Category Archives: Wall Street

Rams & Bears: University of Rhode Island Meets The Big Short

The year 2020 has been quick to provide crises of both the pandemic and social variety. But let us not allow the discomforts of fresh disasters to dampen our memories of the old ones. This year marks the tenth anniversary of The Big Short, Michael Lewis’ best-selling post-mortem of the financial crisis. The Big Short served as a sharp portrait of the financial instruments that rocked the global economy, and the characters who found fortunes in the wreckage. Likely the most insightful book on the financial meltdown, it is far and away the most entertaining.

Less obvious, though of particular interest to those in southern New England, are the book’s linkages to the University of Rhode Island. A typical state school with a predisposition towards STEM, URI ranks 166th^th among national universities and has been the state’s flagship school since its founding in 1917. Its College of Business, my alma mater, is home to solid accounting and finance curriculums, and sends a healthy number of students to the Big 4 accounting firms, though fewer to banks. In a given year, however, a few students with sharp pencils and sharper elbows can typically land analyst roles on Wall Street.

To understand The Big Short’s connections to URI, it’s helpful to review the timing of some key events. Early in the book, protagonist investor Steve Eisman encounters a Deutsche Bank salesman named Greg Lippman, who comes baring a warning. Large numbers of Americans had acquired unaffordable mortgages, Lippman argued. The investment banks then took those mortgages, bundled them together, and sold them off to unsuspecting investors. When homeowners could no longer afford their payments, housing-linked securities would freefall, and the effects to the financial system could be disastrous. Lippman’s solution? Place a wager against the US housing market—through him of course—and become enormously rich.

After digging through the data, Eisman’s team found merit to Lippman’s recommendation; the housing market was teetering, catastrophe near. Steve Eisman faced a gnawing question, however. If the housing market was in deep trouble, who was foolish enough to be betting on its longevity? As it happened, other investors were asking Greg Lippman the same question, and he decided to hold a dinner in Las Vegas to help answer it. As with many stories, particularly those involving bets, The Big Short is full of winners and losers, and URI has alumni on both sides of the coin.

Tasked with managing housing linked investments for large investors like pensions and insurance companies, Wing Chau—quickly identified as a graduate of URI and Babson—was brought to dinner to play the fool. And seated beside Steve Eisman, he played the role beautifully. Chau, surprisingly to Eisman, was happy to continue betting on the US housing market. After all, his compensation was driven mostly by how much money he managed for his clients, not how well he managed it. The more assets under his purview, the bigger his fee, Chau gloated. Eisman was stunned.

Chau, who is painted as a portly purveyor of financial calamity for several pages, sued Lewis for defamation in 2011. He lost. Chau himself was sued by the SEC in 2008 for neglecting his fiduciary duties—his legal obligation to place his investors’ interests above all—and settled for a number well into the seven figures. Though the blame does not belong to money managers like Chau, exclusively. The investment rating agencies, S&P, Moody’s, and Fitch, performed horribly, too. Housing investments during this time were routinely marked as investment grade, while according to Eisman, many were anything but.

Fear not, the University of Rhode Island has a champion in the story, too. So rare was the money manager who put his chips against the US housing market in 2008 that Lewis estimated the number to be fewer than twenty. While most were based in New York City, several others were scattered across the US, including one hedge fund in Massachusetts. As Greg Lippman crisscrossed the country, trying to convince investors that things were falling apart, he made a stop in Boston and found himself across the table from a young investor named Jesse Baker.

I first came across Jesse at a career day alumni panel during my undergraduate years at URI. To be clear, he was on the panel, to dispense advice to lowly students, and I was in the audience, probably underdressed. Jesse was spectacled and—aside from a subtle barb at the fixed income specialist on the panel—quiet while awaiting his turn to speak. And when he did speak, his pedigree did most of the talking. After URI, Jesse joined Goldman Sachs, cycling through investment banking and private equity groups in New York and London, before heading to Harvard for an MBA.

Jesse was hired as a hedge fund analyst following Harvard, and shared his account of watching the crisis unfold firsthand. Sure enough, a salesman had come to the office, trumpeting notions of financial mayhem; Lippman offered Jesse’s group the same deal he’d offered Eisman, an instrument to bet against the housing market, in return for a fee. During the meeting, Lippman showed a graph of US housing prices; the trend mirrored that of real estate prices in Japan prior to the country’s devastating decline of the ’90s. After some additional number-crunching, Jesse’s team was sold. The firm went short, awaiting Armageddon, and riches.

With 18,000 students on its leafy campus, a large school like URI is bound to have alumni in the headlines for the right and wrong reasons. Of all villains, Michael Lewis chose Wing Chau—an unknown New Jersey money manager with a URI economics degree—as the poster boy for bad decision-making and misaligned interests underpinning the crisis. More improbable still, in a nation of 320 million, the number of people who spotted and bet on the housing crash is not far beyond double digits, and one went to URI. Armed with a Rhody finance degree and penchant for Excel, Jesse Baker found himself amid a short reserved for the smartest of smart money.

The Big Short’s linkages to the University of Rhode Island thread a global discussion directly into our local community while also affirming an old truth. People, financial professionals and otherwise, serve as ambassadors for their institutions, past and present.

Matthew Doyle is a business development manager at L3Harris in Somerville and a graduate of the University of Rhode Island. His writing on business and the economy has appeared in The Providence Journal, Providence Business News, and The Day. The views expressed in his writing are his own. Follow him on Twitter @MatthewJDoyle_.

Vice, the New Face of Media

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The Internet jabbed a knife into legacy media, and millennials twisted. Millennials are America’s largest generational cohort and consumer group. The problem is certain companies—especially the media titans—were never sure how to approach the defiant, smart-phone wielding bunch. They don’t pay for cable TV. News is a birthright, not an expense. The audacious idea that they would pay for ad-riddled television was met with cord-cutting. And only 40% of millennials pay for a news subscription. These developments are chilling to media companies and their corporate counterparts who fork over billions in advertising dollars.

It follows that a media company with the superpower to influence and engage millennials might be worth something. Vice Media, which started as a Montreal–based punk rock magazine in the 90’s, is a household name among Gen Y. The digital media darling churns out edgy and millennial-centric news and content—from documentaries on drug use in the US to reporting on wars in far flung corners of the world—across a bevy of mediums including its websites and television station as well as social platforms YouTube and Snapchat. Over the summer TPG, the seminal buyout group, invested $450 million in Vice. The investment values the company at $5.7 billion, nearly double what the New York Times would garner in a sale today. And Vice is worth every penny.

But why is Vice the answer? Their billion dollar CEO looks like a House of Blues Bouncer. They publish lewd headlines about German sex dolls and generally possess a penchant for embracing political incorrectness. The company’s smash mouth style has done little to curb its skyrocketing valuation nor has it deterred industry incumbents like Disney and Rupert Murdoch from hurling financing at the upstart. The centerpiece of Vice’s value proposition is that it understands millennials in a deep, genuine way that mature companies both inside and outside of media do not. For the right price, Vice leverages its Gen Y savvy to help make other products cool too.

Vice’s differentiator is branded content, advertising that weaves together a legitimate, well-reported narrative about a brand or product. An example is Nike paying for a video detailing the history of its famed SB Dunks. It’s not wrong to say Vice is doing the work of Madison Avenue; Vice helps brands build an image and tell a story. From a business standpoint, Vice’s reliance on branded content isn’t a bad thing. Vice does not suffer from the illusion it will make money selling news. The WSJ reported most of Vice’s $800 million in projected revenue for 2016 would come from branded content. It doesn’t hurt that Vice has sharpened its journalistic credibility, either. Rugged reporting assignments have included embedding a reporter in ISIS and sneaking founder Shane Smith into North Korea to film a covert video series.

Critics, including Vice’s defunct digital rival Gawker, have asserted Vice is capturing the attention of hip consumers and selling their attention to the very corporate monoliths those consumers eschew. Shane Smith vigorously denies that corporate customers dictate Vice’s storytelling. The truth is an investor doesn’t care where Vice’s allegiances lie. Vice has 25 million monthly visitors on its websites and access to another 25 million through sites that pay Vice to handle ad sales. In comparison, the NYT has about 80 million monthly visitors. Vice helps connect those millennial eyeballs to hip brands like Nike and unhip brands like Dell. It also teams with legacy media companies like CNN to help them get a seat at the cool table. And for its services Vice earns $800 million a year in revenue.

Using the $450 million from TPG, Vice plans to pursue scripted programming and international expansion. However, solid reporting and lofty corporate ambitions aren’t enough to bring a media company to the Promised Land. But mix those attributes with a knack for understanding millennials, and an ability to turn that understanding into revenue, and the new face of media begins to emerge. Millennials are elusive, but their buying power is too large to ignore. Companies, media and otherwise, must find ways to appeal to them. For now, Vice owns the keys to the kingdom, and rightfully, a $6 billion dollar price tag.

Is Gary Cohn the Man for the Job?

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Gary Cohn, the former Wall Street trader and second-in-command at Goldman Sachs, has emerged as a contender to succeed Janet Yellen as Chair of the Federal Reserve come February. Cohn currently serves as Director of the National Economic Council, a post he was granted following President Trump’s election in November. Cohn, who helped lead Goldman’s tactful glide through the global financial meltdown, is as credentialed as anyone on Wall Street. His background however, which stands in stark contrast to that of the prototypical Fed Chair, presents a mix of challenges and upside.

First, Gary Cohn is not an economist. The primary role of the Federal Reserve is to craft monetary policy that ensures the American economy runs soundly. Unsurprisingly, the Federal Reserve is packed wall to wall with economists. A PhD in economics seems to have become prerequisite for the Fed Chair seat, as well as for the regional fed Chair seats Cohn would be tasked with leading. Fed heavyweights tend to come from academia or the government, though exceptions do exist. Three of the twelve current regional Chairs are non-PhD, ex-bankers. Cohn however, if nominated, would be the first Fed Chair to come from industry in 40 years, and the first without graduate education in 70 years

Cohn’s industry experiences as COO of Goldman Sachs—leading teams, evaluating and managing risk, and navigating market crises—would be valuable to him as Chair. The liability for Cohn lies in the fact that his background is not deeply technical, while at times the nature of his work could be. There is little question that Cohn could quickly absorb a primer on regression analysis. However there is a steep learning curve to leading and debating colleagues who have been doing it for 20 plus years. Cohn’s leadership capabilities could be beneficial in corralling differing views within the Fed; however he will need to rely heavily on his team in grappling with the technical nuances of central banking.

Second, the corporate culture in which Gary Cohn was reared and excelled is vastly different from that of the Federal Reserve. Big, bald and direct, Cohn was known to prowl the Goldman trading floor, plant his foot on a trader’s desk, and demand an update on the markets. Although few are holding their breath on a story where Cohn hoists a shoe onto the desk of the vice chair, the cultural differences go far beyond management style. Gary Cohn is a trader, and traders often rely on gut and intuition to make tough calls. A marquee characteristic of both Cohn and his former Wall Street employer is decision-making that is both quick and bold. And as of late, the Fed has been neither.

During its quest to raise interest rates, the Federal Reserve has been methodical and deliberate. The cadre of policymakers continues to face the conundrum of strong employment and low inflation; the federal funds rate sits at 1.25% nearly ten years removed from the financial crisis. On the one hand, the presence of a forceful decision-maker atop the Fed could be a great thing for an institution that has faced criticism for analysis paralysis and data dependency. On the other, a gunslinger bent on the speedy escalation of interest rates runs the risk of tipping the economy back into recession. The balancing act for Cohn will be forcing some direction into the interest rate discussion while knowing that the Fed operates in a world where too much direction can be a bad thing.

Cohn’s ascent serves as a reminder that we live in a country where a dyslexic boy from Ohio with heap of a drive and bachelor’s degree can become the world’s preeminent central banker. Installing the ex-trader as head of the Federal Reserve would be a policy experiment of mammoth proportions. Some aspects of Cohn’s background—strong leadership and an intimate history with the markets—could be highly advantageous to running one of the world’s most influential institutions, one that affects lives from Wall Street to Main Street. With that said, it is fair to wonder whether a brash play-caller without formal economics training is well-suited for the world of monetary policy. Should Mr. Cohn relocate his office to Constitution Ave in February, we will have our answer.

Hoodies, Handcuffs & High Finance: Martin Shkreli

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The coming of age for millennials in America, or those born between 1980 and 2000, seems to have happened swiftly. They number 75 million. They have surpassed Baby Boomers as the largest cohort both in the workplace and in the country at large. While society continues to associate millennials with puberty and hooded sweatshirts, the reality is the older end of the generation is well into its thirties and far-removed from the orthodontist. As noted by London Business School, a great deal of time has been spent pondering how to best lead millennials. Conclusions point toward a determined and tech-savvy bunch with a penchant for pushing change. Less flattering diagnoses also reflect a group that is entitled, vain and not especially loyal to employers. The subjects meanwhile have proven uninclined to wait for direction.

Millennials are impactful. They run public companies, win Nobel Prizes, and get elected to Congress. A few also go to Wall Street where, through the years, the land of iconic wealth, avarice and big deals has seen its share of robber barons. But never have the two labels—millennial and rogue financier—been so flawlessly merged into a single character, until now. Enter Martin Shkreli, the 32 year old hedge fund manager turned pharmaceutical entrepreneur arrested for securities fraud in December. While his improbable rise from have-not to high finance lends credence to millennials’ reputation as go-getters, his public persona—a greedy, brash social media troll with a knack for irritating Hillary Clinton—has done little to dispel their image as snot-nosed narcissists. Congratulations Martin Shkreli, you are the first millennial Mega Villain of Wall Street.

His early life reads like Good Will Hunting with more chess and fewer street fights. A first generation American reared in blue-collar Brooklyn, Shkreli rocketed into finance, starting two hedge funds before his 27^th birthday. He was quickly recognized as a formidable activist investor, known for scathing blog posts of biotech companies he was short. Soon he would reverse course. In 2011 Shkreli took “the ultimate long position”, founding Retrophin, a biotech startup with the mission to battle “rare and life-threatening diseases.” In 2012 he was afforded a spot on the Forbes 30 under 30 in Finance. For a brief while Shkreli was loved; David armed with a big mouth and a spreadsheet, destined to defeat the Goliath CEO’s of the evil drug industry. Relentlessly ambitious, adept at using technology to catalyze change and armed with an apparent desire to tackle social issues, Martin Shkreli represented the tantalizing millennial upside that, at times, signals a generation ready to right the world.

Often times, the villainous and derided do not begin the story as antagonists. Harvey Dent is no stranger to Wall Street, from the decay of Bernie Madoff’s $36 billion dollar lie to the implosion of Enron. In the early hours of December 17^th, nearly three years to the day of his 30 under 30 designation, a hooded Mr. Shkreli was escorted from his Murray Hill apartment donning manacles. The arrest was not an epochal moment, but rather the punctuation on a gradual ascent to mega-villainy. Standing before a judge at the Federal District Court in Brooklyn, Shkreli appeared at ease. While brazen behavior is not a new fad among corporate crooks, his attire—a black V-neck and sneakers—was a notable departure from the four-figure uniforms of his Wall Street predecessors at battle with the law.

Despite his early achievements as the biotech boy wonder, Shkreli developed a magnetic-like ability to draw critics long before the Department of Justice came wielding a federal indictment. In 2011 Shkreli’s hedge fund, MSMB Capital, lost $7 million betting against the stock of Orexigen Therapeutics, effectively wiping out his investors. Consistent with millennial tendency to bend the truth about poor performance, Shkreli told investors that things were fine, and he had in fact doubled their money. The move put him in the precarious position of having to pony up funds he didn’t have, funds he would eventually siphon out of Retrophin. The charade lasted long enough for Shkreli to cover his obligations at MSMB, but Retrophin investors eventually caught wind of the stunt, followed by its board, who showed Shkreli the door in 2014. In true millennial form, Shkreli took to social media to vent his frustrations.

While details of his ouster from Retrophin were still unclear, TheStreet crowned Shkreli Worst Biotech CEO of 2014. Though disdain for the young parvenu was still contained largely to industry, his time in the shadows of Wall Street would be short lived. It didn’t take long for Shkreli to kick off his second entrepreneurial venture, Turing Pharmaceuticals. It was here that Shkreli set the stage for his leap to notoriety. In November 2015, Turing acquired the rights to Daraprim, a drug used to treat infections in individuals with HIV. Shkreli soon raised the price of a single pill an astronomical 5,000% from $13 to $750, catapulting himself into the crosshairs of Presidential candidate Hillary Clinton. The New York Times estimated the price hike—a practice oft-implemented by smart money-backed drug companies—could cost patients hundreds of thousands of dollars. “1b[illon] here we come”, was Shkreli’s boastful message to a colleague.

In September, Mrs. Clinton launched her assault. Clinton laid into Shkreli at a town hall meeting in New Hampshire, called for investigations into the price hike, and, representative of the fast-growing number of elderly on social media, took her 68 year-old fingers to the keyboard to serve up a shot on Twitter. Shkreli, in perhaps his archetypal act of millennial defiance, dismissed the then-Democratic frontrunner with a brief “LOL” – the three letter phrase branded into the e-vocabulary young people that rose to prominence during the time of AIM chatrooms and T-Mobile Sidekicks. BBC quickly named Shkreli the most-hated man in America, followed by The Daily Beast. In December, to ensure he had adequately appalled all corners of American society, Shkreli purchased the lone copy of Wu-Tang Clan’s latest effort for $2 million with no intent listen to the album but rather to “keep it from the people.”

Martin Shkreli began accumulating mega-villainy stature long before his December 17^th arrest. His chicanery at Retrophin coming into public view was more or less icing on the cake for the millennial lighting rod. There is a likeness in his situation to that of the fallen banker, Michael Milken. The toupee-sporting Junk Bond King of the 80’s grew wildly unpopular well before his insider trading arrest, thanks to his practice of arming corporate raiders with billions of junk debt to stage hostile takeovers. Though not illegal, the takeovers were regarded as dirty corporate practice, much like the Daraprim price hike. It is as easy to imagine Mr. Milken’s bewilderment listening to a Wu Tang album as it is unlikely that he has ever owned a V-neck. The sophisticated finance scoundrel is not a new breed. Shkreli is just the latest model.

“You could go down in history as the poster boy for greedy pharmaceutical executives, or you could change the system.” Those were the words directed at Shkreli by Congressman Elijah Cummings. In a broader sense, it is advice that can be taken to heart by all millennials. They are indeed a generation capable of propelling great change. However they must ensure their tendency to cut corners does not undermine their willingness and capacity to solve problems. They must also learn strike a balance between drive and humility. Martin Shkreli embodies the paradox well. Misled investors and burdened patients lie in the wake of his intense ambitions. He remains unapologetic. Perhaps if it’s not too late, Mr. Shkreli can find his way back to square one. Otherwise, the millennial wunderkind may be facing checkmate.