Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to
Speaker 1: The Money Stuff Podcast, your weekly podcast where we talk
Speaker 1: about stuff related to money. I'm Matt Levin and I
Speaker 1: write The Money Stuff com for Bloomberger Pain.
Speaker 2: I'm Katie Greifeld, a reporter for Bloomberg News and an
Speaker 2: anchor for Bloomberg Television.
Speaker 1: What are we talking about today?
Speaker 2: We're going to talk about the slow death of shorts
Speaker 2: and specifically the retirement of Nate Anderson. We're going to
Speaker 2: talk about evil bankers, my favorite cut. We're going to
Speaker 2: talk about ESG Evil ESG, Hindenburgh, Nate Anderson. This was surprising,
Speaker 2: was it? I was surprised. I mean, I don't know.
Speaker 2: You think about Jim Chainos retiring in twenty twenty three,
Speaker 2: he had a pretty rough run towards the end. Nate Anderson,
Speaker 2: I feel like has had a lot of wins. And
Speaker 2: also he only started Hindenburg in twenty seventeen.
Speaker 1: Yeah, I mean it's a hard business, you know, running
Speaker 1: a short. So Nate Anderson, the founder of short focused
Speaker 1: research from Hindenburg Research, announced that Hindenburg Research is no
Speaker 1: more and he's going to tend to his garden or.
Speaker 2: Something, listen to some medium, listen to some.
Speaker 1: Medim I don't know. It's a hard job. And I
Speaker 1: was trying to think about, like why now. And one
Speaker 1: thing that occurred to me is if you read his letter,
Speaker 1: a lot of these people, a lot of people who
Speaker 1: like run these short research firms, sort of style themselves
Speaker 1: as hedgehund managers, in part because that's like a cool
Speaker 1: thing to say, I'm a Hedgehong manager. And like, actually
Speaker 1: the SEC case against Andrew Left is hilarious because they
Speaker 1: like actually claimed that it was fraud for him to
Speaker 1: call himself a hedgehond manager. Yeah, like imply that he
Speaker 1: had clients because he was like talking about his clients
Speaker 1: when he was just the third person, right, which I
Speaker 1: thought was like a little nasty of the sec Yeah,
Speaker 1: it was like, I good enough, it is the kind
Speaker 1: of a Hedgehne manager. But like you know, it's called
Speaker 1: Hindenburg Research, and when you read his life, he like
Speaker 1: describes it as a research firm. It's not a hedge fund.
Speaker 1: It's not like in the business and making short trades, right,
Speaker 1: it's in the business of discovering bad stuff at companies,
Speaker 1: discovering fraud or accounting malfeisms or whatever, and then generating
Speaker 1: money from that somehow. And I don't know exactly how
Speaker 1: Hindenburg generates money. Like the original way I think he
Speaker 1: was generating money was by going to the SEC and
Speaker 1: submitting like whistleblower, what's the word quast step steps yes,
Speaker 1: And so he would like say to the SEC, hey,
Speaker 1: there's front of this company and they would be like, oh, well,
Speaker 1: there is run at that company. They'd find the company
Speaker 1: a lot of money and they'd give him some of
Speaker 1: the money. Or that was the idea. And I think,
Speaker 1: you know, I don't really know what Hindenburg does, but
Speaker 1: like a lot of these firms will sell research ideas
Speaker 1: to hedge funds, will then, you know, do the short trades.
Speaker 1: They have more capital and more diversification than a short
Speaker 1: only hedge fund would have. And like you know, we've
Speaker 1: talked about Hunter Brook. Hunter is in the business of
Speaker 1: finding bad stuff at companies and publishing them and then
Speaker 1: among other things, bringing securitieslawaw suits. And they team up
Speaker 1: with plaintiffs lawyers to bring lawsuits against these companies. And
Speaker 1: if you were as in the business of like monetizing
Speaker 1: fraudit companies by like having your own capital or your
Speaker 1: investor's capital and doing short sales. Like that's a hard business, right, Yeah,
Speaker 1: that's a lot of ways to blow up. Whereas if
Speaker 1: you're in the business of like monetizing whistleblower rewards, that's
Speaker 1: less capital intensive. It takes kind of a long time. Yeah, uncertain.
Speaker 2: I mean it just seems like a hard way to
Speaker 2: pay the bills.
Speaker 1: What whistle lawer awards, Yeah, yeah it is. It's it's lumpy,
Speaker 1: but like people have kind of professionalized it, more lawyers
Speaker 1: than researchers, but some researchers have professionalized that made up
Speaker 1: money in any case, Like if you think about like
Speaker 1: the landscape of these short research frames, like you kind
Speaker 1: of need all of those options. You read his letter,
Speaker 1: he talks about we've led to more than one hundred
Speaker 1: prosecutions and like investigations, like he is measuring his success
Speaker 1: in getting regulatory and prosecutorial attention on the companies he targets. Right,
Speaker 1: it's not like we've caused stock prices to go down.
Speaker 1: It's we have brought fraud to light and how to
Speaker 1: be investigated. And when I think about what is happening
Speaker 1: right now, Yeah, I've written a lot in the last
Speaker 1: couple of weeks about how there have been a lot
Speaker 1: of like sec prosecutions, sec cases, a lot of other stuff.
Speaker 1: There's a big Justice Department anti trust case against KKR
Speaker 1: filed this week. We're going to talk today about the
Speaker 1: CFPP case against Capital One nice Tia. So a lot
Speaker 1: of stuff that is happening now because it won't happen
Speaker 1: next week, right, Yeah, Like if you were in the
Speaker 1: business of like alerting regulators through fraud, you might think
Speaker 1: that's going to be a bad business starting next week
Speaker 1: and going for four years.
Speaker 2: Yeah.
Speaker 1: I don't know that that's actually his calculation, but it
Speaker 1: just feels like a week ago, if you said, oh,
Speaker 1: this company is a fraud, that would have a big effect,
Speaker 1: and like starting in a week saying oh, this company
Speaker 1: is a fraud might not have a big effect.
Speaker 2: Well. Yeah, the thing is like there's no guarantee that
Speaker 2: the stock will actually go down and your short will work.
Speaker 2: You think about their last report was on Carvana alleging fraud,
Speaker 2: and Carvana stock has done really well so far in January.
Speaker 1: Yeah, they could be wrong, right, They always be wrong.
Speaker 1: They are specifically in the business of waving their hands
Speaker 1: and saying to regulators, Hey, look at this company over here,
Speaker 1: this is a fraud. Right, Sometimes they will be wrong
Speaker 1: and the regulators won't look at it. But like sometimes
Speaker 1: they'll be right and the regulators won't look at it.
Speaker 1: And like, my suspicion is that the incidents of that
Speaker 1: will go up soon because like you will have a
Speaker 1: much less enforcement intensive regulatory regime everywhere in the US
Speaker 1: economy starting next week.
Speaker 2: That's interesting.
Speaker 1: That could be like way off base.
Speaker 3: But I don't know.
Speaker 2: It's like my little sp but perhaps there's a political
Speaker 2: angle here.
Speaker 1: I don't know that he's thinking that. I just think
Speaker 1: I think it like I would, like, you know, i'd
Speaker 1: be worried if my business model was calling regulatory attention
Speaker 1: to frauds because like I don't know, Like I don't
Speaker 1: want to say the name. Never mind, I'm gonna move
Speaker 1: right along. We're not gonna say, like some companies.
Speaker 2: That I don't know, you even name some names. You
Speaker 2: can do anything once anyway, you know, well really don't don't.
Speaker 1: I don't need that matter, all right.
Speaker 2: Well, moving softly along firs all In terms of how
Speaker 2: they make money, there was an FT article talking about
Speaker 2: this small New York based firm called Kingdon Capital that
Speaker 2: works with Hindenberg on a number of its trades.
Speaker 1: So, right, like you sell ideas to or a partner with, yeah,
Speaker 1: somebody who is not.
Speaker 2: And then you're the public face.
Speaker 1: Yeah, you're the public face of the short idea. But
Speaker 1: also like they're the people who have like long short
Speaker 1: capital because like just being a short seller, as Jim
Speaker 1: Chaina has found, is hard because slacks mostly go up.
Speaker 2: Yeah, that is painful. Well related to this. So he's
Speaker 2: winding up the firm, he's working through the last of
Speaker 2: the ideas, and then they're handing off the tips on
Speaker 2: suspected PAZI schemes to regulators. So there's probably some investable
Speaker 2: ideas in there. And also maybe they'll get some of
Speaker 2: these whistleblower rewards.
Speaker 1: Yeah, I assume there's some tell where like like the
Speaker 1: whistleblowers thick, really long time to come.
Speaker 2: How much can you make I'm interested.
Speaker 1: I mean they've given out I believe, several nine digit awards.
Speaker 1: Don't They've hid out hundreds and hundreds of millions of dollars.
Speaker 2: I wonder what the average award is.
Speaker 1: You know, they paid out press basis for the big ones.
Speaker 1: I don't know, but like they're not small. Like this
Speaker 1: sort of the way it works is kind of like
Speaker 1: the sort of the rack rate is kind of fifteen
Speaker 1: to thirty percent of what the SACI covers.
Speaker 2: That's wild.
Speaker 1: Yeah, you always get that and takes a long time
Speaker 1: and it's like controversial. But like if you bring them
Speaker 1: a big fraudt they get a big fund, you get
Speaker 1: a big check.
Speaker 2: Yeah, lumpy, Like you said, it kind of reminds me
Speaker 2: of being a freelance journalist if that's how you make
Speaker 2: your living. I'm too risk averse to ever just rely on.
Speaker 1: Oh but compared to like shorting stocks, yeah, capital.
Speaker 2: Intensive, Yeah, I think I'd rather just be a TV anchor.
Speaker 2: In any case, what I'm excited about is that over
Speaker 2: the next six months, Anderson plans to work on a
Speaker 2: series of videos and materials on Hindenberg's models so that
Speaker 2: others can learn how the firm conducted its investigations. That
Speaker 2: sounds like some good viewing and I don't know, maybe
Speaker 2: more people will be inspired to take up the mantle
Speaker 2: now that they have the tools.
Speaker 1: Is it a Barnes and Noble This weekend go on
Speaker 1: and I went to the business section and they're still
Speaker 1: these like for dummies books like investing for dummies, and
Speaker 1: I was like picking them up and leaving through them.
Speaker 1: I really want like a Nate Anderson activist short selling
Speaker 1: for dummies. It sounds like you, you know, it's like
Speaker 1: he's a good expert to record a series of YouTube
Speaker 1: tutorials on how to be a short seller.
Speaker 2: Well soon, so the firm has eleven employees, and also
Speaker 2: in his letter, he said that for now I will
Speaker 2: be focused on making sure everyone on our team lands
Speaker 2: where they want to be next. So the alumni class
Speaker 2: of Hindenburg Research, I mean, who knows if all of
Speaker 2: them will go into short selling, but it'll be interesting
Speaker 2: to follow that.
Speaker 1: Yeah, I think the letter suggested that I've read between
Speaker 1: the lines a little bit to suggests that like there
Speaker 1: will be a continuation of Hindenburg. It won't be called
Speaker 1: Hindenburg and he won't work there, but like several of
Speaker 1: the people there will continue to kind of do the
Speaker 1: same work in a similar format.
Speaker 2: Yeah, I want to know what he does next. Again,
Speaker 2: only he.
Speaker 1: Suggested like like literal gardening.
Speaker 2: And did he I read the part where he said
Speaker 2: this has been really hard. I'm tired. And also I
Speaker 2: want everyone to go get jobs. Now you think he's
Speaker 2: really gonna get down in the dirt plant some petunias. Yes,
Speaker 2: we should.
Speaker 1: Ask him, Yeah, we should have him. Nate, come on
Speaker 1: the pot. I met him once at a book party.
Speaker 2: Huge. I feel like there's he's at least the fifth
Speaker 2: person I've mentioned and Matt has said, yeah, I saw
Speaker 2: them at a book party. It seems like book parties
Speaker 2: are sort of where you spent your free time. Barnes
Speaker 2: and Nobles and this.
Speaker 1: Podcast and book parties are my social life.
Speaker 2: Wow.
Speaker 1: The Barnes and Noble is like party is like my
Speaker 1: actual social life is children's birthday parties. But like, but
Speaker 1: now I'm in like the drop off phase of children's
Speaker 1: birthday parties. So it's like I go to the children's
Speaker 1: birthday party, I'm angle for two minutes. I leave. Yeah,
Speaker 1: I sit in my car and read a book. I
Speaker 1: drafted Bardes and Noble and read a book.
Speaker 2: You know it's gonna say so if you're looking to
Speaker 2: find Matt out in the wild Capital one, Matt, I
Speaker 2: knew you were a banker, but I didn't know you
Speaker 2: were evil.
Speaker 1: I worked at Goldman at like the peak of Goldman
Speaker 1: is a great vampire squid wrapping its blood funnel around
Speaker 1: humanity or whatever the line is. I was pretty evil,
Speaker 1: but like you know, I was like evil adjacent and
Speaker 1: I always had a soft spot for evil.
Speaker 2: Yeah, I could. It really came through in this column,
Speaker 2: of course, we're talking about the Consumer Financial Protection Bureau.
Speaker 2: It alleged that Capital One cheated customers out of two
Speaker 2: billion dollars by keeping them in the dark about a
Speaker 2: savings program that offered higher interest rates on their deposits.
Speaker 1: There's like really no dispute about what happened. Heret okay.
Speaker 1: There's like three kinds of bank accounts whatever the treat
Speaker 1: guns are like floating red bank acount. There's check accounts
Speaker 1: pay basically you're interested. There's savings accounts which exists which
Speaker 1: also seemed to pay zero interest. Like when I go
Speaker 1: to my bank and I like click on the they're like, oh,
Speaker 1: to open a savings account. I click on it, and
Speaker 1: it's like you could get interest as much as zero
Speaker 1: point zero three percent with a million dollar bounce right.
Speaker 1: And then there's a thing called the highield savings account,
Speaker 1: which is distinguished from a regular savings account by paying
Speaker 1: like something more than nominal interest. And in like twenty thirteen,
Speaker 1: Capital One opened highield SAVIS account called three sixty Savings
Speaker 1: and they were like, this is a highield Savis account.
Speaker 1: You'll get the best interest rate, and so people open
Speaker 1: their accounts and they did this for like seven years,
Speaker 1: and the rate would go up and down with like
Speaker 1: you know, interest rates, and then in twenty twenty, in
Speaker 1: twenty twenty, they like quietly deprecated it, where they basically
Speaker 1: said everyone who was in that account stayed in that account,
Speaker 1: their rate dwindled to like zero point three percent, so
Speaker 1: like a lot more than my bank is offering on
Speaker 1: like regular SAVIS account, but a lot less than like
Speaker 1: fed funds or like yeah, you know, really a lot less.
Speaker 1: And meanwhile they launched a different product called three sixty
Speaker 1: Performance Saving, which is difference from three sixty Savings, and
Speaker 1: three sixty Performance Savings is the new product that they
Speaker 1: marketed to new people, and they're like, oh, this will
Speaker 1: have the highest right and it did in fact have
Speaker 1: like a you know, PID like four percent or whatever.
Speaker 1: And so if you were like looking to open a
Speaker 1: highield Saves account at Capital One in like twenty twenty three,
Speaker 1: they were like, oh, yeah, here's our four percent rate
Speaker 1: opened three sixty performance savings and you did, and they
Speaker 1: got your money. But if you already had a three
Speaker 1: sixty saves account, your rate dwindled to nothing and nobody
Speaker 1: called you to be like, hey, you should move your
Speaker 1: money to the higher yielding exact similar product. And so
Speaker 1: they got a lot of money. They had a lot
Speaker 1: of deposits from people who just didn't notice and kept
Speaker 1: their money at the low yielding thing. And the CFPB
Speaker 1: says they saved two billion dollars in interest sixpence by
Speaker 1: doing this.
Speaker 2: So you seemed pretty sympathizic.
Speaker 1: I'm like, giggling now is.
Speaker 3: Such a good Yeah?
Speaker 2: Well, I mean your position seems to be like dah,
Speaker 2: this is how banking works.
Speaker 1: The point of a bank is like they take cheap deposits, right, yeah,
Speaker 1: Like I don't want to call it my bank. I
Speaker 1: have no problem with them. But they offer me zero
Speaker 1: points zero three percent on savings. Well, you know, because
Speaker 1: like they can do that, I.
Speaker 2: Will say, okay, So this is how banking works. You
Speaker 2: talk about how like the deposit franchise system is based
Speaker 2: on people not knowing what the not checking.
Speaker 3: The interest rates.
Speaker 1: Like banking theory is that when interest rates go up,
Speaker 1: the cost the deposits of banks doesn't go up as
Speaker 1: fast because there's a thing called deposit beta. Like some
Speaker 1: people just don't move their money out or don't ask
Speaker 1: for a higher interest rate, and certain banks can save money.
Speaker 1: And it's like really important to the stability and health
Speaker 1: of banks that people don't demand every last basis point
Speaker 1: of market interest rates on their savings accounts because loosely speaking,
Speaker 1: the collapse of like Silicon Valley Banking twenty three is
Speaker 1: like because people like demands of market rates on their
Speaker 1: interest on their bank deposits.
Speaker 2: I mean you still see the after effects of that,
Speaker 2: because you take a look at money market funds and
Speaker 2: I think they're still close to seven trillion dollars depending
Speaker 2: on what you look like.
Speaker 1: And I like exaggerating when I say because SPV was
Speaker 1: like had like solvency problems. Yeah, but like the aftermath
Speaker 1: of that was very much. People are like, ooh, my
Speaker 1: regional bank, that's weird. And then they're like, oh wait,
Speaker 1: I can get more on a money market fund and
Speaker 1: it's all on treasuries and it's safer than my regional banking. Yeah,
Speaker 1: So like everyone moved their money to money market funds,
Speaker 1: and so the cost of funding for regional banks went
Speaker 1: up so much because like basically all these deposit franchises
Speaker 1: got like rerated to market interest rates. Yeah, and Capital
Speaker 1: One it's not getting rerated to market interest rates because
Speaker 1: it was paying zero point three percent to all these
Speaker 1: people who weren't paying attention.
Speaker 2: Well, quick segue. It seems like that is the dynamic
Speaker 2: that's going to exist for a while because Okay, there's
Speaker 2: seven trillion dollars in money market funds and it's just
Speaker 2: not coming out, even though the FED has lowered rates
Speaker 2: by like one hundred basis points. There's a bunch of
Speaker 2: bullish people in the stock market who are saying that's
Speaker 2: cash on the sidelines that belongs to the market. But
Speaker 2: then you have people on the other side saying, like,
Speaker 2: no trillions of that came in the wake of sb
Speaker 2: BE collapsing because people realize that's a much better way
Speaker 2: to earn interest on their savings.
Speaker 1: I think that's right, and like anecdotally, like that is
Speaker 1: my experience. I had my saviors and accounts, and eventually
Speaker 1: someone was like, you should really put that in the
Speaker 1: money market, but like I'm not, that's not going into equities.
Speaker 2: No, No, that would probably go back to banks.
Speaker 1: But we'll go to the money market plans.
Speaker 2: You're just going to stay there for the rest of
Speaker 2: your life.
Speaker 1: Cool power to unless Capital One or someone else offers me.
Speaker 2: A higher rate on not going to be capital one.
Speaker 2: My question, So what you were saying this I like
Speaker 2: a good trade. This is how banking works. And it
Speaker 2: sounds like they weren't necessarily lying.
Speaker 1: When they were lying at all, They just weren't calling
Speaker 1: their customers proactively to be like, hey, we have a
Speaker 1: better rate elsewhere.
Speaker 2: But doesn't this doesn't this sound bad? It sounds like
Speaker 2: they were basically told to keep this secret because you
Speaker 2: put in block quotes that the bank this is according
Speaker 2: to the cfp BE, the bank told frontline ambassadors associates
Speaker 2: who work in the bank's physical branches, they must they
Speaker 2: must not proactively mention the ability to convert three sixty
Speaker 2: savings accounts to three sixty performance saving accounts to customers. Similarly,
Speaker 2: the bank forbade its ambassadors from forwarding three sixty saving
Speaker 2: account holders to Bank Voice, the bank's units that handles
Speaker 2: account conversions, unless the account holders asked directly about the
Speaker 2: ability to convert accounts. That seems bad, Matt.
Speaker 1: It's like converting to judaism. You have to ask three times.
Speaker 1: It's bad customer service. Yeah, there's no doubt about it.
Speaker 1: Is it fraud?
Speaker 2: Why did they launch three sixty performance Savings in the
Speaker 2: first place?
Speaker 1: It's a great question. I assume the answer is because, like,
Speaker 1: you do want to gather deposits, and the way to
Speaker 1: do that online as a bank is you do, like
Speaker 1: legitimately advertise the best rate. Right, if you say our
Speaker 1: highield save as account, you'ld four point three percent, come
Speaker 1: join us, right, and then people do so. They would
Speaker 1: advertise this new product to get new deposits in, and
Speaker 1: they had to pay a market rate to do that.
Speaker 1: But like, well, I raise the rate on the old deposits.
Speaker 1: So you launched a new product and then the old
Speaker 1: product can pay less and less than less. I was
Speaker 1: also shady, right.
Speaker 2: It seems it smells so stinky, Matt. And I was
Speaker 2: gonna say it seems like false advertising. But you do
Speaker 2: point out that you know they advertise this is the
Speaker 2: best and the highest interest rate.
Speaker 1: I think it was like it's false advertising because in
Speaker 1: twenty nineteen they said it was the best rate and
Speaker 1: then in twenty twenty three, I was like, well, this
Speaker 1: is different.
Speaker 2: Years, I guess, but if you know that, you know
Speaker 2: the vast majority of deposits and who knows if it
Speaker 2: was the vast majority are in there because you advertised
Speaker 2: it as having the higher rates straight and then that changed.
Speaker 2: Shouldn't you tell them?
Speaker 1: Yes, the CFPP says, and yes, if you're like a
Speaker 1: good upsetting vide you're a bank, you know, it's like
Speaker 1: a different story. I had a friend when I was
Speaker 1: at Goldman. I had a friend who managed his family's
Speaker 1: cash balances. He would like put money at Hyta and
Speaker 1: every like month he would check the rates on hoyotav
Speaker 1: And there's always someone who is better than someone else, right,
Speaker 1: because like this is what you do. You advert has
Speaker 1: a high rate, you draw in money, and then you
Speaker 1: figure people aren't going to pay close attention, so you
Speaker 1: could have like not quite the highest rate right now.
Speaker 1: Usually they were all kind of fairly close to each other,
Speaker 1: but like each month someone had a like essentially promotional
Speaker 1: rate to get in money. And so if you move
Speaker 1: your money every month, you could earn a higher rate
Speaker 1: every month. But you had to be kind of weird
Speaker 1: to do that and the banks for keep banking on
Speaker 1: people mostly not being that weird and mostly like leaving
Speaker 1: their money there even if they didn't offer the highest
Speaker 1: rate all the time. And Capital One did a sort
Speaker 1: of extreme version of them. Yeah.
Speaker 2: Well, they report earnings next week. It'll be interesting to
Speaker 2: see if there's any commentary on this on the call.
Speaker 1: Yeah. I'm gonna say two other things about Capitol one.
Speaker 1: On one is that before the pandemic, I would meet
Speaker 1: people for coffee and they'd be like, where can we
Speaker 1: meet for coffee near Bloomberg? And I had a whole
Speaker 1: list of places, and they all close during the pandemic.
Speaker 1: And now when people say where can we meet for
Speaker 1: coffee near Bloomberg, I'm like, well, there is a Capital
Speaker 1: One cafe in our building, and that is the only
Speaker 1: place I meet people for coffee. And it used to
Speaker 1: have the advantage that it was kind of like large
Speaker 1: and quiet and so you could always find a seat.
Speaker 1: But then that stopped having that. Everyone meets at the
Speaker 1: Capitol One cafe.
Speaker 2: Oh my god, So it used to be in h
Speaker 2: and M. It's literally in the Bloomberg building. I love
Speaker 2: the Capital One And I met your brother for coffee
Speaker 2: isn't that bizarre. Yeah, we have a memory together at
Speaker 2: the Capital One Cafe. Uh Viil Donna Hirich was also
Speaker 2: there and my brother Greg and some other guy. That
Speaker 2: was quite a strange meeting of the mines. Capital One Cafe.
Speaker 2: It's a great place to get a kind of soggy sandwich.
Speaker 1: You don't have to bank there, but I believe you
Speaker 1: get a disc of you do great stuff. I feel,
Speaker 1: you know, in addition to loving a good trade, I
Speaker 1: sympathize at the Capital One because they provide me my
Speaker 1: meeting space. The other thing I want to say is
Speaker 1: that what happened is the CFP brought a case right
Speaker 1: and like next week you'll be a new CFPV. This
Speaker 1: is like they are rushing to get everything out the
Speaker 1: door before the new administration comes in. And you know
Speaker 1: a lot of the defendants in these cases are kind
Speaker 1: of saying that they're like, ah, this is the last
Speaker 1: ditch effort by the CFPB to bring a politically motivated
Speaker 1: case and like it won't really stand up and there
Speaker 1: might be something to do to that. Like, I think
Speaker 1: this is a this is kind of a novel theory here,
Speaker 1: because like the CFPB is not really alleging that they lied.
Speaker 1: They should have been proactively telling customers about it. And
Speaker 1: we'll see like what the new CFPB does and and
Speaker 1: sort of where this goes. But like this might go nowhere,
Speaker 1: and Capital one on the call might say this is nothing,
Speaker 1: and they might be right.
Speaker 2: Wow, Perhaps Nate Anderson had some political considerations in mind.
Speaker 2: Perhaps CFPB did as well.
Speaker 1: We're not going to talk about the SEC case against
Speaker 1: the Elon Musk no on this podcast.
Speaker 3: Thanks, we're short out time, but yeah, well you know
Speaker 3: what we.
Speaker 2: Are going to talk about ESG, Yes and American Airlines.
Speaker 1: Turns out if I had did an AUTO like we're
Speaker 1: gonna talk about Elon.
Speaker 2: Would be crazy. I would just stare at you, slackshod
Speaker 2: and walk out of the room. So American Airlines pilots
Speaker 2: are assuming American Airlines in Texas for ESG. As you
Speaker 2: point out, this plan by black Rock didn't have any.
Speaker 1: American Airlines runs like a four O one K fund
Speaker 1: Yes pro one K plan for its pilots. Right and
Speaker 1: one pilot brought a class action saying that this plan
Speaker 1: violates its fiduciary duties to the beneficiaries to the pilots
Speaker 1: because it is ESG and ESG environmental, social and governance
Speaker 1: investing is not putting the financial best interests of the
Speaker 1: pilots first. It is enacting Americans or black Rocks like
Speaker 1: evil social goals rather than caring only about financial returns
Speaker 1: the pilots. As I pointed out in my column, there
Speaker 1: are no ESG funds.
Speaker 3: Yeah, this four on K plan.
Speaker 1: They's just like, at no point does anyone make any
Speaker 1: investment decision that's like, oh, we can't buy coal plants
Speaker 1: because like they're not ESGA. Right, no ESG funds. But
Speaker 1: what there is, though, is that there's regular index funds,
Speaker 1: and the index ones are managed by black Rock and
Speaker 1: Blackrock for a while not anymore. For a while, Larry
Speaker 1: think the CEO of Blackrock would send like a yearly letter,
Speaker 1: like a public letter to CEOs of public companies saying
Speaker 1: you need to care about your impact on communities and
Speaker 1: we're going to be very focused on climate change and
Speaker 1: all these things that seemed in the very different days
Speaker 1: of like twenty twenty one to be like really good
Speaker 1: marketing for Blackrock. Yeah. Oh, look at Blackrock. It's like
Speaker 1: a socially responsible long term steward of capital, and it
Speaker 1: thinks about things like climate change and social impact of
Speaker 1: businesses and like, now that's all not allowed. And so
Speaker 1: these pilots, you know, sued and the argument was that
Speaker 1: by Blackrock out these letters and thinking about ESG and
Speaker 1: sometimes of voting like in favor of like climate proposals
Speaker 1: at portfolio companies, it threw its beneficiaries under the bus
Speaker 1: and it wasn't putting their interests first. And also American
Speaker 1: by hiring Blackrock and by not yelling at them to
Speaker 1: stop doing ESG violated its duties of loyalty to its pilots,
Speaker 1: and therefore, you know, is liable for like not running
Speaker 1: its four h one k plan under the law. And
Speaker 1: they brought this case in like this federal court in
Speaker 1: Texas with like a sort of famous conservative judge who like,
Speaker 1: you bring your conservative cases in Texas because he'll ruin
Speaker 1: your favor. And he said, that's right. ESG by definition
Speaker 1: doesn't prioritize investors' financial returns and so it's not allowed.
Speaker 1: And uh, an American violated its duty of loyalty.
Speaker 2: Yeah, that's really interesting. I mean we've talked about ESG
Speaker 2: on the podcast before obviously, and the question that I
Speaker 2: always ask is like, what are the motivations of ESG.
Speaker 2: Are you investing to do good or because you think
Speaker 2: that if you don't invest to do good eventually things
Speaker 2: will happen to your business that are bad.
Speaker 1: I think that most mainstream ESG investors, certainly including black Rock,
Speaker 1: would say it's the latter. They would say, formally, what
Speaker 1: we are doing is considering long term risks to the
Speaker 1: businesses that we invest in. Climate change, and like the
Speaker 1: transition away from fossil fuels is a giant long term
Speaker 1: risk that we are analyzing and predicting, and so we
Speaker 1: want companies to be positioned for it. We want airlines
Speaker 1: to think about how to you just feel more efficiently.
Speaker 1: We want oil companies to think about transitioning to cleaner
Speaker 1: energy because like that's the long term future. Yeah, And
Speaker 1: like similarly with like social issues, right, it's like diverse
Speaker 1: companies perform better, and diverse companies, like in a more
Speaker 1: diverse world will perform better. And so when we take
Speaker 1: the long view, we think that diversity is important, even
Speaker 1: if it's like expensive. Now, I think that this has
Speaker 1: always been the mainstream of how people who work in
Speaker 1: ESG have described. Now there are two big cavists that
Speaker 1: one is that a lot of people don't believe that.
Speaker 1: And the judge talks about this, he's like, yeah, they
Speaker 1: pay lip service to the idea that it improves financial returns,
Speaker 1: but it's not real. And I think that, you know,
Speaker 1: there is kind of evidence both ways, and like the
Speaker 1: performance of ESCH funds is hard to untangle from like
Speaker 1: influence into es CHI funds. You know, he cites like
Speaker 1: ESG funds underperformed the S and P like in twenty
Speaker 1: twenty three or whatever. Again, no ESG funds in this portfolio,
Speaker 1: so it's an irrelevance iation but whatever, ye yah, yeah.
Speaker 1: But the other problem with this is that I think
Speaker 1: everyone who worked in ESG, if you like pressed them
Speaker 1: on this issue, would say it's about considering long term
Speaker 1: risks to the portfolio. They also definitely benefited from, like
Speaker 1: creating the impression that they were investing to do good. Right.
Speaker 1: I think as an advertising matter, as a you know,
Speaker 1: accumulating of assets matter, blackrock positioning itself as like a
Speaker 1: steward of the environment was appealing to some people, whether
Speaker 1: or not it improved their returns, right, Like they wanted
Speaker 1: the world to you know, they wanted like to fight
Speaker 1: against climate change, and they had like the vague impression
Speaker 1: that putting their money at Blackrock would help in the
Speaker 1: fight against climate change. And I think that like confusing
Speaker 1: those two issues, confusing like are you investing for social good?
Speaker 1: Are you considering long term risks to your portfolio? Was
Speaker 1: like really beneficial to ESG investors during the rise of ESG. Yeah,
Speaker 1: And like there's really bad for them now because they're
Speaker 1: getting lawsuits like this and they're getting pushed back from
Speaker 1: like politicians saying, well, you're not actually putting your clients
Speaker 1: interest first, You're like only trying to do, you know,
Speaker 1: achieve your social goals, which I think is not what
Speaker 1: they would have like officially said, but it's kind of
Speaker 1: what they implied a little bit, So it's not on
Speaker 1: them in trouble now.
Speaker 2: I do want to go back to the lip service thing,
Speaker 2: because that just don't I don't, I don't know. So
Speaker 2: the judge said that oftentimes Blackrock couched its ESG investing
Speaker 2: in language that specifically pledge allegiance to an economic interest,
Speaker 2: but Blackrock never gave more than lip service to show
Speaker 2: how I mean, how do you distinguish what is actually
Speaker 2: a lip service. What if they were giving lip service
Speaker 2: to the ESG part but actually only cared about the
Speaker 2: economic impact. I feel like we can't know that.
Speaker 1: Yeah, And like what I wrote is the Black cair
Speaker 1: complex has a lot of skin in this game, right, Yeah,
Speaker 1: Like Blackrock and plays a lot of investment professionals who
Speaker 1: are like rewarded for doing well, right, And so if
Speaker 1: like they were constantly undermining the economic interests that they're
Speaker 1: trillions of dollars of funds, they might stop doing that, right.
Speaker 1: Blackrock also like has a lot of clients, right, And
Speaker 1: like it's clients range from you know, individuals to like
Speaker 1: very sophisticated pension funds who have like you know, principle
Speaker 1: Asian problems, to like you know, big endowments, like all
Speaker 1: sorts of clients who you know, it's the biggest asset
Speaker 1: manager in the world. Presumably those clients like think it's
Speaker 1: helping them make money, right, Like, like maybe they're all deluded,
Speaker 1: but it's weird to be like, you know, the people
Speaker 1: who invested like trillions and trillions of dollars to the
Speaker 1: black crack are all wrong about it trying to make
Speaker 1: them money. And I a judge in Texas am right,
Speaker 1: and I know that those people are all that like
Speaker 1: Blackrock is actually not looking after them. It's a strange
Speaker 1: like like, what's the evidence that that it was only
Speaker 1: lip service? Well, he doesn't really say, you know, there's
Speaker 1: like test the money in a trial. Maybe he heard
Speaker 1: something very convincing. But to me, like if Blackrock was
Speaker 1: not trying to make money for its investors, it's kind
Speaker 1: of weird that it's got so many investors.
Speaker 2: I do wonder what this means reputationally for Blackrock going forward,
Speaker 2: especially the thing like on.
Speaker 1: That point, like Blackrock is not involved in this lawsuit. Yeah,
Speaker 1: it's like a weird because it's like, right, like black
Speaker 1: Rock is getting its name drive through the mud and
Speaker 1: it's not even still.
Speaker 2: I mean, you you raise the point that it's possible
Speaker 2: in twenty twenty one corporate managers who might have been
Speaker 2: afraid to be critical of ESG might have you know,
Speaker 2: hired Blackrock for four one ks to curry favor with Blackrock.
Speaker 1: A point in this lawsuit that's important. It's like Blackrock
Speaker 1: is one of the biggest shareholders of American and so
Speaker 1: like can American criticized BlackRock's THEESGV.
Speaker 2: Is I mean you. You could on the flip side,
Speaker 2: see a company considering, you know, who to hire for
Speaker 2: their for one k, see what's happening in Texas and
Speaker 2: be like, maybe we should just go with Vanguard or
Speaker 2: like Fidelity or something because we don't want this rhcstoria or.
Speaker 1: Like the anti woke right right? Who I really like?
Speaker 1: You know, there's all these people like springing up to
Speaker 1: like oh up this pie right, get all the.
Speaker 2: Anti Yes, But yeah, I don't know. I would love
Speaker 2: to talk to Larry Think. Just sometimes I think about
Speaker 2: who are the people I would love to talk to
Speaker 2: in a completely honest setting like this? Yeah, I come on,
Speaker 2: just like, do you regret it? I know that black
Speaker 2: Rock is backed away ESG.
Speaker 1: I could answer for that. Heats it. Yeah, he regrets
Speaker 1: it because he's a businessman, you know.
Speaker 2: Like he's a business common man.
Speaker 1: Yeah. Like the story in this case that like Larry
Speaker 1: Think is like a crusader for my environmental justice. Who
Speaker 1: will put that over the interests of money is like crazy?
Speaker 2: Yeah.
Speaker 1: I know, back leaned into ESG because it was great
Speaker 1: marketing and now they're leaning way out of ESG because it's.
Speaker 2: Terrible market But you know, if we asked Larry on
Speaker 2: this podcast or in any other public forum, he would
Speaker 2: be like, he wouldn't say that he regrets it necessarily,
Speaker 2: he would say fancy words.
Speaker 1: He would say, I think we are stewards of our investors' capital,
Speaker 1: and we consider the long term risks of that capital.
Speaker 1: We thought and think that, like things like social contribution
Speaker 1: and climate change are material long term risks, and so
Speaker 1: as sensible stewards of capital, we considered those risks, and
Speaker 1: I tried to convey that financial motivation and some letters
Speaker 1: and people are misinterpreting those letters. So I think it's
Speaker 1: all true, but like those letters are kind of written
Speaker 1: to be misinterpreted.
Speaker 2: Larry Fink, come on the podcast, Go do It.
Speaker 1: And that was the Money Stuff Podcast.
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