Their Reputations have Never been Worse

Malt Liquidity 88

Suisse Cheese

The simplest, most effective categorization of finance firms is the sell side/buy side split. Sell side institutions sell services or products and collect fees/premiums, while buy side institutions are asset allocators. The classic sell side institution is the investment bank, which provides some of the following: advisory services on M&A, facilitates bond, stock, and structured product transactions, research, prime brokerage, wealth management services, and more. The important thing to note is that these are all client-facilitated business streams — every desk has a revenue target that it’s expected to reach to pay for all the staff facilitating that stream, from back office to front. While some of these activities fall under “investment banking”, others fall under “sales and trading”, and others fall under “wealth management”, they all fall under the banner of the bank, because naturally, if one area is slipping, the revenue from the others has to cover the shortfall. I’ve talked before about how the past year was a down year for classic IB operations like M&A and IPOs (and SPACs), but perhaps no bank has struggled more than Credit Suisse as of late (even more than Deutsche!), which has gotten Hwang’d, got Greensill’d, attempted a name change, and more. This kind of repeated mishandling across the board damages a reputation systemically — I mean, would you ever trust someone with your money who couldn’t even calculate margin properly? While individual banks definitely have their own specialties, they are either competent in their other business lines or spin them off/shut them down. It’s a bit late to do it after the fact, especially when you’re leaking money:

Credit Suisse Group AG reported a fifth consecutive quarterly loss and said rich customers withdrew around $100 billion in the fourth quarter, signs that the beleaguered lender has yet to turn the corner.

The Swiss bank is trying to recover from scandals and financial losses with a sweeping overhaul. It wants to focus on wealth management and is breaking up its investment bank.

On Thursday, it said it would pay $175 million for Klein Group LLC, the investment banking business of M. Klein & Co. LLC, as part of a plan to spin off its capital-markets and advisory business under the name CS First Boston. Michael Klein, formerly a member of Credit Suisse’s supervisory board, will join Credit Suisse’s executive board and lead the new company.

Board shenanigans aside, it’s not a good sign that a bank is ceasing, y’know, banking activities and trying to become a wealth manager. What does it say about your ability to navigate the financial sector if you can’t do other core activities competently? As it is, asset management is a massive competition — it’s about accumulation of AUM through telling a story as to how someone’s money is safer with you than with anyone else. Does anyone believe this is the case with Credit Suisse?

Turmoil begets more turmoil. Losses and scandals (and the occasional mysterious death) require constant restructuring and replacement of executives, who will all have different ideas on how to “recover” from the business, but the reputation loss is the real death sentence. Furthermore, how are they going to retain any remaining talent through their “bonus now pay later” structure in a bonus-driven industry? Admitting that business lines aren’t going well just shows even more incompetence which leads to more caution from potential clients which leads to even more business lines being shut down — it’s the death spiral. I don’t really see how Credit Suisse recovers without being absorbed by another institution at this point. As Agassi would say, “Image is Everything.”

Well, this is stupid

It always shocks me how there’s a cottage industry of reporters who apparently just sit around watching ETF filings, inflows, and outflows all day (without trading on the effects of inflows and outflows.) ETF filings have gotten incredibly stupid and prolific over the past couple years, but this might take the cake:

Investors who believe that members of the US Congress have access to information that could give them a trading advantage can now trade two exchange traded funds that follow members’ stock transactions.

The two ETFs, whose tickers are a play on the names of US politicians on opposite sides of the political spectrum — congresswoman Nancy Pelosi, the former Democratic speaker of the House of Representatives, and Ted Cruz, the Republican senator — will also invest according to political affiliation. NANC will only focus on equities purchased or sold by members of Congress who are registered members of the Democratic party and their spouses, a filing with the Securities and Exchange Commission shows, whereas KRUZ will focus on Republican members and their spouses. Both ETFs carry a 0.75 per cent management fee. “We believe members of Congress have more information than the rest of us, and if they can trade on that information, we should be able to do the same, and now we can,” said Christian Cooper, the ETFs’ portfolio manager.

I can’t even fathom the logic of a trading strategy this fucking dumb. If, as an asset manager, you’re going to pile into trades after an individual, you are literally going to make their returns better. I don’t even know where the reputation of Pelosi’s trading prowess came from — she’s no Hillary Clinton — as nothing in Pelosi’s trading even seems that suspect to me. Her trades look like a bored, wealthy Robinhooder levering up and buying calls in a bull market. Of course the raw return will look good — that’s the entire point of adjusting for risk! Why this annoys me so much is because the dream in trading is for your trade to predate the inflows — and the ETF prospectus literally tells you that they will be allocating to whatever positions you hold. Not only that, the strategy itself of “following” even successful traders is flawed — you may not have the same capital, risk profile, time horizon, or overall cross-asset portfolio exposure to justify taking the same trades as someone else. Listening to individuals with signal is useful, but it has to be folded into your own strategies rather than mutely mimicking someone else, if for nothing else, the fact that if they’re aware of their following, they will simply exit before you as you provide liquidity.

…the average gap between the transaction date and the filing date was getting shorter and was now averaging between 10 and 20 days. The ETFs will only update portfolios based on disclosed holdings and Cooper plans to update the portfolios “around weekly” unless there is a significant change, in which case they will make the change immediately.

A core problem with the automated rebalancing of exchange-traded products is that you know how they have to trade. Since the transactions can be made before being cleared, it would be trivial to accumulate over time and dump once the first transaction is revealed through the filing. Especially if the original position is disguised through structuring exposure through options, this would be trivial to take advantage of. I doubt “political tracking” ETFs will be allowed to blatantly violate their prospectus like USO did to my chagrin:

USO delivers its exposure to oil using near-term futures. USO gets exposure to oil using derivatives, like several oil ETPs. The fund predominately holds near-month-futures contracts on WTI, rolling into future contracts every month. This method is particularly sensitive to short-term changes in spot prices. USO held front month contracts until April 17, 2020, at which time following leeway in the prospectus, USO changed the exposure from holding specifically front-month contracts to holding predominantly front-month contracts, 30% next month and 15% contracts with further expiry.

Hmm. I wonder what happened on that week in April? The proof is in the pudding — when you have a telegraphed rollover schedule and own a certain % of the OI on a contract, everyone will frontrun you. I doubt these “political meme theme” ETFs ever build up enough size to ever truly matter, but wouldn’t it be comforting to know that 9 figures will buoy your every buy? Seriously, it needs to be harder to file an ETF.