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 Colin for Bloomberg.
Opinion, and I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.
Got Katie.
We're going to talk about a merger.
I don't think it's a merger. I think we're talking about 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.
That's an important world.
And then we're going to talk about bloom Er Candy Delicious. I'm gonna say that. Okay, so this is a merger, but maybe it's not.
We're telling you about MMTLP.
Yeah, there's some more here.
Thing that people on social media really care about it.
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 begin.
So there's an oil company called Torchlight. It had some leases that were not producing a lot of oil, but I like drill the releases. 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 like they could do it bad,
like spinning it out to shareholders. But like at some point they had conceived this notion that short sellers were bad and that like short sellers were the problem with 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 solve 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 Meta Materials, that like has a public 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. Public get traded stock is easy, you just go buy it on 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 short positions because after the merger closes, they'll be host there'll be no way to close out there short they'll be in big trouble. This
is the idea, and so they do 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 put it in their public filings. They weren't like, oh, we're doing this to do a short squeeze, but like privately amongst themselves, they were like, we're doing this to do a short squeeze, and like they sort of like tried to convince short sellers that
they would get squeezed. And they also like 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 doing at the market offering a stock like right before the merger closes in order to take advantage of the short squeeze and raise like one 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 gonna be a short scueze, usually in like a meme stock. It's like people on Reddit are saying, hey, there's gonna be a short scuzz here. It's the company doing. But then two, the other thing that's like really important is they engineered the short squeeze 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 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 SEEO 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 succeeded during the short scuers. No short sellers bought back their stock. There 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, because just nobody knows why the.
Stock 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 the 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 out 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 one hundred million dollars 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, eighty percent, 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 torch Light, 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 like 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 cases about stuff that happened only twenty twenty one.
Since then, yeah, MMCLP has become even more of a meme because what happened is at some point the company was like, you know what, the stock is not non traded enough for us. There are still short sellers.
We're still mad at short to exterminate them.
So we're going to do this again, but like more so. And so 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 next Bridge, 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. 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 it. The plan wasn't twenty twenty one they were gonna get rid of all the short sellers, but they replaced MMTLP
with Next Bridge. They published a perspective for it that like explicitly said there's going to be a short squeeze, and there was, in fact, again a rally, and MMTLP stock is like either because there was a short squeeze or because people were like, oh, there's gonna be a
short squez, it's great. And then Finra, the financial regulator, halted trading in the stock like two days before it poofed into Next Bridge, 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 had stuck holding mm TOP for like the last two days, and then it poofed into a Next Bridge, which they can't sell at all.
So now I just own the stock in this oil company that doesn't make any money, and like you know, as in oil properties, it may one day make 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 hoording short sellers, one that's gonna 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 twenty percent of the time, like you are not spending enough time on your business, and these guys are thinking about short sellers like ninety percent, I.
Was gonna say that's one hundred percent. 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 Meta Materials that wanted to do the merger so that they would get the list in.
Yeah. Meta material is like a small Canadian company and they were like listed on a I think on one of the secondary Canadian stock exchanges, and they wanted a US listing, and so yeah, torch Light had a Nasdaq listing, and so they did a reverse merger where basically Meta Materials would get Torchlights listing, and torch Light's assets would be spun out into this 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 Meta Materials, Like, I don't know. It just feels like there 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 the pump the stock up, right, and like so they did pump the stock up. They raised like one hundred million, a hundred plus million dollars selling stock into this whatever it was rally, and then most of that money went to Meta Materials M. The Canadian company got not only the publicly thing, 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 like, oh great, yeah, I want a pumped up stock price and I want a lot of money a good deal.
There you go.
So they did it. Now, why did Meta Materials do the extra super duper not tradable thing? Why afterwards? I don't know. I think some of it might be they were really mad at short sellers. Some of it was like they had to get rid of this MMTLP things. Somehow they did have this retail investor base that has spent years having conspiracy theories about short sellers.
So you wrote in your Money Steff 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 lightly 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 twenty twenty one was a fraud. But there's still the like MMTLP into next Bridge, 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, honest, they sort of arguing about this, like, I, you know, all my interactions with the MMTLP people have been fine, but there's a lot of them, like they're really passionate about it. And the conspiracy theory at this point involves Finra. The MMTLP community believes that the trading halt in that stock was Finna trying to bail out short sellers, and like
Finra is conspiring with short sellers. By the way, this is not true. The halt came after the X date for short sellers to have to close out their positions, like this is not true. But they you know, they're calling for hearings and whatnot. And so meanwhile, the sec like explicitly said in this case, we are still continuing our investigation of the subsequent events 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's something a little.
Bit fun like to me, Like, I feel really bad for the regulators here, who, like I think, are just doing very straightforward market regulation, and you 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 were 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 treaded stock
and have lost a lot of money. So I just think that 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 reading for I often read for Cass, but here I'm like, these hard working 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 manipation, right. It's like causing the price of a security not to reflect the fundamentals of supply, and 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 twenty twelve, the SEC brought acase against Phil Falcone, who ran Arbager, 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 his bonds, right,
And he like owned these boonds. He liked these bonds, and he heard that some bank was shorting them, also encouraging its clients to short them, and he got mad at short slash. And so what he did was like, He's like, okay, you're shorting the bonds. So he would buy them. Like people would short the bonds, he'd buy them,
and he would also lend out his bonds. If you want a 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 up, and like he would keep landing at 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 issued like two hundred million dollars of bonds and he had own two hundred and twenty million because he had like bought all of them and loan them out and then bought them again. And so once he owned more than
all of the bonds, he stopped lending them out. He called in the stock bar, 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 Falcon, and they couldn't buy them because he owned all of them and he wasn't selling. Yeah, and so the sec has this incredible passage of like this unnamed at banker brokerage called Phil Falcon. It 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 it 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 was a long position in the bonds and excess of like the size of the total bonds, and and the bank said, how could you know this. Phial Cones said that he was working the position himself and that he had acquired approximately one hundred and ninety 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. Still, I just like picture this conversation.
It's like he must have been having so much, just like.
The greatest feeling in the world to be like, oh, yeah, just.
Keep bidding, but he's gonna 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. Come on, they sued him, they settled. I don't think he admitted wrongdoing. It my suspicions that he thinks and also kind of I think this was just extremely cool that you 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 meta materials 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 has 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 short sellers is just like an overreaction, even if they're.
Doing something ill, that man can hold a grudge. Should we talk about on cycle pe recruiting? I guess I s Business Insider of course out with reporting this week that apparently his cycle is starting much than usual, or at least a month earlier then it started last year, which was also starting.
Yeah, but it's a key month. R So, like the way it works is like you go to college, maybe like one summer you intern at an investment bank. 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 to your 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's end. And at some point in the distant past, twenty 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 analysts program ms, they can interview five months before your analyst program mens. And it has moved up so much that now it is happening in June before your analysts 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 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 had analysts, these pre analysts who hadn't started 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 plate.
Well, I'm sympathetic to their plate. I don't work in private equity, yeah, like 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 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've moved to New York to go do an interview, Like you know you always read about
like the encycle 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 sixteen hour days as an investment bank analyst. And so there are stories about like people interviewing at two in the morning because that's the only time they could get away from their desk.
Skipping their trainings or something else.
Skipping their trainings.
I feel like, fine, oh that's fine.
No, I mean I feel like in.
Tier days, Matt, you know, they weren't giving back, right, No.
But as a matter of like how human it is for them, I feel like interviewing at two am after a long day of yeah, building pitch books is worse than skipping the training that you're probably gonna ignore anyway. But maybe that's wrong.
Yeah, I mean, so I hear your point 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 in banking is completely fungible, which it's 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 and 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
it to your 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 year. That's so that's nut so to me.
Also, the average like a little bit conditional. Like 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 privatya firm has like seen whatever they're seeing 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 find.
Maybe you had some great jokes to tell me 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 kind of the banks field about this.
The banks have mixed feelings. You know. Goldmen for a while was really fighting this and was saying like 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, I think you're working on deals, You're like doing a cell side for a company, and like one bidder is your private equity firm and another bid is a different private agre. Like that's weird. Now you're an analyst. There's only so much you can do to
influence the process. But Gulbe for a while hated it and was like would say, you know, you can't work here if you have 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 and banking, and you need the middle ranks to like one do the work and to 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 ninety nine percent 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 a vice presidents instead. But no that banks don't like it, but like they do need to get rid of some people, and so it's 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 ecud 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, 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, which has been fun to watch. I mean, Liquidity, for example, has been posting a lot of the responses that he's gotten 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 sixty percent 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 prepared 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 in interviews. It's like kind of like a little oh, then maybe it gives you a leg up on your job.
This is my favorite post though the title was playing on cycle recruiting to a clueless europoor. 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 were 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 thirteen colony lead, which I think is just the perfect answer. 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 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 boud 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 acquity 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 out I think there's like more coasting and like the few months leading up to when they leave for private equity than there is like day one. But like you know, it is like a little bit demotivating.
Yeah, definitely, the end is in sight.
Yeah, the end is insight 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 sixteen 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 up people like them.
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 Belchunas
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 call. 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 one hundred percent 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 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 s and P five hundred. But like if the SMP goes down, you still get all your money back. You get like nothing else, but you get your money back, Whereas if the sp goes down, if you adjust been in stocks, you would have lost money.
But the upside cap, especially on the one hundred percent products, the upside cap is pretty slim.
Yeah, Like I think like the math works out these days that you can buy an ETF where you always get back one hundred percent of your money and you get the return on the SMP up to like eight ish percent something like that. There was one I wrote about on Thursday where you get back a cap of four point eight percent, but that's for six months. So you do that twice and you're like, yeah, like nine percent, you know something like that.
That's super bad.
It's not terrible, but that math works because T bill returns are over five percent. 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 five percent, then they give you, you know, zero to eight or nine percent. 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 Morning Star. 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 zero to nine percent return instead of like a five percent 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 ETA, So you could 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. There's the box ETF that I'm 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 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 risks. Can you do a derivative? And the answers like, yeah, sure you can do it deriv But you know what
you could do. You could sell half your stock. Yeah, you could sell half your stock and then you have half as much risk and half as much upset and your design equity to drive it is 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 one hundred delta means that like it's just owning stock, a zero delta means it's just owning you know, cash, and like a fifty delta means it's like, yeah, it's like half as much stock. And so what you know, I'd like design to de rives for people, like, yeah, there's a collar where you get like it's like a
seventy delta collar. And I've always want to be like, why don't you just like sell thirty percent of the stock because then you have the same delta and you won't pay us.
Yeah, yeah, 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 Apple. 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 or your stock and put it in treasury bills, and then you're kind of in the same play. It's like that really, but 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, ninety ten percent stock.
Yeah, but like one of the household names, I don't know if that's true for everyone, but JEFPY, 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 twenty twenty two, for example, you know the S and P five hundred was down like twenty percent.
I think JEFPY was down something like two. You know, it wasn't down is cash And then you look at you know, in a raging bowl 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, like I don't actually know offhand, like like it's always possible that some strategy like has you know, better returns than like some mix of cash and stock. Right, there's some like market reason for that, right, But I do think that a lot of this is product designed
to appeal to investors, right. It's just it's like, deep down, our tools are cash and stock, and we can like mix those things together to produce a fancy package, right, And if we do that in the right way, you're like, oh, that package looks so good. Yeah, And so you'll buy the thing that's made out of cash and stock and you'll pass a fee rather than just like having you know,
your own mix of cash and stock. But that could be good, right, Like you might like 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 lunch 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, all right in July.
I hope you enjoyed this one because we're not here next week. A Happy Birthday, America.
I'll be back on July twelve with them well rested.
Episode A lot more stuff.
And that was the Money Stuff Podcast.
I'm Matt Levian and I'm Katie Greifeld.
You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.
Dot com, and you can find me on Bloomberg TV every day between ten to eleven am Eastern.
We'd love to hear from you. You can send an email to you Moneypot at Bloomberg dot 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. It helps more people find the show.
The Money Stuff Podcast is produced by Anna Maserakus and Moses.
On Our theme music was composed by Blake.
Maples, Brandon, Francis nunimss our.
Executive producer and Stage Bauman is Blomberg's head of podcasts.
Thanks for listening to The Mody Stuff podcast.