One Horse at a Time: A Mailbag Episode

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Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

And I'm Katie Greif, a reporter for Bloomberg News and an anchor for Bloomberg Television.

And today,

mailbag.

I didn't mean to sing that.

All right.

I said it.

Don't worry about it.

Yeah, yeah.

I actually sang it.

That's what everyone wants.

Got a lot of great questions.

Got a lot of great questions.

Thanks for sending us your questions.

They really tied us over in periods where I am on vacation.

It's also nice because.

Yeah, that's true.

It's nice because I don't think we really solicited people for questions this time around.

We always solicit them.

Yeah, but like not like, hey, we're recording.

Consider this a standing solicitation.

True.

Anytime you have a question, send it to us and periodically we'll put them in a batch and think about answering them.

Yeah.

So shall we start off with Mark?

Sure.

Let's start off with Mark.

Mailbag.

Mailbag.

Mark asks, do you think we'll see a law firm do an IPO for itself in the next few years?

I.e., will retail investors be able to trade shares in K ⁇ E or Paul Weiss in five years?

From a business model model perspective, would a public company structure even make sense?

I'm sure they'd at least get the disclosures right.

That's funny, Mark.

Are you sure?

I worked at a law firm.

I wouldn't be sure.

So there are law firm IPAs in other countries, like I think including in the UK, you can trade shares of law firms.

In the U.S., it has historically been prohibited because U.S.

legal ethics suggests that it's unethical for law firms to be owned by non-lawyers.

This is in part for genuine ethical reasons, like you want lawyers to have fiduciary duties only to their clients and not to their shareholders.

And in part for like

guild protectionism reasons where like you want lawyers to control their own terms of employment.

That's changing a little bit.

You see like a few states allow outside ownership of law firms.

And like, yeah, we might see law firm IPOs in a few years.

I don't know.

I think of a law firm as being not like a super capital intensive business where like most of what a law firm is is like

lawyers.

And so so on the one hand, that means that you don't need to go to public markets to raise hundreds of millions of dollars

to fund AI research because you're just like, you know, you're just doing deals and

getting paid by the deal.

So like, there's not a lot of like long-term investment that only pays off years later.

That's not entirely true, right?

And like, you, you know, I've written a little bit about like the litigation finance market.

And like one thing that litigation finance is, is law firms that take on incredibly complicated, very long-term consumer class actions where they invest a lot of resources over years and don't get paid.

And then five years later, they win some massive verdict and get paid a billion dollars, right?

Like that sort of investment is a little bit hard to do when you're just like some lawyers who need to make a living.

And so they get like outside investors for that.

And it's not like share ownership, right?

It's like a sort of special financing vehicle.

But you could imagine doing that in an IPO form where you like just have a publicly traded law firm that can make long-term investments.

And also just like, you know, there's some level of long-term investments that you would make if acquiring a new team that does some kind of work.

Right.

And like you're hoping for it to pay off in the long term.

The other problem with law firms is like, because they are just people,

they can leave.

Right.

It'd be funny to like be a law firm and go public and then sell your shares and collect money and then like go leave and start another law firm and do it again, right?

Like there's not a ton of stuff there other than the lawyers, right?

Like there's some franchise value in the name, but like probably less so than there is at like a big investment bank.

And like you don't have as much capital intensive business.

So like if you just leave, you can capture most of the value that you previously sold to investors.

And you see that like where law firms like like law firms are pretty fragile businesses.

And like if a law firm runs into trouble,

it's very easy for it to break up because know, like some law firm, it's like main business stops working and it's not making money, like the people who like you know, the MA team who are really good can just go somewhere else and like it's not that jarring for them to leave.

Like they don't lose a lot of franchise value.

So it's like a little bit of a fragile business to take public, but people do it elsewhere.

So it kind of reminds me of publicly listed hedge funds.

Like there's a lot of key man risk there.

Yeah, right.

There's a lot of key man risk and it's the same thing where like the assets walk out the door or whatever.

But like, you know, hedge hedge funds are still better because like the hedge fund has

long-term contractual relationships with its investors.

Now, there might be like key man provisions and that, but like law firms don't really have that, right?

Like law firms like do things by engagements most of the time, like often don't have like long-term contracts with their customers.

And so anyone can leave and take the clients with them.

Yeah.

Well, I wish that there were publicly listed law firms, just because I think it would be interesting to see how they trade and how they move as a group.

There's a lot of information in law firm stock prices

now because law firms are under attack and so forth.

But yeah, I don't know that it's a great idea for the law firms.

Well, it was a great question, Mark.

Thanks, Mark.

Yeah.

Also from Mark.

I assume the same Mark.

For Katie, would you buy a cyber horse?

Kawasaki just announced one.

Google Kawasaki Corleo, and it looks absolutely wild.

I love that all your questions are real.

All my questions are real.

That's not a girl.

I do appreciate the question, Mark.

I can tell that you're not an equestrian.

Neither a lawyer nor an equestrian.

Not to sound too much like a horse girl.

It does look awesome.

I did see the video.

It looks like a lot of fun, but having a horse is about much more than just riding it.

It's about your relationship with your horse.

And I actually really value that.

My childhood pony is named Batman.

He's still with us, but he is very much retired.

He's only a couple of years younger than I am.

I haven't been able to ride him since like 2020.

He's been out of commission.

And I bought the horse that I currently ride, whose name is Gus, I bought him, you know, as a three-year-old in 21, the summer of 2021.

But there was a solid year there where I was just driving out to the barn to hang out with Batman.

Literally just hang out with him, which is a lot of driving.

and a lot of time, but it's a relationship.

So I would not buy a cyber horse.

I like my you wouldn't drive it to the barn to hang out with your calorie cyber horse.

No, I'd just put that in the garage.

Would you buy the cyber horse for like

riding when you can't get to the barn?

No.

Like an exercise bike when you can't get outside?

I don't think so.

No,

I don't really think so.

It's not like I

like if I go for a long time without horseback riding, obviously I miss it because it's fun.

But it's like, like when like

the horse horse treadmill, can you ride part of them?

Like, if I'm on vacation with my parents, for example, my parents have a horse out of the suitcase.

But, like, people go on rides, like trail rides and stuff.

I like having, you know, one dance partner.

I don't really like crave to ride any horse.

You're going to cheat on your horse with a robot horse.

It's weird.

It's like a long-term relationship.

Batman has been in my life since I was 11, and I like to just have one horse, one relationship at a time.

So I probably wouldn't buy a cyber horse.

But thank you for the question, Mark.

Anyway, moving swiftly along, I feel like I shared part of my soul there.

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Mailbag.

Mailbag.

This one comes from Will.

He says, love the podcast.

I have a question about private credit moving to marketplaces.

It strikes me that the underlying companies with this type of debt, like private equity portfolio companies, have little interest in their debt trading.

I worked at a PE fund and I work at a portfolio company.

And a lot of the value from lenders is that you are a repeat client with a relationship in case you want to change the agreement, e.g., or example, do acquisitions, or are under duress.

We have debt in our debt documents that debt holders are not allowed to transfer their debt without our permission, which I imagine is a pretty standard term.

Given the negotiating leverage, hot demand for lenders to issue more private credit, why would a firm be okay with their debt trading?

With these dynamics, it seems pretty unlikely that private credit would materially move to a marketplace.

I think that's absolutely right that like

a lot of the value proposition of private credit to borrowers is you will have a long-term relationship with your lenders who will be nice and won't sell your debt to like distressed debt vultures.

I'm not sure that that would prevent a marketplace from developing.

So first of all, one thing we've seen is like quasi-marketplaces for LP stakes in private credit funds, which is a different thing, right?

Like instead of actually your debt trading, you're still facing, as a borrower, you're still facing the same private credit fund, but like the ultimate owners of that fund can shift a little bit.

So that's not quite the same thing as a private credit marketplace, but it does like give the LPs like some ability to get liquidity and some ability to get like marks.

But like, I don't know, even within like the private credit loans themselves actually trading, you know, Apollo is setting up a trading desk, right?

Yeah.

I think that

one thing that is possible is to have some sort of marketplace where you have like

the borrowers have some ability to limit who can buy their bonds, right?

And you see a little bit of this in the broadly syndicated loan market where like there's approved lists of who can buy the loans.

But you could have a thing where the marketplace says each borrower can specify who's allowed to buy their loans or can specify who's not allowed to buy their loans so they don't get bad distressed vultures.

But one thing is that private credit is kind of new and hasn't seen distress cycles.

And some of the talk about private credit is nicer to companies that run into distress.

You can imagine a world where there's a broad downturn and that stops being true because it sort of stops being true for everyone at once.

And similarly, you can imagine a world where like, you know, private credit funds need to sell and they all need to sell.

And so there's like some amount of leverage for them to be like, look, we got to, you know, have ability to trade and where some more trading springs up.

But I agree that like

in a dynamic where there's a real huge demand for paper and the borrowers have a lot of leverage,

it does seem hard to be like, we're going to have total free tradability where anyone can buy your loans because that is the thing that the borrowers don't want.

Yeah.

It's interesting.

And I mean, Apollo is on one end of the spectrum.

And then you have like Blue Owl on maybe the opposite end because they think private credit should stay private.

They're not setting up a marketplace.

I believe they're on the record saying that.

Yeah, I think everyone will talk about relationships are really important and like being a buy and hold investor is really important.

But, you know,

at the same time, Apollo is like, you know, getting this to retail investors is really important because it'll.

We want this in your 401k.

Yeah.

And like, ultimately, the pitch of that has to be, we can get better rates if there's more liquidity and more

like a broader audience for it.

Right.

Like at some level, if you go to a borrower and you say,

in exchange for not having a warm personal relationship with you for the rest of time,

we'll charge you 50 basis points less.

Some borrowers will say yes to that.

Yeah.

I like that Will brought his own personal experience to the question as well.

Great question, Will.

Shall we move on to Max?

Max.

Mailbag.

Mailbag.

Regarding Matt's story on equity funding costs, increasing costs of SP futures, this seems like a great place for dot dot dot in ETF.

Question mark to exclamation points.

I think the ETFs that sell zero-day options are very fun, and selling SP futures, then collecting the spreads, does seem to rhyme with this in some way.

Could an ETF do this while still being liquid and tradable?

Does this already exist in the form of covered call ETFs?

Or is selling futures different in some way?

P.S.

I'm a molecular biologist, not a finance person.

So sorry if this question is totally obvious to exclamation points.

That was charming, Max.

So I love this.

So we talked on the podcast last week about the basis trade.

Yeah.

This is the basis trade for SP 500 futures, right?

Like this is the trade here is that people want to buy SP 500 futures to basically like leverage exposure to the S ⁇ P.

And it is hard for them to do that because nobody, or banks, don't want to use their balance sheet to buy the S ⁇ P and sell futures against it, right?

So

someone needs to provide the funding to buy the S ⁇ P, buy the actual stocks and then sell the futures to people who want to buy the futures.

Who should provide that?

Well, one answer is money market funds.

Basically, like that trade, it's not a stock trade.

It's just like a cash trade it's like lending balance sheet to provide people with access to stocks so you buy stocks you sell stock futures you have no risk you're just like providing funding and if as has been the case that funding is expensive because like no one wants any banks don't want to do it and there's a lot of demand for these futures then you can get paid a lot for providing that funding and the reason it's like no one wants to do it and it's expensive is just kind of a weird trade right if you are a money market fund someone can come to you and be like look what you should do is you should buy the S ⁇ P and sell S ⁇ P futures, and you'll get paid a very high cash return for that.

And you can get out anytime you want.

It's like a money market investment.

You'd say, no, it's not a money market investment.

I'm not allowed to buy stocks.

I'm not allowed to sell futures.

None of this is allowed.

And so money market funds don't do it.

And, you know, I wrote about this because there was a story about

some like long-only fund managers who have like some ability to be pretty tactical are like, yeah, we're doing that.

Instead of buying treasury bills or doing repo or whatever, we are buying the S ⁇ P and selling futures and we're getting paid, you know, 10% instead of 4%.

But not a lot are doing that.

And so the question here is, why not an ETF?

And it reminds me of, do you remember the ETF called Box Bioaccess?

How could I forget?

So this is the same thing, right?

Box is like a crazy trade where it's like, they like buy and sell options to get...

cash returns and have no equity risk and also they think get really good tax treatment although that is highly debated.

But this is the same thing, right?

It's like Fox is like basically, there is demand for lending in the options market.

And we are going to be the lender into the options market.

We're not buying options, selling options.

We're not doing any options trades.

I mean, we are, but like not to do options trades.

We're doing them just to be a lender into the options market because the options market will pay more for cash than like treasury repo markets will.

And this is the same thing.

It's like the S ⁇ P 500 futures market right now will pay for cash.

So someone should set up a ETF that will provide that cash.

I think the reason there's not an ETF for it's probably one lunching next week, but like, I think the reason there's not an ETF is like, it is not at all clear that this is a permanent trade.

Right.

Like this can go away at any time.

And so it's a little weird to set up a ETF that will do this trade for years.

A flash in the pan.

Yeah.

Like it's a little tempting to be like, there should be a weird cash trade ETF.

Like you have an ETF that's like, we're a money market ETF, but like we're not constrained to regular money market instruments.

We can do anything that's like a short-term cash investment.

Yeah.

And like when S ⁇ P 500 futures basis is wide, we'll do that trade.

And like when something else works, we'll do something else.

Well, I mean, I hear what you're saying that, you know, it's hard to know if this is permanent.

To that point, I'm really surprised that there isn't a treasury basis trade ETF.

Not that because I think it should exist,

because there's so many opportunistic filers.

That trade is we borrow 100 times our net asset value to buy treasuries.

You can't do that in ETF.

There's some issuers that I talk to often.

I wouldn't put it past them.

No, I would put it past them.

But you're not allowed to do that.

I'll see.

I feel like you're foreshadowing an actual basis trade, ETF.

Max, great question.

Good luck with the biology.

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Mailbag.

Mailbag.

All right, Sal.

Sal has a question.

Sal asks, what is the value of the option to declare personal bankruptcy?

And how would you monetize it?

Could an investor recruit a bunch of 18-year-olds to take levered risks?

I feel like the option value is very low because you can't get that much money when you're 18.

The question is, in general, if you borrow money, you have to pay it back.

And so if you borrow money to buy lottery tickets and you lose all the money, then you're in trouble because you have to pay back all the money and your lottery tickets didn't pan out.

But if you declare bankruptcy, then you don't have to pay the money back.

This is the theory, right?

You effectively

can structure your financial life like a call option where, like, if everything works out, you get all the upside.

And if it doesn't work out, you don't get any of the downside because you declare bankruptcy and move on.

Now, there are several problems with this.

One is like declaring bankruptcy is, in some ways, a downside.

Right, right.

You don't necessarily want to declare bankruptcy.

And the reason that Sal asks about 18-year-olds is that

if you're 46 and have a house, you probably don't want to declare bankruptcy.

You probably get to keep your house, but that's not legal advice.

But, like, you know,

your life will get worse if you declare personal bankruptcy.

Whereas if you're 18, your life may not get significantly worse if you declare personal bankruptcy.

But that's why they won't lend you money.

Like, you can only borrow so much money when you're 18 because they know that this option exists.

And the one huge exception to that is student loans because they're not dischargeable in bankruptcy, right?

Yeah.

So like you can borrow hundreds of thousands of dollars as an 18-year-old to go to college, not because that's a particularly good credit risk, but because like you're not allowed to get rid of that debt.

Yikes.

Yeah.

And then the other part of the question is, could an investor recruit a bunch of 18-year-olds to take levered risks?

Like even if you could do that and like you structured a deal with them,

someone would find you and be like, this wasn't really an 18-year-old borrowing this money.

This was you, the investor, borrowing the money.

And they'd try to look through it and get you to pay it back.

So I think that it is pretty hard to monetize the option to declare personal bankruptcy.

But one reason I wanted to ask this question on the show is I'm sure we will get emails from people who are like, This is how I monetize the option to declare personal bankruptcy.

It's beautiful, and we can talk about that in our next mailbag episode, possibly, or even in the next regular episode.

That's true, that's true.

The possibilities are limitless.

Mailbag.

Mailbag.

Here's a question from John on the podcast some time ago.

Katie quipped that she might name a kid Xanadu someday.

I feel like Katie would be more likely to name kids, hers or other people's, after ETF tickers.

What ETF tickers would be the best children's names?

What about horses' names?

I don't know that we have an answer to this question, but it was a funny question.

John, I'm not sure if I like the way your brain works, but.

What do we know about Katie?

Horses?

ETFs.

Yeah, so no, I don't think I would.

No one's asking me to name their children, and I I actually have a lot of children's names that I love.

They don't have to be ETFs.

John Corrado is a name that I would love to unleash at some point.

I love the name Corrado so much.

It's like an old Italian name made famous by the Sopranos.

I feel like you can't name just a kid your first name Corrado anymore.

You don't really hear it.

But if you put John in front of it, then he becomes JC, John Corrado.

I love that.

It's like a really well-thought-out answer.

I think about this a lot.

And then I have a lot lot of ladies' names that I like.

I guess girls' names.

In terms of ETF tickers, there are some fun ETF tickers out there.

None that I would name a child or a horse after.

I'm sure there's a Gus ticker out there.

And if not,

maybe there should be.

I love the name Gus.

For a horse.

For a horse.

For a kid, too.

But it'd be weird to name your

child after your horse, probably.

Yeah, yeah.

I feel like certain husbands would might take issue with that.

Plus, there'd be like the

uncertainty when you refer to Gus.

Yeah, that's true.

At first, I thought this question was: you know, what is an ETF ticker that you think should exist, which is not this question.

No.

But I have an answer to the question that wasn't asked.

There's all these, not all these, but there's been a lot of interest in Texas lately from the ETF community.

BlackRock filed for a Texas equity ETF a few weeks back, and it wasn't listed with a ticker.

The ticker y'all is already taken.

I think Y H A W would be cute.

Like yeehaw.

Yeah.

So

Larry Fink, friend of the show, if you're listening, there you have it.

Mailbag.

Mailbag.

Neil, rounding us out.

Listening to Friday's money stuff got me to wondering, why not just split the difference and put a bunch of different BDCs into an ETF?

All the exposure to private credit and the BDC assets, all the shiny exchange-traded wrapper that the kids today enjoy.

Something for Matt, something for Katie.

Neil, rather.

Listeners know us so well.

Neil, I like how your brain works.

This definitely exists.

There's one minute of Googling found me BizD, which is the Van Eck BDC income ETF, which is invites an ETF of BDCs.

For all I know, there's millions of them.

Yeah.

I have said that BDCs are the publicly traded form of private credit, and so you don't need the convolutions of putting private credit into an ETF because you can just have a BDC.

There's like some limits on that.

Like, BDCs are not like the full spectrum of private credit, right?

They're like sort of designed for small and medium enterprises.

Yeah.

So it's like not exactly the same as saying every private credit fund could be wrapped in public form as a BDC, but many can and are, and there are BDCs for a lot of the big private credit funds, and you can ETF them if you want.

Yeah.

Should I say?

No, no,

I was going to say, have I said what a BDC is?

It doesn't matter.

Why don't you say it again?

That's true.

What's an ETF?

On minute 37 of the mailbag episode for the Money Stuff podcast.

We're on like year.

Oh, my God.

Yeah, it's like the anniversary.

Happy anniversary, dude.

Happy anniversary.

It was actually

last week's episode, which we recorded today.

Yeah, we're recording them simultaneously, so we can just pass that back in.

Man, April 12th.

Wow.

Yeah, between last week's episode and this week's episode,

Money Stuff, the podcast, turned one.

Yeah, it is crazy that it's been that long.

Yeah.

Now it's over.

You've listened to the last episode.

We're going to hear.

Have a good life.

We won the bet.

Now it's over.

And that was the Money Stuff Podcast.

I'm Matt Levie.

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