Sep 19, 2019

Axios Capital

By Felix Salmon
Felix Salmon

Situational awareness: "The Lehman Trilogy" is coming to Broadway, after sold-out runs at London's National Theatre and at the Park Avenue Armory. If you haven't yet seen it, now's your chance.

  • This week's newsletter clocks in at 1,606 words — a 6-minute read. Below you'll find musings on the reliability of markets, the financial success of sociopaths, and what happens when high-minded companies run into the need to make money.
1 big thing: Untrustworthy markets

Illustration: Aïda Amer/Axios

Don't trust the markets. That's the big lesson of this week: While market information is a very important signal, it should never be taken as being definitive.

  • In the stock market, public order books on "lit" markets — where all the buy and sell orders for any given stock are theoretically visible to all traders — have been functionally useless for years. High-frequency traders place and withdraw millions of orders every second, and there's a mini "flash crash" in some stock or other every day, with the price plunging and then recovering within the blink of an eye.
  • In precious metals futures, criminal racketeering and market manipulation went on for some 8 years, according to a complaint this week against JPMorgan traders, including the former head of the bank's precious metals desk.
  • In fixed-income markets, banks have been fined billions of dollars — and 5 bankers have gone to jail — for manipulating the key Libor interest rate.

Driving the news: U.S. money markets fell into chaos this week as risk-free overnight interest rates spiked to almost 10%.

  • The move was largely due to a series of technical factors, including the fact that the Treasury issued some $54 billion of new bonds at exactly the same time that companies started withdrawing cash in order to make their Sept. 15 quarterly tax payments.
  • That created a liquidity crunch, forcing the Fed to step in with $203 billion of short-term cash.

Context: Until the financial crisis in 2008, the Fed conducted open market operations every day to keep interest rates at their target level. Those operations ended when quantitative easing massively expanded the central bank's balance sheet.

  • Now that its balance sheet is shrinking and banks need abundant reserves for regulatory reasons, the Fed is going to have to step in more frequently to ensure that rates are where they should be.

My thought bubble: The Fed's traders could probably have told Treasury's liability-management team that the timing of their bond issues would be problematic for the money markets.

  • But we no longer live in a world where Tim Geithner could move effortlessly from Treasury to the New York Fed and back again. President Trump is waging war against the Fed, which makes things very awkward at Treasury.

What they're saying: "There are some advantages to just asking banks to make up the interest rate," writes the indispensable Bloomberg columnist Matt Levine. "To the extent that reality is messy and idiosyncratic there is something nice about abstracting away from it."

The bottom line: Multitrillion-dollar financial markets often look reasonably stable from afar. But they're always slapdash and human, and prone to deliberate or accidental breakage.

  • When that happens, governments and technocrats need to be able to step in to fix what's broken. Governments aren't perfect, but taking them out of the system entirely, as some Bitcoin true believers would like to do, seems like a terrible idea.
Bonus: The market's pre-Fed jitters
Expand chart
Chart: Axios Visuals; Data: CME FedWatch

The futures markets knew that the Fed was going to cut rates yesterday. Or at least they knew that as recently as Aug. 28, when the implied probability of a 25bp September rate cut was more than 99%.

  • Then, for mysterious reasons, there was a sudden selloff. While the probability of a quarter-point cut was 95% on Monday, Sept. 9, it plunged to 48% on Tuesday, Sept. 17, the day before the rate decision.

Why it matters: The Fed did indeed cut rates by 25bp, as most analysts were expecting. But that went against a lot of bets that were placed just before the decision.

2. When do-gooders don't

Illustration: Aïda Amer/Axios

We, the parent company of WeWork, is a company on a very high-minded mission. That mission is, literally, "to elevate the world's consciousness."

  • We is also a company whose founder, CEO, and controlling shareholder is reportedly happy to leave "a sizable chunk" of marijuana in a chartered Gulfstream jet, opening up its owner to significant criminal liability. The same man "instructed staff to fire 20% of employees a year."

Kickstarter is a company dedicated to having a "radically positive impact on society." As a chartered Benefit Corporation, it attests that it's more interested in its community than in its profits.

  • Kickstarter is also fighting a unionization drive. It has fired 3 of the 8 members of its union organizing committee, and refuses to voluntarily recognize the union.
  • Kickstarter is risking its much-vaunted status by doing so. "Specific actions taken against a unionization drive may jeopardize a company’s B Corp status," a representative of B Lab, the company that certifies companies as B Corps, tells Axios.

Etsy used to be a B Corp, but then it fired its CEO and more than 200 other employees, gave up its B Corp status, and started becoming much more profitable.

The bottom line: Companies love to talk about their grand ideals. But those ideals can get thrown under the bus very quickly if profits lie elsewhere.

3. The rewards of sociopathy

Illustration: Sarah Grillo/Axios

Capitalism rewards psychopaths. As detailed by investment banker and pseudonymous blogger The Epicurean Dealmaker in the wake of the financial crisis, most if not all senior investment bankers exhibit "a very substantial number of the commonly accepted markers for psychopathy."

  • These include superficial charm, manipulativeness, lack of empathy, poor judgment, and the inability to distinguish right from wrong.
  • "Sexually deviant lifestyle" and "promiscuous sexual behavior" are also on the list.

In my reporting on Jeffrey Epstein I've been able to speak to a few different people who had firsthand experiences with him. (I also reported this week on how he managed to circumvent Harvard's rule against accepting money from him.) Common threads include his easy charm and the way in which he went out of his way to show concern for others.

  • A picture tells a thousand words: In one photograph that has been doing the rounds in recent weeks, Epstein smiles genuinely at Larry Summers, who is wearing his trademark rictus. The photo shows how good Epstein was at putting people at their ease — very, very few people can appear so loose and relaxed around Summers in particular.
  • "Jeffrey was brilliant in understanding how people felt,” one of his ex-girlfriends told Vanessa Grigoriadis of Vanity Fair. “He could feel energy very clearly. But I think because he’s a sociopath, he would manipulate that for his own needs."
  • Epstein would help people in ways large and small. He would offer them access to top-flight physicians for their medical problems, make valuable introductions, donate money to their favorite charities, or find the staff they were looking for. Such actions resulted in those people liking him, trusting him, and feeling indebted to him.
  • Epstein's monstrous treatment of the women and girls he sexually assaulted proves that his shows of empathy were deeply fake. But those displays felt real, to the targets of his attention.

By the time he was arrested on sex trafficking charges earlier this year, Epstein had amassed a fortune of more than $500 million — even after decades of lavish spending, and despite the fact that he never even got a college degree.

  • While the exact source of his wealth remains a mystery, it ultimately must have come from his skill at manipulating individuals.

Why it matters: Epstein is an extreme case, but charming sociopaths in general tend to do very well in business. (You probably have an ex-boss who fits the bill.)

The bottom line: Capitalism often looks as though it has been designed to reward its most malign actors.

Bonus: Ban private jets!

Illustration: Aïda Amer/Axios

Epstein used one tool in particular when trying to get into the good graces of others: He would offer rides on his private jet.

  • Private jets epitomize the enormous difference between the top 0.1% and the top 1%: they're the most salient luxury available only to the ultra-wealthy.
  • One of the oldest tricks in public relations is for a CEO being profiled to be "too busy" to be interviewed anywhere other than on his private jet. (Alternatively, the CEO sends his jet to bring the journalist to his island/dacha/yacht.) In accepting the offer, the journalist feels special, and subconsciously grateful for the access and the privilege. That gratitude often shows up in the story.
  • In my reporting, people who turned down Epstein's offers of private-jet travel tend to have been the people largely immune to his charms. Those who accepted — including Bill Gates, who is no stranger to the inside of Gulfstreams — are much less likely to want to speak about Epstein.
  • ICYMI: Gates broke his silence on Epstein to Axios' Mike Allen this week, but still left many questions unanswered.

My thought bubble: Private jets aren't just a symptom of extreme inequality, they're also a tool that the ultra-wealthy use to make themselves even richer — and can be a brass ring that the almost-ultra-wealthy use to convince themselves they're not rich enough. Banning them would be a small step towards a healthier, more egalitarian economy.

4. Coming up: World leaders at the UN

Illustration: Lazaro Gamio/Axios

World leaders arrive in New York next week for the 74th annual United Nations General Assembly, Axios' Courtenay Brown writes.

Why it matters: The world's biggest diplomatic gathering comes in the midst of geopolitical chaos. (And will create a different form of chaos: midtown traffic.)

  • Tensions between the U.S. and Iran got worse in the last week. Iran President Hassan Rouhani is scheduled to attend, but a visa issue could change that.
  • Among those not attending: Israel Prime Minister Benjamin Netanyahu and Venezuela President Nicolas Maduro.

What to watch: Climate change is a major focal point this year. Swedish teen Greta Thunberg is leading a global climate strike tomorrow ahead of the UN Climate Action Summit 3 days later.

5. Building of the week: L'Arbre Blanc
Photo: Pascal Guyot/AFP/Getty Images

The Mediterranean city of Montpellier, in the south of France, is bathed in sunshine for 80% of the year, which means that even apartment dwellers want ample outdoor space of their own.

  • Enter Japanese architect Sou Fujimoto, whose Arbre Blanc, completed this year, gives every apartment an ample balcony. (Duplexes get 2.) The balconies are at least 75 square feet, and can be as large as 375 square feet.
  • The balconies extend as much as 25 feet from the building walls. They provide shade for the apartments below them; they also help break up skew winds to create cooling breezes.

A rooftop bar and restaurant is open to the public, as is an art gallery in the base.

Felix Salmon

Finally, in case you still don't understand the finer details of tri-party repo, I present to you @SuperMugatu's explainer. It should clear up any lingering questions you might have.