Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to The Money Stuff Podcast, your weekly
Speaker 2: podcast where we talk about stuff related to money. I'm
Speaker 2: Matt Levine and I write The Money Stuff Colin for Bloomberg.
Speaker 1: Opinion, and I'm Katie Greifeld, a reporter for Bloomberg News
Speaker 1: and an anchor for Bloomberg Television.
Speaker 2: Got Katie.
Speaker 1: We're going to talk about a merger.
Speaker 2: I don't think it's a merger. I think we're talking
Speaker 2: about short squeeze.
Speaker 1: We're going to talk about a short squeeze. That's not
Speaker 1: a merger. There is fraud involved. We're going to talk
Speaker 1: about on cycle private equity recruiting. It wasn't a world
Speaker 1: that I was familiar with.
Speaker 2: That's an important world.
Speaker 1: And then we're going to talk about bloom Er Candy Delicious.
Speaker 1: I'm gonna say that. Okay, so this is a merger,
Speaker 1: but maybe it's not.
Speaker 2: We're telling you about MMTLP.
Speaker 1: Yeah, there's some more here.
Speaker 2: Thing that people on social media really care about it.
Speaker 1: Oh yeah, a lot, a lot.
Speaker 2: I've been getting emails about it for years.
Speaker 1: Yeah, I mean I was reading some Reddit posts from
Speaker 1: three years ago this morning. Gosh, how to begin how
Speaker 1: to begin begin.
Speaker 2: So there's an oil company called Torchlight. It had some
Speaker 2: leases that were not producing a lot of oil, but
Speaker 2: I like drill the releases. But it was a publicly
Speaker 2: listed company and it did a reverse merger with a
Speaker 2: like material science company, and they decided to get rid
Speaker 2: of the oil assets, and like they could do it bad,
Speaker 2: like spinning it out to shareholders. But like at some
Speaker 2: point they had conceived this notion that short sellers were
Speaker 2: bad and that like short sellers were the problem with
Speaker 2: the company, and they were like, we want to find
Speaker 2: a way to punish the short sellers. And the way
Speaker 2: you do that, it turns out there's like a technology
Speaker 2: to punish short sellers, which is that instead of spinning
Speaker 2: out Torchlight or like the oil assets as a new
Speaker 2: company where people could buy and sell the stock, you
Speaker 2: spin it out as a company where they can't buy
Speaker 2: and solve the stock. And the reason you do that
Speaker 2: is like, if you were a short seller who is
Speaker 2: short Torchlight, you've borrowed the stock and you have to
Speaker 2: return what you borrowed. So if Torchlight splits up into
Speaker 2: two companies, one of which is like the new Meta Materials,
Speaker 2: that like has a public traded stock and one of
Speaker 2: them is like this new not traded stock, then you
Speaker 2: have to return both of those things to your stock lender.
Speaker 2: Public get traded stock is easy, you just go buy
Speaker 2: it on the stock market, but the not traded stock
Speaker 2: you can't buy in the stock market, so you can't
Speaker 2: return it to your stock lender. And so what Torchlight
Speaker 2: figured out is if we do this merger and like
Speaker 2: we have like this new meta material stock that's the
Speaker 2: new public company, and we also have this other non
Speaker 2: traded stock, then like the short sellers will see that,
Speaker 2: and before the merger closes, they will know they have
Speaker 2: to buy back their Torchlight short positions because after the
Speaker 2: merger closes, they'll be host there'll be no way to
Speaker 2: close out there short they'll be in big trouble. This
Speaker 2: is the idea, and so they do that. They created
Speaker 2: this non traded stock or this thing that wasn't supposed
Speaker 2: to be traded called MMTLP. It's like a weird preferred
Speaker 2: stock of the new public company that wasn't supposed to
Speaker 2: be traded on a public stock exchange, and like sort
Speaker 2: of represented a claim on the oil and gas assets.
Speaker 2: And they like announced this merger, and they went out
Speaker 2: and sort of marketed quietly to the right people. They
Speaker 2: marketed the idea that there would be a short squeeze,
Speaker 2: and so they didn't put it in their public filings.
Speaker 2: They weren't like, oh, we're doing this to do a
Speaker 2: short squeeze, but like privately amongst themselves, they were like,
Speaker 2: we're doing this to do a short squeeze, and like
Speaker 2: they sort of like tried to convince short sellers that
Speaker 2: they would get squeezed. And they also like tried to
Speaker 2: convince some number of Torchlight shareholders that there would be
Speaker 2: the short squeeze. And the point of all this is
Speaker 2: just before the merger, there's a short squeeze, all the
Speaker 2: short sellers have to buy back the stock. The stock
Speaker 2: goes way up, and what they do is just before
Speaker 2: the merger they sell a bunch of stock. They doing
Speaker 2: at the market offering a stock like right before the
Speaker 2: merger closes in order to take advantage of the short
Speaker 2: squeeze and raise like one hundred million dollars to use
Speaker 2: to like keep drilling Torchlights oil leases.
Speaker 1: That feels like meme stock economics.
Speaker 2: It's very meme stock economics. The difference between this and
Speaker 2: like game Stop is one, the company is explicitly like saying, hey,
Speaker 2: there's gonna be a short scueze, usually in like a
Speaker 2: meme stock. It's like people on Reddit are saying, hey,
Speaker 2: there's gonna be a short scuzz here. It's the company doing.
Speaker 2: But then two, the other thing that's like really important
Speaker 2: is they engineered the short squeeze by like giving out
Speaker 2: this non traded stock in game Stop or whatever. The
Speaker 2: short squeeze is not like a real short squeeze. It's
Speaker 2: just like the price goes up and so short sellers
Speaker 2: like lose money and so they feel like they need
Speaker 2: to cover their short positions. But this is a specific
Speaker 2: designed structure to make it impossible to keep a short
Speaker 2: position on. So even if the stock went down, the
Speaker 2: shorts would still be in trouble because they wouldn't be
Speaker 2: able to buy back this weird non traded stock that
Speaker 2: the company was giving out. So that was the idea.
Speaker 2: Now I don't know if it worked. And the reason
Speaker 2: we're talking about it is the SEC brought a fraud
Speaker 2: case against Meta Materials, the company, and like the SEEO
Speaker 2: of Torchlight and the former CEO of Meta materials who
Speaker 2: were sort of allegedly in on this plan. And the
Speaker 2: SEC says what you were doing was fraud, but they
Speaker 2: don't know why it was fraud. They say, either it
Speaker 2: was fraud because you did this short squeeze and that's
Speaker 2: market manipulation. You're not allowed to do this thing that
Speaker 2: causes the short squeeze, or it was fraud because you
Speaker 2: didn't actually succeeded during the short scuers. No short sellers
Speaker 2: bought back their stock. There was fine, but you convinced
Speaker 2: enough retail shareholders that there would be a short squeeze
Speaker 2: that they all bought the stock and then you were
Speaker 2: able to sell because the stock did go up a lot,
Speaker 2: because just nobody knows why the.
Speaker 1: Stock But either way, what you did is fraud.
Speaker 2: That's what the SEC says.
Speaker 1: So what does this mean for the actual shareholders because
Speaker 1: there were actual shareholders in this company while this was
Speaker 1: all happening.
Speaker 2: Oh yeah, if you bought stock, there's a good chance
Speaker 2: you lost money. Right, Like the company sold you all
Speaker 2: the stock at basically the peak, right, like they did
Speaker 2: this short squeeze or whatever it was, like the stock
Speaker 2: went way up and they did an out the market offering,
Speaker 2: like right at the peak because they timed it to
Speaker 2: when they were planning to have the short squeeze, and
Speaker 2: so they sold one hundred million dollars worth of stock
Speaker 2: to people, maybe some short sellers, but a lot of
Speaker 2: like regular investors at prices that you know, like then
Speaker 2: the stock fell by like, you know, eighty percent, so
Speaker 2: a lot of people lost money. The other thing it means, though,
Speaker 2: is like if you bought the stock sort of leading
Speaker 2: into the short squeeze, you got shares of Meta Materials,
Speaker 2: which is the public company, but you also got these
Speaker 2: MMTLP shares. And the MMTLP shares were supposed to be
Speaker 2: not traded, right, so like instead of having like a
Speaker 2: public company, like you own torch Light, which is a
Speaker 2: public company, and now you have like this not traded company.
Speaker 2: Now it turns out they were traded. The company was like,
Speaker 2: we're going to make them not traded. We're going to
Speaker 2: like not list them on a stock exchange. But that
Speaker 2: doesn't matter. They can still trade over the counter. It's
Speaker 2: still a public company. And so in fact, MMCLP shares
Speaker 2: did trade, not a lot, but they traded. You know,
Speaker 2: the sec cases about stuff that happened only twenty twenty one.
Speaker 2: Since then, yeah, MMCLP has become even more of a
Speaker 2: meme because what happened is at some point the company
Speaker 2: was like, you know what, the stock is not non
Speaker 2: traded enough for us. There are still short sellers.
Speaker 1: We're still mad at short to exterminate them.
Speaker 2: So we're going to do this again, but like more so.
Speaker 2: And so they did is they took MMTLP, which was
Speaker 2: sort of like a tracking stock on the oil assets,
Speaker 2: and they replaced it with they spun out the oil
Speaker 2: assets into a new company called next Bridge, and the
Speaker 2: stock of that company is like super duper not traded.
Speaker 2: It's not registered with DTC, the like repository of all stock.
Speaker 2: And so what that means is your broker can't hold
Speaker 2: or transfer your shares for you, so it's just you
Speaker 2: really can't trade it at all. And the idea was
Speaker 2: like that would really drive out the short sellers. You
Speaker 2: definitely couldn't buy that stock to close out your short
Speaker 2: So I don't really know how many short sellers were
Speaker 2: left at MMTLP because it was hard to trade it.
Speaker 2: The plan wasn't twenty twenty one they were gonna get
Speaker 2: rid of all the short sellers, but they replaced MMTLP
Speaker 2: with Next Bridge. They published a perspective for it that
Speaker 2: like explicitly said there's going to be a short squeeze,
Speaker 2: and there was, in fact, again a rally, and MMTLP
Speaker 2: stock is like either because there was a short squeeze
Speaker 2: or because people were like, oh, there's gonna be a
Speaker 2: short squez, it's great. And then Finra, the financial regulator,
Speaker 2: halted trading in the stock like two days before it
Speaker 2: poofed into Next Bridge, And so all these people who
Speaker 2: had bought the stock expecting one there'd be a short
Speaker 2: squeeze and two they would then sell at the peak,
Speaker 2: they got stuck in it. They had stuck holding mm
Speaker 2: TOP for like the last two days, and then it
Speaker 2: poofed into a Next Bridge, which they can't sell at all.
Speaker 2: So now I just own the stock in this oil
Speaker 2: company that doesn't make any money, and like you know,
Speaker 2: as in oil properties, it may one day make money,
Speaker 2: but they can't trade it because it's really super duper
Speaker 2: not tradable, and so it's like these decisions that the
Speaker 2: company made were really bad for shareholders. Yeah, they made
Speaker 2: life much worse for actual shareholders in the pursuit of
Speaker 2: making life worse for short.
Speaker 1: Sellers in a way, I find that sort of just
Speaker 1: do whatever it takes kind of just amazing.
Speaker 2: Yeah, it's like such a sort of well known obvious
Speaker 2: fact that if a company is going around doing stuff
Speaker 2: for the purpose of hoording short sellers, one that's gonna
Speaker 2: be bad for shareholders, but two, like that company is
Speaker 2: focused on the wrong thing, right, Yeah, if you're thinking
Speaker 2: about short sellers like twenty percent of the time, like
Speaker 2: you are not spending enough time on your business, and
Speaker 2: these guys are thinking about short sellers like ninety percent, I.
Speaker 1: Was gonna say that's one hundred percent. Well, there's a
Speaker 1: few questions that I'm hoping you can help me out with.
Speaker 1: So before this combination, it was Torchlight that was heavily shorted, right,
Speaker 1: and it was the old version of Meta Materials that
Speaker 1: wanted to do the merger so that they would get
Speaker 1: the list in.
Speaker 2: Yeah. Meta material is like a small Canadian company and
Speaker 2: they were like listed on a I think on one
Speaker 2: of the secondary Canadian stock exchanges, and they wanted a
Speaker 2: US listing, and so yeah, torch Light had a Nasdaq listing,
Speaker 2: and so they did a reverse merger where basically Meta
Speaker 2: Materials would get Torchlights listing, and torch Light's assets would
Speaker 2: be spun out into this like MMTLP whatever kind of thing.
Speaker 1: What I don't quite understand is both CEOs linking arms
Speaker 1: in this cause to just like kill all the shorts.
Speaker 1: Why did this become the cause of the Meta Materials, Like,
Speaker 1: I don't know. It just feels like there was a
Speaker 1: cleaner way to do this.
Speaker 2: Okay, yes, but the SEC would say the goal here
Speaker 2: was not just to kill the shorts. There was another goal,
Speaker 2: which the pump the stock up, right, and like so
Speaker 2: they did pump the stock up. They raised like one
Speaker 2: hundred million, a hundred plus million dollars selling stock into
Speaker 2: this whatever it was rally, and then most of that
Speaker 2: money went to Meta Materials M. The Canadian company got
Speaker 2: not only the publicly thing, but like this money from
Speaker 2: this pumped up stock price. Now, the deal was they'd
Speaker 2: give some of that money to like Torchlight, to like
Speaker 2: keep drilling the assets. But the SEC would say they
Speaker 2: went around looking for companies that wanted a reverse merger
Speaker 2: and then they're like, hey, by the way, we have
Speaker 2: this great plan to pump up the stock price and
Speaker 2: like raise a lot of money, and then you know,
Speaker 2: some number of CEOs would say like, oh great, yeah,
Speaker 2: I want a pumped up stock price and I want
Speaker 2: a lot of money a good deal.
Speaker 1: There you go.
Speaker 2: So they did it. Now, why did Meta Materials do
Speaker 2: the extra super duper not tradable thing? Why afterwards? I
Speaker 2: don't know. I think some of it might be they
Speaker 2: were really mad at short sellers. Some of it was
Speaker 2: like they had to get rid of this MMTLP things.
Speaker 2: Somehow they did have this retail investor base that has
Speaker 2: spent years having conspiracy theories about short sellers.
Speaker 1: So you wrote in your Money Steff column that they
Speaker 1: took a page from the Overstock CEO's book from that
Speaker 1: experience who did something similar. Then they did this, which
Speaker 1: was a lightly better version. That's what you called it.
Speaker 1: I wonder where this now evolves to.
Speaker 2: Well, we're like really in the middle of the story
Speaker 2: because the SEC brought these charges saying that the thing
Speaker 2: they did in the merger in twenty twenty one was
Speaker 2: a fraud. But there's still the like MMTLP into next Bridge,
Speaker 2: the trading halt that's hotly controversial. They've been writing letters
Speaker 2: to Congress, They've been sending threatening emails to journalists. They've
Speaker 2: been sending very polite emails to me, honest, they sort
Speaker 2: of arguing about this, like, I, you know, all my
Speaker 2: interactions with the MMTLP people have been fine, but there's
Speaker 2: a lot of them, like they're really passionate about it.
Speaker 2: And the conspiracy theory at this point involves Finra. The
Speaker 2: MMTLP community believes that the trading halt in that stock
Speaker 2: was Finna trying to bail out short sellers, and like
Speaker 2: Finra is conspiring with short sellers. By the way, this
Speaker 2: is not true. The halt came after the X date
Speaker 2: for short sellers to have to close out their positions,
Speaker 2: like this is not true. But they you know, they're
Speaker 2: calling for hearings and whatnot. And so meanwhile, the sec
Speaker 2: like explicitly said in this case, we are still continuing
Speaker 2: our investigation of the subsequent events MMTLP, so there will
Speaker 2: probably be another case about the MMTLP.
Speaker 1: So are you rooting for chaos here?
Speaker 2: No? Okay, I kind of like.
Speaker 1: Do you want there to be hearings because that's something
Speaker 1: a little.
Speaker 2: Bit fun like to me, Like, I feel really bad
Speaker 2: for the regulators here, who, like I think, are just
Speaker 2: doing very straightforward market regulation, and you clearly think you
Speaker 2: know the SEC's position here, which is what I've been saying,
Speaker 2: you know, since I started writing about this, is like
Speaker 2: this company was doing a fraud by trying to arrange
Speaker 2: the short squeeze, and all of the investors think the opposite.
Speaker 2: They think the short sellers were doing some sort of
Speaker 2: fraud and the company was just helping out shareholders by
Speaker 2: taking revenge on the shorts, which is again not true
Speaker 2: because the shareholders are stuck in this non treaded stock
Speaker 2: and have lost a lot of money. So I just
Speaker 2: think that the regulators are sort of very straightforwardly doing
Speaker 2: the right thing and trying to prevent weird market manipulations,
Speaker 2: and like somehow there's this populist view that that's all
Speaker 2: wrong and the regulators should be punishing the short sellers
Speaker 2: and like this sort of short squeeze is good. So no,
Speaker 2: I'm not reading for I often read for Cass, but
Speaker 2: here I'm like, these hard working regulators are just trying
Speaker 2: to keep orderly markets and we should.
Speaker 1: Let them God bless them.
Speaker 2: Yeah, I'm going to talk about my favorite financial story. Ever.
Speaker 2: I think it's interesting that the SEC believes that like
Speaker 2: engineering a short squeeze is illegal. It's not like super
Speaker 2: clear to me that that's right, but you know, it's
Speaker 2: probably right. I mean it's market manipation, right. It's like
Speaker 2: causing the price of a security not to reflect the
Speaker 2: fundamentals of supply, and that's kind of market manipulation. So
Speaker 2: I understand the case. It's probably right, but it's a
Speaker 2: little odd. And every so often not companies, just market
Speaker 2: participants engineer a short squeeze. And my favorite of them
Speaker 2: is in twenty twelve, the SEC brought acase against Phil Falcone,
Speaker 2: who ran Arbager, the hedge fund he like owned some
Speaker 2: bonds which are delightfully called the max zips. I don't
Speaker 2: know what Max is. I don't know his bonds, right,
Speaker 2: And he like owned these boonds. He liked these bonds,
Speaker 2: and he heard that some bank was shorting them, also
Speaker 2: encouraging its clients to short them, and he got mad
Speaker 2: at short slash. And so what he did was like,
Speaker 2: He's like, okay, you're shorting the bonds. So he would
Speaker 2: buy them. Like people would short the bonds, he'd buy them,
Speaker 2: and he would also lend out his bonds. If you
Speaker 2: want a short bonds, you have to borrow them from someone,
Speaker 2: and so you know, Phil Falcone would tell his prime broker,
Speaker 2: you can let out my bonds, and his bonds got
Speaker 2: loaned up, and like he would keep landing at bonds.
Speaker 2: People would borrow them, they'd sell them, he'd buy them,
Speaker 2: he'd lend them out again, and ultimately he ended up
Speaker 2: owning more than all of the bonds. The company issued
Speaker 2: like two hundred million dollars of bonds and he had
Speaker 2: own two hundred and twenty million because he had like
Speaker 2: bought all of them and loan them out and then
Speaker 2: bought them again. And so once he owned more than
Speaker 2: all of the bonds, he stopped lending them out. He
Speaker 2: called in the stock bar, He called all the brokerage
Speaker 2: firms and said I want my bonds back, and they
Speaker 2: had to go buy them to return them to Phil Falcon,
Speaker 2: and they couldn't buy them because he owned all of
Speaker 2: them and he wasn't selling. Yeah, and so the sec
Speaker 2: has this incredible passage of like this unnamed at banker
Speaker 2: brokerage called Phil Falcon. It was like, you know, we
Speaker 2: understand you want your bonds back, but we can't find
Speaker 2: them to buy them. And he said they should quote
Speaker 2: just keep it bidding.
Speaker 1: Oh my goodness.
Speaker 2: And he said, sometimes you are just on the wrong
Speaker 2: side of the trade.
Speaker 1: Wow.
Speaker 2: And so you know, the bank was like, I don't understand. Apparently,
Speaker 2: Falcone said that he knew that there was a long
Speaker 2: position in the bonds and excess of like the size
Speaker 2: of the total bonds, and and the bank said, how
Speaker 2: could you know this. Phial Cones said that he was
Speaker 2: working the position himself and that he had acquired approximately
Speaker 2: one hundred and ninety million bonds, meaning more than all
Speaker 2: of the bonds. Yeah, And the SEC says the senior
Speaker 2: officer and the other Wall Street firm personnel were stunned. Still,
Speaker 2: I just like picture this conversation.
Speaker 1: It's like he must have been having so much, just like.
Speaker 2: The greatest feeling in the world to be like, oh, yeah, just.
Speaker 1: Keep bidding, but he's gonna I mean, I would be
Speaker 1: chasing that high for the rest of my life.
Speaker 2: I mean yeah, I tell you. The SEC determined that
Speaker 2: this was market manipulation. Come on, they sued him, they settled.
Speaker 2: I don't think he admitted wrongdoing. It my suspicions that
Speaker 2: he thinks and also kind of I think this was
Speaker 2: just extremely cool that you shouldn't have gotten in trouble
Speaker 2: for it, but he did get in trouble for it.
Speaker 2: The SEC believes that engineering a short squeeze is market manipulation,
Speaker 2: so they got meta materials too.
Speaker 1: I just feel like short selling just breaks everyone's brain
Speaker 1: on every single side of it.
Speaker 2: It really does. People get mad at short sellers in
Speaker 2: a way that has just exceeds like what they're actually doing.
Speaker 1: People would say they're manipulating the market.
Speaker 2: Yeah, but like even if you think that, like to
Speaker 2: arrange your entire public company around punishing short sellers is
Speaker 2: just like an overreaction, even if they're.
Speaker 1: Doing something ill, that man can hold a grudge. Should
Speaker 1: we talk about on cycle pe recruiting? I guess I
Speaker 1: s Business Insider of course out with reporting this week
Speaker 1: that apparently his cycle is starting much than usual, or
Speaker 1: at least a month earlier then it started last year,
Speaker 1: which was also starting.
Speaker 2: Yeah, but it's a key month. R So, like the
Speaker 2: way it works is like you go to college, maybe
Speaker 2: like one summer you intern at an investment bank. Sure,
Speaker 2: you graduate from college. I mean, if you're looking to
Speaker 2: work in sort of like the standard financial path, and
Speaker 2: you graduate from college and you go work at an
Speaker 2: investment bank for to your analyst program, and at the
Speaker 2: end of your two year analyst program, you often want
Speaker 2: to work in private equity, and so you get a
Speaker 2: job offer from you know, a big private equity fund KKR, Apollo,
Speaker 2: Blackstone or whatever to start there after your two years
Speaker 2: as an analyst's end. And at some point in the
Speaker 2: distant past, twenty months into your analyst program, after doing
Speaker 2: a bunch of deals and learning how you know, to
Speaker 2: build financial models and generally, you know, getting some experience
Speaker 2: in investment banking, you would go interview at the big
Speaker 2: private equity funds and they'd ask you about your work
Speaker 2: experience and they would hire you, and then you would
Speaker 2: a few months later leave your bank and go work
Speaker 2: in private equity. But over the years, the private equity
Speaker 2: firms realized that they could get the best candidates by
Speaker 2: interviewing a little bit earlier. So like, instead of interviewing
Speaker 2: four months before your analysts program ms, they can interview
Speaker 2: five months before your analyst program mens. And it has
Speaker 2: moved up so much that now it is happening in
Speaker 2: June before your analysts program starts. So like you started
Speaker 2: at a bank in like let's say July or maybe August.
Speaker 2: And now the private equity interviewing is starting in June,
Speaker 2: a little more than two years in advance of when
Speaker 2: you'd start in private equity. So you haven't started at
Speaker 2: your bank yet, and you are doing interviews for the
Speaker 2: job that you will take after your two years the bank.
Speaker 1: Is over to anyone not in that industry or who
Speaker 1: isn't very familiar with this sounds like lunacy. Like that
Speaker 1: sounds like crazy town. And Business Insider had some delicious
Speaker 1: details about these analysts who haven't started at their investment bank.
Speaker 1: Maybe I don't want to call them analysts anyway, these
Speaker 1: people who had analysts, these pre analysts who hadn't started
Speaker 1: their investment bank, not even being in the city yet
Speaker 1: having to hop on a plane. I know that you
Speaker 1: are not sympathetic to their plate.
Speaker 2: Well, I'm sympathetic to their plate. I don't work in
Speaker 2: private equity, yeah, like like I've made different life choices. No,
Speaker 2: I'm sympathetic to their plight. I think that's rough. What
Speaker 2: I wrote is like I sort of understand it as
Speaker 2: the interviewing conditions to some extent reflect the working conditions, right,
Speaker 2: where like you want people who are so dedicated to
Speaker 2: the cause of private equity that they will hop on
Speaker 2: a plane before they've moved to New York to go
Speaker 2: do an interview, Like you know you always read about
Speaker 2: like the encycle recruiting. Like, in some ways this is
Speaker 2: more humane than it was last year, because it used
Speaker 2: to be like you started at your bank and then
Speaker 2: like two weeks later you did your private equity interviewing,
Speaker 2: and like you were working sixteen hour days as an
Speaker 2: investment bank analyst. And so there are stories about like
Speaker 2: people interviewing at two in the morning because that's the
Speaker 2: only time they could get away from their desk.
Speaker 1: Skipping their trainings or something else.
Speaker 2: Skipping their trainings.
Speaker 1: I feel like, fine, oh that's fine.
Speaker 2: No, I mean I feel like in.
Speaker 1: Tier days, Matt, you know, they weren't giving back, right, No.
Speaker 2: But as a matter of like how human it is
Speaker 2: for them, I feel like interviewing at two am after
Speaker 2: a long day of yeah, building pitch books is worse
Speaker 2: than skipping the training that you're probably gonna ignore anyway.
Speaker 2: But maybe that's wrong.
Speaker 1: Yeah, I mean, so I hear your point that again,
Speaker 1: it's like a good test of the actual working conditions
Speaker 1: you should be able to hop on a plane at
Speaker 1: any time. But just hiring someone two years out with
Speaker 1: zero work experience, it doesn't quite solve that problem for
Speaker 1: me because that seems like lunacy.
Speaker 2: It conveys a belief that what you learn in investment
Speaker 2: in banking is completely fungible, which it's true, not in
Speaker 2: a bad way. I think that the private equity firms
Speaker 2: are sort of saying, we trust these banks so much
Speaker 2: to train these people and all that they need to
Speaker 2: know that we're not going to quiz them about what
Speaker 2: they need to know. They're fine, they will go through
Speaker 2: it to your analyst program. They will learn everything they
Speaker 2: need to do private equity and that's fine, and we'll
Speaker 2: just interview them now for like personality fit.
Speaker 1: Are they giving them actual offers at the end of
Speaker 1: the year. That's so that's nut so to me.
Speaker 2: Also, the average like a little bit conditional. Like if
Speaker 2: you like really screw up at your bank, then like
Speaker 2: you lose your offer. I don't exactly know how the
Speaker 2: mechanics of that work. You arrive at your bank with
Speaker 2: an offer at your private equity firm because the privatya
Speaker 2: firm has like seen whatever they're seeing you right, like
Speaker 2: they like your style, your work ethic. Maybe you've interned
Speaker 2: at a bank the previous summer, so you have some
Speaker 2: knowledge of find.
Speaker 1: Maybe you had some great jokes to tell me interview.
Speaker 2: You know, and you've like studied, right, Like you get
Speaker 2: asked questions about valuation and stuff. You have like some
Speaker 2: ability to pretend that you know what you're talking about financially,
Speaker 2: but you haven't like actually done deals, or maybe you've
Speaker 2: done like a little bit as a summer intern. But yeah, no,
Speaker 2: I mean, like the idea is they trust that the
Speaker 2: banks will train you up, and you know, they know
Speaker 2: what bank you're going to, and they know like what
Speaker 2: department you'll be working in, and.
Speaker 1: So kind of the banks field about this.
Speaker 2: The banks have mixed feelings. You know. Goldmen for a
Speaker 2: while was really fighting this and was saying like you
Speaker 2: weren't allowed to have an accepted offer at a private
Speaker 2: equity firm, which makes sense, right, Like it's a conflict
Speaker 2: of interest, right, I think you're working on deals, You're
Speaker 2: like doing a cell side for a company, and like
Speaker 2: one bidder is your private equity firm and another bid
Speaker 2: is a different private agre. Like that's weird. Now you're
Speaker 2: an analyst. There's only so much you can do to
Speaker 2: influence the process. But Gulbe for a while hated it
Speaker 2: and was like would say, you know, you can't work
Speaker 2: here if you have accepted offer, but then like you
Speaker 2: lose everyone. It's a mixed bag for the banks. I
Speaker 2: think the banks have always been very inverted pyramid models
Speaker 2: where they hire a lot of analysts to do a
Speaker 2: lot of grunt work, and then ultimately they only need
Speaker 2: so many managing directors. So it's good if people leave
Speaker 2: throughout their career. Now it is maybe not that good
Speaker 2: if every analyst.
Speaker 1: Leaves, right, Yeah, that's what I was thinking.
Speaker 2: Like it's good to have like fewer associates than analysts,
Speaker 2: but you need a lot of associates, right, And if
Speaker 2: it becomes like everyone in banking wants to go into
Speaker 2: private equity, then you're left with kind of no middle
Speaker 2: ranks and banking, and you need the middle ranks to
Speaker 2: like one do the work and to like eventually produce
Speaker 2: the senior ranks. Yeah, part of what you do as
Speaker 2: a bank is try to convey to your junior bankers
Speaker 2: that like a career there is pretty good, pretty good
Speaker 2: competitive with private equity. I think that's hard these days.
Speaker 2: I think like culturally, as you know from these articles,
Speaker 2: like ninety nine percent of people who go into banking
Speaker 2: as junior analysts, their dream is to go into private
Speaker 2: equity and not to be investment bank vice presidents. But
Speaker 2: some people, you know, along the way get convinced to
Speaker 2: be investment bank a vice presidents instead. But no that
Speaker 2: banks don't like it, but like they do need to
Speaker 2: get rid of some people, and so it's a good way.
Speaker 2: But it's also like private equity is so important to banks, right,
Speaker 2: Like it produces so many deals, produces so many financing fees. Right,
Speaker 2: the private ecud firms are such big clients of the
Speaker 2: banks that having a lot of your alumni working at
Speaker 2: private equity is marginally good for the banks, right, Like
Speaker 2: you know, you want your employees to leave, not to
Speaker 2: become competitors, but to become clients, right, And like to
Speaker 2: some extent, that's what's happening here, right, not entirely right,
Speaker 2: because like a lot of these private equity firms are
Speaker 2: like really competitors of banks, right, Like you have like
Speaker 2: private credit competing with bank lending. You have like you know,
Speaker 2: you have banks trying to compete with private equity, Like
Speaker 2: it's it's not as simple as like they're leaving to
Speaker 2: go become clients, but it's like kind of like that,
Speaker 2: that's kind of the story that people tell.
Speaker 1: So this has been all over social media, which has
Speaker 1: been fun to watch. I mean, Liquidity, for example, has
Speaker 1: been posting a lot of the responses that he's gotten
Speaker 1: outreach on his Instagram story. I also spent some time
Speaker 1: on Wall Street Oasis, sure, and I'd like to read
Speaker 1: you some of the posts. I think they're interesting. One
Speaker 1: kind of gets what we were talking about when it comes
Speaker 1: to being ready to hop on a plane and you know,
Speaker 1: just do this very you know, kind of vicious sounding process.
Speaker 1: This person wrote, I should have studied sooner. Yeah, I
Speaker 1: am probably like sixty percent there, but June is insane.
Speaker 1: Stuff like this makes me wonder if I am cut
Speaker 1: out for this quote high finance pipeline, which I guess
Speaker 1: is also part of the weeding out process.
Speaker 2: Yeah, it's funny, like you do study right, like you
Speaker 2: prepared to talk about DCF models, like you're going to
Speaker 2: learn it in your two years at a bank, but
Speaker 2: like you have to learn it in advance to be
Speaker 2: able to talk about in interviews. It's like kind of
Speaker 2: like a little oh, then maybe it gives you a
Speaker 2: leg up on your job.
Speaker 1: This is my favorite post though the title was playing
Speaker 1: on cycle recruiting to a clueless europoor. All the threads
Speaker 1: lately on the on cycle recruiting madness are really insane
Speaker 1: to me. It seems to be accepted that it is
Speaker 1: just the way it is, but I would love to
Speaker 1: understand how it got to this point slash how it
Speaker 1: works and what the logic is. From what I understand,
Speaker 1: you recruit for a job you will start MP in
Speaker 1: two years time, before you even hit the desk and
Speaker 1: have any clue about what you were doing at the
Speaker 1: largest pe funds? How does that make any sense? A
Speaker 1: lot changes in two years, as does people's performance ability
Speaker 1: slash motivation. And then my favorite reply, which I believe
Speaker 1: is the top reply, is we move fast here London boy,
Speaker 1: remember that time y'all blew a thirteen colony lead, which
Speaker 1: I think is just the perfect answer. Yeah, I mean,
Speaker 1: fair points on both sides.
Speaker 2: Yeah, it definitely seems to me like a little crazy
Speaker 2: to say, like we can identify someone two weeks out
Speaker 2: of college who will be a good mid level employee
Speaker 2: for us in two years. But I don't know, I
Speaker 2: kind of trust that, like there's some truth to that.
Speaker 2: You know, you're combining like the personal characteristics you see
Speaker 2: from that person and like their motivation and their ability
Speaker 2: to study for the interview and all that with your
Speaker 2: assumption that, like the training they get at a bank
Speaker 2: will be pretty good and pretty interchangeable.
Speaker 1: Yeah, I do think there.
Speaker 2: Must be duds, right, There must be people.
Speaker 1: Who like definitely who are you know, great in the interview,
Speaker 1: but who are kind of boud at their job actually, right.
Speaker 2: And like the other thing is like what is your
Speaker 2: motivation at your bank analyst program? Right? Like, on the
Speaker 2: one hand, you want to learn a lot and like
Speaker 2: be a big deal guy, so that like when you
Speaker 2: get to your private acquity firm you'll be good at it.
Speaker 2: But on the other hand, like you're not trying to
Speaker 2: get promoted, you know, you're not trying to stay there
Speaker 2: for the long term. You've got your next job lined up.
Speaker 2: There's some out I think there's like more coasting and
Speaker 2: like the few months leading up to when they leave
Speaker 2: for private equity than there is like day one. But
Speaker 2: like you know, it is like a little bit demotivating.
Speaker 1: Yeah, definitely, the end is in sight.
Speaker 2: Yeah, the end is insight like before the beginning.
Speaker 1: Also, I think the point on like, people's motivations change
Speaker 1: a lot, especially at that period in your life when
Speaker 1: you are so young out of college. Do you know
Speaker 1: what you're going to want to do in two years?
Speaker 2: Right?
Speaker 1: Like two years ago, I wanted to be a TV anchor,
Speaker 1: And you know, but like.
Speaker 2: For instance, if you've never worked a sixteen hour day
Speaker 2: at a finance job and you do it for a
Speaker 2: month or two, you might decide you don't like it. Yeah,
Speaker 2: and then you're like, well, I've signed up for two
Speaker 2: years of this at my bank and then two more
Speaker 2: years of it at my private equity firm. That's a
Speaker 2: you know, you might change your mind, But I guess
Speaker 2: the interview is to screen up people like them.
Speaker 1: All right, let's move along here to boomer candy, which
Speaker 1: it could mean sort of these very popular options writing ETFs,
Speaker 1: or it could mean these buffer ETFs. And what we're
Speaker 1: talking about right now are these buffer ETFs. So boomer
Speaker 1: candy it's a label that Bloomberg Intelligence and Eric Belchunas
Speaker 1: came up with. The Wall Street Journal published an article
Speaker 1: on it this week that it's sort of become this
Speaker 1: catch all term for these derivatives backed products that promise
Speaker 1: you some degree of safety investing in the stock market.
Speaker 2: Yeah, you buy an ETF that gives you like stock exposure,
Speaker 2: but there's a floor, yeah, maybe a cap. Maybe you
Speaker 2: get some income by selling call. There's some like you
Speaker 2: add some derivatives to make it a little bit less
Speaker 2: like stock and a little bit more like fixed income.
Speaker 1: We are approaching, I feel like the extremes because now
Speaker 1: you have these one hundred percent downside protected buffer ETFs
Speaker 1: that are launching another couple which launched just this week.
Speaker 1: In fact, you did some nice math on what that
Speaker 1: actually means.
Speaker 2: Yeah, so buffer ETF is like you put money in
Speaker 2: and at the end of like six months or a
Speaker 2: year or two years, you get all of your money back,
Speaker 2: plus like some of the return on the s and
Speaker 2: P five hundred. But like if the SMP goes down,
Speaker 2: you still get all your money back. You get like
Speaker 2: nothing else, but you get your money back, Whereas if
Speaker 2: the sp goes down, if you adjust been in stocks,
Speaker 2: you would have lost money.
Speaker 1: But the upside cap, especially on the one hundred percent products,
Speaker 1: the upside cap is pretty slim.
Speaker 2: Yeah, Like I think like the math works out these
Speaker 2: days that you can buy an ETF where you always
Speaker 2: get back one hundred percent of your money and you
Speaker 2: get the return on the SMP up to like eight
Speaker 2: ish percent something like that. There was one I wrote
Speaker 2: about on Thursday where you get back a cap of
Speaker 2: four point eight percent, but that's for six months. So
Speaker 2: you do that twice and you're like, yeah, like nine percent,
Speaker 2: you know something like that.
Speaker 1: That's super bad.
Speaker 2: It's not terrible, but that math works because T bill
Speaker 2: returns are over five percent. These things are like sort
Speaker 2: of like they're giving you some range of returns around
Speaker 2: the risk free rate, and so if like the risk
Speaker 2: free rate is five percent, then they give you, you know,
Speaker 2: zero to eight or nine percent. That's something.
Speaker 1: So I mean the criticism of these products is that
Speaker 1: that's a lot of fancy maneuvering to basically not quite
Speaker 1: get juicy equity returns for not that much protection. I
Speaker 1: liked this quote from Ben Johnson, he's head of Client
Speaker 1: Solutions over at Morning Star. He said, we know, over
Speaker 1: long enough periods of time that markets tend to go up,
Speaker 1: and what you're giving up is going up every bit
Speaker 1: as much as the market does over longer periods of time. Now,
Speaker 1: if you're willing to make that trade in exchange for
Speaker 1: a degree of comfort, for being able to sleep at night,
Speaker 1: then so be it. But I think it raises the
Speaker 1: good question of where do you take away from in
Speaker 1: your portfolio to put this in? Are you taking away
Speaker 1: from your equity allocation? Are you taking away from your
Speaker 1: fixed income allocation? These are just these sort of hybrid products,
Speaker 1: and I don't quite know what the answer is.
Speaker 2: So two points on that. I think there's an argument
Speaker 2: that these are to some extent marketed as you take
Speaker 2: away from your fixed income allocation because it's fixed income
Speaker 2: with better tax treatment. I don't know how true that is,
Speaker 2: but that's my impression that, like, it's not fixed income, right,
Speaker 2: it's like zero to nine percent return instead of like
Speaker 2: a five percent return, so it's like sort of a
Speaker 2: range around treasury returns. But I think it seems pretty
Speaker 2: clear that the tax treatment of these things is that
Speaker 2: your gains are capital gains. You can like roll them
Speaker 2: over so that you only pay taxes when you sell
Speaker 2: the ETA, So you could keep the money in the
Speaker 2: thing for three years. You're paying long term capital gains
Speaker 2: taxes and you're only paying it at the end of
Speaker 2: the three years, whereas if you just own treasuries, you'd
Speaker 2: pay ordinary income taxes every year. So there are ETFs
Speaker 2: that are just explicitly that. There's the box ETF that
Speaker 2: I'm written about, where like it's explicitly you are buying
Speaker 2: a thing that promises you the Treasury Bill return but
Speaker 2: tries to characterize it as long term capital gains. There's
Speaker 2: debate about whether that works. But this is not that.
Speaker 2: This is like you get a range of returns. It's
Speaker 2: like equity linked, but it's like equity linked enough that
Speaker 2: you get the good tax treatment, but fixed income enough that, like,
Speaker 2: you know, your money doesn't go down. So I think
Speaker 2: that's part of the answer to your question is like,
Speaker 2: to some extent, this is a substitute for fixed income
Speaker 2: with better tax treatment.
Speaker 1: Yeah.
Speaker 2: The other thing I would say is like, your question
Speaker 2: is the right one. So I used to be like
Speaker 2: an equity derivatives structure, of course, and so people would
Speaker 2: come to us with various ideas for like have the stock.
Speaker 2: I don't want to take as much risk as I'm taking.
Speaker 2: I'm willing to give up some upside to take less risks.
Speaker 2: Can you do a derivative? And the answers like, yeah,
Speaker 2: sure you can do it deriv But you know what
Speaker 2: you could do. You could sell half your stock. Yeah,
Speaker 2: you could sell half your stock and then you have
Speaker 2: half as much risk and half as much upset and
Speaker 2: your design equity to drive it is like you know,
Speaker 2: you'd like do some stuff. You do some math, and
Speaker 2: like the model tells you the delta of your product. Right.
Speaker 2: The delta is essentially how much stock it is, right,
Speaker 2: So like a one hundred delta means that like it's
Speaker 2: just owning stock, a zero delta means it's just owning
Speaker 2: you know, cash, and like a fifty delta means it's like, yeah,
Speaker 2: it's like half as much stock. And so what you know,
Speaker 2: I'd like design to de rives for people, like, yeah,
Speaker 2: there's a collar where you get like it's like a
Speaker 2: seventy delta collar. And I've always want to be like,
Speaker 2: why don't you just like sell thirty percent of the
Speaker 2: stock because then you have the same delta and you
Speaker 2: won't pay us.
Speaker 1: Yeah, yeah, we're charging.
Speaker 2: You a lot of money to do this for you.
Speaker 2: You can like draw scenarios where it's like you'd be
Speaker 2: much happier with the derivative than you would with just
Speaker 2: selling some of the stock. But what the delta is
Speaker 2: telling you is that in expectation, they're basically equivalent on Apple. Yeah,
Speaker 2: and you're paying us more to do the complicated derivative trade.
Speaker 2: And so here it's the same sort of thing where
Speaker 2: it's like you're marketing this product that's like, oh, we're
Speaker 2: giving you equity returns, but with less downside. It's like, yes,
Speaker 2: but another way to do that would be to like
Speaker 2: sell three quarters or your stock and put it in
Speaker 2: treasury bills, and then you're kind of in the same play.
Speaker 2: It's like that really, but kind of in the same.
Speaker 1: Place for a lot of these products, like maybe you
Speaker 1: would just be better off in cash or like.
Speaker 2: You know, ninety ten percent stock.
Speaker 1: Yeah, but like one of the household names, I don't
Speaker 1: know if that's true for everyone, but JEFPY, for example,
Speaker 1: it's the JP Morgan Equity Premium Income ETF. It's just
Speaker 1: absolutely ballooned in size. It's super super popular, and basically
Speaker 1: it owns low volatility stocks and then it writes call
Speaker 1: options on top of that to harvest that income and
Speaker 1: it does outperform in a down market. That much is true.
Speaker 1: But in twenty twenty two, for example, you know the
Speaker 1: S and P five hundred was down like twenty percent.
Speaker 1: I think JEFPY was down something like two. You know,
Speaker 1: it wasn't down is cash And then you look at
Speaker 1: you know, in a raging bowl market, it's going to
Speaker 1: lag as well. So it's doing exactly what it's supposed
Speaker 1: to do. But you could ask the existential question of
Speaker 1: why bother.
Speaker 2: Yeah, I mean, like I don't actually know offhand, like
Speaker 2: like it's always possible that some strategy like has you know,
Speaker 2: better returns than like some mix of cash and stock. Right,
Speaker 2: there's some like market reason for that, right, But I
Speaker 2: do think that a lot of this is product designed
Speaker 2: to appeal to investors, right. It's just it's like, deep down,
Speaker 2: our tools are cash and stock, and we can like
Speaker 2: mix those things together to produce a fancy package, right,
Speaker 2: And if we do that in the right way, you're like, oh,
Speaker 2: that package looks so good. Yeah, And so you'll buy
Speaker 2: the thing that's made out of cash and stock and
Speaker 2: you'll pass a fee rather than just like having you know,
Speaker 2: your own mix of cash and stock. But that could
Speaker 2: be good, right, Like you might like not be able
Speaker 2: to figure out the right mix of cash and stock
Speaker 2: and someone else doing it for you is good, right,
Speaker 2: But that's the game.
Speaker 1: It's certainly fun to lunch of services do. It gives
Speaker 1: me something to write and talk about.
Speaker 2: Oh, we should talk about the fact that the podcast
Speaker 2: is off next week, all right in July.
Speaker 1: I hope you enjoyed this one because we're not here
Speaker 1: next week. A Happy Birthday, America.
Speaker 2: I'll be back on July twelve with them well rested.
Speaker 1: Episode A lot more stuff.
Speaker 2: And that was the Money Stuff Podcast.
Speaker 1: I'm Matt Levian and I'm Katie Greifeld.
Speaker 2: You can find my work by subscribing to the Money
Speaker 2: Stuff newsletter on Bloomberg.
Speaker 1: Dot com, and you can find me on Bloomberg TV
Speaker 1: every day between ten to eleven am Eastern.
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Speaker 2: The Money Stuff Podcast is produced by Anna Maserakus and Moses.
Speaker 1: On Our theme music was composed by Blake.
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Speaker 1: Executive producer and Stage Bauman is Blomberg's head of podcasts.
Speaker 2: Thanks for listening to The Mody Stuff podcast.