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So long, farewell, auf wiedersehen, adieu

Banking Essentials Newsletter - November Edition

Online Brokerage Space Should Remain Rich Source Of M&A

University Essentials | COVID-19 Economic Outlook in Banking: Rates and Long-Term Expectations: Q&A with the Experts

Estimating Credit Losses Under COVID-19 and the Post-Crisis Recovery

So long, farewell, auf wiedersehen, adieu

AdaLee is a senior analyst for Indaba Global Research. The views and opinionsexpressed in this piece represent only those of the author and not necessarilythose of S&P Global Market Intelligence.

Allgood things must come to an end, and after lasting much longer than I'd everhave guessed, this will be the final post for the Soapbox.

Ithas been a fun venture, not least because of the opportunity it afforded toexamine pressing, under examined financial market issues, such as how HansGruber could have hoped to earn 20% returns on the money he attempted to stealin Die Hard (best guess: buying the RJR Nabisco LBO debt just right), andwhether John Maynard Keynes could have hacked it as a modern money manager (thesequence of his returns suggests he'd have been fired before ever hitting hisstride, even assuming his big years weren't abetted by inside information).Early on, there was also occasion to examine the striking parallels betweenWall Street pay czar Ken Feinberg and The Grinch, although the comparisonultimately breaks down, since the Grinch saw the error of his ways and wasredeemed in the end.

Thosewere silly (though hopefully engaging) topics, though sadly no more silly, andarguably a good deal less so, than a lot of the things allegedly serious peoplehave gotten up to during the life of this blog. In fact, maybe the biggestlesson I take away from scouring the news for blog post topics every month isthat the human susceptibility to delusion is even greater, and even lesscurable, than I had appreciated.

Onthe venture capital side of things, for example, just 15 years after thebursting of the dot-com bubble, and less than a decade after the bursting of amuch larger financial bubble, we have seen the spectacle of a teenage venturecapitalist who aspires to ferret out emerging opportunities with the potentialutility — very loosely defined, obviously — of Snapchat. In such an atmosphere,the sort of vetting failures that appear to have attended Theranos seem likelyto be revealed in time as far less of an exception than investors in VC fundswould like to think.

Thereare only a handful of different types of stories, and post-crisis venturecapital looks like it fits squarely into the tragedy column, if somewhat fardown the list from Hamlet (or to provide a point of reference for teenageventure capitalists, Sons of Anarchy).

Thepublic markets, of course, have their fair share of irrationality fated to makefuture generations look back and shake their heads at their predecessors.

Individualinvestors are beset by advice that, while good-intentioned, is simplistic atbest, and holds the potential to be both massively destructive, and in somecases, a source of asbestos-scale long-tailed liabilities.

Afew examples that leap immediately to mind include , a fast-growingbusiness that looks like it may not reduce investment risks so much as merelysubstitute one for another — cutting down volatility of returns for aginginvestors by shifting exposure from equities to fixed income, while by the verysame process reducing long run expected return, and thus dialing up the risk ofoutliving one's assets. Note to purveyors: when, a decade or two hence, theclass-action lawsuits start getting filed featuring sympathetic retireesreduced to subsisting on cat food, don't say you weren't warned.

Arguablyworse, because it appeals to certain moralistic views with the promise of doingwell by doing good, is the growth business of so-called "." This is, by definition, a step back from theefficient risk-return frontier, implying inferior risk-adjusted returns. Anyonewho imagines otherwise would be well-advised to read Peter Bernstein's CapitalIdeas which, for people interested in such things, is an interestinghistory of the development of financial theory since the mid-20th Century.Investment funds touting "socially responsible" strategies shouldcome with the kind of blunt warnings found on cigarette packages.

Meanwhile,the board rooms of publicly traded companies have become a for parasites who make theirliving out of identity politics. This effort is long past its sell-by date;what should have been the last word was published by Warren Buffett in a shareholder letter adecade ago:

"Inselecting a new director, we were guided by our long-standing criteria, whichare that board members be owner-oriented, business-savvy, interested and trulyindependent… Charlie and I believe our four criteria are essential if directorsare to do their job — which, by law, is to faithfully represent owners. Yetthese criteria are usually ignored. Instead, consultants and CEOs seeking boardcandidates will often say, 'We're looking for a woman,' or 'a Hispanic,' or'someone from abroad,' or what have you. It sometimes sounds as if the missionis to stock Noah's ark. Over the years I've been queried many times aboutpotential directors and have yet to hear anyone ask, 'Does he think like anintelligent owner?'"

Thiscatalogue is growing lengthy and we haven't even gotten to Wall Street properyet, so let's go there now, and let's also take it as read that there are, atany given point in time, many securities trading at irrationally high or lowvaluations, and so skip to structural questions.

Thedefining characteristic of investment banks as companies is that, as the clichéholds, the most valuable assets ride the elevators down and go home everyevening. Bottom-line success in the markets for financial capital is heavilydependent upon success in the market for human capital, which makes this oldobservation by Bill Gates still relevant:

"Inthe early 1990s, Bill Gates was asked what competitor worried him the most.Goldman Sachs, Gatesanswered. He explained: "Software is an IQ business. Microsoft must winthe IQ war, or we won't have a future. I don't worry about Lotus or IBM,because the smartest guys would rather come to work for Microsoft. Ourcompetitors for IQ are investment banks such as Goldman Sachs and ."

Twodecades on, Goldman Sachs might be the only company that still inarguablybelongs in that conversation, but the underlying reality remains the same,while the relative competitiveness between Wall Street and Silicon Valley hasshifted quite a bit, in favor of the Bay Area.

Someof that is out of investment banks' control; for the same day's work, techcompanies are free to pay you in cash and on time, while regulatorsincreasingly demand that Wall Street turn its best employees into poorlydiversified holders of unsecured debt portfolios.

Yet,even where Wall Street retains freedom to act, the results have beenunderwhelming, often amounting to various ways of making life easier forthe least committed among theiremployees, which invites if not guarantees adverse selection. Comeon guys; think harder.

Idoubt that this is a uniquely irrational period. Were this post being writtenin 1976, or 1996, or 2036, I suspect that an equally long list of irrationalepisodes would be just as easily compiled. In light of which, I think theoverarching lesson to be drawn from the fact that incidences of sub-rationalityare so plentiful in a business that, competitive challenges notwithstanding,still attracts an outsized share of the workforce's intellectual capital isthat this is something approximating the base level of foolhardiness belowwhich human systems, even with really smart and diligent humans, can't go veryfar. The technology and rules of capital markets change; the wiring of thehumans that comprise said markets does not. That seems both simplistic andunderappreciated at the same time.

Let'sfinish this blog with a prediction, provocative enough to be worth considering,but with a long enough shelf life that it can't be discredited any time soon.Hey, spend enough time focusing on Wall Street and you'll grow cynical, too.Don't judge.

Hereis my prediction: People reading this will live long enough to see New Yorklose its status as the nation's financial capital to sunbelt city (or cities).

Supportfor this thesis is steadily accumulating, mostrecently with the decampment of Appaloosa Management founder David Tepper to Florida,where he will face a marginal state income tax of zero, down from nearly 9% inhis old home state of New Jersey.

Mr.Tepper is just one man, but the list of hedge fund managers moving from thehigh-tax tri-state area around Manhattan to no-tax Florida is steadily growing.

Admittedly,there are not that many people with both the financial resources and theprofessional flexibility to move to Florida without ceding anything in anindustry that remains Manhattan-centric.

Atthe same time, no law of God or man dictates that capital markets must remainManhattan-centric.

TheNew York MSA retains a critical mass of financial firms, large corporateclients, and people with high-value financial skill sets.

Eachsignificant departure detracts from that critical mass, however, while helpingto establish a critical mass in parts of the country with less burdensomegovernment, better weather and, if we in New York are being completely honest,people with better manners.

TheNew York Stock Exchange, for all the romanticism about trading under theButtonwood tree, is now owned by an Atlanta company, and conducts most businesson servers that can be located almost anywhere, while the iconic exchangebuilding now largely serves as the world's most heavily fortified broadcaststudio. Electronification of the markets, including those that have managedthus far to resist it, will only continue, further reducing the importance ofgeography.

Revenueconstraints drive cost pressures, which force more and more functions to bereviewed with an eye toward whether they really need to be performed inManhattan.

Moreimportantly, all the things that make Manhattan a place where high-earningfinanciers want to live — the vast breadth of world-class culture, cuisine,what-have-you — are all things that follow the money. New York didn't have themuntil it emerged as a commercial center. And the hedge fund managers who leavefor Florida will, over time, ensure that Florida has the sorts of culturalamenities that hedge fund managers like, attracting more of them. Lather,rinse, repeat.

Thesame holds for the other great critical mass in New York, corporate clients.General Electric left New York for then-low tax (and safer, during New York'sTaxi Driver era) Connecticut, also home to many hedge funds. General Electricis now leaving Connecticut for Boston over tax issues. When your tax codecauses people to flee to a place maligned as Taxachusetts, it is maybe time totake a step back and re-evaluate.

ButConnecticut can't, and neither can New Jersey; their long term financialoutlooks are too shambolic. Corporate clients are leaving metro New York, inGE's case for Boston, but more frequently for places like Dallas or othersunbelt cities.

Banksfollow their clients, so I think the die is largely cast.

Financiersfrom other cities often feel compelled to point out to condescending Manhattancolleagues that "just because I'm not from New York, it doesn't mean I'man idiot." Before long, it may be the hold-outs in Manhattan's offices whofeel compelled to tell their Southern colleagues, "just because I'm fromNew York, it doesn't mean I'm hopelessly tethered to a bygone era."

That'sit; that's my prediction, and that's the end of the Soapbox. It has beeninteresting and fun, and I've enjoyed interacting with readers, so feel free tosay hello at

Thank you.