00:00:02 Speaker 1: Bloomberg Audio Studios. Podcasts. Radio. News. 00:00:08 Speaker 2: I never know how we should do the intros. 00:00:14 Speaker 1: Should I just, like, crawl up to the. 00:00:16 Speaker 2: Like, you know the Monty Python hits guy? No. In Monty Python's Flying Circus, many of the episodes begin with, like, this very long, faraway shot of a, like, a haggard, like, shipwrecked man. And he gets up to the camera, like, huffing and puffing, looking like he's about to die. And he says, it's. And then it cuts to the credits. 00:00:38 Speaker 1: That's really good. 00:00:39 Speaker 2: Anyway. 00:00:39 Speaker 1: That's me. 00:00:40 Speaker 2: That's you. I never know how to do intros because, like, we always do cold opens with Katie. But, like, it's weird to be, like, just. 00:00:47 Speaker 1: Chatting for a while. 00:00:48 Speaker 2: Stranger lady voice. And then be like, hello and welcome. 00:00:51 Speaker 1: Surprise, that wasn't Katie. 00:00:52 Speaker 2: I know, right? So. Hello and welcome to the Money Stuff podcast. 00:00:57 Speaker 1: Yes. 00:00:58 Speaker 2: I'm Matt Levine. I wrote the money stuff column for Bloomberg Opinion, and I'm joined here by my friend, Mary Childs. 00:01:05 Speaker 1: Hey. Hi. 00:01:06 Speaker 2: Do you want to, like, say your spiel? Do you want to, like. 00:01:10 Speaker 1: Introduce myself, maybe? 00:01:11 Speaker 2: Yeah, introduce yourself. 00:01:12 Speaker 1: Hi, I'm Mary Childs. I was a Bloomberg-er for six years. 00:01:17 Speaker 2: That's where we met. 00:01:17 Speaker 1: That's where we met. 00:01:19 Speaker 3: And I was until somewhat recently a host of Planet Money, NPR's twice-weekly economics podcast. I'm a little out of breath because I was late coming here. 00:01:27 Speaker 1: I sprinted. And I currently have a new show called Marian America, which is a weekly video first interview podcast, which is just a talk show. 00:01:38 Speaker 2: But on YouTube. But on YouTube. 00:01:40 Speaker 1: And we can't say talk show. 00:01:41 Speaker 2: It's too short. 00:01:41 Speaker 1: And we talk about business, economics, finance, and also culture. 00:01:45 Speaker 2: Yes, it's very good. 00:01:46 Speaker 1: Thank you. 00:01:47 Speaker 2: So I tell people the story of how we met, which is, I think, money stuff relevant. Mm-hmm. Which is, I believe, this may not be how we literally met, but, like, I started working at Bloomberg Opinion, and I was working not in this office. Mm-hmm. And I was reading about, I'm pretty sure, Codere. I think this was Codere. 00:02:04 Speaker 1: A Spanish gambling company. 00:02:05 Speaker 2: A Spanish gambling company that did some wild stuff to manipulate at CDS. 00:02:09 Speaker 1: Very fun times. 00:02:10 Speaker 2: And, like, some hedge fund person, someone told me something about it, and I was like, that's amazing. Mm-hmm. And I was like, who can I tell this? And so I called you up and I was like, can I just gossip with you about a credit default swap trade? And you're like, is it Codere? So you and I have been friends for a long time. It's true. And you have been a professional podcaster for some of that time. That's true. Also true. And during that time. You have never had me on a podcast, although now I have you on my podcast. 00:02:40 Speaker 1: I had a policy. 00:02:41 Speaker 3: I had a save Matt Levine for emergencies policy, but I guess I never had an emergency yet. 00:02:45 Speaker 2: Alas. Alas. Yeah. Anyway, what are you going to talk about? 00:02:49 Speaker 1: Well, you have the paper. 00:02:50 Speaker 2: I don't know. A lot of AI stuff. But one is, there was a great Bloomberg story last week about the effect of AI on mortgage refinancing. 00:02:58 Speaker 1: Yeah. 00:02:59 Speaker 2: It's based on this Morgan Stanley research. But so the idea is, broadly speaking, people do not refinance their mortgages optimally. 00:03:07 Speaker 1: They really don't. And it's a point of frustration for me personally. 00:03:10 Speaker 2: Why? 00:03:11 Speaker 3: I was on a plane the other day and this man was telling me for some reason, I don't know what I did to him, but he was telling me his mortgage rate and that he needs to buy a bigger house. 00:03:18 Speaker 1: And I was like, what is it? And he was like, it's like two point. And I was like, do not sell that house. He can't sell it. He's going to do it. He wouldn't listen to me. I feel like I'm going one by one and meeting people with low interest rate mortgages, rates that are lower than where rates are today. So if they buy a new house, they're going to get a higher rate. Sorry, I forgot what audience this is. I don't need to say that. 00:03:37 Speaker 2: Okay, so that's true. But that I sympathize with because sometimes you need a different house. 00:03:42 Speaker 1: No, build onto your house. 00:03:44 Speaker 2: Okay. 00:03:45 Speaker 1: Sorry. I'm sorry. It's a strongly held belief. I can't do anything about it. 00:03:49 Speaker 2: Like I said, I sympathize with people who leave their houses with low mortgage rates and go to houses with higher mortgage rates because they need a bigger house or a house in a different place. 00:04:01 Speaker 1: Are you saying that you did this? 00:04:02 Speaker 2: No. Yeah, you didn't do this. I keep looking at real estate. 00:04:04 Speaker 1: Oh, you're trying to do this. 00:04:05 Speaker 2: Even though I have like a sub 3% mortgage. 00:04:07 Speaker 1: That's handcuffs, right? 00:04:08 Speaker 2: Yeah. 00:04:09 Speaker 1: Golden handcuffs or whatever. 00:04:10 Speaker 2: But the thing that people do really suboptimally is when rates go down. 00:04:15 Speaker 1: Right. They don't do anything. 00:04:16 Speaker 2: They don't do anything. 00:04:17 Speaker 1: And they should. 00:04:17 Speaker 2: And they should. And the Morgan Stanley thesis is that rates right now are like, let's say high-ish. 00:04:24 Speaker 1: I feel like they're very high. 00:04:25 Speaker 2: They're high compared to like recent history. I'm not sure they're high in like the grand scheme of things. That's true. But so they're like, if rates go down again- mortgage refinancing is going to be a lot easier than it was last time with rates went down because like all these like mortgage companies have invested in like ai tools to make the process easier so it's like 10 minutes to refinance your morgans instead of like two weeks and also i think like one clear reason that people don't refinance their mortgages is just inattention right like people don't pay attention to mortgages they don't understand like the. 00:04:55 Speaker 1: They're not sitting next to me on a plane yeah and they should. 00:04:58 Speaker 2: And it's possible that like sort of like waving my hands and Literally like, like vaguing over this, but like possibly like in a world with more AI, like somehow your AI agents will be like, Hey buddy, time to refinance your mortgage. Now rates have fallen by 200 basis points or whatever. And so there's some notion that like right now people really, really, really do not optimally refinance their mortgages. And in some sort of AI world, they will be much more likely to. And so one, that's kind of interesting too. It's very bad for mortgage investors because right now, like, there's this refinance option in every mortgage, right, where, like, you have the option to refinance basically without penalty. And people exercise it really suboptimally. And so it is not priced. Like, if you, like, just did an interest rate model, you would charge people a lot for that option and, like, the interest rate of the mortgage. But, like, you don't because they don't exercise it optimally. And if they did, then mortgages would be more expensive. Morgan Stanley says 10 to 20 basis points more expensive for everybody. 00:05:57 Speaker 3: And this builds on research by Fabrice Touré, formerly of Goldman Sachs, now at, I forgot what university. 00:06:05 Speaker 2: I think he's at Baruch. Anyway, Fabulous Fab, who is now a finance academic, but was previously a mortgage derivative structure at Goldman Sachs, where he got in some trouble for structuring some mortgage derivatives. 00:06:17 Speaker 1: Well, who better to know when retail investors are not making sense? 00:06:20 Speaker 2: Who better to know? And he wrote this paper about, he's the co-author of the paper, Refinancing Frictions, Mortgage Pricing, and Redistribution. And one thing that the abstract of the paper says is, many policies that lead to more frequent refinancing also increase equilibrium mortgage rates and thus reduce residential mortgage credit access for a large number of borrowers. That is, if you make it easier for people to refinance their mortgages, then... Mortgage rates will go up because they will refinance more optimally and mortgages will be more expensive, more negative convexity. And so investors will like them less. And so they will charge more for them. Yeah. 00:06:52 Speaker 3: So it's like bad for society for people to be if you believe in it. 00:06:57 Speaker 1: Oh, your face. If you think when your face goes dead a little bit. 00:07:02 Speaker 3: It either means you really don't. If you want a society where people own their homes, which has historically been a great vehicle for wealth creation in this country. then you want mortgage rates to be subsidized in this way. And if you have people who optimally exercise their options and the market has to reprice based on that, fewer people are going to have access to mortgages and houses. 00:07:23 Speaker 2: Yeah. And like this has come up a lot in recent years the other way, right? So like Morgan Stanley is really talking about when rates drop, people optimally refinancing. But like right now, rates have gone up in the last few years and people have been really... Boxed out. Yeah. And then people have been like really antsy about that and have thought about ways to unbox them out. So like if you have like assumable mortgages where like if I have a 3% mortgage and I sell you my house, you can keep my mortgage, right? 00:07:45 Speaker 1: I love that. 00:07:46 Speaker 2: You love that, but that would make mortgages more expensive in the future, right? Because it's the same thing. It's like you would have more optimal exercise and therefore the option would be more valuable and therefore mortgages would be more expensive. 00:07:56 Speaker 1: In Switzerland, you can take your mortgage with you. 00:07:58 Speaker 2: Sure. 00:07:59 Speaker 3: I wanted to do a Planet Money survey of the whole world of like, what's the best, most fun, crazy thing your mortgage market does? 00:08:05 Speaker 1: But I didn't do it. It's a lot of work. 00:08:07 Speaker 2: Right. The best, most crazy thing the U.S. mortgage market does is offer 30-year fixed rate mortgages that are prepayable. 00:08:12 Speaker 1: It's like a very. 00:08:14 Speaker 2: Very, very subsidized product. And one way it's subsidized is just like institutional structures, but one way it's subsidized is by the fact that people do not exercise it optimally. Reading this thing, I loved it in part because that prepay option is really big and interesting, but also because so much of consumer finance is like this. Credit card rewards are like this. 00:08:33 Speaker 1: I know. 00:08:34 Speaker 3: Reading it, you cited the Capital One example of a relatively high APR. 00:08:40 Speaker 1: I'm a Capital One customer. I think I'm there. 00:08:42 Speaker 3: I think that I'm the person being written about not optimally exercising my, I should be shopping for a higher rate. 00:08:48 Speaker 2: It's easy to be like, oh, people are not paying attention or being stupid. But in your actual life, there's a lot of rational ignorance, right? I knew a guy at Goldman who like, Every week would check the highest yielding high-yield savings accounts. 00:09:01 Speaker 1: I love that about him. 00:09:02 Speaker 2: And would move his money from the one paying like 5% to the one paying like 5.05%. But most people don't do that. 00:09:08 Speaker 1: Was he fun or not fun? 00:09:09 Speaker 2: Very fun. Okay, see? I mean, not in a traditional sense. 00:09:13 Speaker 1: Was it Goose? 00:09:14 Speaker 2: I liked him. Just kidding. No, it wasn't Goose. 00:09:17 Speaker 1: Hi, Goose. 00:09:17 Speaker 2: I'm keeping that all in. But, you know, I don't check my rates every week. But maybe we should. I don't have to, like, change my password. 00:09:25 Speaker 1: Maybe you should have an AI agent that scrapes for you. 00:09:28 Speaker 2: Well, this is the thing. Like, this is the thing that the Morgan Stanley Note is making me think of is, like, in the future, all this stuff gets more frictionless. And, like, I read a lot about, like, retail brokerage stuff where, like, agentic trading will make trading much more frictionless and therefore … you will lose just bushels of money because you'll be trading all the time, right? But I think in other ways, making it easy to move to the highest yielding, high yield savings account will. 00:09:52 Speaker 1: I want that. 00:09:53 Speaker 2: It'll make you some money, but it'll also like... Save you brain space. Yeah, but it'll also like break the way the financial system works because... like the system right now is set up around a certain level of like non-optimal exercise of all these options. And like if everyone has AI agents to exercise everything optimally, then like it'll get weird. 00:10:10 Speaker 1: What do you think they're doing about this? They've got to know, right? 00:10:13 Speaker 2: Well, there's no they. 00:10:14 Speaker 1: I know, but there's a lot of they. 00:10:16 Speaker 2: Like one thing they are doing about this is Morgan Stanley writing this note Which says things like historical prepay behavior will understate future prepays. So models trained on the past mispriced this option that borrowers will be more inclined to exercise. So one thing they're saying is like don't buy mortgages at like current model prices because like you'll have to reprice everything for like higher exercise rates. But it's going to be the same in like insurance and savings accounts. 00:10:42 Speaker 1: Not to bring this back to PIMCO. 00:10:45 Speaker 2: That's the first mention of PIMCO. Mary wrote a book about PIMCO. I did. 00:10:50 Speaker 1: I did. 00:10:50 Speaker 3: And I've worked really hard to think about other things in the intervening years. But Scott Simon was a mortgage trader at PIMCO, one of the very admired mortgage traders of that cohort, that generation, pre- and post-crisis. And he had a little suitcase that had his own little computer in it with his model, with his mortgage-backed security investing model in it. 00:11:12 Speaker 2: Cool. 00:11:13 Speaker 3: And I know, and he would not plug it in. That's how valued these models are. His little special model, which is the whole basis of why he was good, he wouldn't even plug it in at his own employer. That's so good. That's all for PIMCO for today. 00:11:29 Speaker 2: We'll see, we'll see. But yeah, so what are they going to do? I don't know. What are they going to do? I don't think there will be a they making a decision all at once. 00:11:37 Speaker 1: No, there's a person at Capital One who's like, shh. 00:11:39 Speaker 2: Yeah, I think options are going to be repriced. I think mortgages... Like if it actually becomes easier to prepay mortgages, like mortgages will get more expensive. I think if it actually becomes easier to– I love the phrase optimally exercise life insurance because it's very– but if it becomes easier to optimally exercise life insurance, which means basically not let it lapse when it's positive expected value, then life insurance will get more expensive. 00:12:00 Speaker 1: It means figure out a way to die without dying, which AI could probably help with. 00:12:04 Speaker 2: No, it means like the suboptimal exercise of life insurance is you buy term life insurance and then you stop paying the premiums and then you die later. 00:12:10 Speaker 1: Right, right. Or you pay all the premiums and you die after the term. 00:12:15 Speaker 2: But that's not a flaw in your exercise of the option. 00:12:17 Speaker 1: Okay. 00:12:18 Speaker 3: Yeah. 00:12:18 Speaker 1: You didn't exercise it. Yeah. 00:12:20 Speaker 2: If you buy a 20-year term life. 00:12:22 Speaker 1: And die at 21. 00:12:22 Speaker 2: Truly, if you buy a 20-year term life and you die at 21 years, that's fine. Like, that's how it's supposed to be. Oh, really? Yeah. Because you're providing for your kids. Oh, I see. 00:12:33 Speaker 1: It's just you enjoyed the— okay. 00:12:35 Speaker 2: There's a reason people buy term life rather than universal life, and it's because there is a window where it would be very economically bad for their beneficiaries. 00:12:42 Speaker 1: Beneficiaries. 00:12:43 Speaker 2: But then after that window, it's fine. Dish, you know, economically. Okay. Can I talk about AI and law firms? Yes. This is a great Financial Times story this week about... It's so rude. All the big banks are like... Excuse me. This is like a general thing is like every company is putting pressure on all of its service providers. It's like professional services firms to cut prices because they can use AI. And so if you hire consultants or you hire investment bankers, you're like, you don't need an army of people to do this stuff. You have AI do it. So charges lower rates. Right. But with law firms, I think it's really interesting because Law firms bill by the hour. Right. 00:13:30 Speaker 1: And— AI saves you time. 00:13:31 Speaker 2: And AI saves you time. But, like, I think it's particularly interesting, and I wrote about this, is, like, law firms kind of fake bill by the hour. Like, they bill by the hour. But, like, the way a, like, law firm partner makes money is not by billing out her time, but it's by, like, having an army of associates who work for her and billing out their time, right? Mm-hmm. And then paying them less than them. Yeah, and paying them less than their hourly rate. Well, she gets more than her hourly rate. And, like, what's happening there is not, like, companies are like, ooh, I want to hire associates and the only way I can hire associates is through this law firm partner. Like, that's not what's happening. What's happening is the companies are hiring the law firm partner and they really value her advice or, like, litigation skills or whatever. 00:14:09 Speaker 1: Expertise. 00:14:10 Speaker 2: But, like, to get her, they need to pay a lot of hours of her associates, like, doing grunt work. And if all the grunt work can be done by AI, then, like, that model doesn't work. And that doesn't mean... That like the law firm partner can't still charge them a lot of money for her expertise and trial skills or whatever. It just means you have to, it can't be by the hour anymore. It can't be by the associate hour anymore. You got to like change the billing model. 00:14:32 Speaker 3: It also means what are they going to do in the future when they have no one who's been trained? Like when there's no junior person learning from her. 00:14:40 Speaker 1: I know. So what happens next? 00:14:42 Speaker 2: This is every professional service firm is like an apprenticeship model. 00:14:45 Speaker 1: Right. 00:14:46 Speaker 2: And the good story that everyone tells is like, no, no, we'll maybe hire fewer. junior people. 00:14:52 Speaker 1: Sure. 00:14:52 Speaker 2: But we'll still hire a lot. And those people will not do as much grunt work, but they will have higher level work. They'll supervise the AI models. They'll learn more good or faster. They'll learn more good or faster. Good. And then they'll become really good partners one day themselves. That's great. Okay. 00:15:07 Speaker 1: I don't need to worry. 00:15:09 Speaker 2: And like, you can think of examples of that. Like the example I always think of is like investment bank analysts. We're like, what do investment bank analysts do that trains them to become senior investment bankers. One thing they do is like format PowerPoint presentations. 00:15:22 Speaker 1: I was about to say, make sure it's flush left. 00:15:23 Speaker 2: Yes. And probably if an AI does that really well, then like the junior bankers will have more time to devote to high level work. 00:15:30 Speaker 1: To using their brain. That's wonderful. 00:15:32 Speaker 2: And will become better senior bankers and like not getting the experience of like formatting PowerPoints. 00:15:36 Speaker 1: It's probably okay. 00:15:37 Speaker 2: Is fine. Yeah. But the other thing they do is like build financial models, right? And senior investment bankers are not spending a lot of time building like three statement models and like, you know, testing sensitivities for, but, like, the experience of that is really valuable and, like, makes you more intuitive at, like, helping companies, you know, do strategic planning and, like, negotiate mergers. And, like, if you lose that, then that makes it much harder to become a good senior banker. And I think there's stuff like that everywhere, right? Like, in law firms, like, a lot of the stuff that junior associates do feels really pointless drudgery and is not, like, related to, like, developing trial strategy, but like a lot of it is, right? And like you have to put in the hundreds of hours of drudgery to become a good senior strategist or whatever. And if you cut out both of those, like it's hard to know where the apprenticeship model goes. 00:16:29 Speaker 3: It's also hard to know exactly where all of the tasks fall on that spectrum between dumb and fungible and it's okay to hand it to the AI versus expertise necessary. 00:16:37 Speaker 2: Also, it's like, it's not clear that like the stuff that is the most drudgery is the stuff that is most easy to hand to the AI. And the stuff that's, like, highest level and smartest is the stuff that, like, one thing you can hand to the AI is, like, write a brief, right? And they'll write a brief, right? And that's, like, the best work for the junior associates, right? And then if it's, like, review these handwritten notes that, like, our clients wrote when they were doing their crimes, like, maybe the AI has trouble reviewing the handwritten notes. 00:17:03 Speaker 1: Right, or, like, converse and detect intonation. Right. 00:17:06 Speaker 2: Uh-oh. So it's possible that, like, the drudgery stays with the associates and the good work gets handed off to the AI. 00:17:12 Speaker 1: Yeah. There have also been recent stories about this guy from Quinn Emanuel. He was there for over a decade. Do you know Chris Kircher? He just left Quinn Emanuel to. 00:17:20 Speaker 3: Start an AI, a new shaped law firm for this exact reason. 00:17:26 Speaker 1: Your face. 00:17:26 Speaker 2: Right. No, I mean, like, right. So like one answer to the question of like, where does the apprenticeship model go? And like, how do you get new partners? If there are, you know, like, I think that what happens is that the big banks, the big law firms continue to take in junior people. and train them. Maybe they take in fewer, maybe the training is different, maybe you miss out on some aspects of it, but like they're aware of this problem. It will go on, yeah. And they're trying to generate new partners because they have a perpetual existence. But I also think that a lot of like, like it's much easier if you're like a managing director at a bank or a partner at a law firm to be like, I don't need any of this. I'm going to go off and be a boutique with like six AI agents and just meet, right? And like, If enough of the top people split off to do that, then that also kind of undermines the apprenticeship model at the big places. Right. Like if you're like a partner in a big law firm, I don't need these associates. I don't need like the partnership committee. I don't need it. I just have an AI. Maybe that makes it harder for the big firms to survive. Well, like to compete and to train their people and all this stuff. Yeah. It's all pretty speculative. 00:18:31 Speaker 1: Exciting, though. 00:18:33 Speaker 2: New things. 00:18:35 Speaker 1: We love new things. I love new things. 00:18:39 Speaker 2: I was talking to our mutual friend, Sylvia Killingsworth, who most recently co-hosted this podcast with me. 00:18:45 Speaker 1: One thing I hate is when you hang out in real life without me. 00:18:47 Speaker 2: I know. It's our group chat. But we do work together. 00:18:49 Speaker 1: I know. 00:18:50 Speaker 3: So frequently I'll get like little scraps in the chat that y'all hung out without me. 00:18:54 Speaker 2: So I decided to tell you about this case. So, okay. So the Federal Trade Commission brought a complaint and like 22 states, attorney generals. 00:19:01 Speaker 1: Attorneys general. 00:19:02 Speaker 2: Attorneys general. 00:19:04 Speaker 1: It's a golden opportunity. You never get to say it. 00:19:06 Speaker 2: The Federal Trade Commission and 22 state attorneys general brought a complaint against Amazon claiming that it deceived advertisers in how it ran its auctions for like sponsored products. You know, like when you search for a product on Amazon, the first results are like, oh, a sponsored result. And, you know, advertisers pay for that. And there's like an auction for, you know, who gets the ad space. Buying that stuff. The FTC says that Amazon deceived the advertisers and hired around the auction. And it's interesting, like I write about the financial industry and this stuff has a certain rhyme with the financial industry, right? Like you're running an exchange platform where people are electronically bidding on assets, right? 00:19:45 Speaker 3: It's a financial market tool in a different context. 00:19:47 Speaker 2: Yeah. But at the same time, like. i was saying to sylvia like arguably i don't really know how to quantify this but like arguably the online advertising business is bigger than the financial industry like it's so big like you think about like the biggest companies in the world they're not you know, chain street or Goldman or millennium or like. 00:20:09 Speaker 1: They are in our house. How dare you? 00:20:13 Speaker 2: They are right. Online advertising companies. 00:20:16 Speaker 1: It's true that everyone I know works in Amazon. 00:20:18 Speaker 2: And meta and like is open AI and online advertising company. Wow. Is Nvidia an online advertising company? No, but it's like downstream of them. 00:20:28 Speaker 1: Literal hardware. 00:20:30 Speaker 2: So anyway, I was like, Oh, we do auctions this way, but like, no, like the people who know the auctions are the people doing online ads. But anyway, Amazon does online ads and they run auctions for spots. And basically like the FTC's contention is that they say they run a second price auction where like the highest bidder in the auction gets the ad spot, but it pays the price that was bid by the second highest bidder. And the FTC says that's actually not true. And it's like 80% of cases, the winning bidder gets the, um, quote, soft reserve. 00:21:02 Speaker 1: It pays its own price. Yeah. 00:21:03 Speaker 2: It doesn't pay the soft reserve. It pays its own highest bid, which is because, in fact, Amazon introduces a thing called a soft reserve price, which is sort of like a phantom bid where it's like Amazon's bid. It's what Amazon thinks the slot is worth. 00:21:19 Speaker 1: If we were bidding in our own auction. 00:21:21 Speaker 2: Right. So if you bid more than the soft reserve price, then you get the soft reserve price because that's the second best bid. And if you bid less than the soft reserve price, then you get your price because that's the second best bid. So in any case, you get the second best bid, but in an auction with an extra bidder who bids high. And so the FTC finds this decisive. And I think Amazon's defense is fascinating because they don't say like, we don't do that. They do say, we disclose it clearly. You know, they say, we actually are not lying about this. Like we actually disclose things. But you know, the FTC quotes all these things where they like send out like educational materials explaining second price auctions to advertisers. And the FTC is like, but that's not what you do. And Amazon's like, look, Nobody buys ads based on like simplified descriptions of the auction mechanics. They buy ads based on like return on ad spend, right? So if you spend a dollar and you get $ 4 of revenue, you're like, yeah, great. I'll keep buying ads. Amazon's defense here, which I think is true. And it's just interesting to me because it's like not how the financial industry works. Amazon's defense is like, basically this is a black box. We do not expect our advertisers to actually understand like the auction mechanics because like what we're doing is not a second price auction, right? It's like, sure, it's a second-price auction with a soft reserve price, but we don't even know the soft reserve price until after. It's computed in real time. So no one can know if they're going to be the second-best price or the first-best price. But also, it's not actually a second-price auction. We're not actually auctioning ad spots to the highest bidder and making them pay the second price. We're actually choosing the ad spots in part based on who the highest bidder is, but in part on relevance. So when you search for toilet paper And we don't want us to show you like sponsored products that are toilet paper. They don't want to show you sponsored products that are like cars, right? Even though that might have a higher margin and might be willing to pay more. 00:23:04 Speaker 1: Emotionally, it feels like they were going down that path for a little while. 00:23:08 Speaker 2: Yeah. They said, you know, we started this. 00:23:10 Speaker 1: We tried it and people got mad because we were advertising for random things. 00:23:13 Speaker 2: And I don't even think it's like a binary. I think it's like they had like a slider that's like, how much should we care about price and how much should we care about relevance? And you can feel as a customer. 00:23:21 Speaker 1: Yeah. 00:23:22 Speaker 2: Figure out what's best for like their overall business. Right. And so like, they're not running a pure auction. Right. They're just doing stuff that optimizes like their own experience on like a million different variables. And they're like, they get what they get. And if they're happy, they're happy, but they're not like expected to understand the auction mechanics and like, It's just a very different world. 00:23:41 Speaker 3: They're speaking completely two different languages. The FTC is looking very closely at, like, slowing down the auction to each individual step. 00:23:48 Speaker 1: And Amazon's like, literally no one cares. 00:23:50 Speaker 2: Right. 00:23:50 Speaker 1: Does it work or not? 00:23:51 Speaker 2: The sort of FTC complaint makes you think, like, you know, like someone at a desk at, like, consumer products companies, like, submitting bids. Right. But, like, of course, like, there's hundreds of bids a second or whatever. And it's all, like, completely automated. 00:24:01 Speaker 1: There's no human in the loop. 00:24:02 Speaker 2: Yeah. 00:24:02 Speaker 1: And, like. 00:24:03 Speaker 2: And it's not like you set your bidding policy. It's like, you know, you have some tool, you like move a slider. 00:24:08 Speaker 1: No one even knows if it's their own bid coming back or not. 00:24:11 Speaker 2: Yeah. Right. And so like, I am very sympathetic to Amazon's view of things. I think it's accurate, but it is like, it is like a strange defense to be like, oh, it's just like a black box. 00:24:22 Speaker 3: I feel sympathetic as well, but it just feels also like there are rules and you are supposed to follow them. 00:24:27 Speaker 2: And if you have- But there are rules. Like, that's the thing, like in financial markets, there's like how the stock market matches buy and sell orders is like set with clear rules and like the rules are approved by the sec and it's a big deal there's no rule like amazon just has its own marketplace and the rule that the ftc is trying to enforce is like you can't disclose things inaccurately right right and like amazon says look we do disclose it accurately but like yeah do we send simplified materials to people to help them grasp the intuition of how a second price auction works sure Do they think that those materials accurately reflect how our black box works? 00:25:00 Speaker 1: Do they read those materials? 00:25:01 Speaker 2: No, they're not idiots. No, they probably read the materials, right? They probably read like, oh, this is how it's like, and they're like, oh, cool, interesting. But like, that's just like an intuition tool. It's not a like, this is how it's actually working under the hood. 00:25:11 Speaker 3: I think it's a fair point that the FTC is making, personally, that if you say, hey, this is the type of auction that we're using, and there's a secret ghost bidder of Amazon with a mustache on in the auction with you, and you don't know that, I. 00:25:25 Speaker 2: Feel like they're saying this is sort of the type of auction we're doing. 00:25:27 Speaker 1: They're saying yada, yada, yada. And the FTC is saying you can't do that. 00:25:30 Speaker 2: So I was thinking about this. Are there other examples of this sort of you run an auction, but you introduce your own bidder? Does it sort of resemble spoofing in financial markets? 00:25:40 Speaker 1: Maybe. 00:25:40 Speaker 2: I don't know. But a reader sent me that apparently the term in art auctions is a chandelier bidder. So if you're selling a painting at a fantasy auction house, you have some reserve price where you won't sell it for less than $ 30 million. And I guess that's not always publicly disclosed. And so what happens is that the auctioneer will be like, do I hear 10 million? 10 million. Do I hear 20 million? 20 million. Do I hear 30 million? 30 million. And they'll just like be pointing into space. And like, it's called the chandelier bid because it's like, they're often just looking up into the ceiling. 00:26:09 Speaker 1: I found reading about this very affirming, having attended art auctions and been like, who, where is the, is it such a show? And as a newbie, I didn't know. 00:26:16 Speaker 2: Like my understanding of art auctions from pop culture is that like the auctioneer is looking around the room and like, there is a prestige to making the subtlest possible movement to indicate that you want to bid. So you don't like raise a paddle and wave it in the air. You just sort of like raise one eyebrow very slightly. And the auctioneer is like, yes, you over there, 40 million. And like the idea of like spending $ 40 million by raising your eyebrow just so slightly is like very affirming. It's like, um, I talk about this a lot, but like I play poker with my children and I've like taught my children how to play poker. I've written about it for, for Sylvia at Bloomberg. 00:26:49 Speaker 3: And, um, And it's like, I'm trying to convince my husband that this is a path we need to go down. 00:26:53 Speaker 2: It's like a highlight of my summer. It feels like a very summer vacation thing. 00:26:57 Speaker 1: Totally. 00:26:57 Speaker 2: To play poker with the children. And my children have now gotten a little more into like, instead of saying check when you don't want to bet, just knocking on the table, which is the like sort of poker way to do it. And it's the same vibe of like just making the subtlest possible movement. 00:27:10 Speaker 1: It just is a flex. 00:27:11 Speaker 2: Yeah, it's a flex. 00:27:11 Speaker 1: Demonstrates expertise. 00:27:12 Speaker 2: So anyway, the point is that at an art auction, if people are very, very subtly indicating how they're bidding, then an auctioneer, can look out into space and be like 30 million over there because like no one's waving their paddle, but like no one would be waving their paddle. So it's fine. Yeah. 00:27:27 Speaker 1: So it's fine. 00:27:28 Speaker 3: And it's all like everyone in that room knows that it's just a ritual and a performance having attended it without. 00:27:34 Speaker 2: Yeah. Although like apparently not everyone in the room knows that like their chandelier bidding, but apparently in like auction catalogs, they put disclosures. So the reader emailed me an article about like the legality of chandelier bidding. And apparently in New York it's required to disclose it. And so, Auction houses have disclosures like, unless otherwise indicated, all lots are offered subject to a reserve. The auctioneer may implement the reserve by opening bidding on any lot by placing a bid on behalf of the seller. The auctioneer will not specifically identify bids placed on behalf of the seller. The auctioneer may further bid on behalf of the seller up to the amount of the reserve by placing successive or consecutive bids for a lot or by placing bids in response to other bidders. So basically, if you have an undisclosed reserve price, the auctioneer can bid that price and... pretend it's a real bidder but really it's just for. 00:28:20 Speaker 3: Show yeah just to like warm everybody up a little bit yeah exactly you gotta get the momentum going is that. 00:28:25 Speaker 2: What amazon's doing no but no no they're not getting momentum going but like they. 00:28:32 Speaker 3: Are they're like we really believe it's about this this is approximately where it should be yeah. 00:28:36 Speaker 2: But also like in our auction it goes to the highest bidder at the highest bid and. 00:28:40 Speaker 1: It's more transparent ironically price. 00:28:42 Speaker 2: Auction so you do have the reserve. 00:28:43 Speaker 3: Has a Well, and I also think that the art market has such a charming insouciance about following laws where, for example, you're definitely supposed to– there's like a law that says you have to put the prices in a store. And so when you go into an art gallery and they haven't displayed prices, they're just like, we'd rather not. 00:29:01 Speaker 1: Thank you. 00:29:02 Speaker 2: And that's fine. You can ask about the prices. 00:29:03 Speaker 1: You can ask. 00:29:04 Speaker 2: He might not tell you. 00:29:06 Speaker 1: It's not for you, babe. 00:29:06 Speaker 2: Yeah. Very different business model from Amazon in that sense. 00:29:11 Speaker 1: So true. 00:29:12 Speaker 2: Less accessible. 00:29:13 Speaker 1: Yeah. Okay, Matt, our last topic for today is the ETF dividend swap. 00:29:29 Speaker 2: Okay, so. 00:29:29 Speaker 1: Dividend avoidance. 00:29:31 Speaker 2: Who can say that? 00:29:32 Speaker 1: Dividend dodging. I hate dividends. When they touch me, I run. 00:29:35 Speaker 2: So that's true of certain foreign domiciled... Caymans-ish investors. 00:29:41 Speaker 1: And it's completely legal. 00:29:43 Speaker 2: Oh, yeah. So, yeah. So Bloomberg's Zach Meiter and Zachova have a story this week about not paying dividends or not receiving dividends. 00:29:52 Speaker 1: Investors doing everything in their power. 00:29:53 Speaker 2: Yeah. 00:29:54 Speaker 1: Different countries are taxing things differently. 00:29:56 Speaker 2: Yeah. The U.S. has withholding tax on dividends for certain foreign investors, which I think includes a lot of, like, Cayman Sea investors. I could be wrong about that. But, like, so a lot of, like, hedge funds have withholding problems with dividends. And so, like, there's a trade. It's called the cash and carry trade. Although I always think of it as just the basis trade for S & P. But the trade is, like, you buy the S & P or, like, S & P ETFs, index funds or, like, the actual stocks. And then you sell S & P futures. And so you're basically providing funding. So it's like a balance sheet trade. It's like a basis trade. And the funding spread has widened for reasons. And so there's money to be made by doing this. And so a number of like investors do it. And if you're doing that trade and you are a foreign company, you do not want the drag of like, you know, on your actual S & P shares, you receive a dividend. And if there's withholding tax on that dividend, that kind of cuts into the like fairly slim margins you're making on the trade. Right. And so- They have this story about how people, foreign investors, hedge funds, banks, whatever, implement this trade by like, the way they own the S & P is through two ETFs. There's a BlackRock S & P ETF called IV, or IVV, and there's a Vanguard S & P ETF called the VOO, V-O-O. And they are basically the same. They own the S & P 500, but they pay dividends about a week apart. 00:31:22 Speaker 1: So like, Which is kind of a long time. 00:31:24 Speaker 2: Yeah. So, you know, the S & P stocks pay dividends throughout the year and like these ETFs accumulate the dividends and they have them in cash. And then at some point they say, OK, we're going to pay out the cash. Right. So if pays out its cash about a week before VU. And so the way you do the trade is you own if and then. 00:31:43 Speaker 1: A day or two or three days before. 00:31:44 Speaker 2: The dividend date. you get out of IV and into VU. So you like sell your IV, you buy your VU. 00:31:52 Speaker 1: The IV to VU pipeline. 00:31:53 Speaker 2: And so then you don't own IV when it pays the dividend. 00:31:57 Speaker 1: When it div, there's something in there. 00:31:59 Speaker 2: Yes. And when it pays the dividend, the stock should drop. The value of the share price of IV should drop, right? It should drop by about the amount of the dividend. So for a little while, IV is trading below VU. And then you switch back. You like sell your VU, you buy back your IV. And so you're You sell IV at the high price. You buy VU at the high price. You sell VU at the high price. And then you buy IV at the low price. So you have captured the dividend by selling high and buying low. And, like, the difference in the price is basically the amount of the dividend. 00:32:30 Speaker 1: With a little bit of friction. 00:32:32 Speaker 2: Yeah, a little bit of friction. But, like, you know, what I wrote about this is, like, you could do this with any stock except, like, it doesn't have a counterpart. So you'd have to be naked for some period of time, right? You'd have to sell the stock, wait for the dividend, and buy it back. And if you wait, you know, 17 hours to buy it back, like from selling it closed to buying back at the open, stuff can happen. Can I quote you to you? 00:32:51 Speaker 1: Ceteris is less likely to be perilous. 00:32:53 Speaker 2: Yeah. So, like, stuff can happen. Like, the stock will probably go up overnight, right? 00:32:56 Speaker 1: Right. 00:32:56 Speaker 2: But here, because you're selling and buying at the same time, you have some friction because there's no guarantee that it'll drop by exactly the amount of the dividend. But you have much less friction and you capture much more of the dividend. This is so much fun. I wrote about this and everyone emailed me to be like, if you sell and buy like that, you're going to have much more capital gains taxes than... You'll save in dividend taxes, which is true if you are like a retirement saver who owns IV and like, I'm going to avoid the dividend tax by selling and buying back. Right. But that's not what's happening here. This is like hedge funds doing carry trades where it's like there's essentially no capital gains because like they're day trading it and they're probably long and short the same. They're not worried about capital gains taxes. 00:33:35 Speaker 1: This is not something that an influencer should recommend on TikTok. Right. 00:33:39 Speaker 2: Exactly. This is not like a rich person trade. This is a hedge fund trade. 00:33:41 Speaker 1: Yeah. 00:33:44 Speaker 2: Important distinction. Marshall Weiss. Yeah. Allegedly. Sure, Marshall Weiss. The Bloomberg Star name is Marshall Weiss. 00:33:51 Speaker 1: I didn't make it up for clarity. 00:33:52 Speaker 2: Possibly one of the people who's doing this. 00:33:54 Speaker 1: Yeah. 00:33:55 Speaker 2: Not people. Marshall Weiss is not a guy. It's a hedge fund. 00:33:58 Speaker 1: Well, it's some guys. 00:34:01 Speaker 2: Marshall and Weiss. Marshall is a first name, too, so it could be one guy. But it's two guys. It's Marshall and Weiss. It's more than two guys now. 00:34:07 Speaker 1: Yeah, it's so many more. But it's fun. 00:34:09 Speaker 3: I mean, ETFs are a tax-informed strategy, you know? 00:34:12 Speaker 1: Yeah. It comes from knowing about taxes. 00:34:14 Speaker 2: Yes. Right. 00:34:15 Speaker 1: So it's only natural. 00:34:16 Speaker 2: I talk a lot in my column on this podcast, which I normally co-host with an ETF fiend. 00:34:22 Speaker 1: Do you miss her so much? 00:34:23 Speaker 2: I do. 00:34:24 Speaker 1: I'm sure. Yeah. She's so great. Hi, Katie. 00:34:27 Speaker 2: Hi, Katie. I wonder if she's listening. 00:34:29 Speaker 1: She's definitely listening. We're going to send it to her. 00:34:32 Speaker 2: Yeah. Hi, Katie. Hi, Katie. Our listeners love Katie. 00:34:37 Speaker 1: Oh. 00:34:37 Speaker 2: Of course they do. 00:34:39 Speaker 1: That's why they listen. Half of why they listen. 00:34:41 Speaker 2: Hi, Katie. Anyway, she's an ETF fiend. And we talk a lot about like the ETF has been really expanded as a vehicle for like avoiding taxes of all kinds. But this is not that. This is not really about ETFs. Like the reason that this is an ETF story is because there are not, as far as I know, other cases of two stocks that are identical, except one of them pays a dividend a week later than the other, right? Right. But like, in theory, there could be. You could have like, you know, Google has three classes of shares. 00:35:08 Speaker 1: Sure. 00:35:08 Speaker 2: They could pay the dividend on one class like a week later than the dividend on the other class. And then like, if people wanted to do this, they could do it, right? But it's not very practical. 00:35:15 Speaker 1: I'm trying to come up with any reason why anyone would do that, and I can't. 00:35:18 Speaker 2: Right. But like, by the way, there is a reason why ETFs do this, which is like... For fun. No, it's possibly the case that these ETFs Like it. Right. 00:35:26 Speaker 1: And indeed, they changed their dates to make it somewhat more welcoming. 00:35:29 Speaker 2: To make themselves more appealing to hedge funds who want to do this trade. So, yeah. 00:35:33 Speaker 1: Right. 00:35:33 Speaker 2: This is an ETF trade only in that, like, there are a lot of ETFs that are identical economic assets, whereas there are not a lot of stocks that are identical economic assets. 00:35:41 Speaker 1: Yeah. Doesn't make as much sense. Yeah. What a fun week. 00:35:45 Speaker 2: What a fun week. 00:35:46 Speaker 1: It was a really fun week. We thought that there wasn't going to be much to talk about, but there was so much to talk about. 00:35:50 Speaker 2: Thanks for coming. 00:35:51 Speaker 1: Thanks for having me. 00:35:52 Speaker 2: Do we need to do any, like, outro for you? That's Mary Child. She wrote a book about PIMCO. She's got a show called Mary in America. It's great. You can find it on YouTube. Or wherever you get your podcasts. I feel like such a self-parody using the phrase wherever you get your podcasts. 00:36:08 Speaker 1: It's actually useful is the problem. It's hard to replace. 00:36:11 Speaker 2: There's no standard place for podcasts. 00:36:13 Speaker 1: People are like, where is your podcast? It's at the podcast place. 00:36:15 Speaker 2: People ask me all the time. 00:36:16 Speaker 1: I'm like, it's wherever you get your podcast. I don't know what to tell you. They're like, is it wherever I get my podcasts? That's really a question I get. Yeah. 00:36:22 Speaker 2: And it is. But it's also on YouTube. 00:36:24 Speaker 1: It's also on YouTube, which is also where people get their podcasts. 00:36:27 Speaker 2: Not this one. 00:36:28 Speaker 1: Oh, not yet. Thanks, Matt. 00:36:31 Speaker 2: Thank you. And that was the Money Stuff podcast. I'm Matt Levine. 00:36:35 Speaker 1: And I'm Mary Childs. 00:36:36 Speaker 2: We'll have fill-in guest hosts for a few months while my usual co-host Katie Greifeld is on parental leave. You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com. 00:36:46 Speaker 3: And you can find me at Mary in America on YouTube or wherever you get your podcasts. 00:36:50 Speaker 2: We'd love to hear from you. You can send an email to moneypod at bloomberg.net. Ask us a question and we might answer it on the air. You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show. The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andon. Our theme music was composed by Blake Maples. Amy Keene is our executive producer and Cheryl Brumley is Bloomberg's head of podcasts. Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.