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Direct Listing: Disintermediation Lives!

Or: Here, Spot!

by Shlomo Maital


   Ernest Hemingway hated big pretentious words, called them “two dollar” words, and preferred two-bit words in his writing. And it was very effective.

   I agree. Except for this one exception.   Disintermediation.   17 letters!   It means, removing mediation, go-betweens.   Go-betweens clip coupons, take a slice of the money – a big slice – and run. Israeli farmers get 3 shekels a kilo for avocado, retailers sell them for 18 shekels a kilo. Guess why!?

     The Internet is the great disintermediator. It can link people who need rides with those who can offer them.  Or people who want to buy anything with those who want to sell anything – directly.   Without anybody in between.

     Here is the latest example of disintermediation – but not via the Internet.

     Spotify is a music streaming platform, developed by Swedes, and launched in 2008. It is available widely, has $5 b. in revenue, employs 2,960, has raised $1 b. in venture capital, and has 157 million monthly users. Five out of 8 regular users are young, between 18 and 34.

     Its market cap is $29.5 billion.

     Spotify thinks different(ly). On Feb. 28 2018 Spotify (NYSE symbol SPOT) shares were listed on the New York Stock Exchange. But NOT, not as an Initial Public Offering. Rather, as a DPL Direct Public Listing.

     What’s the difference?

     IPO is a sale of new shares, by a company, on the stock exchange, to raise capital.

     DPL is simply a listing of existing shares, no new ones, not with any intention of raising capital, but simply making shares ‘liquid’ and enabling those who wish to sell ‘existing’ shares on the stock market.   There are no intermediaries, investment banks, underwriters, banks, nobody to clip coupons. Direct from SPOT to you.   Here, Spot! Good boy!   Sit.

     The NYSE stock exchange has far less stringent requirements for DPL than for IPO. DPL is mainly designed for smaller businesses.   But SPOT saw the opportunity. Spotify does not need more capital (it can raise all it wants, at any time). It would like to be listed, and permit those who want to cash out (after a whole decade!) partly, to be able to do so. Hence, DPL.

     DPL is disintermediated. And the trend may catch on. This could be a disruptive technology for Wall Street. Ever since Netscape did its IPO in 1995 and saw its shares soar by ten times, Wall St. has cashed in on IPO’s. The resulting bubble led directly to the 2000-2001 crash that did much damage. DPL does not have the same ‘bubble’ potential – because it simply lists existing shares, without any increase in their supply.

   Of course, those existing share prices could crash too – but somehow it is less likely for a balloon to burst when no air is added (i.e. no more new shares), than when you have a whole bunch of greedy enthusiasts pumping more and more air into it.

     So, Hemingway – OK to say, disintermediation? Or, if you insist:   Dis   …. Inter …… Mediation.

Here, Spot(ify)  !  Sit!  Lie Down!  Good Boy!   List.  Direct.  Well done! 

Wall St.: Yup, They’re At It Again!

 By Shlomo Maital



 Frank Partnoy was a Wall St. insider who wrote two powerful books, showing how greed and deceit have corrupted our crucial financial markets, leading to the disastrous 2008 financial crash and ensuing economic crisis.

       Hard to believe but – he now reports (in the Financial Times) that the same skullduggery that sank the world in 2008 has begun anew, with slightly different disguises.

   The central culprit this time is the collateralised loan obligation. Like its earlier esoteric cousins, a CLO bundles risky low-grade loans into attractive packages and high credit ratings. In May, there were two deals of more than $1bn each, and experts estimate that $75bn worth are coming this year. Antares Capital recently closed a $2.1bn CLO, the largest in the US since 2006 and the third-largest in history. Although most of the loans underlying these deals are of “junk” status, more than half the new debt is rated triple A. Sound familiar?   During the early 2000s, similar highly rated deals called collateralised debt obligations were popular. At first, they seemed harmless, or at least not so big that their collapse could cause financial contagion. But when regulators ignored their growth, they became more opaque and more profitable, with credit ratings disconnected from reality. Like cracks in a building’s foundation, the risks seemed minor at first. But high ratings hid the instability of the entire structure. Until it was too late.

   Same script, different actors.   Hide junk bonds in a package with good bonds, and have the credit ratings agencies rate the whole package AAA, triple A, risk-free.

The credit rating agencies, particularly Moody’s Investors Service and S&P Global Ratings, are the central actors in this story, just as in the original. The computer programs they use to assign triple-A ratings remain flawed. Because loan defaults can come in waves, mathematical models should account for “correlation risk”, the chance that defaults might occur simultaneously. But the models for CLOs assume correlations are low. When defaults occur at the same time, these supposed triple-A investments will be wiped out. CLOs are just CDOs in new wrapping.

   Partnoy observes that keeping financial markets honest, clean and sane is really difficult!

It is hard to police the financial markets. New business school graduates are inevitably one step ahead of their regulator counterparts, and many of the least creditworthy businesses find it easy to borrow, because their loans can be quickly repackaged and sold. During the debates about Dodd-Frank repeal, legislators should keep their eyes on these complex investments and the agencies that facilitate them.

    Trump and his Treasury Secretary are actively working to repeal the key elements of Dodd-Frank, the legislation that keeps 2008 from recurring.

Fasten your seat belts!

Warning: The Next Crash is Taking Shape

 By Shlomo Maital

     In the children’s fable, a boy cried “Wolf! Wolf!” in jest – until, when there really was a wolf, nobody came to help. Economists seem to be like that boy. We are always crying “wolf!”.   Problem is, sometimes, not always, the wolf does come.

     Writing in the New York Times, Ruchir Sharma, chief global strategist of Morgan Stanley Investment Management (a Wall Street insider for sure) sounds a thousand warning bells. When an insider cries Wolf!, we should listen.

       Here is why.

      “Central banks adopted zero to negative interest rates and provided huge amounts of cash” after the 2008 crisis. Result: “global financial assets are worth over $250 trillion, up from $12 trillion in 1980, or more than 3 times global GDP.” …”The ocean of money in financial markets is so large, it’s possible that ripples on its surface could trigger the next big downturn.”

       Suppose, just suppose, as North Korea and the US square off, global financial markets fall by 10%. That implies paper losses of $25 trillion, or half again as large as the United States’ annual GDP. That could trigger widespread panic.

         Why have asset prices risen so dramatically? Because when you get to borrow free money, you are tempted to do something, anything, with it —   even when returns are low. At long last, central banks are beginning to worry about what they’ve done – create a new bubble. As Sharma notes, “asset prices from stocks to real estate have never been this expensive simultaneously.” Clue that it’s a bubble? Of course.

         Since WWII, there have been 88 recessions – and 62 of them followed a stock or housing bubble or both. So a financial crash will inevitably bring an economic crisis.

       Does anyone else agree that the wolf is on the way?   Philip Inman, The Guardian, does. He notes that the US Federal Reserve is now starting to sell its $4 trillion in bonds, bought in order to pump money into the system. In other words – soak up some of the mountain of money it created. This will require the US Treasury to raise more in tax, Inman notes. Why? If the Treasury can’t sell bonds, it has to raise taxes.  But baby boomers everywhere, those who have grown wealthy, simply refuse to pay the taxes needed to keep their governments afloat. And the Trump administration is hell-bent on lowering taxes, not raising them.   The baby boomers are “offloading the problem to younger lower-income groups, who now must borrow excessively just to make ends meet”.  

     It’s a recipe for big trouble, which now includes a war between the generations – when once, we old fellows used to try to make things better for the younger kids, and now we seem to be working hard to make them worse. And I haven’t even mentioned climate change.  

     “There is growing evidence of a slide into outright deflation even ahead of the next recession…”, notes a financial analyst, Albert Edwards. He thinks the US will soon slide into recession. And Trump is about to appoint five new Fed governors, all of whom want less regulation and less government.  

       I know a fairly wealthy investor, highly savvy, who is pulling his investments out of the US and putting them into Europe, of all places. Problem is, in a global crisis, there is no safe haven.

       These are dangerous times.   Everyone should set aside a bit extra for rainy days, and prepare at least mentally for a new global crisis.


Smoking Gun – How the FED Pampered Goldman Sachs

By Shlomo  Maital

Goldman Sachs

  Carmen Sigarra is a veteran lawyer, who worked for the Federal Reserve, overseeing banking operations, specifically Goldman Sachs.  She was fired and is now suing the Fed.

   During her stay at the Fed, she recorded nearly 50 hours of sessions in which Fed examiners checked Goldman Sachs transactions.  She has now released these tapes, and they will be the subject of an upcoming episode of This American Life, on PBS (American public radio).   Don’t miss it!

   What emerges is a picture of lax regulators, overly delicate with how they treat Wall St. Big Money, especially Goldman Sachs.   It demonstrates the culpability of the Fed in the 2008 financial collapse and crisis.  Blame the Fed is the title of an article I published in Barron’s,  and these tapes confirm it.  Blame Goldman Sachs too – they are not blameless.

   Specifically, one transaction that illustrates the whole picture was this:  the embattled Spanish bank Santander was being pressed by European regulators to boost  its capital –  that is, to have more liquid cash on hand, in case its assets declined in value.  To avoid doing this, Santander needed to get some assets off its books.  So it asked Goldman Sachs to babysit them – keep the assets on Goldman’s books.  For a hefty fee, of course.  Goldman agreed… it’s legal, (but shady, said the Fed examiner.  Legal, but shady.  That is the mantra of many people on Wall St.).

   Goldman attached a clause:  The transaction was subject to Fed approval. So the Fed could have killed this ‘shady’ transaction. But of course they didn’t.  And it went ahead. And so did many many many other similar, much worse transactions.

    What do we learn?   Wall St. has immense power.  The alleged independence of the regulators, the Fed,  is a fiction.  This is why another financial collapse, totally different in nature, could well occur. 


 Anat vs Eric: Take Your Pick

By Shlomo  Maital

  Cantor      Admati

Eric Cantor                                             Anat Admati

  Yesterday’s (August 10) New York Times has an editorial, along with a business section article, that offer stark contrast between two people, two world views, and what is wrong and right about America today.

   Eric Cantor is the former Republican House Majority Leader.  He lost a primary election in his district last June, in a stunning and almost unbelievable upset, despite his high visibility and infinite money.   Why did he lose?  Because from Day One, says the Times, he “courted the favor and donations of Wall Street”, becoming the “top congressional recipient of its generosity”. In other words, the top money raiser in Congress lost a PRIMARY (not even an election).  His close ties to big money led to his defeat, apparently, as his opponent focused on that issue.

    Now, Cantor is about to cash in.  He resigned his seat as of August 18, even though he has several more months to serve until the new Congress convenes in January.  Why?  He’s going to work for the same Wall St. firms that he helped so much, as House Leader. He’s going to make money.  He has little real financial genius. But connections?  Infinite.  And Wall St. will pay big money for that. Eric Cantor will be a multi-millionaire faster than you can say,  Public Service?????

   Admati is a Stanford University finance professor, and an Israeli.  She did complex financial modeling until 2008, and published in academic journals.  When the financial system collapsed (or WAS collapsed by the banks, and Wall St.),  she became a powerful advocate of tighter government regulation, battling weak regulators and the incompetent Obama administration.  Admati, says the Times, even took a course on how to write opinion articles that people understand.  She has lunched with Obama and has a powerful simple explanation of what is broken on Wall St. and how to fix it.  And Wall St. despises her.  Guess why.

      Here is what she claims.  1.  We the people lend money to the banks by depositing it.  We don’t worry about how the banks use our money, because the Federal Deposit Insurance Corp. insures each deposit account for up to $250,000.  FDIC is of course the government, which is us.  And FDIC uses OUR money; when it runs out, in bad times, the government refills the coffers.  2.  The banks take large undue risks with our money when they lend and invest it, as they did during 2001-2008,  investing in sub-prime mortgages for instance, because they are “too big to fail” and because if they get in trouble, as they did in 2008-10, they know the government will bail them out.  They get the profit from their risk taking, if it works out; and they dump the losses on us if it doesn’t.  Good deal.  And nothing really has changed in this crackpot system since 2008.   3. The solution?  Regulate not how banks lend and invest their money, but how much they borrow (from us).   

Wall St. absolutely hates that idea, because the money machine that borrows from us at 1 per cent and lends at 5 per cent is a sweetheart of a deal, especially when government bears the risk of that 5 percent. So they deeply dislike Admati as well.

      Admati vs. Cantor.  From public service to millionaire overnight; and from academic professor to public advocate, serving the public, also overnight.

       Take your pick.  Which do YOU prefer?    


Blog entries written by Prof. Shlomo Maital

Shlomo Maital