Opinion

Ben Walsh

from Counterparties:

The problem with requiring junior bankers to take time off

Ben Walsh
Jan 14, 2014 23:16 UTC

Banks want to make the lives of their junior investment bankers more pleasant. Goldman Sachs, for instance, has instituted a 36-hour weekend. JP Morgan liked the way those old National Guard commercials sounded and is giving its junior bankers one weekend a month off.

As Matt Levine points out, these rules are fairly silly. Junior bankers cater to the whims of senior bankers, and senior bankers cater to the whims of clients. Being a senior banker has very little to do with being a good manager; in fact, it’s often antithetical to being a good boss. What's more, the most important working hours for junior investment bankers tend to be late at night, and very early in the morning. Levine’s proposal for banks to cut out the useless daylight facetime and let junior bankers just work nights and weekends is as good as rules on this subject get. Not only is Levine right that a lot of deals happen over the weekend, but weekends are important when things are quiet, too. Some of the best, most helpful (and least stressful!) work junior bankers do is done at 11:30 on a Saturday morning.

The problem is, even a good rule isn’t the best way to make junior investment bankers' lives better. The best solution is for senior investment bankers to be better managers. But in a client service business, people tend to get promoted for servicing clients, and that can involve precisely the sort of tedious, repetitive work that makes junior bankers miserable. Management ability is a nice to have, not a must-have.

Banks are trying use rules to prod their senior bankers into becoming better planners and communicators. But rules, simply put, can’t create good managers. To put it in regulatory terms, management is a principles-based, not rules-based, regime.

from Counterparties:

Trading with élan

Ben Walsh
Jan 10, 2014 22:55 UTC

The trial of former SAC analyst Mathew Martoma began today. Prosecutors say the case is “not about science or trading... The case is about cheating”. Martoma’s lawyer countered that the government has simply charged an innocent person. “This case is like ‘The Exonerated’”, he said.

The prosecution’s case is that Martoma allegedly got information about an Alzheimer’s drug’s clinical trials from a doctor working on the trials. Martoma then allegedly used this information to recommend SAC short shares of the drug’s developers, Elan and Wyeth, netting $276 million for SAC when the shares slumped. The defense counters that there were many reasons to sell or short Elan and Wyeth, and that “insider trading is not one of them”. The prosecution, they say, is overly dependent on the doctor who allegedly gave Martoma the trial results and who has since been pressured, they claim, into cooperating with the government in exchange for immunity.

DealBook’s Matthew Goldstein and Alexandra Stevenson report that Martoma was expelled from Harvard Law for electronically altering his transcript, sending the forged document to 23 judges, and then fabricating emails and creating a “counterfeit report from a computer forensics firm” to conceal his actions. Alex Tabarrok points out that Martoma previously worked as a medical ethicist at the NIH, and that an undergraduate professor wrote in a letter of recommendation that “no one has contributed more to our class discussions of Sissela Bok’s Lying, nor was anyone in our class as acute on the issues of moral capacity raised by Camus’ The Plague”.

from Counterparties:

Europe’s new low

Ben Walsh
Jan 9, 2014 23:04 UTC

Mario Draghi is back in unfortunately familiar territory. Reuters writes: “the European Central Bank on Thursday forcefully underlined its determination to take action” if something that is already a problem becomes even more of a problem. Today, the ECB held rates steady and Draghi addressed Europe’s latest inflation reading of 0.8% in December, which is still well below the central bank’s 2% target. Excluding fuel and food, inflation hit a record low of 0.7%.

Antonio Fatas parses an interview Draghi gave with Der Spiegel, and likes “his honesty and clarity when he asserts that all German fears about increasing inflation in the Euro area have turned to be wrong”. Fatas is unsure, however, whether Draghi can do much, against both Germany’s objections and his own structural limitations, to move inflation higher.

Worryingly low inflation is not a new phenomenon in Europe. In November, Ryan looked at the growing fear of disinflation, if not deflation, in Europe. Matt Yglesias doesn’t think the ECB is being forceful on inflation. On the contrary, he argues it is being unacceptably blasé:

from Counterparties:

Too big to regulate

Jan 8, 2014 23:14 UTC

JPMorgan has agreed to pay $2.6 billion to the Department of Justice and various victims of Bernie Madoff’s $18 billion ponzi scheme, Reuters writes. That amount includes a $1.7 billion fine for violating money laundering rules and is “the largest forfeiture a bank has ever had to pay to resolve anti-money laundering violations.” It also includes a $350 million payment to the Office of the Comptroller of Currency. The bank is also paying $218 million to settle a private class action lawsuit over Madoff, and $325 million to settle a case with the Madoff bankruptcy trustee.

The remarkable part of this agreement, Sheelah Kolhatkar says, is that it’s a deferred prosecution agreement, which is reserved for “cases in which the facts underlying the case are severe but a criminal indictment might destroy the company.”

The settlement documents, Felix writes, show that JPMorgan, Madoff’s primary banker for more than 20 years, was guilty of “sheer unmitigated — and, yes, probably criminal — incompetence.” A Madoff account which JPMorgan’s banker thought was only being used for rent and expenses saw $752 million in inflows in one day, yet a JPMorgan investigation into the account went nowhere. Tom Braithwaite writes that in 1998 and 2007 JPMorgan’s asset management division decided not to invest in Madoff funds because their returns were “possibly too good to be true”.

from Counterparties:

Why Christmas should always be on a weekend

Ben Walsh
Jan 3, 2014 21:20 UTC

Tyler Cowen thinks Christmas should always fall on a Wednesday, as it did in 2013. “The goal,” he writes tongue-in-cheek, “is to minimize non-convexities”. For Cowen personally, that means maximizing mail delivery, library access, paid vacation, traffic-free roads to optimize shopping, and trips to far-flung ethnic restaurants.

My response: for the sake of the US economy, Christmas should be observed on a weekend, preferably Saturday. Why? A weekend Christmas optimizes US consumer holiday spending.

Here’s the holiday the holiday shopping scramble, charted using monthly US retailer sales from 2000. It’s an oddly EKG-like pattern: something like the heartbeat of consumer spending in America. (All data for this chart and the second chart below from FRED’s monthly retailer sales data series.)

from Counterparties:

Top of the charts

Dec 20, 2013 23:01 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

The onslaught of year-end lists is upon us, and in the econoblogosphere that means, among other things, charts. Lots of charts.

The Atlantic’s Matthew O’Brien rounds up the most important economic stories of 2013 from 44 journalists, economists, and policy experts. Business Insider’s Matthew Boesler has 100-plus charts from investors and Wall Street analysts. The Counterparties team sorted through O’Brien and Boesler’s lists, as well as our own catalogue of charts, to semi-arbitrarily bring you the 8 best charts (of the best charts) of the year:

from Counterparties:

Renters get owned

Ben Walsh
Dec 19, 2013 23:15 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

In 2012, the federal government spent $240 billion on housing aid, according to a new study by the Center on Budget and Policy Priorities. Despite the fact that 65% of American households are homeowners, 75% of housing aid, or $180 billion, is set aside for homeowners. Not only is federal housing aid disproportionately targeted to homeowners, it’s disproportionately targeted to the wealthiest homeowners. Here’s the CBPP:

The bulk of homeownership expenditures go to the top fifth of households by income, who typically could afford to purchase a home without subsidies... More than half of federal housing spending for which income data are available benefits households with incomes above $100,000.  The 5 million households with incomes of $200,000 or more receive a larger share of such spending than the more than 20 million households with incomes of $20,000 or less.

How Blackstone made $8.5 billion from Hilton’s $6 billion increase in value

Ben Walsh
Dec 16, 2013 16:13 UTC

In July 2007, Blackstone took Hilton private for $26 billion. On Monday, Hilton IPO’d at $20 a share. Using the same measure to value the company as when Blackstone acquired it, Hilton’s enterprise value is now $32 billion. That’s $6 billion above Blackstone’s takeover price.So it’s a bit confusing to read that Blackstone has an made an $8.5 billion profit on its investment in Hilton.

Here’s how Blackstone, in Matt Levine’s words, “made more on Hilton, in dollar terms, than Hilton has made itself”.

Step 1: Acquire using some equity, and a lot more debt

Blackstone and its investors bought Hilton for $5.7 billion in equity. They also borrowed $13 billion and agreed to take on $7 billion of Hilton’s already existing debt. Equity plus debt minus cash held by the company, what’s called enterprise value, is how you get that $26 billion takeover cost.

from Counterparties:

Marginal budgeting

Ben Walsh
Dec 12, 2013 23:00 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

The best news about the budget deal which was announced Tuesday, writes Neil Irwin, is “the fact that it exists at all”. That alone “signals an improvement in the functioning of budget policymaking”, Fitch Ratings says.

The less good news is the actual substance of the deal. Government spending will be $45 billion higher than if the deal hadn’t been reached, but Irwin points out that discretionary spending will still decline next year. Taken together, says Irwin, “fiscal policy [will] still be a drag. It just will be less of a drag than it would be otherwise”.

from Counterparties:

The state of American homelessness

Ben Walsh
Dec 9, 2013 23:16 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

On any given night, more than 600,000 Americans are homeless; one in four, or 138,000, are children. Nationally, homelessness has fallen 9% since 2007, according to the most recent statistics from the Department of Housing and Urban Development. The number of chronically homeless has dropped 25% in the past six years, while the homeless veteran population overall is down 24%.

Over the same time period, however, homelessness has increased by more than 20% in Massachusetts, Missouri, New York, and Washington, DC. In 2013, the New York shelter system population “hovered around a record 50,000 overall. Nearly half are children”.

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