40 replies
3d22h
Wells Fargo did a bad thing. But the badness of the thing is uncertain, amorphous, hard to quantify: People were harmed, but not in ways that the legal system can easily reduce to money.
But the financial system can: The bad thing that Wells Fargo did caused its stock to drop, which is a good rough measure of how bad it was. The shareholders perform the socially useful service of measuring the badness [...]
I think this is a really interesting point - assuming the actors in the market who are buying and selling stocks share the same general morals of the rest of the population, they can penalize companies that do bad things. But that would mean market forces would need to act on moral grounds and not on profit motives.
That's a dangerous idea as it presumes that shareholders are investing not for profit but to improve "goodness" in the world. This is obviously not true.
The shareholders are providing the economically useful service of measuring _risk_ to those future profits. These two factors may be linked through an abstraction but they are most definitely not equivalent.
Without journalists to expose the bad things in the first place the investors can do no such thing. There is no mechanism in place to discover these facts and there is no effort to build one independent of journalism.
It doesn't presume that shareholders are altruistic.
It presumes that shareholders' only objective is to maximize the share price.
From Wells Fargo's reports to investors, it's clear that management believed that investors would interpret successful diversity efforts as important to maximize the share price.
After the diversity rules were suspended, the share price dropped.
It's nearly impossible to prove cause and effect, but the plaintiffs don't have to prove direct causation. They only have to show that management misrepresented the facts in reports to investors, that the false statements were material, and that investors suffered a loss at that time.
How much is the stock movement a direct response to news like that, and how much is it someone gaming based on how others will react to news?
Can you elaborate on the distinction between these?
What is a "direct response"? Any change in price is still the result of individual actors expressing directional opinions.
Non-investor, and I was conflating too many concepts, but, very roughly: based on fundamental value of the business vs. only how others will react in buying&selling of the stock (and maybe even nudging others to react).
The "fundamental value of the business" is not an exact amount. The day-to-day variation in price (to the extent it isn't correlated to the index, anyway) can generally be viewed as a side-effect of uncertainty about what it actually is. In some sense, the value is unknowable, because it is a function of other things that are not knowable (e.g. future interest rates). So there's a measure of "other people would find an argument for this valuation reasonable", even for the fundamentals.
In any event, this sort of news generally does not move the fundamental value of the business in a way that exceeds the "uncertainty band", so pretty much all of the active trading is necessarily in anticipation of how others will view the news.
This is in contrast to e.g. merger offers, which are much more about the actual value of the business (which has suddenly become very concrete and precise), and not trying to judge the reaction of others. But major events like that are a small minority.
Isn't that backwards? Investors are a major funder of journalism in the broad sense, and one of the few robust revenue sources left for it.
I see it as an advertising driven industry. I'm not sure how investors could be funding it directly.
That there are publications meant for investors does not mean investors can be seen as the revenue source. The advertisers looking to get in front of investors are the source.
If someone was investing in news for it's own sake then why is the quality of the information presented so poor? You'd almost have an easier time making the case they invest to _intentionally_ obscure the process of reporting facts.
Financial-oriented news tends to be noticeably better than other kinds. Often the best widely-published journalism in the UK will be in the Economist or the FT, for example, and some more specialised publications allegedly have even higher standards.
Unlike science news, financial news does not talk down to its audience.
The article is from Bloomberg, which provided high quality news feeds to investors and other market participants for high prices - $1000+.
This is part of their public articles.
The author (Matt Levine) is always a bit tongue in cheek about securities fraud and the “socially useful” role shareholders play in pricing securities. He writes about these kind of incidents in a weekly basis, so his typical audience knows to read it that way.
He likes to point out that basically everything and anything a company may do is securities fraud. It’s almost parody at this point, which I think is his point. So it’s basically impossible to exist without committing said fraud by definition. That seems to be a problem — likely a structural one as well. At some point everyone is going to use that as a defense (or maybe they have already) and the sec/courts/congress are going to have some work to do.
It's probably intentional - securities fraud is a catch-all in the same way that tax evasion is an easy catch-all for all sorts of varied criminal activity which is much harder to prosecute.
There is a financial accounting line item called “goodwill” and it’s often non-trivial.
In a functioning market customers (whether consumers or enterprise purchasing decision makers) tell you to take a walk if you act with bad will in any kind of consistent way.
There isn’t much money to be made in markets that are both of “mature” and functioning.
Goodwill has a very specific definition that has nothing to do with your behavior. It is simply the difference between the price an acquirer pays for something and the book value of that thing
TFA accurately cites a decrease in cap on the day over a revelation of bad behavior, in no way affecting fundamentals. That comes out of goodwill.
Why do people say things like this?
Goodwill only comes into play in the context of an acquisition. Unless they are being bought, the decrease in market cap is just that. It doesn't come out of anything in particular, accounting-wise.
Price is definitionally attached to the likelihood of a transaction! The “price” of something is perfectly defined at the moment of a transaction, at any other time it is at best a rough estimate of the consensus of an amount at which a transaction would occur.
I’m not nitpicking: this a la carte treatment of market capitalization neatly severed from what anyone would be willing to pay, warped by the prospect of intervention and other insidious capture is why we’re discussing this embarrassing cavalcade of depressing behavior on the part of the executives in the first place.
Goodwill isn’t germane only to risk arbitrage discussions, it is (among other things) how the accountants keep track of the impact on value that accrues to piece of shit finance guys pulling stunts like this one.
Why do folks say things like what you’re saying?
Goodwill has a meaning which isn’t related to market cap due to a bad news day.
In accounting, "goodwill" has a specific definition which takinola correctly gave. It is IMO poorly named, since it has nothing to do with what "goodwill" means outside of accounting. The amount of "goodwill" a company has on its books has nothing at all to do with what a layman would think of as "good will".
How does the bad behavior have no effect on fundamentals? Their own SEC filings claim that it is essential to the company's success.
I think the point of this case is that they don't have to be moral at all. They penalise the company for doing bad things not because they think it's bad, but because they have financial incentive to do so.
Markets are not about morality. They are designed to allocate resources optimally. If you want moral outcomes, you would need to inject incentives that make those outcomes optimal for the market participants
Point of Order: markets are designed to make money, which is orthogonal to optimal resource allocation.
And what is money but a proxy for the sake of resource allocation?
Whatever the incentives, they already decided to include DEI commitments into their obligations to shareholders.
The idea that retail buying/selling pressure has any effect on market price is a very old fashioned idea.
"actors in the market who are buying and selling stocks" does not necessarily mean retail, no?
People who have the stake or dry powder to move the share price of a bank (or megacap tech company while we’re at it) are in no way interested in socially useful pricing around dickhead behavior.
Well, except to make sure it doesn’t apply to them, hah.
funds don't share those morals
I think this explains a lot of the "companies only act in the interests of their shareholders" thing, too. I know there's a legal obligation to act in the interests of the shareholders, but additionally, as TFA points out: shareholders have a really easy time quantifying their damages so that a case can be brought.
Employees having a really bad time at a company because it keeps doing bad things have to be able to quantify that bad time in dollars, and that's hard.
It's interesting to think of how we could adjust the legal system to allow for emotional distress, environmental damage, morally bad actions, etc on their own terms without having to convert them to monetary damages. Make it easier for a court to judge executive decisions on moral grounds and that makes it easier to claim damages for bad decisions and that makes it easier to keep companies behaving morally.
Morals are subjective and fluid. They are effectively areas where society has "agreed to disagree".
Morals that society agree on are codified into laws. The legal system is set up to enforce and uphold laws. It cannot uphold morals because they are not law.
As executives we allowed alcohol at the year end party. If some of our group gave a moral position of no alcohol (say Mormons or Muslims) is that morally incorrect for us yo allow it?
What if said objector imbibed at the event? Are we "morally responsible"? Who gets to decide and tell us what is morally ok or not ok?
I disagree that morals align with laws.
There are endless examples of legal actions which are utterly immoral.
I agree that morals are personal and differ between individuals. Though that's not an opinion that religious folks accept: they hold that morals are defined by their deity and codified in their sacred texts. I'm glad we don't recognise that codification in our laws (though some countries do).
Having said all that, there are some pretty clear cases where companies are acting immorally; against the interests of their employees, customers, etc and generally against the interests of humanity. It would be cool to be able to call this shit out in a court without having to monetise the damages.
Companies should (and are) called out for immoral behaviour. Citizens, journalists etc do it all the time.
And I agree that some laws are immoral. Either because morals have changed while the law has remained static, or because the elected people who wrote the law themselves behaved immorally (and subsequent electees have not sought to reveal them.)
But the place for pointing out immoral behavior is not the courts. And the penalty for such behavior is our wallets - if you don't like a company, don't doend your money with them.
It's almost like the state actually has standing in a lot of the cases where regulatory power has been slashed.
This is inaccurate, and the article itself actually contradicts itself by showing that it's inaccurate.
They can penalize companies for lying. If the companies just stop lying that they do/will do/will not do/don't do a certain thing, there's no securities fraud. The issue is that they lie about it.
this is a sad truth for lots of things. Like folks who collect, then lose private information. It is wrong and bad, but rarely quantifiably so in court.
This is a part that he takes on faith which is completely unsupported. What the market is really doing (assuming rationality) is judging how much any punishment Wells Fargo might receive from regulators, customers, counterparties will alter the net present value of the stock.