Corporate access Next week a bunch of investors, who among them control $9 trillion of assets and are among the biggest shareholders at hundreds of public companies, will all get together in Boston to meet, privately, with the chief executive officers of a bunch of big public consumer-staples companies, including Walmart Inc., Coca-Cola Co. and Clorox Co. We talk a lot around here about a controversial theory that big diversified institutional investors who are large shareholders in all the companies in the same industry will somehow discourage those companies from competing with each other, leading to higher consumer prices and more profits for those investors to share. And I always say, well, it is not like Fidelity and T. Rowe Price and Capital Group all get together with the CEOs of all the companies in an industry to talk about how they should be running their businesses. Except next week I mean! Also there'll be a health-care one in Baltimore in November. The good news is that the big investors are not meeting the big companies to tell them how to run their businesses. (Maybe!) They're meeting them to get nonpublic information that they can use to outperform other investors who do not have access to all the CEOs. Bloomberg reports: T. Rowe continues to "find value in the access to corporate leaders that Wall Street has facilitated over many years," but is adding its own "direct corporate access program," said a spokesman for the Baltimore-based firm. "This includes joining with other major asset-management firms to plan separate corporate access events that will provide a unique and tailored research experience for our company's investors." A spokesperson for Capital Group, best known for its American Funds, confirmed the event and said in a statement that the Los Angeles-based firm regularly meets with "company management, boards and other stakeholders to build the investment insights that deliver superior investment results." And from the Wall Street Journal: It has also sparked worry among smaller asset managers not invited into the club. While CEOs aren't allowed to share corporate secrets at closed meetings, investors focus on their tone and body language in the hopes of picking up useful information. It appears to work: A 2011 academic study found that fund managers who attended corporate meetings made more money than those who didn't. The planned conferences won't include public presentations by CEOs, but rather a series of 75-minute one-on-one meetings, attendees said. That means companies won't have to disclose the meetings or release webcasts or transcripts of what is discussed. I always assume that "tone and body language" is code for "they disclose a little bit of secret stuff"; I have trouble believing that every fundamental equity investor is highly trained in interpreting body language. You can't say "we're gonna do a big merger next week" in these meetings, or "boy our earnings will be terrible this quarter," but you can walk the investors through how you're thinking about strategy and competition, you can help them with their models, you can disclose a whole bunch of stuff that isn't so material that it needs to be put out publicly, but that does help them understand the company and make better investing decisions. And the investors know how to ask questions to elicit useful-but-not-illegal information, and your investor-relations director knows how to answer those questions in helpful-but-not-illegal ways. And everyone knows this and it's fine. The story about this conference, in Bloomberg and the Wall Street Journal, is not that it is happening; conferences like this are the most normal thing in the world. The story is that the investors are cutting out the banks to do this conference themselves: The insurgency threatens a status quo on Wall Street, where banks earn millions of dollars in fees brokering meetings between their investor clients and their corporate clients. They arrange what are known as road shows ahead of stock offerings and take shareholders on field trips through factory floors, often charging thousands of dollars a head. That business, known as corporate access, has been a key moneymaker for banks. Investing clients reward them with trading commissions, and corporate clients reward them with underwriting and merger-advisory mandates. ... Word of the conferences has caused consternation among banks. Next week's event coincides with a Bank of America Corp. consumer-goods conference, where Macy's Inc. and Dick's Sporting Goods Inc. are set to pitch to investors. We have talked about this before, but it really is one of the places where the popular conception of financial rules is most out of step with actual standard practice. Everyone in the investing world understands that companies meet privately with investors and tell them things that the investors find useful, and that big investors have more opportunities to do this than small investors, and that that is sort of inherent in the nature of companies that are owned by investors and need to communicate with their owners. Outside of the investing world there is a view that insider-trading law creates a level playing field for all investors, in which everyone has to have the same information at the same time. "There's regulations that stop that, talking to analysts," Supreme Court Justice Sonia Sotomayor once said in oral argument in an insider-trading case. But really it happens all the time. Marto At Institutional Investor, Leanna Orr has a profile of Marto Capital, a hedge fund started by Bridgewater Associates alumna Katina Stefanova that has had some rough times and pivoted to cryptocurrency. Among other things, the story works as a sort of oblique profile of Bridgewater, which, man, is a weird place. Stefanova left Bridgewater in part over what sounds like pretty minor trouble over her personal trading, which Bridgewater blew out of proportion in a very Bridgewater way: Stefanova left Bridgewater following repeated trading violations in her personal account, according to multiple people with knowledge of the situation. Stefanova counters that she was "not fired for cause, and Bridgewater can confirm this." (Bridgewater declined to comment, citing policy.) … Stefanova had been caught in at least one prior violation, which had led to a warning and a $65 fine but little else. She broke the rules again, and this time she didn't get a warning. "It was made very public, so I'm sure a litany of people who were at Bridgewater knew about it," says one former senior Bridgewater employee. ... The company distributed an audio recording of co-CEO Murray confronting Stefanova about the violations, according to someone who says they listened to it. Stefanova admitted the trades were hers, per the source. Bridgewater also produced a case study and asked employees if they would fire her given the circumstances, two others said. This case study was later redacted, but still alluded to the trading breaches, according to a then-employee who read it. Yeah look I know that this is not the Bridgewater way, but my rule of thumb is that if my employer ever circulates a survey to all of my coworkers asking if I should be fired, I quit. That does not sound like it would be a fun place to work anymore, for me. My impression of Bridgewater is that everyone is constantly being surveyed about whether to fire all of their coworkers, like they all walk around with iPad apps to update that feedback in real time, so I guess it doesn't feel that weird when they send out a specific survey about you. Still: tough! Here's some more about Bridgewater, from a trader named Luc Faucheux who had worked at UBS and Citi and was hired at Marto by its trading director, Ken Tremain: As Wall Street veterans, Faucheux and Tremain filled in gaps between Marto the vision and an actual, functioning, SEC-abiding, trade-clearing, client-reporting investment operation. "In my opinion," Faucheux says, "some of the Bridgewater people had worked in a mature and sophisticated environment where a lot was done in the background." An investor's job might be generating a signal from detailed research and modeling, and then "somehow the trading just happens." But startup life requires knowing those nitty-gritty mechanics. "People like Ken and me brought an understanding of how to build a full-fledged investment operation, having experienced it at our previous jobs, which maybe were less siloed." On the one hand this supports my half-joking theory of Bridgewater that it is a group meditation project in which no one would ever be so crass as to discuss investing. On the other hand it sounds nice! If you have an environment where smart people get to muse about the workings of the economic system, and then there is some machine in the basement that turns those musings into money, I can see how that would be an attractive place for smart people to work. And how it would be a jolt for those people to leave, and go out into the world, and have to rebuild the machine from spare parts. One other point about Bridgewater is that it employs a lot of people, and few of them do any investing, and lots of them don't even do the sorts of musing-about-economic-systems that Bridgewater's algorithms turn into investing. Stefanova, for instance, did not, and that became controversial when she started her own fund: Stefanova hardly worked on investments or portfolio research at Bridgewater, only as a new graduate in the firm's first class of Harvard Business School recruits. Instead, she mostly ran management projects for Dalio and Bridgewater's back office, overseeing IT workers and the like. She excelled in this senior role, but numerous former colleagues — many of them admirers — say her background is as relevant to investing as being a salesperson or an accountant. Many who knew her at Bridgewater rankle at her "rebranding" as an investment executive. "It would be like me starting a hedge fund as the chief investment officer," explains one former client servicer. "I'm not an investor. And neither was she." As another high-up former colleague puts it, "She was miles, miles away from any investing function." Stefanova counters that executive management relates as much, or more, to CIO work as stock picking or trading, and strongly denies ever misrepresenting her background. "I was never instrumental in Bridgewater's returns," she says from Marto's airy and simple midtown office. (Stefanova agreed to speak on the record for this article; however, she declined to allow the interview to be recorded.) "What I was good at is bringing together a team. The founders of Millennium and Citadel never managed money." (Izzy Englander worked as a floor trader and broker back when stock markets had floors, and later built Millennium Management into a $40 billion hedge fund business. Ken Griffin ran $1 million of his boss's money for a single year before founding Citadel in 1990.) Yeah I don't know about those examples. But I think she has a point. Steve Cohen is by all accounts a great trader and investor, and his own ability to analyze trades is clearly a big part of Point72's (and SAC Capital's) success. Jim Simons is a brilliant mathematician who did some pioneering work in quantitative investing. Ray Dalio has a lot of thoughts about the economic machine. But in each case, a whole lot of the story of their success seems to be about their human-resources practices. Steve Cohen has an unusual and successful approach to spotting and encouraging and incentivizing talented portfolio managers to make their own investments on his behalf. Jim Simons was really good at identifying and attracting talented mathematicians and scientists who could build trading systems better than he could. Ray Dalio has a lot of thoughts about radical transparency in the workplace. It does not seem inappropriate to say that these legendary hedge fund managers are successful in large part because they are good human-resources managers, not just good stock-pickers or algorithmic traders or macro analysts. But with them this sort of thing tends to be coded as "leadership" rather, than, like, "human resources," and it tends to be counted as part of their investing skills—"he's a great investor because he is good at leading a team," that sort of thing. It is at least possible that some of this coding is gendered, and if a woman is good at identifying and attracting and encouraging and managing talented investment professionals, none of that will count in the same way. This is mostly idle speculation on my part, and in fact Marto seems to have had some problems in the investing department. "A non-investor starts a hedge fund that doesn't excel at investing," Orr summarizes it, fine. That trader Luc Faucheux, meanwhile, is very good on the sociology of hedge funds generally: "I kind of had nothing to do at the time, except play tennis — which unfortunately is very hard to do in a manner that brings a decent level of satisfaction," Faucheux says. "I'd never been at the startup of a hedge fund. At the beginning, it was a very visible story. I think that a lot of people, including me, got on board for the team. It was a very pleasant, smart — at times brilliant — group of people. That makes you want to get up in the morning to get on the train from Westport to Grand Central with no immediate monetary payoff." I don't think there could be a better statement of hedge-fund aspirations than "makes you want to get up in the morning to get on the train from Westport to Grand Central with no immediate monetary payoff," though with some hedge funds you take the train the other way. Obviously there is an implicit "… but with a large eventual monetary payoff." Robinhood I wrote yesterday that "one of the best services a retail broker can provide is not answering the phones during a crash": When the market is going down, retail investors often panic and sell at the worst time. Just turning off the phones—or, these days, the computers—can save your investors a lot of money. On the other hand online brokerage Robinhood's platform crashed this Monday, when the market was up 4.6% and lots of Robinhood customers were hoping to buy. That seems bad! But it depends on what the counterfactual is. One reader emailed me the tongue-in-cheek headline "Market Rallies as Robinhood Outage Ends Panic Selling." Robinhood's platform was down basically all day Monday, and Monday was the first green day for stocks in over a week. Robinhood traders who were looking to buy, and couldn't, complained loudly; Robinhood traders who were looking to sell first thing Monday morning, and couldn't, were presumably quietly relieved. But what if there were a lot of the latter? What if they had all watched the market drop and made plans to sell on Monday, and the market would have gone even lower, but Robinhood's outage prevented them from doing so and led to the rally? Robinhood's problems were more or less fixed by yesterday, and the market dropped again. Hmm. I'm kidding, I'm kidding, I don't really believe that the global stock market moves around with the whims of mobile-phone-based retail traders. But I did read that WallStreetBets story. Maybe the retail traders are more powerful than we think? Anyway here is Robinhood's apology for the outage. It makes no mention of the theory (popular on Twitter and Reddit, but without any apparent evidence) that the problems were due to a Leap Day coding error. Instead it blames the problems on, just, too much going on: We now understand the cause of the outage was stress on our infrastructure—which struggled with unprecedented load. That in turn led to a "thundering herd" effect—triggering a failure of our DNS system. Multiple factors contributed to the unprecedented load that ultimately led to the outages. The factors included, among others, highly volatile and historic market conditions; record volume; and record account sign-ups. I have to say, if I ran an upstart brokerage firm that had to apologize for not having the infrastructure to support a lot of trades in a volatile market, I might stay away from the phrase "thundering herd." I get that it is a standard phrase in computer science, but it has a different meaning in the financial industry. There it usually refers to Merrill Lynch's giant army of retail brokers. Often these days, in a world of indexing and robo-advisers and online zero-commission trading, the "thundering herd" sounds a little quaint, but if you run an online zero-commission brokerage that breaks, you don't really want to remind your customers that your competitor has thousands of live brokers standing by to take their calls. Elsewhere: Customers of Vanguard Group and Fidelity Investments had trouble accessing online accounts on Friday morning, angering investors who couldn't trade as stock markets fell. The S&P 500 closed on Friday at its lowest level since October; it has since rebounded. Vanguard and Fidelity did it right! Forget it, Jake I guess one story you could tell is that sometimes the U.S. Securities and Exchange Commission will be investigating a big public company for cooking its books, and the company will complain to its congressperson, and the congressperson will happen to have a seat on a congressional committee that oversees the SEC, and the congressperson will call up the SEC and say "hey you'd better drop this case, this company is in my district, I don't want it to get in trouble because that might cost me the election," and the SEC will say "huh we can't afford to antagonize this congressperson, you win this round, fraudulent company," and the SEC will tell its line enforcement lawyers to drop the case, and they will learn that the whole system is deeply corrupt, and it will be sort of a noir plot but about securities regulation. I don't feel particularly good about any of that, as a plot for my securities-regulation noir novel. It is not intuitive that congresspeople would worry about losing elections because of SEC enforcement actions against companies in their districts, or that if they were worried about that they'd try to stop the SEC from bringing the actions, or that the SEC would listen to them, or anything. Still I guess it's kind of true? We document that corporate financial misconduct has significant consequences for politicians' election outcomes and, in particular, those politicians that serve on U.S. congressional committees with SEC- relevant oversight responsibilities ("SEC-relevant politicians"). These politicians display a 31% greater likelihood of losing a reelection campaign after a local firm faces SEC enforcement for corporate financial misconduct. We also document that SEC-relevant politicians appear to influence the SEC to limit career effects due to the potential consequences from enforcement against local firms. First, the timing of enforcement action announcements around SEC-relevant politicians' elections appears opportunistic. Second, firms in the districts of SEC-relevant politicians are less likely to receive SEC enforcement actions relative to other firms and, when faced with enforcement, receive smaller penalties. Collectively, these results are consistent with the argument that politicians' career concerns impede the SEC's enforcement efforts. That is from "Politician Careers and SEC Enforcement Against Financial Misconduct," by Mihir Mehta and Wanli Zhao. Also: We undertake two tests to evaluate causality. First, we use politician transfers to other powerful but unrelated congressional committees and politician death to identify plausibly exogenous changes in firms' representation on SEC-relevant committees. A difference-indifferences specification indicates that SEC enforcement actions are more likely after firms experience the loss of a powerful SEC-relevant committee representative for one of these two reasons, relative to other firms. Second, we use firm headquarter relocations as a plausibly exogenous change to firm-level representation on SEC-relevant committees. Findings from a difference-in-differences specification show that changes in SEC-relevant committee representation following firms headquarter relocations are significantly and negatively related to the change in the likelihood of facing SEC enforcement actions, relative to other firms. These findings are consistent with a causal link between powerful SEC-relevant committee representation and SEC enforcement activity. It is an uncanny-valley sort of result. We talk sometimes around here about financial papers that are like "hedge fund managers who drive fast cars make riskier investments," and the proper reaction there is "well yes of course, obviously, but it is nice that someone documented it." Sometimes there are papers that ask questions like "do regulators get more lucrative post-government private-sector opportunities by being strict regulators or lax regulators," and there is a popular obvious answer ("companies like lax regulation so they hire lax regulators") and a sort of contrarian clever answer ("companies dislike strict regulation so they hire away strict regulators to stop them from regulating"), and the paper finds evidence for the contrarian clever answer and we all get to feel contrarian and clever. But this result—companies that are connected to powerful politicians face laxer securities-law enforcement—seems simultaneously obvious ("politically connected companies can avoid enforcement") and contrarian ("there is no law, only power") and just sort of weird and diffuse. If there was one example of a connected company exerting pressure on the SEC I'd be like "yeah I believe that happens sometimes," but for it to show up in the data as a statistical pattern feels strange. One lesson here might be that even weak incentives are stronger than you think; if it's a little bad for politicians to have securities fraud cases in their districts, and if they exercise a little power over the SEC, then that will end up creating a statistically significant difference in enforcement. Things happen Federal Reserve Cuts Rates by Half Percentage Point to Combat Virus Fear. Supreme Court Justices Indicate They May Further Narrow SEC's Enforcement Authority. The Supreme Court appears likely to hand Trump an important victory in a showdown over the CFPB. BlackRock's Vow for Greener Planet to Get First Real-World Test. Tesla short sellers reap $2.8bn in tumbling market. Honeywell to Roll Out Quantum Computer. Cost Matters: Why Lambda School should have a lower success rate than college. This Backpack Has It All: Kevlar, Batteries and a Federal Investigation. Can Men Under 60 Wear Berets? 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! | 
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