Audible Frustration: C, ME, ETF

Speaker 1 The global industrial renaissance is transforming our world.

Speaker 1 Over the next decade, industries like energy, infrastructure, and technology will need an estimated $75 to $100 trillion to modernize and meet demand. Long-term projects need long-duration capital.

Speaker 1 That's where Apollo steps in. With scale, flexibility, and a focus on growth, we're partnering with companies to drive the future, one innovation at a time.

Speaker 1 Learn more at thinkitnew.com/slash renaissance.

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Speaker 11 Easycator, your business tool for food.

Speaker 10 To learn more, visit easycater.com/slash podcast.

Speaker 1 Bloomberg Audio Studios.

Speaker 2 Podcasts, radio, news.

Speaker 2 Two things.

Speaker 14 I'm wearing glasses. You are.
Which does not matter to our listeners.

Speaker 14 I kind of feel like I am wearing a costume.

Speaker 2 I don't know. Totally different person wearing those glasses.

Speaker 14 Feels like it. The other point that I wanted to make is that I'll be wearing these glasses at a party tonight.
A party?

Speaker 2 Yeah, specifically. Not my party.

Speaker 3 No, at your party.

Speaker 2 I'm going to your party. Party hopping.
Yeah. Seriously, stopping by my party.
By the time this airs, the party will have happened. That's true.
It's a debacle. We're going to cuddle this up.

Speaker 14 Yeah, exactly. If things go dramatically south, this will not be included in the podcast.
But if you're hearing it, assume that it went well and we had a great time.

Speaker 2 It was great. What a great party.

Speaker 14 This is sort of a birthday party.

Speaker 2 Right.

Speaker 14 In that sense. For money stuff, which turned 10 years old.

Speaker 2 Right.

Speaker 2 It's not my birthday. It's not even really Money Suffice Stuff's birthday, which was like a month ago.

Speaker 2 And even that is like, the accounting is a little fuzzy, but we're going to say it's the 10th anniversary of Money Stuff. Yeah.
It's 10th anniversary observed.

Speaker 2 10th anniversary party. What a great time it has been.
All right.

Speaker 2 Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

Speaker 2 I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

Speaker 14 And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

Speaker 2 What are you talking about today, Katie?

Speaker 14 The fattest fingers in the world. 23andMe.
And Wheaton, Illinois.

Speaker 2 Wheaton, Illinois. I have a fondness for Wheaton Illinois because I have a Wheaton terrier, but that's not really related at all.
No.

Speaker 2 Never mind. All right, fat fingers.

Speaker 14 Yeah, man, what is going on over at Citigroup? It seems incredible.

Speaker 2 Yeah, I don't know. Like, Citigroup has had a series of, like, very public and very comical, like, mistaken payments.

Speaker 2 of which the greatest, honestly, was a few years ago in 2020. They sent out $900 million to some hedge funds and they were like, sorry, we didn't mean to do that.

Speaker 2 And the hedge funds were like, we're keeping it. And there was a court case, it got appealed.
It was great.

Speaker 2 But recently, there's been reporting on like a couple of times last year, they sent out extremely comical mistaken payments,

Speaker 2 but they got those back. That was fine.
That was like a typo. It was like, in one case, they meant to pay $280 to some customer's escrow account, I think in Brazil, and

Speaker 2 they put in $81 trillion,

Speaker 2 which is much, much more money than Citigroup has.

Speaker 2 So you can't do that. But, you know, it's not like then the money left and like the customer fled.
It's like they reversed the payment like the next day and they told regulators it was a near miss.

Speaker 2 So they had some near miss. A near miss.
A near miss. It's an internal transfer, right?

Speaker 2 Like on Citi's Books and Records, they briefly credited the customer with $81 trillion because the money left the bank, and then they took it it back the next day.

Speaker 2 So, you know, Citi has gotten grief from regulators about like its

Speaker 2 systems and processes and technology. And it's been sort of like...

Speaker 14 Understandably so.

Speaker 2 Yeah, it's been like trying to kind of turn the page and be like, we're really good at not making mistaken payments.

Speaker 2 So when they very publicly make or almost make mistaken payments and when they are very comically large, that's embarrassing for them. It like sort of puts them in an ill light with regulators.

Speaker 2 But like, it's not like they lost $81 trillion, trillion,

Speaker 2 which would be amazing.

Speaker 14 Well, there was $81 trillion, which was amazing in and of itself. That actually made the $6 trillion fat finger that came

Speaker 2 the next day, Bloomberg reported on a $6 billion

Speaker 2 mistaken transfer that they had actually done like a week before the $81 trillion one. So like they had this private wealth customer.

Speaker 2 They had to send this customer, my impression is like a few million dollars, but they typed the account number

Speaker 2 the amount field. So instead of typing like $3 million, they typed a 10-digit account number that began with a six.
And they sent $6 billion to this customer instead of a few million dollars.

Speaker 2 And then again, quickly discovered that it was a mistake and took it back and it was all fine. But you know, it's like it's a near miss.
They had to report it to regulators.

Speaker 2 And the Bloomberg story reported that the head of wealth management, who had just started.

Speaker 14 It provoked audible frustration.

Speaker 2 It provoked audible frustration, which is a great way to describe swearing.

Speaker 2 So they were pretty sad about that until like a week later when they did the $81 trillion thing. And they're like, ah, $6 billion is nothing.

Speaker 15 Not so bad. Not so bad.

Speaker 14 I tweeted a joke that a great way to make this stop happening is just not let Citi get the money back. And several people brought up Revlon that they tried to do it.

Speaker 2 They really didn't get the money back.

Speaker 2 They did, but they didn't do that.

Speaker 14 I actually forget how Revlon ended. I remember the headline.

Speaker 2 They got the money back. They did.
So Revlon was interesting because, first of all, it wasn't wasn't an internal transfer.

Speaker 2 They actually sent the money out of a bank to people's accounts at other banks.

Speaker 2 But secondly, the accidental payment was part of an actual intended transaction that was a sort of aggressive debt restructuring by Revlon that was basically hosing some of its creditors.

Speaker 2 And so the creditors who were getting hosed randomly got $900 million and were like, sweet, we're keeping this. And then City's like, no, no, I have to give it back.

Speaker 2 And they're like, nope, we're not giving it back because you are trying to restructure this debt in a way that was bad for creditors.

Speaker 2 And so they sued or they cut the money and Citi sued them and they defended themselves saying we were actually owed this money because like they were owed the money, it's not right then.

Speaker 2 And Citi made the payment on behalf of Revlon and we're keeping it. And they actually won in the trial court, but then it was reversed on appeal.
It was like the right answer.

Speaker 2 But yeah, it was like fun for a while.

Speaker 14 So we weren't around when Revlon happens, but I was trying to remember why have we discussed Citi fat fingers on this podcast before?

Speaker 14 And then I was reminded of a different type of fat finger incident that was uncovered back in May. Do you remember that fat finger stock trade?

Speaker 14 They were fined by the UK like 62 million Euro if you round up.

Speaker 14 In that situation, a trader had intended to sell a basket of equities that was valued at $58 million, but made an error while inputting that value.

Speaker 14 And as a result, the basket was actually valued at $444 billion

Speaker 14 being created instead. So this is the thing.

Speaker 2 All these things, it's like screens with like a big box with like 75 different fields and you can fill in different fields.

Speaker 2 So if you want to sell $58 million worth of stock, there's some field that's like sell $58 million. If you want to sell 58 million shares, there's a different field that's like, sell this many shares.

Speaker 2 And this person, I think, put like the dollar number in the shares field. So like the shares are worth like hundreds of dollars.
And so you multiply the amount by hundreds of dollars.

Speaker 2 But it was just like going fast in a complicated interface and just put it in the wrong box.

Speaker 2 Same thing with the account number person who put the six billion account number into the amount field and sent out $6 billion. It's just like there's too many things on the screen.

Speaker 14 Well, if I had prepped better for this podcast, I would have gone back and listened to the episode we recorded in May because I recall fuzzily that at the time we talked about how there were a bunch of warnings that popped up, at least when it came to the stock trade.

Speaker 2 There are too many.

Speaker 14 There are too many and you kind of get numb and you just click through them. How do you fix this? It seems to happen uniquely often at Citi.

Speaker 14 So I don't know if their processes differ greatly from some of their peers.

Speaker 2 One thing they seem to have done is like, this is in the $6 billion story, the wealth management group has a new set of, actually, I think the whole firm has a new set of warnings where like there's some threshold of like large anomalous transfer where like someone not pressing the button gets an alert.

Speaker 2 Like the head of wealth management gets like, hey, we're sending $6 billion to someone for no reason.

Speaker 14 The man who expressed the audible or someone else.

Speaker 2 It might not actually be him, but like someone gets a warning.

Speaker 2 So it's not just the person pressing the button, ignoring the the warnings, but someone gets a, you know, you got to do it judiciously, right?

Speaker 2 Like you can't pop up 200 warnings for every transaction because then everyone's going to ignore them.

Speaker 2 But like, you know, there's some level of like, it should not be possible for anyone at Citi to wire or to send $81 trillion to anyone because that's more than they have. Yes.

Speaker 2 But even $6 billion, like there should be someone checking that, maybe.

Speaker 14 I want someone to ask. Jane Frazier about this.
I want this. I don't think it necessarily will come up on the next earnings call, but I want to see this in an earnings transcript.

Speaker 2 it's very funny to imagine these being material risks to the bank right like a bank going bankrupt because it accidentally wired out 81 trillion dollars but like they're not really like they're symbolic risks they're like you should have better tech so that you don't mess stuff up but it's not like any one of these was like that serious a risk right

Speaker 2 the red line was bad but like not that bad

Speaker 2 you have to imagine that this is certainly a symptom of something that maybe is yeah like a symptom of like bad computer screens like the the $81 trillion transaction, the reporting on that is wild.

Speaker 2 That wasn't like putting the wrong thing in the wrong field. That was, they used some sort of rarely used backup screen to make the payment that was pre-populated with 15 zeros.

Speaker 2 So you had to delete the 15 zeros to type in the amount. And if you just typed in the amount, you like overwrit some of the zeros and you sent out trillions of dollars.
And that's what happened.

Speaker 2 Which is just like,

Speaker 2 you could just not do that. You could just not have it automatically populate with 15 zeros.
And then like you've saved saved yourself a problem right there.

Speaker 2 So it is just like a lot of it, I think, is like software design. Yeah.
And it's not always a priority for the CEO of a bank to be like, we need the internal software to be more user-friendly.

Speaker 2 But, you know, it might be for Jane Fraser.

Speaker 14 At this point, you know, I would imagine it's moved up the priority list a few notches.

Speaker 2 Like someone is asking Jane Fraser about the user interfaces on the payment software.

Speaker 14 Maybe we'll get some answers.

Speaker 14 you know, yeah, I do love the point that you made in Money Stuff that maybe this is a reason actually to bank with Citi. You're basically by opening up an account with them, buying a lottery ticket.

Speaker 2 Stereotypically, banks sometimes make mistakes. Yeah, I read about a bank doing some error, and people be like, I think you're being too generous to the bank.

Speaker 2 They never make errors in the customer's favor. It's always in favor of the bank.
It's like, well, no, Citi makes errors in the customer's favor all the time.

Speaker 2 They don't like necessarily get to keep the money. You probably shouldn't try to bank with a bank that makes mistaken payments all the time.
That's more likely to end badly for you.

Speaker 2 But it would be kind of fun to get $81 trillion in your account.

Speaker 14 And what if it's like a really small amount? You know, like what if it's just

Speaker 14 a casual like half a million dollars that they would they even notice? I don't know.

Speaker 2 Yeah. Yeah.

Speaker 2 Well, I'm just thinking about my account number at my bank, which has nine digits, which would be nice.

Speaker 14 Do you want to say them here?

Speaker 2 Should be cool.

Speaker 1 The global industrial renaissance is transforming industries and reshaping our world.

Speaker 1 Over the next decade, sectors like energy, infrastructure, and technology will require an estimated $75 to $100 trillion in CapEx to modernize and meet the growing demand.

Speaker 1 This unprecedented level of investment is beyond the scope of public markets alone. Long-term projects need long-duration capital.
That's where private capital comes in. And that's where Apollo leads.

Speaker 1 With significant scale, the flexibility to adapt to evolving CapEx needs, and a steadfast focus on enabling economic growth, we're partnering with companies to provide the financing solutions that fuel the future.

Speaker 1 Learn more at thinkitnew.com slash renaissance.

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Speaker 5 Need AI to turn 100 pages of market research into five insights with a click?

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Speaker 6 Do that with Acrobat.

Speaker 7 Need an AI specialist to tailor the tone of your market report to sound real smart in real time?

Speaker 3 Do that with the all-new Adobe Acrobat Studio.

Speaker 9 Learn more at adobe.com slash do that with Acrobat.

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Speaker 11 In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform: EasyCater, your business tool for food.

Speaker 11 To learn more, visit easycater.com/slash podcast.

Speaker 2 My account number is

Speaker 14 23

Speaker 2 and

Speaker 14 me.

Speaker 2 Segue.

Speaker 14 This is.

Speaker 14 I really like this story mostly because we were talking about this at my desk before we recorded this podcast. Then I was like, you know what? Don't talk to me.
We'll just talk about it in 90 minutes.

Speaker 14 23andMe is a really fascinating story because I think it's still a household name. It kind of is.
And last time I thought about it, it was going public via SPAC. It was 2021.
Things were great.

Speaker 14 The market was frothy. And I didn't realize that it's been slowly in a death spiral since then.

Speaker 2 Yeah, I don't entirely understand it, but my impression is that like the recurring revenue of selling genetic tests, like you kind of only need to find out your ancestry once.

Speaker 14 Yeah, but there's so many people in the world.

Speaker 2 There are a lot of people, but like, I also think that it's become less popular as people get worried about like privacy concerns and like they were hacked. Yeah.

Speaker 2 It's like a bad database to get hacked, you know?

Speaker 14 Yeah, specifically in 2023, they were hacked. And I think that's a good thing.

Speaker 2 But they remember the time before them. They've like never made money.

Speaker 14 Yeah, that's true. Yeah.
And I was searching for a reason why. Because you think about, I feel like it was really peak 2017, 2018.
They were really popular as gifts around the holidays.

Speaker 14 Remember, Elizabeth Warren took a genetic test to prove that she had Native American heritage.

Speaker 14 That was basically the peak, actually, because apparently 23andMe and also their competitors, Ancestry being one of them, have just seen sales steadily decline since then.

Speaker 2 Yeah.

Speaker 2 And to their credit, they went public at the top.

Speaker 14 The Halcyon days.

Speaker 2 They went public in like 2021 at a like $3.5 billion valuation. I don't know.
Anyway, I think they did the SPAC margin in like 2021. And they had like a $3.5 billion valuation.

Speaker 2 It's currently in the ballpark of 1% of that. Yeah.

Speaker 14 So not great. I mean the shares are trading under $2 right now.
I think the absolute high was well above 300 above.

Speaker 2 There's been a stock, but yes,

Speaker 2 that's right. Yeah.
But so anyway, the founder and CEO and 49% shareholder and Rozewski wants to take it private.

Speaker 2 I don't actually know how much she cashed out of this, but like took it public at $3.5 billion.

Speaker 2 Wants to take it private at not zero dollars, but like quite close to zero. She wants to pay public shareholders something like $10 million for the company, which is like 41 cents per share.

Speaker 2 And

Speaker 2 that is an interesting negotiation because she's the controlling shareholder.

Speaker 2 And, you know, the board of directors is in charge of negotiating with her and trying to get a fair price for the public shareholders. I don't know what they think about the future of the business.

Speaker 2 Like, she clearly thinks it's worth something because she wants to buy it and like put some more money into it. But she's offering $10 million to the public shareholders.

Speaker 2 By the way, that's much less than the current trading price of the stock. She's offering 41 cents per share.
It's now at like $1.50 or something like that. So she's offering a take-hunter.

Speaker 2 She's saying, shareholders are deluded about the value of this company. I want to pay you much less for it.
If I were a director, I'd have a really hard time accepting a deal like that because

Speaker 2 you're going to get sued. You're saying, I want to sell this company for a big discount, not only to its like all-time high, not only to its IPO price, but to its price today.

Speaker 2 It's like a tough deal to take. And so she offered not that deal, but a similarly sort of like low to negative premium deal last year.
And the directors said no.

Speaker 2 And then they all quit because she's the controlling shareholder and like she could fire them. And so they were like, well, we're not going to take this deal.

Speaker 2 And so There's nothing we really can do here as directors. And so they all quit.
And so she was the only director of the company. And she went and and appointed new independent directors

Speaker 2 and offered a new, much lower price to take the company private. And they all said no again this week.
So they're back to the square one. They haven't resigned.

Speaker 14 I was thinking she shouldn't, you know, do an Elon Musk and just get really friendly board members who maybe are related to her.

Speaker 2 Well,

Speaker 2 right. When all of the directors quit, she got to appoint the new directors.

Speaker 2 And there are two ways you can go with that. You can appoint your relatives, who will then sell you the company at 41 cents a share and get sued.

Speaker 2 Or you can appoint like

Speaker 2 reputable independent directors who like,

Speaker 2 you know, you've had conversations with. You hope that they will take your proposal seriously.

Speaker 2 You hope that they will see the reasons behind your wanting to pay much less than the current price of the company and will take your deal, but

Speaker 2 You haven't specifically signed up to that because that looks bad. And so then if they agree to your deal, you look good, right?

Speaker 2 Like when you get sued, you can say, no, no, these independent independent directors like really did their due diligence and accepted my deal.

Speaker 2 So I think that's what was happening here is like these directors are not her relatives. They come from real places.
Like they look like good independent directors who could consider her deal.

Speaker 2 And if they signed off on it, it wouldn't be a rubber stamp. But then they didn't sign off on it.
So oops.

Speaker 14 Yeah. And I mean, I don't know where this company goes.
Obviously, there's some deep fundamental flaws here.

Speaker 2 You occasionally see these take hunters.

Speaker 2 You see these deals where a company is not viable and someone will buy it for like much less than its stock price and say, we're going to put a little bit more cash on the balance sheet and we're going to keep the company alive.

Speaker 2 But like the shareholders are diluted and they're not getting that much money. And the board will be like, yes, that's true.
It sucks for the shareholders, but we're doing it.

Speaker 2 But it's like, that's a tough thing for a director to do, particularly if you were just appointed to do the deal. Right.
So it's, it's, it's like a tough spot.

Speaker 2 Like if she's right that it's kind of a melting ice cube and it's not worth what the public shareholders are paying for it, like it's going to be hard for her to persuade directors directors of that, even if it's true.

Speaker 2 And then, you know, where do you go? Yeah.

Speaker 2 I think they're exploring other strategic alternatives, right? But it's tough to do that when you have a 49% shareholder.

Speaker 14 Yeah. I was thinking maybe they could pivot into dog DNA test kits.
I know that that's still a very popular market.

Speaker 14 I think the company has warned that it needs to raise cash or find some solution or else it won't be around for much longer. So I don't know.
It'll be fascinating to follow.

Speaker 14 I mean, it just feels like a company that would naturally want to go private right now. And also, I was surprised.

Speaker 14 But but the question is the price you know yeah and like and wojiski does not think it's worth 40 million dollars yeah for a little bit i mean she had a partner and that's also part of the problem yeah yeah new mountain and i think like the bid that she offered the 41 cents a share wasn't that 84 or something below

Speaker 2 the new mountain bid yeah which in turn was lower than the bid last year that the directors resigned over her bids have been getting lower probably for reasons yeah like yeah it looks bad it's a bad process Normally the board negotiates you up.

Speaker 2 Here they're negotiating her down. Yeah.

Speaker 2 Not great. I don't know.

Speaker 14 I mean, I hope that the

Speaker 14 genetic testing universe continues to exist and perhaps thrive is because you think about true crime. I listen to a lot of true crime podcasts.

Speaker 14 And there have been instances where like these sort of kits where you can find your family members, long lost family members, have been uncovered through little kits like this.

Speaker 2 this. I think I read an interview with her where she talked about that as a negative for sales.

Speaker 2 Because, like, you know,

Speaker 2 if you're a serial killer, you know, for sure, it's a kid.

Speaker 2 But if you're like, you know, you do a little genetic testing and then like your cousin gets arrested as a serial killer, you're like, I wish I hadn't bought that kip.

Speaker 14 It's good for society, maybe bad for sales.

Speaker 2 Bad for sales.

Speaker 14 But again, as someone who, I don't know, maybe I am related to a serial killer, but I think that these should exist in some form. Right.

Speaker 14 I think it was the Golden State killer who was found through something like this, which was wild.

Speaker 14 It definitely didn't help the share price.

Speaker 2 Right. It's not like a good advertisement for like the privacy practices of to the genetic testing industry.

Speaker 14 You wouldn't offer up your saliva to potentially help capture a murderer, even if it depends like how close a family member this murderer is. Cousin?

Speaker 2 I feel like

Speaker 2 I don't know in advance which family member of mine did this murder.

Speaker 14 I mean, you'd probably have some suspicions, honestly, if you were in this scenario.

Speaker 14 I mean, I could probably guess.

Speaker 2 You know which of your family members are

Speaker 2 most likely to be serial killers? I don't really have a problem with it, but I'm guessing none of my family members are serial killers. But I bet everyone is like that until

Speaker 2 their cousin is the golden state killer.

Speaker 14 I can't wait to revisit the next city, Fatfinger, where 23andMe goes when one of your cousins gets arrested. Yeah.

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Speaker 11 To learn more, visit easycater.com/slash podcast.

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Speaker 2 Moving swiftly along.

Speaker 14 I love this story from Emily Graffeo and Max Abelson. I know that they've been working on it for a long, long time.

Speaker 14 A really great deep dive into First Trust, which is an ETF issuer based in the Netherlands.

Speaker 2 Why is an ETF story here?

Speaker 14 This one, actually, you led money stuff with it. So this wasn't even my influence.

Speaker 2 Love an ETF story. ETF sales channels, right? One is advisors, where like a financial advisor.
has a client and the advisor says, this is the menu of stuff that I'm going to put you in.

Speaker 2 And the client is like, sure, whatever, right? And so the advisor just picks the ETFs.

Speaker 2 And the advisor is a fiducher for the client and has an obligation to try to put the client in ETFs that are good, right? But like, the advisors pick the ETF.

Speaker 2 And then the other kind is like Robinhood, right? Like, there's an enormous mass of self-directed investors. A lot of them buy Vanguard SP 500 ETFs, right?

Speaker 2 Like, huge business of self-directed investors buying cheap index ETFs, but also clearly a huge business or some business of like Robinhood people buying triple levered ETFs and like weird stuff to make weird bets.

Speaker 2 And I don't really know how that gets sold. I don't know if that's like

Speaker 2 you're like searching Robinhood for fun tickers or if it's like you're on Reddit reading about the latest cool ETF. But I don't have a great sense of like what the split is.

Speaker 2 Like away from like the Vanguard S ⁇ P 500, like a weird ETF, is that like always mostly an advisor product or is that like...

Speaker 2 Reddit boards are selling that to Robinhood people. A weird ETF, like the triple triple levered, the buffers.
Buffer feels like an advisor product, but I don't know.

Speaker 14 Yeah, I think that that's fair to say that buffers are popular with advisors, but sort of the shiny stuff, the funky, high-octane.

Speaker 2 The thing that's like we double-lever you and we put like one times your money in gold and one times your money in Bitcoin. Crazy product.
That seems like it could sell in Robinhood.

Speaker 14 Yes, that's probably where you're finding it. And even, I mean, some of the Bitcoins.

Speaker 2 Right, your advisor's not doing that. Oh, yeah.

Speaker 14 But for example, I mean, I wrote up BlackRock added iBit, their Bitcoin ETF, to their model, a portion of their model portfolios for the first time. That was really advisor-driven.

Speaker 14 Financial advisors asking BlackRock to add it because I want to put my clients in this.

Speaker 2 I understand that. I can see an advisor wanting to put their clients in iBit, but like when they launched iBit, it was a

Speaker 14 bit of a clients, if they couldn't get it through their advisors, then they would probably go to a platform to buy it.

Speaker 2 Right. I think of a Bitcoin ETF as being, in the first instance, a product for self-directed retail.

Speaker 2 Like, is it the first instance of like people want to buy that, they'll buy it on Robinhood, and then, like, you know, later an advisor might add it in, but it's not like an advisor product. Yeah.

Speaker 2 The buffer I can see being an advisor product.

Speaker 14 Yeah, big time. And an endowment product, apparently.
First Trust. First.

Speaker 2 Get us distracted, but like First Trust that makes advisor products. Yeah.
I think it's fair to say. Exactly.

Speaker 14 They have about the last, I checked, about $200 billion in AUM. Their average fee, though, is 78 basis points, which is pretty high.

Speaker 14 The industry average is 58. The industry average, so that includes all the funky, expensive leverage stuff in addition to the stuff that costs like three basis points.

Speaker 2 It's not average. Dollar-weighted.

Speaker 14 No, no.

Speaker 14 It's just pure.

Speaker 2 Yeah. Yeah.
It's like

Speaker 2 divide, like take

Speaker 2 funds and like.

Speaker 14 I prefer this podcast like an hour before. I didn't have time to do that.

Speaker 2 But the point being that the dollar weighted average is like

Speaker 2 three basis points. Yeah.
Well,

Speaker 14 yeah. The point being that it's a relatively small issuer, but it makes a lot of money for its size because it has a pretty high fee.

Speaker 14 And there's just great quotes in here about the sales tactics that have been employed by First Trust, which, according to our own reporting and some other outlets, is actually under investigation by Friendra for them.

Speaker 2 Right. Because like the way you sell advisor products is some combination of like.
to give the advisor something cool to show to their client.

Speaker 2 Like a buffer ETF is like, oh, look, I've given you stock upside with no downside how nice right

Speaker 2 but the other way is to like take the advisor out to dinner and be like hey why don't you sell my ets instead of vanguard's ets because vanguard doesn't take you out to dinner maybe they do but probably not that much and the implication of the finner investigation and of the bloomberg reporting is that first trust leans heavily on entertainment.

Speaker 2 There are like quotes from the First Trust salespeople saying, This company was built on entertaining. It was and still is the one leg up on our competition.

Speaker 2 And another guy says, You're selling the most expensive ETF with mediocre performance. You better do something different.
And that's what we did.

Speaker 2 And something different is like, so they took them out to dinner. They had like conferences in nice places.

Speaker 2 Also, if you're an advisor who like sold a lot of their ETFs, you could go to the nice conference and they'd pay for you to go to the nice conference.

Speaker 14 Also, a performance coach. Performance coach.

Speaker 2 I've not been a performance coach.

Speaker 14 Yeah, I'm not familiar with the concept. What is a performance coach in this context?

Speaker 2 Like one negative mean way to characterize what's going on here is like they're like bribing the financial, right?

Speaker 2 They're like giving the financial advisors stuff for the financial advisors that benefits the financial advisors.

Speaker 2 And then the financial advisors are putting the clients into like these ETFs that charge very high fees and don't have like amazing performance. But that's like too mean.

Speaker 2 Like what's kind of going on here is you're a financial advisor. You're sort of like holistically trying to be good at it, right? Like one thing that being good at it means is like

Speaker 2 putting your client in investments that go up or whatever that you expect to go up. But there are other things, right? And like one of them is like sales and like being

Speaker 2 personable and answering your clients' questions when they have questions and just being like a good, effective financial advisor. And how do you do that?

Speaker 2 Well, a variety of things, but like there are coaches who can tell you how to do that, right? Who can tell you how to get better at your job.

Speaker 2 And so First Trust will go to the advisors and be like, we have this performance coach who will help you be a better financial advisor. And the financial advisor, like, that's great.

Speaker 2 That's great for me. It's great for my clients if I'm better, right? If my performance is better.

Speaker 2 So they take the coaching. And

Speaker 2 is it possible that a condition for getting the coaching is that they put their clients into the first trust ETFs? No, that's not what you're, that's regulatorily, that's not allowed.

Speaker 2 But like, there's some implication in some internal emails that maybe there was some, some hint of that.

Speaker 2 But like the coaching, like if you're a financial advisor, you're not like experiencing that as like, I'm taking a bribe, right like you're experiencing that it's like i'm trying to do a good job for my clients and one way to do a good job is this coach will coach me and like you know like as part of doing a good job for my clients i'm putting them in this expensive etf but it gets me this coaching that makes it so good yeah don't worry about the performance

Speaker 2 we've talked about this actually like like vanguard cutting fees right and you have mentioned there are people like financial advisors yeah like i don't like vanguard cutting fees because they don't invest in having a good website Like answering questions.

Speaker 2 Like that's a real legitimate concern for a financial advisor, right? Is like

Speaker 2 my clients are in this ETF. Like if I have questions about the ETF, they have questions about the ETF.
If I can't get an answer, like that's bad.

Speaker 2 Whereas a really expensive ETF, like they've got customer service people. They answer the phone when the advisors call.
That could arguably be good for the clients. It's expensive.

Speaker 2 The clients are paying for it. But like

Speaker 2 you could imagine an advisor making a fiduciary decision saying, I want the client in this more expensive thing because the customer service is better and like the client needs that too.

Speaker 14 Yeah. No, it's a it's a super fair point.
And an easy to use, intuitive website goes a long way with some of the folks that are in these ETFs.

Speaker 2 I should say the Bloomberg story talks a little trash about the website of First Trust 2, but that's not the point.

Speaker 14 Looks like a pixel hasn't changed since it was first put up. This story is a joy to read though because it's so deeply reported.
So let's talk about some of the emails that Max and Emily dug up.

Speaker 14 I liked this one in particular. I was thinking of you as I read this.

Speaker 14 Apparently in one email five to six years ago, a managing director chided colleagues writing that pay to play is obviously illegal, but we have wholesalers, which means salespeople doing it repeatedly.

Speaker 2 So there you have it. I wrote about this with some sympathy because like if you're a person at a financial firm and you notice that your colleagues are doing bad stuff, it's very tempting.

Speaker 2 to email your colleagues to say, you are doing bad stuff. Please stop it.
It's illegal. Right.
Like that's a good email to send, but it's not really because, like, then you have an email.

Speaker 2 You have a record of your colleagues are doing bad stuff. Even if they knock it off immediately, it's a bad thing to have on email.
And if they don't knock it off immediately, it's much worse.

Speaker 14 Yeah, I hope I never.

Speaker 2 You pick up the phone and you say, hey, guys, knock it off.

Speaker 14 I always think I would hate to get my email searched for so many reasons, but also for telling my editor it's illegal for you to edit my piece this much. It's a crime, actually, to limit.

Speaker 14 Yes, exactly. But, you know, some things look different under different lights I don't think that this email was a joke though I don't think it was a joke either yeah

Speaker 2 I think

Speaker 14 the thrust of the reporting is like you know I'm not saying it's a joke just to be clear just to draw I'm just drawing a contest between what I said and what this email said I think geography is really important here.

Speaker 14 I think it came through in the piece as well, but certainly, you know, talking to Emily about this, we said back to back and a lot of the OGs in the ETF world happen to come from Wheaton, Illinois, or around it.

Speaker 14 And I think that is also very important to, as that person you quoted said, we've always been about entertainment.

Speaker 14 The fact that First Trust was located in sort of a flyover zone allowed First Trust to just really

Speaker 14 run this industry when it comes to places like Dayton, Ohio, Wichita, Kansas, et cetera, which I think is interesting.

Speaker 14 I think about geography a lot because also the Vanguards of the world, like Vanguard specifically isn't on Wall Street.

Speaker 2 Yeah, but like, again, like

Speaker 2 the thing they're doing is covering the financial advisor in Dayton, right? Yeah.

Speaker 2 They're like going to that person and they're buying them steak or whatever, but they're also like talking to them and being like, yeah, how can we help you?

Speaker 2 And that advisor is going to naturally be inclined to put their clients into the ETS of a firm that talks to the advisor and listens to their concerns than a Vanguard fund where Vanguard never talks to him, but like, you know, they charge one basis point.

Speaker 2 So it's like...

Speaker 14 Yeah, or BlackRock isn't flying out to

Speaker 14 talk to you.

Speaker 2 It's like the coverage is not a straightforward pay-to-play, right? It's like something a little different. It's like coverage.

Speaker 2 It's like paying attention to the advisors and creating good feelings at the advisors. Arguably, that's bad, right?

Speaker 2 Like, arguably, the advisors are fiduciary for the client, and they should only be concerned with

Speaker 2 very specifically what is the best ETF for the client's portfolio. But

Speaker 2 they could take a more holistic view and be like, well, you know, I'm getting service that allows me to to help my client. And so I'll put them in the more expensive ETF.
I don't know.

Speaker 14 Well, we'll see.

Speaker 2 I do want to say a reader emailed me to remind me of a Charlie Munger anecdote.

Speaker 2 Charlie Munger would ask business school students, is it possible for a company to like raise the price of its service and thereby increase sales?

Speaker 2 And, you know, people think about it and be like, well, you know, raising the price can signal higher quality. And so people might buy more of it.

Speaker 2 And like, there's examples of that, like in like, you know, beer marketing.

Speaker 2 But I think Charlie Munger points out also that like raising the price can give you more money to like effectively bribe the sales channel to like pay more to salespeople or pay more to intermediaries who will then put the ultimate buyer into the product.

Speaker 2 And you see that here, right? Like Vanguard has a good business of selling ETFs at like very, very low prices.

Speaker 2 But like there's also a business to sell ETFs at very high prices and invest the money into a sales process. And that's kind of what's arguably happening here.

Speaker 14 Well, that's the thing. If there's one takeaway from this other than maybe don't do pay to play, also

Speaker 14 don't get divorced the reason that this came to light the man who runs first trust his name is jim bowen he got divorced and it came to light in his ex-wife's lawyers asking for more money that he's apparently making a ton of money like jamie diamond level money they be like thirty four point eight million dollars in 2022 it's the thing there's like wild money like in weird pockets of asset management.

Speaker 14 So apparently her lawyers honed in on his expenses at restaurants in Naples, Florida in 2021, asking about more than $147,000 spent at sea salt, an additional $100,000 spent at continental steakhouses, also $70,000 spent at seafood places.

Speaker 14 And he explained that I'm dining, I'm entertaining in 2022 in a court appearance.

Speaker 14 And then his ex-wife's attorneys asked him on the stand in the same year whether that $70,000 alcohol bill at the Naples Ritz-Carlton was related to First Trust. He answered, mm-hmm.
Is that a yes?

Speaker 14 the lawyer asked. That's a yes? The judge asked.
Yes, Bowen said. So that was kind of the smoke around this fire.

Speaker 2 That's going to be like the alcohol bill for the money stuffed party committee.

Speaker 2 So my favorite expense from the divorce proceedings is that he spent like $4,800 at Hermes one year on a haul that included scarves he said were for workers in Chicago's hotels and restaurants.

Speaker 2 So not for financial advisors. No.
This is like he takes financial advisors out to dinner at hotels and restaurants in Chicago. And he says, some of my best customers are high maintenance.

Speaker 2 And these people, meaning the hotel and restaurant workers, are the ones that handle the high maintenance issues.

Speaker 2 So like basically he takes like high maintenance customers to like fancy restaurants in Chicago and the waiters take care of these people. And then he gives the waiters Hermes scarves.

Speaker 2 It's like a third level business expense. It's very generous.

Speaker 14 Got to give it to them.

Speaker 2 No, it's like, it's very smart. It's like, it's like, okay, I want to sell ETFs to retail investors in Dayton, Ohio.
How should I do that?

Speaker 2 I should buy fancy scarves for waiters in Chicago because I'm going to take the advisors of those people in Dayton to restaurants and I want them to be well treated.

Speaker 2 And so like, it's like the sort of third level of paying for like the people to

Speaker 2 that will ultimately trickle down to like the ETF sales.

Speaker 14 I'm not much of a seafood gal, but I would have loved to be at one of these dinners. Sounds like a blast.

Speaker 2 You're really good at at service.

Speaker 2 And that was the Money Stuff Podcast. I'm Matt Levine.

Speaker 14 And I'm Katie Greif.

Speaker 2 You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com.

Speaker 14 And you can find me on Bloomberg TV every day on Open Interest between 9 to 11 a.m. Eastern.

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Ask us a question and we might answer it on air.

Speaker 14 You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the the show.

Speaker 2 The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.

Speaker 14 Our theme music was composed by Blake Maples.

Speaker 2 Brendan Francis Noonan is our executive producer.

Speaker 14 And Sage Fauman is Bloomberg's head of podcasts.

Speaker 2 Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.

Speaker 14 I have a party to go get ready for, actually.

Speaker 14 You do too.

Speaker 2 I'm not going to make it.

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