Generous Portion: FTC, CMG, ETF

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Bloomberg Audio Studios.

Podcasts, radio, news.

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

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

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

What are we talking about today?

Arbogeton.

Arbogeddon.

I hope I said that right.

And then we're going to.

I apparently spelled it wrong in my newsletter, but because it's not a real word, I'm not going to correct it.

That's good.

There's an upside there.

We're going to talk about securities fraud

in the burrito market.

And then we're going to talk about leverage Warren Buffett.

Let's see how it goes.

I didn't look at anything.

So I don't know if I did it.

You're doing great.

I don't know if I did that in the right order.

Doesn't matter.

I did it in

order of your own interest.

Personal interest.

Yeah, that's what we need.

All right.

I am intoxicated with power.

Anyway, merger, Arbogeddon.

Arbogeddon.

I think Arbogeddon is a term that is applied to something that happened in 2014.

God.

It doesn't matter.

But yeah.

Does the term Arbogeddon apply here?

No.

Yeah.

The opposite.

So why are we saying it's an Arbogedon?

Oh, no, we're not.

So what happened is that there have been over the years bad things that happened to merger ARB firms.

Most recently, when the handbag deal blew up, which is, what is it, Tapestry and Capri or the companies?

It's like a very narrow market segment definition, which is like

expensive but not very expensive handbags.

as far as I can tell.

It's like affordable luxury.

Affordable luxury.

Something like that.

And so those companies dominate the market market for affordable luxury.

And so they announced a merger.

Merger arbitrageurs loaded up on Capri stock, I think.

And then the Federal Trade Commission sued to block the deal.

A judge agreed at the FTC and blocked the deal.

Capri stock fell like 49%.

And some merger arbs, they lost a lot of money.

Yeah.

And more generally, like in the last few years, the FTC has been gung-ho on suing to block deals.

Sometimes it has succeeded.

And the result of that is bad news for merger arbs.

and some number of them have lost their jobs, according to a Wall Street Journal article that was published earlier this week.

Yeah, I was messy.

The headline of the Wall Street Journal article is that basically Arbigedden potentially is over.

Yeah.

Arbogedins have occurred, but like the assumption is that

Donald Trump will unleash animal spirits in the merger market.

That is the raging consensus right now.

I don't know how many we're so back memes that you've seen over the past week, but that is most of my social media right now.

M MNA bankers,

I didn't know that I followed so many financial meme accounts, but apparently I do.

And in light of that, it was interesting to see the tapestry and Capri deal fall apart.

We're recording this on Thursday, and the headline crossed this morning that they're walking away from the deal.

And the reason that the companies gave was that it's in the best interest of both companies as the required closing condition of receiving necessary U.S.

regulatory approvals was unlikely to be met by the outside date of February 10th.

By February 10th, of course, there will be a new administration, at least in the White House.

Yeah, it's cutting a close.

Yeah, it's a little close.

Once you have a judge ruling that your deal is an antitrust violation, it's like hard to walk that back.

It's not completely impossible, but it's hard, and it's harder to do.

And, you know, three weeks after, you know, the new administration is inaugurated.

So there are.

And it's a lot of uncertainty between now and then.

Yeah.

Yeah.

So I just, I liked this story because it was a little bit of reality that there are going to be some lost causes when it comes to the deal landscape right now.

After the election last week, you saw so many potential deal stocks just shoot up.

I'm thinking about like Capital One and Discovery in particular.

And I'm not commenting on those odds, but not all of those deals are going to go through.

Some of them will die on the vine before things actually change.

Right.

There's like so much of a like immediate psychological shift in how people see the new administration, like even before it's in place.

And my general sense is that the wheels grind kind of slowly and it is hard to reverse course.

Now, this is clearly an administration that is not, you know, a respecter of norms and procedures.

And so the wheels will grind a little faster than they usually do.

But right, like once you have a court decision, it's pretty tough.

The other thing that I think is weird is like everyone kind of assumes that this will be a far more merger-friendly administration.

And the backing of all these business people and bankers suggests that there's some reason to assume that.

But like J.D.

Vance has praised Lena Khan, the head of the FTC, who's been very militant about blocking big mergers.

It's not obvious that a sort of heterodox populist Republican administration will actually be that much more pro-merger or that they'll be pro-merger in all the ways that people want them to be.

Yeah.

But, you know, that is everyone's assumption.

So here we are.

Yeah.

It's a good point.

I do wonder, and I don't want to talk about politics, but I do wonder, you know, how much of a say JD Vance is going to have.

Oh, none, none.

But I'm not, you know, I'm not sure anyone is like a.

Yeah.

There's going to be some random television personality is put in charge of the FTC, and who knows what that person thinks, right?

Like, who knows?

Oh, Katie's pointing to herself.

Katie, as a television personality, should be put in charge of the FTC.

That's a good thing.

It would be an honor to serve my country.

Specific to tapestry and Capri, though, you point out that it's a quick turnaround.

Two weeks is not a lot of time.

But also, I wonder if...

One thing that could happen is that a deal gets dropped and it goes away.

And then in six months, they start negotiating again.

If circumstances are changing, you have an argument that, oh, it's not anti-competitive now.

And you have a much friendlier FTC and it all works out.

But that's pretty risky for a jilted merger target at that point.

It does seem like tapestry shareholders do not want this deal to happen, though.

Sure, yeah, yeah.

I mean,

like, if both sides wanted this deal to happen like you say we'll appeal and like you know there's a deadline at february 10th that doesn't matter you can you can mutually get together and waive the deadline but if you don't want to mutually get together then the deal's off you know yeah but also this is an 18 month saga like this deal has been going on for a long time things have been pretty good at tapestry their earnings have been solid they recently raised guidance for the year apparently the coach brand is popping off and it seems like things have kind of been deteriorating at Capri during that time.

So maybe there's a sigh of relief here.

Oh, yeah, definitely.

It is often the case that when a deal is blocked and people are like, ah, it was blocked.

Often what that means is that one side is kind of relieved it was blocked, right?

Like circumstances have changed and you no longer want to do the deal.

And you can't just back out of the deal.

But if there's some regulatory impediment, you can do things like not agree to extend the deadline.

And then there you are.

Yeah.

We gave it the good college try.

It's just not going to work out, you guys.

You know, you have an obligation to give it a...

The words are like, use, you know, all reasonable best efforts.

But then once you do that, you're done.

Yeah.

I do think that like, there's just the more general point of like the, you know, the merger arb

business, which has been difficult but lucrative in the last few years, right?

So like merger arb, I think of as like being sort of almost a market-making business where like you're doing a lot of trades.

Each trade has like kind of a small spread.

You make the spread in expectation.

and every so often you get like absolutely run over on a deal like tapestry capri where like you lose you know 50 of your investment or whatever in a scenario where like lina khan is running the ftc and the ftc sues to block a lot of deals that then they lose in court like that's a really fun environment for merger arb

because you can do things like buy target stock after the ftc sues and like the stock has gone down and then the ftc loses and the stock goes up and you make a lot of money right it's like anything else like if you think of like merger arb as a market making business, then market makers make more money in volatile periods, right?

And so if you have a volatile period where some mergers don't go through, some mergers do go through, some mergers get sued and they go down and then like they go through and they go up, you can make a lot of money in this like sort of liquidity provision business where you buy stocks when the merger is announced and sort of sell them into the merger when the merger closes.

So it's a good lucrative business, but it's also a business where you can get blown up, right?

And if you just like make a couple of the wrong bets, you get blown up and you're out of the business.

Whereas the assumption is that in a Trump administration, you know, there'll be a lot of mergers, so you'll have a lot of volume.

You know, if you think of it as a market-making business, you'll have a lot of deals to do, and they'll all go through, so you won't really have a lot of risk, you won't get blown up.

The flip side of that is spreads will compress, and you'll just make a sort of more modest profit and not make tons of money on each deal, but like you'll have an easier life.

What a pleasant and sedate landscape that sounds like.

I kind of like the high-octane.

Yeah, I think that almost everything about financial markets and the world will be like less sedate under a Trump administration.

But like, you know, Major Arab, it'll be like, yeah,

they all close.

Yeah.

Or not, or not, right?

Or there will be, you know, a confounding of expectations and they'll sue to block every deal.

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Let's get to the good stuff.

What's that?

Burritos.

Burritos.

And how little meat is in Chipotle burritos.

The lawsuit that we're going to talk about also points out that some of these burritos skimp on the rice and beans.

Unbelievable.

It's not just the expensive, it's everything.

I haven't been to a Chipotle in like 15 years.

When I worked at Dealbreaker, my job before this, we were upstairs from a Chipotle.

And there was a period where I ate a Chipotle like three times a week for months on end.

And probably never since then.

What was your Chipotle?

But I like Chipotle.

I had like a burrito with like a regular burrito.

Standard.

Yeah.

Regular guy.

I think I got,

I don't even remember

what meat I had in my burrito.

Was it a true burrito, not a burrito bowl?

I don't think I've ever eaten a burrito bowl.

Wow.

We're different people.

I don't know.

I find it off-putting.

It's like a very wrong salad.

Yeah.

It's like a salad, but more fun with less carbs than a burrito.

But still a lot of more carbs than a salad because there's rice.

The tortilla is so thin.

How many carbs?

It would shock you.

Anyway, I've never had a burrito ball, but I've had hundreds of, or at least dozens of Chipotle burritos.

They're pretty good.

What were the portion sizes like?

I don't remember, but this was more than a decade ago, and so I think they were ample.

I think this was before Chipotle.

Well, apparently things have deteriorated since then.

If you spend any time on social media, this has been a long-running issue.

By long-running issue, I mean at least a couple of months.

Yeah, it's been like a thing this year.

Yeah.

Maybe, maybe last year too, but I think it was like really sort of took off in like spring and summer of 2024.

Like people on social media.

I'm not on the YouTube channels where people are like reusing.

Not on the YouTube.

Like wherever TikTok,

wherever people are going to like post videos about their disappointment disappointment with their burritos, I'm not on those channels.

No.

But they exist and they're hugely influential.

And I guess.

And some people have posted serious complaints about the size of Chipotle burrito bowls to the point that Wells Fargo equity research analysts went and did a study where

they ordered 75 quote like-for-like burrito bowls across eight locations of Chipotle in New York City and found the smallest bowl was 13.8 ounces and the largest was 26.8 ounces.

This had to be interns.

I don't know.

You know, sending them out to various locations and having them pick up.

I hear you, but like,

I mean.

Sounds like a summer project or something.

Yeah, that's probably right.

But what did they find?

But also, like, I don't know, like, like, what a fun.

Like, you're an equity research analyst.

Like, I'm going to get out of the building and order 75 burrito bowls.

Like, that's funny.

I don't know.

I don't know.

Well, Spargo stock should fall because this is how their analysts are spending their time.

But what are the analysts supposed to spend their time?

What groundbreaking conclusion did they find?

The biggest bowl is twice as big as the smallest bowl.

That's pretty bad.

That's pretty bad.

Yeah.

And it prompted endless, endless soul-searching from Chipotle.

Yeah.

The CEO on the July earnings call said, Before I give an update on our five key strategies, I want to take a minute to address the portion concerns that have been brought up in social media.

First, there was never a directive to provide less to our customers.

Generous portion is a core brand equity of Chipotle.

Okay.

I don't know what that means.

It always has been and always will be.

With that said, getting the feedback caused us to relook at our execution across our entire system with the intention to always serve our guests delicious, fresh, custom burritos and bowls with generous portions.

Was this still Brian Nickel?

Yeah, yeah, yeah.

No, Starbucks.

Yeah.

By the way.

If they make the Starbucks drinks smaller, I am going to riot.

Sure, sure, sure, sure, sure.

Sure.

Well, you'll sue.

Yeah.

We're getting away from the point.

Which is that, okay, people have complained about various small consumer indignities on the internet forever.

But like, there's this incredible modern technology, the securities fraud lawsuit, that allows you to turn this into a multi-billion dollar lawsuit, right?

You're like, oh, the portions of my burrito are too small.

What can you do about it?

You're going to sue because your burrito is too small.

You're going to have a class action where you get everyone else's burrito is too small.

It's crazy, right?

But

what happens here is that these reports come out and the stock goes down a little bit.

Chipotle

actually announces earnings like most recently, like their earnings for Q3, which they announced like just a couple of weeks ago.

And their earnings have like an increase in cost of goods sold because they're putting more meat in the burritos.

They're addressing the problem.

Like we did a thorough audit of our portions and we found that some stores were not putting enough in.

And so we're putting more in everything.

That's not exactly what they said, but like they're putting more in everything.

That was implied.

Yeah, yeah.

And so the stock goes down.

Why does the stock go down?

Well, it's an earnings release.

There's like a number of reasons the stock could go down.

And one of them, you know, might be that the future cost of goods sold is higher.

And another one might be that you worry that you've lost some brand value by

getting yelled at for skimping on portions.

All we know is the stock goes down, right?

And the stock goes down by like single-digit number of percentage points, which translates into billions of dollars of losses, right?

Yeah.

And so if you're a securities lawyer, you just like slap that in a lawsuit.

They said the portions were big.

In fact, the portions were small.

They were lying.

It's fraud.

The stock went down when the fraud came out.

So everyone who bought the stock was defrauded out of, you know, billions of dollars.

Yeah.

And then you sue, and then, you know, it's like kind of ridiculous.

But like, maybe you settle it for like, you know, pennies on the dollar and you collect a, you know, multi-million dollar legal fee for bringing this lawsuit.

It's amazing.

It is amazing.

And I'm excited to see how this turns out.

I read all the time, everything is securities fraud.

It's like an amazing

use of the American legal system to go after like really incredible complaints.

Do you want to speculate on how it might shake out?

Do you think that they're actually going to settle?

I don't actually know.

I always write out these people when people file them.

A lot of them do

not go very far.

Some of them settle.

Yeah.

I don't know.

It takes you like an hour to write this complaint.

It's so funny.

And then maybe they settle it and you get a few million dollars.

Well, if it does go that route, I wonder, like, does this set any precedent for what you could sue for?

Like.

I've been writing out this for for years.

I know, but

you can sue for anything if it's a public company.

Anything.

If a company sells marbles, for example, and it says, like, oh, people are loving the green marbles.

And then on their earnings call, they have to say, actually, people didn't love the green marbles that much.

You can sue for that?

Of course.

Well, how?

You can sue for anything.

Not all these cases win, but like enough make money that like it's a lucrative business for plaintives for securities lawyers.

Well, I don't know.

Maybe if I don't, you know, become the next FTC head, this is something I could do.

Brian Nicol knew that people were upset about the Chipotle portion sizes.

There was this amazing article by Fortune in late May.

The headline is, Chipotle CEO, our portion sizes aren't getting smaller, but you can get more food with a secret look.

Do you remember this?

Did this enter your sphere of knowledge?

Tell me more.

Okay.

I'm so excited to tell you about this.

In an interview with Fortune, Nicol said, portions have not gotten smaller and offered disappointed customers seeking an even bigger burrito or bowl a pro tip.

Give the workers a secret look.

This is a direct quote.

One of the things I think is great about Chipotle is if you come into the restaurant and you want a little more rice or you want a little more pico de gallo, Nicol told Fortune, who then widened his eyes slightly and

clear out that pico de gallo.

Did I say that wrong?

What did I say?

Pico de gallo.

Did I really?

Sorry.

I can't believe I said that okay

uh if you want more cheese on your quesadilla

or you want more jalapenos

this is a direct quote

one of the things i think is great

one of the things i think is great about chipotle is if you come into the restaurant

if you

I'm going to start saying that though.

We used to call it that in my family.

One of the things I think is great about Chipotle is if you come into the restaurant and you want a little more rice or you want a little more pico

de gallo?

How do I say it?

I think we're done.

What is wait?

How do I say it?

Now I'm in my own head.

Pico de Gallo, Nicoll told Fortune, who then widened his eyes slightly and nodded his head.

Usually our guys and women give them a little more scoop.

So

he was aware of the complaints.

And I just

love the suggestion of giving like a secret nod and like maybe a wink to one of the Chipotle workers.

I just think it's like, you know, it is not a factory produced product that should have exactly the same weight each time.

It's like you're talking to a person who's like using a spoon, right?

Like you can, you can do that.

You can give a, you could even say, could you bet a little more on that?

I don't know.

I haven't done this in 10 years, but it does seem like a thing you could do.

And, you know, then like Wells Fargo is going out and like, I wonder if Wells Fargo like controlled for

like the looks.

Right.

Yeah.

Like there's maybe the big 26-ounce bowl was like they like looked at the worker a little bit too intensely and the worker was like, okay, here's more.

Yeah, we do need to know the methodology.

Like, did they make

one intern was making more eye contact than the other intern and got more

smile, perhaps?

Or glare?

Yeah, all of these kind of influence results.

Maybe this is a good case for AI.

You know, maybe if the robots made made your bulls, then you get a perfect measurement every time.

But humans still rule this planet, and this is just a byproduct of that.

I think that we've said everything we need to say about this session.

I think I said too much poorly.

I hope we're keeping most of that.

We can keep some of it.

I don't want to sound too much like a blubbering idiot.

It's really hard being on TV because my worst instincts when it comes to pronunciation always win.

Always win.

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What do you think Warren Buffett's doing?

Leveraging?

No, what?

He's probably not thinking about this strange ETF filing based off of Berkshire Hathaway.

Tell me more.

Okay, so one of South Korea's largest retail brokerages has teamed up with this white label issuer named Title to create a double leveraged fund that will track, if approved, Class B shares of Berkshire Hathaway.

So this is another leveraged single stock ETF.

And I know that we've talked about them a lot.

Maybe more than the listeners want.

But listen, this one is weird and interesting just because Berkshire Hathaway shares are so boring, Matt.

This is like antithetical to the single stock leveraged wrapper.

What is the purpose of the single stock leveraged wrapper?

To me, it is just marketing, right?

And so like...

It's fun.

Yeah.

But like

if you have some like snazzy thing, you can be like, oh, a snazzy thing.

And then you get money and then like you.

Yeah.

Well,

I think the appeal.

Like, this is not as snazzy as like Tesla because it's not that volatile, but it's like, yeah, like Warren Buffett over there.

He's like being Warren Buffett.

I don't know if that's snazzy.

Snazzy is not the word.

I think that has some retail appeal to someone.

Someone, maybe to South Korean investors, because in this article, it is pointed out that individual investors from South Korea do follow and hold a lot of Berkshire shares, and they also love leveraged single-stock ETFs, namely the Tesla ones.

But this one is strange because, okay, you have this Nazzy marketing thing, but like the fun in it is watching it go up and down a lot.

If you look at some of the numbers behind Berkshire, it's just not very exciting.

The stock's 90-day volatility is like 19%.

You compare that to NVIDIA.

Nvidia's is 59%.

And then MicroStrategy, which is very popular in these rappers, is like 98%.

So it's not going to be exciting.

Oh, okay.

So a couple of things.

First of all,

like making it a levered ETF makes it more exciting, right?

Like there's some.

No, like twice as exciting.

There's some level of volatility and expected high returns from Berkshire Heather.

And you get twice as much in the thing.

Instead of seven-tenths of a percent, it went up 1.4%.

Sure.

The other thing, though, is that, you know, when we talk about these levered ETFs on like very volatile stocks, they are a great one-day gambling product, but they're a mess to hold for a long time because you have the volatility drag of like if you hold them over time.

you don't get necessarily two times the return or three times the return of the underlying.

You get like some weird, horrible thing that is often lower than the returns on the underlying.

Not always, but often lower than like two times the returns on the underlying.

With a not very volatile stock, you get less volatility drag.

And it's a little bit, I'm sure they're not like, this is a buy and hold forever product because it's, you know, it's a risky way to buy and hold forever.

But it's like you could hold it for longer and probably get closer to two times the returns of Berkshire Hathaway than you would if you were holding, you know, a 2x microstrategies.

ETF for a year.

Yeah, that's true.

I mean, I was thinking about it, like, could it make sense as buy and hold?

And then I was remembering all of our conversations about volatility drag.

It's just less so here.

It's not, you know, eliminated, but it's, it's just less so here because it's a less volatile stock.

If I had that much conviction about Berkshire Hathaway, and I'm a journalist, so I don't have any opinions, but I would just buy more shares of Berkshire Hathaway.

Like instead of spending buying one share, maybe I would buy two shares.

That's what I would do.

Well, this is a way to buy two shares.

Yeah, but that's going to cost me some money.

money.

This is a planned ETF.

We should note that it hasn't been launched.

And TBD, if it does launch.

Sure.

We talked about, well, whatever.

Talked about that

AI Warren Buffett ETF.

That was pretty cool.

Yeah, we did.

That's like a vague gesture in the direction of Warren Buffett and also AI.

This is like just buying two shares of Berkshire Hathaway.

Yeah.

I will note this has been done before.

Sure.

There's a two times

India.

No, no, no.

There's a two-times Warren Buffett ETF in Europe.

It launched in 2022, and and it has about $2.3 million in assets, which is not very much.

And I don't know, you think about the marketing, and obviously, Warren Buffett is a name, but

it's a name that doesn't seem to appeal to the cohort of individual traders who buy single-stock ETFs.

But maybe.

Maybe this is like broadening that audience.

Maybe this is like, you think you don't like levered single-stock EDFs because they're on crazy stocks.

But here is a levered single-stock EDF on a nice little stock, a nice, or a nice big stock, a nice calm, Warren Buffetty value.

Steady, Eddie.

Yeah.

Yeah, I don't know.

I'm not.

It's not my idea.

I'm excited to,

with so many of these products, I am excited to see them launch and I am excited to then check on them in like six months.

I just feel like...

technology and like know-how are going to progress to the point where you can like viably run a $5 million ETF, right?

You can just be like, we offer a suite of 20,000 ETFs.

And if each of them raises $5 million, it's fine.

And then you can have whatever dumb thing you want in an ETF.

You can have levered two times every single stock.

And if someone wants it, they can buy it.

And this is the sort of thing.

It's less appealing than Tesla and NVIDIA for this thing, but more appealing than some stock you've never heard of.

But they're going to keep going down the list.

Yeah, we are approaching the point where there's going to be more US-listed ETFs than US-listed companies.

That's great.

Which will be be fun.

Why should there be?

It's like the power set of U.S.

listed companies.

It's like every possible combination of companies is going to be.

Leveraged and inverse.

Leveraged, inverse.

Every possible single-stock, two-stock, three-stock.

Pair trade and ATFs.

23 stock.

Any number.

Oh, my God.

The sky's the limit.

But I was chatting with some of my colleagues on my print team who cover ETFs with me at Bloomberg News.

I don't know why I have such a preamble.

And we chat to a lot of white label issuers because they're really interesting.

They work with a lot of different clients.

And we were talking about what it costs to launch an ETF.

Costs have come down mightily.

And

depending on what your strategy is, you can launch an ETF for like 50 grand.

And I heard that and I was like, why?

Why don't you have an ETF?

Why don't I have an idea?

And that also explains why we've just seen so many launches.

It is just silly season out there.

Right.

It's like barely a product.

It's like a, it's just a combination of stocks.

And

you can just, any combination you can dream of, you pay a small fee and then you can offer it.

And maybe people will be excited about it.

There is some.

We're not there yet, but we're getting there.

There is some break-even level of assets.

Yeah, sure, sure, sure, sure, sure.

Sure.

We're not there yet.

This is like the future.

The future is bright.

We're going to have a ton of MA.

Every deal is going to go through.

And boy, we are just going to have thousands of UTFs and so much meat in our burritos.

And that was the Money Stuff Podcast.

I'm Matt Matt Levian.

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