Mouth Noises: 50y, ISS, HF

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Speaker 3 I'm going to eat a bowl of Avgo Limono soup. Wait, what is it? Avgo Limono soup.

Speaker 3 Lemon. Potato and lemon.
Yeah, yeah. Potato and lemon.
That sounds lovely. This, of course, from the Bloomberg pantry.
Ah. Get that on the mic.
This is ASMR.

Speaker 3 If you've ever wanted to hear... This is ASMR.

Speaker 3 If you ever wanted to hear Malavine, someone just inhaling soup. I want to be clear that I was exaggerating my slurping there for the mic.
That's what ASMR is. You exaggerate your sounds.

Speaker 3 At least, I don't know. I've never actually watched an ASMR video.
I'm like aware of ASMR.

Speaker 3 I see parodies of it on TikTok.

Speaker 3 Like

Speaker 3 people really clicking keyboards.

Speaker 3 But that's all I got.

Speaker 3 Yeah. I hope that some people get spine tingles out of this podcast.

Speaker 3 Katie just got a spine tingles. I just shuddered.
Got a spine shudder.

Speaker 3 Hello and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

Speaker 3 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.

Speaker 3 You just took a sip of water off, Mike, and I feel like... Yeah, I'm not in general trying to make mouth noises throughout the podcast.

Speaker 3 That's what the podcast is, just mouth noises.

Speaker 3 That's the title of this episode. Perfect.
All right, one thing's out of the way.

Speaker 3 We're done here.

Speaker 3 So, I don't own a home. I would really like to.

Speaker 3 And maybe. But you're not 40 yet, which is like the median age of the first time home buyer.
I know. I think it's 39, but you know.

Speaker 3 Anyway, what would make your home more affordable

Speaker 3 is probably not a 50-year mortgage, but that's like been in the news this week. It's been in the news.
Trump tweeted about it or truthed about it or whatever he did. He did.

Speaker 3 Did you see the politico story on the TikTok of how it came to be? It's so good. It's so good.
Because it's like a politico story that's like the Trump administration is just a snake pit.

Speaker 3 And so it's like all the people who don't like Bill Pultey, who is the head of like the federal housing regulator and a real, you know, publicity hound.

Speaker 3 Bill Pulte like apparently showed up to a golf game with Trump with like a giant poster board saying like

Speaker 3 Franklin Roosevelt invented the 30-year mortgage, Donald Trump invented the 50-year mortgage, and Trump was like, great, I'll tweet about it. I have the details.
It was a Saturday evening.

Speaker 3 It was not during a golf game, but it was at President Donald Trump's Palm Beach Golf Club. It was a three by five poster board.
Sure.

Speaker 3 And you're right in that FDR appeared below 30-year mortgage, and there was a photo of Trump below 50-year mortgage. And the headline was great American presidents.

Speaker 3 So that was enough for Trump to tweet about it and be like, oh, yeah, that's all the policy analysis I need to back a 50-year mortgage.

Speaker 3 And then, like, other people in the Trump administration went to Politico and are like, he sold POTUS a bill of goods that wasn't necessarily accurate.

Speaker 3 And I don't know, they said a bunch of other nasty things about Pulte, like, you know,

Speaker 3 recorded in Politico. Yeah, it's funny because it's showing up in the stock market.
We're recording this on Thursday.

Speaker 3 And at least right now, shares of Fannie Mae and Freddie Mac, apparently, they're falling in a big way because the word on the street is that Pulte is falling out of favor with the administration, which is probably, I don't know, nothing's real until it is, but it's funny to see shares actually react.

Speaker 3 Right. And it's such like a bank shot.
It's not like, would a 50-year mortgage be good for Fannie? Would it be bad for Fannie?

Speaker 3 It doesn't matter. Like, I've written about this for literally a decade.

Speaker 3 One day Fanny and Freddie will be released from government conservatorship, but you could always make money by betting against the Ding in the next year.

Speaker 3 Like for the last 10 years, people have said, oh, it can't last forever. They have to be released.

Speaker 3 But so like there was like a thesis that Pulte would be the one to crack it open and actually make it happen.

Speaker 3 And now if Pulte is out of favor, then I don't know. I still think one day they're going to be released.
Well, it's funny because you saw such a big run-up in shares on this idea.

Speaker 3 And to your point, that you can always make money betting against that idea. Apparently shares of both have lost about 50% since their September peak.
So just in the last two months or so.

Speaker 3 It's pretty amazing though that the pushback to the idea of a 50-year mortgage has been pretty bipartisan. Oh yeah.
It's a terrible idea.

Speaker 3 Tell me why. Well, okay.
The idea of a 50-year mortgage is that if you spread out your payments over 50 years instead of 30 years, your payments will be lower. This sounds good.

Speaker 3 And like, you know, normal assumptions, people are like, you'd save like 10 or 15% on your monthly mortgage payment.

Speaker 3 And so if people think about affordability of homes as being mainly a matter of the monthly payment they could make, then cutting 15% off your monthly payment makes homes more affordable.

Speaker 3 And if people are worried about home affordability, then this is a good policy.

Speaker 3 There are various problems with that. One of which is that you have to have your mortgage for 50 years.
And so you don't build up equity. You're spending a lot more on interest.

Speaker 3 You know, people are like, it doubles the cost of interest you pay over the life of the loan. And so it feels even less like homeownership and more like just renting forever.

Speaker 3 But to me, that's not the big problem. To me, the big problem is like,

Speaker 3 and this is biased by my experience living in and around New York, go on, but like where I live, housing is a positional good, and there are only so many houses that people compete to buy them.

Speaker 3 And so, if you just waved a magic wand and said, houses will be 10% more affordable, then people would still compete to buy them and they would just bid them up more until they stopped being 10% more affordable, right?

Speaker 3 Like, the price of a house where I live is not determined by how much it costs to build a house.

Speaker 3 It's determined by like, you know, there's only so many houses, there's only so much land in desirable areas. And so people bid up the price of that.

Speaker 3 And so if you did something to make housing more affordable, you would just raise the price of houses to like fully eliminate that affordability advantage. And so houses would be no more affordable.

Speaker 3 People like me who own homes would make money because there'd be like a windfall one-time gain, although then you'd have to go buy a, you know, if you moved, you'd have to buy a more expensive house.

Speaker 3 But like all of the affordability goals would be eliminated and you'd end up just having the same monthly payment, but for 50 years instead of 30 years, which seems terrible.

Speaker 3 I don't think this is true everywhere, but like

Speaker 3 a lot of U.S. housing is supply constrained.
And you do like see this effect, right? Like people talk about student loans, right?

Speaker 3 Like if you have government subsidies of student loans, what happens is not that it gets cheaper to attend college. It's that colleges raise their tuition to fully capture that subsidy.

Speaker 3 And it gets to be the same price to attend college, but the government is subsidizing it.

Speaker 3 And I think you'd see that here, where if the default mortgage was 50 years, you would still kind of be paying the same amount per month, but nominal house prices would be higher.

Speaker 3 Yeah, well, I mean, make it about myself. I would like to buy a home.
Yeah. Rates are really high.

Speaker 3 I don't need

Speaker 3 they'd be higher for 50-year mortgage.

Speaker 3 Yeah, I don't need to buy a home, so we're kind of just timing the market, waiting for rates to go down. But there has to be a bunch of people like me.

Speaker 3 And you think about, okay, rates go down, but then the people on the sidelines come in and they push up the price of the the house and I don't know it probably ends up in the wash in terms of yeah how much I'm saving like it's not fully true that like house prices go up as rates go down but it is like kind of true that like

Speaker 3 you know you'd think lower rates would lead to more housing affordability but like to some extent that gets washed out by raising the prices of houses yeah it's the same basic mechanism to your point that it probably feels like renting forever.

Speaker 3 There was a note from Compass Point that was pretty crazy.

Speaker 3 The view of this analyst was that a 50-year mortgage offers, quote, homeownership via an indentured servitude contract, calling the concept a bad idea.

Speaker 3 Yeah, I agree with that, but I also like the difference between 30 years and 50 years isn't that great. Like

Speaker 3 most. That's what President Trump said.
Yeah, he was like backing, right? He's like, ah, it's a little thing.

Speaker 3 I don't worry about it. Most people don't live in their homes for 30 years, right? Like a 30-year mortgage is a way to sort of adjust the payments.

Speaker 3 And ultimately, you sell your house after seven years and you cash out whatever the increase in the equity is.

Speaker 3 With a 50-year mortgage, you'd build, in round numbers, zero equity in your first seven years. And so you'd basically be cashing out the increase in the house price rather than

Speaker 3 actually having a savings device. But isn't that literal? And you don't have to stay there for 50 years.

Speaker 3 I'm sure a lot of people opened this analyst's research note, though.

Speaker 3 Because it said indentured servitude. In the headline, probably.
Yeah, I would click on that. That's pretty good.

Speaker 3 I do want to talk about the other Bill pultey ideas yeah tell me about them well so they're assumable and portable mortgages yes you didn't invent these ideas people have been talking about this forever and like

Speaker 3 they exist in various pockets of the world but they're not like the norm in US mortgages but so an assumable mortgage is like I move out of my house you buy my house I give you my mortgage

Speaker 3 and a portable mortgage I move out of my house I buy a different house and I take my mortgage with me, right?

Speaker 3 So like if I have a 3.25% mortgage, which Katie, i do okay flat if i have a three and a quarter percent mortgage and i want to move now like whatever mortgage rates are you know six and change percent something like that if i wanted to move if i could keep my three and a quarter percent mortgage that would be nice for me right and so in normal u.s mortgages now you can't but like you know there are places where you can and pulte has talked about having some version of that in the kind of like fanny and freddie standardized u.s mortgage market that

Speaker 3 makes sense Yeah, sort of. It would be nice if you could do it.
The problem is... There might be more inventory because people wouldn't just sit on their houses for each other.
Yeah, that's true.

Speaker 3 It would loosen up the market a little bit. The problem is that

Speaker 3 the U.S. has a 30-year mortgage.
Yes. Which has fascinating terms.
It is a 30-year mortgage with a fixed rate. This is a normal

Speaker 3 people's mortgage. 30-year mortgage with a fixed rate that is prepayable at any time without penalty.
And that is a like, in theory, a very valuable option, right?

Speaker 3 If you borrow money for 30 years and at any point you can prepay it without penalty, then if like market interest rates go up, you keep your mortgage and you're paying a below market rate.

Speaker 3 And if market rates go down, you prepay your mortgage and get a new mortgage and you get the lower rate. So

Speaker 3 if you're a mortgage investor, you're always on the wrong side of that. If rates go up, you hold below market paper.
And if rates go down, you get prepaid.

Speaker 3 And that's not really true because almost nobody optimally exercises their prepayment option. Because almost everybody who has a 30-year mortgage moves after like seven years.

Speaker 3 And so when they move, they have to prepay their mortgage. And so it's not the case that people only prepay when rates go down, right? It's like people prepay kind of randomly.

Speaker 3 And sometimes people who have 3.25% mortgages move and prepay their mortgage and go get another 6% mortgage and grumble about it, but they have to do it because they have to move for work or whatever.

Speaker 3 And if you got rid of that, then the prepayment option would be be a really valuable option. And that would make it be really bad for mortgage investors.

Speaker 3 It would make mortgages much more expensive, I think, because you'd have to price that option, right? Because people would never prepay except when rates went down.

Speaker 3 And so you'd always have kind of the wrong way interest rate risk on your mortgage.

Speaker 3 And how do you feel about assumable mortgages? It's the same story. But that's what.

Speaker 3 Either way, the point is that if you have a below market mortgage, someone can keep it, right? Yeah.

Speaker 3 And like, you know, assumable mortgage is like, you take my below market mortgage, but like, presumably, you pay me for that, right? So it's the same basic idea.

Speaker 3 I would like to take it without paying you. Oh, I understand.
Okay. But no.
Oh. I want my mortgage.
That could have. I mean, something could have happened here.

Speaker 3 Anyway, I don't want to move to your house, though. That's true.
I'm sure it's great. I mean, it's got dead possums.
It's fine. That's right.
We've talked about it.

Speaker 3 So don't leave bad things about my house. Call that.
I have a nice house.

Speaker 3 No, I'm I see it on Instagram sometimes. Do you know what I have a really I have a really good mortgage rate? Yeah, yeah, that's probably, yeah.
I want to die in New Jersey, though.

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Speaker 3 What do you want to talk about now? I don't know. You want to talk about proxy advisors? Yeah, why not?

Speaker 3 This is a fun conversation on the heels of, of course, the Tesla vote on

Speaker 3 Elon Musk's compensation package. Yeah, yeah, there's two proxy advisors.
I mean, there's more than two, but there's two for practical purposes.

Speaker 3 And they're called ISS, which is Institutional Shareholder Service, and Glass Lewis. And they are in the business of telling investors how they should vote on proxy votes.

Speaker 3 And you almost never hear about it because it doesn't matter, right? It's like all these advisory proxy votes at companies you don't care about.

Speaker 3 And then every once in a while, not that infrequently, Tesla is like, we'd like to give Elon Musk a trillion dollars. Yeah.
What do you think, shareholders? And then Glass Lewis and ISS say no.

Speaker 3 Of course, they say no, because they are

Speaker 3 professionals in the business of corporate governance.

Speaker 3 And

Speaker 3 they have certain professional norms and expectations.

Speaker 3 They go to conferences, they talk to like-minded people who are interested in corporate governance. And if you ask anyone interested in corporate governance, should we pay the CEO a trillion dollars?

Speaker 3 They'll say no.

Speaker 3 That's not a good thing. And then Tesla is like a different kettle of fish, right? Like Tesla has investors who like Elon Musk, and he's like, I want a trillion dollars.

Speaker 3 I'm like, great, here I have a trillion dollars. But Class Lewis and ISS don't want that.
And so they say no.

Speaker 3 And then nobody cares because Tesla's investors, some of them follow Glass Lewis and ISS recommendations, but most of them are not. And so Tesla voted in favor of giving Elon Musk bags of money.

Speaker 3 But Elon Musk got mad at Glass Lewis and ISS.

Speaker 3 I think there's a widespread, you know, kind of like right-wing coded being mad at Glass Lewis and ISS

Speaker 3 because they tell people how to vote on corporate shareholder votes.

Speaker 3 And corporate shareholder votes, a lot of them are about shareholder proposals like you should write a report about how much carbon you produce, right? It's very like environmental and social coded.

Speaker 3 And so these firms sometimes tell shareholders you should vote in favor of writing a report on carbon emissions.

Speaker 3 So there's this perception that they're like kind of ESG-ish, that they like care more about environmental, social, and governance issues than

Speaker 3 the Trump administration or the Republican Congress people do. And so there's the sense that they have too much power and they push companies to be more left-wing than they otherwise would be.

Speaker 3 And so there's an effort to rein them in. And you've seen that this week with the Wall Street Journal reporting that

Speaker 3 the Trump White House is contemplating some sort of executive order to in some way rein in the proxy advisors.

Speaker 3 And then also there's a report that the Federal Trade Commission is investigating them for antitrust problems.

Speaker 3 Yeah, basically whether they're breaking antitrust laws related to how they advise on proxy issues such as climate and social-related policy. Yeah, it's not clear what the antitrust problem is.
Yeah.

Speaker 3 There was a House hearing on

Speaker 3 antitrust and the proxy advisors a few months ago.

Speaker 3 And the kind of thrust there is that there are only two of them and they somehow stifle competition or have bought up competitors so that there's only two proxy advisors and the world would be a better place place if there was a lot of proxy advisors.

Speaker 3 I don't think that's really the problem. I think the problem that people worry about is that however many, you know, two or three or 10 proxy advisors, the proxy advisors have

Speaker 3 theoretically outsized impact because they tell shareholders of every company how to vote. Like the market is not for proxy advisory services.
The market is for every public company.

Speaker 3 I also think that like

Speaker 3 there are only two proxy advisory services that are big. But how many should there be? be?

Speaker 3 Kind of reminds me of ratings agencies because there's three of them. It's very similar, yeah.
Yeah, there's more than three, but

Speaker 3 there's three of them. There is more competition in ratings agencies.
People worry that it's an oligopoly, but it's more competitive than in proxy advisory. And I think one reason for that is like

Speaker 3 ratings

Speaker 3 keep that in.

Speaker 3 I don't even know what that was.

Speaker 3 Ratings is a demon inside you.

Speaker 3 ratings

Speaker 3 are intuitively important. Yeah.
Like, people care about the creditworthiness of their loans and whatnot.

Speaker 3 I've written this week one reason that every investor outsources its proxy voting decisions to proxy advisory services is that the stuff doesn't matter. Like,

Speaker 3 you own 0.1% of the shares of some public company. You know, you own 500 companies.
They each have like 10 advisory shareholder proposals each year.

Speaker 3 Your vote, like, one, you're not going to change the outcome of the vote, and two, the outcome of the vote doesn't have any practical effect.

Speaker 3 And so it's kind of crazy to spend a lot of time thinking about it. And so you outsource it to people who can think about it on behalf of everyone.

Speaker 3 And the number of people that you need to do that is not that high. Yeah.

Speaker 3 Well, when you said, you know, it doesn't matter. This is like my thesis.
Like people care about this a lot. Yeah.
But like there's very rarely a practical implication. Like mergers.
Right.

Speaker 3 Like mergers, there's a shareholder vote and every so often it's contested and like Glass Lewis or ISS will have a view.

Speaker 3 But often in those cases like the shares are kind of held by arbitrageurs anyway who have their own view.

Speaker 3 You know the Elon Musk compensation every couple of years. There's a meaningful

Speaker 3 vote there. But it's a lot of routine stuff.
Yeah. It's not like never impactful, but it's almost never impactful.

Speaker 3 Well, that made me think of whether or not it even matters, matters, whether their recommendations matter or not.

Speaker 3 Because you think about the experience with Tesla, and Tesla is a unique beast, but I've seen stats that like 30% of their shareholder base is retail.

Speaker 3 Both of these proxy advisors recommended passing this package. It obviously passed regardless.
So how much do their recommendations even matter in this day and age? Well, so a couple of things.

Speaker 3 One is that their recommendations used to matter more, and now more big asset managers, because of sort of a pressure campaign about this over the last few years now more big asset managers are like no no no we make our own decisions we don't look at ISS or Glass Lewis also ISS and Glass Lewis have kind of backed away from having a house view and to get ahead of this and yeah like there's you know places like Tesla where it's a lot of retail shareholders who don't care about ISS and Glass Lewis for the most part it's really like it's not the biggest asset managers it's not retail it's kind of smaller asset managers in the middle who tend to defer to Glass Lewis and ISS more.

Speaker 3 But the other thing is like they tend not to defer to them as much on huge economically meaningful decisions that affect big companies that make up big portions of their portfolios.

Speaker 3 If you believe like Elon Musk is going to leave Tesla if you vote against the package, then

Speaker 3 you will make your own decision about that,

Speaker 3 not just do whatever ISS says. But yen, you have 400 other companies where they're like, oh, we have a shareholder proposal on our greenhouse gas emissions, and you just check a box.

Speaker 3 their recommendations have more impact on like lower profile votes. And there are just so many many lower profile votes.
And those votes are lower profile, but they also annoy corporate CEOs when

Speaker 3 50 or 30 or 10% of their shareholders vote in favor of having a report on greenhouse gas emissions. That's annoying to a CEO.

Speaker 3 And so they complain to their congressperson or to the FTC or whatever, oh, these guys are interfering in our business. But it's not that impactful.
Yeah, that's funny.

Speaker 3 Something I wondered in all of this, and I didn't take the time to look it up, are Glass Lewis and ISS ever in conflict? Like, do they ever split or do they always sort of recommend as a block?

Speaker 3 I haven't looked it up either. I'm certain that they have split.
Yeah. It would be crazy if they never split.

Speaker 3 It would be crazy, wouldn't it? But as I said, like these people

Speaker 3 come from

Speaker 3 a professional interest in corporate governance and there are sort of like standard views on what's good governance, right? Like the standard views are not like not everyone agrees with them, right?

Speaker 3 Like it's classically good governance to, for instance, have a board chair who is not the CEO, right?

Speaker 3 right so the board has more like effective oversight over the CEO and so ISS and Glasgow is pretty not always but pretty regularly recommend voting in favor of splitting the board chair and CEO but you know you look at like there are a lot of like very successful CEOs who are like no I want to be the chair of my company because I want to I'm the right person to run this company and I want to supervise the board too and like that's not like a crazy view it's not like quote-unquote good governance, but it's a thing that like some shareholders and, you know, agree makes sense with some CEOs.

Speaker 3 So a lot of stuff like that, where it's like there's a classic view on good governance that is not always applicable.

Speaker 3 And like, you know, ISS and Glass Lewis err a little more on the side of classic good governance rather than what shareholders want for a particular company. I want to say one other thing about

Speaker 3 so like

Speaker 3 this story is like a lot of it is about ISS and Glass Lewis, but not all of it. Like there's also

Speaker 3 the very closely related issue of index fund managers like BlackRock and Vanguard, who used to defer more to ISS and Glass Lewis, now kind of have their own house views, but are kind of similar in that they affect the votes of huge portions of every public company.

Speaker 3 Reluctantly. Yeah, reluctantly.
Yeah. Yeah.
By the way, ISS and Glass Lewis, too, reluctantly. They want to collect fees for managing the voting process.

Speaker 3 No, it's not. It's not.

Speaker 3 How else do they do? No, they do. It's a lot of administrative work.
It's a lot of like they help companies actually do the process of voting. Right.

Speaker 3 So like if they could just like flip a coin and be like, you should vote, you know, for this, or they don't care that much about the substantive recommendations.

Speaker 3 They care about getting paid to do the sort of administrative work. And so they are backing away from doing some of the substantive recommendations and having a house view.

Speaker 3 I didn't mean to besmirch them. I'm sorry, ISS and Glass Lewis.
But so like BlackRock and Vanguard and State Street control huge blocks of every public company

Speaker 3 and

Speaker 3 vote and

Speaker 3 people get mad at them for how they vote and like there's this view that they're too left-wing and blah, blah, blah.

Speaker 3 And so the reports about a potential executive order on this, it's not just about the proxy advisors, it's also about index fund voting. Yeah.

Speaker 3 And I've never heard like a great solution for what they should do.

Speaker 3 But the report that I saw in like the Wall Street Journal was like, there's talk of having them mirror their voting so that they can ask their, you know, so if you're BlackRock, you have thousands of clients in your index funds, and you ask your clients, how would you vote?

Speaker 3 And, you know, 99.9% of them don't return the questionnaire and like 0.1% say, I would vote in favor of management or whatever.

Speaker 3 And then I think the idea would be that the index fund managers would have to mirror the votes of their clients who responded,

Speaker 3 which is kind of a crazy outcome if you think about it, because the people who respond are going to be passionate? Passionate. I was going to say cranks.
Passionate is nicer.

Speaker 3 So right now, people complain about BlackRock, but

Speaker 3 the big index funds mostly vote with management.

Speaker 3 But if they had to ask their investors, how would you vote? and then get weird answers back, they would vote a lot more against management.

Speaker 3 And it would be kind of bad for corporate managers and kind of good for like activist shareholders. Yeah.
Well, I wrote this at the end of October.

Speaker 3 Vanguard has this program called Investor Choice, and I'm sure that BlackRock and State Street have similar initiatives as well. But this is recency bias because I wrote this story.

Speaker 3 Anyway, so basically, it asks its

Speaker 3 people who own shares of the index funds that are in this program, basically how they would like management to vote or how they would like the fund company to vote.

Speaker 3 They don't ask them about everything. I believe it's like a range of choices as to, you know, I want to maximize profits or I care about social issues.
And then Vanguard votes.

Speaker 3 I think there's some subjectivity to that, but they vote based on what that shareholder selected. Yeah, but don't they vote that shareholder shares?

Speaker 3 Like, in other words, like if they ask every shareholder and 99% of them don't answer, then the 1%

Speaker 3 get voted the way they want to, but the 99% vanguard is

Speaker 3 not just mirroring the 1%, right? Like they're making their own decisions, I think. It's somewhere between them.
I don't remember the exact details. Right.

Speaker 3 If you do full mirroring, then the cranks get a lot of that size impact.

Speaker 3 I do like that. Yeah.

Speaker 3 But maybe that's how it should be. I don't know.
If you're serious. Yeah, that was your argument, right?

Speaker 3 Like, if you, the people who care, who pay attention to share, I just like, I come back to, like, it is kind of irrational to pay attention to shareholder voting, so it's not really how it should be.

Speaker 3 Like, you'll get the worst results if you let the people who pay attention to shareholder voting be the ones deciding the outcome. But there's not another way to do it.

Speaker 3 You need someone to pay attention to it. Yeah, that's true.
And maybe you should be rewarded for you taking the time to care and answer the thing. Yeah, it goes.

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Speaker 3 Speaking of rewards, competition for talent. I know, it's a lot of rages on.
Yeah, there's this great story by Bradley Sachs at Business Insider about

Speaker 3 the talent wars at the hedge funds. It's like an evergreen story.
It's an evergreen story. He quotes someone saying, you set up something to attract mercenaries, but now you want loyal soldiers.

Speaker 3 It doesn't work. Because

Speaker 3 if you went to work at a hedge fund because they promised you $50 million,

Speaker 3 you're probably a person who would go work at a different hedge fund if they promised you $60 million.

Speaker 3 Like probably you're there for the money. Like probably.

Speaker 3 Yeah, yeah, that's probably safe to assume. That's fine.
If you're working at a hedge fund for $50 million, there's a lot of reasons to assume that you're there for the money.

Speaker 3 And so you could be lured away by a higher bidder. And that makes it frustrating if you are the head of a hedge fund and you want.
to stop having constant bidding wars.

Speaker 3 I also, I hadn't really thought about it, but like

Speaker 3 he makes the point that like there's an artificial constraint on hedge fund talent caused by the fact that everyone has these like super long gardening leaves. Yeah.

Speaker 3 And so basically like half of all hedge fund portfolio managers are on the beach at any given time.

Speaker 3 And so the price of hedge fund managers gets bid up because you can only get so many of them because the rest are on long-term gardening leaves. Yeah.

Speaker 3 It's great.

Speaker 3 Creates value. Yes.
Artificial scarcity. And it's great great because, like,

Speaker 3 a stylized fact of economic history is that after the Black Death in Europe, you know, labor or like farmhand wages went up because farmhands were so scarce that they could command a much higher wage.

Speaker 3 That's a very bad way to create scarcity in the labor market. Yeah.
The hedge fund manager way of half of you are on vacation at any time, so the other half get paid more is like really nice.

Speaker 3 It's like you have a career where you get paid a lot because you're scarce, like artificially scarce. And also you get to take long vacations every couple of years.
Yeah.

Speaker 3 Izzy Englander called it a talent bubble that's created by, you know, you restrict supply.

Speaker 3 Yeah. The other thing is like I don't really understand

Speaker 3 why hedge fund talent is so

Speaker 3 exogenous and inelastic. Like the article talks about it.
Like some of these big multi-strategy funds have set up, you training academies. They hire out of college.

Speaker 3 They like try to take unmolded clay and turn it into hedge fund managers. That should be possible.

Speaker 3 Why can't you teach someone how to manage a hedge fund? Like, I understand. It's like hard, but if you're paying them $20 million, you can get someone to do it.
Yeah, I agree with you.

Speaker 3 You sounded a little bit like Elwood's there, so it kind of threw me for a loop. Okay.
Oh, like it's hard. What? Like, it's hard? Yeah, yeah, yeah.
Yeah.

Speaker 3 If you don't pay me $20 million to manage a hedge fund, I'll do it for six months and then take two years of gardening leave. Yeah.

Speaker 3 But I feel like this story, I don't know, we talk about talent wars all the time.

Speaker 3 We talk about it when it comes to banking. We talk about it when it comes to hedge funds.
We talk about it when it comes to AI. AI, we've talked about this before.

Speaker 3 It feels like a little bit more pure, to your point, that if a hedge fund pays you $50 million to do hedge fund things, that probably you'll take an offer for $60 million.

Speaker 3 But maybe with AI, there is a little bit more of a mission statement. And I want to save the world.
Yeah, I don't know. Or destroy it.

Speaker 3 One thing about AI is like hedge funds have been around in some form for a long time, and in the modern form for, you know, years, maybe decades. AI is very new.

Speaker 3 And so it's very understandable that there is a hugely constrained supply, right? Like the number of people who went and got AI PhDs

Speaker 3 is not that high because that was kind of a specialized thing until it became...

Speaker 3 Also, if you got that PhD, how long before it's stale? Aaron Powell, I don't think it gets stale because I think you then work in AI and you would like work at the cutting edge of the field.

Speaker 3 But yeah, I mean, right. If you, if you get that PhD and then spend 20 years, you know, doing something else, it'll get stale.

Speaker 3 But I think that like the market did not produce that many AI PhDs because it wasn't a thing that got you paid $100 million five years ago.

Speaker 3 And now that it is, I'm sure that one, there will be, you know, in the next 10 years, there will be more AI PhDs. And two,

Speaker 3 they will perhaps have less pure motives, right?

Speaker 3 Because if you're, you know, if you're a 16-year-old who's good at math, instead of thinking, maybe one day I'll work at a hedge fund, now you're like, oh, maybe one day I'll work at an AI startup and give it $100 million a year.

Speaker 3 So

Speaker 3 you'll get more supply and less purity. But like hedge funds have been around for a while.

Speaker 3 It should equilibrate. I don't know.
Yeah.

Speaker 3 Okay, that's about all I have to say. Apparently, there's a rocket launch that I forgot was happening.

Speaker 3 Okay. I'm going to just

Speaker 3 Money Stuff Podcast. I'm Matt Levine.
And I'm Katie Greifeld. You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com.

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Speaker 3 The Money Stuff Podcast is produced by Anna Mazarakis and Rosa Rosa Thonda. Our theme music was composed by Blake Maples.
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