Just Keep Bidding: MMTLP, PE, ETFs

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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 Matt Levine, and I write the money stuff column for Bloomberg Opinion.

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

What do we got, Katie?

We're going to talk about a merger.

I don't think it's a merger.

I think we're talking about a short squeeze.

We're going to talk about a short squeeze.

That's not a merger.

There is fraud involved.

We're going to talk about on-cycle private equity recruiting.

It wasn't a world that I was familiar with.

Oh, that's an important world.

And then we're going to talk about Bloomer Candy.

She's I was going to say that.

Okay, so this is a merger, but maybe it's not.

We're talking about MMTLP.

Yeah, there's some lore here.

It's a thing that people on social media really care about.

Oh, yeah.

A lot.

A lot.

I've been getting emails about it for years.

Yeah.

I mean, I was reading some Reddit posts from three years ago this morning.

Gosh.

How to begin.

How to begin.

How to begin.

So there's an oil company called Torchlight.

It had some leases that were not producing a lot of oil, but I had to drill the leases.

But it was a publicly listed company and it did a reverse merger with a like material science company.

And they decided to get rid of the oil assets.

And they could do it by spinning it out to shareholders.

But at some point, they had conceived this notion that short sellers were bad and that short sellers were the problem of the company.

And they were like, we want to find a way to punish the short sellers.

And the way you do that, it turns out, there's like a technology to punish short sellers, which is that instead of spinning out Torchlight or like the oil assets as a new company where people could buy and sell the stock, you spin it out as a company where they can't buy and sell the stock.

And the reason you do that is like if you were a short seller who is short Torchlight, you've borrowed the stock and you have to return what you borrowed.

So if Torchlight splits up into two companies, one of which is like the new metamaterials.

that like has a publicly traded stock and one of them is like this new not traded stock then you have to return both of those things to your stock lender publicly traded stock is easy You just go buy it in the stock market.

But the not traded stock, you can't buy in the stock market.

So you can't return it to your stock lender.

And so what Torchlight figured out is if we do this merger and like we have like this new meta-material stock, that's the new public company, and we also have this other non-traded stock, then like the short sellers will see that.

And before the merger closes, they will know they have to buy back their Torchlight shorts positions.

Because after the merger closes, they'll be hosed.

There'll be no way to close out their short.

They'll be in big trouble.

This is the idea.

And so they did that.

They created this non-traded stock or this thing that wasn't supposed to be traded called MMTLP.

It's like a weird preferred stock of the new public company that wasn't supposed to be traded on a public stock exchange and like sort of represented a claim on the oil and gas assets.

And they like announced this merger and they went out and sort of marketed quietly to the right people.

They marketed the idea that there would be a short squeeze.

And so they didn't like put it in their public filings.

They weren't like, oh, we're doing this to do a short squeeze.

But privately, amongst themselves, they were like, we're doing this to do a short squeeze.

And they sort of like tried to convince short sellers that they would get squeezed.

And they also tried to convince some number of Torchlight shareholders that there would be the short squeeze.

And the point of all this is just before the merger, there's a short squeeze.

All the short sellers have to buy back the stock.

The stock goes way up.

And what they do is just before the merger, they sell a bunch of stock.

They do an at-the-market offering of stock like right before the merger closes in order to take advantage of the short squeeze and raise like a hundred million dollars to use to like keep drilling torchlights oil leases that feels like meme stock economics it's very meme stock economics the difference between this and like game stop is one the company is explicitly like saying hey there's going to be a short squeeze usually in like a meme stock it's like people on reddit are saying hey there's going to be a short squeeze here it's the company doing but then two the other thing that's like really important is they engineered the short squeeze right by like giving out this non-traded stock in game stop or whatever the short squeeze is not like a real short squeeze.

It's just like the price goes up.

And so short sellers like lose money.

And so they feel like they need to cover their short positions.

But this is a specific designed structure to make it impossible to keep a short position on.

So even if the stock went down, the shorts would still be in trouble because they wouldn't be able to like buy back this weird non-traded stock that the company was giving out.

So that was the idea.

Now, I don't know if it worked.

And the reason we're talking about it is the SEC brought a fraud case against Meta Materials, the company, and like the CEO of Torchlight and the former CEO of Meta Materials, who were sort of allegedly in on this plan.

And the SEC says what you were doing was fraud, but they don't know why it was fraud.

They say either it was fraud because you did this short squeeze and that's market manipulation.

You're not allowed to do this thing that causes the short squeeze or it was fraud because you didn't actually succeed at doing the short squeeze.

No short sellers bought back their stock.

It was fine, but you convinced enough retail shareholders that there would be a short squeeze, that they all bought the stock and then you were able to sell, because the stock did go up a lot.

Yeah.

Just nobody knows why the stock did.

But either way, what you did is fraud.

That's what the SEC says.

So

what does this mean for the actual shareholders?

Because there were actual shareholders in this company while this was all happening.

Oh, yeah.

If you bought stock, there's a good chance you lost money, right?

Like the company sold you all this stock at basically the peak, right?

Like they did this short squeeze or whatever it was.

Like the stock went way up and they did an at-the-market offering, like right at the peak, because they timed it to when they were planning to have the short squeeze.

And so they sold $100 million worth of stock to

people,

maybe some short sellers, but a lot of like regular investors at prices that, you know, like then the stock fell by like, you know, 80%.

So a lot of people lost money.

The other thing it means, though, is like, if you bought the stock sort of leading into the short squeeze, you got shares of Meta Materials, which is the public company, but you also got these MMTLP shares.

And the MMTLP shares were supposed to be not traded.

Right.

So like instead of having like a public company, like you own Torchlight, which is a public company, and now you have like this not traded company.

Now, it turns out they were traded.

The company was like, we're going to make them not traded.

We're going to not list them on a stock exchange, but that doesn't matter.

They can still trade over the counter.

It's still a public company.

And so in fact, MMCLP shares did trade.

Not a lot, but they traded.

You know, the SEC case is about stuff that happened in like 2021.

Since then,

MMCLP has become even more of a meme because what happened is at some point, the company was like, you know what?

This stock is not non-traded enough for us.

There are still short sellers.

We're still mad at short sellers.

We have to exterminate them.

So we're going to do this again, but like more so.

And so what they did is they took MMTLP, which was sort of like a tracking stock on the oil assets, and they replaced it with, they spun out the oil assets into a new company called NextBridge.

And

the stock of that company is like super duper not traded.

It's not registered with DTC, the like.

repository of all stock.

And so what that means is your broker can't hold or transfer your shares for you.

So, it's just you really can't trade it at all.

And the idea was like that would really drive out the short sellers because you definitely couldn't buy that stock to close out your short.

So, I don't really know how many short sellers were left at MMTLP because it was hard to trade.

The plan was in 2021, they were going to get rid of all the short sellers, but they replaced MMTLP with NextBridge.

They published a prospectus for it that like explicitly said there's going to be a short squeeze.

And there was, in fact, again, a rally in MMTLP stock is like

either because there was a short squeeze or or because people were like, oh, there's going to be a short squeeze.

It's great.

And then FINRA, the financial regulator, halted trading in the stock like two days before it poofed into NextBridge.

And so all these people who had bought the stock, expecting, one, there'd be a short squeeze and two, they would then sell at the peak, they got stuck in it.

They got stuck holding MMTLP for like the last two days and then it.

poofed into NextBridge, which they can't sell at all.

So now they just own this stock in this oil company that like doesn't make any money and like, you know, has some oil properties.

It may one day make money, money, but they can't trade it because it's really super duper not tradable.

And so it's like these decisions that the company made were really bad for shareholders.

Yeah.

They made life much worse for actual shareholders in the pursuit of making life worse for short sellers.

In a way, I find that sort of just do whatever it takes kind of just amazing.

Yeah.

It's like such a sort of well-known obvious fact that if a company is going around doing stuff for the purpose of hurting short sellers, one, that's going to be bad for shareholders, but two, like that company is focused on the wrong thing, right?

Yeah.

If you're thinking about short sellers like 20% of the time, like you are not spending enough time on your business.

And these guys are thinking about short sellers like 90%.

Yeah, I was going to say that's 100%.

Well, there's a few questions that I'm hoping you can help me out with.

So before this combination, it was Torchlight that was heavily shorted, right?

And it was the old version of MetaMaterials that wanted to do the merger so that they would get the listing.

Yeah, Metamaterial is like a small Canadian company and they were like listed on a, I think I'm one one of the secondary Canadian stock exchanges and they wanted a U.S.

listing.

And so Torchlight had a NASDAQ listing and so they did a reverse merger where basically MetaMaterials would get Torchlight's listing and Torchlight's assets would be spun out into lists like MMTLP, whatever kind of thing.

What I don't quite understand is both CEOs linking arms in this cause to just like kill all the shorts.

Why did this become the cause of the MetaMaterials CEO?

Like, I don't know, it just feels like there was was a cleaner way to do this.

Okay, yes.

But the SEC would say the goal here was not just to kill the shorts.

There was another goal, which is to pump the stock up.

Right.

And like, so they did pump the stock up.

They raised like $100 million, $100 plus million dollars selling stock into this whatever it was rally.

And then most of that money went to metamaterials.

The Canadian company got not only the public listing, but like this money from this pumped up stock price.

Now, the deal was they'd give some of that money to like torchlight to like keep drilling the assets.

But the SEC would say they went around looking for companies that wanted a reverse merger, and then they're like, Hey, by the way, we have this great plan to pump up the stock price and like raise a lot of money.

And then, you know, some number of CEOs would say, Oh, great.

Yeah.

I want a pumped-up stock price and I want a lot of money.

Good deal.

There you go.

So they did it.

Now, why did MetaMaterials do the extra super duper not tradable thing

afterwards?

I don't know.

I think some of it might be that they were really mad at short sellers.

Some of it was like they had to get rid of this MMTLP thing somehow.

They did have this retail investor base that has spent years having conspiracy theories about short sellers.

So you wrote in your Money Stuff column that they took a page from the Overstock CEO's book from that experience who did something similar.

Then they did this, which was a slightly better version.

That's what you called it.

I wonder where this now evolves to.

Well, we're like really in the middle of the story because the SEC brought these charges saying that the thing they did in the merger in 2021 was a fraud.

But there's still the like MMTLP into NextBridge, the trading halt.

That's hotly controversial.

They've been writing letters to Congress.

They've been sending threatening emails to journalists.

They've been sending very polite emails to me, honestly, sort of arguing about this.

Like, I, you know, all of my interactions with the MMTLP people have been fine, but there's a lot of them.

Like, they're really, you know, passionate about it.

And the conspiracy theory at this point involves FINRA.

The MMTLP community believes that the trading halt in that stock was FINRA trying to bail out short sellers.

And like FINRA is conspiring with threat sellers.

And by the way, this is not true.

The halt came after the X date for short sellers to have to close out their positions.

It's not true.

But they're calling for hearings and whatnot.

And so meanwhile, the SEC explicitly said in this case, we are still continuing our investigation of the subsequent events at MMTLP.

So there will probably be another case about the MMTLP.

So are you rooting for chaos here?

No.

Okay.

I kind of like.

Do you want there to be hearings?

Because that sounds

a little bit fun.

Like, to me, I feel really bad for the regulators here who I think are just doing very straightforward market regulation and who clearly think you know the sec's position here which is what i've been saying you know since i started writing about this is like this company was doing a fraud by trying to arrange the short squeeze and all of the investors think the opposite they think the short sellers are doing some sort of fraud and the company was just helping out shareholders by taking revenge on the shorts which is again not true because the shareholders are stuck in this non-traded stock and have lost a lot of money so i just think like the regulators are sort of very straightforwardly doing the right thing and trying to prevent weird market manipulations.

And like somehow there's this populist view that that's all wrong and the regulators should be punishing the short sellers and like this sort of short squeeze is good.

So no, I'm not rooting for KS.

I often read for KS, but here I'm like, these hardworking regulators are just trying to keep orderly markets and we should let them.

God bless them.

Yeah.

I'm going to talk about my favorite financial story ever.

I think it's interesting that the SEC believes that like engineering a short squeeze is illegal.

It's not like super clear to me that that's right, but you know, it's probably right.

I mean, it's market manipulation, right?

It's like causing the price of a security not to reflect the fundamentals of supply and demand.

That's kind of market manipulation.

So I understand the case.

It's probably right, but it's a little odd.

And every so often, not companies, just market participants, engineer a short squeeze.

And my favorite of them is in 2012, the SEC brought a case against Phil Falcone, who ran Arbiger, the hedge fund.

He like owned some bonds, which are delightfully called the Max Zips.

I don't know what Max is.

I don't know

these bonds, right?

And he like owned these bonds.

He liked these bonds.

And he heard that some bank was shorting them and was also encouraging its clients to short them.

And he got mad at short sellers.

And so what he did was like, he's like, oh yeah, you're shorting the bonds.

So he would buy them.

People would short the bonds.

He'd buy them.

And he would also lend out his bonds.

If you want to short bonds, you have to borrow them from someone.

And so, you know, Phil Falcone would tell his prime broker, you can let out my bonds.

And his bonds got loaned out.

And like, he would keep lending out bonds.

People would borrow them.

They'd sell them.

He'd buy them.

He'd lend them out again.

And ultimately, he ended up owning more than all of the bonds.

The company had issued like $200 million of bonds and he only owned $220 million because he had like bought all of them and loaned some out and like bought them again.

And so once he owned more than all of the bonds, he stopped lending them out.

He called in the stock borrow.

He called all the brokerage firms and said, I want my bonds back.

And they had to go buy them to return them to Phil Falcone.

And they couldn't buy them because he owned all of them and he wasn't selling.

Yeah.

And so the SEC like has this incredible passage of like this unnamed bank or brokerage called Phil Falcone and was like, you know, we understand you want your bonds back, but we can't find them to buy them.

And he said they should, quote, just keep bidding.

Oh my goodness.

And he said, sometimes you are just on the wrong side of the trade.

Wow.

And so, you know, the bank was like, I don't understand.

Apparently, Falcone said that he knew that there is a long position in the bonds in excess of like the size of the total bonds.

And the bank said, how could you know this?

Falcone said that he was working the position himself and that he had acquired approximately 190 million bonds, meaning more than all of the bonds.

Yeah.

And the SEC says the senior officer and the other Wall Street firm personnel were stunned.

Stunned.

Just like picture this conversation.

It's like he must have been having so much fun.

Just like the greatest feeling in the world.

To be like, oh, yeah, just keep bidding.

But he's going to, I mean, I would be chasing that high for the rest of my life.

I mean, yeah.

I tell you, the SEC determined that this was market manipulation.

Oh, come on.

They sued him.

They settled.

I don't think he admitted wrongdoing.

My suspicion is that he thinks, and also kind of I think, this was just extremely cool.

He shouldn't have gotten in trouble for it.

But he did get in trouble for it.

The SEC believes that.

Engineering a short squeeze is market manipulation.

So they got him at metamaterials too.

I just feel like short selling just breaks everyone's brain on

every single side of it.

It really does.

People get mad at short sellers in a way that is just exceeds like what they're actually doing.

People would say they're manipulating the market.

Yeah, but like even if you think that like to arrange your entire public company around punishing shortsellers is just like an overreaction, even if they're doing something illegal.

That man can hold a grudge.

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Should we talk

about on-cycle PE recruiting?

I guess.

So

Business Insider, of course, out with reporting this week that apparently this cycle is starting much earlier than usual, or at least a month earlier than it started last year, which was also starting earlier.

Yeah, but it's a key month, right?

So the way it works is

you go to college, maybe like one summer you intern at an investment bank.

For sure.

You graduate from college.

I mean, if you're looking to work in sort of like the standard financial path and you graduate from college and you go work at an investment bank for a two-year analyst program and at the end of your two-year analyst program you often want to work in private equity and so you get a job offer from you know a big private equity fund kkr apollo blackstone or whatever to start there after your two years as an analyst end.

And at some point in the distant past, 20 months into your analyst program, after doing a bunch of deals and learning how, you know, to build financial models and generally, you know, getting some experience in investment banking, you would go interview at the big private equity funds and they'd ask you about your work experience and they would hire you.

And then you would a few months later leave your bank and go work in private equity.

But over the years, the private equity firms realized that they could get the best candidates by interviewing a little bit earlier.

So like instead of interviewing four months before your analyst program ends, they can interview five months before your analyst program ends.

And it has moved up so much that now it is happening in June before your analyst program starts.

So like you started at a bank in like, let's say, July or maybe August.

And now the private equity interviewing is starting in June,

a little more than two years in advance of when you'd start in private equity.

So you haven't started at your bank yet.

And you are doing interviews for the job that you will take.

after your two years with the bank is over.

To anyone not in that industry or who isn't very familiar with this, sounds like lunacy.

Like that sounds like crazy town.

And Business Insider had some delicious details about these analysts who haven't started at their investment bank.

Maybe I don't want to call them analysts.

Anyway, these people who hadn't.

Pre-analysts.

These pre-analysts who hadn't started at their investment bank, not even being in the city yet, having to hop on a plane.

I know that you are not sympathetic to their plight.

Well, I'm sympathetic to their plight.

I don't work in private equity.

Yeah.

Like,

I've made different life choices.

No, I'm sympathetic to their plight.

I think that's rough.

What I wrote is like, I I sort of understand it as the interviewing conditions to some extent reflect the working conditions, right?

Where like you want people who are so dedicated to the cause of private equity that they will hop on a plane before they move to New York to go do an interview.

You know, you always read about like the on-cycle recruiting.

Like in some ways, this is more humane than it was last year because it used to be like you started at your bank and then like two weeks later, you did your private equity interviewing and like you were working 16 hours a day as an investment bank analyst.

And so there are always stories about like people interviewing at two in the morning because that's the only time they could get away from their desk.

Or skipping their trainings or something else.

Skipping their trainings, I feel like, is

that fine.

Oh, that's fine.

No, I mean, I feel like.

But they were skipping volunteer days, Matt.

You know, they weren't giving back.

Right.

No, but as a matter of like how humane it is for them, I feel like interviewing at 2 a.m.

after a long day of building pitch books is worse than skipping.

the training that you were probably going to ignore anyway.

But maybe that's wrong.

Yeah.

I mean, so I hear your point that, that, again, it's like a good test of the actual working conditions.

You should be able to hop on a plane at any time.

But just hiring someone two years out with zero work experience, it doesn't quite solve that problem for me because that seems like lunacy.

It conveys a belief that what you learn in investment banking is completely fungible, which I think is true.

Not in a bad way.

I think that the private equity firms are sort of saying, we trust these banks so much to train these people in all that they need to know that we're not going to quiz them about what they need to know.

They're fine.

They will go through a two-year analyst program they will learn everything they need to do private equity and that's fine and we'll just interview them now for like personality fit are they giving them actual offers at the end of the interview that's so that's nutso to me also the offers are like a little bit conditional like if you if you like really screw up at your bank then like you lose your offer i don't exactly know how the mechanics of that work you arrive at your bank with an offer at your private equity firm because the private equity firm has like seen whatever they see in you right like they like your style your work ethic maybe you've interned at a bank the previous summer, so you have some knowledge of financial.

Maybe you had some great jokes to tell in the interview.

You know, and you've like studied, right?

Like you get asked questions about valuation and stuff.

You have like some ability to pretend that you know what you're talking about financially, but you haven't like actually done deals.

Or maybe you've done like a little bit as a summer intern.

But yeah, no, I mean, like the idea is they trust that the banks will train you up and you know, they know what bank you're going to and they know like what department you'll be working in.

And so how do the banks feel about this?

The banks have mixed feelings.

You know, Goldman for a while was really fighting this and was saying that you weren't allowed to have an accepted offer at a private equity firm, which makes sense, right?

Like it's a conflict of interest, right?

Like you're working on deals, you're like doing a sell side for a company and like one bidder is your private equity firm and another bidder is a different private equity firm.

That's weird.

Now you're an analyst, so there's only so much you can do to influence the process.

But Goldman for a while hated it and was like, would say, you know, you can't work here if you have a accepted offer, but then like you lose everyone.

It's a mixed bag for the banks.

I think the banks have always been very inverted pyramid models where they hire a lot of analysts to do a lot of grunt work.

And then ultimately, they only need so many managing directors.

So it's good if people leave

throughout their career.

Now, it is maybe not that good if every analyst leaves, right?

Yeah, that's what I was thinking.

Like, it's good to have like fewer associates than analysts, but you need a lot of associates, right?

And if it becomes like everyone in banking wants to go into private equity, then you're left with kind of no middle ranks in banking and you need the middle ranks to like one, do the work and two, like eventually produce the senior ranks yeah part of what you do as a bank is try to convey to your junior bankers that like a career there is pretty good pretty good competitive with private equity i think that's hard these days i think like culturally as you know from these articles like 99 of people who go into banking as junior analysts their dream is to go into private equity and not to be investment bank vice presidents but some people you know along the way get convinced to be investment bank vice presidents instead but no the banks don't like it but like they do need to get rid of some people.

And so this is a good way.

But it's also like private equity is so important to banks, right?

Like it produces so many deals, produces so many financing fees, right?

The private equity firms are such big clients of the banks that having a lot of your alumni working at private equity is marginally good for the banks, right?

Like, you know, you want your employees to leave.

not to become competitors, but to become clients, right?

And like to some extent, that's what's happening here, right?

no not entirely right because like a lot of these private equity firms are like really competitors of banks right like you have like private credit competing with bank lending you have like you know you have banks trying to compete with private equity like it's it's not as simple as like they're leaving to go become clients but it's like kind of like that that's kind of the story that people tell so this has been all over social media uh which has been fun to watch i mean liquidity for example has been posting a lot of the responses that he's got and outreach on his instagram story i also spent some time on wall street oasis sure And I'd like to read you some of the posts.

I think they're interesting.

One kind of gets what we were talking about when it comes to being ready to hop on a plane and, you know, just do this very, you know, kind of vicious sounding process.

This person wrote, I should have studied sooner.

Yeah, I am probably like 60% there, but June is insane.

Stuff like this makes me wonder if I am cut out for this, quote, high finance pipeline, which I guess is also part of the weeding out process.

Yeah, it's funny.

Like you do study, right?

Like you prepare to talk about DCF models.

Like you're going to learn it in your two years at a bank, but like you have to learn it in advance to be able to talk about it in interviews.

It's like kind of

like a little.

Maybe it gives you a leg up on your job.

This was my favorite post, though.

The title is Explain On-Cycle Recruiting to a Clueless Europore.

All the threads lately on the on-cycle recruiting madness are really insane to me.

It seems to be accepted that it is just the way it is, but I would love to understand how it got to this point slash how it works and what the logic is.

From what I understand, you recruit for a job, you will start MP in two years' time before you even hit the desk and have any clue about what you are doing at the largest PE funds.

How does that make any sense?

A lot changes in two years, as does people's performance, ability, slash motivation.

And then, my favorite reply, which I believe is the top reply, is we move fast here, London boy.

Remember that time y'all blew a 13-colony lead, which I think is just the perfect answer.

13 colony lead.

Yeah, I mean.

Fair points on both sides.

Yeah, it definitely seems to me like a little crazy to say like we can identify someone two weeks out of college who will be a good mid-level employee for us in two years.

But I don't know, I kind of trust that like there's some truth to that.

You know, you're combining like the personal characteristics you see from that person and like their motivation and their ability to study for the interview and all that with your assumption that like the training they get at a bank will be pretty good and pretty interchangeable.

Yeah.

I do think the most is.

I'm sure there must be duds, right?

There must be people who like definitely who are you know great in the interview, but who are kind of bad at their job actually.

Right.

And like the other thing is like, what is your motivation at your bank analyst program, right?

Like on the one hand, you want to learn a lot and like be a big deal guy so that like when you get to your private equity firm, you'll be good at it.

But on the other hand, like...

You're not trying to get promoted, you know?

You're not trying to stay there for the long term.

You've got your next job lined up.

There's some I think there's like more coasting in like the few months leading up to when they leave for private equity than there is like day one.

But

it is like a little bit demotivating.

Yeah, definitely.

The end is in sight.

Yeah,

the end is in sight, like before the beginning.

Also, I think the point on like people's motivations change a lot, especially at that period in your life when you are so young out of college.

Do you know what you're going to want to do in two years?

Right.

Like, two years ago, I wanted to be a TV anchor.

And, you know.

But, like, for instance, if you've never worked a 16-hour day at a finance job and you do it for a month or two, you might decide you don't like it.

Yeah.

And then you're like, well, I've signed up for two years of this at my bank and then two more years of it at my private equity firm.

That's a, you know, you might change your mind.

But I guess the interview is to screen out people like them.

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All right, let's move along here to Boomer Candy, which it could mean sort of these very popular options writing ETFs, or it could mean these buffer ETFs.

And what we're talking about right now are these buffer ETFs.

So Boomer Candy, it's a label that Bloomberg Intelligence and Eric Balchunas came up with.

The Wall Street Journal published an article on it this week that it's sort of become this catch-all term for these derivatives-backed products that promise you some degree of safety investing in the stock market.

Yeah, you buy an ETF that gives you like stock exposure, but there's a floor.

Yeah.

Maybe a cap.

Maybe you get some income by selling calls.

There's some, like you add some derivatives to make it a little bit less like stock and a little bit more like fixed income.

We are approaching, I feel like the extremes because now you have these 100% downside protected buffer ETFs that are launching.

Another couple which launched just this week, in fact.

You did some nice math on what that actually means.

Yeah, so a buffer ETF is like you put money in and at the end of like six months or a year or two years, you get all of your money back plus like some of the return on the SP 500.

But like if the S P goes down, you still get all your money back.

You get like nothing else, but you get your money back.

Whereas if the S P goes down, if you had just been in stocks, you would have lost money.

But the upside cap, especially on the 100%

products, the upside cap is pretty slim.

Yeah, like I think the math works out these days that you can buy an ETF where you always get back 100% of your money and you get the return on the S ⁇ P up to like 8-ish percent, something like that.

There was one I wrote about on Thursday where you get back a cap of 4.8%, but that's for six months.

So you do that twice and you're like, yeah, like 9%, you know, something like that.

Not super bad.

It's not terrible, but that math works because T-bill returns are over 5%.

These things are like sort of like...

They're giving you some range of returns around the risk-free rate.

And so if like the risk-free rate is 5%, then they give you, you know, 0% to 8% or 9%.

That's something.

So, I mean, the criticism of these products is that that's a lot of fancy maneuvering to basically not quite get juicy equity returns for not that much protection.

I liked this quote from Ben Johnson.

He's head of client solutions over at Morningstar.

He said, We know over long enough periods of time that markets tend to go up, and what you're giving up is going up every bit as much as the market does over longer periods of time.

Now, if you're willing to make that trade in exchange for a degree of comfort for being able to sleep at night, then so be it.

But I think it raises the good question of where do you take away from in your portfolio to put this in?

Are you taking away from your equity allocation?

Are you taking away from your fixed income allocation?

These are just these sort of hybrid products, and I don't quite know what the answer is.

So two points on that.

I think there's an argument that these are to some extent marketed as you take away from your fixed income allocation.

because it's fixed income with better tax treatment.

I don't know how true that is, but that's my impression that like, it's not fixed income, right?

It's like a 0% to 9% return instead of like a 5% return.

So it's like sort of a range around treasury returns.

But I think it seems pretty clear that the tax treatment of these things is that your gains are capital gains.

You can like roll them over so that you only pay taxes when you sell the ETF.

So if you keep the money in the thing for three years, you're paying long-term capital gains taxes and you're only paying it at the end of the three years.

Whereas if you just own treasuries, you'd pay ordinary income taxes every year.

So there are ETFs that are just explicitly that.

This is the box ETF that I've written about where like it's explicitly you are buying a thing that promises you the treasury bill return, but tries to characterize it as long-term capital gains.

There's debate about whether that works.

But this is not that.

This is like you get a range of returns.

It's like equity linked, but it's like equity linked enough that you get the good tax treatment, but fixed income enough that like, you know, your money doesn't go down.

So I think that's part of the answer to your question is like,

to some extent, this is a substitute for fixed income with better tax treatment.

Yeah.

The other thing I would say is like, your question is the right one.

So I used to be like an equity derivatives structure.

Of course.

And so people would come to us with various ideas for like, I have the stock.

I don't want to take as much risk as I'm taking.

I'm willing to give up some upside to take less risk.

Can you do a derivative?

And the answer is like, yeah, sure.

You can do a derivative.

But you know what you could do?

You could sell half your stock.

Yeah.

You could sell half your stock.

And then you'll have half as much risk and half as much upside.

And you design equity derivatives, like, you know, you'd like do some stuff, you do some math, and like the model tells you the delta of your product, right?

The delta is essentially how much stock it is, right?

So, like, a 100 delta means that like it's just owning stock, a zero delta means it's just owning, you know, cash, and like a 50 delta means it's like, yeah, it's like half as much stock.

And so, when I, you know, I like design derivatives for people, like, oh, here's a collar where you're at like a, it's like a 70 delta collar.

And I would always want to be like, why don't you just like sell 30% of the stock?

Because then you have the same delta and

you won't pay us.

Yeah.

Yeah.

Like we're charging you a lot of money to do this for you.

You can like draw scenarios where it's like you'd be much happier with the derivative than you would with just selling some of the stock.

But what the delta is telling you is that in expectation, they're basically equivalent on average.

Yeah.

And you're paying us more to do the complicated derivative trade.

And so here it's the same sort of thing where it's like you're marketing this product that's like, oh, we're giving you equity returns, but with less downside.

It's like, yes.

But another way to do that would be to like sell three quarters of your stock and put it in treasury bills.

And then you're kind of in the same place.

Like, not really, but like kind of in the same place.

For a lot of these products, like maybe you would just be better off in cash.

Or like, you know, 90% cash, 10% stock.

Yeah.

But like one of the household names, I don't know if that's true for everyone, but Jeppy, for example, it's the JP Morgan Equity Premium Income ETF.

It's just absolutely ballooned in size.

It's super, super popular.

And basically it owns low volatility stocks.

And then it writes call options on top of that to harvest that income.

And it does

outperform in a down market.

That much is true.

But in 2022, for example, you know, the SP 500 was down like 20%.

I think Jeppy was down something like 2%.

You know, what wasn't down is cash.

And then you look at, you know, in a raging bull market, it's going to lag as well.

So it's doing exactly what it's supposed to do.

But you could ask the existential question of why bother?

Yeah.

I mean, I don't actually know offhand.

It's always possible that some strategy has

better returns than some mix of cash and stock.

There's some market reason for that.

But I do think that a lot of this is product design to appeal to investors.

It's like.

Deep down, our tools are cash and stock.

And we can mix those things together to produce a fancy package.

And if we do that in the right way, you'll be like, oh, that package looks so good.

And so you'll buy the thing that's made out of cash and stock and you'll pay us a fee rather than just like having your own mix of cash and stock.

By the way, that could be good, right?

Like you might not be able to figure out the right mix of cash and stock and someone else doing it for you is good, right?

But that's the game.

It's certainly fun to do.

What a bunch of services do.

It gives me something to write and talk about.

Oh, we should talk about the fact that the podcast is off next week.

Oh, right.

Yeah.

Hope you enjoyed this one because

we're not here next week.

Happy birthday, America.

We'll be back on July 12th with a new

well-rested episode.

A lot more stuff.

And that was the Money Stuff Podcast.

I'm Matt Levium.

And I'm Katie Greifeld.

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

And you can find me on Bloomberg TV every day between 10 to 11 a.m.

Eastern.

We'd love to hear from you.

You can send an email to moneypot at bloomberg.net.

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

You can also subscribe to our show wherever you're listening right now and leave us a review.

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The Money Stuff Podcast is produced by Anna Mazarakis and Moses Anda.

Our theme music was composed by Blake Maples.

Brendan Francis Newnham is our executive producer.

And Sage Bauman is Bloomberg's head of podcasts.

Thanks for listening to the Money Stuff Podcast.

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