Feb 20, 2020

Axios Capital

By Felix Salmon
Felix Salmon

Situational awareness: Morgan Stanley is buying E*Trade for $13 billion. It doesn't seem to have any worries that the Trump administration might have a problem with Wall Street's giants getting even bigger.

  • E*Trade is going to give Morgan Stanley checking capabilities for the first time — before even Goldman Sachs gets there.
  • Separately, LendingClub is also getting checking accounts by buying Radius Bank.

There's more about President Trump's attitude to Wall Street in this newsletter. Also: Bloomberg's surprising stance on the same issue; the Boy Scouts of America; a 🔥 new memoir; Scandinavian traffic trends; the hottest stock of the moment; and more. All in
1,860 words, a 7-minute read.

1 big thing: Trump's first love

Photo Illustration: Sarah Grillo/Axios. Photo: Chris Graythen/Getty Images

Donald Trump loves Wall Street shenanigans. Companies owned by him have declared bankruptcy six different times, and he was once sued alongside Mike Milken for participating in a scheme to artificially inflate junk-bond prices.

Driving the news: Trump pardoned Milken this week, with an official statement positively gushing over Milken's role in developing the wilder side of fixed-income capital markets.

  • The statement strongly implies that Milken — who was originally charged with 98 counts of racketeering, securities fraud, and other crimes — in fact committed no crimes at all.

Context: The pardon comes against a backdrop of aggressive Wall Street deregulation. Trump has defanged the Consumer Financial Protection Bureau, loosened regulations on banks, and given free rein to non-bank entities like insurers, ratings agencies, and hedge funds.

  • Under Trump's regulatory and legal regime, it is very unlikely that Milken would have been charged with any crimes. Trump, after all, describes him as "one of America’s greatest financiers."
  • Many individuals close to Trump are credited in the statement with helping to obtain the pardon — including Rudy Giuliani, who led Milken's prosecution in the 1980s, and Rupert Murdoch, who used Milken's services to turbocharge the growth of News Corp.

Milken has been determined to engineer this pardon for decades, and he's finally found a president whose fondness for ultra-rich financiers makes that possible. Bloomberg's Max Abelson lists many of them, including Apollo Global Management co-founder Josh Harris, Carlyle’s David Rubenstein, and hedge fund manager John Paulson.

  • Think of the pardon as Milken calling in favors.
  • “When he walked out of prison, he was bent double under the weight of a Rolodex," said author and former banker Michael Thomas in a 2017 Bill Cohan profile of Milken. "He had a lot of due bills he could call on. He made people rich. He made them powerful."

The bottom line: Milken, convicted felon and junk-bond billionaire, is the perfect avatar for Wall Street in the age of Trump. His pardon sends a clear message: If you want to get rich through financial legerdemain, now's the time to do it.

2. Mike Bloomberg's mistrust

Illustration: Sarah Grillo/Axios. Photo: Mark Wilson/Getty Images

Mike Bloomberg is a former head of equity trading at Salomon Brothers, one of the most aggressive investment banks on Wall Street. (It was immortalized in Michael Lewis' "Liar's Poker.") He also makes billions of dollars from Wall Street clients every year.

  • Despite that, or perhaps because of it, he doesn't seem to trust Wall Street very much.

Context: Bloomberg this week released a very aggressive plan to rein in the financial sector — one that would be fought vociferously by the biggest clients of Bloomberg LP.

Why it matters: Bloomberg's detailed financial reform policy, released Tuesday, could cost Wall Street trillions of dollars. It's a vision that would not be at all surprising coming from Elizabeth Warren, but that was less expected from an avatar of red-blooded capitalism.

How it works: At the top of Bloomberg's wish list is for banks to hold significantly more capital on their balance sheets. While the policy doesn't specify a number, it does approvingly footnote a paper from the Minneapolis Fed that would end "too big to fail" by raising the so-called "capital requirement" for banks from 13% to as much as 38% for the biggest banks.

  • The Minneapolis Fed plan would force the banks to raise about $2 trillion from the markets, and would raise loan rates by 1.4 percentage points. Add it all up, and the total cost is estimated at about 30% of GDP.

Also on Bloomberg's list...

  • Impose a 0.1% financial transactions tax.
  • Place "speed limits" on the stock exchange that would level the playing field by allowing everybody's orders to be filled at the same time and price.
  • Allow the Post Office to provide banking services.
  • Toughen banking supervision, including more stringent stress tests from the Fed and a ban on banks using their money to speculate in the markets.
  • Fully nationalize Fannie Mae and Freddie Mac.
  • Beef up the CFPB.
  • Automatically tie student loan payments to income, and make it easier to discharge student loans in bankruptcy.

The bottom line: Where Trump deregulated Wall Street, Bloomberg wants to re-regulate it — and he wants to go significantly further than even former President Obama managed with the post-crisis Dodd-Frank legislation.

Bonus: The rise and fall of E*Trade
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Data: FactSet; Chart: Axios Visuals

A darling of the first dot-com bubble, E*Trade was inevitably a victim of the dot-com crash.

  • Morgan Stanley CEO John Mack, eyeing a bargain, first tried to buy the discount brokerage in 2002, when it was trading at roughly the same share price that it's at today.
  • E*Trade's second run-up, in the mid-2000s, was scuppered by the financial crisis.
  • Its final attempt to recover, which took it from about $8 per share in 2012 to more than $60 per share in 2018, was unlikely to resume after competition forced the company to slash commission prices to zero last year.
3. The Boy Scouts' bankruptcy tactic

Illustration: Aïda Amer/Axios

Donald Trump, when accused of overseeing multiple corporate bankruptcies, famously retorted that he had "used, brilliantly, the laws of the country." It seems that the Boy Scouts of America (BSA) were paying attention.

Driving the news: BSA filed for bankruptcy protection this week, Axios' Courtenay Brown reports, with the sole purpose of relieving the legal pressure it faces from sexual abuse victims.

Why it matters: Bankruptcy means that a judge will put a ceiling on how much BSA will pay to victims. The proceedings could limit the degree to which local councils’ billions of dollars' worth of assets can be awarded to victims.

Context: The 100-year old organization is facing 275 lawsuits, and expects thousands more claims to be filed.

  • Thanks to new state laws, sexual abuse victims can bring cases to court regardless of when the misconduct occurred.

How it works: Organizations can turn to bankruptcy courts when facing a monsoon of lawsuits from corporate wrongdoings. Examples include...

  • USA Gymnastics, which faces fallout from multiple cases of sexual abuse by former team doctor Larry Nassar.
  • Catholic Church dioceses, including one in Harrisburg, Pennsylvania, which filed for bankruptcy Wednesday.
  • PG&E, the California energy utility facing claims from victims of wildfires sparked by its equipment.

By the numbers: BSA is solvent.

  • The organization has $1 billion of assets, against $294 million in liabilities.
  • If you include assets owned by local councils and related nonprofits, it has way more. The local councils have $3.3 billion in assets, per the Wall Street Journal.
  • BSA has tried to separate itself from the 261 local groups. In the bankruptcy filing, it says the councils are financially independent and separate entities. That could protect the councils from having to pay into a compensation fund while also putting billions of dollars out of the reach of victims.

The bottom line: One lawyer told the New York Times this strategy is similar to the Catholic Church, whose dioceses — not parishes — filed for bankruptcy protection in an attempt to protect parishes’ assets. (It sometimes worked.)

4. What we're reading: "Whistleblower"

Book cover via Penguin Random House

Susan Fowler burst onto the public stage in February 2017 with the most momentous blog post in the history of the internet.

  • Her 2,900-word "reflection on one very, very strange year at Uber" precipitated the downfall of Uber's founding CEO Travis Kalanick.
  • It also marked the point at which the entire national conversation about technology companies shifted from cheerleading to skepticism.

Fowler went quiet after her blog post was published. But now, three years later, she's back with a memoir, "Whistleblower," that deserves to start a new conflagration of its own. This time, the system being indicted is not Uber, or even Silicon Valley more broadly, but the entire American patriarchy.

Fowler is a truly extraordinary woman. As a girl born into deeply religious poverty, she home-schooled herself through high school while being allowed "no female friends who did not go to church, no male friends whatsoever, and certainly no boyfriends."

She fought her way into Arizona State University and then the University of Pennsylvania through the sheer force of her thirst for knowledge, but continued to encounter appalling sexism.

  • Penn treated Fowler atrociously. She encountered serious sexual harassment and discrimination and found herself the person punished — the school prevented her from receiving an M.A. in philosophy and a B.A. in physics, and dashed her dreams of getting a physics Ph.D.

Unable to remain in academia, Fowler went to work as a software engineer in Silicon Valley, but the sexism persisted — first at Plaid, then at PubNub, and then, famously, at Uber.

  • Fowler's first-hand account of the duplicity and dysfunction at Uber is genuinely shocking. The company would have gotten away with it, too, just as they had countless times in the past, were it not for Fowler's unique background. As a serious philosopher, she felt compelled to speak out; as a meticulous scientist, she had all the receipts.

While the media narrative is dominated by #MeToo stories of sexual assault, "Whistleblower" masterfully pulls back the camera.

  • Fowler reveals a world of sexual discrimination, retaliation, and a broader culture where women's careers are simply not valued as highly as men's. Hers is not a story of Bad Men; in fact, much of the sexism she encountered was at the hands of women.

The bottom line: Fowler's left arm is tattooed with a phrase from Ovid: "Nitimur in vetitum semper, cupimusque negata." American society did its very best to prevent her from succeeding. Her life, and this excellent book, represents her triumph over almost inconceivable odds.

5. Stonks gonna stonk
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Source: FactSet; Chart: Axios Visuals

If the rise in Tesla stock this year is incomprehensible, what does that make the rise in Virgin Galactic stock?

  • The space tourism company is now worth more than $7 billion, which is admittedly peanuts in comparison to the Tesla market cap of $166 billion. Still, if Virgin Galactic needs to raise capital, now might be a good time to do so.
6. How to build a safer city
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Data: City of Helsinki; Chart: Naema Ahmed/Axios

Traffic accidents did not kill a single pedestrian or cyclist last year in either Helsinki or Oslo, Axios' Sam Baker writes.

The big picture: The main ingredient in these cities' successes should not surprise you: They made their streets a lot less accommodating to cars.

Denser cities have an inherent advantage in walkability, and older cities often have more rail infrastructure. But Helsinki also employed plenty of modern interventions that other cities can learn from, Streetsblog notes.

  • Wide sidewalks and narrow traffic lanes prioritize people over cars, and the city has almost 750 miles of protected bike lanes.
  • Helsinki has also lowered its speed limits. Most local roads now have limits of about 20 mph, and major arterials are as low as 37 mph.

Go deeper: In a study published in January, an international group of researchers studied the road and transit layouts of nearly 1,700 cities, breaking them down into nine types to analyze their safety.

  • Unsurprisingly, density, short blocks and the availability of mass transit all contributed to fewer injuries.

The bottom line: "The best approach is to get people out of cars in the first place, and to design cities in ways that people are using motor vehicles less," one of the study's authors told Fast Company.

7. Coming up: Buffett’s letter

Photo: Daniel Zuchnik/WireImage via Getty Images

Warren Buffett will release his annual letter to investors on Saturday, alongside Berkshire Hathaway’s earnings report, Courtenay writes

  • Berkshire notably exited the newspaper business last month.
  • Buffett turns 90 this year, though there’s no indication he plans to step aside.
  • There’s speculation about Buffett’s successor and what he might say about that in his letter — though that’s not different from prior years.
8. Building of the week: Anlu City hospital, China

Photo: Hu Huhu/Xinhua via Getty

The one part of the Chinese economy that's booming right now is hospital construction.

  • This particular hospital, photographed on Feb. 11 and completed on Feb. 15, is in Anlu City, in central China's Hubei province. But there are many others like it.
  • Wuhan City built a 1,000-bed hospital in less than 10 days.
  • The hospitals are made from shipped-in prefab structures stacked two stories high and connected by a central corridor.

The bottom line: When China wants something done fast, all financial and bureaucratic constraints can magically disappear — to the point where authorities can build an entire hospital in less time than most architects would spend on an initial site visit.

Felix Salmon