| There's a guy in Kentucky whose job is running volleyball tournaments and whose hobbies are (1) day-trading stocks and options and (2) talking to the media about it. I once wrote about him: I am sorry, I am sure he has lots of profitable trades and I don't mean to be rude, but just, statistically speaking, for equity market makers, there are few more beautiful phrases in the English language than "day trader and volleyball-programs coordinator." If you walk into the offices of Susquehanna International Group and say "hi I am a day trader and volleyball-programs coordinator from Louisville, Ky., and I love short-dated options but I wish they were shorter-dated, can you help," they will treat you like a celebrity and give you anything you ask for. You are their muse.
This was a joke, in several respects. For one thing, he apparently did make a ton of money on GameStop, so who am I to criticize. Also, though, it's not clear how much equity market makers can really target the most lucrative-seeming customers. Ideally, if you were a market maker in stocks or options, you'd ask retail brokers to send you orders from their most degenerate customers, the ones who frequently trade in large size and lose money. But practically speaking you get all the orders and you do the best you can to trade with them profitably. There are things you can do — you can give better prices to brokers whose customers are, on average, worse at trading; you can get the brokers to kick out retail traders who are too sophisticated; you can develop products that appeal to gamblers — but this is a regulated business and you have some obligation to treat all orders fairly. You can't just trade with the people you most want to trade with. But the people you most want to trade with are, of course, the ones who trade a lot and tend to lose money. One thing that I like about legal online gambling in the US is that it is not subject to so many constraints, so it can be clarifying about how markets work. Online bookmakers, like stock market makers, prefer to interact with customers who will bet a lot of money and lose. They prefer not to interact with customers who will bet a lot of money and win. How can they tell the difference between those two categories? Well, in the long run, the ones who win will mostly win, and the ones who lose will mostly lose, and you'll try to keep the losers around and ban or limit the winners. But in the short run things are less obvious. There is a lot of randomness in sports betting. If someone bets a lot of money and wins, do you want to cut them off there, or do you want to let them keep playing to see if they lose it all back? The answer is basically that there are a lot of behavioral tells that, to a bookmaker, signal either "this is a sophisticated advantage player who will keep winning" or "this is a degenerate gambler who got lucky once and will mostly lose." And then if you are a bookmaker in a lightly regulated industry, you act on those signals. If a lucky degenerate wins, you congratulate him and encourage him to bet more. If a sophisticated advantage player wins, you shut down her account. And then there is a further game in which the sophisticated advantage players try to figure out what those signals are, and then they send the "I'm a degenerate" signals, in order to fool the bookmakers into letting them play more. Bloomberg's Ira Boudway reports: Pro bettors have recently added a wrinkle to their priming routines: They're acting like gambling addicts. Isaac Rose-Berman recently described the practice in his How Gambling Works newsletter: "One pro bettor I know set up a bot which logs in to his accounts every day between 2 and 4 a.m., to make it seem like he can't get through the night without checking his bets. Another withdraws money and then reverses those withdrawals so it looks like he can't resist gambling." Simulating addictive behavior, says [professional bettor Rufus] Peabody, is an effective way to get online sportsbooks to send you bonus money and keep your accounts open. This isn't necessarily because operators are targeting problem bettors, he says; they're simply looking to identify and encourage customers who are likely to spend—and lose—the most. This just happens to be a good way to find and enable addicts, too.
I assume that some of these things must be urban legends and not every bookmaker is necessarily watching your account to see if you log in at 3 a.m., but the broader point is that, yes, there are some behaviors that correlate with losing a lot of money on sports betting, and bookmakers do watch for those behaviors, and if you can mimic those behaviors the bookmakers will like you, and if you can mimic those behaviors and also win then that's a good business. Here's a somewhat unusual deal, a merger with a negative price: DirecTV and Dish have agreed to combine in a deal that will create the biggest pay-TV provider in the US with about 18 million subscribers. Under the terms of the transaction, DirecTV will acquire Dish TV and Sling TV from EchoStar Corp. for a nominal consideration of $1 plus the assumption of about $9.75 billion of debt, according to a statement on Monday that confirmed previous Bloomberg News reporting. The deal is contingent upon Dish's bondholders agreeing to take a haircut on the principal amount of the company's debt of at least $1.568 billion, the statement shows.
Dish is currently part of EchoStar. It has $9.75 billion of debt and a business that is, apparently, worth about $8.2 billion. If DirecTV paid EchoStar zero dollars for Dish, it would be getting a bad deal. Somebody has to pay DirecTV $1.6 billion to take Dish. Who will pay? Not EchoStar: Dish's debt is not guaranteed by EchoStar, so it is in some rough sense not EchoStar's problem. EchoStar could just hand Dish over to its creditors without putting another penny into it. On the other hand, if the creditors — the holders of that $9.75 billion of Dish bonds — got Dish, what would they do with it? Probably not turn it around and make it worth more than $8.2 billion. And so those bonds have traded at low prices. Bloomberg tells me that the 5.125% bonds due 2029 ($1.5 billion of the total) were trading at about 56 cents on the dollar a week ago. The math is something like "this business is worth less than the amount of debt it has outstanding, nobody will pump more money into it, and eventually it will go bankrupt and not have enough assets to pay off the debt." And then along comes DirecTV, which also operates a pay-TV network, wants to add Dish, and is as far as I know worth more than $0: DirecTV is owned by AT&T Inc. and joint-venture partner TPG Inc. In connection with Monday's deal, TPG will acquire the 70% stake in DirecTV that it doesn't already hold from AT&T in a $7.6 billion in cash transaction.
That suggests that DirecTV is worth about $11 billion. Maybe, under DirecTV's management, the Dish business could be worth more than zero too. But right now it's worth less than zero, so someone needs to pay DirecTV to take it. And the obvious candidates are Dish's creditors: If they're willing to take a haircut on their bonds, to accept less than 100 cents on the dollar, then the deal can work. And since the bonds are worth 56 cents on the dollar without a deal, there is some room to negotiate. And so that's the plan: Dish and DirecTV announced this deal, but it is contingent on the Dish bondholders taking a haircut. They launched a bond exchange offer, and DirecTV can abandon the deal if not enough bondholders take it. The way the exchange offer works is that you exchange $100 of old Dish bonds into $100 of new Dish bonds, but if the merger actually closes (getting through regulatory review, etc.), then your $100 of new bonds poof into some lesser amount of new, post-merger bonds. In the case of those 5.125% bonds due 2029, they poof into $60 of post-merger bonds. (Shorter-dated bonds have less of a haircut; the 5.25% bonds due 2026 get back 93 cents on the dollar. If every single bond takes the exchange offer, the total haircut would be about $1.86 billion, so the required $1.57 billion would be about an 85% success rate.) Also there are "exit consents": To take the deal, bondholders will have to vote to strip the old bonds of collateral, guarantees and "substantially all of the covenants and certain events of defaults." And so if you don't take the exchange offer (and the haircut), you are left with 100 cents on the dollar of much worse bonds. And so for the Dish bondholders, the choices are (1) take the deal, get a haircut, but have a better chance of getting your (post-haircut) money back eventually or (2) reject the deal and take your chances with Dish on its own. Sixty cents on the dollar is more than 56, so maybe there's a deal to be done, though Bloomberg tells me those bonds traded at around 66 today so maybe not. We have talked around here about the "capital solutions" business, a jolly euphemism for credit investors helping finance companies by taking value from other credit investors: A hedge fund will go to a company and say "I'll lend you more money if you agree not to pay back some of your previous lenders." This can often seem messy and zero-sum, but it isn't always. The core idea of it is that there is some valuable business here, and giving it more financing will help it survive and thrive and create value and employ workers and so forth. And the way to generate that financing is at the expense of other, previous lenders who maybe had too optimistic a view of how much the business was worth. This is that, but for mergers and acquisitions. The place you want to reach in your career is where you work for a company and you are like "you know what, I am just so rich, I don't want you to pay me anymore, it's fine, I'll work for free," and your bosses are like "nope, sorry, we insist, we cannot allow you to work here for less than $10 billion." And then you're like "ohhhhhhhh fine, fine, fine, I do love working here, and if there's really no other way, I guess I will take the $10 billion." Nothing remotely like this has ever happened to me in my life but here's Sam Altman: On Thursday, Altman told some employees that there were "good reasons" he shouldn't take equity, though he didn't elaborate. And he said investors were pushing for an equity grant to align his financial interests with those of OpenAI, said someone who heard the comments. Altman also said a Wednesday news report that he might get a 7% stake in the new OpenAI was "ludicrous."
We talked about this last week: There have been reports that, as OpenAI becomes a for-profit company, it might give Altman (its co-founder and chief executive officer, who currently owns no equity) a 7% stake worth about $10 billion. I surmised that this was not something he wanted, but something the investors wanted: "He is the founder and CEO of a hot startup, and the founder and CEO of a hot startup is supposed to own equity. Not just for his sake — not just so that he can be rich — but to align incentives." And here is Altman saying that: He doesn't want the $10 billion, but the investors are insisting. Nobody in history has ever been better at, like, business negging than Sam Altman. He got OpenAI to a $150 billion valuation in part by going around saying "oh no, nobody should allow us to build our product, we're going to destroy humanity," and now he is allegedly going to get handed a $10 billion stake in OpenAI because he's going around saying "oh no, nobody should give me equity, that's ludicrous." A crude way to think about it is that there are mass-market financial products, like index funds, that are marketed to middle-class investors and are fine. And there are high-end financial products, like hedge funds and venture capital, that are marketed to institutions and the very rich, and are fine. And then there are the bad versions of high-end financial products, like investing in bad hedge funds and bad private companies, which have the cost and opacity of high-end finance but with bad performance. Those are marketed to dentists. I mean, that is the stereotype, and I have indulged in it before, and it's rude, and every so often dentists email me to object. But it's the stereotype for a reason. If you are rich and sophisticated, but not too rich or too sophisticated, then you are in the sweet spot for a lot of people who want to market complicated, expensive, terrible financial products to you. Usually these products are private investment opportunities, but the Wall Street Journal reports: Ryan Ulibarri, a family dentist in Fort Collins, Colo., is in tax trouble that could take a big bite of his time and money. In late August, a Denver grand jury indicted him on six criminal counts for using an "abusive-trust tax shelter" to hide more than $3.5 million of taxable income he earned from 2017 to 2022. He allegedly underpaid more than $1 million of tax over that period. … While most Americans aren't in the market for tax shelters, the allegations in this case are a reminder of what can happen when taxpayers ignore professional advice and common sense on taxes. They also show how easy it can be for people who want to slash their taxes to delude themselves. "People see a complex structure and think, 'This is what rich people do to reduce their taxes,' " says Bryan Skarlatos, a criminal tax attorney with Kostelanetz. "But a complex structure with no business purpose is often a sign of fraud to the IRS."
From the indictment: To use the Abusive-Trust Tax Shelter, clients nominally assigned nearly all of their business income to a sham business trust to create the illusion that the income assigned to the sham trust was not earned by the client. In reality, however, the client continued to retain full use and control over the income assigned to the sham business trust. The sham business trust then distributed its income to a second sham trust (referred to as a "family trust"), which, in turn, distributed its income to a third sham trust (referred to as "charitable trust"). On trust tax returns, each trust in the series reported deductions and distributions matching or exceeding its income, and the sham charitable trust purportedly "donated" any remaining income to a purported tax-exempt private family foundation. Finally, funds "donated" to the private family foundation would be "loaned" to the client's business, business trust, or family trust so that the client could retain full control and beneficial use of those funds. As a result, the clients avoided paying income taxes on nearly all of their business income.
Uh, right, sure, if you earn all of your income through a business, and that business assigns all its profits to a trust, and that trust assigns all of its money to another trust, and that trust assigns all its money to a third trust, and that trust "donates" all its money to a foundation, and that foundation "lends" all of its money to you, then (1) you still have all the money and (2) you have said many of the words that people actually say when they are setting up functioning tax shelters. But not all of them, and not in the right order. You have a thing that looks like a tax shelter that a sophisticated billionaire might use, but isn't. Not, you know, all the business stuff. Just the recruiting. Here's Jamie Dimon: "I know a lot of you work at JPMorgan, you take a job at a private equity shop before you even start with us," Dimon told a crowd of undergraduate business school students. "I'm going to say something a little different, okay, because I didn't talk about character. The most important thing about people's character, I think that's unethical. I don't like it."
What percentage of incoming JPMorgan investment banking analysts will have jobs lined up at private equity firms within their first month of starting at JPMorgan? Not 100%, I mean, but a lot, including most of the really good ones? I see where Dimon is coming from: It is weird to start a new job having already committed to leaving it in two years, and JPMorgan probably does want some of its best new analysts to stick around to become senior bankers. But at this point the market structure sort of is what it is, and it is odd for Dimon to go around saying "oh yes most of our junior bankers are unethical." If you walk into a bank chief executive officer's office and shout "AI, AI, AI," will she throw money at you? There do seem to be a lot of artificial intelligence-driven projects at banks and financial firms. That, you know … do stuff? Broker chatbots? Foreign exchange market making? It seems plausible to think that there are a lot of pattern-recognition-type problems in finance that could efficiently be addressed by modern artificial intelligence technologies Meanwhile. In 2017 if you shouted "blockchain!" at a bank CEO she would definitely fling money at you, and people respond to incentives, so a lot of people shouted "blockchain!" at a lot of financial industry CEOs, and a lot of financial blockchain projects were announced. But it was often very hard to articulate what a blockchain could do, for traditional financial firms, that a regular database couldn't. And now for the next few years you will read occasional articles to the effect of "remember that blockchain project? lol no." Here's one: Two years ago, a behind-the-scenes giant in U.S. financial markets went live with one of Wall Street's biggest and most ambitious blockchain initiatives. Known as Project Ion, the effort aimed to use blockchain to revolutionize settlement of stock trades, when buyers fork over the cash and get share certificates. Firms ranging from big banks like JPMorgan Chase to trading app Robinhood got involved. But it didn't catch on, a person familiar with the project said, and the firm at the center of the effort, the Depository Trust and Clearing Corp., quietly ended the effort late last year.
Sure. On the other hand, "DTCC announced a pilot in which firms used U.S. Treasuries as collateral on a blockchain, showing that counterparties in trades could take legal possession of collateral instantly if the other side of a trade defaulted," so hope springs etc. We talked on Thursday about the indictment of New York City Mayor Eric Adams for bribery, in which the bribes were paid in the form of business-class travel on Turkish Airlines. I mentioned that, as bribes go, this is an unusually non-fungible and limited-use currency: Business-class flights on Turkish Airlines are a nice way to get to Turkey, but they are not a great way to get to, for instance, Paris (where Adams actually flew via Istanbul), or Easter Island (where he tried). And they're an even worse way to, like, pay for housing or whatever. I wrote: I am sure some of my pointsmaxxing readers will reply "oh man I could retire early and buy a mansion with unlimited free Turkish Airlines flights," but for normal people like me and Eric Adams, unlimited free Turkish Airlines flights wouldn't even cover all of our air travel needs.
But the Wall Street Journal did this joke better and actually called up some pointsmaxxers to get them to make fun of Adams's Turkish Airlines flights: "It's mind-blowing to someone in the points and miles world that this is the business class you would go out of your way to fly," said [Adam] Morvitz, founder and CEO of point.me, a points and miles search aggregator and booking service. "We're talking about a business class where if you're in a window seat you still have to step over your neighbor to get to the bathroom." … "If you're going to get indicted in large part because you were taking illicit upgrades to business class, at least do it with an airline that has a better product," said Jason Rabinowitz, a New Yorker who co-hosts an aviation podcast for the plane-tracking site Flightradar24, on X. ….
I feel like they are missing the point? It's not like someone came to Adams and handed him a sack full of money and he had to use the money as efficiently as possible to book business-class travel to Europe. Someone (allegedly) came to Adams and handed him free Turkish Airlines flights, and he had to turn those flights into bribery as efficiently as possible. It's a harder problem! New titans of Wall Street: How trading firms stole a march on big banks. The Giant Hedge Fund That Hates Risk and Still Wins. Harvard's Not-So-Smart Money: Two Decades of Poor Returns and Rich Pay. The Mavericks of Metals Are Back, Rocking a $15 Trillion Market. Epic Games Sues Google, Samsung Over Alleged App-Store Scheme. Quant Hedge Funds Face More Margin Calls as Chinese Stocks Surge. The $1.7 Billion Takeover Brawl Fueled by a Fear of China. Lombard Odier Dumped Entire China Allocation, Won't Buy Rebound. Fidelity Slashes Mobile Deposit Limits Following Fraud Wave. The Big Shift From Salaries to Bonus-Based Pay. Industry and ESG. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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