| Programming note: Money Stuff will be off on Monday and Tuesday, back Wednesday, Oct. 23. Fractional shares This is cool, I like this: Charles Schwab Corp. will let investors buy and sell fractions of shares in coming months as part of an effort to attract younger clients to its online brokerage platform. Founder and Chairman Charles R. Schwab told The Wall Street Journal Thursday that fractional share trading would soon be introduced, along with several other new programs, as the online brokerage looks ahead after it eliminated trading commissions earlier this month. … Schwab's move would be the first by a major online brokerage to allow investors to buy and sell fractions of stocks. Some of the most well-known and popular companies have high price tags, making owning a share impossible for some would-be investors. A share of Amazon.com Inc., for example, costs around $1,794. In addition, fractional shares can help younger and less-wealthy investors diversify their investment portfolios by spreading relatively small pots of money over a broader range of stocks. Schwab is not the first brokerage to do this—firms like M1 Finance LLC and Social Finance Inc. let clients buy fractional shares—but it's the first "major" one I guess. The investing logic of it—letting retail customers invest based on the amount of money they have to invest, rather than based on the price of any particular share of stock—is pretty obvious, but I also like it because it highlights some oddities of stock ownership. For one thing, most of the time, you can't really own a fractional share of stock. Companies mostly issue shares only in integer amounts. Schwab slice a stock certificate in half and give you one half. But this is not really a problem because you don't own any shares anyway. If you buy stock in a brokerage account, the stock will ordinarily be "owned," in a technical record-ownership sense, by a weird company called Cede & Co. whose job is to own all the stocks on behalf of all the brokers. Schwab (or whoever your broker is) will then have an account at the Depository Trust Company (an affiliate of Cede) saying how many of Cede's shares Schwab is entitled to, and you will have an account at Schwab saying how many of Schwab's shares you are entitled to. Cede will own an integer number of shares, and Schwab will be entitled to an integer number of shares on DTC's books, but Schwab can set its own rules for what sorts of numbers of shares you can own on its books. If it has a share, and wants to give you half and another customer the other half, that's fine. If it wants to give you half and keep the other half for its own account, taking on a teeny fractional bit of stock-price risk[1] in order to make customers' lives easier, that's also fine. But this only works because you don't own the shares you have at Schwab, because Schwab doesn't, like, have a stack of stock certificates in a vault with your name stamped on them. Your share ownership consists of just a number in a database on Schwab's computers, and if Schwab wants to make that number floating-point that's Schwab's business. For another thing, most of the time, you can't really buy a share of fractional stock, like on the stock exchange. What happens if you come to Schwab one day and say "I would like to buy half a share of Amazon"? Schwab can't go to the stock market and buy that half-share. It could buy a whole share, for $1,794 or whatever, and then sell you half of it, assuming the ownership problem is solved. But it—or someone—is necessarily a principal in that transaction. It can't just route your order for a half-share to the stock exchange and bring you back the half-share you ordered. Schwab, or someone, will have to buy the whole share for its own account, using its own money, and then sell you the half-share out of its own inventory. Your can't execute this trade on a stock exchange with an anonymous counterparty; you can only execute it with Schwab, or someone pre-selected by Schwab who is in on the deal, as your counterparty. But this too is fine because, again, Schwab probably wasn't routing your order to the stock exchange anyway. Schwab, like many retail brokers, sends most of its customers' orders to a handful of wholesalers, electronic trading firms like Citadel, Virtu, G1X and UBS, who trade with Schwab's customer orders for their own account. The order never goes to the stock exchange; you just buy your shares from Virtu or whoever. (The wholesalers pay the brokers for their customers' order flow, which is endlessly controversial, though it seems clear to me that this process gets the customers better execution than they'd get by sending their orders to an exchange.) If Schwab is sending most of its customers to its wholesalers' inventory anyway, then it can surely negotiate with the wholesalers to either sell the customers fractional shares out of inventory, or to sell Schwab the necessary whole shares and let Schwab split them up as principal. I am sure that these market makers will find ways to make a little bit of money selling people fractional shares, and I am sure that those ways will be controversial, and I am sure that those controversies will be silly for the same reason that most payment-for-order-flow controversies are silly. This is a good service, and it can't be provided by buying normal shares on normal stock exchanges, but it can be provided by retail brokers sending their customers to wholesalers' inventory, and the wholesalers (and the brokers) should probably make a bit of money doing that. All this stuff. There is a level of finance that is smooth continuous math, and a level of finance that is, like, routing orders to wholesalers and holding shares on the books of Cede & Co. and generally mucking around with discrete strange bits. If you are a normal person, or even really a professional investor, you mostly want to live at the smooth continuous level. You want to be able to pick investments, and invest the number of dollars you want in the investments you want, and let someone else handle the business of translating your continuous numbers into the dumb mechanical facts of how shares are traded and owned. And of course so much of the actual business of the financial industry, so much of the actual value that is provided, consists of providing a smooth continuous surface over the weird stuff, making it look like things work the way they should work rather than the way they do. WeMelt Uh okay: SoftBank Group Corp. is assembling a rescue financing plan for WeWork that may value the office-sharing company below $8 billion, according to people familiar with the discussions. The new figure is a fraction of the $47 billion valuation the startup commanded as recently as January. The talks are fluid and the terms could change, said the people, who requested anonymity because the discussions are private. Less than 48 hours ago the story was that SoftBank would be putting in "roughly $5 billion of rescue financing" but would nonetheless "not amass a majority of voting rights" because "part of the package may include non-voting preferred stock." I pointed out that SoftBank has already put something like $10.8 billion into WeWork, and that if it put in another $5 billion, at a valuation of about $15 billion or less, "there is some possibility that, after this deal, (1) SoftBank will have put more cash into WeWork than WeWork is currently worth, and (2) it won't even have a majority of the stock." But … $8 billion? If SoftBank puts in $5 billion at an $8 billion valuation—and WeWork apparently does need several billion dollars just to get it through the next year—then it will … I don't … what? Like that $5 billion right there is more than half of the value of the company? Obviously if you put up more than half the value of the company, in one go, you should get at least half of the stock? Perhaps the $8 billion is a pre-money valuation? If SoftBank puts in a new $5 billion at a sub-$8 billion valuation, that will bring its total investment to about $15.8 billion, or about twice WeWork's current value. If it doesn't get a majority of the stock for that, it should just hand WeWork founder Adam Neumann the keys to its next $100 billion Vision Fund with a note saying "you are better at this than we are, here's a present." Below $8 billion! They should have done the IPO! WeWork tried to do an initial public offering, and hired bankers who pitched it on a $60+ billion valuation, then pulled the IPO when investors laughed at it and it seemed like it might not get done at even a $15 billion valuation. But, you know, 15 is more than 8. And if they'd raised at least $3 billion in the IPO then they'd have unlocked another $6 billion of debt financing on terms that now look ridiculously attractive. If they'd done the IPO at even a $10 billion valuation, they'd have sold 30% of the company for $3 billion of equity and $6 billion of cheap debt. Instead, this. Conceivably some of the investors who thought WeWork sounded silly at $40 or $20 billion would have thought it was a bargain at $8 billion. Or not, I don't know. All these numbers are sort of made-up anyway—it's not like WeWork makes money—and at a certain point a loss of confidence is self-perpetuating; if the thing is not worth $20 billion then why should it be worth $8 billion either Below $8 billion! Nothing has changed! Oh fine things have changed; Neumann is out as chief executive officer, and WeWork has hived off some of its weird side businesses. But those were voluntary changes that were supposed to increase WeWork's valuation. It's not like WeWork's buildings all burned down, or people found out it was cooking its books or anything. WeWork is basically doing the same thing it was doing a year ago, but somehow it was worth $47 billion to SoftBank then and $8 billion to SoftBank now. It is tempting to conclude something like "market valuations of money-losing tech companies are crazy and nobody knows anything," but I guess none of these things are exactly market valuations and maybe the right conclusion is "SoftBank doesn't know anything." Hanky-panky (1) We talked the other day about a story about Deutsche Bank AG's "Brazen Scheme to Woo China," and the brazen scheme turned out to involve taking connected Chinese people out to play golf or giving them nice bottles of wine or crystal trinkets as gifts. Oh, sure, Deutsche Bank hired some unqualified children of Chinese government officials for cushy jobs, and paid millions of dollars to well-connected consultants, but all in all it was pretty run-of-the-mill bribery. You want a brazen scheme? Here's a Bloomberg headline that says "Ex-Credit Suisse Banker Says Secret Affair Helped Fuel $45 Million Fraud." That's the stuff! You don't need to say "Brazen Scheme" in a headline when you can say that! (Though prosecutors do call it "a brazen international criminal scheme.") Actually that undersells it: It wasn't a $45 million fraud, it was a $2 billion fraud, the $45 million was just how much the Credit Suisse guy took in bribes. I am going to quote it at length because it is just terrific: Andrew Pearse, 49, admitted he got at least $45 million for his role in arranging $2 billion in loans to companies in Mozambique. He's the U.S. government's first witness in the trial of Jean Boustani, a Privinvest Group salesman who's accused of defrauding U.S. investors. Pearse testified Thursday that while sitting by a pool at a hotel in Maputo, Mozambique, in 2013, Boustani offered him a bribe in exchange for lower transaction fees Credit Suisse would charge on a loan. "I remember it clearly because it was the first time in my life I'd been offered a kickback," Pearse told the jury in Brooklyn. Man, you never forget the first time you get offered a kickback. Also good for him that his first kickback was $45 million! You might think that getting into the kickback game would require starting small, learning the ropes and working your way up to the really big kickbacks, and sometimes it clearly does work that way, but sometimes it's the opposite. Sometimes the way it works is that if you build a long career of probity and legitimate deals, you find yourself in a position where you're especially worth bribing, and where your counterparty knows it will cost a lot. Anyway about that affair: Those decisions were spurred by his affair with Detelina Subeva, a Credit Suisse banker who was junior to him, Pearse said. She has also pleaded guilty and will testify as a prosecution witness against Boustani. Assistant U.S. Attorney Mark Bini asked Pearse if his affair with Subeva played any role in his decision to quit in 2013. He replied he was trying to hide the "very deep romantic relationship" from his superiors. "We were both married at the time and it was difficult to see each other unless we were traveling," Pearse said. "I wanted that relationship to continue. I wanted to leave Credit Suisse. I wanted to establish a deeper relationship with Ms. Subeva." How many international business transactions are driven primarily by a desire of two of the advisers to continue having an affair with each other? Working around the clock on a complex bond deal in Mozambique is a pretty solid excuse to get away from your spouse to spend time in a hotel with your colleague/lover; even if the deal itself makes no economic sense, you might advocate for it just for the romantic possibilities. Also of course the bribes help. Hanky-panky (2) We talked yesterday about a funny conspiracy theory, promulgated by William Cohan in Vanity Fair, about trading in S&P 500 e-mini futures. The theory is that someone was buying a lot of futures before big geopolitical events, and then making a lot of money when the events occurred, because he or she or they had advance knowledge of the events—perhaps leaked from the Trump administration, or the government of China, or the people who blew up Saudi oil facilities, or whatever. I expressed quite a bit of skepticism about this theory, saying that "really there is no evidence at all" for it: There are lots of big futures trades, and each one has a buyer and a seller, and hoo boy is there a lot of geopolitical news, so it is pretty easy to look back at the tape and find big futures trades in the hours or days before big geopolitical events. One side of those trades will have made money (the other will have lost money), and you can be like "hmmm suspicious coincidence!" Felix Salmon expressed similar skepticism at Slate, in stronger terms. But actually our skepticism was insufficient and the evidence is much thinner even than that. Here are Sarah Ponczek and Nick Baker at Bloomberg: One trading expert, the chief executive officer of a major quantitative shop who asked not to be identified, said an analysis by his firm suggests no giant trades like the ones the article described appear to have happened. The story says that in the last 10 minutes of trading on Aug. 23, someone bought 386,000 of the September S&P 500 contracts. That number is close to the total volume for September e-minis from 3:50 p.m. to 4 p.m. New York time, spread over thousands of trades -- unlikely to be the work of a single person. Moreover, CME rules prohibit anyone from owning more than 60,000 e-minis at a time. And such a trade would've been gargantuan: worth nearly $60 billion. That's big enough to send the stock market sharply higher and probably trigger trading halts, according to the CEO. That didn't happen. That is, the evidence for this conspiracy theory is not even that sometimes there were big futures trades shortly before big geopolitical events. The evidence for this conspiracy theory is that there were futures trades shortly before big geopolitical events. Like, a lot of futures contracts traded, but not all in one big trade. Not one person buying 386,000 contracts, but 386,000 contracts trading, in thousands of individual trades between unrelated traders. The evidence for the theory is essentially "people traded S&P futures the day before weird Trump stuff happened." But people trade S&P futures every day! Lots of them! Billions and billions of dollars' worth, in lots of trades! It's an incredibly active and liquid market! This is … I mean, this is what a market is. People buy stocks, and people sell stocks, and if you just add up all the people who buy stocks before the stock market goes up then they will have made a lot of money, but that's not because they were all tipped off, it's because there is no other way anything could possibly work, come on. Things happen Saudi Aramco Delays Launch of World's Largest IPO. Structured-note ETFs. AT&T in Talks to Resolve Elliott Management's Activist Campaign. 'It's the Only Way to Get Paid': A Struggle for Citgo, Venezuela's U.S. Oil Company. Deutsche Bank Is Stuck With LBO Loan for 'Times New Roman' Owner. When Bankers Play 'The Great British Bake Off,' It Gets Cutthroat. In appeal to young Catholics, Vatican unveils the 'eRosary' — an electronic way to pray. Pelican wanders into restaurant, gets in line. 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] Super teeny, you understand. Schwab shouldn't have to own more than 0.999 shares of any one stock as fractional-share residues; it can add up everyone's fractional ownership and own the next-highest integer number, keeping only the excess for itself. I just added up the prices of all of the stocks in the Russell 3000 index (from Bloomberg data) and got $169,861.05, so that's basically a cap on any broker's residual fractional U.S. stock ownership, though the expected number would be much less. | 
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