Matt Levine’s Money Stuff: Who Will Run the CFPB and Goldman?
published Nov 27, 2017 8:46:01 AM, by Matt Levine
(Bloomberg View) —
I feel like a simple misunderstanding is driving the fight over the Consumer Financial Protection Bureau. The CFPB’s staff, and its departing director Richard Cordray, think that the bureau’s job is to protect consumers from financial institutions. But President Donald Trump clearly thinks that its mission is to protect financial institutions from consumers. I do not think there is another way to interpret this tweet: The Consumer Financial Protection Bureau, or CFPB, has been a total disaster as run by the previous Administrations pick. Financial Institutions have been devastated and unable to properly serve the public. We will bring it back to life!
I mean, the idea that the CFPB has been bad for banks and should be shut down is a common one in Washington. It is, for instance, the view of Mick Mulvaney, the White House budget director, who as a congressman called it a “sick, sad” joke, and whom President Trump has named to succeed Cordray as the acting director of the CFPB. It is unusual, though, to think that the CFPB has been bad for banks and should be brought back to life to be nicer to them.
Anyway the big story now is that Trump has named Mulvaney to take over the CFPB on an interim basis, while Cordray, on his way out the door, named his chief of staff, Leandra English, as deputy director, who is supposed to run the agency in the “absence or unavailability” of the director. There is an argument that Trump gets to name the interim director, and so Mulvaney is in charge, but there is also an argument that the CFPB’s succession rules apply and that English is in charge. And this morning English sued in federal court for a declaration that she’s in charge.
It is — obviously — a strange fight. “‘We think he’ll show up Monday, go into the office and start working,’ an administration official said of Mr. Mulvaney’s plans,” which sounds pretty normal, but which is actually not what anyone was expecting a week ago. Mulvaney also has another important job running the Office of Management and Budget, and when we first talked about his nomination, he was “expected to name someone else or a team of people to run the CFPB on a day-to-day-basis so he could keep his focus on OMB.” In general, becoming the acting director of the CFPB and never showing up would be quite a pointed way to assert his authority: It would send an unambiguous message about his plans for the agency’s future, or lack thereof. It would be a power move, if he was the only CFPB acting director floating around. But it is a risky strategy if there is someone else who also thinks she is the CFPB acting director. If she’s there and he’s not, she has a big advantage!
But I assume, given the dispute, that Mulvaney will show up at the CFPB this morning, and he and English will have an awkward speed-walking race to be the first one to get to the director’s office and sit in the big chair, and it will all be a little farcical. But there are other ways this could go. If I were English I’d be thinking about flanking moves. You know Mulvaney will show up at the CFPB. That means he’s leaving his office at OMB unoccupied. She should show up there and try to take over the OMB.
Our government is so stupid.
The basic issue here is that some people think that the CFPB is or ought to be an arm of the executive branch that is answerable to the president. Of course a president with an anti-regulation agenda and a long personal history of consumer financial fraud should be able to neuter it; that is the point of having presidential elections. (My Bloomberg View colleague Noah Feldman takes roughly this line.) Others think that the CFPB is essentially an independent branch of government, like the Federal Reserve or the Supreme Court, and that the president’s ability to meddle is limited to his statutory right to appoint a director with the Senate’s approval. There is evidence for this latter view in the CFPB’s statute and legislative history, and indeed in the history of Republican opposition to it, which has characterized it as a runaway bureaucracy unaccountable to the president.
There are good legal and political arguments on both sides, but I have to say that, practically speaking, the CFPB does not feel like the Federal Reserve or the Supreme Court. It has no long august bipartisan history of independence. It is six years old, and has only had one director under one president of one party. If Donald Trump wants to roll back environmental regulation and bank regulation and diplomacy by changing the personnel and priorities of the Environmental Protection Agency and the Treasury Department and the State Department, there’s no real dispute that he can. If he wants to roll back consumer financial regulation by changing the personnel and priorities of the CFPB, I will be surprised if he fails. And if I came to the CFPB under President Obama with the goal of helping protect consumers from financial institutions, I’d probably be looking for a new job now, whoever is sitting in the big temporary chair this morning.
Elsewhere in consumer financial protection, here’s a story about a consumer financial scam run by the Treasury Department:
The Treasury Department is making a mint off a line of pricey American Eagle coins in what is known as proof condition—sheathed in plastic and never touched by human hands. Last year, sales totaled $112 million.
The government currently is selling the gold-coin proofs at a 25% markup over per-ounce gold prices, a premium that can run as high as $360 per coin. The silver coins carry a more than 200% premium over market silver prices.
The coins are eligible to be retirement-account investments, “making them a favorite for coin dealers pitching a ‘Gold IRA’ to retirees,” and people are constantly shocked to find that they’re buying currency from the government at higher prices than the value of its metal content. Also one coin dealer describes his business model as “We buy it high, mark it up and sell it high,” which seems like a great business to be in.
Harvey vs. David.
This weekend Kate Kelly checked in on the succession battle at Goldman Sachs Group Inc., where co-presidents Harvey Schwartz and David Solomon are “immersed in an indefinite on-the-job competition against each other” to succeed Lloyd Blankfein as chief executive officer. “If I come over to your house at Thanksgiving and I sharpen your knife, you will definitively know the difference right away,” says Schwartz, and while he is speaking literally (he worked as a butcher in college), one assumes there is at least a bit of metaphor there. If you want to run Goldman Sachs, you gotta keep your knives sharp. (Disclosure: I used to work at Goldman.)
What do the metaphorical knives look like? Well, they look like this incredible anecdote, about a conference call with managing directors on which Schwartz gave “a smooth, confident presentation” on Goldman’s financial results:
Then things got awkward. Mr. Blankfein — who was participating by phone from the World Economic Forum in Davos, Switzerland — invited Mr. Solomon to say a few words. But Mr. Solomon was also in Switzerland and had been told ahead of time he would not have to speak. Taken aback, he remarked briefly on his client meetings in the Alps, and then returned the floor to Mr. Blankfein.
Some employees speculated that Mr. Blankfein was trying to give equal airtime to the two presidents. Others wondered whether perhaps he had deliberately caught Mr. Solomon off guard.
The incident, slight as it was, was talked about for weeks afterward. It was a sign of the intensifying internal gossip about what some referred to as the “Hunger Games”-style jockeying for the top job.
Do you know that “The Hunger Games” is a book and movie series about children who battle to the death in order to bring food to their impoverished communities? Do you know that the stakes of the Goldman succession battle are that a millionaire might be embarrassed on a conference call? They’re basically identical!
“Everything is seating charts,” I sometimes say: The actual lived experience of business at high levels is not about conflicting theories of shareholder value or complex merger maneuverings or billion-dollar bets on risky new ventures, but about who sits in the nice seat and who gets to do the good bits of conference calls. It is deeply, simply, personal; it is about pride and shame and friendship and rivalry; and when stripped as bare as it is in that anecdote, it is a little embarrassing. If you came home from elementary school and complained that your teacher made you talk in class after telling you you wouldn’t have to, your parents would roll their eyes and tell you to grow up. But in the executive suite at Goldman Sachs, that’s viewed as practically akin to a stabbing.
I do have one quibble though: Mr. Schwartz, a black belt in karate, spends many Sunday afternoons in the office. Over five hours of interviews for this article, the most revealing moment about his business psychology came when he described how he interviews job candidates: He asks them to try to sell him the Polycom speakerphone that sits on his desk.
That’s the most revealing moment? That is the most common sales-job interview question ever, at least since the Polycom succeeded the pencil as the salesperson’s tool of choice. If I ever become rich and powerful and need to hire salespeople, I would keep, like, a Betamax machine, or a can of New Coke, or a Ford Pinto in my office. “Go ahead, sell me that Pinto,” I’d say, then I’d lean back in my chair, pull out a big butcher’s knife, and start sharpening it.
Here are Bloomberg’s Tracy Alloway, Dani Burger and Rachel Evans on the power of index providers: In a market increasingly characterized by passive investing, these players can direct billions of dollars of investment flows by reclassifying a single country or company, effectively redrawing the borders of markets, shaping the norms of what’s considered acceptable in international finance, and occasionally upsetting the travel plans of government ministers.
“The worry, however, is that passive investing effectively passes the proverbial buck,” as passive funds don’t make active investing decisions about which securities to buy, but instead outsource those decisions to index providers. Of course the index providers pass the buck right back to their clients: “We’re not activists,” says Mark Makepeace, head of FTSE Russell, which this year banned companies that don’t give shareholders enough voting rights from joining its gauges. “We’re setting the minimum standards that investors generally will accept, and our role is to build consensus amongst that investor community as to what that minimum standard should be.”
As a social investing process this makes sense. Everyone who wants to invest in, say, emerging markets, gets together and agrees on which countries are emerging markets and how much of each of them they should all buy. (I mean, they don’t actually get together and agree, but they effectively do so by communicating with the index providers who are “building consensus.”) No one can get an unfair advantage over anyone else by, say, choosing to overweight one market that happens to go up more than the other markets. Everyone agrees on the rules of the game that they are not going to play.
I am being a little sarcastic there, but really it is fine. The basis of passive investing is the belief that you cannot beat the market, and so you resign yourself to getting average performance. Building consensus among all the passive investors, and then all going out and buying the same things, is a good way to implement that belief. You just have to be clear that that is what you are doing. If instead you think that indexes represent some objective truth about the world, that passive investing is just buying “the market” without making any active investing decisions, then the messy reality of index providers will be a bit disappointing.
Elsewhere, here is a story from a couple of weeks ago about an exchange-traded fund with $6 million in assets that used to track an index of Latin American real estate companies but will now track an index of marijuana companies, presumably because not enough people were interested in Latin American real estate. This sort of pivot for an ETF is unusual, but it happens all the time in penny stocks: You start a gold-mining company, raise some money, don’t find any gold, pivot to being a medical-marijuana company, raise some more money, don’t sell any marijuana, pivot to being a blockchain company, raise some more money, and so on forever. With the rise of passive investing it is only natural that this action will move from companies to ETFs.
Can a publicly-traded company serve something other than the bottom line?
Hahaha nope! Here is the amazing story of Etsy Inc., which was founded as a “B corporation” with a social mission, went public, faced activist pressure, replaced its CEO, gave up on being a B corporation, laid off a bunch of staff, and pivoted its mission to just increasing sales growth. “The ‘Values-Aligned Business’ team, which oversaw the company’s social and environmental efforts, was dismantled,” presumably to be replaced with a Business-Aligned Business team. It is as straightforward a cautionary story as you could ask for. “If you really want to build a company that works for people and the planet, capitalism isn’t the solution,” says one early employee, and he doesn’t so much mean “capitalism” (or does he?) as he means “going public.”
Do shareholders own public companies? Do directors and managers of public companies have a fiduciary duty to maximize profits for shareholders, and to prioritize that duty over any social concerns? I think that there are very strong legal and theoretical arguments that the answers to those questions are no, or not really, or not quite. But in a practical sense the answer seems to be yes: If you are a public company CEO, and you acknowledge that you have values beyond the bottom line, and those values hurt your bottom line, then shareholders will complain and activists will arrive and your board will revolt and you will generally have a sort of awkward and uncomfortable life. But that understates the case, because realistically if you are the sort of person who becomes a public company CEO you will probably have internalized the shareholder-value perspective on corporate governance yourself, and you will go around saying things like “I would love to stop polluting, but I have a sacred duty to my shareholders to maximize value, so what can I do?”
I find this disappointing, just because I am a big fan of corporate-governance experimentation. There’s no reason to think that every public company needs to maximize shareholder value. And in fact some public companies explicitly disclaim fiduciary responsibilities to their shareholders, though they’re mostly private equity firms like the Carlyle Group LP, which is … not … exactly … Etsy. A public company that really didn’t care about shareholder value would be a mess, but a fun mess, and it’s a little disappointing that they’re so hard to find. The good news is that we live in a golden age for non-public and non-traditional financing structures. You can do a private offering, or a crowdfunding campaign, or an initial coin offering, or whatever, and straight-up tell investors that you don’t want to make a profit for them, and they’ll still give you money. Going public may ruin your company’s social mission, but these days it’s pretty optional.
Blockchain blockchain blockchain.
A nice little linguistic tic in financial markets is that sometimes analysts or pundits will advise you to “be cautious with X,” but the opposite of “be cautious with X” is not “don’t be cautious with X.” That would be stupid. You should be cautious with everything. An analyst who explicitly says “be cautious with X” means “X is bad”; but if she changes her mind and decides that X is good, she will say something like “buy some X.” She won’t say “there’s no need for caution with X.” Right?
“Last week, bitcoin fell to $5,600 and since then rebounded,” [strategist Tom Lee] wrote in a note to clients. “This move to $5,600 cleaned up weak hands and we no longer feel caution is warranted.”
Just go, like, mortgage your house to buy bitcoins; caution is dead.
Elsewhere in caution, New Zealand’s Financial Markets Authority told investors not to subscribe to an initial coin offering run by “an Auckland teen who has raised millions from the public and is seeking hundreds of millions more for an exotic cyptocurrency venture,” and who “appears to have inflated some of the claims of his website’s success by a factor of 10,000.”
And here is “Taking the block out of blockchain”: As bank “blockchain” applications become, essentially, centralized databases with each participant keeping a copy of its own transactions, there is no real reason to group transactions into blocks. There is no real reason to call it a “blockchain” either except that it sounds sexy, but here we are.
“Stock trading using just your voice is not too far away.”
“Traders could be buying and selling stocks with just a voice command in the near future, Sandler O’Neill analysts predicted.” Honestly what will they think of next? I bet we are only a few years away from a voice trading system that asks you about your kids and makes contextually appropriate comments about last weekend’s football games.
Crystallex, Venezuela Agree to Settle $1.2 Billion Mine Dispute. Meredith to Buy Time Inc. With Koch Backing. Highland Capital Used False Pretexts in Ousting of Portfolio Manager, Panel Finds. Julius Baer chief quits suddenly for Pictet. Tax-Hike Fears Trigger Talk of Exodus From Manhattan and Greenwich. The Economy Is Humming, but Businesses Aren’t Borrowing. Barclays plans to send private bankers back to Asia. “CoCo issues result in statistically significant declines in issuers’ CDS spreads, indicating that they generate risk-reduction benefits and lower costs of debt.” Startups That Seek to “Disrupt” Get More Funding Than Those That Seek to “Build.” Lessons from the Evolution of Corporations and Shareholder Rights in China. Big flutes. Bad punt.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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