Matt Levine is a great writer and he often brings insights into finance, about what the rules are exactly, and why they are that way (even though they go against our intuitive judgement). I hope that people here would read 'Money Stuff' so we can avoid the inevitable morality bashing whenever a finance article is posted.
The whole point of finance is maximizing profits; I think that people need to understand and accept this for us to have a meaningful discussion.
> The whole point of finance is maximizing profits; I think that people need to understand and accept this for us to have a meaningful discussion.
Former finance person here. I understand but don't accept. The individual's point may be maximizing profits. The societal point of what we reward, permit, hinder, or ban? That is definitely not maximizing profits.
One way to look at it is to compare it with video games. An individual player's proximate goal might be to maximize points scored. But the game designer's goal is broader. The society's goal is broader still. One could even look at the evolutionary purpose of play itself.
For those interested in this sort of distinction, I strongly recommend James Carse's "Finite and Infinite Games": https://www.amazon.com/dp/B004W3FM4A/
But society's goal of maximizing the benefit (profit) to society from the Finance industry is not the same as a Finance company's goal of maximizing profit for themselves.
In both cases the goals are complimentary in some ways but conflict in others and one is purely monetary while the other might be progress towards many different societal goals.
But society's goal of maximizing the benefit (profit) to society from the Finance industry is not the same as a Finance company's goal of maximizing profit for themselves.
Well it is if you tax those profits, obv closing loopholes.
Societies work when all the participants interests are aligned. If farmers can get rich growing crops, there will never be a famine.
> If farmers can get rich growing crops, there will never be a famine.
Tell that the Irish, they were exporting food while suffering from the Great Famine. The farmers and landowners had no reason to help during the famine as it was more profitable to export.
Even today we throw away food for the simple reason that a shorter fake shelf life has been shown to increase profits over the actual shelf life. There is simply no profit to be made from redistributing the over abundance of food to people in need, worse it would cost money making a profit oriented person just shudder at the thought.
> If farmers can get rich growing crops, there will never be a famine.
You're not considering that food has a limited shelf life, seasonal, difficult to distribute efficiently and the customers have highly variable purchasing powers. Also local production is incredibly sensitive to local environmental variation. We already produce enough food to feed nearly twice the global population, and yet plenty of people are malnourished.
I would personally suggest that the best way to prevent famines is to improve food storage and distribution methods, and have robust systems for environmental or conflict induced local famines. Though the unbalanced nature of consumer wealth is also important - it makes sense to waste 50% of your crop selling it in Europe if you can sell it for 3x as much than locally. So maybe the best thing is simply to raise the wealth of poorest people in the world?
I'm not sure, I kind of disagreed with both statements you were making, and decided to pick holes in the latter, since it was providing support for the former.
If I'm missing a "wider point", can you elucidate?
You disagree that societies work best when the interests of all the participants are aligned? This seems obvious to me, so I am curious as to what you object to. If people are rewarded for doing thing X, X will be more likely to happen, and if they are punished for Y, then Y will be less likely to happen. Clearly there will be outliers, but why would you construct a society that actively penalises things that it wants?
Truly aligned incentives are almost impossible to achieve - in a lot of situations, "mostly aligned most of the time" is the best we can hope for.
For example, if my startup is renting servers from AWS our incentives are aligned in the sense that we'll buy more from AWS as we get more users; but unaligned in the sense that if we're using more resources than we need to AWS wouldn't profit from pointing that out. Indeed, even an externality-free positive-sum deal between two parties brings with it a zero-sum deal in deciding how to distribute the benefits.
How do you define what a society wants? There is not an implicit goal when a society exists, there is just a collective of individuals who happen to have some interaction. So essentially, this is the function of politicians in a democracy: to reconcile the irreconcilable views of individuals. However, as with all compromises, often no one is left happy...
I'm not explaining things well I think, hope you can make sense of that!
Taxing proceeds of a crime doesn't necessarily compensate for the damage of the crime. The same applies to some of the greyer areas of finance. An individual can gain millions and pay fair tax on them whilst wiping out billions in value for others. Especially when it comes to insider trading where it's much easier to induce an artificial fall in a share price than an increase.
Sure, there is a certain strand of right-wing economist that has got the wrong end of Coase's argument about transaction costs would argue that virtually all forms of financial shenanigans could, in theory be solved by investor consortiums that stand to lose billions paying the bad actors more than the millions they could earn through malicious activity to desist. But I don't think any sane person believes that shareholders agreeing to overcompensate executives even more to avoid them seeking to profit from insider information at their expense actually is a more efficient solution than aligning those incentives through the legal system.
> Societies work when all the participants interests are aligned.
with:
Regulation ensures that people don't work against the greater good for their own narrow profit and we all lose out.
But you went with people "getting rich".
Some would argue that if some people are getting rich, and there's no competitors entering to bid down their profits, by providing more of what is desired at lower costs, then economic interests are not aligned properly.
wpietri's point was that the player's primary goal was different than the game designer's goal, just as the individual trader's goal might be different than society's goals in setting up the trading arena.
Well, I would imagine people do understand and accept that the point of financing is profit, but that doesn't free investors or financiera from legal and moral judgement, even when the goals of both act destructively towards one another. You don't get to eschew law/judgement because it's inconvenient to your goals.
I don't know enough about finance to comment on the article itself but the idea of "that's it's purpose so you can't judge it that way" rings hollow for me. Scrutiny applies regardless of purpose. The article itself even suggests there are ways the story could play out where Cooperman is guilty, it's just not clear at the moment.
I’m going to elaborate here because I can’t edit my comment anymore.
I’m not arguing about whether there should or should not be regulation, but about the purpose of regulation - it’s rarely about ‘ethics’. If you look at the SEC enforcements, most of them are about fraud or about a breach of duty. Fraud - you’re not allowed to lie, that is pretty self explanatory. Breach of duty - someone else places trust in you to act in their best interests, and you violate that trust. This is broad and can be applied in variety of ways, but a duty has to be established. Other than these two and some other exceptions, you’re free to do whatever you want - and that’s to maximise your profits.
Financial regulation is not and has never been about ethics. It’s about providing a market for exchange, without fear of being lied to, or worry about your agents[0] not acting in your interests. If you’re looking for equity or want to solve problems with corporations, you need to do it somewhere else.
You wrote this:
> but about the purpose of regulation - it’s rarely about ‘ethics’.
And then:
> ... SEC enforcements, most of them are about fraud or about a breach of duty. Fraud - you’re not allowed to lie, that is pretty self explanatory. Breach of duty - someone else places trust in you to act in their best interests, and you violate that trust.
Fraud and duty identify ways of operating with other people, in other words "ethics". I'd argue laws codify community agreed ethics or create a common language for debating these agreements.
I think the specific argument would be better framed in terms of the standards or levels of ethics being applied, rather trying to hide a weak application of ethics behind a poorly defined role for the scope of law.
Preventing fraud and breach of duty are about enforcing ethics in a very narrow sense. In a broader sense, it might be unethical for a PE firm to relocate manufacturing to China and lay off employees. But the SEC has no role (and should not) in enforcing that kind of ethics.
I interpreted that to mean that ethics is a much larger problem to solve than just avoiding fraud or breach of duty. Which is a fair argument - the law doesn't (and shouldn't) require you to be a good person, just not hurt others.
It's not about it being morally or ethically bad in itself, it's about whether a market can function efficiently (or at all!) when you can't trust the other person to follow through on simple things. There are plenty of ethically and morally abhorrent practices that are perfectly legal and allowed.
I believe the problem comes when finance does unethical things to maximise profits.
Outside of finance for example, I'm fine with everyone trying to get the highest salary they can. But if you do it by telling lies about your colleagues then you don't deserve it. You earn a payrise by adding value to the production line, not by elbowing people out of the way so you take more than your fair share.
This applies to finance. If you're adding value to the system, you deserve your millions. If you're just exploiting loopholes and golf-buddy connections to move money into your bank account, then you deserve all the vitriol that comes your way.
> Please give an example of a finance guy adding value to the system
Finance guys lend money to relatively impoverished inventors to bring their inventions to fruition.
Finance guys make deals with corporations to remove financial risks e.g. foreign exchange, interest rate, corporate default, that the corporation doesn't have the expertise to be exposed to.
Finance guys insure me against certain catastrophic events that would bankrupt my family should they occur uninsured.
I've also heard that finance guys keep the white, fluffy cat and secret volcano residence franchises afloat but that may be apocryphal.
Lame attitude. The purpose of war is to kill people, yet nearly everyone agrees there are some particularly bad ways to do such - some of those ways are bad solely by their shear effectiveness.
The whole point of finance is maximizing profits, sure. The whole point of not "accepting" that as-is and thus regulating is because there are some particularly awful ways to make profits.
Only for largely uselessly overblown interpretations of the term profit to mean any perceived gain or advantage, or incremental progress towards any goal whatsoever.
Wars were fought for honour, various slights or (diplomatic or personal) insults, lots of reasons, not all of them profitable. In general war is not profitable to the entities that wage them.
To fight and conquer in all your battles is not the supreme excellence. Supreme excellence is to defeat the enemy without fighting. -- Sun Tzu.
Infact the whole Art of War is about avoiding fighting wherever possible, and when you have no other choice, fight to win but with no more destruction of people or property than you absolutely need.
Okay, the purpose of battles is to kill people. Who cares? The point is that just because the purpose of x is y, and you want y, does not mean that you must accept all forms of x.
Very rarely. The purpose of a battle is to take and hold ground, usually. If you do it without killing anyone it's still a victory. A lot of Gulf War 1 was fought this way, the Iraqis took a look at Western tank divisions and simply surrendered. Another reason is to degrade the enemy's ability to fight subsequent battles. You could do this by destroying all their equipment and supplies. If you do it without killing anyone it's still a victory. An example of this is catching an enemy's air force by surprise and destroying their planes while still on the ground. The Israelis are masters of this technique.
No sane general wakes up and thinks, I just want to kill some people today, I don't care about strategic objectives.
>yet nearly everyone agrees there are some particularly bad ways to do such
Do they, really? Ethics and rules in war are a luxury, and usually imposed by the rich and dominant. When things are truly desperate it all flies out the window. I think history (and its multitude of atrocities, including by the US) supports this view.
The fact that it takes things being truly desperate for them to fly out the window would seem to support the theory that people agree that those things are bad.
> The whole point of finance is maximizing profits; I think that people need to understand and accept this for us to have a meaningful discussion.
You haven't factored in your thought that there are no monopolies in the financial world, unless they're state backed. Competition is everywhere. Competition decides the profit, not the firm.
I wonder if he has a staff at all? If not, then it's even a more impressive body of work!
I'm pretty sure that when Matt wrote for http://dealbreaker.com/ he did it without any support staff. It was probably that gig that got him noticed by Bloomberg.
I'm a fan, to be sure
You can always go back in the Dealbreaker archives and read his earlier stuff. It's pretty equivalent to what he now writes for Bloomberg View.
I always enjoyed his articles on Dealbreaker, but I think his writing is very well suited for Bloomberg. However, I feel like his training as a writer for Dealbreaker taught him a style of prose that feels very fresh in a more mainstream news venue. I remember when he first started writing for Dealbreaker and in opinion, his writing quickly improved within a few months there.
A little bit off topic here but does someone know other great writers like him? I tried Bloomberg View, the Economist, WSJ... but I couldn't find a gem like him.
What do you mean by "like him"? The only writer I find comparably insightful is Scott Alexander (slatestarcodex.com), and he has a quite different style and covers quite different subject matter.
I guess it is a combination of a great writing style with interesting stories. He gives us a real view of how it works inside and sometimes he shares his own knowledge. Like in his "Banking is boring."[1] article.
I find Tyler Cowen to be insightful, even if he has strong political opinions (which he expresses). Can you point to a few sensationalist/wrong/confused posts so I can compare?
I think he brings up a dynamic that most people don't fully understand about investor/company relationships, atleast one I didn't understand until I saw it happen many times over.
Once a company has a large investor, typically a hedge fund, its very common for the CEO/CFO to have a good personal relationship with that investor. I mean, this just makes sense, under the Warren Buffet theory of investing one of the big things you invest in is the management.
And from that it follows that management will often use this investor as a sounding board for ideas. So if a company is going to raise money why not ask the money manager what they think about
- how the market will react to an equity vs debt raise,
- should they offer warrants as a sweetener?
- even things like how they believe the market will react to certain news.
And i mean why not? Do you think the companies that Warren Buffent invests in don't call him for advice?
And once you allow for this, then as Matt says, things get grey. I don't know how all funds do it but the typical dance is the executive will call up and ask the fund manager if they will be willing to:
1) be locked up from trading
2) for a certain period, typically under 2 weeks.
and if the money manager says yes to both, then the executive is free to discuss pretty much anything and everything, including non public information because the hedge fund has agreed to be locked up for the period until the company makes this knowledge public.
Where this goes wrong is sometimes executives, or more often, sell side( tiny little investment banks) acting on behalf of the company will call the hedge fund and before asking if they want to be locked up, just blurt out the news. it's an awkward conversation that typically goes something like:
"Hey Chris, just wanted to let you know ..... something that will crater the stock in the short term like raising money in a bad market.... This isn't public information yet so you'll be locked up for 2 weeks."
And just like that they've fucked you. Now you either have to choose to be locked up knowing that your investment will drop or take the risk of selling and knowing that you'll have to defend your actions to the SEC.
Now in the case Matt's talking about they were trading on good news. The only suspicious thing is that Leon Cooperman's fund has been around since about 1991. it really seems weird that he would use short dated options to trade on insider information.
That's almost the financial equivalent of going out and buying a gun, using it to commit murder on the same day, and then leaving it at the scene of the crime. The SEC can trace back every option trade to the fund who made it, its not like they can hide and if you are buying a whole whack of out of the money short dated call options then you are either covering a large short position or you are essentially telling the market that you know something is up.
> Where this goes wrong is sometimes executives, or more often, sell side( tiny little investment banks) acting on behalf of the company will call the hedge fund and before asking if they want to be locked up, just blurt out the news. it's an awkward conversation that typically goes something like:
> "Hey Chris, just wanted to let you know ..... something that will crater the stock in the short term like raising money in a bad market.... This isn't public information yet so you'll be locked up for 2 weeks."
> And just like that they've fucked you. Now you either have to choose to be locked up knowing that your investment will drop or take the risk of selling and knowing that you'll have to defend your actions to the SEC.
Levine talks about this regarding the David Einhorn/Punch Taverns case. My understanding of what he said: in the US the law doesn't work like that, if they tell you and you didn't explicitly agree not to trade on it then you can trade on it (the guy who told you could theoretically get in trouble for a Reg FD violation, but you're in the clear). But in the UK it does work like you say.
So in the UK can you deliberately stop all your big investors from selling by telling them inside information? Like if you were about to announce bad news and wanted to keep your stock price up?
Yes, Matt Levine thought that the ruling in the Einhorn/Punch case meant exactly that:
> Under UK law, as it appears from this decision, Punch can call Greenlight, shout “hey we’re raising capital and now you know about it suckers!” into the phone, and hang up. Now Greenlight, through no fault of their own, have inside information and can’t legally trade. That would be kind of diabolical, no?
In fact, in the actual discussion Einhorn explicitly refused the opportunity to discuss inside information in exchange for not trading on it, Punch told him the information anyway, and then Einhorn traded and got in trouble.
Trading on non public information is pretty much legal now though, as long as you don't provide consideration to the tipper, right? (with the exception of any separate duty to keep confidential that you and Matt mention)
In a nutshell, you may trade on privileged non-public information provided that you do not either:
1) compensate another party for this information
2) directly work for either the company itself and are the one revealing the information
3) are acting in an advisory role to the company (major investors sometimes fall in this hole)
If you're at a bar and happen to overhear privileged information, you don't work at that company and aren't a major stakeholder/advisor... then that's totally OK. You may get hassled by the SEC... but technically it's kosher.
Interesting perspective. One thing that doesn't get brought up here is that Omega Partners does seem to have a particularly aggressive culture when it comes to gathering information. Just my perspective interacting with them..
I wonder how much of it stems from Cooperman himself.
That's a great article - really well written. It managed to explain a key point of insider trading that I've often wondered about - if I know non-public information what are the rules around trading.
Hands down best writer/explainer in finance. I'd read anything this guy writes. No bs moralizing, just plain rational agents maximizing their own perceived 'profits'
I love Matt, but he actually made a (minor) mistake this time. He wrote in footnote 8:
Once the options reached the minimum possible price, there's no reason to keep a short position open -- you can only lose money. So of course Omega should have bought in the position, regardless of whether it had good or bad or no news.
That's wrong. The options had an actual price. Granted, it was a low price, Cooperman bought them back at an average of $0.07, having sold for $1.32.
But it was still a bid. The majority of options actually expire worthless. I.e. the "minimum possible price" is actually $0.00. This is often reported as "no bid" well before expiration.
So it's wrong to say that Cooperman "can only lose money". He could have actually made an extra $0.07 per option had he not bought them back and potentially allowed them to expire worthless.
> That's wrong. The options had an actual price. Granted, it was a low price, Cooperman bought them back at an average of $0.07, having sold for $1.32.
He's not wrong, he was pointing out that almost all the potential profit had been realized, but there was still a way to lose it all. With numbers: they already made 95% of possible profit, but were able to lose 100%. It makes sense to close a position like that out and is indeed commonplace. Most shops don't like that type of negative asymmetric risk.
However, what they didn't do is roll them forward to keep the short position, that's also a common technique.
Matt certainly was wrong when he said: you can only lose money. I pointed out that Cooperman could have made a potential additional $0.07 if the options expired, and you're agreeing with that.
I agree with you that it usually makes sense to close out or roll an asymmetric position. BUT, and this is an important BUT, holding a position to expiration is far from rare.
Here are some statistics (but I can't vouch for their accuracy)[1]:
10% of options are exercised
55% to 60% of options positions are closed out (bought back)
30% to 35% expire worthless
Option expiration shouldn't be glossed over. That final case occurs one-third of the time.
The whole point of finance is maximizing profits; I think that people need to understand and accept this for us to have a meaningful discussion.