Deutsche Bank A good general model of working at an investment bank is that you come in and work hard all year for free, with the expectation that at the end of the year you will be awarded a big bonus that will fully compensate you for all that you did. This was never really true—bankers and traders always got perfectly healthy salaries, paid twice a month, in between their annual bonuses—and it is significantly less true now as regulators have pushed banks to make bonuses a smaller part of compensation (and salaries larger). Still it has a deep psychological hold on the industry. You get your "comp" once a year, and everything that you do is oriented toward making that comp as big as possible. And the comp has to be big, not only to compensate you for doing work and generating revenue, but also to compensate you for bearing the risk and delay of waiting a whole year to get paid. One thing this means is that there are, as it were, high- and low-leverage situations for comp. The value of any trade to you is something like (1) the revenue from the trade times (2) the percentage of that revenue that will make it into your bonus times (3) the probability that you'll actually get the bonus. And item (3) shifts over the course of the year. If it's October and you're generally in good standing with your bosses, you should chase every bit of incremental revenue: They'll remember it when they allocate bonuses in a few weeks. If it's March and the market is looking grim, your incentives are weaker: You might do a big trade now, be a hero for a bit, get fired in September anyway and never get your rightful bonus for that trade.[1] If you are a Deutsche Bank AG equities trader in New York, what are the odds you'll get your bonus for 2019? What does that tell you about when you should leave for the bar each afternoon? On the trading floor, seats sit empty at mid-morning. Computer screens are black. Some who remain are openly hunting for jobs at rival banks. Their bosses know, and don't mind. On a recent weekday, an executive spied junior traders enjoying beers at the nearby Full Shilling pub. It was just past 1 p.m. Older traders could be found at Cipriani on Wall Street, where the famous bellini cocktails are served in wood-paneled rooms or on a terrace between stone ionic columns. So it goes nowadays at Deutsche Bank in New York, where everybody, from the executives down, seems to sense that more bad news is coming from Frankfurt. To be fair, it is summer, and you can probably find traders from every bank at the bar on the occasional weekday afternoon. On the other hand, it is Deutsche Bank, and it's been gloomy forever: Deutsche Bank now plans to tell hundreds of U.S. equities and rates traders that they will no longer be employed there, people familiar with the matter told Bloomberg. Chief Executive Officer Christian Sewing may present a major restructuring plan as early as this week, slashing as many as 20,000 positions worldwide. … Executives in New York have for more than a year worked under the cloud of whether the U.S. operation would be sold, gutted or spun off. I don't know, would you work for more than a year under a cloud of your entire business maybe being laid off? I mean you wouldn't necessarily quit; you'd still come to work most days. You'd just leave at noon. Your incentives would ebb over time, to the point that when Deutsche Bank finally did lay you off it would take you a minute to remember who "Deutsche Bank" was. It is not particularly pleasant for the Deutsche Bank traders whose jobs are on the line, but I suppose it could be worse. They are still getting paid, for now—their salaries, I mean; their bonuses are another story. That pay apparently does not come without too much expectation that they'll do any work. They've had a lot of warning, and some time to look for other jobs, and if they are laid off no other employer will take that as too much of a reflection on their personal work. (It's not a great thing to have on your resume, working for a business that was such an albatross for Deutsche Bank, but that doesn't mean everyone there was bad.) And it's been a year of this. "The Germans say that the horrible end is better than horror without end," Credit Suisse AG CEO Tidjane Thiam once memorably said about his own bank's restructuring, but it is not obvious that that's true for the people awaiting the horrible end. At least endless horror gives you a lot of time for cocktails at lunch. Checking & Savings Last year, Robinhood Financial LLC launched a new "Robinhood Checking & Savings" product with a 3% interest rate. Then within 48 hours it un-launched the product because it turned out to be super illegal: It wasn't a checking or savings account, because Robinhood isn't a bank, and amounts in the account would not, as Robinhood had advertised, be insured by the Securities Investor Protection Corp. It was kind of a weird, though brief, incident. One wondered what they were thinking. At Business Insider today, Nick Bastone and Dan DeFrancesco have a deep postmortem on what they were thinking, which seems to have been: very little! During one meeting, the former executive said, product managers raised concerns with [founder and co-CEO Baiju] Bhatt about naming the product checking and savings. The trouble, they argued, was that the money was not in a checking account or in a savings account: It was in a brokerage account. And unlike traditional bank accounts, brokerage accounts aren't insured by the Federal Deposit Insurance Corp. Pitching the product as bank account could mislead customers. "… we're doing it anyways," Bhatt said in the product meeting, according to the former executive who was in the room. The name, Bhatt said, would resonate with users. (He said something else—something you might expect a brash move-fast-and-break-things tech CEO to say—before "we're doing it anyways.") And: Robinhood would market checking and savings as insured by the SIPC up to $250,000. But according to the former executive and a former employee who worked with Robinhood's legal team, Bhatt explicitly decided not to contact the SIPC before the checking and savings announcement to confirm that the product would be covered. He thought, they said, that the issues would work themselves out over time and ultimately resolve in his company's favor. When product managers questioned how Robinhood could say the product was SIPC-insured when they hadn't spoken to anyone there, Bhatt's response was "we're going to be fine," according to the former executive. Super. I have already made fun of Robinhood Checking & Savings, twice, at some length; the gist is that the "move fast and break things" theory of running a tech company does not work so well in a tightly and effectively regulated industry like finance. Uber really can waltz into a city, ignore its taxi regulations, and then say "what, those regulations were bad, people want Ubers, make an exception for us," and have it mostly work out. You can't do that with bank accounts, though. I do want to point out one subtler disconnect here. Notice that the essential problem here is not that, like, Robinhood's lawyers read Bhatt a SIPC rule saying "thou shalt not start a checking & savings account at your app-based brokerage," and he said "bah, I don't care about your petty rules." It's that "the lawyers said they would be more comfortable if they reached out first to SIPC," and he apparently declined to do that. Tech founders sometimes seem to think of regulation as sort of an open-source body of code: Anyone can go read it, figure out what is explicitly prohibited, and then do anything else. And if you can read the rules and make a clever argument that your thing is not explicitly prohibited—if you're not allowed to launch "checking accounts" or "savings accounts," say, but the rule says nothing about "checking & savings accounts"—then you win, congrats, go ahead and do it. Financial lawyers, meanwhile, are trained in legal realism. Regulation to them is essentially a matter of predicting the reactions of regulators, and predicting what they can do to you if their reaction is negative. Obviously the text of the rules is a good starting point for these predictions, and a good tool for persuading the regulators to react favorably. At the same time, though, an even better tool for predicting the reactions of regulators is sometimes to just call them up and say "hey what do you think of this?" If you ask your lawyer "will the SIPC insure these accounts," and if instead of going to the library and spending hours poring through SIPC regulations and precedents she just calls the SIPC and asks them and they tell her, then she is doing her job very sensibly and efficiently. And if you tell her not to call the SIPC, then you are not really getting the full benefit of legal advice. I once wrote an imaginary dialogue about this issue between Elon Musk and the lawyer in charge of babysitting his Twitter account. "Whether you like it or not," I imagined the lawyer saying, "regulators and courts operate in large areas of discretion; they have lots of ways to make life more difficult for you and for the company that you manage as a fiduciary for others, and they are used to being treated with a certain amount of deference by the people they regulate." And: "My job as a lawyer is not just to look up rules and show them to you; it is to make predictions, grounded in research but also in experience and a certain professional connoisseurship, about how officials will react to particular fact patterns, and to advise you on the wisest course of action in shaping their reaction." This is not a message that is particularly appealing for tech visionaries to hear. There is something anti-libertarian about it, this notion that the law is not equally available and comprehensible to everyone, and that the decisions of individual human regulators have effectively the force of law. It is philosophically unsettling and also probably does stymie innovation: The regulators will tend to be conservative, and they might listen with more favor to well-connected entrenched insiders than to brilliant disruptors. I have no real answers to those complaints; you can go ahead and dislike it! It just happens to be true, and if you choose to ignore the regulators, that doesn't mean that they'll ignore you. Negotiating strategy Look, I have never been a venture capital investor, but I was a capital markets banker, and in that line of work I acted as a middleman between companies that wanted to raise money and investors who wanted to give it to them. In general there is a very obvious alignment of interests and views between the companies and the investors: Good ambitious companies tend to think that their business will grow and be worth a lot of money, and the investors who want to give them money also tend to think that. But there is also a very obvious conflict of interests, which is that the companies want to raise money at a high valuation and the investors want to invest at a low valuation. (If the company does end up worth a lot of money, the company wants more of that value to accrue to itself—its earlier investors, etc.—while the investors want more of it to accrue to them.) The way this often plays out in practice is that the companies confidently say that they can achieve high growth and impressive revenue in the near future, while the investors—who, sure, at some level agree; that's why they're looking to invest—are cautious and express doubt about those projections and argue for a lower valuation to account for the risk that they won't come true. In venture capital, though, sometimes the company confidently says that it can achieve high growth, and the investor says "no no no you're wrong we think you can achieve much higher growth." The smart response is for the company to say "actually you're wrong, it will be even higher," and then they keep one-upping each other until the investor agrees to put in money at an infinite valuation. Seems fine. Here's a story about Masayoshi Son of SoftBank Group Corp. and his investment in WeWork Cos.: Its rapid growth is down to the unbridled optimism of two men: Adam Neumann, the 40-year old entrepreneur and founder of WeWork, and Mr Son, who has egged on his protege's lofty visions. He has also pumped more money into the younger man's company than any other investor, effectively setting its valuation, which at $47bn now eclipses all but a handful of publicly traded property groups. "What he brought to the table was a bigger thinker, which we thought was hard to find because we thought we were quite big thinkers," Mr Neumann told the FT in an interview in May. "He came in and said, 'Woah, woah, woah, wait. Why [target] only a million members when you can have 5m?'" We have talked before about one result of this thinking, which is that SoftBank invested in WeWork at a $20 billion valuation and then invested again a year and a half later at a $47 billion valuation, even as other investors were selling, to SoftBank, at close to the earlier valuation. Meanwhile in public markets, generally the investors are supposed to be smaller thinkers than the entrepreneurs. Every ambitious chief executive officer has a plan for world domination and truly believes that his company can do anything; the job of the investors is to evaluate all of those CEOs' plans skeptically and choose the ones that survive scrutiny. In the land of the unicorns, everyone is competing to be the biggest thinker. It can skew valuations! Anyway WeWork is now contemplating an initial public offering, and a big question is whether it can get the public markets to be as big-thinking as SoftBank: Bankers have for weeks been pitching their services for the upcoming IPO. The critical question they will confront is whether the institutional investors who can make or break a new offering agree with WeWork's characterisation of itself as a tech company or measure it against the far more lowly-rated real estate sector. Even the research analyst covering WeWork for JPMorgan Chase, one of the banks angling for the mandate, has purview over property, not tech. I would really like to read more about how banks are pitching the WeWork IPO? Not, like, valuation and positioning and all that normal banking stuff, but the softer tech-banking question of what stunts the banks are pulling to convey to WeWork that they get its vibe and are the best bank to tell its story. You know, like how Michael Grimes drove an Uber before pitching the Uber Technologies Inc. IPO, or how bankers all pitched the Lululemon Athletica Inc. IPO wearing yoga pants. Oh sure sure the banks' tech teams could abandon their offices and move into a WeWork for the next few months, that's fine, that's something. But it seems like table stakes here, no? WeWork has a deeply weird vibe; it has informally changed its name to "The We Company," and "aims to encompass all aspects of people's lives, in both physical and digital worlds," and once "mapped out plans for everything from WeSleep to WeSail to WeBank," and is "a state of consciousness, … a generation of interconnected emotionally entrepreneurs." You can't just show up in a suit with a PowerPoint deck to pitch a state of consciousness on leading its IPO, even if you did make the deck in one of its co-working spaces. People are worried about bond market liquidity Congratulations to bond ETFs, which turned one trillion last month: The amount of money in fixed-income exchange-traded funds passed $1 trillion last month, an ascendance that has reshaped the market in which countries and companies raise money to pay their bills. Bond ETFs marked the milestone as they mark every other day, with some worries about bond market liquidity: In June, The Wall Street Journal sat down with one of the biggest beneficiaries of the bond ETF boom: Rob Kapito, president of BlackRock. When asked about the liquidity-crunch criticism bond ETFs most often get, Mr. Kapito responded with an eye roll. Mr. Kapito made little effort to conceal his derision for armchair alarmists. "A lot of your colleagues have been trying to find a fault with this thing," Mr. Kapito said. "It's a pent-up desire that hasn't been fulfilled, because it actually works." Elsewhere, here is a European Systemic Risk Board report titled "Can ETFs contribute to systemic risk?" (The answer is maybe.) People are worried about stock buybacks That too: Some companies are easing up on share repurchases this year, potentially removing a pillar of support from the stock market as executives contend with the consequences of trade tensions and slowing economic growth. What I like about buyback worries is that if buybacks go up, that means that companies are too short-termist and are underinvesting in research and capital equipment, while if they go down, that removes "a pillar of support from the stock market." If you are worried about stock buybacks, isn't this good news? Companies are investing more for the long term now, right? Things happen Lee Buchheit: The crisis veteran on the sovereign debt frontline. The Earnings Mirage: Why Corporate Profits are Overstated and What It Means for Investors. Saudi Aramco to Restart Preparations for Mega IPO. London Bankers Brace for Summer Gloom With Thousands of Job Cuts. Jefferies Adds Investment-Banking Staff as Rivals Pull Back. How a lawsuit could reveal secrets about Silicon Valley's favorite philanthropic loophole. Spies fear a consulting firm helped hobble U.S. intelligence. The Pentagon has a laser that can identify people from a distance—by their heartbeat. "A blockchain-based platform that enables fully customizable funerals." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Meanwhile, you will sometimes hear that trades at the very end of the year don't count and should be avoided. If your employer decides bonuses for the year in early December, based on revenue for that year, then you shouldn't do a deal on December 30: This year's bonus is already fixed, next year's bonus will be based only on next year's revenue, so a December 30 deal is worthless for you. Better to encourage the client to wait for January. | 
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