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Speaker 2: Two things. I'm wearing glasses you are, which does not
Speaker 2: matter to our listeners. I kind of feel like I
Speaker 2: am wearing a costume.
Speaker 1: I don't know, totally different person wearing feels like it.
Speaker 2: The other point that I wanted to make is that
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Speaker 1: A party, Yeah, specific party.
Speaker 2: No, at your party. I'm going to your party.
Speaker 1: Party having Yeah, I'm hofually stopping by my party. The
Speaker 1: time this airs, the party will have happened.
Speaker 2: That's true, soup, Yeah, exactly. Things go dramatically south. This
Speaker 2: will not be included in the podcast, but if you're
Speaker 2: hearing it, assumed that it went well and we had
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Speaker 1: It was great. What a great party.
Speaker 2: This is sort of a birthday party, right in that
Speaker 2: sense for money Stuff, which turned ten years old.
Speaker 1: Right, it's not my birthday, not even really, money says
Speaker 1: Earth there. It's just like a month ago. And even
Speaker 1: that is like the accounting is a little fuzzy. But
Speaker 1: we're going to say it's the tenth anniversary of money Stuff. Yeah,
Speaker 1: sh anniversary observed, anniversary party. What a great time it
Speaker 1: has been. Hello, and welcome to the Money Stuff Podcast.
Speaker 1: You're a weekly podcast where we talk about stuff related
Speaker 1: to money. I'm Matt Levin and I write the Money
Speaker 1: Stuff column for Bloomberg Opinion.
Speaker 2: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 2: an anchor for Bloomberg Television.
Speaker 1: What are you talking about today, Katie?
Speaker 2: The Fattest Fingers in the World twenty three and me
Speaker 2: and Wheaton, Illinois, Wheaton, Illinois.
Speaker 1: I have a funness for whet In Illinois because I
Speaker 1: have a wheatened tarrier. But oh, that's not really really
Speaker 1: at all. No, never mind, all right, fat fingers.
Speaker 2: Yeah, man, what is going on over at City Group?
Speaker 2: It seems incredible.
Speaker 1: Yeah, I don't know. Like City Group has had a
Speaker 1: series of like very public and very comical, like mistaken
Speaker 1: payments of which the greatest, honestly was a few years
Speaker 1: ago in twenty twenty they sent out nine hundred million
Speaker 1: dollars to some hedge funds and they're like, sorry, we
Speaker 1: didn't mean to do that. In hutch Ones we're keeping it,
Speaker 1: and there's a court case peal that was great. But
Speaker 1: recently there's been reporting on like a couple of times
Speaker 1: last year, they sent out like extremely comical mistake and payments,
Speaker 1: but they got those back. That was fine. That was
Speaker 1: like a typo. It was like in one case they
Speaker 1: meant to pay two hundred and eighty dollars to some
Speaker 1: customers ask crow account like theyk in Brazil, and they
Speaker 1: put in eighty one trillion dollars, which is much much
Speaker 1: more money than the City group has. So you can't
Speaker 1: do that. But you know, it's not like then the
Speaker 1: money left and like the customer fled. It's like they
Speaker 1: reversed the payment like the next day, and they told
Speaker 1: regulators it was a near miss. So they had some
Speaker 1: near a near miss. It's an internal transfer right like
Speaker 1: on cities books and records. They briefly credited the customer
Speaker 1: with eighty one trillion dollars. We like the money left
Speaker 1: the bank and then they took it back the next day.
Speaker 1: So you know, City has gotten grief from regulators about
Speaker 1: like it's systems and processes and techno, and it's been
Speaker 1: sort of like understandably. So yeah, it's been like trying
Speaker 1: to kind of turn the page and be like we're
Speaker 1: really good at not making mistake in payments. So when
Speaker 1: they very publicly make or almost make mistaken payments, and
Speaker 1: when they are very comically large, that's embarrassing for them.
Speaker 1: It like sort of puts them in an ill light
Speaker 1: with regulators. But they it's not like they lost eighty
Speaker 1: one trillion dollars would amazing.
Speaker 2: Well, there was eighty one trillion dollars, which was amazing
Speaker 2: in and of itself. That actually made the six trillion
Speaker 2: dollar fat finger that came six billion the next day.
Speaker 1: The next day, Bloomer reported on a six billion dollar
Speaker 1: mistake and transfer that they had actually done like a
Speaker 1: week before the eighty one trillion dollar one. So like
Speaker 1: they had this private wealth customer. They had to send
Speaker 1: this customer, my impression is like a few million dollars,
Speaker 1: but they typed the account number into the amount field.
Speaker 1: So instead of typing like three million dollars, they typed
Speaker 1: ten digit account number began with the six, and they
Speaker 1: sent six billion dollars to this customer instead of a
Speaker 1: few million dollars. And then again quickly discovered that it
Speaker 1: was a mistake and took it back and it was
Speaker 1: all fine, but you know, it's like it's a near miss.
Speaker 1: They had to report it to regulators and the Bloomberg
Speaker 1: story reported that the head of wealth management, who like
Speaker 1: kind of just started.
Speaker 2: It, provoked audible frustr vote.
Speaker 1: Audible frustration, which is a great way to describe swearing.
Speaker 1: But so they were pretty sad about that until like
Speaker 1: a week later when they did the eighty one trillion
Speaker 1: dollars things, and they're like, ah, six billion is nothing,
Speaker 1: not so bad.
Speaker 2: I tweeted a joke that, you know, a great way
Speaker 2: to make this stop happening is just not let city
Speaker 2: get the money back, and several people brought up Revlon
Speaker 2: that they tried, they really didn't.
Speaker 1: Get the money. Well, they did, but they could.
Speaker 2: I actually forget how Revlon ended. I remember the headline
Speaker 2: they got.
Speaker 1: The money back. They did. So Revlin was interesting because
Speaker 1: first of all, it wasn't an internal transfer. They actually
Speaker 1: sent the money out of a bank right to people's
Speaker 1: accounts at other banks. But secondly, like the accidental payment
Speaker 1: was like part of an actual intended transaction that was
Speaker 1: a sort of aggressive debt restructuring by Revlon that was
Speaker 1: like basically hosing some of its creditors, and so the
Speaker 1: creditors who were getting hosed randomly got nine hundred million
Speaker 1: dollars and we were like, sweet, we're keeping this. And
Speaker 1: then City's like no, no, I have to go back and
Speaker 1: they're like nope, we're not giving back because like you
Speaker 1: were trying to restructure this debt in a way that
Speaker 1: was bad for creditors, and so they sued or they
Speaker 1: kept the money and City sued them and they defeended
Speaker 1: themselves saying we were actually owed this money because like
Speaker 1: they were, the money is not right then and City
Speaker 1: made the payment on behalf of Revlon and we're keeping
Speaker 1: it and they actually won in the trial court, but
Speaker 1: then it was her first on appeal. It was like
Speaker 1: the right answer. But yeah, it was like fun for all.
Speaker 2: So we weren't around when Revlon happens. But I was
Speaker 2: trying to remember, why have we discussed City fat fingers
Speaker 2: on this podcast before? And then I reminded of a
Speaker 2: different type of fat finger incident that was uncovered back
Speaker 2: in May. Do you remember that fat finger stock trade
Speaker 2: were fined by the UK like sixty two million years
Speaker 2: if you round up. In that situation, a trader had
Speaker 2: intended to sell a basket of equities that was valued
Speaker 2: at fifty eight million dollars but made an error while
Speaker 2: inputting that value, and as a result, the basket was
Speaker 2: actually valued at four hundred and forty four billion dollars
Speaker 2: being created instead.
Speaker 1: So this is the thing. All these things, it's like
Speaker 1: screens with like a big box with like seventy five
Speaker 1: different fields. You can fill in different fields. So if
Speaker 1: you want to sell fifty eight million dollars worth of stock,
Speaker 1: there's some field that's like sell fifty eight million dollars.
Speaker 1: If you want to sell fifty eight million shares, there's
Speaker 1: a different field that's like sell this many shares. And
Speaker 1: this person, I think, put like the dollar number in
Speaker 1: the shares field, so like the shares are worth like
Speaker 1: hundreds of dollars, and so you multiply the amount by
Speaker 1: hundreds of dollars. But it was just like going fast
Speaker 1: in a complicated interface and just put it in the
Speaker 1: wrong box. Same thing with the account number person who
Speaker 1: put the six billion account number into the amount field
Speaker 1: and sent out six billion dollars. It's just like there's
Speaker 1: too many things on the screen.
Speaker 2: Well, if I had prepped better for this podcast, I
Speaker 2: would have gone back and listen to the episode we
Speaker 2: recorded in May, because I recall fuzzly that at the
Speaker 2: time we talked about how there were a bunch of
Speaker 2: warnings that popped up, at least when it came to
Speaker 2: the stock trade.
Speaker 1: There are too many.
Speaker 2: There are too many, and you kind of get numb
Speaker 2: and you just click down. How do you fix this?
Speaker 2: It seems to happen uniquely often at City, so I
Speaker 2: don't know if their processes differ greatly from some of
Speaker 2: their peers.
Speaker 1: One thing they seem to have done is like this
Speaker 1: is in the six billion dollar story, the wealth management
Speaker 1: group has a new set of Actually I think the
Speaker 1: whole firm has a new set of warnings, where like
Speaker 1: there's some threshold of like large anomalist transfer, where like
Speaker 1: someone not pressing the button gets an alert. Like the
Speaker 1: head of wealth management gets like, hey, we're sending six
Speaker 1: billion dollars to someone for no reason.
Speaker 2: I sure expressed the audible so much I said, it.
Speaker 1: Might not actually be him. But like someone gets a warning.
Speaker 1: So it's not just the person pressing the button ignoring
Speaker 1: the mornings, but someone gets a You know, you gotta
Speaker 1: do it judicially, right, Like you can't pop up two
Speaker 1: hundred warnings for every transaction because then everyone's gonna ignore them.
Speaker 1: But like you know there's some level of like it
Speaker 1: should not be possible for anyone at city to wire
Speaker 1: or to send eighty one trillion dollars to anyone because
Speaker 1: that's more than they have. Yes, but even six billion dollars,
Speaker 1: like there should be someone checking that.
Speaker 2: Maybe I want someone to ask Jane Frazier about this.
Speaker 2: I want this. I don't think it necessarily will come
Speaker 2: up on the next earnings call, but I want to
Speaker 2: see this in an earnings transcript.
Speaker 1: It's very funny to imagine these big material risks to
Speaker 1: the bank, right, like a bank going bankrupt because it
Speaker 1: accidentally wired out eighty one trillion dollars. But they're not
Speaker 1: really like they're symbolic risks. They're like you should have
Speaker 1: better tech so that you don't mess stuff up. But
Speaker 1: it's not like any one of these was like that serious.
Speaker 1: The Redlin was bad, but like not that happening.
Speaker 2: You have to imagine that this is certainly a symptom
Speaker 2: of something that maybe.
Speaker 1: Is like a symptom of like bad computer screens, like
Speaker 1: the eighty one trillion dollar transaction. The reporting on that
Speaker 1: is wild. That wasn't like putting the wrong thing in
Speaker 1: the wrong field. That was they use some sort of
Speaker 1: rarely used backup screen to make the payment that was
Speaker 1: prepopulated with fifteen zeros, so you had to delete the
Speaker 1: fifteen zeros to type in the amount, and if you
Speaker 1: just type in the amount, you like override some of
Speaker 1: the zeros and you sent out trillions of dollars and
Speaker 1: that's what happened, which is just like you could just
Speaker 1: not do that, You just not have it automatically populate
Speaker 1: with fifteen zeros and then like you've saved yourself a
Speaker 1: problem right there. So it is just like a lot
Speaker 1: of it I think is like software design. Yeah, and
Speaker 1: it's not always a priority for the CEO of a
Speaker 1: bank to be like we need the like internal software
Speaker 1: to be more user friendly, but you know it might
Speaker 1: be for Jane Fraser at.
Speaker 2: This point, you know, I would imagine it's moved up
Speaker 2: the priority list a few notches.
Speaker 1: Like someone is asking Jane Fraser about the you know,
Speaker 1: user interfaces on the payment software.
Speaker 2: Maybe we'll get some answers regulator, maybe like, yeah, I
Speaker 2: do love the point that you made in Money Stuff
Speaker 2: that maybe this is a reason actually to bank with City.
Speaker 2: You're basically by opening up a with them, buying a
Speaker 2: lottery ticket.
Speaker 1: Stereotypically, banks sometimes make mistakes. Yeah, I write about a
Speaker 1: bank doing some error, and people be like, I think
Speaker 1: you're being too generous to the bank. They never make
Speaker 1: errors in the customer's favor. It's always in favor of
Speaker 1: the bank. It's like, well, no city makes yours in
Speaker 1: the customers faver all the time. They don't like, necessarily
Speaker 1: get to keep the money. You probably shouldn't try to
Speaker 1: bank with a bank that makes mistake in payments all
Speaker 1: the time. That's more likely to end badly for you.
Speaker 1: But it would be kind of fun to get eighty
Speaker 1: one trillion dollars in your account.
Speaker 2: And what if it's like a really small amount, you know,
Speaker 2: language a casual like half million dollars that they would
Speaker 2: they even notice. I don't know.
Speaker 1: Just thinking about my account number by bank, which has
Speaker 1: nine digits, it should be nice.
Speaker 2: Do you want to say them here? Should be cool?
Speaker 1: My account number.
Speaker 2: Is twenty three and me, uh, segue this is I
Speaker 2: really like this story, mostly because when we were talking
Speaker 2: about this at my desk before we recorded this podcast,
Speaker 2: then I was like, you know what, don't talk to me,
Speaker 2: We'll just talk about it. In nineteen twenty three and
Speaker 2: meters is a really fascinating story because I think it's
Speaker 2: still a household name.
Speaker 1: It kind of is.
Speaker 2: And the last time I thought about it, it was
Speaker 2: going public via spack. It was twenty twenty one. Things
Speaker 2: were great, the market was frothy, and I didn't realize
Speaker 2: that it's been slowly in a death spiral since then.
Speaker 1: Yeah. I don't entirely understand it, but my impression is
Speaker 1: that like the recurring revenue of selling genetic dusts to
Speaker 1: be like you kind of only need to find out
Speaker 1: your ancestry once.
Speaker 2: Yeah, but there's so many people in the world people,
Speaker 2: But like.
Speaker 1: I also think that it's become less popular as people
Speaker 1: get worried about like privacy concerns and like they were hacked. Yeah,
Speaker 1: she took a bad databaseically get hacked, you know.
Speaker 2: Yeah, specifically in twenty twenty three, they were hacked.
Speaker 1: And I think the time before then they've never made money.
Speaker 2: Yeah, that's true. Yeah, And I was I was searching
Speaker 2: for a reason why because you think about I feel
Speaker 2: like it was really peak twenty seventeen, twenty eighteen, they
Speaker 2: were really popular as as gifts around the holidays. Remember
Speaker 2: Elizabeth Warren took a genetic test to prove that she
Speaker 2: had Native American heritage. That was basically the peak actually,
Speaker 2: because apparently twenty three and me and also their competitors,
Speaker 2: Ancestry being one of them, have just seen sales steadily
Speaker 2: declined since then.
Speaker 1: Yeah, and to their credit, they went public at the
Speaker 1: top and.
Speaker 2: The halcyon days in public in.
Speaker 1: Like twenty twenty one, a three point five billion dollar valuation.
Speaker 1: Oh know, anyway, I think they did this back mar
Speaker 1: journally twenty twenty one, and they had like a three
Speaker 1: point five billion dollar valuation. It's currently in the ballpark
Speaker 1: of one percent of that, so not great.
Speaker 2: I mean the shares are treating hundred two dollars right now.
Speaker 2: I think the absolute high was well above three hundred.
Speaker 1: Yeah stocks, but yes, that's right. Yeah. But so anyway,
Speaker 1: the founder and CEO and forty nine percent shareholder and
Speaker 1: Majiski wants to take it private. I don't actually know
Speaker 1: how much she cashed out of this, but like took
Speaker 1: it public at three point five billion dollars. Wants to
Speaker 1: take a private at not zero dollars, but like quite
Speaker 1: close to zero. She wants to pay public shareholders something
Speaker 1: like ten million dollars for the company, which is like
Speaker 1: forty one cents per share. And that is an interesting
Speaker 1: negotiation because she's the controlling shareholder, and you know, the
Speaker 1: board of directors is in charge of negotiating with her
Speaker 1: and trying to get a fair price for the public shareholders.
Speaker 1: I don't know what they think about the future of
Speaker 1: the business. Like she clearly thinks it's worth something because
Speaker 1: she wants to buy it and like put some more
Speaker 1: money into it. But she's offering ten million dollars to
Speaker 1: the public shareholders. By the way, that's much less than
Speaker 1: the current trading price of the stock. She's offering forty
Speaker 1: one cents per share it now at like a buck
Speaker 1: fifty or something like that. So she's offering a take
Speaker 1: on her you know, she's saying shareolders are diluted about
Speaker 1: the value of this company. I want to pay you
Speaker 1: much less. Part if I were a director, I'd have
Speaker 1: a really hard time accepting a deal like that, because
Speaker 1: like you're gonna get sued. You're saying, I want to
Speaker 1: sell this company for you know, a big discount. Not
Speaker 1: only too, it's like all time, Hi not only did
Speaker 1: Sie to its price today, it's like a tough deal
Speaker 1: to take, and so she offered not that deal but
Speaker 1: a similarly sort of like loaded negative premium deal last year,
Speaker 1: and the directors said no, and then they all quit
Speaker 1: because she's the controlling shareholder and like she could fire them,
Speaker 1: and so they were like, well, we're not going to
Speaker 1: take this deal, and so there's the only thing you
Speaker 1: really can do here as directors, and so they all quit,
Speaker 1: and so she was the only director of the company,
Speaker 1: and she went and appointed new independent directors and for
Speaker 1: a new much lower price to take the company private,
Speaker 1: and they all said no again this week, so they're
Speaker 1: back to the square one. They have it resigned.
Speaker 2: I was thinking she shouldn't, you know, do any elon
Speaker 2: musk and just get really friendly board members who maybe
Speaker 2: are related to her.
Speaker 1: Well, right, when all of the directors quit, she got
Speaker 1: to appoint the new directors. And there are two ways
Speaker 1: you can go with that. You can appoint your relatives
Speaker 1: who will then sell you the company at forty one
Speaker 1: cents a share and get sued. Or you can to
Speaker 1: point like reputable independent directors who like you know, you've
Speaker 1: had conversations with you hope that they will take your
Speaker 1: proposal seriously. You hope that they will see the reasons
Speaker 1: behind you're wanting to pay much less than the current
Speaker 1: price of the company and will take your deal. But
Speaker 1: you haven't specifically signed up to that because that looks bad.
Speaker 1: And so then if they agree to your deal, you
Speaker 1: look good, right, Like when you get sued, you can
Speaker 1: say no, no, these independent directors like really did their
Speaker 1: due diligence and accepted my deal. So I think that's
Speaker 1: what was happening here, is like these directors are not
Speaker 1: her relatives. They come from real places, Like they look
Speaker 1: like good independent directors who could consider her deal and
Speaker 1: if they signed off on it, it wouldn't be a rubber stamp.
Speaker 1: But then they didn't sign off on it. So oops.
Speaker 2: Yeah, And I mean, I don't know where this company goes.
Speaker 2: Obviously there's some deep fundamental flaws here.
Speaker 1: You occasionally see these take hunters. You see these deals
Speaker 1: where a company is not viable and someone will buy
Speaker 1: it for like much less than at stock price and say,
Speaker 1: we're gonna put a little bit more cash on the
Speaker 1: balance sheet, We're gonna keep the company alive. But like
Speaker 1: the shareholders are diluted and they're not getting that much
Speaker 1: money and the board will be like, yes, that's true.
Speaker 1: It sucks for the shareholders, but we're doing it. But
Speaker 1: it's like, that's a tough thing for a director to do,
Speaker 1: particularly if you were just apported to do the deal right.
Speaker 1: So it's it's like a tough spot, Like if she's
Speaker 1: right that it's kind of a melting ice cube and
Speaker 1: it's not worth what the public shaholders are paying for it,
Speaker 1: Like it's gonna be hard for her to persuade directors
Speaker 1: of that, even if it's true. And then like, you know,
Speaker 1: where do you go?
Speaker 2: Yeah?
Speaker 1: I think they're exploring other strategic alternatives, right, but it's
Speaker 1: tough to do that when you have a forty five
Speaker 1: percent shareholder.
Speaker 2: Yeah, I was thinking maybe they could pivot into dog
Speaker 2: DNA test kits. I know that that's still a very
Speaker 2: popular market. I think the company has warned that it
Speaker 2: needs to raise cash or find some solution or else
Speaker 2: it won't be around for much longer. So I know
Speaker 2: it'll be fascinating to follow. I mean, it just feels
Speaker 2: like a company that would naturally want to go private
Speaker 2: right now. And also I was surprised the question is the.
Speaker 1: Price you know and like? And it was just he
Speaker 1: does not think it's worth forty million dollars.
Speaker 2: Yeah, for a little bit. I mean she had a partner,
Speaker 2: and that's also part of the problem. Yeah, a new mountain,
Speaker 2: and I think like the bid that she offered the
Speaker 2: forty one cents a share, wasn't that eighty four percent
Speaker 2: or something below.
Speaker 1: The new Mountain bod which in turn was lower than
Speaker 1: the bid last year that the director's resigned over her.
Speaker 1: Bids have been getting lower, probably for reasons. Yeah, yeah,
Speaker 1: it looks bad. It's a bad process. Normally the board
Speaker 1: like negotiates you up here they're negotiating or down. Uh
Speaker 1: not great.
Speaker 2: I don't know. I mean I hope that the genetic
Speaker 2: testing universe continues to exist and perhaps thrive. Is because
Speaker 2: you think about true crime. I listen to a lot
Speaker 2: of true crime podcasts, and there have been instances where
Speaker 2: like these sort of kits where you can find your
Speaker 2: family members, long lost family members have been uncovered through
Speaker 2: little kids like this.
Speaker 1: I think I read an interview with her or she
Speaker 1: talked about that as a negative for sales because like
Speaker 1: you know, serial killer for sure, a little genetic testing
Speaker 1: and then like your cousin gets arrested in the serialcular.
Speaker 1: I wish I hadn't bought that Kip.
Speaker 2: It's good for society, maybe bad for sale. But again
Speaker 2: as someone who I don't know, maybe I am related
Speaker 2: to a serial killer, but I think that these should
Speaker 2: exist in some form. I think it was the Golden
Speaker 2: State killer who was found through something like this, which
Speaker 2: was wild. Yeah, it definitely didn't help the share price, right.
Speaker 1: It's not like a good advertisement for like the privacy
Speaker 1: practices of the genetic testing industry, you.
Speaker 2: Wouldn't offer up your saliva to potentially help capture a murderer.
Speaker 1: Even depends how close a family member this murderer is cousin.
Speaker 1: I feel like I don't know an advance with family
Speaker 1: member of mine did this murder.
Speaker 2: I mean, you'd probably have some suspicions, honestly, if you
Speaker 2: were in this scenario. I mean, I could probably guess
Speaker 2: you know what.
Speaker 1: You are you most likely to I don't have a
Speaker 1: problem with it, but I'm guessing none of my family
Speaker 1: members about everyone's like that. I can't till their cousin
Speaker 1: is the Golden stateuler.
Speaker 2: I can't wait to revisit the next city fat Finger
Speaker 2: where twenty three amigos when one of your cousins gets arrested. Yeah,
Speaker 2: moving swiftly along. I love this story from Emily Grafeo
Speaker 2: and Max Abelson. I know that they've been working on
Speaker 2: it for a long long time. A really great deep
Speaker 2: dive into First Trust, which is an ETF issuer based
Speaker 2: in thet This one actually you led money stuff with it,
Speaker 2: so this wasn't even my influence.
Speaker 1: Love an ETF story. ETF sales channels, right. One is advisors.
Speaker 1: Like a financial advisor has a client and the advisor says,
Speaker 1: this is the menu of stuff that I'm going to
Speaker 1: put you in, and the client is like, sure, whatever, right,
Speaker 1: And so the advisor just picks the ETFs, and the
Speaker 1: advisor is a fiduciary for the client and has an
Speaker 1: obligation to try to put the client and ETFs that
Speaker 1: are good, right, But like the advisor's pick media. And
Speaker 1: then the other kind is like Robin Hood right, Like
Speaker 1: there's an enormous mass of self right that investors, A
Speaker 1: lot of them buy vanguard s and P five hundred
Speaker 1: at ets right, Like, yeah, huge business of self directed
Speaker 1: investors buying cheap index ETFs. But also clearly a huge
Speaker 1: business or some business of like Robinhood people buying triple
Speaker 1: lever at ETFs and like weird stuff to make weird pets.
Speaker 1: And I don't really know how that gets sold. I
Speaker 1: don't know if that's like you're like searching Robinhood for
Speaker 1: fun tickers, or if it's like you're on Reddit reading
Speaker 1: about the latest cool ETF. But I don't have a
Speaker 1: great sense of like what the split is like away
Speaker 1: from like the vanguard s and P five hundred, like
Speaker 1: a weird ETF. Is that like always mostly an advisor product,
Speaker 1: or is that like reddit boards are selling that to
Speaker 1: robin Hood people.
Speaker 2: A weird ETF like the triple triple lever the buffers
Speaker 2: buffer feels like an advisor.
Speaker 1: Product, but I don't know.
Speaker 2: Yeah, I think that that's fair to say that buffers
Speaker 2: are popular with advisors, but sort of the shiny stuff,
Speaker 2: the funky, high octane, the.
Speaker 1: Thing that's like we double lever you and you put
Speaker 1: like one times your money in gold and one times
Speaker 1: your money in bitcoin, crazy product that seems like it
Speaker 1: could sell in Robinhood.
Speaker 2: Yes, that's probably where you're finding it. And even I
Speaker 2: mean some of the bitcoin your advisor's.
Speaker 1: Not doing that well your advisors. I don't know.
Speaker 2: But for example, I mean I wrote up Blackrock added ibit,
Speaker 2: their bitcoin ETF to their model a portion of their
Speaker 2: model portfolios for the first time. That was really advisor
Speaker 2: driven financial advisors asking Blackrock to add it because I
Speaker 2: want to put my clients in this.
Speaker 1: I understand that, Like I can see an advisor wanting
Speaker 1: to put their clients and IBT, but like when they
Speaker 1: launched ibet it was a but I'm saying.
Speaker 2: Like their clients, if they couldn't get it through their advisors,
Speaker 2: they would then they would probably go to a platform
Speaker 2: to buy it, right.
Speaker 1: I think of of a bitcoin ETF as being in
Speaker 1: the first instance a product for self directed retail because
Speaker 1: the first instance of like people want to buy that,
Speaker 1: they'll buy it on robin Hood and then like you know,
Speaker 1: later an advisor might add it in. But it's not
Speaker 1: like an advisor product. Yeah, the buffer I can see
Speaker 1: being an advisor.
Speaker 2: Product, yeah, big time, and an endowment product apparently first
Speaker 2: Trust first Yeah, get.
Speaker 1: Us distracted, but like First Trust that makes advisor products.
Speaker 2: Yea exactly. They have about the last I checked, about
Speaker 2: two hundred billion dollars in AUM their average fee though
Speaker 2: is seventy eight basis points, which is pretty high. The
Speaker 2: industry average is fifty eight the industry average. So that
Speaker 2: includes all the funky expensive leverage stuff in addition to
Speaker 2: the stuff that costs like three basis points. It's not no, no,
Speaker 2: it's just pure Yeah, it.
Speaker 1: Funds.
Speaker 2: I prefer this podcast like an hour before I have
Speaker 2: time to do that. But the point being that, yeah,
Speaker 2: well yeah, the point being that it's a relatively small issuer,
Speaker 2: but it makes a lot of money for its size
Speaker 2: because it has a pretty high fee. And there's just
Speaker 2: great quotes in here about the sales tactics that have
Speaker 2: been employed by First Trust, which, according to our own
Speaker 2: reporting and some other outlets, is actually under investigation by
Speaker 2: friendra for them.
Speaker 1: Right, because like the way you sell advisor products is
Speaker 1: some combination of like to give the advisor something cool
Speaker 1: to show to their client, like a buffer ETF is like, oh, look,
Speaker 1: I've given you stock upside with no downside. How nice? Right,
Speaker 1: But the other way is to like take the advisor
Speaker 1: out to dinner and be like, hey, why don't you
Speaker 1: sell my ets instead of Vanguard's ets? Because Vanguard doesn't
Speaker 1: take you out to dinner. Maybe they did probably not
Speaker 1: that much. And the implication of the Finner investigation and
Speaker 1: of the Bloomberg reporting is that First Trust leans heavily
Speaker 1: on entertainment. They are like quotes from the First Trust
Speaker 1: salespeople saying, this company was built on entertaining. It was
Speaker 1: and still is the one leg up on our competition.
Speaker 1: And another guy says, you're selling the most expensive ETF
Speaker 1: with mediocre performance, you better do something different. And that's
Speaker 1: what we did. And something different is like, so they
Speaker 1: took them at dinner. They had like conferences in nice places.
Speaker 1: So if you're in a advisor who like sold a
Speaker 1: lot of their atfs, you could go to the nice
Speaker 1: conference and they'd pay for you to go to a
Speaker 1: nice conference.
Speaker 2: Also, performance coach, performance came performance. Yeah, I'm not familiar
Speaker 2: with the concept. What is a performance coach in this context?
Speaker 1: Like one like negative mean way to characterize what's going
Speaker 1: on here is like they're like bribing the financially right,
Speaker 1: They're like giving the financial advisors stuff for the financial
Speaker 1: advisors that benefits the financial advisors, and then the financial
Speaker 1: advisors are putting the clients into like these ETFs that
Speaker 1: charge very high fees and don't have like amazing performance.
Speaker 1: But that's like to mean, like, what's kind of going
Speaker 1: on here is you're a financial advisor. You're sort of
Speaker 1: like holistically trying to be good at it, right, Like
Speaker 1: one thing that being good at it means is like
Speaker 1: putting your client and investments that go up or whatever
Speaker 1: that you expect to go with. But there are other things, right,
Speaker 1: and like one of them is like sales and like
Speaker 1: being personable and answering your clients questions and they have
Speaker 1: questions and just being like a good effective financial advisor
Speaker 1: and how do you do that or a variety of things.
Speaker 1: But like they're coaches who can tell you how to
Speaker 1: do that, right, who can tell you how to get
Speaker 1: better at your job. And so First Trust will go
Speaker 1: to the advisors and be like, we have this performance
Speaker 1: coach who will help you be a better financial advisor.
Speaker 1: And the financial advisors that's great. That's great for me.
Speaker 1: It's good for my clients if I'm better, right, if
Speaker 1: my performance is better. So they take the coaching, And
Speaker 1: is it possible that a condition forgetting the coaching is
Speaker 1: that they put their clients into the First Trust CTS. No,
Speaker 1: that's not what you're that's regulatorily is not allowed, but
Speaker 1: like through some implication, some internal emails that maybe there
Speaker 1: are some hint of that. But like the coaching, like
Speaker 1: if you're a financial advisor, you're not like experiencing that
Speaker 1: as like I am taking a bribe, right, Like you're
Speaker 1: experiencing that. It's like I'm trying to do a good
Speaker 1: job for my clients, and one way to do a
Speaker 1: good job is this coach will coach me. And like
Speaker 1: you know, like as part of doing a good job
Speaker 1: for my clients, I'm putting them in this expensive ETF.
Speaker 1: But it gets me this coaching that makes it so good.
Speaker 2: Yeah, don't worry about the performance.
Speaker 1: We've talked about this actually, like like Vanguard cutting fees, right,
Speaker 1: and you have mentioned there are people the financial advisors, yeah,
Speaker 1: or like I don't like Vanguard cutting fees because they
Speaker 1: don't invest in having a good website, right, answering questions
Speaker 1: Like that's a real legitimate concern for a financial advisor, right,
Speaker 1: is like my clients are in the CTF, Like if
Speaker 1: I have questions about the ETF, they have questions about
Speaker 1: the ETF. If I can't get an answer, like that's bad.
Speaker 1: Whereas a really expensive ETF like they've got customer service people.
Speaker 1: They answered the phone when the advisors call. That could
Speaker 1: arguably be good for the clients. That's expensive. The clients
Speaker 1: are paying for it, but like, right, you could imagine
Speaker 1: an advisor making a fiduciary decision saying, I want the
Speaker 1: client in this more expensive thing because the customer service
Speaker 1: is better, and like the client needs that too.
Speaker 2: Yeah. No, it's a it's a super fair point and
Speaker 2: easy to use, intuitive website goes a long way with
Speaker 2: some of the folks that are in these ETFs.
Speaker 1: I should say the Bloomberg story talks a little trash
Speaker 1: about the website for First Trust too, but that's not
Speaker 1: the point.
Speaker 2: It looks like a pixel hasn't changed since you know,
Speaker 2: it was first put up. This story is a joy
Speaker 2: to read the because it's so deeply reported. So let's
Speaker 2: talk about some of the emails that Max and Emily
Speaker 2: dug up. I liked this one in particular. I was
Speaker 2: thinking of you as I read this. Apparently, in one
Speaker 2: email five to six years ago, a managing director chided colleagues,
Speaker 2: writing that pay to play is obviously illegal, but we
Speaker 2: have wholesalers, which means salespeople doing it repeatedly, So there
Speaker 2: you have it.
Speaker 1: I wrote about this with some sympathy because, like, if
Speaker 1: you're a person at a financial firm and you notice
Speaker 1: that your colleagues are doing bad stuff, it's very tempting
Speaker 1: to email your colleagues to say you're doing bad stuff,
Speaker 1: please stop it. It's illegal, right, Yeah, Like that's a
Speaker 1: good email to send, but it's not really because like
Speaker 1: then you have an email you have a record of,
Speaker 1: like your colleagues are doing bad stuff. Even if they
Speaker 1: knock it off immediately, it's a bad thing to have
Speaker 1: an email, And if they don't knock it off immediately,
Speaker 1: it's much worse.
Speaker 2: Yeah, I hope I.
Speaker 1: Uh on the phone and you say, hey, guys, knock
Speaker 1: it off.
Speaker 2: I always think, like I would hate to get my
Speaker 2: email searched for so many reasons, but also like for
Speaker 2: telling my auditor it's illegal for you to edit my
Speaker 2: piece this much. It's a crime actually to limit yes, exactly,
Speaker 2: but you know, some things look different under different lights.
Speaker 2: I don't think that this email was a joke.
Speaker 1: Though I don't think it was a joke either. Yeah,
Speaker 1: I think the the rest of the reporting.
Speaker 2: Is, like, you know, I'm not saying it's a joke,
Speaker 2: just to be clear, just to draw I'm just drawing
Speaker 2: a contest between what I said and what this email said.
Speaker 2: I think geography is really important here. I think it
Speaker 2: came through in the piece as well. But certainly, you know,
Speaker 2: talking to Emily about this, we sit back to back
Speaker 2: and a lot of the ogs in the ETF world
Speaker 2: happened to come from Wheaton, Illinois or around it. And
Speaker 2: I think that is also very important too. As that
Speaker 2: person who quoted said, we've always been about entertainment. The
Speaker 2: fact that First Trust was located in sort of a
Speaker 2: flyover zone allowed First Trust to just really run this
Speaker 2: industry wh it comes to places like Dayton, Ohio, Whichita, Kansas,
Speaker 2: et cetera, which I think is interesting. I think about
Speaker 2: geography a lot because also the vanguards of the world,
Speaker 2: like Vanguard specifically isn't on Wall Street.
Speaker 1: Yeah, but like again, like the thing they're doing is
Speaker 1: covering the financial advisor in Dayton, right. Yeah, they're like
Speaker 1: going to that person and they're buying them stake or whatever,
Speaker 1: but they're also like talking to them and being like, yeah,
Speaker 1: how can we help you? And that advisor is going
Speaker 1: to naturally be in cliented to put their clients into
Speaker 1: the ets of a firm that talks to the advisor
Speaker 1: and listens to their concerns. Then a Vanguard fund where
Speaker 1: Vanguard never talks to him, but like, you know, they
Speaker 1: charge one basis plan, so it's.
Speaker 2: Like yeah, or you know, black Rock isn't flying out.
Speaker 1: To It's like the coverage is not a straightforward like
Speaker 1: pay to play, right, It's like something a little different.
Speaker 1: It's like coverage. It's like paying attention to the advisors
Speaker 1: and like creating good feelings that the advisors like. Arguably
Speaker 1: that's bad, right, Like arguably the advisors of producie for
Speaker 1: the client they should only be concerned with, like very
Speaker 1: specifically what is the best ETF for the client's portfolio.
Speaker 1: But like they could take a more holistic view and
Speaker 1: be like, well, you know, I'm getting service that allows
Speaker 1: me to help my client, and so I'll put them
Speaker 1: in the more expensive ETF.
Speaker 2: I don't know, Well, we'll see.
Speaker 1: I do want to say a reader email. The three
Speaker 1: remind me of a Charlie Munger anecdote. Charlie Munger would
Speaker 1: ask business school students, is it possible for a company
Speaker 1: to like raise the price of its service and thereby
Speaker 1: increased sales. And you know, people think about it and
Speaker 1: they'll be like, well, you know, raising the price can
Speaker 1: signal higher quality and so people might buy more of it,
Speaker 1: and like there's examples of that, like in like, you know,
Speaker 1: beer marketing. But I think Charlie Munger points out also
Speaker 1: that like raising the price can give you more money
Speaker 1: to like effectively bribe the sales channel to like pay
Speaker 1: more to sales people, pay more to intermediaries who will
Speaker 1: then put the ultimate buyer into the product. And you
Speaker 1: see that here, right, Like Vanguard has a good business
Speaker 1: of selling ETFs at like very very low prices, but
Speaker 1: like there's also a business to sell ats at very
Speaker 1: high prices and invest the money into a sales process.
Speaker 1: And that's kind of what's arguably happening here.
Speaker 2: Well that's the thing. If there's one takeaway from this
Speaker 2: other than maybe don't you pay to play, also don't
Speaker 2: get divorced. The reason that this came to light the
Speaker 2: man who runs First Trust, his name is Jim Bowen.
Speaker 2: He got divorce and it came to light in his
Speaker 2: ex wife's lawyers asking for more money that he's apparently
Speaker 2: making a ton of money like Jamie Diamond level money, maybe.
Speaker 1: Like thirty four point eight million dollars in twenty twenty two.
Speaker 1: It's the thing that's like wild money, like in weird
Speaker 1: pockets of asset management.
Speaker 2: So apparently her lawyers honed in on his expenses at
Speaker 2: restaurants in Naples, Florida in twenty twenty one, asking about
Speaker 2: more than one hundred and forty seven thousand dollars spent
Speaker 2: at Sea Salt, an additional one hundred thousand dollars spent
Speaker 2: at Continental steakhouses, also seventy thousand dollars spent at seafood places,
Speaker 2: and he explained that I'm dining, I'm entertaining in twenty
Speaker 2: twenty two in a court appearance, and then his ex
Speaker 2: yfe attorneys asked him on the stand in the same
Speaker 2: year whether that's seventy thousand dollars alcohol bill at the
Speaker 2: Naples Ritz Carlton was related to First Trust. He answered,
Speaker 2: mm hmm, Is that a yes? The lawyer asked, that's
Speaker 2: a yes. The judge asked yes. Bowen said, so that
Speaker 2: was kind of the smoke around this fire.
Speaker 1: That's going to be like the alcohol bill for the
Speaker 1: money stuff party from so my favorite expense from the
Speaker 1: divorce proceedings. Yeah, he spent like forty eight hundred dollars
Speaker 1: at ar Mez one year on a hall. It included scarves,
Speaker 1: he said were for workers in Chicago's hotels and restaurants,
Speaker 1: so not for financial advisors. No, this is like he
Speaker 1: takes financial advisors out to dinner at hotels and restaurants
Speaker 1: in Chicaio and he says, some of my best customers
Speaker 1: are high maintenance, and these people, meaning the hotel and
Speaker 1: restaurant workers, are the ones that handle the high maintenance issues.
Speaker 1: So like basically he takes like high maintenance customers to
Speaker 1: like fancy restaurants in Chicaio, and the waiters take care
Speaker 1: of these people, and then he gives the waiters as scarves.
Speaker 1: It's like a third level business expect It's very generous.
Speaker 2: Gotta give it to him.
Speaker 1: No, it's like it's very smart. It's like it's like, Okay,
Speaker 1: I want to sell ETFs to retail investors in Dayton, Ohio.
Speaker 1: How should I do that? I should buy fancy scarves
Speaker 1: for waiters in Chicago because I'm going to take the
Speaker 1: advisors of those people in Dayton to restaurants and I
Speaker 1: want them to be well treated and so like. It's
Speaker 1: like the sort of third level of paying for like
Speaker 1: the people to that will ultimately trickle down to like
Speaker 1: the ETF sales.
Speaker 2: I'm not much of a seafood gal, but I would
Speaker 2: have loved to be at one of these dinners. Sounds
Speaker 2: like a blast, really good service.
Speaker 1: And that was The Money Stuff Podcast.
Speaker 2: I'm Matt Livian and I'm Katie Greifeld.
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Speaker 1: The Money Stuff Podcast is produced by Anna Maserakus and
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Speaker 1: Thanks for listening. To the Money Stuff Podcast. We'll be
Speaker 1: back next week with more stuff.
Speaker 2: I have a party to go get ready for. Actually,
Speaker 2: so you do too.
Speaker 1: I'm not gonna make it.