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Speaker 2: ever want to hear Malvine just inhaling soup.
Speaker 1: I want to be clear that I was exaggerating my
Speaker 1: slurping there for the mic.
Speaker 2: That's what ASMR is, to exaggerate your sounds. At least
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Speaker 1: I'm like aware of the SMR with us.
Speaker 2: I see parodies of it on TikTok, like people really
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Speaker 1: of this podcast.
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Speaker 1: Hello and welcome to the Money Stuff Podcast, your weekly
Speaker 1: podcast where we talked about stuff related to money. I'm
Speaker 1: Matt Levine and I write the Money Stuff column for
Speaker 1: Bloomberg Opinion.
Speaker 2: And I'm Katie greifeld a reporter for Bloomberg News and
Speaker 2: an anchor for Bloomberg Television. You just took a sip
Speaker 2: of water off mic, and I.
Speaker 1: Feel like, yeah, I'm not, in general trying to make
Speaker 1: mouth poises throughout the podcast.
Speaker 2: That's what the podcast is, just mouth.
Speaker 1: That's the title.
Speaker 2: All right, one thing, We're done here. So I don't
Speaker 2: own a home. I would really like to and maybe.
Speaker 1: But you're not forty yet, which is like the median
Speaker 1: age of.
Speaker 2: I know, I know, I think it's thirty nine.
Speaker 1: But you know, anyway, what would make your home more affordable.
Speaker 1: It's probably not a fifty year mortgage. But that's like
Speaker 1: been in the news this week.
Speaker 2: It's been in the news.
Speaker 1: Trump tweeted about our about it or whatever he.
Speaker 2: Did he did. Did you see the Politico story on
Speaker 2: the TikTok of how it came to be?
Speaker 1: It's so good. It's because it's like a political story
Speaker 1: that's like the Trump administration is just a snake pit.
Speaker 1: And so it's like all the people who don't like
Speaker 1: Bill Poulty, who is the head of the Federal Housing
Speaker 1: Regulator and a real you know, publicity hound, Bill Bulting
Speaker 1: like apparently shut up to a golf game with Trump
Speaker 1: with like a giant poster board saying like Franklin Roosevelt
Speaker 1: invented the thirty year mortgage, Donald Trump invented the fifty
Speaker 1: year mortgage. And Trump was like, great, I'll tweet about it.
Speaker 2: I have the details. It was a Saturday evening, it
Speaker 2: was not during a golf game, but it was at
Speaker 2: President Donald Trump's Palm Beach golf club. It was a
Speaker 2: three x five poster board. Sure, and you're right in
Speaker 2: that FDR appeared below thirty year mortgage and there was
Speaker 2: a photo of Trump below fifty year mortgage and the
Speaker 2: headline was great American President. Right.
Speaker 1: So that was enough for Trump to tweet about it
Speaker 1: and be like, oh, yeah, that's all the policy analysays
Speaker 1: I needed to back a fifty year mortgage. And then,
Speaker 1: like other people in Tromp administration, went to political and
Speaker 1: are like he sold potus a bill of goods that
Speaker 1: wasn't necessarily accurate, and I don't know, they said about
Speaker 1: your other nasty things about Pulty, like you know, yeah,
Speaker 1: recorded in Politico.
Speaker 2: Yeah, it's funny because it's showing up in the stock market.
Speaker 2: We're recording this on Thursday and at least right now,
Speaker 2: shares of Fanny May and Freddie Mack apparently they're falling
Speaker 2: in a big way because the word on the street
Speaker 2: is that Pulty is falling out of favor with the administration,
Speaker 2: which is probably I don't know nothing's real until it is.
Speaker 2: But it's funny to see shares actually.
Speaker 1: React, right, And it's such like a bank shot. It's
Speaker 1: not like would a fifty year mortgage be good for Fanny?
Speaker 1: Would it be bad for Fanny? It doesn't matter. Like
Speaker 1: I've written about this for literally a decade, one day
Speaker 1: Fanny and Freddie will be released from government conservatorship. But
Speaker 1: you could always make money by betting against the being
Speaker 1: in the next year. Like for the last ten years
Speaker 1: people said, oh, it can't last forever, they have to
Speaker 1: be released. But so like there was like a thesis
Speaker 1: that Pulty would be the one to crack it open
Speaker 1: and actually.
Speaker 2: Make it happen over the line.
Speaker 1: And now if both out of favor, then I don't know,
Speaker 1: I still think one day they're going to be released.
Speaker 2: Well, it's funny because you saw such a big run
Speaker 2: up and shares on this idea, and to your point
Speaker 2: that you can always make money betting against that idea. Apparently,
Speaker 2: shares of both have lost about fifty percent since their
Speaker 2: September peak, so just in the last two months or so.
Speaker 2: It's pretty amazing, though, that the pushback to the idea
Speaker 2: of a fifty year mortgage has been pretty bipartisan. Oh yeah,
Speaker 2: it's a terribly tell me why.
Speaker 1: Well, Okay, the idea of fifty year mortgage is that
Speaker 1: if you spread out your payments over fifty years instead
Speaker 1: of thirty years, your payments will be lower.
Speaker 2: This sounds good and.
Speaker 1: Like, you know, a normal assumption to like you'd save
Speaker 1: like ten or fifteen percent on your monthly mortgage payment.
Speaker 1: And so if people think about affordability of homes as
Speaker 1: being mainly a matter of the monthly payment they could make,
Speaker 1: then cutting fifteen percent off your monthly payment makes homes
Speaker 1: more affordable. Yeah, and if people are worried about home affordability,
Speaker 1: the is a good policy. There are various problems with that,
Speaker 1: one of which is that you have to have your
Speaker 1: mortgage for fifty years, and so, like you don't build
Speaker 1: up equity, you're spending a lot more on interest. You know,
Speaker 1: people are like it doubles the cost of interest you
Speaker 1: pay over the life of the one and so it
Speaker 1: feels even less like home ownership and more like just
Speaker 1: renting forever. But to me, that's not the big problem.
Speaker 1: To me, the big problem is like, and this is
Speaker 1: biased by my experience living in and around New York,
Speaker 1: but like where I live, housing is a positional good,
Speaker 1: and there are only so many houses, and people compete
Speaker 1: to buy them. And so if you just waved a
Speaker 1: magic wand and said houses will be ten percent more affordable,
Speaker 1: that people would still compete to buy them, and they
Speaker 1: would just bid them up more until they stopped being
Speaker 1: ten percent more affordable. Right, Like, the price of a
Speaker 1: house where I live is not determined by how much
Speaker 1: it costs to build a house. It's determined by, like
Speaker 1: you know, there's only so many houses, there's only so
Speaker 1: much land in desirable areas, and so people bid up
Speaker 1: the price of that. And so if you did something
Speaker 1: to make housing more affordable, you would just raise the
Speaker 1: price of houses till fully eliminate that affordability advantage, and
Speaker 1: so houses would be no more affordable. People like mey
Speaker 1: who own homes would make money because there'd be like
Speaker 1: a windfall one time gain, although then you'd have to
Speaker 1: go buy it. You know, if you moved, you'd have
Speaker 1: to buy a more expensive house, but like all of
Speaker 1: the affordability goals would be eliminated and you'd end up
Speaker 1: just having the same monthly payment but for fifty years
Speaker 1: instead of thirty years, which seems terrible. I think it's
Speaker 1: true everywhere, but like a lot of us housing is
Speaker 1: supply constrained, and you do like see this effect, right,
Speaker 1: Like people talk about student loans, right, Like, if you
Speaker 1: have government subsidies of student loans, what happens is not
Speaker 1: that it gets cheaper to attend college. It's that colleges
Speaker 1: raise their tuition to fully capture that subsidy, and it
Speaker 1: gets to be, you know, the same price to attend college,
Speaker 1: but the government is subsidizing it. And I think you'd
Speaker 1: see that here where if the default mortgage was fifty years,
Speaker 1: you would still kind of be paying the same amount
Speaker 1: per month, but nomeral house prizes will be higher.
Speaker 2: Yeah. Well, I mean make it about myself. I would
Speaker 2: like to buy a home. Rates are really high.
Speaker 1: I don't need they'd be higher for to your markets.
Speaker 2: Yeah, I don't need to buy a home, So we're
Speaker 2: kind of just timing the market waiting for rates to
Speaker 2: go down, but there has to be a bunch of
Speaker 2: people like me and do you think about Okay, rates
Speaker 2: go down, but then the people on the sidelines come
Speaker 2: in and they push up the price of the house,
Speaker 2: and I don't know, it probably ends up in the
Speaker 2: wash in terms of yeah, and how much of saving.
Speaker 1: It's not fully true that like house prices go up
Speaker 1: as rates go down, but it is like kind of
Speaker 1: true that, like, you know, you'd think lower rates would
Speaker 1: lead to more housing affordability, but like the summits that
Speaker 1: that gets washed out by raising the prices of houses. Yeah,
Speaker 1: it's the same basic mechanism.
Speaker 2: To your point that it probably feels like renting forever.
Speaker 2: There's a note from Compass point that was pretty crazy.
Speaker 2: The view of this analyst was that a fifty year
Speaker 2: mortgage offers quote home ownership via an indentured servitude contract,
Speaker 2: calling the concept a bad idea.
Speaker 1: Yeah, I agree with that, but I also like the
Speaker 1: difference in thirty ars and fifty years and that great like.
Speaker 2: Most that's what President Trump said, Yeah, just.
Speaker 1: Like back to use. It's a little thing I don't
Speaker 1: Most people don't live in their homes for thirty years, right,
Speaker 1: Like a thirty year MORTGAGEES is a way to sort
Speaker 1: of adjust the payments and ultimately, like you saw your
Speaker 1: house after seven years and you you know, cash out
Speaker 1: whatever the increase in the equity is. With a fifty
Speaker 1: year mortgage, you'd build the in round numbers zero equity
Speaker 1: in your first you know, seven years, and so you'd
Speaker 1: basically be cashing out the increase in the house price
Speaker 1: rather than you know, actually having a savings device. But
Speaker 1: it's not literal, and you know you don't you don't
Speaker 1: have to stay.
Speaker 2: There for fifty years. I'm sure a lot of people
Speaker 2: opened this analyst's research note though.
Speaker 1: So because it's said indentured it's hurt in the headline.
Speaker 2: Yeah, I would click on that.
Speaker 1: It's pretty good. I Do you want to talk about
Speaker 1: the other Bill Pulty ideas?
Speaker 2: Yeah, tell me about them.
Speaker 1: Well, so they're assumable and portable mortgages. Yes, you didn't
Speaker 1: about these ideas. People have been talking about this forever
Speaker 1: and like they exist in various pockets of the world,
Speaker 1: but they're not like the norm in US mortgages. But
Speaker 1: so in an assumable mortgage is like I move out
Speaker 1: of my house, you buy my house, I give you
Speaker 1: my mortgage and a portal mortrorgage. I move out of
Speaker 1: my house, I buy a different house, and I take
Speaker 1: my mortgage with me. Right, So, like if I have
Speaker 1: a three and a quarter percent mortgage, which.
Speaker 2: Katie, I do, okay less.
Speaker 1: With three and a quarter percent mortgage, and I want
Speaker 1: to move now, like whatever mortgage rates are, you know,
Speaker 1: six and change percent.
Speaker 2: Something like that.
Speaker 1: If I wanted to move, if I could keep my
Speaker 1: three and a quarter percent mortgage, that would be nice
Speaker 1: for me, right, And so in normal US mortgages now
Speaker 1: you can't, but like you know, there are places where
Speaker 1: you can't, and both He has talked about having some
Speaker 1: version of that in the kind of like Fanny and
Speaker 1: Freddie standardized US mortgage market.
Speaker 2: That makes sense, Yeah, sort of.
Speaker 1: It would be nice if you do it. The problem is.
Speaker 2: There might be more inventory because people wouldn't just sit
Speaker 2: on their houses for.
Speaker 1: Ye, that's true. It would like loosen up the market
Speaker 1: a little bit.
Speaker 2: Yeah.
Speaker 1: Problem is that, like the US has a thirty year mortgage, yes,
Speaker 1: which has fast terms. It is a thirty year mortgage
Speaker 1: with a fixed rate. Normal you know people's mortgage thirty
Speaker 1: your mortgage with a fixed rate that is prepayable at
Speaker 1: any time without penalty, and that is a like in theory,
Speaker 1: a very valuable option. Right, if you borrow money for
Speaker 1: thirty years and at any point you can prepay it
Speaker 1: without penalty, then if like market insru's rates go up,
Speaker 1: you keep your mortgage and you're paying a low market rate.
Speaker 1: And if market rates go down, you prepay your mortgage
Speaker 1: and get a new mortgage and you get the lower rate.
Speaker 1: So if you're a mortgage investor, you're always on the
Speaker 1: wrong side of that. If rates go up, you hold
Speaker 1: a low market paper and if rates go down, you
Speaker 1: get you know, prepaid. And that's not really true because
Speaker 1: almost nobody optimally exercises their prepayment option because almost everybody
Speaker 1: who is a thirty year mortgage moves after like seven years,
Speaker 1: and so when they move, they have to prepay their mortgage.
Speaker 1: And so it's not the case that people only prepay
Speaker 1: when rates go down, right, It's like people prepay kind
Speaker 1: of randomly, And sometimes people who have three and a
Speaker 1: quarter percent mortgages move and prepay their mortgage and go
Speaker 1: get another six percent mortgage and grumble about it, but
Speaker 1: they have to do it. Let the move for work,
Speaker 1: or whatever, right, and if you got rid of that,
Speaker 1: then the prepayment option would be a really valuable option,
Speaker 1: and that would make it would be really bad for
Speaker 1: mortgage investors and make mortgages much more expensive, I think,
Speaker 1: because you'd have to price that option right, because people
Speaker 1: would never prepay except when rates went down, and so
Speaker 1: you'd always have kind of the wrong way interest rate
Speaker 1: risk on your mortgage.
Speaker 2: And how do you feel about assumable mortgages.
Speaker 1: It's the same story, but either way, the point is
Speaker 1: that if you have a below market mortgage, someone can
Speaker 1: keep it right. Yeah, And like you know, assumable mortgage
Speaker 1: is like you take my blow market mortgage, but like
Speaker 1: presumably you pay me for that, right, So it's the
Speaker 1: same basic idea.
Speaker 2: I would like to take it without paying you.
Speaker 1: I understand.
Speaker 2: Okay, that could have I mean, something could have happened
Speaker 2: to here anyway. I don't want to move to your house, though,
Speaker 2: I'm sure it's great. It's not dead possums.
Speaker 1: And that's right, we've talked. Its only bad things about
Speaker 1: my house.
Speaker 2: No, I see it on Instagram sometimes.
Speaker 1: You know what, I have a have a really good
Speaker 1: mortgage rate.
Speaker 2: Yeah, yeah, that's probably Yeah, I want to die in
Speaker 2: New Jersey. Though, what do you want to talk about now?
Speaker 1: I don't know, you talk about proxy advisors?
Speaker 2: Yeah, why not? This is a fun conversation on the
Speaker 2: heels of, of course, the Tesla vote Elon Musk's compensation package.
Speaker 1: Yeah, there's two praxy advisors. I mean there's more than two,
Speaker 1: but there's two for practical purposes, and they're called ISS
Speaker 1: IS in Distitutional Shareholders Service and Glass Lewis, and they're
Speaker 1: in the business of telling investors how they should vote
Speaker 1: on proxy vote and you almost never hear about it
Speaker 1: because it doesn't matter. It's like all these like advisory
Speaker 1: practice votes at companies you don't care about. And then
Speaker 1: every once in a while, not that infrequently, Tesla's like,
Speaker 1: we'd like to give Elon Musk at trillion dollars, what
Speaker 1: do you think shareholders? And then Glass Lewis and ISS
Speaker 1: say no. Of course they say no because, like they
Speaker 1: are professionals in the business of corporate governance, and they
Speaker 1: have certain professional norms and expectations, Like they go to conferences,
Speaker 1: they talk to like minded people who are interested in
Speaker 1: corporate governance. And if you ask anyone interested in corporate
Speaker 1: governance should we pay the CEO at trillion dollars. They'll say, no,
Speaker 1: that's not a good thing. And then Tesla is like
Speaker 1: a different kettle of fish. Right, Like, Tesla has investors
Speaker 1: who like Elon Musk, and he's like, I want a
Speaker 1: trillion dollars. I'm like, great, here, I have a trillion dollars.
Speaker 1: But Class Lewis and I as us don't want that,
Speaker 1: and so they say no, and then nobody cares because
Speaker 1: Tesla's investors some of them follow Glass Lewis and Is
Speaker 1: as recommendations, but most of them are And so Tesla
Speaker 1: voted in favor of giving Elms bags of money, but
Speaker 1: el Ms got mad.
Speaker 2: Yeah.
Speaker 1: I think there's a widespread you know, kind of like
Speaker 1: right wing coded being mad at Glass Lewis and Iss
Speaker 1: because they tell people how to vote on corporate shareholder votes.
Speaker 1: And corporate shareholder votes, a lot of them are about
Speaker 1: shareholder proposals, like you should write a report about how
Speaker 1: much carbon you produce. Right, It's very like environmental and
Speaker 1: social coded, and so these firms sometimes tell shareholders you
Speaker 1: should vote in favor of writing a report on carbonations.
Speaker 1: So there's this perception that they're like kind of esg
Speaker 1: ish that they care more about environmental, social, and governance
Speaker 1: issues than like, you know, the Trump administration or the
Speaker 1: Republican Congress people do. And so there's the sense that
Speaker 1: like they have too much power and they push companies
Speaker 1: to be more left wing than they otherwise would be.
Speaker 1: So there's like an effort to rain them in, and
Speaker 1: you've seen that this week with like the Wall Street
Speaker 1: Journal reporting that the Trump White House is contemplating some
Speaker 1: sort of executive order too in some way rein in
Speaker 1: the proxy advisors, right, and then also there's a report
Speaker 1: that the Federal Trade Commission is investigating them for anti
Speaker 1: trust problems.
Speaker 2: Yeah, basically whether they're breaking anti trust laws related to
Speaker 2: how they advise on proxy issues such as climate and
Speaker 2: social related policy.
Speaker 1: Yeah, it's not clear what the anti trust problem is. Yeah,
Speaker 1: there was a House hearing on you know, anti trust
Speaker 1: in the proxy advisors a few months ago. And the
Speaker 1: kind of thrust there is that there are only two
Speaker 1: of them, and they somehow stifle competition or have bought
Speaker 1: up competitors so that there's only two proxy advisors. And
Speaker 1: the world would be a better place if there was
Speaker 1: a lot of proxy advisors. I don't think that's really
Speaker 1: the problem. I think the problem that people worry about
Speaker 1: is that, however many you know, two or three or
Speaker 1: ten proxy advisors, the proxy advisors have theoretically outside impact
Speaker 1: because they tell shareholders of every company how to vote. Like,
Speaker 1: the market is not for proxy advisory services, the market
Speaker 1: is for every public company. I also think that, like,
Speaker 1: there are only two proxy advisory services that are big,
Speaker 1: but how many should there be?
Speaker 2: Kind of reminds me of ratings agencies, because there's three
Speaker 2: of them.
Speaker 1: It's very similar.
Speaker 2: Yeah, yeah, there's more than three, but there.
Speaker 1: Is more competition in ratings agency. People worry that it's
Speaker 1: an olocopoly, but it's more competitive than in proxy advisory
Speaker 1: And I think one reason for that is, like.
Speaker 2: Ratings keep it in.
Speaker 1: I don't even know what that was. Ratings is ratings
Speaker 1: are intuitively important. People care about the credit worthiness of
Speaker 1: their loans and whatnot. I've written this week one reason
Speaker 1: that every investor a sources it's proxy voting decisions to
Speaker 1: to proxy advisory services. The stuff doesn't matter. Like, you
Speaker 1: know you own like zero point one percent of the
Speaker 1: shares of some public company, you know you own five
Speaker 1: hundred companies. They each have like ten share advisory shareholder
Speaker 1: proposals each year, your vote like one, you're not going
Speaker 1: to change the outcome of the vote, and to the
Speaker 1: outcome of the vote doesn't have any practical effect, and
Speaker 1: so it's kind of crazy to spend a lot of
Speaker 1: time thinking about it, and so you outsource it to
Speaker 1: people who can think about it on behalf of everyone,
Speaker 1: and the number of people that you need to do
Speaker 1: that is the high.
Speaker 2: Yeah. Well, when you said it doesn't matter.
Speaker 1: This is like my thesis, like people care about this
Speaker 1: a lot.
Speaker 2: Yeah, but like there's very rarely a.
Speaker 1: Practical implication like mergers. Right, Like mergers, there's a shareholder
Speaker 1: vote and every so often it's contested and like class
Speaker 1: lewists or iss will have a view, but often in
Speaker 1: those cases, like the shares are kind of held by arbitration.
Speaker 1: As anyway, who have there view? You know the Elin
Speaker 1: Muss compensation. Every couple of years, there's a meaningful we'll
Speaker 1: be here, got there, But it's a lot of routine stuff. Yeah,
Speaker 1: it's not like never impactful, but it's almost never impactful.
Speaker 2: Well that made me think of, you know, whether or
Speaker 2: not it even matters whether their recommendations matter or not
Speaker 2: because you think about the experience with Tesla, and Tesla
Speaker 2: is a unique beast. But I've seen stats that like
Speaker 2: thirty percent of their shareholder base is retail. Both of
Speaker 2: these proxy advisors recommended passing this package. It obviously passed regardless,
Speaker 2: So like how much do their recommendations even matter in
Speaker 2: this day and age.
Speaker 1: Well, so a couple of things. One is that their
Speaker 1: recommendations used to matter more, and now like more big
Speaker 1: asset managers because of sort of a pressure campaign about
Speaker 1: this over the last few years. Now more big asset
Speaker 1: managers like no, no, no, we make our own decisions.
Speaker 1: We don't look at ISS our Glass list. Also, ISS
Speaker 1: and Glass Lewis have kind of backed away from having
Speaker 1: a house view and to get ahead of this. And yeah,
Speaker 1: like there's you know, places like Tesla where it's a
Speaker 1: lot of retail shaholders who don't care abouts and classes.
Speaker 1: For the most part, it's really like it's not the
Speaker 1: biggest asset managers, it's not retail. It's kind of smaller
Speaker 1: asset managers in the middle who tend to defer to
Speaker 1: class Lewis and as more. But the other thing is
Speaker 1: like they tend not to defer to them as much
Speaker 1: on huge economically meaningful decisions that affect big companies that
Speaker 1: make up big portions of their portfolios. Right, if you believe,
Speaker 1: like Elon Musk is gonna leave Tesla, if you vote
Speaker 1: against the package, then you will make your own decision
Speaker 1: about that. Yeah, not just do whatever iss is. But
Speaker 1: you have four hundred other companies where they're like, oh,
Speaker 1: we have like a shareholder proposal on our greenhouse gas emissions,
Speaker 1: and you just like check a box. Right, So, like
Speaker 1: I think their recommendations have more impact on like lower
Speaker 1: profile votes, and there are just so many lower profile
Speaker 1: votes and those boots are lower profile. But they also
Speaker 1: like they annoy corporate CEOs when like fifty or thirty
Speaker 1: or ten percent of their shareholders vote in favor of
Speaker 1: like having a report on greenhouse gas emissions. Like that's
Speaker 1: annoying to a CEO, and so they complain to like
Speaker 1: their Congress per Center, to the FTC or whatever, like, ah,
Speaker 1: these guys are, you know, interfering in our business, but
Speaker 1: it's not that impactful.
Speaker 2: Yeah, that's funny. Something I wondered in all of this,
Speaker 2: and I didn't take the time to look it up.
Speaker 2: Are Glass Lewis and Iss ever in conflict, Like do
Speaker 2: they ever split or do they always sort of recommend
Speaker 2: as a block.
Speaker 1: I haven't looked at up you there. I'm certain that
Speaker 1: they have split. Yeah, it would be crazy if they
Speaker 1: never split.
Speaker 2: It would be crazy, wouldn't it.
Speaker 1: But as I said, like these people come from a
Speaker 1: professional interest in corporate governance, and there are sort of
Speaker 1: like standard views on what's good governance. Right, I think
Speaker 1: those standard views are not like not everyone agrees with them, right,
Speaker 1: Like it's classically good governance too. For instance, have a
Speaker 1: board chair who is not the CEO, right, so the
Speaker 1: board has more like effective oversight over the CEO, and
Speaker 1: so ISAs in Glass Lives, pretty not always, but pretty
Speaker 1: regularly recommend voting in favor of splitting the board chair.
Speaker 1: And see, yeah, but you know, you look at like
Speaker 1: there are a lot of like various six us whole CEOs.
Speaker 1: We're like, no, I want to be the chair of
Speaker 1: my company because I want to I'm the right person
Speaker 1: to run this company, and I want to supervise the
Speaker 1: board too, And like that's not like a crazy view,
Speaker 1: it's not like quote unquote good governance, but it's a
Speaker 1: thing that like some shareholders and you know, agree makes
Speaker 1: sense with some CEOs. So a lot of stuff like
Speaker 1: that where it's like there's a classic view on good
Speaker 1: governance that is not always applicable and like you know,
Speaker 1: Iss and glass Lewis or a little more on the
Speaker 1: side of you know, classic good governance rather than what
Speaker 1: shareholders want for a particular company. I want to say
Speaker 1: one other thing about so, like this story is like
Speaker 1: a lot of it is about Iss and glass Lewis,
Speaker 1: but not all of it. Like there's also the very
Speaker 1: closely related issue of index fund managers like black Rock
Speaker 1: and Vanguard, who used to defer more to Iss and
Speaker 1: Glass Lewis now kind of have their own house views
Speaker 1: but are kind of similar in that they like affect
Speaker 1: the votes of huge portions of every public company. Yeah reluctantly, Yeah,
Speaker 1: I sas and Glass Lewis too, reluctantly know it collect
Speaker 1: views for like managing voting. No, it's not, it's not
Speaker 1: like they do it.
Speaker 2: They do.
Speaker 1: It's a lot of like administrative work. It's a lot
Speaker 1: of like they help companies like actually do the process
Speaker 1: of voting. Right, So like if they could just like
Speaker 1: flip a coin and be like you should vote, you know,
Speaker 1: for this, or they don't care that much about the
Speaker 1: substantive recommendations. They care about like getting paid to do
Speaker 1: the sort of administrative work, and so they are backing
Speaker 1: away from doing some of the substantive recommendations and having
Speaker 1: a house sept.
Speaker 2: I didn't mean to smirch them. I'm sorry.
Speaker 1: It's so like black Rock and Vanguard and State Street,
Speaker 1: you know, control huge blocks of every public company famously
Speaker 1: and vote, and people get mad at them for how
Speaker 1: they vote, and like there's this view that they're too
Speaker 1: left wing and blah blah blah. And so the reports
Speaker 1: about a potential executive order on this, it's not just
Speaker 1: about the proxy advisors, it's also about index line voting. Yeah,
Speaker 1: and I've never heard like a great solution for what
Speaker 1: they should do. But the report that I saw, like
Speaker 1: the Wall Street Journal, like there's talk of having them
Speaker 1: mirror their voting so that they can ask their you know,
Speaker 1: so if you're a black Rock, you have you know,
Speaker 1: thousands of clients and your index funds, and you ask
Speaker 1: your clients how would you vote? And you know, ninety
Speaker 1: nine point nine percent of them don't return the questionnaire,
Speaker 1: and like zero point one percent say I would vote
Speaker 1: in favorite management or whatever, and then I think the
Speaker 1: idea would be that the Index one managers would have
Speaker 1: to mirror the votes of their clients who responded, which
Speaker 1: is kind of a crazy outcome if you think about it,
Speaker 1: because the people who respond are going to be passionate, passionate.
Speaker 1: I was going to say cranks, passionate and nicer. So
Speaker 1: right now people complain about Black Rock, but black like
Speaker 1: the big index ones, mostly vote with management. Yeah, but
Speaker 1: if they had to ask their investors how would you
Speaker 1: vote and then get weird answers back, they would vote
Speaker 1: a lot more against management, and it would be kind
Speaker 1: of bad for corporate managers and kind of good for
Speaker 1: like activists shareholders.
Speaker 2: Yeah. Well, I wrote this at the end of October.
Speaker 2: Vanguard has this called Investor Choice, and I'm sure that
Speaker 2: Black Crock and State Street have similar initiatives as well.
Speaker 2: But this is recency biased because I wrote this story anyway.
Speaker 2: So basically it asks it's people who own shares of
Speaker 2: the index funds that are in this program, basically how
Speaker 2: they would like management to vote or how they would
Speaker 2: like the fun company to vote. They don't ask them
Speaker 2: about every thing. I believe it's like a range of
Speaker 2: choices as to you know, I want to maximize profits
Speaker 2: or I care about social issues, and then Vanguard votes.
Speaker 2: I think there's some subjectivity to that, but they vote
Speaker 2: based on what that shareholder selected.
Speaker 1: Yeah, but don't they vote that shareholder shares like in
Speaker 1: other words, like if they ask every shareholder and ninety
Speaker 1: nine percent of them don't answer, then the one percent
Speaker 1: get voted the way they want to. But the ninety
Speaker 1: nine percent Vanguard is not just mirroring the one percent, right,
Speaker 1: Like they're making their own decisions.
Speaker 2: I think it's somewhere between them. I don't remember the
Speaker 2: exact details.
Speaker 1: If you do full mirroring, then like the cranks get
Speaker 1: a lot.
Speaker 2: Of Yeah, I do like that. Yeah, but maybe that's
Speaker 2: how it should be. I don't know if you're.
Speaker 1: Argument right, like if you the people who care who
Speaker 1: pay attention to share I just like I come back
Speaker 1: to like, it is kind of irrational to pay attention
Speaker 1: to shareholder voting, so it's not really how it should be.
Speaker 1: To get the worst results if you let the people
Speaker 1: who pay attention to shareolder voting be the ones, this
Speaker 1: lad in the outcome. But there's not another way to
Speaker 1: do it. You need someone to pay attention to do it.
Speaker 2: Yeah, that's true, and maybe you should be rewarded for
Speaker 2: you taking the time to Karen answer the thing. Speaking
Speaker 2: of rewards, competition for talent reaches on.
Speaker 1: Yeah, this is a great story about Bradley Sacks that
Speaker 1: Business Insider about the talent wars at the hedge funds.
Speaker 2: It's like an evergreen story.
Speaker 1: It's an evergreen story. He quotes someone saying, you set
Speaker 1: up something to attract mercenaries, but now you want loyal soldiers.
Speaker 1: It doesn't work because, like, if you went to work
Speaker 1: at a hedgehund because they promised you fifty million dollars,
Speaker 1: you're probably a person who would go work at a
Speaker 1: different hedge fund if they promised you sixty million dollars, right, Like,
Speaker 1: probably you're there for the money, Like.
Speaker 2: Probably, yeah, yeah, that's really safe. That's fine.
Speaker 1: If you're working at a hedgehund for fifty million dollars,
Speaker 1: a lot of reasons to assume that you're there for
Speaker 1: the money, and so you could be lured away by
Speaker 1: a higher bidder. And that makes it frustrating. If you
Speaker 1: are the head of a hedge fund and you want
Speaker 1: to stop having constant bidding wars. I also, I hadn't
Speaker 1: really thought about it, but like he makes the point that,
Speaker 1: like there's an artificial constraint on hedge fund talent caused
Speaker 1: by the fact that everyone has these like super long
Speaker 1: gardening leaves. Yeah, and so basically like half of all
Speaker 1: hedge fund portfolio managers are on the beach at any
Speaker 1: given time, and so the price of hedgemen managers gets
Speaker 1: bid up because you can only get so many of
Speaker 1: them because the rest are on long term gardening leaves.
Speaker 3: Yeah, it's great, creates value, yes, artificial scarcity, and it's
Speaker 3: great because like like a stylized the fact of economic
Speaker 3: history is that after the Black Death in Europe, you know,
Speaker 3: labor or like farm hand wages went up because farmhands
Speaker 3: were so scarce that they could command a much higher wage.
Speaker 1: That's a very bad way to create scarcity in the
Speaker 1: labor market. The hedgemund manager way of half of you
Speaker 1: are on vacation at any time so the other half
Speaker 1: get paid more is like really nice. It's like you
Speaker 1: have a career where you get paid a lot because
Speaker 1: you're scarce, like artificially scarce, and also you get to
Speaker 1: take long vacations every couple of years.
Speaker 2: Yeah, I is. The Englander called it a talent bubble
Speaker 2: that's created by you know, you restrict supply.
Speaker 1: The other thing is like, I don't really understand why
Speaker 1: hedge fund talent is so exogenous and and elastic, like
Speaker 1: the article talks about it. Like some of these big
Speaker 1: multi strategy funds have set up you know, training academies
Speaker 1: they hire out of college. They like try to take
Speaker 1: unmolded clay and turn it into you know, hedge fund managers,
Speaker 1: like that should be possible. Why can't you teach someone
Speaker 1: how to manage a hedge fund? They can understand it's
Speaker 1: like hard, but you know, if you're paying the twenty
Speaker 1: million dollars, you get someone to do it.
Speaker 2: Yeah, I agree with you. You sounded a little bit like
Speaker 2: Elwood's there. So it kind of threw me for a loop. Okay,
Speaker 2: like it's hard, Like it's hard. Yeah, Yeah, I'm.
Speaker 1: Paying me twenty million dollars to manage a hedge fund.
Speaker 1: I'll do it for six months and then take two years.
Speaker 2: Regardingly, Yeah, but I feel like this story, I don't know.
Speaker 2: We talk about talent wars all the time. We talk
Speaker 2: about it when it comes to banking, we talk about it.
Speaker 2: When it comes to hedge funds, talk about it when
Speaker 2: it comes to AI. AI. We've talked about this before.
Speaker 2: It feels like a little bit more pure to your
Speaker 2: point that if a hedge fund pays you fifty million
Speaker 2: dollars to do hedge fund things, that probably you'll take
Speaker 2: an offer for sixty million dollars. But maybe with AI
Speaker 2: there is a little bit more of a mission statement
Speaker 2: and I want to save the world. Yeah, I don't
Speaker 2: know one thing that destroy it.
Speaker 1: One thing about AI is like hedge funds have been
Speaker 1: around and some before them for a long time, and
Speaker 1: like in the modern form for you know, years, maybe decades.
Speaker 1: AI is very new, and so it's very understandable that
Speaker 1: there is a hugely constrained to supply. Right, Like the
Speaker 1: number of people who went and got aiphds is not
Speaker 1: that high because that was kind of a specialized thing
Speaker 1: until it became you know.
Speaker 2: Also, if you got that PhD, how long before it's stale.
Speaker 1: I don't think it gets stale because I think you
Speaker 1: then work in AI and you would like work at
Speaker 1: the cutting edge of the field. But yeah, I mean, like, right,
Speaker 1: if you if you get that PhD and then spend
Speaker 1: twenty years, you know, doing something else. I'll get stuff.
Speaker 1: But I think that like the market did not produce
Speaker 1: that many aiphds because it wasn't a thing that got
Speaker 1: you paid hundred million dollars five years ago, and now
Speaker 1: that it is, I'm sure that one there will be
Speaker 1: you know, in the next ten years, there'll be more
Speaker 1: AI paches, and two they will perhaps have less pure motives,
Speaker 1: right because if you're you know, if you're a sixteen
Speaker 1: year old who's good at math, instead of thinking maybe
Speaker 1: one day or at a hedgehot now you're likeeah, maybe
Speaker 1: one day or at an AI start up and one
Speaker 1: hundred million dollars a year, So you'll get more supply
Speaker 1: and less purity. But like hedgehunts, they've been around for
Speaker 1: a while, Like you should it should equilibrate. I don't know.
Speaker 2: Yeah, Okay, that's foe all I have to say. Apparently
Speaker 2: there's a rocket launch that I forgot was happening. I forgot.
Speaker 1: Okay, I'm gonna just have some delicious And that was
Speaker 1: the Money Stuff podcast.
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