1 00:00:02,720 --> 00:00:07,200 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:07,760 --> 00:00:11,840 Speaker 2: Should I get closer? Yeah, even though people like my 3 00:00:12,000 --> 00:00:13,440 Speaker 2: audio at least relative to Matt. 4 00:00:13,600 --> 00:00:18,919 Speaker 1: Yeah, I'm the audio of death. Sorry, I'm so low. 5 00:00:19,520 --> 00:00:21,439 Speaker 1: Should I do this? Should do like an Ero vice 6 00:00:21,480 --> 00:00:22,080 Speaker 1: the whole time? 7 00:00:22,239 --> 00:00:23,680 Speaker 2: Maybe they'd like it a little bit more. 8 00:00:24,040 --> 00:00:27,640 Speaker 1: Hello, and Welcome to the Money Stuff Podcast. 9 00:00:27,960 --> 00:00:31,000 Speaker 2: And then maybe they would like your normal voice more. 10 00:00:31,960 --> 00:00:36,520 Speaker 1: Hello and welcome to the Money Stuff Podcast, your weekly 11 00:00:36,560 --> 00:00:40,040 Speaker 1: podcast where we talk about stuff related to money. I'm 12 00:00:40,040 --> 00:00:41,920 Speaker 1: Matt Levin and I write the Money dot Com for 13 00:00:41,960 --> 00:00:42,800 Speaker 1: Bloomberg Opinion. 14 00:00:42,920 --> 00:00:45,360 Speaker 2: And I'm Katie Greifeld, a reporter for Bloomberg News and 15 00:00:45,400 --> 00:00:46,720 Speaker 2: an anchor for Bloomberg Television. 16 00:00:47,360 --> 00:00:50,360 Speaker 1: What are we talking about today, Katie. 17 00:00:50,120 --> 00:00:53,199 Speaker 2: Well, you're we're talking about Vanguard getting put on the 18 00:00:53,280 --> 00:00:58,360 Speaker 2: SEC's naughty List. We're going to talk about Buffer Bicklin ETFs, 19 00:00:58,920 --> 00:01:01,920 Speaker 2: and then we're going to talk about two sigmas. 20 00:01:05,520 --> 00:01:08,800 Speaker 1: I wrote this. It might be the last SEC natty list. 21 00:01:09,760 --> 00:01:09,840 Speaker 3: You. 22 00:01:10,400 --> 00:01:12,600 Speaker 1: I'm really interested what's going to happen in the next 23 00:01:12,600 --> 00:01:14,680 Speaker 1: few years in terms of like like I've made fun 24 00:01:14,720 --> 00:01:16,840 Speaker 1: of the SEC over the past few years about some 25 00:01:16,880 --> 00:01:19,960 Speaker 1: of its enforcement things like the like cell phone stuff 26 00:01:19,959 --> 00:01:21,640 Speaker 1: where like if you text about work, you get in 27 00:01:21,640 --> 00:01:24,039 Speaker 1: trouble with the SEC. I don't know how much the 28 00:01:24,080 --> 00:01:27,400 Speaker 1: SEC is like a sort of like self operating mechanism 29 00:01:27,400 --> 00:01:30,160 Speaker 1: that has inertia. And we'll keep bringing cases and we'll 30 00:01:30,200 --> 00:01:32,560 Speaker 1: keep going after Security is for out, and how much 31 00:01:32,560 --> 00:01:34,000 Speaker 1: of it is going to be Like the tone from 32 00:01:34,000 --> 00:01:36,520 Speaker 1: the top is screwtys. Frode is great, and then we 33 00:01:36,720 --> 00:01:39,000 Speaker 1: just you know, never see an SEC case again, or 34 00:01:39,040 --> 00:01:40,880 Speaker 1: you see SEC cases, but they have a very different 35 00:01:40,880 --> 00:01:44,080 Speaker 1: political posture, you know, Yeah, well anti ESG cases. 36 00:01:44,160 --> 00:01:46,960 Speaker 2: It seems like that sentiment is shared because it was 37 00:01:47,000 --> 00:01:49,440 Speaker 2: a real rush to the finish for the SEC. You 38 00:01:49,480 --> 00:01:52,639 Speaker 2: had a very long column about everything that the SEC 39 00:01:52,760 --> 00:01:53,640 Speaker 2: was like. 40 00:01:53,640 --> 00:01:56,680 Speaker 1: One quarter of the things that the SEC SEC did 41 00:01:56,720 --> 00:01:58,080 Speaker 1: last week. There's so many things. 42 00:01:58,280 --> 00:02:01,680 Speaker 2: Nestled at the bottom was something on Vanguard. Of course, 43 00:02:01,760 --> 00:02:04,720 Speaker 2: Vanguard to pay one hundred and six million dollars to 44 00:02:04,760 --> 00:02:09,120 Speaker 2: resolve violations related to capital gains distributions in their target 45 00:02:09,200 --> 00:02:13,120 Speaker 2: date funds. This is a rare moment where Matt and 46 00:02:13,200 --> 00:02:16,120 Speaker 2: I both wrote about something him and money stuff me 47 00:02:16,320 --> 00:02:20,880 Speaker 2: in the ETFIQ newsletter newsletters. Yeah, Matt, you find this 48 00:02:21,280 --> 00:02:27,720 Speaker 2: aggressively boring, but I think it's kind of interesting. What okay, 49 00:02:27,919 --> 00:02:31,000 Speaker 2: Well this came down and to me it sort of 50 00:02:31,040 --> 00:02:33,079 Speaker 2: read like the inverse of what we were talking about 51 00:02:33,120 --> 00:02:36,840 Speaker 2: with Capital One. And let me tell you. Yeah, okay, 52 00:02:36,919 --> 00:02:40,440 Speaker 2: all right, so you're buying in. So Vanguard basically lowered 53 00:02:40,520 --> 00:02:45,880 Speaker 2: the minimum initial investment on its Vanguard Institutional Target Retirement 54 00:02:45,960 --> 00:02:49,960 Speaker 2: funds in December twenty twenty. But they also had a 55 00:02:50,000 --> 00:02:53,680 Speaker 2: retail version of this, and the institutional version had a 56 00:02:53,720 --> 00:02:57,640 Speaker 2: lower fee than the retail And my crude explanation in 57 00:02:57,680 --> 00:03:02,240 Speaker 2: my newsletter was that, okay, they told the investors in 58 00:03:02,280 --> 00:03:04,800 Speaker 2: the retail product that they were lowering the minimum, and 59 00:03:04,840 --> 00:03:08,120 Speaker 2: you had a bunch of these retirement investors switched to 60 00:03:08,160 --> 00:03:12,639 Speaker 2: the now lower fee institutional TRFs that they could get 61 00:03:12,680 --> 00:03:15,520 Speaker 2: access to. But the bad news came in when the 62 00:03:15,560 --> 00:03:18,280 Speaker 2: retail funds to meet those redemptions, that had to sell 63 00:03:18,320 --> 00:03:21,280 Speaker 2: a bunch of assets and the remaining holders were caught 64 00:03:21,360 --> 00:03:22,400 Speaker 2: with big capital gains. 65 00:03:22,680 --> 00:03:25,320 Speaker 1: Yeah. So there's the two glasses of the investor fund 66 00:03:25,360 --> 00:03:28,160 Speaker 1: and the institutional fund. The investor fund is not exactly retail. 67 00:03:28,200 --> 00:03:31,200 Speaker 1: It was like sub one hundred million dollars and so 68 00:03:31,240 --> 00:03:33,560 Speaker 1: a lot of retirement funds had their money in the 69 00:03:33,639 --> 00:03:36,120 Speaker 1: investor fund, and then they cut the minimum for the 70 00:03:36,160 --> 00:03:39,120 Speaker 1: institutional fund to five million from one hundred million. So 71 00:03:39,160 --> 00:03:42,640 Speaker 1: all these like small and mid sized retirement plans were like, Okay, 72 00:03:42,680 --> 00:03:44,640 Speaker 1: we'll get the lower fees by taking our money out 73 00:03:44,640 --> 00:03:47,280 Speaker 1: of the investor and putting it an institutional. But to 74 00:03:47,360 --> 00:03:51,960 Speaker 1: get the lower fees, that's technically a like taxable transaction. 75 00:03:52,120 --> 00:03:55,440 Speaker 1: Like technically the retail fund sells all those stocks and 76 00:03:55,520 --> 00:03:58,480 Speaker 1: the institutional fund buys it, and that means that the 77 00:03:58,520 --> 00:04:02,440 Speaker 1: retail fund has capital gains, and those capital gains are 78 00:04:02,440 --> 00:04:05,520 Speaker 1: shared by not the redoing holders, but also the continuing holders. 79 00:04:05,560 --> 00:04:07,440 Speaker 1: So if you had money in that fund, you got 80 00:04:07,440 --> 00:04:10,400 Speaker 1: a big capital gains tax bill and you were surprised 81 00:04:10,400 --> 00:04:12,440 Speaker 1: by it because it's not it's not in any sort 82 00:04:12,480 --> 00:04:15,440 Speaker 1: of proportion to your actual gains. It's like all these 83 00:04:15,440 --> 00:04:18,040 Speaker 1: people cashed out, so there was a big bill. Yeah, 84 00:04:18,480 --> 00:04:21,760 Speaker 1: so mutual funds, mutual funds, you were like, I wrote 85 00:04:21,760 --> 00:04:23,640 Speaker 1: about this, and I was like, let me guess they 86 00:04:23,640 --> 00:04:24,760 Speaker 1: should have done an ETF. 87 00:04:25,279 --> 00:04:28,800 Speaker 2: Well, I mean ets with ETFs, this wouldn't have happened. 88 00:04:28,800 --> 00:04:32,880 Speaker 2: Do you think about the creation redemption mechanism of ETF shares. 89 00:04:33,360 --> 00:04:38,280 Speaker 2: People love ETFs because you don't get capital gains bills 90 00:04:38,279 --> 00:04:39,960 Speaker 2: in the same way that you would with a mutual 91 00:04:40,000 --> 00:04:41,920 Speaker 2: fund when other holders redeem. 92 00:04:41,760 --> 00:04:43,440 Speaker 1: Right, it's like you have to sort of think about, 93 00:04:43,440 --> 00:04:45,599 Speaker 1: like what is the right treatment, you know. So I 94 00:04:45,600 --> 00:04:47,840 Speaker 1: wrote a few years ago, like Bloomberg, Zach Miner had 95 00:04:47,839 --> 00:04:50,280 Speaker 1: a series of stories about the ETF heartbeat trade, or 96 00:04:50,360 --> 00:04:53,640 Speaker 1: basically like if you run an ETF, broadly speaking, you 97 00:04:53,680 --> 00:04:57,479 Speaker 1: can avoid realizing any taxable gains because you're doing in 98 00:04:57,560 --> 00:05:00,240 Speaker 1: kind creations and redemptions. But every so often you need 99 00:05:00,279 --> 00:05:02,440 Speaker 1: to like adjust the holdings of your fund, and if 100 00:05:02,440 --> 00:05:05,880 Speaker 1: you traded for cash, you would have taxable gains. If 101 00:05:05,920 --> 00:05:08,159 Speaker 1: you run an ETF, the number one goal is never 102 00:05:08,200 --> 00:05:10,640 Speaker 1: have taxable gains. And so people have developed all of 103 00:05:10,640 --> 00:05:14,200 Speaker 1: these like complicated mechanisms to take advantage of what a 104 00:05:14,200 --> 00:05:16,479 Speaker 1: lot of people call the ETF tax loophole, right, Like 105 00:05:16,560 --> 00:05:20,120 Speaker 1: it's a loophole that you can have this fund that 106 00:05:20,320 --> 00:05:23,920 Speaker 1: never buys or sells stocks and never has taxable gains. 107 00:05:24,040 --> 00:05:26,480 Speaker 2: Yeah, after heart it's kind of a tax dodge. 108 00:05:26,560 --> 00:05:29,080 Speaker 1: Yeah, it's kind of a taxx. It is so intuitively 109 00:05:29,120 --> 00:05:32,000 Speaker 1: appealing to say I've put my money in a fund. 110 00:05:32,960 --> 00:05:35,159 Speaker 1: In a year or ten years or thirty five years, 111 00:05:35,360 --> 00:05:36,720 Speaker 1: I'll take my money out of the fund. If I 112 00:05:36,760 --> 00:05:39,400 Speaker 1: have gains over those thirty five years, I'll pay taxes 113 00:05:39,440 --> 00:05:42,160 Speaker 1: on the gains. But in between, I shouldn't pay any 114 00:05:42,160 --> 00:05:44,400 Speaker 1: taxes because I haven't sold anything. Like what's the taxable 115 00:05:44,400 --> 00:05:46,719 Speaker 1: event where I just hold the mutual fund and every 116 00:05:46,760 --> 00:05:48,880 Speaker 1: year I get a tax bill and the tax bill 117 00:05:48,920 --> 00:05:51,239 Speaker 1: is not really related to my actual gains in the fund. 118 00:05:51,440 --> 00:05:53,560 Speaker 1: It's just weird. Yeah, And like that's how the tax 119 00:05:53,600 --> 00:05:56,080 Speaker 1: lot works for mutual funds. It's not how the tax 120 00:05:56,160 --> 00:05:59,039 Speaker 1: law works for ETFs, in part because there is this 121 00:05:59,120 --> 00:06:01,520 Speaker 1: CTF loophole and part because people have built the industry 122 00:06:01,520 --> 00:06:05,080 Speaker 1: around exploiting the loophole. But like the ETF treatment is 123 00:06:05,120 --> 00:06:07,080 Speaker 1: just more intuitive than the mutual fund treatment. And like 124 00:06:07,120 --> 00:06:09,840 Speaker 1: a lot of people are genuinely surprised that they get 125 00:06:09,880 --> 00:06:13,080 Speaker 1: a tax bill for their mutual fund trading activity, and 126 00:06:13,120 --> 00:06:15,039 Speaker 1: the SEC is like they should have been surprised, Like 127 00:06:15,080 --> 00:06:16,839 Speaker 1: it's not fair. They shouldn't get to the tax bill, 128 00:06:16,960 --> 00:06:19,000 Speaker 1: you know, because that is the tax law. But no one, 129 00:06:19,120 --> 00:06:21,200 Speaker 1: no one finds it intuitive or appealing. 130 00:06:21,360 --> 00:06:23,760 Speaker 2: I mean, so mutual funds when they're in four A 131 00:06:23,800 --> 00:06:27,000 Speaker 2: one k's what we're talking about, like sort of goes away, 132 00:06:27,080 --> 00:06:28,920 Speaker 2: like yes, for a one k's, you don't have that 133 00:06:29,000 --> 00:06:32,920 Speaker 2: capital gains thing in this specific instance with these Vanguard 134 00:06:33,480 --> 00:06:37,440 Speaker 2: target date funds. So it was the investors that held 135 00:06:37,480 --> 00:06:40,280 Speaker 2: these funds in their tax BIWL accounts that we're talking about. 136 00:06:40,880 --> 00:06:43,200 Speaker 1: So Vanguard sort of assumed that most of these people 137 00:06:43,200 --> 00:06:46,400 Speaker 1: were four O NK investors theoretic and in part because 138 00:06:47,320 --> 00:06:49,960 Speaker 1: a lot of people hold these funds through Vanguard's own platform, 139 00:06:50,040 --> 00:06:53,719 Speaker 1: like their website and their brokerage, and so Vanguard could 140 00:06:53,720 --> 00:06:55,560 Speaker 1: look at those people and say, almost all these are 141 00:06:55,560 --> 00:06:57,480 Speaker 1: furrow and K plans, so they won't have to pay 142 00:06:57,520 --> 00:06:59,599 Speaker 1: the taxes, so it's not a big deal. But also, 143 00:06:59,760 --> 00:07:02,680 Speaker 1: like people hold billions of dollars of these funds away 144 00:07:02,800 --> 00:07:06,040 Speaker 1: like in other brokerage accounts, and Vanguard didn't have transparency 145 00:07:06,040 --> 00:07:08,320 Speaker 1: on them and sort of assumed, yeah, it's all four 146 00:07:08,400 --> 00:07:10,120 Speaker 1: on K plans, it's fine. But in fact, a lot 147 00:07:10,160 --> 00:07:13,600 Speaker 1: of retail taxable investors had money in these funds and 148 00:07:13,640 --> 00:07:15,680 Speaker 1: then got a big tax bill, yeah, because they were 149 00:07:15,680 --> 00:07:16,560 Speaker 1: outside of the four one K. 150 00:07:17,040 --> 00:07:19,920 Speaker 2: So we talked a lot about products and rappers so far. 151 00:07:20,200 --> 00:07:22,880 Speaker 2: I want to talk though about why this is like 152 00:07:22,960 --> 00:07:26,120 Speaker 2: the spiritual inverse of the Capital One example, because you 153 00:07:26,160 --> 00:07:28,400 Speaker 2: had a lot of sympathy for Capital One last week, 154 00:07:28,440 --> 00:07:30,360 Speaker 2: and if that's the case, you must have a ton 155 00:07:30,400 --> 00:07:33,160 Speaker 2: of sympathy for Vanguard here kind of trying to do 156 00:07:33,240 --> 00:07:36,560 Speaker 2: this out of the goodness of their hearts for these investors. 157 00:07:36,520 --> 00:07:39,400 Speaker 1: I do I mean talk about that. The thing they 158 00:07:39,440 --> 00:07:43,000 Speaker 1: did here was they wanted to lower fees. Yeah, Vanguard 159 00:07:43,040 --> 00:07:46,120 Speaker 1: is an interesting company because it's sort of not a company, right, 160 00:07:46,120 --> 00:07:48,600 Speaker 1: it's like owned by the funds, So it's a mutual 161 00:07:48,640 --> 00:07:51,480 Speaker 1: in a sort of classics apps like the funds ultimately 162 00:07:51,480 --> 00:07:53,760 Speaker 1: on Vanguard, so it doesn't like charge as much as 163 00:07:53,760 --> 00:07:56,520 Speaker 1: it can to provide returns to the shareholders. It like 164 00:07:56,560 --> 00:07:58,880 Speaker 1: has a mandate to kind of keep fees low, and 165 00:07:58,960 --> 00:08:03,000 Speaker 1: so it offered these funds. It set some expense ratios, 166 00:08:03,320 --> 00:08:06,400 Speaker 1: and the funds gathered a lot of assets, including from 167 00:08:06,400 --> 00:08:08,120 Speaker 1: like mid size furrow on k plans and they're like, 168 00:08:08,120 --> 00:08:10,560 Speaker 1: we're making so much money off these plans that we 169 00:08:10,560 --> 00:08:14,160 Speaker 1: don't need. Yeah, like let's give it back. And they 170 00:08:14,200 --> 00:08:16,720 Speaker 1: thought of different ways to give it back and the 171 00:08:16,760 --> 00:08:19,720 Speaker 1: way they came up with was lower the minimums on 172 00:08:19,760 --> 00:08:22,920 Speaker 1: the institutional fund, which there are a lot of other options, 173 00:08:23,160 --> 00:08:26,040 Speaker 1: and they chose this one for reasons that are not 174 00:08:26,200 --> 00:08:28,280 Speaker 1: entirely clear to me, but basically the SEC sort of 175 00:08:28,320 --> 00:08:31,920 Speaker 1: implies that they didn't fully appreciate the tax problem, in 176 00:08:31,960 --> 00:08:33,520 Speaker 1: part because they thought everyone was in FORO O on 177 00:08:33,559 --> 00:08:37,000 Speaker 1: K plans, and in part because when they were considering this, 178 00:08:37,080 --> 00:08:39,480 Speaker 1: it was like March of twenty twenty, and so stocks 179 00:08:39,480 --> 00:08:41,120 Speaker 1: were all the way down and so they're like, yeah, 180 00:08:41,120 --> 00:08:43,160 Speaker 1: nobody has capital gains. It's fine, it's not a big deal. 181 00:08:43,200 --> 00:08:44,319 Speaker 1: But then by the time they actually did it be 182 00:08:44,360 --> 00:08:45,280 Speaker 1: blood capital gains. 183 00:08:45,360 --> 00:08:45,600 Speaker 2: Yeah. 184 00:08:45,640 --> 00:08:47,680 Speaker 1: So I sympathize with a lot of that. One thing 185 00:08:47,720 --> 00:08:49,000 Speaker 1: I was say, like, you know, I have a soft 186 00:08:49,000 --> 00:08:50,400 Speaker 1: spot for Vaneyard. A lot of my money is in 187 00:08:50,440 --> 00:08:55,000 Speaker 1: Vanguard funds, but like Vanguard feels like historic innovator in 188 00:08:55,640 --> 00:08:58,199 Speaker 1: index funds that is like a. 189 00:08:58,160 --> 00:09:03,200 Speaker 2: Little timy okay, old fashioneds, like you know, out in 190 00:09:03,200 --> 00:09:04,439 Speaker 2: the woods of Pennsylvania. 191 00:09:04,640 --> 00:09:07,920 Speaker 1: Yeah, and like you know, they sort of resisted etfization 192 00:09:08,000 --> 00:09:09,280 Speaker 1: a little bit more than the other place. 193 00:09:09,400 --> 00:09:11,240 Speaker 2: Jack had a lot to say about ETF. 194 00:09:12,080 --> 00:09:15,080 Speaker 1: Some of that about what we'll get to like weird 195 00:09:15,280 --> 00:09:17,720 Speaker 1: weird product ETFs. But like some they just didn't like 196 00:09:17,720 --> 00:09:20,800 Speaker 1: the e structure because they felt trader and they want 197 00:09:20,840 --> 00:09:23,160 Speaker 1: like a sort of long term buy and hold investors. 198 00:09:23,720 --> 00:09:28,439 Speaker 1: And the way they've structured this, you could have done 199 00:09:28,440 --> 00:09:30,480 Speaker 1: this in a lot of others. Started from the beginning 200 00:09:30,520 --> 00:09:34,160 Speaker 1: with we have one fund, and we can have two 201 00:09:34,200 --> 00:09:36,080 Speaker 1: classes of shares of the fund, and we can lower 202 00:09:36,120 --> 00:09:38,320 Speaker 1: the fees on one class without lowering you know. Like 203 00:09:38,520 --> 00:09:40,840 Speaker 1: the problem here is that they had two separate funds, 204 00:09:41,080 --> 00:09:42,840 Speaker 1: and so when they lowered the fees on some of 205 00:09:42,880 --> 00:09:45,600 Speaker 1: the investors, those investors had to sell one fund and 206 00:09:45,600 --> 00:09:47,800 Speaker 1: buy another one, which is like kind of crazy. It 207 00:09:47,800 --> 00:09:49,959 Speaker 1: shouldn't work that way. So, like, I have a lot 208 00:09:49,960 --> 00:09:52,559 Speaker 1: of sympathy here for Vanguard because really all they were 209 00:09:52,559 --> 00:09:56,320 Speaker 1: trying to do is lower fees out. But I also like, yeah, 210 00:09:56,360 --> 00:09:57,560 Speaker 1: this is kind of sloppy, you know. 211 00:09:57,840 --> 00:10:00,720 Speaker 2: Yeah, a couple of things. Vanguard turns fifty years old 212 00:10:00,760 --> 00:10:04,000 Speaker 2: on May first. May first, nineteen seventy five was when 213 00:10:04,160 --> 00:10:08,160 Speaker 2: Vanguard was born. Vanguard does this all the time in 214 00:10:08,240 --> 00:10:11,840 Speaker 2: terms of lowering fees. Like you talked about their ownership 215 00:10:11,920 --> 00:10:14,360 Speaker 2: structure a little bit like any time that they have 216 00:10:14,600 --> 00:10:18,120 Speaker 2: extra cash or assets generated by their products that is 217 00:10:18,240 --> 00:10:22,120 Speaker 2: just funneled into lowering fees, which has put a crunch 218 00:10:22,160 --> 00:10:26,080 Speaker 2: on the entire industry because of the way that their owns. 219 00:10:26,559 --> 00:10:29,520 Speaker 2: Other people like Blackrock doesn't operate like Vanguard does, but 220 00:10:29,520 --> 00:10:31,760 Speaker 2: black Rock still has to compete with Vanguard and just 221 00:10:32,160 --> 00:10:36,839 Speaker 2: lower fees to dirt cheap levels, which is interesting. And 222 00:10:37,320 --> 00:10:40,560 Speaker 2: in the ETFIQ newsletter, you know, after you know you've 223 00:10:40,559 --> 00:10:44,240 Speaker 2: read money stuff, if you read the ETFIQ newsletter the 224 00:10:44,240 --> 00:10:47,520 Speaker 2: one hundred and six million dollars, I saw some reaction 225 00:10:47,640 --> 00:10:50,320 Speaker 2: that was like, oh, that's nothing for Vanguard. They manage 226 00:10:51,000 --> 00:10:54,560 Speaker 2: how many like ten trillion dollars in assets. But because 227 00:10:54,600 --> 00:10:57,600 Speaker 2: their fees are so low, assuming that they charge an 228 00:10:57,640 --> 00:11:00,320 Speaker 2: average of ten basis points, one hundred and six million 229 00:11:00,400 --> 00:11:04,400 Speaker 2: dollars for Vanguard is like napkin math, one percent of 230 00:11:04,440 --> 00:11:07,800 Speaker 2: their total revenue. So this is actually pretty painful for 231 00:11:08,040 --> 00:11:11,120 Speaker 2: van Card. Maybe it was sloppy, you know, but it 232 00:11:11,200 --> 00:11:11,760 Speaker 2: was painful. 233 00:11:12,200 --> 00:11:13,840 Speaker 1: I think that I write about a lot. I write 234 00:11:13,840 --> 00:11:16,319 Speaker 1: about cases where either the SEC or like a shareholder 235 00:11:16,400 --> 00:11:18,320 Speaker 1: class action, sues a company for doing a bad thing 236 00:11:18,320 --> 00:11:20,400 Speaker 1: and the company agrees to pay a big fue or 237 00:11:20,440 --> 00:11:24,320 Speaker 1: pay a big recovery to shareholders. And people always ask like, 238 00:11:24,679 --> 00:11:26,880 Speaker 1: isn't that circular? Like where does the money come from? 239 00:11:26,920 --> 00:11:28,440 Speaker 1: And part of the answer is like, the money sometimes 240 00:11:28,480 --> 00:11:30,960 Speaker 1: comes from dn O insurance, but like sometimes yeah, like 241 00:11:31,000 --> 00:11:34,640 Speaker 1: the company writes a check to compensate shareholders who lost 242 00:11:34,640 --> 00:11:36,960 Speaker 1: money on something, and you're like, well, like, how did 243 00:11:37,000 --> 00:11:38,880 Speaker 1: that help the shareholders? Like the lawyer's got a fee, 244 00:11:38,920 --> 00:11:41,200 Speaker 1: but like the shareholders are writing a check to the shareholders. 245 00:11:42,480 --> 00:11:46,840 Speaker 1: Similarly with Vanguard, it's owned by its funds, right, yeah, 246 00:11:46,920 --> 00:11:50,040 Speaker 1: if you find Vanguard one hundred million dollars, in some sense, 247 00:11:50,400 --> 00:11:53,440 Speaker 1: are you taking that money from the Vanguard investors who 248 00:11:53,559 --> 00:11:55,960 Speaker 1: like lost money because of this tax problem? 249 00:11:56,080 --> 00:11:56,320 Speaker 2: Wow? 250 00:11:56,480 --> 00:11:59,200 Speaker 1: Like they're the shareholders, they're the owners, That's true, They're 251 00:11:59,200 --> 00:12:00,120 Speaker 1: the ones paying the fine. 252 00:12:00,400 --> 00:12:01,040 Speaker 2: There's a good point. 253 00:12:01,080 --> 00:12:02,160 Speaker 1: And might I say that, I mean. 254 00:12:02,160 --> 00:12:06,600 Speaker 2: Me, Yeah, So it's technically not a fine. And I 255 00:12:06,679 --> 00:12:10,839 Speaker 2: learned that the hard way because I had said it 256 00:12:10,920 --> 00:12:12,920 Speaker 2: was fine. I said it was a fine, and I 257 00:12:12,960 --> 00:12:15,600 Speaker 2: had to correct my newsletter. It's technically not a fine 258 00:12:15,640 --> 00:12:18,080 Speaker 2: because the one hundred and six million dollars will be 259 00:12:18,120 --> 00:12:22,800 Speaker 2: distributed to those impacted. So but you should still subscribe 260 00:12:23,120 --> 00:12:31,200 Speaker 2: to ETF I Q of the time is correct. Oh, 261 00:12:31,280 --> 00:12:45,040 Speaker 2: come on, I'm doing my best. Let's talk about something 262 00:12:45,080 --> 00:12:50,160 Speaker 2: that Jack Bogel would absolutely hate. They're called buffer bitcoin ETFs, 263 00:12:50,720 --> 00:12:53,719 Speaker 2: Buffer ETFs. They're really popular. They've just ballooned over the 264 00:12:53,760 --> 00:12:57,640 Speaker 2: past several years. Oh, I don't know, I actually so. 265 00:12:57,800 --> 00:12:59,000 Speaker 2: I mean it's a great pitch. 266 00:12:59,240 --> 00:13:01,600 Speaker 1: Yeah, I've written this like it is so close to 267 00:13:01,640 --> 00:13:03,559 Speaker 1: my heart because it's like a pitch that I learned 268 00:13:03,559 --> 00:13:06,280 Speaker 1: as a young derivative structure at an investment bank. Because 269 00:13:07,120 --> 00:13:09,800 Speaker 1: there's no downside exactly all your mouney back. It's great, 270 00:13:09,920 --> 00:13:10,800 Speaker 1: Like what a great pitch. 271 00:13:10,880 --> 00:13:13,920 Speaker 2: Yeah, and it's sort of evolved to be no downside 272 00:13:13,920 --> 00:13:17,400 Speaker 2: at all. Of course, one hundred percent protection downside. Buffer 273 00:13:17,400 --> 00:13:19,640 Speaker 2: and ETFs have launched in the past year or so, 274 00:13:19,800 --> 00:13:23,440 Speaker 2: but buffer ETFs came into existence. I'm sure they existed 275 00:13:23,600 --> 00:13:27,560 Speaker 2: in other iterations, but they came into existence in twenty twenty. 276 00:13:27,600 --> 00:13:29,560 Speaker 2: I believe I was pretty new to the ETF beat 277 00:13:29,920 --> 00:13:32,440 Speaker 2: and in that time they've ballooned to this like sixty 278 00:13:32,520 --> 00:13:36,360 Speaker 2: billion dollar asset class. And it's because the pitch is 279 00:13:36,400 --> 00:13:39,720 Speaker 2: really good. We're going to shield you against these losses. 280 00:13:40,040 --> 00:13:41,880 Speaker 1: Yeah, We're going to give you the upside in something. 281 00:13:42,040 --> 00:13:45,640 Speaker 1: Yeah whatever, yeah, miker whatever, and if like it goes down, 282 00:13:45,720 --> 00:13:47,760 Speaker 1: it doesn't go down, like you get all your money back. Yeah, 283 00:13:47,760 --> 00:13:49,319 Speaker 1: it's amazing. What a great pitch. 284 00:13:49,400 --> 00:13:53,080 Speaker 2: It makes sense in stocks, the one hundred percent downside. 285 00:13:53,320 --> 00:13:56,600 Speaker 2: To me, I can kind of see it in bitcoin. 286 00:13:56,720 --> 00:14:02,200 Speaker 2: I don't super understand it because volatile is the selling 287 00:14:02,200 --> 00:14:05,000 Speaker 2: point of bitcoin for a lot of people. People have 288 00:14:05,080 --> 00:14:09,240 Speaker 2: fun treating extremely volatile cryptocurrencies. If you are buying one 289 00:14:09,360 --> 00:14:13,400 Speaker 2: hundred percent bitcoin buffer ETF with like an upside cap 290 00:14:13,520 --> 00:14:18,439 Speaker 2: of twelve percent or eleven percent, what is the GD point? 291 00:14:20,280 --> 00:14:20,920 Speaker 1: What is what? 292 00:14:21,840 --> 00:14:22,040 Speaker 2: Yes? 293 00:14:22,760 --> 00:14:25,960 Speaker 1: Right, so Calahs is launching these buffered bitcoin ETFs right, 294 00:14:26,000 --> 00:14:28,000 Speaker 1: where like these things are all like defined periods, right, 295 00:14:28,040 --> 00:14:30,000 Speaker 1: so you get like a one year, like you buy 296 00:14:30,000 --> 00:14:32,400 Speaker 1: it at the beginning and at the end you get 297 00:14:32,440 --> 00:14:34,800 Speaker 1: some amount of the return on bitcoin, but like floor 298 00:14:34,880 --> 00:14:36,360 Speaker 1: it at some level, right, so like they have a 299 00:14:36,400 --> 00:14:38,480 Speaker 1: one hundred by like one to eleven something like that. 300 00:14:38,760 --> 00:14:41,200 Speaker 1: Not exactly sure on what the cap levels are, but 301 00:14:41,240 --> 00:14:44,200 Speaker 1: so basically you buy it and if bitcoin goes down 302 00:14:44,280 --> 00:14:45,640 Speaker 1: you get your money back in the year, and if 303 00:14:45,640 --> 00:14:49,000 Speaker 1: bitcoin goes up, you get the return on bitcoin unless 304 00:14:49,000 --> 00:14:50,920 Speaker 1: it goes up by more than eleven percent, which cause 305 00:14:50,960 --> 00:14:54,000 Speaker 1: you only get eleven percent. Right, So if you're sure 306 00:14:54,000 --> 00:14:56,360 Speaker 1: that bitcoin will go up, this is like a way 307 00:14:56,400 --> 00:14:58,440 Speaker 1: to get an eleven percent return on your money. But 308 00:14:58,440 --> 00:15:00,960 Speaker 1: if you're sure that bitcoin will have big coin and like, 309 00:15:01,040 --> 00:15:03,840 Speaker 1: you know, a thousand percent, So why would you rather? 310 00:15:04,080 --> 00:15:06,720 Speaker 1: I continue to ask you, why do people buy buf fordts? Right? 311 00:15:06,720 --> 00:15:08,760 Speaker 1: I mean, like it's such a good pitch. When I 312 00:15:08,800 --> 00:15:10,560 Speaker 1: was doing this, they didn't exist in ETF form. They 313 00:15:10,560 --> 00:15:12,760 Speaker 1: existed in structured notes at banks, right, Like this is 314 00:15:12,960 --> 00:15:15,600 Speaker 1: this is like a classic structured note product. Right. This 315 00:15:15,680 --> 00:15:19,360 Speaker 1: is like your wealth manager goes to a rich conservative 316 00:15:19,360 --> 00:15:21,640 Speaker 1: person who's like, oh, I like this stock, and you're like, well, 317 00:15:21,800 --> 00:15:25,160 Speaker 1: I can give you that stock, but no downside, right, 318 00:15:25,640 --> 00:15:27,960 Speaker 1: Like to be clear, like you're always trading up upside, right, 319 00:15:28,000 --> 00:15:32,040 Speaker 1: Like the trade is that the advisor goes and buys 320 00:15:32,480 --> 00:15:37,840 Speaker 1: treasuries for you know, ninety six percent of the investment, right, 321 00:15:38,040 --> 00:15:40,560 Speaker 1: and like that provides the downside protection because at ninety 322 00:15:40,600 --> 00:15:42,600 Speaker 1: six dollars, treasury bill mature is at one hundred and 323 00:15:42,640 --> 00:15:44,640 Speaker 1: a year, right, And then he takes the other four 324 00:15:44,680 --> 00:15:47,000 Speaker 1: dollars and buys a call spread that gives you some 325 00:15:47,080 --> 00:15:48,960 Speaker 1: of the upside on the on the asset. Right, So 326 00:15:50,240 --> 00:15:53,400 Speaker 1: this is a medium to high interest rates product. Is like, 327 00:15:53,600 --> 00:15:56,080 Speaker 1: if interest rates are really low, you have to spend 328 00:15:56,120 --> 00:15:58,280 Speaker 1: like ninety nine dollars on the treasuries to mature at 329 00:15:58,280 --> 00:15:59,680 Speaker 1: one hundred and so you have like only a dollar 330 00:15:59,680 --> 00:16:01,440 Speaker 1: to spend on a call spread. But if inter it's 331 00:16:01,440 --> 00:16:03,000 Speaker 1: really high, I can spend like ten dollars on a 332 00:16:03,000 --> 00:16:05,000 Speaker 1: call spread and then you have then you're in business. 333 00:16:05,080 --> 00:16:08,160 Speaker 2: Yeah, so Storty I actually started reporting like in autumn 334 00:16:08,160 --> 00:16:10,760 Speaker 2: of last year rate before the Fed started cutting rates, 335 00:16:10,880 --> 00:16:14,640 Speaker 2: was what happens to these one hundred percent downside ETFs 336 00:16:14,760 --> 00:16:17,880 Speaker 2: once rates start going lower, and it seems like a 337 00:16:17,880 --> 00:16:19,880 Speaker 2: couple of aer caps. Yeah, well that's the thing. Well, no, 338 00:16:20,360 --> 00:16:24,040 Speaker 2: some issuers, there's a choice you have to make to yeah, 339 00:16:24,080 --> 00:16:27,320 Speaker 2: do you keep the one hundred percent downside protection or 340 00:16:27,480 --> 00:16:30,320 Speaker 2: do you lower the cap? And some issuers were thinking about, 341 00:16:30,680 --> 00:16:33,160 Speaker 2: you know, maybe it's not one hundred percent protection, it's 342 00:16:33,360 --> 00:16:35,840 Speaker 2: eighty five percent, So there's a choice that has to 343 00:16:35,840 --> 00:16:37,760 Speaker 2: be made. But then interest rates went up like a 344 00:16:37,840 --> 00:16:40,680 Speaker 2: hundred basis points, so it's less relevant right now. But 345 00:16:40,720 --> 00:16:42,240 Speaker 2: it will become relevant at some point. 346 00:16:42,440 --> 00:16:46,000 Speaker 1: My crude assumption is that you can get a buffer 347 00:16:46,040 --> 00:16:49,000 Speaker 1: ETF that has a one hundred floor so you always 348 00:16:49,040 --> 00:16:51,400 Speaker 1: get your money back, and it has a cap of 349 00:16:51,480 --> 00:16:54,760 Speaker 1: like crudely twice the treasury billt rate, right, because like 350 00:16:55,400 --> 00:16:57,320 Speaker 1: you know, like your option is like put one hundred 351 00:16:57,320 --> 00:17:00,240 Speaker 1: dollars in today and get back the treasury rate, or 352 00:17:01,000 --> 00:17:03,400 Speaker 1: put one hundred dollars in today and get back you know, 353 00:17:03,400 --> 00:17:06,239 Speaker 1: with equal probability between zero and twice the treasure right. 354 00:17:06,280 --> 00:17:09,040 Speaker 1: So it's like that's sort of like the right expected value. Yeah, 355 00:17:09,560 --> 00:17:11,880 Speaker 1: it's not exactly right, but it's like it's like kind 356 00:17:11,880 --> 00:17:14,000 Speaker 1: of close. And so like you see caps that are around 357 00:17:14,000 --> 00:17:16,760 Speaker 1: like one ten with like a four and change treasure bill. Right. 358 00:17:16,840 --> 00:17:18,639 Speaker 1: The other thing I'll say is that the bitcoin buffer 359 00:17:18,640 --> 00:17:20,960 Speaker 1: ATF that we're talking about from Calamus, they actually have 360 00:17:21,040 --> 00:17:23,840 Speaker 1: three options. One is like one hundred by like one 361 00:17:23,840 --> 00:17:25,680 Speaker 1: eleven or whatever, and then the others are like a 362 00:17:25,760 --> 00:17:28,560 Speaker 1: ninety by one thirty and a eighty by one fifty. 363 00:17:28,640 --> 00:17:30,680 Speaker 2: So like those haven't launch it though, right. 364 00:17:30,600 --> 00:17:32,600 Speaker 1: Yeah, but they're like they're talking about them like by 365 00:17:32,600 --> 00:17:34,760 Speaker 1: eighty one fifty. I mean, like if bitcoin goes down 366 00:17:34,800 --> 00:17:37,320 Speaker 1: by more than twenty percent, you only go down by 367 00:17:37,320 --> 00:17:39,720 Speaker 1: twenty percent, right, Yeah, Like if bitcoin this is half 368 00:17:39,720 --> 00:17:41,960 Speaker 1: its value, you only lose twenty percent of your investment. 369 00:17:42,160 --> 00:17:44,280 Speaker 1: But then if Bitcoin goes up, you get up to 370 00:17:44,359 --> 00:17:47,360 Speaker 1: fifty percent returns on your investment. So it's like a 371 00:17:47,440 --> 00:17:54,360 Speaker 1: much wider collar, which is maybe more appealing. Still, it's 372 00:17:54,359 --> 00:17:55,200 Speaker 1: like a weird trade. 373 00:17:55,040 --> 00:17:57,560 Speaker 2: That it is. Before we talk about trump Coin, which 374 00:17:57,640 --> 00:18:00,240 Speaker 2: is coming. One more point that I just remembered on 375 00:18:00,800 --> 00:18:04,399 Speaker 2: buffer ETFs broadly, I remember talking to Alliance about this 376 00:18:04,440 --> 00:18:07,359 Speaker 2: and basically asking the same question that we are, who 377 00:18:07,400 --> 00:18:10,800 Speaker 2: and why would you buy this? And the point that 378 00:18:10,840 --> 00:18:14,720 Speaker 2: they made, which I found somewhat compelling, was this is 379 00:18:14,880 --> 00:18:18,359 Speaker 2: a better version of bonds. Like, if you're putting together 380 00:18:18,359 --> 00:18:22,200 Speaker 2: a portfolio, don't take from your equity bucket to put 381 00:18:22,240 --> 00:18:25,119 Speaker 2: into these buffer products. Takes from your fixed income allocation. 382 00:18:25,640 --> 00:18:28,960 Speaker 2: This is a better version of bonds because bonds have 383 00:18:29,040 --> 00:18:33,600 Speaker 2: been an unreliable hedge since the pandemic anyway, this makes 384 00:18:33,640 --> 00:18:36,760 Speaker 2: more sense as a fix income alternative. That was their pitch, 385 00:18:36,800 --> 00:18:39,879 Speaker 2: which you know, if you're getting one hundred percent downside protection, 386 00:18:40,040 --> 00:18:44,320 Speaker 2: but you know twice what Treasury builds are yielding. That 387 00:18:44,720 --> 00:18:45,840 Speaker 2: makes a little bit more sense. 388 00:18:46,440 --> 00:18:48,920 Speaker 1: Yeah, And like just in generally you have some exciting 389 00:18:48,960 --> 00:18:52,439 Speaker 1: sounding things stant on some bond like product, right, Like 390 00:18:52,480 --> 00:18:54,639 Speaker 1: you have like ooh, it's bitcoin but in bond form, right, 391 00:18:54,640 --> 00:18:56,840 Speaker 1: Like that's appealing, right. Yeah. I've written a lot about 392 00:18:56,880 --> 00:19:00,400 Speaker 1: micro strategies convertibles, right, which are bitcoin and bond form, right, 393 00:19:00,800 --> 00:19:02,879 Speaker 1: And the appeal of that is a lot of that 394 00:19:02,960 --> 00:19:04,679 Speaker 1: is the conrod of arbitreagures, but a lot of it 395 00:19:04,720 --> 00:19:08,919 Speaker 1: is actually to like just boring fundamental institutional investors who 396 00:19:08,960 --> 00:19:12,320 Speaker 1: are like I'll take some bitcoin upside and some you know, 397 00:19:12,480 --> 00:19:13,959 Speaker 1: one hundred percent downside protection. 398 00:19:14,119 --> 00:19:15,960 Speaker 2: So yeah, I feel like there's still work to be 399 00:19:16,000 --> 00:19:18,000 Speaker 2: done though when it comes to the pitch for a 400 00:19:18,119 --> 00:19:19,280 Speaker 2: buffered trump coin. 401 00:19:19,119 --> 00:19:23,800 Speaker 1: ETF, Yeah, God, that's going to happen, isn't it. Yeah, 402 00:19:24,280 --> 00:19:27,160 Speaker 1: Like someone announced the filing for a trump coin ETF, 403 00:19:27,200 --> 00:19:30,560 Speaker 1: not a buffered one, just like trump coin in a 404 00:19:30,600 --> 00:19:31,320 Speaker 1: stock wrapper. 405 00:19:31,480 --> 00:19:32,880 Speaker 2: Yeah, because like vanilla. 406 00:19:33,200 --> 00:19:35,159 Speaker 1: Yeah. No, it's interesting because like you think about like 407 00:19:35,160 --> 00:19:37,160 Speaker 1: what's like the trump coin audience, right, Like a lot 408 00:19:37,160 --> 00:19:39,359 Speaker 1: of it is like Trump has a huge like crypt 409 00:19:39,520 --> 00:19:42,080 Speaker 1: native following who are like going on Solana and buying 410 00:19:42,080 --> 00:19:44,800 Speaker 1: trump coin, but he also has like a you know, yeah, 411 00:19:45,040 --> 00:19:47,960 Speaker 1: less tech native following who would love to buy trump 412 00:19:47,960 --> 00:19:50,080 Speaker 1: coin but aren't going to like mess around with the blockchain, 413 00:19:50,400 --> 00:19:52,879 Speaker 1: and so selling them trump coin and ETF form is like, 414 00:19:52,920 --> 00:19:54,000 Speaker 1: you know, has an obvious appeal. 415 00:19:54,200 --> 00:19:57,200 Speaker 2: We had Kathy Wood of Arc Investment on et F 416 00:19:57,280 --> 00:19:59,920 Speaker 2: i Q the television show this week, and of course 417 00:20:00,080 --> 00:20:03,480 Speaker 2: we asked her about trump coin and she stays away 418 00:20:03,520 --> 00:20:06,639 Speaker 2: from meme coins. She likes the Big Three, as she 419 00:20:06,720 --> 00:20:09,879 Speaker 2: called it, and she said something to the effect of 420 00:20:09,960 --> 00:20:11,760 Speaker 2: the I'm not sure what the utility of trump coin 421 00:20:11,840 --> 00:20:14,359 Speaker 2: what it is, and it seems like the utility is 422 00:20:14,400 --> 00:20:17,600 Speaker 2: just following money to the Trump family, hopefully. 423 00:20:17,280 --> 00:20:18,640 Speaker 1: The alongest side on utility. 424 00:20:19,840 --> 00:20:22,360 Speaker 2: I don't know if this is relevant, but let's find out. 425 00:20:22,720 --> 00:20:26,640 Speaker 1: So this gets back to the SEC five years ago. 426 00:20:27,880 --> 00:20:29,719 Speaker 1: If you talk to cryptop people, there's a lot of 427 00:20:29,720 --> 00:20:33,040 Speaker 1: talk about like we're building the future of the Internet. 428 00:20:33,040 --> 00:20:36,400 Speaker 1: We're building like these useful tools that will affect people's lives, 429 00:20:36,840 --> 00:20:40,120 Speaker 1: new ways of gaming and new ways to store files 430 00:20:40,119 --> 00:20:43,800 Speaker 1: and decentralize everything, right, And you don't hear that anymore, 431 00:20:44,160 --> 00:20:49,480 Speaker 1: and now you hear fart coin and dogecoin and trump coin, right. Why. Well, 432 00:20:50,680 --> 00:20:54,600 Speaker 1: one very obvious possibility is that, like all of those 433 00:20:54,640 --> 00:20:58,480 Speaker 1: promises of utility, many of them were kind of vaporware 434 00:20:59,119 --> 00:21:01,239 Speaker 1: and they didn't work out, and people like, yeah, it's 435 00:21:01,240 --> 00:21:04,199 Speaker 1: fun gambling, right. Another possibility is that like the people 436 00:21:04,280 --> 00:21:08,120 Speaker 1: who were either building or hyping new technologies in crypto 437 00:21:08,880 --> 00:21:11,240 Speaker 1: saw a new shiny object in AI, and now we're 438 00:21:11,280 --> 00:21:13,960 Speaker 1: all building and hyping large language models. But I think 439 00:21:13,960 --> 00:21:16,800 Speaker 1: a really important explanation for all of this is that 440 00:21:17,080 --> 00:21:20,800 Speaker 1: the SEC had a huge crackdown on crypto, and it 441 00:21:20,880 --> 00:21:24,479 Speaker 1: was specifically addressed to like people who are building stuff. 442 00:21:24,800 --> 00:21:27,879 Speaker 1: If you were offering an investment in some project that 443 00:21:27,920 --> 00:21:31,240 Speaker 1: you thought would like build utility for the world, the 444 00:21:31,280 --> 00:21:34,560 Speaker 1: SEC said, well, that was a securities offering and you 445 00:21:34,600 --> 00:21:36,560 Speaker 1: couldn't do it. And if you've got to list it 446 00:21:36,600 --> 00:21:38,280 Speaker 1: on an exchange, the exchange you're get in trouble. The 447 00:21:38,320 --> 00:21:41,119 Speaker 1: crypto exchange would get in trouble. And so there was 448 00:21:41,160 --> 00:21:44,399 Speaker 1: a SEC crackdown on crypto generally, but specifically on like 449 00:21:44,800 --> 00:21:49,240 Speaker 1: useful crypto, whereas meme coins everyone agrees basically are not 450 00:21:49,320 --> 00:21:52,200 Speaker 1: securities because they don't promise anything. They're just like, yeah, 451 00:21:52,240 --> 00:21:54,800 Speaker 1: it's a meme has no utility. As long as you 452 00:21:54,800 --> 00:21:57,000 Speaker 1: don't have utility, you can sell it to your heart's content. 453 00:21:57,040 --> 00:21:59,560 Speaker 1: It's like a collectible. It's not an investment. And so 454 00:21:59,640 --> 00:22:01,760 Speaker 1: the SEA he can't regulate it. I feel like if 455 00:22:01,760 --> 00:22:03,520 Speaker 1: the SEC went back, it would find that to be 456 00:22:03,560 --> 00:22:06,280 Speaker 1: like a bad strategic decision because like it didn't stop crypto, 457 00:22:06,320 --> 00:22:08,639 Speaker 1: it just made crypto more useless. Yeah, So one question 458 00:22:08,720 --> 00:22:11,760 Speaker 1: is like, with a much more accommodating SEC, will crypto 459 00:22:11,800 --> 00:22:15,720 Speaker 1: become more useful? Or is the meme coin gambling stuff 460 00:22:16,000 --> 00:22:18,840 Speaker 1: too good and that's all anyone wants anymore and it'll 461 00:22:18,840 --> 00:22:20,840 Speaker 1: just be a lot of no utility mome coins. 462 00:22:21,160 --> 00:22:33,480 Speaker 3: Yeah, and we'll find out what we want. 463 00:22:36,600 --> 00:22:40,879 Speaker 2: Two sigmas. This was also, you know, in the rush 464 00:22:40,880 --> 00:22:44,719 Speaker 2: to the finish for the SEC under the Biden administration. 465 00:22:45,680 --> 00:22:47,320 Speaker 1: They got against two sigma. 466 00:22:48,119 --> 00:22:49,680 Speaker 2: Tell me about it, so two. 467 00:22:49,440 --> 00:22:51,919 Speaker 1: Sigma and adds in like twenty twenty three that it 468 00:22:51,960 --> 00:22:54,120 Speaker 1: has found someone messing with its models. One of its 469 00:22:54,119 --> 00:22:56,760 Speaker 1: employees was messing with its models in a way that 470 00:22:56,920 --> 00:23:00,840 Speaker 1: caused some funds to make an extra four hundred fifty 471 00:23:00,840 --> 00:23:03,080 Speaker 1: million dollars and other funds to lose one hundred and 472 00:23:03,080 --> 00:23:05,919 Speaker 1: seventy million dollars, and when the stories came out, it 473 00:23:05,960 --> 00:23:08,040 Speaker 1: was like he was messing with the models to try 474 00:23:08,080 --> 00:23:10,400 Speaker 1: to improve his bonus, which is like the only reason 475 00:23:10,440 --> 00:23:13,199 Speaker 1: anyone does anything right. And it's like a little bit 476 00:23:13,240 --> 00:23:18,280 Speaker 1: of a funny story, because he succeeded in the aggregate, yeah, 477 00:23:18,520 --> 00:23:21,600 Speaker 1: in improving the performance of two Sigmas funds, right, Like 478 00:23:21,640 --> 00:23:23,479 Speaker 1: he made more money on the good funds than he 479 00:23:23,560 --> 00:23:25,760 Speaker 1: lost on the bad funds. And like you could imagine, 480 00:23:27,160 --> 00:23:29,280 Speaker 1: ex anty, if you knew that that was going to happen, 481 00:23:29,440 --> 00:23:31,600 Speaker 1: he'd be like, heyeah, we'll just like take one hundred 482 00:23:31,600 --> 00:23:33,560 Speaker 1: and seventy million dollars from the funds that win, give 483 00:23:33,600 --> 00:23:35,360 Speaker 1: it to the funds that lose. Then they haven't lost, 484 00:23:35,400 --> 00:23:37,639 Speaker 1: they're fine, and the funds that win have an extra, like, 485 00:23:37,680 --> 00:23:40,960 Speaker 1: you know, two hundred and eighty million dollars. Like, great work, 486 00:23:41,160 --> 00:23:42,199 Speaker 1: here's your big bonus. 487 00:23:42,280 --> 00:23:43,760 Speaker 2: This seems like a happy story. 488 00:23:43,600 --> 00:23:46,320 Speaker 1: Right, But neither two Segments or the SEC saw it 489 00:23:46,320 --> 00:23:48,879 Speaker 1: that way. The guy was fired and two ended up 490 00:23:48,880 --> 00:23:51,280 Speaker 1: paying like ninety million dollars in penalties to the SEC, 491 00:23:51,800 --> 00:23:55,360 Speaker 1: and so like, yeah, so he improved the overall performance 492 00:23:55,400 --> 00:23:58,200 Speaker 1: of the funds and instead of a round of applause. 493 00:23:58,200 --> 00:24:00,560 Speaker 1: He got fired and two seven got fined, and it's 494 00:24:00,560 --> 00:24:03,439 Speaker 1: a little unclear why. Yeah, I mean, like part of 495 00:24:03,480 --> 00:24:05,760 Speaker 1: it is like he did it without authorization, right, and 496 00:24:05,800 --> 00:24:09,000 Speaker 1: you're supposed to run your hedge fund in a properly 497 00:24:09,080 --> 00:24:11,359 Speaker 1: supervised way. So one reason they got in trouble was 498 00:24:11,359 --> 00:24:14,480 Speaker 1: for like failure to supervise. He's basically like, there is 499 00:24:14,560 --> 00:24:17,240 Speaker 1: a long list of parameters that you're not supposed to 500 00:24:17,359 --> 00:24:20,879 Speaker 1: change without running it through a review process, and he 501 00:24:20,880 --> 00:24:23,640 Speaker 1: would just change them without running it through that process. 502 00:24:23,640 --> 00:24:25,800 Speaker 1: Like he just, yeah, went into the computer and changed 503 00:24:25,800 --> 00:24:27,800 Speaker 1: the parameters. He was not supposed to do that, but 504 00:24:27,840 --> 00:24:30,479 Speaker 1: he did it anyway, And so that's like a failure 505 00:24:30,480 --> 00:24:34,840 Speaker 1: to supervise thing. But the other thing that probably happened 506 00:24:35,280 --> 00:24:38,240 Speaker 1: is that probably, like you know, a quantitative hedge fund 507 00:24:38,280 --> 00:24:43,000 Speaker 1: is basically aiming for high risk adjusted returns, aiming for 508 00:24:43,040 --> 00:24:45,680 Speaker 1: some level of risk and the highest possible returns within 509 00:24:45,720 --> 00:24:48,360 Speaker 1: that level of risk. And it seems like what happened 510 00:24:48,480 --> 00:24:50,879 Speaker 1: is that he changed these parameters to dial up the 511 00:24:51,000 --> 00:24:53,760 Speaker 1: risk that the fund was taking on his strategies. That 512 00:24:53,880 --> 00:24:56,520 Speaker 1: he built a bunch of strategies for the fund for 513 00:24:56,600 --> 00:25:01,960 Speaker 1: the funds for two Sigma and too Sigma's overall model 514 00:25:02,080 --> 00:25:03,840 Speaker 1: was like, we're gonna put this much risk into these 515 00:25:03,840 --> 00:25:07,560 Speaker 1: strategies in order to achieve good risk adjusted returns, and 516 00:25:07,600 --> 00:25:09,720 Speaker 1: he kind of turned the dial to put more risk 517 00:25:09,760 --> 00:25:12,800 Speaker 1: into those strategies, which did, in fact, over the time 518 00:25:12,840 --> 00:25:15,760 Speaker 1: period mostly lead to higher returns, which was good for 519 00:25:15,840 --> 00:25:18,560 Speaker 1: his bonus, but which was not what TWU sigma was 520 00:25:18,560 --> 00:25:20,280 Speaker 1: looking for. And like, you know, if you ran the 521 00:25:20,280 --> 00:25:22,199 Speaker 1: simulation one hundred times, it might not have made as 522 00:25:22,280 --> 00:25:24,640 Speaker 1: much money. And they're they're aiming for sort of long 523 00:25:24,720 --> 00:25:26,840 Speaker 1: term risk management framework, but like it happened to make 524 00:25:26,880 --> 00:25:28,040 Speaker 1: more money in the time that he did. 525 00:25:28,359 --> 00:25:32,679 Speaker 2: Yeah, so that one funds overperformed, but one of the 526 00:25:32,680 --> 00:25:36,520 Speaker 2: funds underperformed, correct, So investors did lose money for sure, 527 00:25:36,680 --> 00:25:38,040 Speaker 2: some investors. 528 00:25:37,560 --> 00:25:41,000 Speaker 1: Right, But like again, like the overperforming fund overperformed by 529 00:25:41,000 --> 00:25:44,280 Speaker 1: more than the underperforming fund underperformed, so like you know, 530 00:25:44,359 --> 00:25:47,199 Speaker 1: you could you could reallocate that to make everyone happy 531 00:25:47,600 --> 00:25:49,960 Speaker 1: or theory you can't really because like there's they have 532 00:25:50,000 --> 00:25:52,320 Speaker 1: specific mandates, right, and if they're not following their mandates, 533 00:25:52,359 --> 00:25:53,160 Speaker 1: then like that's bad. 534 00:25:53,960 --> 00:25:57,440 Speaker 2: Does the fact that one fund overperformed lessen the blow 535 00:25:57,520 --> 00:26:00,480 Speaker 2: to two sigma at all, Like this ninety million dollar penalty, 536 00:26:00,520 --> 00:26:03,080 Speaker 2: would it have been one hundred and eighty dollars if 537 00:26:03,280 --> 00:26:04,280 Speaker 2: everyone lost money? 538 00:26:04,720 --> 00:26:07,240 Speaker 1: I think, I mean, who knows, But like I think 539 00:26:07,280 --> 00:26:11,439 Speaker 1: that there's always a range of rogue trader behavior, right, 540 00:26:11,600 --> 00:26:13,040 Speaker 1: Like this guy was not quite a rogue trader. 541 00:26:13,320 --> 00:26:15,560 Speaker 2: Are you supposed to ask for forgiveness later? 542 00:26:16,359 --> 00:26:18,919 Speaker 1: Right? Like you know, it's an interesting question of like 543 00:26:18,920 --> 00:26:20,960 Speaker 1: what would happen if he had just made money? Yeah, 544 00:26:21,000 --> 00:26:23,240 Speaker 1: everything had gone better. I think that a lot of 545 00:26:23,280 --> 00:26:27,120 Speaker 1: these quant funds are like really quite rigorous about risk management, 546 00:26:27,359 --> 00:26:30,200 Speaker 1: and like if they caught him just making nine hundred 547 00:26:30,200 --> 00:26:32,840 Speaker 1: million dollars for clients, they might have fired him. They 548 00:26:32,960 --> 00:26:36,120 Speaker 1: might have been like, Nope, you messed with our risk management, 549 00:26:36,160 --> 00:26:39,040 Speaker 1: like that is really important, and you're fired even though 550 00:26:39,040 --> 00:26:41,160 Speaker 1: you only made nine hundred million dollars. Who they might 551 00:26:41,160 --> 00:26:43,439 Speaker 1: not have I don't know. And like I think, like 552 00:26:43,880 --> 00:26:46,560 Speaker 1: two segments interesting because it's like truly like a quand fund, right, 553 00:26:46,600 --> 00:26:49,959 Speaker 1: Like I think a lot of like less rigorous banks 554 00:26:50,040 --> 00:26:53,480 Speaker 1: like kind of famously like don't fire rogue traders who 555 00:26:53,520 --> 00:26:55,760 Speaker 1: make money. This is like changing a little bit, But 556 00:26:55,840 --> 00:26:58,439 Speaker 1: that's the stereotype but yeah, I think, you know, if 557 00:26:58,440 --> 00:27:01,520 Speaker 1: he had only lost money, then it looks like malice 558 00:27:01,640 --> 00:27:04,800 Speaker 1: or incompetence or it just like it looks really bad. 559 00:27:04,840 --> 00:27:06,720 Speaker 1: If he makes money, then it's like he was genuinely 560 00:27:06,720 --> 00:27:08,560 Speaker 1: trying to make money for the firm, unless for his 561 00:27:08,640 --> 00:27:12,000 Speaker 1: bonus that's a little bit less a little bit less 562 00:27:12,000 --> 00:27:12,520 Speaker 1: bad conduct. 563 00:27:12,760 --> 00:27:14,840 Speaker 2: Well, maybe he got hired by a bank, you know, 564 00:27:14,960 --> 00:27:17,919 Speaker 2: maybe has an illustrious new chapter. 565 00:27:19,080 --> 00:27:22,000 Speaker 1: Yeah, I mean, like, you know, like he could start 566 00:27:22,000 --> 00:27:25,199 Speaker 1: his own fun being like we're like two Sigma, we 567 00:27:25,280 --> 00:27:25,960 Speaker 1: take more risks. 568 00:27:26,040 --> 00:27:30,760 Speaker 2: Yeah, two Sigma full octane. We do have a listener 569 00:27:30,880 --> 00:27:32,480 Speaker 2: question on this. 570 00:27:32,920 --> 00:27:37,000 Speaker 1: Oh yeah, listen asked like why is this an SEC case? Yeah, 571 00:27:37,480 --> 00:27:39,280 Speaker 1: you know, it's a good question. Like the answer is, like, 572 00:27:39,359 --> 00:27:41,320 Speaker 1: if you read it, it's like they violated the anti 573 00:27:41,359 --> 00:27:45,040 Speaker 1: fraud provisions of the Investment Advisors Act, and so why 574 00:27:45,320 --> 00:27:47,960 Speaker 1: Like it's not like two Sigma was doing a fraud 575 00:27:48,000 --> 00:27:50,080 Speaker 1: on its investors in any obvious way, right, Like they 576 00:27:50,119 --> 00:27:53,840 Speaker 1: weren't lying to them. But I don't actually know what 577 00:27:53,840 --> 00:27:56,639 Speaker 1: their market material said, but they probably didn't describe in detail, 578 00:27:56,680 --> 00:27:59,359 Speaker 1: like the information security around the parameters for the you know, 579 00:27:59,400 --> 00:28:02,240 Speaker 1: like they probably didn't lee to investors at all. But 580 00:28:02,320 --> 00:28:04,359 Speaker 1: the SEC is like, Ah, you did this thing that 581 00:28:04,480 --> 00:28:06,800 Speaker 1: like just seems kind of bad, and so it's probably 582 00:28:06,880 --> 00:28:09,359 Speaker 1: operated as a fraud on your investors. And you know 583 00:28:09,400 --> 00:28:12,679 Speaker 1: in this environment you said all that case. Is that 584 00:28:12,760 --> 00:28:15,600 Speaker 1: a case that the next SEC brings I don't know. 585 00:28:15,720 --> 00:28:19,919 Speaker 1: I will say there is one other reason that the 586 00:28:19,960 --> 00:28:22,520 Speaker 1: Two Segment got in trouble with the SEC, which is 587 00:28:22,560 --> 00:28:26,600 Speaker 1: that they have NDAs. And I've written this like, it 588 00:28:26,680 --> 00:28:29,840 Speaker 1: is sort of illegal for financial firms to have NDAs. 589 00:28:30,160 --> 00:28:32,120 Speaker 1: If you have an NDA that says you won't tell 590 00:28:32,160 --> 00:28:34,640 Speaker 1: anyone about the secret stuff you learned at this firm, 591 00:28:35,359 --> 00:28:37,639 Speaker 1: the SEC says, well, but what about whistleblawers. What if 592 00:28:37,640 --> 00:28:40,280 Speaker 1: a whistleblower wanted to come to the SEC and tell 593 00:28:40,360 --> 00:28:44,040 Speaker 1: us that you were doing securities at violations, CDA would 594 00:28:44,080 --> 00:28:45,840 Speaker 1: prevent them from doing that. That's a violation of our 595 00:28:45,880 --> 00:28:48,400 Speaker 1: whistleblower protection role. And so the SEC goes after all 596 00:28:48,400 --> 00:28:51,600 Speaker 1: these firms for having NDAs that don't specifically say but 597 00:28:51,720 --> 00:28:53,600 Speaker 1: you can tell the SEC. And in fact Two Sigma 598 00:28:53,760 --> 00:28:56,280 Speaker 1: had NDAs that did say you can go tell the SEC. 599 00:28:56,360 --> 00:28:58,640 Speaker 1: But the SEC said, well, but they didn't say that 600 00:28:58,680 --> 00:29:01,200 Speaker 1: you were they said, you know, you had to represent 601 00:29:01,240 --> 00:29:04,680 Speaker 1: that you hadn't already disclosed any confidential information, and that 602 00:29:04,720 --> 00:29:07,600 Speaker 1: part didn't say you can have already told the SEC. 603 00:29:07,880 --> 00:29:11,040 Speaker 1: And so the SEC find two sigma for having this NDA. 604 00:29:11,120 --> 00:29:13,120 Speaker 1: That sort of said you can tell the SEC, but 605 00:29:13,160 --> 00:29:15,040 Speaker 1: didn't say it in the right way. That was the 606 00:29:15,080 --> 00:29:16,880 Speaker 1: last one. Never see that case. 607 00:29:17,040 --> 00:29:17,320 Speaker 3: That's it. 608 00:29:17,720 --> 00:29:18,320 Speaker 2: I enjoy it. 609 00:29:18,600 --> 00:29:20,520 Speaker 1: That's not legal advice, but you'll never see that one again. 610 00:29:20,640 --> 00:29:24,960 Speaker 2: Man Paul Atkins over to you? Is he confirmed to 611 00:29:27,120 --> 00:29:28,960 Speaker 2: Paul Atkins potentially over to you soon? 612 00:29:32,160 --> 00:29:33,600 Speaker 1: And that was the Money Stuff Podcast. 613 00:29:33,760 --> 00:29:36,320 Speaker 2: I'm Matt Livian and I'm Katie Greifeld. 614 00:29:36,640 --> 00:29:38,720 Speaker 1: You can find my work by subscribing to the Money 615 00:29:38,720 --> 00:29:41,200 Speaker 1: Stuff newsletter on Bloomberg dot com. 616 00:29:40,960 --> 00:29:43,440 Speaker 2: And you can find me on Bloomberg TV every day 617 00:29:43,520 --> 00:29:46,600 Speaker 2: on Open Interest between nine to eleven am Eastern. 618 00:29:47,000 --> 00:29:48,680 Speaker 1: We'd love to hear from you. You can send an 619 00:29:48,720 --> 00:29:51,840 Speaker 1: email to money Pod at Bloomberg dot net, ask us 620 00:29:51,880 --> 00:29:53,400 Speaker 1: a question and we might answer it on air. 621 00:29:53,680 --> 00:29:55,880 Speaker 2: You can also subscribe to our show wherever you're listening 622 00:29:55,920 --> 00:29:57,960 Speaker 2: right now and leave us a review. It helps more 623 00:29:57,960 --> 00:29:58,840 Speaker 2: people find the show. 624 00:29:59,000 --> 00:30:01,760 Speaker 1: The Money Stuff Podcast is produced by Ana Mazerakus and 625 00:30:01,840 --> 00:30:02,600 Speaker 1: Moses on them. 626 00:30:02,760 --> 00:30:04,840 Speaker 2: Our theme music was composed by Blake Maples. 627 00:30:05,200 --> 00:30:06,680 Speaker 1: Brandon Francis newdam is our. 628 00:30:06,600 --> 00:30:10,000 Speaker 2: Executive producer, and Stage Bauman is Bloomberg's head of podcasts. 629 00:30:10,440 --> 00:30:12,760 Speaker 1: Thanks for listening to the Money Stuff Podcast. 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