Morgan Stanley Dean Witter Smith Barney E*Trade One thing to say about E*Trade Financial Corp. is that its name starts with "E*." Not even E-hyphen, E-asterisk. It is a throwback to a very specific 1990s vintage of corporate naming, a time when typography was weird, "E" signified "the internet," and the internet was enormously promising but not yet ubiquitous. "We're a brokerage firm," E*Trade's name implied, "but we've got an E* so you know we're on the internet." Other brokerages had names that were just stodgy concatenations of dead rich people's last names, with no asterisks at all, suggesting, often accurately, that they were less online. The prospectus for E*Trade's 1996 initial public offering is a trip: Just as the microprocessor changed computing, the emergence of the Internet as a tool for communication and commerce is driving a revolution in online transactions and information services, providing organizations and individuals around the world with new ways of conducting business. And: E*TRADE offers electronic access virtually anywhere, at any time, thereby shifting the financial services paradigm from a business hours only, intermediary-based model to one in which consumers have ultimate control over when and where they initiate transactions. And: E*TRADE's service is accessible through multiple gateways: the Internet, direct modem access, online service providers CompuServe and America Online, touch-tone telephone and, to a lesser extent, interactive television. Also: The Company's technology can be adapted to other aspects of electronic commerce. Leveraging this technology and its position as a leading provider of online discount brokerage services, E*TRADE's mission is to be a recognized leader in electronic commerce. Well that last part never really happened; decades later E*Trade is still an online discount brokerage, not, you know, Amazon. But what is striking about most of the rest of it—not so much the "interactive television" bit—is how totally it has been normalized. Yes duh right commerce happens on the internet now. Yes duh right if you want to buy stock you go to a web page and click a button; you don't, like, walk into a strip mall during business hours to talk to a broker. Everyone operates this way—or at least gives customers the option of operating this way; some still let them call a broker—and E*Trade's E* has long been an anachronism. Ooh, you're a broker but on the internet, super. Every decade or so Morgan Stanley buys a retail brokerage—Dean Witter in 1997, Smith Barney in sort of 2009 through 2012—and today it's buying E*Trade: Morgan Stanley is buying E*Trade Financial Corp. in a $13 billion deal that will reshape the storied investment bank and firmly stake its future on managing money for regular people. The all-stock takeover, set to be announced Thursday, will combine a Wall Street firm in the late innings of a decadelong turnaround with a discount broker built on the backs of dot-com day traders. It is the biggest takeover by a giant U.S. bank since the 2008 crisis. E*Trade brings five million retail customers, their $360 billion in assets and an online bank with cheap deposits that Morgan Stanley can funnel into loans. Its CEO, Michael Pizzi, is coming along to run the e-brokerage business, which will keep its brand, its handful of retail storefronts and its buzzy and well-funded ad campaigns, Morgan Stanley Chief Executive James Gorman said. ... Morgan Stanley already has 15,500 human advisers catering to millionaires and last year rolled out an online-only tool for customers with less money and less-complicated financial lives. E*Trade will slot into that wealth-management arm, which will have more than eight million users and $3.1 trillion in client money once the deal closes. … Its crown jewel is a comparatively low-profile business: managing the stock that employees at hundreds of companies receive as part of their pay. Those shares are typically locked up for a few years and when they become available, E*Trade aims to move those employees into brokerage accounts. To be clear, E*Trade is pretty small relative to Morgan Stanley, even relative to Morgan Stanley's retail-ish business. E*Trade has about $677.5 billion of customer assets (including unvested corporate holdings) and made $955 million last year; Morgan Stanley's wealth management division has almost $2.6 trillion of customer assets and made $962 million last quarter. Having a famous name and thousands of advisers catering to the rich is a bigger business than having a website and catering to day traders. Still doesn't it feel a little bit like, in the long run, E*Trade is the model that won here? Morgan Stanley is a famous old investment bank, founded by J.P. Morgan's grandson and also a guy named Stanley, that has historically done big deals for big institutional clients and used its own balance sheet to intermediate financial risk. E*Trade is, like, you can use your modem to buy stocks from our website. The latter model just seems like the future these days: In reshaping the firm since the financial crisis, Gorman has been emphasizing Morgan Stanley's wealth-management powerhouse. Purchasing E*Trade helps him add clients who are less wealthy than its traditional customers. The New York-based company has lost some business to the retail brokerages in recent years as those firms invested heavily in their web platforms. "Wall Street banks continue to covet Main Street customers," Greg McBride, an analyst at Bankrate.com, said in an email. The acquisition "gives them access to brokerage customers, employees with company stock, and the lifeblood of financial services -- low cost retail bank deposits." Or as they put it in the press release: "Combination accelerates Morgan Stanley's transition to a more balance sheet light business mix and more durable sources of revenue." "Balance sheet light business mix."[1] Don't risk your own money positioning bonds and derivatives for big institutional clients, renting out your capital, hoping to make money with it, and sometimes losing money instead. Just run the website where regular people can buy stocks, and make reliable money charging them fees.[2] The shareholders of big investment banks are conservative and suspicious these days. It used to be that the proposition to investors, for investment banks like Morgan Stanley and Goldman Sachs Group Inc., was "we will take your money and use it to buy and sell securities, and because we are good at that we will make a lot of money." No one wants to hear that anymore; no one trusts that. Last month Goldman had an investor day where it told shareholders about the nice new website it has for transaction-banking clients. It also has a nice, newish website for retail banking, online savings accounts, not a product that Goldman offered for most of its history.[3] And now Morgan Stanley is buying its own new web product, because that's where the durable revenues are. Big banks these days love to say that they're really tech companies. What they usually mean by that is that they employ a lot of software engineers and talk a lot about machine learning and blockchains. But the other thing that it often means is that they'd rather be in the business of selling software subscriptions—building electronic platforms and charging people recurring fees to use the platforms—than be in the business of financial intermediation. The historical business—much of the historical purpose—of the big investment banks, using their own capital to facilitate financial transactions, is just not that appealing these days. The money these days is in websites. Efficiency Yesterday's xkcd was a cartoon about the efficient market hypothesis. One stick figure says: But there's a weird corollary to that idea: It implies that, ignoring fees and stuff, it's just as hard to consistently lose money by picking bad stocks from an index. If someone could consistently buy bad stocks, you could beat the average by hiring them, letting them pretend to invest, then buying every stock except the ones they pick. In a way, bad judgment is just as helpful as good judgment. "Oh my God," says the other. "I can do that! This is the job I was born for." One thing I will say about this is that everyone thinks "hahaha I could lose money picking bad stocks," but I am on Twitter a lot and I have my doubts. The two investments that people hate the most, in my anecdotal experience, are Tesla Inc. and Bitcoin, and both have had absolutely amazing runs over the past few years. "It's easy to lose money, I will just buy dumb things like Tesla and Bitcoin," you'd say, and then you'd accidentally be rich.[4] Another thing I will say, though, is that actually a lot of people do underperform the market pretty reliably. If you could do the opposite of them, you'd get rich. The efficient market hypothesis relies on some stylized assumptions about the world—"ignoring fees and stuff"—and where those assumptions don't hold you can make consistent errors. Of course where those assumptions don't hold is exactly where it is hard to capitalize on the errors. Still it can be instructive to think about the big errors and what the opposite of them might be. The main error—the main way that ordinary people seem to reliably underperform the market—seems to be bad market timing. Probably some hedge fund should hire me to observe when I sell all my stocks and move into cash, and when I start buying stocks again, and just do the opposite. But the problem here is that it is hard for you to do the opposite because you too are probably constrained by economic cycles and behavioral factors. Sure maybe a good time to buy stocks is when everyone is selling, but if people are pulling money from your fund and brokers are refusing to provide leverage, you'll probably be selling too. There are exceptions! Warren Buffett's philosophy is famously to "be fearful when others are greedy and greedy when others are fearful," that is, to watch other investors' bad market timing and do the opposite. But also he has a large stable permanent capital vehicle in the form of an insurance company, so he can do that. And he has had a long career of beating the market. This one kind of works! Another classic way to lose money is on transaction costs and slippage: Lots of investors trade too much, and they lose a little money each time they trade (paying commissions, buying at the offer and selling at the bid, moving the price against themselves, etc.). The way to do the opposite of this is to be the one charging the transaction costs. This could mean being a brokerage firm and charging commissions, or it could mean being a high-frequency-trading market-making firm selling stock to retail traders at the offer and buying at the bid. Those businesses are competitive, and harder than they used to be—brokerage commissions are zero now, and high-frequency-trading profits have been squeezed—but they are both still pretty reliable money-makers. (By the way there is an extension of this: The way a lot of investors in actively managed mutual funds underperform is that the funds roughly track their benchmarks and charge a high management fee. They underperform, in expectation, by the amount of the management fee. The way to be on the other side of this trade is to, uh, be the mutual fund manager? And get paid the fee?) One more way to lose money is by investing in stocks that don't have a reliable market price that incorporates all information. Sometimes you can do this in public markets: There will be weird shady penny stocks that are suddenly worth billions of dollars, and you probably could create a reliable rule to lose money on them. Something like "if a company (1) has never had any revenue, (2) has a market capitalization of under $20 million, and (3) a month later has a market capitalization of over $5 billion, (4) still without any revenue mind you, then (5) put all of your money into that stock." It won't come up that often, but it will come up sometimes, and it's a pretty great money-loser! It's very hard to do the opposite, though. These stocks are so volatile because they don't trade very much; if you tried to profit by shorting them, you wouldn't be able to get much done.[5] Also they tend to be closely held and so hard to borrow to sell short. Also there are other, more arcane ways that shorting those stocks can go very wrong. The stock can be suspended, forcing you to keep your short on forever. You can get caught in a pump-and-dump-and-short-squeeze. "Bet against amazingly obvious inflated penny-stock frauds" seems like a great way to make money on the stock market but is often terrible in practice. You can also get unreliable market prices in private markets. Same sort of dynamics: Private companies don't trade on an open market with willing buyers and sellers, there is no short selling, and the only price will be what the company agrees with its most enthusiastic investors. There is no guarantee that private-market prices will be especially efficient, and there are plenty of notorious busts. It is less obvious that there are particular investors who reliably pick those busts—no one goes around advertising that they invest only in losing venture capital ideas—but I suspect there are. I suspect that they are mostly dentists and retired football players. Byrne Hobart has a terrific post about "Judging VC Skill," in which he points out that the main ways venture capitalists create value are "dealflow and judgment": "Typically outsiders overweight judgment ('did you know it was going to be big?') and underweight dealflow (there are lots of companies that everyone thinks will be big, but only Sequoia gets to say so with a check)." You could apply the same thinking to negative value creation. To take a recent example, lots of people could have lost their life savings on a cryptocurrency scam that promised "tremendous returns of roughly 15% a month with precise and limited risk," but only a select group of doctors were actually offered the chance.[6] Here too it is hard to do the opposite, but there are ways. You can't short-sell most private investment opportunities, and if you are the sort of person who would be inclined to short them, you probably won't even get to see them. Again the way to do the opposite is just to be on the other side of the trade. All the way back in 2016, I wrote that if you thought there was a bubble in private tech unicorn valuations, the way to short the bubble was not through some weird financial product but by starting a dumb startup and selling stock to venture capitalists or, for that matter, to dentists. Later I suggested that WeWork founder Adam Neumann more or less did that and now he's super rich. Bad judgment is just as valuable as good judgment, really, as long as you're on the other side of it. More WeWork Are you tired yet of WeWork postmortems? No, of course not, me neither, here's a good one from the Financial Times. Here's a fun governance detail: [SoftBank's Masayoshi] Son and Ron Fisher, the SoftBank vice-chairman who led the negotiation, had concluded that [founder Adam] Neumann's taste for tequila and marijuana was not a deal-breaker, but they wanted a mechanism to take control if things went badly wrong. Lawyers agreed that SoftBank could oust Neumann as chief executive only if he committed a violent crime and was jailed in a common law jurisdiction. Drug use would not be enough to trigger the clause and, even if he were jailed, Neumann could regain control on his release. It was an extreme example of the trust funders placed in founders at a time when venture capitalists liked to boast how "founder-friendly" they were. Only if he committed a violent crime in a common law jurisdiction! A murder in France wouldn't cut it! I am reminded of Carlos Ghosn, who was arrested in Japan, decided that he did not approve of Japan's legal system, left, and put out a (possibly not entirely sincere) request for other countries that might want to adjudicate his alleged crimes. If you reach a certain level of international corporate power and statelessness—Neumann grew up in Israel, worked in New York and answered to a Japanese fund running Middle Eastern money; Ghosn is French-Lebanese-Brazilian and worked in Japan—you can just sort of float above national legal systems, opting in to the ones that you find most amenable. The story is largely about "Project Fortitude," a planned enormous investment by SoftBank Group Corp. in WeWork that eventually fell through, leading to WeWork's debacle of an attempted initial public offering. The sticking point in the negotiations (at which "Neumann sometimes showed up barefoot, or encouraged his team to hold hands and pray") seems to have been that SoftBank wanted Neumann to sign a noncompete, and Neumann wanted the same from SoftBank: But Neumann wanted further reassurance that he would not wake up one day to find SoftBank had thrown billions at a competitor. When Son asked for a pledge that he would not launch a competing office-space provider, Neumann dispatched Jen Berrent, one of his top deputies, to demand that SoftBank agree in return not to finance any direct rival. The demand was anathema to Son, who often bet on several companies in a single industry. … What WeWork executives — and Neumann — failed to realise was how much Son had chafed at the founder's demands. The idea of his protégé handcuffing him from investing in other real-estate groups was too much, people briefed on his thinking said. As the tech-propelled stock market rally wobbled and SoftBank's shares suffered over concerns that it was overexposed to WeWork, Son changed his mind. On December 24, he called Neumann in Hawaii to tell him that the deal was off. Everyone lives up to their reputations so perfectly, you know? The stereotype of SoftBank is that (1) it throws massive amounts of money at one company in each industry to crush its competitors and build an unassailable position in that industry, but (2) also it somehow regularly does that with multiple companies and sets them to crushing each other? In the event WeWork was able to crush itself all on its own, but it's fun that Son's insistence on being able to inflate as many office-rental companies as he wanted is what killed this deal. Coronacoin We have talked a couple of times recently about pandemic bonds, but here's something real dumb: Bet on the coronavirus pandemic by investing on CoronaCoin, the more the virus spreads the more valuable the token becomes. CoronaCoin (NCOV) is a ERC20-compliant token. The total supply is based on the world population (7,604,953,650 NCOV) and the token will be burnt once every 48 hours depending on the number of infected people and fatalities, so the token is deflationary and also non-mintable. I have no idea whether this is real, or what it would mean for it to be real; as a matter of policy I do not ask those questions about cryptocurrencies. But there is actually a very common mistake here. The mistake is thinking something like "it would be cool if there was a token whose value fluctuated with some outside fact in the world, so I will just declare that my token is worth $1 times some statistical measure of that fact, and then people who want to bet on that fact will buy my token." It doesn't work that way! You need a mechanism to link the price of the token to the outside fact! Saying "the more the virus spreads the more valuable the token becomes" doesn't make it so, even though if that were true the coin would potentially be useful both for speculation and for hedging. (Macabre and in poor taste, yes, but useful.) "The coronavirus-backed ERC-20 token," says the headline on Reddit, but it's not backed by coronavirus, and it is hard to imagine what it could mean for it to be backed by coronavirus. What it seems to mean is that the supply is linked to coronavirus cases, but that is only relevant if you assume the thing has some intrinsic value, which, why? Buzzwords Here's a theory of corporate buzzwords: The fact that buzzwords are a joke even to many of the people who rely on them suggests that work, and its language, is a kind of pretense. And speaking the language of work reminds people that they're pretending. Graeber remembers the first time he and all his high-school friends shook hands, as kind of a gag. It became a recurring joke, as in "Oh, this is what adults do." "I think people in these offices are permanently caught at that moment," he says. We're forever "closing the loop" on things because of a vague notion that this is what adults do. From my time in investment banking I can easily believe that most investment banking transactions occur because investment bankers are pretending to do what investment bankers do, acting out scenes from "Liar's Poker" until they start to seem real. I don't know why investment banking would be different from any other industry. So sure, yeah, work is a kind of pretense. Things happen UBS Names Outsider Hamers in Surprise to Succeed CEO Ermotti. People are worried that people aren't worried enough. Victoria's Secret to Go Private at $1.1 Billion Valuation. Investors Fume as China Develops New Playbook for State-Backed Bonds. Julius Baer rebuked over anti-money laundering shortcomings. Switzerland Files Bribery Charge Against Former FIFA Head. Carlos Ghosn Faces Stepped-Up Probe in France. More Investment Funds Reduce Ties With Family Behind Purdue Pharma. Ken Griffin Adds Calvin Klein's Hamptons Compound to Collection of Luxury Homes. How Saudi Arabia Infiltrated Twitter. Italy's Alpine Border Melts and Leaves a Pasta Restaurant In Switzerland—Maybe. 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] Incidentally one big attraction of the deal is the "low cost retail bank deposits" to fund assets. Those obviously gross up the balance sheet, but no one talking about big investment banks thinks of retail bank deposits as "balance sheet heavy." "Balance sheet," in that pejorative sense, means "trading assets," not "deposit liabilities." [2] Obviously one big motivator for this merger, from E*Trade's perspective, is that now retail brokers don't charge fees to buy stocks anymore—commissions went to zero late last year—but the general point still stands. E*Trade can still charge commissions for options trades, and charge fees to corporate and advisor clients, and get risk-free payments for order flow. Most of its revenue does come from net interest income on balances, though. [3] Disclosure, I have a Goldman savings account now. Also I used to work there. [4] Though the third-most-hated investment, in my experience, was Argentine century bonds, and if you bought them out of performative dumbness, yep, you'd have lost your shirt. [5] The xkcd approach is more modest, not short selling but *underweighting*: You buy all the stocks in the index except the bad ones, and so outperform the market. This doesn't work that well with scammy penny-stocks: They're not in a lot of indexes, and even to the extent they're in total-market indexes they will not make up enough of the index to matter much. [6] Roddy Boyd told their amazing story last week. They were drawn from "several loose, informal doctor networks that coalesced around a Facebook group named Physician Dads' Group," and they were allegedly scammed by a fellow doctor. | 
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