| Programming note: Money Stuff will be off tomorrow, back on Thursday. Meta-banking The basic business of investment banking is advising companies on big financial transactions. If you are the chief executive officer of a big company, and the CEO of another big company calls you up and offers to buy your company, you will hire an investment bank or two to help you evaluate the offer and make sure you get the best deal. Or if your company wants to raise a billion dollars of outside financing, you will hire an investment bank or two to help you figure out the best ways to do that and to negotiate the best price with investors. The banks are repeat players; they know how this stuff works; they have negotiation skills and market knowledge and specialized expertise in structuring transactions. The investment banks will generally charge a fee that is large compared to, like, the median family income, but small—on the order of one percent[1]—compared to the size of the deal. If you are raising a billion dollars, paying $10 million for advice just does not feel that material, and you may not be inclined to sweat the details that much. If the bankers can get you a meaningfully higher price on a billion-dollar transaction, it's silly to quibble with them over a million dollars of fees. On the other hand if you are raising $100 billion in an initial public offering, not only is that IPO a big transaction, but even the IPO mandate is a big transaction. That is, the IPO transaction where you issue stock to investors and they give you money is a big important transaction that you want to structure and price and negotiate correctly, but the transaction where you hire banks to structure and price and negotiate the IPO is also a big important transaction that you want to structure and price and negotiate correctly. Like that's a billion-dollar deal right there![2] If you were going to negotiate a billion-dollar acquisition, or a billion-dollar financing, you'd probably hire a bank to help you negotiate it. And if you're going to negotiate a billion-dollar deal with the banks who will run your hundred-billion-dollar deal, you might want some extra banks to negotiate with the other banks: Saudi Aramco has picked Lazard Ltd. and Moelis & Co. to advise on the oil giant's second attempt at the world's largest initial public offering, people with knowledge of the matter said. The boutique investment banks have started preparatory work on the offering, according to the people, who asked not to be identified because the information is private. They are expected to play a key role in the listing, including in the selection of underwriters and listing venues as well as working to ensure Aramco can secure its valuation expectations, the people said. Lazard and Moelis have the odd advantage, for this purpose, of not being particularly big IPO underwriters. Bloomberg's "Global Equity IPO" league table for 2019 year-to-date ranks Moelis 145th, with $71.6 million dollars of league table credit; Lazard isn't even on the list. (First place is Goldman Sachs Group Inc. with $5.9 billion, still tiny compared to a potential $100 billion Aramco deal.) Presumably Aramco will hire a bunch of big investment banks with large equity underwriting franchises to actually sell the stock to investors. But before that it will hire advisers to advise it on its dealings with those other advisers. This is not really a matter of negotiating the IPO fee; Aramco can probably take care of itself there. It's that the whole investment banking relationship is fraught with potential conflicts of interest. Aramco's ultimate underwriters will want to get the best possible deal for Aramco, for a variety of reasons (fees as a percentage of value, future business, etc.). But they will also have conflicting incentives: to make the deal as easy as possible for themselves, to make their investor clients happy, etc. Every deal decision that Aramco makes—where to list, what assets to include or spin off, how to price the deal and what investors to target—has the potential to be better or worse for the underwriters, so Aramco might as well hire some extra bankers to help it manage those conflicts and make sure the decisions are made in its best interests. Really in a perfect world this is how a lot of investment banking would work. You'd have executing banks to do the transaction, and they would necessarily have some conflicts of interest with the client. IPOs are conflicts of interest; that's the whole thing; you hire a bank to underwrite your stock precisely because investors expect that bank to look out for their interests.[3] But then you'd also have advisory banks whose only job was to advise the client, and whose only loyalty would be to the client. The client would, ideally, get the benefit of both unconflicted advice and useful well-connected execution. Most of the time those roles get combined for efficiency reasons: Hiring extra banks to not do the deal is a rather luxurious use of money, hiring too many banks can be distracting and slow down the deal, and most of the time the executing banks have decent incentives to give you good advice anyway. But if you are doing the biggest deal ever, and hiring all the banks anyway just to execute it, there's really no reason not to hire some extra banks to keep an eye on the other banks. Manipulation!? As I was reading the news last weekend and getting ready to come back from vacation, I saw an announcement from the U.S. Commodity Futures Trading Commission that it had settled a market manipulation case with Mondelez International Inc. I remembered that case; we talked about it years ago, when the CFTC first brought it. As sometimes happens with CFTC market manipulation cases, I had found it kind of puzzling. The basics of the case were that (1) Mondelez wanted to buy wheat so (2) it bid to buy wheat in the futures market and (3) then it bought wheat. Which … sounds … fine? It's more complicated than that—this was a kind of basis trade, where the futures bids were meant to drive down the difference in price between cash and futures wheat by suggesting that the demand was for later wheat—but this is not the sort of classically manipulative situation where Kraft pretended it wanted to buy wheat while it was secretly selling wheat, or vice versa. It was a closer question than that, and just a bit of a strange case. So I thought "huh this settlement will explain it," and I clicked through and started reading and remembered it was all pretty complicated, and I had other things to do, so I just made a note of the link and planned to come back to it. And then I came back to it yesterday and it was gone. Here it is; as of today it just says "You are not authorized to access this page." The explanation is as goofy as can be. From Bloomberg's Matt Robinson and Ben Bain: Three Commodity Futures Trading Commission members were ordered to court next month for a hearing called to determine whether public statements about a recent enforcement case against Mondelez International Inc. violated the agency's agreement with the company. Mondelez agreed last week to pay $16 million to settle CFTC claims that the company manipulated wheat prices in 2011, when it was a unit of Kraft Foods Inc. In a statement that has since been removed from the CFTC's website, Democratic Commissioners Rostin Behnam and Dan Berkovitz stated that they believed Kraft had manipulated markets. A Mondelez spokesman said that the CFTC's statement blatantly violated the agreement and that the company would seek court relief. U.S. District Judge John Robert Blakey gave notice Monday that he will hold a hearing in Chicago on Sept. 12 to determine whether CFTC officials should be held in contempt. He ordered Behnam, Berkovitz, CFTC Chairman Heath Tarbert and enforcement chief Jamie McDonald to appear. The agency agreed to remove the press release from its website until the next court date. Often when a company settles a case with a regulator, it contains a provision saying that the company neither admits nor denies its guilt. People get mad about these settlements—they want the company to admit guilt—but they do have the effect of preventing the company from going around saying "we were totally innocent but had no choice but to settle with an overreaching regulator." If it does that, it is potentially violating a court-approved settlement; the regulator can tear up the settlement or perhaps even get a judge to hold the company in contempt. On the other hand, the Mondelez settlement—for, again, a strange and debatable market-manipulation claim—seems to have forbidden the CFTC from asserting Mondelez's guilt. The CFTC sued Mondelez for market manipulation, and Mondelez agreed to pay the CFTC for the market manipulation, but only if everyone agreed not to say that Mondelez had done market manipulation. And then the CFTC said that it had, and now the CFTC—or rather, specific individuals at the CFTC—might be in trouble. Look, as a guy who writes about market manipulation, I have some sympathy for Mondelez here. This seemed like a borderline case, they had an argument that they had done nothing wrong, they agreed to pay the CFTC $16 million just to shut them up about it, and the CFTC took their money and then refused to shut up. Mondelez did not get the service that it paid for, and is now going to court to complain. Reasonable! As a matter of, like, democratic governance, though, it is … not the best? From a public policy perspective, maybe Mondelez should not be able to insist on getting what it paid for, if what it paid for was for its regulator to stop talking about market manipulation? It does seem like regulators who think that a market is being manipulated should at least be allowed to say that. Reg FD We talk sometimes around here about a weird dynamic in which (1) U.S. public companies often meet privately with big investors or sell-side research analysts, (2) these meetings appear to be helpful for those investors and analysts, (3) Regulation FD prohibits companies from sharing material nonpublic information with analysts or selected investors without simultaneously disclosing that information publicly, and (4) you rarely see Reg FD enforcement actions. It's just sort of a puzzle, perhaps a story about the gap between the sort of information that is interesting to investors and the sort that is "material" under the law, or perhaps a story about how that particular law is only enforced in rare and egregious cases. I dunno. Well, you don't see Reg FD enforcement actions every day, but there is one today: The Securities and Exchange Commission today charged TherapeuticsMD Inc., a pharmaceutical company headquartered in Boca Raton, Florida, with violations of Regulation FD based on its sharing of material, nonpublic information with sell-side research analysts without also disclosing the same information to the public. The SEC's order finds that on two separate occasions in 2017, TherapeuticsMD selectively shared material information with analysts about the company's interactions with the U.S. Food and Drug Administration (FDA). As detailed in the SEC's order, on June 15, 2017, one day after a publicly-announced meeting with the FDA about a new drug approval, TherapeuticsMD sent private messages to sell-side analysts describing the meeting as "very positive and productive." TherapeuticsMD's stock price closed up 19.4 percent on heavy trading volume the next day. At that time, the company had not issued a press release or made any other market-wide disclosure about the meeting. Yeah I just don't know why you would do that? I guess I do at some level. You have a professional relationship with those analysts, and you rely on them to help tell your story. You want them to like you, and one way to do that is to help them do their job—to give them information that the market doesn't have, so that they can add value by telling it to the market. And you think that good news will sound better coming from the analysts than from you: Investors will discount your positive press release as spin, but they will believe a positive report from a neutral analyst. It is all standard stuff, really, and it is part of why, in the days before Regulation FD, companies regularly communicated to the market through analysts, rather than through direct disclosure. It's just that Regulation FD was very explicitly supposed to stop that, and mostly, with weird squishy exceptions, it did. But not here. "At the time of these selective disclosures, TherapeuticsMD did not have policies or procedures regarding compliance with Regulation FD," says the SEC. Summer reading Business Insider has an absolutely glorious memo that UBS AG's investment bank sent to its U.S. employees with some summer reading recommendations. Here is how it starts: Colleagues, As I mentioned at the recent townhall, it is vital that we continue to challenge the status quo and drive agility in our thinking and structure. Being open to change and managing towards it is not only an important driver of successful businesses; it can also create opportunities we hadn't even imagined. The whole thing is like that, a sheer perfection of corporate style. "Change, be it disruption or innovation, isn't a new problem for our age, nor one of technology," yes. "As showcased in some of these books, it is something that we as a society have been grappling with for many generations," yes! So the books are about change. You can read the books to learn how to handle change. "Bloomberg reported that UBS's co-heads of investment banking, Piero Novelli and Rob Karofsky, are mulling an overhaul of the business and also considering cutting hundreds of jobs," notes the article. Or, if books aren't your thing, there are, I swear, TED Talks: In addition to our suggested readings, I encourage everyone to use the additional resources at your disposal (i.e., TED Talks or simply researching the topic of change on the internet) to continue to explore how to best deal with change, satiate your intellectual curiosity and prepare yourselves for the future - whatever it may be. But then, after the dizzying joy of the memo, comes the reading list! The reading list is amazing! "Charlotte's Web"! "One of the themes of the book is change: the turning of the seasons, the process of transitioning from childhood to adulthood," the death of spiders, the slaughter of pigs averted by quasi-magical means, you know how it is. "Rather than accepting these things as an inevitability, the characters go beyond the limits of change." Presumably some underperforming bankers are going to take away the obvious lesson that they should train a spider to weave the words "SOME VP" into webs around their desks if they want to keep their jobs. But then! Then! Then! Then! "Waiting for Godot: A Tragicomedy in Two Acts" By Samuel Beckett What it's about: Based on Beckett's translation of the French play En Attendant Godot, the play begins with one of two strange souls who sit under a tree and...wait. They are waiting for Godot. They don't know when he will arrive or what they will do when he gets there, but still they wait. Each day, they say they will stop waiting, but wait they do... Why it's applicable: Piero Novelli often references this book. It is a great story of two passive observers who are waiting for something to come to them rather than taking action. Spoiler alert: nothing happens. Piero sees much value in this book, and I think you will too. Not only can you read this, you can also see the play! I imagine Samuel Beckett, sitting in mid-century Paris, translating "the French play En Attendant Godot" (just go with it!), thinking that his characters' passivity will one day serve as a good model to help investment bankers learn what not to do: If you want to win business, you can't just sit around waiting, you have to take action. Vladimir and Estragon's problem is that they don't have an actionable targeting dashboard that ranks the highest-value potential Godots, and that they wait for the client to call them rather than proactively getting on a plane to visit the client themselves. Investment banking is amazing. Things happen Wall Street Poised to Get Long-Sought Changes to Volcker Limits. Finance Needs People Who Work Well With Robots. How Shareholder Democracy Failed the People. JPMorgan's Dimon Among CEOs Rejecting Investor-Centric Model. KKR is hiring college seniors. Investors' New Weapon in Japan: Votes to Embarrass the Boss. Pimco looks to offload ultra-hot bonds after huge rally. Junk-Bond Investors Turn Picky as Slowdown Talk Swirls. Jennifer Lopez, Alex Rodriguez Are Investing in Fintech Firm Acorns. Buy Gold 'At Any Level,' Mobius Says as Central Bankers Ease. The 'Beach Money' Threat to Venture Capital. Hero dog saves fisherman owner who was bitten by shark. Adult Recess. 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] Here I am generalizing very broadly; fees for large short-term investment-grade debt issuances can be under 0.1%, merger fees tend to run about 0.5% with a fair amount of variance, U.S. high-yield bonds and equity offerings tend to be low single digit percentages, smallish U.S. initial public offerings are customarily 7%, etc. There's a wide range but it's generally within an order of magnitude of 1%. [2] I have no idea what the actual bill will end up being but we are talking rough orders of magnitude here. [3] Other transactions are even more direct conflicts of interest: If a company buys a derivative from a bank, there's a good chance that the bank is both advising the company on how to structure and price the derivative, and taking the other side of the transaction. And in fact there is a small booming business of former investment bank derivatives structurers who open boutiques to advise companies on how not to get taken advantage of by current bank derivatives structurers. Mergers, meanwhile, have less obvious and direct conflicts than underwritings and derivatives. They also have a bit more of a history of hiring multiple banks for different roles, with, say, one big bulge-bracket bank getting an advisory fee and also working on the financing (creating conflicts), and another boutique bank getting an advisory fee, giving a fairness opinion and avoiding any conflicts. | 
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