traveling with only three golf clubs, a suitcase, and a dog? The copy suggests she is “traveling” but I can’t think of any activities that requires that particular combination of items. Secondly, there is some insight into how Wells Fargo ended up in this dilemma. If you don’t know, the bank is in hot water for opening accounts for customers that didn’t know they were getting accounts. Everything from checking accounts to credit cards. Employees say they felt pressured to meet impossible quotas set forth by management so they turned to fraud in order to keep their jobs. It’s a losing model all around. The bank probably didn’t want accounts that wouldn’t make any money (people don’t use accounts they don’t know about), employees didn’t want to commit fraud (I think), and customers didn’t want to have their identity stolen (definitely). Que bono? The bank wanted accounts that produced revenue and increased customer loyalty so they set forth quotas to drive that result. The bank also knew what the bankers were doing because there is an embarrassingly long list of employees that were fired for committing this fraud as well as extensive internal communications making it clear to employees that the bank did not want them opening fake accounts. Unfortunately, never once did the bank reduce quotas or rethink their incentives and targets. That brings us back to the second journal article. I would hazard that Wells Fargo never thought about their quotas in the first place. Remember, I said this whole thing comes from stupidity. “In the 2010 annual report, Mr. Stumpf said he often was asked why Wells Fargo had set a cross-selling goal of eight. “The answer is, it rhymed with ‘great,’ he wrote. “Perhaps our new cheer should be: ‘Let’s go again, for ten!’” What?!? My first problem with this is that he was writing about it in the annual report. If a CEO of a major bank is being asked about something enough times (by the right people) to feel compelled to write about it in an annual report to shareholders then there needs to be a thought process beyond “it rhymes.” The other issue is that clearly the bank is being run by morons. If I asked my boss about systemic ethical violations across an entire division and he responded with a poem I would resign so fast my head would spin. At the recent senate hearing the CEO was encouraged to resign due to his “gutless leadership.” I would argue that the excerpt from the annual report is enough. Seriously, forget all the employee feedback, customer complaints, and audits (there were tons of all three), that rhyme is grounds for termination.




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