Yet Another Value Podcast - Marc Rubinstein from Net Interest on the Financial Sector

Episode Date: September 3, 2020

Marc Rubinstein from Net Interest  (https://netinterest.substack.com/) discusses everything happening in the financial sector: how big banks are taking share during COVID, and financial sectors FANG equivalents.

All right. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have the founder of net interest, Mark Rubenstein. Mark, how are you doing? I'm not right, Andrew. Thanks. It's great to be on. Well, hey, thank you so much for coming on the pod. And let me start this pod the way I do every podcast. And that's by plugging you. I'd say everyone I've had on here so far, you're the person who I was as of like two or three months ago, the person I was least familiar with. You started publishing net interest. I think was it March or April. And the moment you started publishing. someone, a couple of my friends who I really respect were like, you need to read this. This is going to be must read. It's going to make you a lot smarter. So I subscribed and they were 100% right. You know, it's about once every other week, I'd say, once a week, once every other week. And it covers the financial sector. And what I really love about it is, it's not just the hottest topics of the financial sector of the day. I love kind of the financial history you bring. So like one example I

was kind of thinking of when I was prepping for this is you did a cautionary tale of equity research that went through all of the history of equity research through the 60s and 70s and had a bunch of antidotes from the late 90s, early 2000s with Elliott Spitzer cracking down. And that's just something it takes a lot of industry knowledge, a lot of expertise. It's really interesting to anyone. So I've really loved net interest. That plug out the way, can you just kind of dive into your background and how you came to start net interest? Well, that's a good segue, Andrew, actually, because my, I mean, if we go, if we, if we go back to the, to the, to the, to the, to the, to the, to the, to the genesis of my career, it started in equity research. So I came out of college and I was thrown straight into the equity research of a major investment bank. And I was thrown into the bank sector. So, no background in banks whatsoever. Didn't even know I wanted to do equity research whilst I was at college. But there I was covering European banks. at a time before the single currency, where the European markets were a disparate collection

of discrete markets. And I did that for 10, 12 years through the Elliott Spitzer period. And then after about 10 years, I switched over to the buy side. So like a lot of equity research, sell side people, I switched over and went to work for my favorite client. So I got a call 2006 from my favorite client. Like a shot, I went straight over there. And this was just before the financial crisis.

And it was specifically to run and analyze companies within the financial services sector. So it was a it was a financials focused fund, long short. Yep. It's one of the longest, one of the oldest hedge fund funds in Europe based in London, which had launched a long short financials fund about a year or so before I joined. So I joined to be part of that, had a couple of, had about a year before the financial crisis, and then boom, strained to the thick of it through the financial crisis. We were long short financial services stocks globally.

Did okay, and we can talk about that, did okay during the financial crisis came out of it. and as everybody knows, trading financial services stocks wasn't the same post-financial crisis as it was pre or during the financial crisis, although it took us a while to understand that. And so we continued to run the fund through until 2016. In 2016, we liquidated the fund, and I took some time out. I went back to college for a year. which was fun. I've never done an MBA and thought it would be fun to do something like an MBA. So I went back to college for a year to immerse myself in non-financial services oriented parts of

the market. And then set up a consulting business, you know, was doing that right until COVID hit. And then COVID here, you know, boom again, you know, consulting projects dried up. and launch net interest. And I've been writing that on a weekly basis. The focus is financial sector themes. And I've just been overwhelmed by the degree to which it's picked up, picked up momentum. Yeah. And one of the other things I like about net interest is I, you know, you say financial sector and financial services. And, you know, in my head, I think, oh, he's going to be covering J.P. Morgan and Wells Fargo. And maybe if I'm lucky, he'll get really spicing cover Visa and MasterCard or something. But, you know, I think you even said in your.

your intro was, you said, look, use the Enron quote, where somebody said, I cover banks and they can put balance sheets out, but you can't put a balance sheet out with your earnings. And the Enron guy famously called him an asshole for saying that. And you say, look, every company or many companies can be like financial service firms in disguise. And I really like how a lot of what you cover is companies that are financial service firms in disguise, I would say. So let's start back into the financial crisis. So you mentioned working for a long short fund in the financial crisis. What was that like? What was your experience? like because I think a lot of people think, oh, long-shirt service firms, while 80% of them are blowing up in the financial crisis, that's the time for alpha. But, you know, coming out of the pandemic, I also think it doesn't matter if you're longer short. Like in the crisis, just everything is straight down. So what would your experiences like there take us through some more stories? Yeah. So, I mean, the first point is that, you know, it really was a front row seat. So I think unlike, I think one of the reasons why, I think, well, unlike subsequent crisis, that crisis started in the financial sector. And it started in the financial sector materially earlier than became evident across the broader market. So, you know, and I would say it started in the financial sector in 2006. So in 2006, I was covering, during the fund, I inherited a short position in New Century,

which was a pure play subprime lender. and I was monitoring the developments in subprime from 2006. And already, you know, in 2006, there was a trend of so-called early payment defaults. You know, and this idea, and, you know, partly because I was an outsider, you know, I was sitting in London. I was sitting in an office in Mayfair in London looking at the subprime industry, you know, not really knowing that much about it. So, you know, the first question that arose was, why would somebody who were just taken out a mortgage default within the first three months of having taken out that mortgage? And this trend was going up. So we saw that through 2006, into 2007, actually new century went bust February 2007, HSBC, which had done this huge acquisition in the US in the subprime space, had a huge profit warning.

2007. So already the beginning of 2007 and to 2006, you know, something clearly was going awry. And I think what gave us, what gave us an advantage as a financials-only fund is that, is that, is that, is that this was happening in the periphery of the financials industry. So we saw it and we were able to trace it. So by the summer of 2007, it hit Europe, the summer of 2007, famously, people kind of debate what marks the beginning of the financial crisis. But in the summer of 2007, some of the French-run funds basically had an issue. In the summer of 2007, one of the German banks started to suffer issues. And then by the autumn of 2007, some UK banks were starting to have issues as well. So it was happening. So we were able to draw, by being global,

and by being involved in financial services, we were able to draw some of these dots. And that was a huge, and it was a huge, it was a very fertile area for long, short, because at the time, at the time there were elements of financial services, you mentioned Visa at the beginning of this chat. You know, Visa went public in March of 2008.

We were involved in the IPA. So, you know, there was an opportunity to be long and there was an opportunity to be short. And actually, you know, it was the first, you know, if we roll forward through Lehman, obviously people are more familiar with that period, threw into the first quarter of 2009. First quarter of 2009, you had huge dispersion between the brokers, which were recovering already. They were the first in, they were the first out of the crisis. So, you know, Goldman's performance was very, very strong in the first quarter of 2009.

Citigroups was very, very weak. it was kind of last in, last out. Chinese banks, we were long, some of those as well, performing very strongly because China was pumping liquidity via the banks into its market. They were performing very strongly. So we had huge dispersion. It was almost a golden era for long, short financial services.

That changed. And I would say, you know, one thing, one of the difficulties in investment is is is is is having that awareness to change one's mental models yep mental model that changed that we were the eye was was was slow to get onto was was was regulation yeah the impact you know and it's a theme we can talk about as well because it's something I've addressed in that interest was this idea that regulators were inserting themselves almost into the capital structure of financial services companies combined with low interest rates, which basically turned banks and financial services

broadly, with the exception of some tech-orientated ones, into a macro trade. Yep. And that macro trade was, you know, it was all about regulation, it was all about rates. And that dispersion, which long short thrives on, diminished. And, you know, since then, and it's been 10 years plus. we've had a very, very high degree of correlation, even between markets. I mentioned China earlier, but that correlation has gone close to one between China, between U.S. banks, between banks globally, and it's driven by interest rates and it's driven by

regulation. And that was a mental model that I was slow to cotton on to, and it cost a little bit of performance kind of in the early part of that financial crisis aftermath. No, look, I think it's the hardest part about being an investor in anything today, right? Like the example I always used is 40 years ago, it would have been easy enough for you and me to go out and kind of flip through the newspaper and say, oh, here's 10 stocks trading at six times price to earnings. We're going to buy all 10 and we could probably expect to outperform the market over time. And today, you know, I would say if you go out and you do it that simply, you're probably going to get your head blown off because all you're doing is replicating what a quant model could do. And I really, you know, the markets, if you compare the bank regulation market of 2005,

to today. Like, it's just apples to oranges. There's no comparison. Let me ask you, you know, we talked about the financial crisis, decent big. When I look at today, you know, unemployment is around 10 percent. And I think, obviously, there's a lot more liquidity in the system thanks to the Fed. But when I look at the unemployment numbers, the uncertainty out there, like, if you had told me at the start of the year, this is what right now would look like. There's a lot of things I would think that haven't come true. But one of the things I would certainly think is the banks would have blown up, like credit losses would be off the charts the banks would be reserving and raising equity everyone would be freaking out and when you look at the sector like that's really not what not what's happening

you know a lot of the banks still trade at or above tangible book values like they're taking credit loss but they're fine but what do you think the difference is between you know unemployment today's higher than it wasn't the financial crisis what's the difference today than 10 years ago well there's probably three differences i think one is uh one is the one is the banks universally have got more capital now than they had going into the crisis. I mean, it's something they bleat on about all the time. You know, there are still corners of regulatory and policymaker circles that argue they need more capital.

But they've got, they've just got more capital than they had going into the financial crisis. Second reason is that, and this is interesting, because this was an accounting change that was introduced, really just in the nick of time. It was the accounting change. It was the Cecil accounting change. That was introduced just in time, almost, for COVID.

And what it required banks to do, and they did in the first quarter of this year, in the US, and there's an equivalent in Europe as well, is to front-load provisioning. Interestingly, they had the earnings to front-load provisioning because markets, business, is because of volatility, we're doing so well. Yep. So, you know, this kind of, you know, if regulator's got one thing, you know, the one thing I've learned about regulation over the years is that it always has unintended consequences and typically those unintended consequences can be more onerous and as an observer

more interesting than the consequences that they're meant to inform. but one thing there was, you know, thinking about Volker and thinking about ring fencing in the UK, one thing there was a lot of momentum towards was to break up banks into broker-dealers or investment banks on the one side and kind of retail banks on the other. And it never happened, you know, fortuitously it never happened because the likes of JP Morgan, the likes Citigroup had huge markets, capital markets-orientated revenues to extract in the first quarter that enabled them to shore up their provisioning through CISA ahead of potential economic collapse. And so, you know, that's the second reason, is that they've just provisioned

upfront to a degree that they weren't able to do 10 years ago. And then the third reason is obviously government, more fiscal intervention. So, I mean, you know, just any model, any classical credit card model would have, you know, you say unemployment at 10%, would have had unemployment at 10%, charge off rates commensurately high. But, you know, what that model wouldn't have factored in is fiscal injections to the extent we've seen globally. And so you've seen just a disconnect in that classical model between unemployment and charge-offs. Now, clearly how long that sustains is an interesting question that's, that explains. why bank valuations are where they are, I guess.

And you mentioned, and I'm going to put you on the spot here. If the answer is no, feel free to say you haven't thought it through fully. But, you know, I agree with you when you say regulation can often be quite onerous. But I also think you can present some opportunities that a lot of people aren't thinking of. So, like, right now coming out of COVID, you know, I think the regulations are still a little bit in flux, to be honest with you. But coming out of COVID, are there any regulations with unintended consequences that you're kind of like seeing opportunities in?

Coming out of, it's a really interesting question, coming out of COVID, I don't know, but you know, a space I've been looking at quite a lot recently, and I've done within that interest a couple of posts, and I did a guest post in napkin math as well, which is part of the everything bundle, also a substack blog, is the exchanges. I've been looking very heavily exchanges. And if there's one subsector that has been the winner, you know, because the other thing, you know, if regulation has unintended consequences, then by the same token, you know, it's not quite zero sum, but for every loser, there's a winner. And I think the winner from the bearing down of regulation on the banks has been and continues to be the exchanges, you know,

whether it's taking libel away from the banks. the exchanges could be a beneficiary of that, whether it's, you know, just last week we saw the, there's a whole debate around, you know, and we may go on to talk about SPACs and IPOs and so on, but. Oh, we're talking about SPACs. Good, good. I've read your post as well, so there's plenty to talk about. But the New York Stock Exchange announced last week that is going to allow primary direct listings on the exchange. So companies, actually, there's been a bit of of a wrinkle there. The SEC have put a hold on it, but it seems likely that in spite of that, companies will be able to directly list on the new exchange and raise capital. That's basically

a shift in the balance of power away from banks, which would control the IPO process, to exchanges. There's a whole list of these examples where exchanges and the beneficiaries of these regulations. Coming out of COVID, I don't know. I suspect, You know, people talk about COVID as being the great accelerator. And so, you know, a lot of those trends we've seen already, be they a shift in the balance of power from banks towards exchanges, could equally be accelerated. It's difficult to discern a specific COVID-related,

probably the impact, and certainly in the UK, there's a lot of political backlash. How that impacts the banks, you know, it could be, they say the banks can be the beneficiaries. It's say, you know, people have said, the banks themselves have said, this time, unlike last time, with a solution, not the problem. Yep. And if that can be proven, then maybe the pendulum swings back towards them. Yeah, I do think with banks, I mean, cable companies are obviously a completely different animal, but banks, cable companies, a lot of these really big companies that are traditionally villains of pretty much anyone. You know, a bank after 2008

was an easy punching bag for any politician. A cable company has always been an easy punching bag, but I do think they've bought themselves a lot of goodwill with the banks, you know, they were there for their customers, they stepped up. I think a lot of them kind of avoided really putting the hammer on credit card debt to people to people who had been affected by COVID with the cable companies. The reason I mentioned it is they weren't disconnecting people who lost their job and couldn't pay for their internet. And obviously that would have been a disaster if they had.

You know, you're basically cutting someone out from the world when they're stuck at home and don't have internet. So I do think they've bought themselves a lot of goodwill. And it's just interesting, like six months from now, it's tough to tell how any of this is going to look, right? Like we don't know what the political environment is going to look like, which is obviously very important for these guys for regulation. We have no idea of what type, you know, do we continue with a V economy?

Is there a vaccine? Like it's just, it's such a strange time. And I kind of think like back to your old days, it's going to be a very fertile time for the type of long, short investing that you use to practice and still obviously follow very closely. Yeah, I think that's right. And I think, I think, you know, there is a bull case to be made for banks. You know, clearly it's not reflected.

I mean, clearly the bear case is wedding out, and the bear case revolves around some of the things we've spoken about, about interest rates and about policymakers kind of inserting themselves in the stack and influencing capital allocation. I mean, you know, when we look, you know, as kind of value investors, you know, capital allocation is, you know, it's a dominant theme. And if a company doesn't have control over its own capital allocation, i. You cannot decide whether it's M&A, you know, Wells Fargo is cut out of that market historically, or whether it's buybacks or dividends, and the banks are being cut out of that right now.

Not having the ability to steer one's own capital allocation strategy, it kind of makes, it kind of degrades your position as a shareholder, below that of the policymaker, which obviously degrades the overall equity story. But there is a bullcase on the other side of that, if we come out of that, which is this consolidation of market share that's taking place. You know, you look at the influx of deposits into the U.S. banking system

and the flow towards the bigger players, it's kind of a feature across most industries, is that the bigger are getting bigger, and that's true. And that's in spite of regulation wanting to kind of enhance competition in the banking sector. You know, another theme I often

I write about quite a lot. One of my other hats is as an active angel investor in FinTech. And one of the other themes that I write about a lot is FinTech. And, you know, kind of coming into COVID, there was a view that this would be FinTech's time. You know, FinTech, these are the innovators,

these are the they offer speed that they offer a digital solution and it just hasn't been it just hasn't been the case I mean there are some exceptions there's some exceptions square but it just hasn't but broadly the smaller ones the startups some of the challenger banks of which the UK has been a big testing ground of a struggling no this is it's actually something I think you wrote about about a month and a half ago right like the big banks it I I agree with you. Like if you told me coming into COVID, it's like, hey, the big banks have a physical footprint, right? That's closed and management's going to have to spend time worrying about that closing. The big banks obviously are much higher concern for regulators than all of these

legacy guys. And they're going to have way more loans and loan losses than the startups. So if you told me coming into COVID, oh, and big banks, because they're so bureaucratic, they're probably going to be slower to shift and adapt to technology. So coming into COVID, I would have said, if you're a startup bank, you know, a SOFI or something like this, I would to guess they were going to see huge share increases. And they, you know, similar to, it's a looser comparison, but similar to Amazon and all these online retailers just pulled tons of share forward because they, uh, all of their physical competitors were closed. I would have guessed all the kind of innovative fintech players were just going to slaughter in this environment. And it doesn't seem to

have played out. In fact, the opposite. So could you dive a little bit more into why the big banks have held up so well and maybe even take and share in this environment? I think partly, it partly to the extent that they are quasi arms of government through the fact that policymakers have inserted themselves in the capital stack figuratively. You know, the challenge was to get money out there into the economy quickly. And that requires scale. And so, you know, if you look at, you know, and I looked at a number of markets, you know, the UK and the US and a number of the European markets, they went, the authorities were slow to authorise fintechs to disperse whether it was PPP or the equivalents in Europe and the UK. And the big banks didn't do such a good job necessarily and there were

question marks about the way that was done, but they were there and they were able to do it quickly. and they're able more about they had the scale to do it for quickly. And the same when it comes to deposits. It's kind of they, as I say, and it's not a feature necessarily of the banking system. It's a feature of most, you know, most industries are seeing most industries. There's a great, you know, Michael Mubison put out this report on public to private. It's a great report. And I'm sure most of your listeners are, you know,

I actually listened to the he did the invest like the best podcast and I listened to it while I was walking the dog this morning on that so yeah exactly exactly so did I actually also I was walking the dog this morning and I listened to it um but he so he talks he talks about um about the uh about the you know the about the herford doll index that he took one of them he talked about exactly and within various industries and it's just increasing many industries and banks are no exception um so for various For various reasons, there's a kind of a concentration of market share. Yeah. And the banks aren't immune to that. Yeah. For banks, like last year, we've traditionally looked at a lot of small banks. And recently one of my questions over the past, I'd say three years has been, look, for a bank, like a lot of this investment into tech and regulation, that scales, right?

And a lot of smaller banks, their mobile app was either non-existent or was awful. And, you know, they were used to, hey, we have the bank on the corner. or so everybody gives us deposits. And they were losing share hand over fist, the Bank of America, Wells Fargo, all these guys. There was even an interesting Wall Street Journal article that had, it was like an employee at a bank was like, yeah, I had to like shift my deposits to Bank of America

so I could do mobile checking, right? So it makes sense that the small banks are losers. And you see that in a lot of the small bank share prices, which trade way under book value. And I continue to think there needs to be consolidation there. But I'm still a little surprised that you didn't see, you know, Robin Hood has obviously grown trading accounts like crazy. and there's a lot of issues there, but I'm surprised you can see like a sofa or something really

break out in this environment. Let me turn to one other bank before we jump into. I really want to talk SPACs with you for a second as well. Wells Fargo, you mentioned, right? And I look at Wells Fargo and see, hey, this trades at 70% of tangible book, whereas JP Morgan trades at 1.7 times. And the regulators aren't going to let them buy back shares. They aren't going to let them grow. They aren't going to let them do M&A. Like, what heck is the future for Wells Fargo? it kind of breaks it's a really interesting question it kind of breaks

it kind of breaks the tech you know kind of you know we talk about capital allocation yeah and go through you know and you've just highlighted you know the textbook uses of capital and I'm not sure there's a chapter

in the textbook for what happens when the regulator actually it doesn't allow you to do any of those so you accumulate capital yeah you know clearly clearly you know, clearly, you know, there's a school which, which embraces the view that retained earnings are shareholder earnings and that, you know, as a owner of Wells Fargo, you own a piece

of Wells Fargo, you know, it's the Buffett School. And at some stage in the future, you will, that you will get, you will get those earnings back as a shareholder, as a partial owner of the business. I, but there's not, you know, and in an environment where rates are low, maybe you are prepared to wait a bit longer for that. Notwithstanding the fact that low rates kill the kind of front book part of the business on the deposit side. But I, but it's, but I, I don't know, I don't know. As I say, you know, the textbook, the chapter hasn't been written.

You know, the model that I use to kind of describe. bribe it is you're a minority shareholder um behind the government and the and and and and when that happens when that happens when that happens shares do trade at a discount yeah um and you know those kind of holding those kind of minority discounts can can can sustain for a long period of time yeah no it's just it's an interesting one right because jp morgan trading at 1.7 times book Wells Fargo is at 70%. Regulators seem like they won't let them do anything. But at the same time, I think like, you know, like six or seven years ago, it reminds me of Bank of America right around the time when Buffett put in the preferred and the converts and everything. And I think the stops been like, even after all the COVID disruption stuff, I think the stock's up like four X over that time. And I look at Wells Fargo and I kind of think like, you know, 10 years from now, a lot of this noise will have passed and you'll have bought what's always been one of the preeminent bank franchises in America at 70% of book. It seems like you do well from there, but at the same time, like, it just feels like there's something squishy there. I can't quite put my finger on. I'm not sure. Anything else on Wells Fargo or anything

here? There's two newsletters of yours, so I really want to highlight. I'll switch to. But any last thoughts here? No, except you mentioned something earlier on about, and it comes through evaluation, you know, which is, you know, another mental model I kind of got broken, which is that, you know, things shouldn't trade a discounted book if you believe. Or even, you know, if we kind of, if we inject some kind of discount because figuratively, you're a minority shareholder, you know, so maybe 0.7 a book. But there's a lot of bank stocks in Europe, which just crashed way, way below that, but crash way below that. and and you mentioned earlier on this point about about changing I suppose you know every investor's challenge is to change as the market changes and you know one thing we've learned over the past

10 years is that there's no for all the reasons we discussed there's not necessarily because the flip side is you know and again actually the one source of the one use of capital allocation we didn't talk about is, is, you know, simple liquidation or or the takeover of the company itself. You know, often look at Deutsche Bank, which trades at, you know, 20, 30 percent of book. And you kind of think, you know, again, the classical textbook response would be just liquidate the company, you know, and clearly these banks are too big, the flip side of them being big and having consolidated, is they're too big to liquidate? and so the and so capital gets trapped it's funny it's funny you mentioned

Deutsche Bank because one thing I was kind of thinking about asking you is you know obviously and you wrote about Wirecard about a month or so ago as well you know Deutsche Bank giant German Bank wired card one of the biggest financial frauds in history and it comes out recently that wire I think it was Wirecard was exploring a merger with Deutsche Bank not the other way around right but I wonder you know it's a super interesting thing in anybody who's not really deep into, I think a lot of American listeners might not be as familiar with Wirecard as the European listeners, particularly people who don't really file a finance. Maybe you can dive a second

into Wirecard, the Deutsche Bank saga and kind of what you learned from that. Well, actually, that's really interesting. And that's really interesting. And I mean, forget, okay, I mean, there's two components of this. One is the fraud component. And two is, you know, just forget for a moment that it was a fraud, you know, here you've got a very high multiple, you know, just wind the clock back. You don't know it's a fraud, but it's a high multiple. This was a company that wants to exploit its multiple to, you know, to buy a company which was, you know, not very profitable, but whose assets were cheap. So to, this was, you know, classical, you know, I'll come back to the fraud in a second. But it's interesting because what you haven't seen yet

is, you know, as tech companies buy banks. Now, I suppose they don't want to because they don't want to get involved in other regulation. Yeah. And we can talk about and financial if you like, because there you've got a model which companies in the US and elsewhere are trying to replicate, which is to do the front-end piece of banking and therefore be exempt of the regulation, which is kind of back-end oriented to do the distribution of financial services where a lot of the margin is accruing. So there is that model. But obviously that wouldn't help Wirecard because Wirecard was a fraud. And on that point, I mean, the only thing I would say is there was a great story. We're chatting on September the 3rd. And there was a great

story in the Financial Times this morning, which is the first person tale of Dan McCrum, who was the FT journalist who kind of broke. He was onto this. And I was reading his Alphabet posts on Wirecard back in 2015. He was onto this five years ago. And it's just an incredible story. You know, undoubtedly it's going to be made into a film. It's an incredible story of an investigative journalist's determination to,

to reveal the truth. And the pressure he was put under by the company, by the establishment, by some cell side analysts. It's just, you know, he stopped that story in the Financial Times today, talking about the Comets Bank analyst and the abuse he got from the Comets Bank saleside analyst around that. It's an incredible story. Yeah. You know, one thing, Wirecard, it's such an interesting story.

And one thing I worry about is you can almost view it through, I mean, Afroaz or right. There's no positive light to view a fraud through. But the wire cards read, like, people were saying it was a fraud as early as like 2008, 2009, if I can remember correctly. And I remember reading some of the Alphaville posts in 2015. And the stock was up like 12x since the first allegations of fraud, which were all completely correct. And then, you know, regulators were pressuring the journalist and investigating short sellers over this. And it turns out like, no, this was a fraud. And I worried like, you know, there are so many stocks I can think of right now in the U.S. markets and everything where it seems similar, right?

stocks are screaming higher and the short sellers are screaming, hey, this is a fraud. And it's like, it's so easy to think of wire card for all of these different things. And I guess the other thing like similarly, like these high multiple high flying stocks with the, why not go merge with the lower multiple stock to take advantage of your, um, take advantage of your multiple. You know, people mock it, but this is what Teledyne did 50 years ago and they were one of the best performing stocks all time, right? If you've got a big multiple, go buy low multiple undervalue things and that help you grow into it. And, you know, I think like, you know, like a lemonade. They trade for like 50 times book. Why not go use your stock to buy an insurer and get into the insurance, really get

Tesla. Use your stocks to go buy Ford or GM and take over all of their engineers and stuff. I don't know if they even need it. But yeah, just stuff like that. Like, it's so. That's right. We saw it in the last cycle. We saw it in 2000, AOL. So, right, the president's there. Sure. And people mocked that, but like what would AOL stock if they hadn't bought Time Warner at the time? Like that actually kind of worked out great for AOL shareholders, right? So yeah, I know these deals are mocked, but actually if you're the person with the high multiple, you can create a lot of value by doing this. You can almost save the business.

And obviously, our card was trying to save the fraud. Let's switch over to SPAC. So I've been obsessed with SPAC. You recently wrote a SPAC piece. You know, this morning we saw another SPAC deal. KCAC announces a deal to buy an electric vehicle, electric battery manufacturer. stock goes from $10 to $18. So maybe you can just dive in.

What is this spec? Why are companies going crazy for specs right now? And why is this interesting? Well, I think it's interesting. And actually, it comes back to this Michael Mobeson piece as well because he talks about, he talks about this shift between private markets and public markets. and over the past 20 years, this fascinating development has occurred whereby public market supply has shrunk, a number of companies has halved, the demand has increased, and on the private

side, the number of companies, because the barriers to starting up a new company have come down so much, the number of new companies has just ballooned. And so you've now got seven, not just private companies and like, you know, your mom and pops, but seven, you've got seven times as many private companies that are owned by venture capital of private equity. So not mom and pop to every one public company. And it kind of occurred to me, you know, my background is public market investor, you know, like you, public markets. But I mentioned earlier that I recently dip my toe into private markets as an angel investor. in FinTech. And it kind of, you know, I kind of creaked open the door into this market and took a peep inside. And it's a different market. You know, I meet with venture capital

folks and they, you know, their background is, and certainly the companies that choose to partner with venture capital firms, in my experience, have prioritized those venture capitalists that have got an entrepreneur of track record, a lot of entrepreneurs. Now, you know, the public markets, you know, occasionally had come across a guy that used to be, you know, an operator, and many of them make very, very good public market investors. But it's not a bigger factor in public markets as being kind of an entrepreneur is in private. Very, very different. You know, it kind of feels as well that, you know, certainly very, very early stage venture and the venture capital method evaluation

is all about looking to the future, you know, whether it's Tam or whatever it might be and discounting it back. Yep. Whereas in public markets, we kind of look to the share, you know, we start at the present and we model forwards or we look at the share price and we kind of, we carve out a path forwards.

We start the present and we go for very different markets. And, you know, that's fine. And they kind of, you know, they coexist. They've got different investors. They've got different companies. companies, they've got different pools of capital. But they come together when public, they come together historically, it was through the IPO. And, you know, my metaphor was kind of like the wardrobe in, you know, the lion, the witch, in the wardrobe. It was kind of, you know, on here.

It was kind of, you know, on the one side, you've got, you know, us public market investors, the humans, you know, and you've got this wardrobe, which is kind of the IPO market, you kind of go through into the other side. Actually, this is more SPAC, but you kind of go through into the other side. And actually, you know, you literally have the unicorns on the other side in the land of Narnia. And what the SPAC does, and so, you know, historically, you have to wait for the private market company to come to you. And they, through the IPO process and, you know, I've kind of been involved in that in

the past, both on the sell side, pre, well, on the south side, where we road showed some of those companies. And on the buy side, obviously, I mentioned Visa before, which was an IPO, long time. go, what we were involved in. And then you've got the SPAC, which is, it's kind of the opposite. Instead of waiting, you know, the private company to come to you, you can actually send your scout in through that wardrobe to go and look in that world and bring one, you know, bring one back out again.

Send him in with $200 million and have them. Exactly, exactly. So, you know, in theory, there's some kind of logic to that. You know, in practice, there's a lot of drawbacks, you know, and I know you've written, you've written in your blog about some of those drawbacks and you know there's a whole list of a whole load of drawbacks um obviously it's difficult to create you know financial engineering if you like has got a financial engineering tends to be quite a cyclical phenomenon um and to the extent this is a manifestation of financial engineering you know it might reflect where we are in the

cycle um but the but the but the but the root cause i e there are are, you know, private companies out there, you know, and there's a lack of, and there's a demand for them in the public markets. The root cause maybe is credible, but, you know, some of the financial engineering may not be. Yeah, so I'll just give a quick example. So, you know, a SPAC is a company, they IPO, and investors will give them $200 million, and the SPAC just goes hunting for a company to merge with, right? And if they can't find a company merge, the investors would get their $200 million back. And a lot of companies have done this recently, you know, draft kings came public through us back uh virgin virgin it's space what the spce is the ticker it's the virgin

galactic space enterprise that it Nicola has been one of the most high flying ones and recently investors have gotten very excited about these right you know these things have 10 dollars per share and cash they're announcing deals and their stocks are going from 10 to 15 20 Nicola famously went 10 to 70 and I guess when I look at this a I see like just off on sentence right like they go they have to to you all or else the spec liquidates and the founders lose all their money. And be I look and I see like, you know, Nicola is the poster child for this. Nicola has no revenues whatsoever. And people just got really excited for an electric vehicle space. And I don't know about you, when I see this, I guess there's two things, I think. The first thing is, do you feel like it reminds you at all

of the dot-com bubble? You know, like people are coming without a business model and investors are just giving them billion dollar valuations? Yes. It does. But then it does. It does. but these, but they sustain those valuations in the public market. So you could argue, you know, you could argue, you know, somebody's exploiting someone. And that's always the case in a bubble. But, you know, I, look, I agree with you. I agree with you. I think some of them, you know, I look, you know, I, you know, I look at stocks historically where, you know, I think at point three times book value, there's value there. the market is not interested. You know, it's interested in 30 times revenues rather than 0.3

times book value. Yeah. I guess the other thing I've been thinking a lot recently, look, if you, and I might have to write an article or tweet this at some point, but like, you know, last year we worked tried to go public. And they filed their IPO. They got laughed out of the room. And it eventually led, you know, we were trying to go public at 50 billion and eventually led to the founder left. The whole company had to be restructured. Like the business model was not sustainable. And I think now we works worth a couple billion or something. who knows if they make it or not. They say they're profitable now, but we were collapsed because they couldn't IPO. And I wonder if today, if you could fast for, if you could take that we

work IPO, fast forward a year, you know, if we work tried to a SPAC, I wonder if a SPAC would go crazy for a we work, a we work deal, you know, and if we work would have sustained a hundred billion IPO and be on the verge of taking over the whole commercial real estate sector. Well, Matt Levine at Bloomberg wrote exactly that. He said he never, he wrote a great article about specs. He said he never understood SPACs until we work. And our mutual friend, Byrne Hobod, I think he's talked about an option on hype in this sense, i.e., you know, the advantage of SPAC has over an IPO is that you can do it very, very quickly. And so, you know, if that's we work and it's let's do it so quickly that no one actually looks at the

books. Yeah. Or whether it's, you know, I'm not sure a fraud could get through, but but but certainly certainly the scrutiny required the bar is a lot lower and and stuff would get through that wouldn't have done otherwise you know cap you know buyer buy beware well you just made me sad because i thought i had a very original thought and i read everything both berna and that published so it probably just burrowed in the back of my brain and came out as you were discussing it uh you mentioned you're an angel investor in fintech maybe you could talk a you know what do you what type of stuff do you look for in fintech and how How has that angel investing been going?

So, no, so as I say, as I say, it's very interesting. It was a completely new market to me. And, you know, coming at it from the Finn perspective, rather than the tech perspective, makes me a little bit unusual. And the way I thought about it, there were kind of four business models within FinTech. And three of them are not that interesting,

one of them is. One of them is just a nicer user, a nicer front end. It's kind of very consumer orientated, you know, a nicer, you know, we'll go after millennials and we'll be, we'll have a better UX. And the first wave of fintechs were revolved largely around that. And many of them now still, you know, that's a big piece of it. It's not lemonade, which you mentioned earlier, is not entirely that, but certainly, you know, there's a kind of story to it. You know, the Robin Hood story. Get your renter's insurance in two minutes. Be able to trade stocks in two seconds in a friendly way, yep.

Yeah, exactly. Well, actually, that's the second thing. The second thing is speed. It's the second thing is speed. So the first thing is UX, second thing is speed. And the third thing is, which is less interesting, is regulatory arbitrage. So, you know, so chime is able, is able to grow so quickly because it's able to offer, you know, because interchange is higher because it falls below the Dodd-Frank kind of threshold around interchange.

You know, there are tons of examples of companies in the US and elsewhere, which basically, and they've emerged post-financial crisis, we were talking about regulation earlier, which are able to kind of arbitrage some of these regulatory loopholes. you know whether that's sustainable probably probably not i was trying to think of an example as you said it but in my in my history i found regulatory arbitrage you can make a lot of money for a short period of time but eventually the either the regulators come on it or your competitors say hey these guys are making money you need to close this loophole and the loophole gets closed and it generally ends up being a zero sometimes less than a zero because you have to pay penalties for uh exploiting the regulators

at some point. Exactly, exactly. And the final one, which is interesting, is kind of new, which is just new products. It's like stuff, you know, it's not about, it's just stuff that couldn't have been innovated in the old banking system or the old financial system. So whether that is, and often that can be linked to speed

because the financial system didn't have the wherewithal to, didn't have the infrastructure, to offer that kind of speed. So, you know, there are some examples around, you know, some of the things I'm interested in, for example, are user acquisition finance. There are some companies,

there's a private company in the US, which I'm not involved in, but private company in the US called Clearbank. Okay. And they do, they do user, they do user acquisition finance. So a, you know, a, you know, a SaaS company or a, or any tech, you know, wouldn't have to be a starter, would come and say, look, these are our unit economics.

You know, we've got the data to show you how those unit economics look. And, you know, and we know the return on investment, if we were able to acquire customers is, you know, 4x, 5x. We want to borrow in order to exploit, in order to exploit that ROI. You know, and a bank doesn't know what we're talking about. about. And there are models evolving to provide that kind of financing. And this is something burn, I believe you wrote about it two days ago as well, right? Like all these SaaS companies, they have to fund with extremely expensive equity, which kind of doesn't make a lot of sense. But a SaaS product is actually a natural for debt, as you're saying, right? Like it's a recurring

cash flow revenue stream. How it really should be financed is, hey, we need to go spend $100 to get users. We should get $100 of debt to finance that because it'll result in $50. of cash in every year, and that's great for a debt product. That makes tons of sense, yep. Exactly. So I'm an investor in a, it's a UK-based, but their market is European company, which does this for the gaming industry. So, you know, one of the features of COVID, obviously people are, I mean, just gaming,

obviously. Gaming like World of Warcraft or gaming like sports betting? Like World of Warcraft. Exactly. Games. So app, typically, you know, app-based games. where the company will publish a game can see that the customers are ramping

and wants to borrow to fund that customer ramp. And they're basically borrowing to get Facebook advertisements, Twitter advertisements to get app installs. Precisely, exactly. They know exactly. So they know exactly. So they know because the data, because Facebook and in the app store make their data available to third parties.

You know, we can see that traction in real time. And that makes a very, very interesting kind of collateral to let to lend against. You know, so that's one sort. And there's another company I'm involved in, which does, and it kind of wants to, its kind of social mission is to stamp out payday lending. And one of the ways to do that is to provide employees with a drawdown on their salary. So people typically get paid either on a biweekly basis or on a monthly basis. There are very solutions out there now.

And this comes back to companies not having the infrastructure to be able to pay people on a daily basis. Yeah. Exactly. But, you know, something, you know, Uber was obviously. able to do with a different model. And there are various innovations out there, various solutions which allow, which kind of insert themselves between the employer and the employee, which kind of enable this. So salary finance is a big one. There's another one that I'm involved in the UK. And how are you sourcing your angel investment deals? Well, this is not so a lot of those

are on network. So people obviously, you know, kind of 20 years and financial services are built up a network. A little bit of one, yeah. Of contact. So some of it, a lot of it is through, through that, you know, I saw Revolut, which is a UK-based. They're now in the US. They've got 13 million customers. It's a challenger bank. A little bit skeptical about their current valuation of these challenger banks, but I was shown that quite early kind of series A. So it just kind of is network, network which people are, you know, coming back to this being a new market to me as a public market investor. You know, one of the criteria is, you know, is there somebody there that I trust. There's somebody there that I know and that I trust.

So that's very important. I think it was your last, your last edition of the newsletter where you mentioned you were looking at the fang equivalence of finance. And you said, I think it was because the Goldman CFO, he said, hey, we are, we consider ourselves the Google of finance, right? And you said, hey, maybe Bloomberg is the Facebook of finance. Have you come up with any kind of other fangs of finance? Well, it's just a bit of fun as now. I don't know. I was a little bit tongue-in-cheek. I think he was, actually, what I didn't write on that post was that he was, and, you know, I suspect the biggest competition increasingly for Goldman in the recruitment market is Google. I was going to get it.

Right, right. So he, you know, clearly he's incentivized to try, you know, hey, you know, when he goes to Harvard, which is where he made the presentation, you know, hey, we're the Google of finance. But yeah, there are, you know, it's a bit of fun. I think, you know, I think in Amex is an interesting metaphor for, or Apple is the interesting metaphor for Amex with some, you know, similarities there. Great brand, you know, possibly slightly more affluent, leaning, a closed ecosystem. You know, Amex historically has presented itself as a closed ecosystem.

So that's one, you know, J.P. Morgan maybe is Amazon. They're both, they're involved both on the consumer side and the enterprise side. The, you know, the merchant solutions business, which is, you know, a fascinating business is, you know, maybe a little bit like the AWS. It's funny. You see that because do you remember, what, like 15, 20 years ago, Citigroup said they wanted to be the the supermarket was it the supermarket of finance or something so when you say jp morgan is amazon everything so i think oh my god like the historical correlations there are uh are not kind yeah that's true but you know as i say it's a bit of fun actually you know your answer is really

ant in america in china um yeah i think you know if i look at the u.s companies that are most closely aligned to Ant in terms of replicating it it could be square but Ant as you know Ant is basically

and has basically done the job of aggregator you know it's interesting actually you know so Ben Thompson who writes strategic back in I was actually I did a search on

strategically to see what he's written about fintech doesn't write about fintech that much And actually, you read a post in 2016 when Lending Club kind of almost collapsed. When the CEO of Lending Club was kicked out, there was a kind of was, I don't know if you call it fraud, but there was kind of a big ethical issue they came up with and the CEO was ousted. And he kind of then used that as an opportunity to talk about FinTech. and he talked about whether fintech really lends itself to aggregation theory, which is his big theory about platform companies.

And he said no, because you've got two, because in the case of Lending Club, you've got your borrowers on the one side and you've got your savers, or your investors on the other side, and it wasn't clear, you know, which they were aggregating. Yep. With Ant, and he hasn't written about this, I don't know why, but and is very, very clearly aggregating, you know, financial service customers. And it did it. Go ahead.

Sorry, I didn't mean to interrupt. Yeah, and it did it through the way Square is possibly doing with Cash App. It did it through a payment mechanism that wasn't by itself very profitable. All of the value accrued to Alibaba wasn't profitable. It's kind of net take rate. It's a basis point. right now but it was sticky and they got consumers into the ecosystem and once they were there they were able to offer other financial products and and this is the supermarket analogy you know it's not

they started by doing their own financial products and they realized very early on that regulation would come down too heavily if they were to do that so now they have a panel of banks and a panel of insurance companies and their take rates are pretty high you know it just shows you how much the value. One of the interesting things about banking is that, you know, a lot of industries have become modularized. You know, banking is one of the last kind of vertically integrated. We were talking before about the branch, you know, the same company owns the branches. It, you know, it does the whole stack. And it's one of the only industries left that kind of does that on a vertical integrated basis. And one of the reasons is a lot of the value is at the front end.

It is at the customer end. And so Anders kind of recognized that. And that's what it's doing right now. I can't wait for someone to write a book on ant because the history is fascinating. Like Alibaba literally steal, they literally steal, they own ant and it's stolen from them, right? Or they steal it from their shareholders. And at one time, as you said, they aggregate their money market fund grows so big. I think it's like got basically all of the money in China and the regulators have to crack down. It has so much money. It's just a crazy story. I'm going to run one one comparison by you, if I told you Robin Hood, if I said Robin Hood, and I debate about this lot, do you think Robin Hood is the Tesla of finance, or do you think it's the Netflix of finance?

What way? How is it? It could be the Tesla because it's got a sleek app. It's beloved by retail investors. And I think the back end might be a little spotty and there might be a little bit of security issues with it. It might be skirting some regulations, which I think all would be fair to say that all of that would apply to Tesla. It could also be the Netflix just because oh, and Robin Hood is hated by institutional investors, loved by retail investors. It could be the Netflix because I think a lot of people don't understand the economics of it. And, you know, people look at it, hey, they give away free trades. How do they make money? Netflix, they burn cash. How do they make money? Well, they're making money. It's just values accruing in different

ways. And because, you know, Robin Hood, I think a lot of investors are doing it more for entertainment than actually for long-term investing purposes, though the way all the Robin Hood stocks have performed, they might be doing it for long-term investing purposes. So which do you think it would be? I mean, I'm a skeptic. I think I'm a skeptic. I'm a skeptic. I'm a skeptic of Tesla as well. I suspect there's some similarities between the two there. And this idea that, just the name Robin Hood, I mean, this idea that this was. So they don't file financial. statements regularly enough. They do file a balance sheet once a year because they have to as a regulated, as a regulated broker. If you look at their, the trouble is, the last filed

balance sheet was end of 2019. And if you look at it, so, you know, it's kind of, it's kind of out of date. It's pre-COVID. And it's just a balance sheet. But if you look at it, they're doing a lot of margin lending. There's a lot of margin lending that's going on in there. And this idea that they are, you know, stealing from the rich to give to the poor, you know, certainly has come under a lot of scrutiny anyway, given the behavior of, and the demographic of their customer base. But, you know, I'd love to see, I'd love to see their latest balance sheet, put it that way. I'm just surprised, you know, because they had the issue where a lot of their users were able to use, They called it the unlimited margin hack on Robin Hood.

And I just can't believe that that issue got discovered and publicized and that the site was still allowed to operate. I mean, I'm not trying to be too old. But that's literally how you get like stock market crashes, right? People use unlimited margins to take wildly outsized positions. And then the moment that a stock dips down, mass liquidations. And I can't believe that that happened. And regulators kind of didn't step in and demand a lot more than a pound of flesh from them. Yeah, and it's interesting.

I think, you know, and again, you know, having a look at FinTech and looks at financial services, one of the features is that there is a window, it comes back to the regulatory arbitrage point. There's a window whereby, there's a window whereby, firstly, regulators tend to be slower than the market. Yep. And, you know, when the market's in kind of hyperdrive and things grow as quickly as they're growing, it takes a while for the regulator to catch up. And secondly, you know, there's a point below which the regulators is not interested. Yeah.

Now, Robbins, right now, it's gone above the parapet on both of those. So I suspect, you know, the regulatory risk is increasing, and that's not a linear increase. Yep. 100% agree. Last question I ask everybody on this podcast. Anyone else you'd recommend for the podcast or anything? So there's a few guys. I mean, I've loved a number of the guys you've had on already.

And, you know, I'm well done for doing this. This is, you know, great project. no i mean you included everyone on here has been super sharp and i've kind of been lucky to have them so it's been a great experience so far um but there's a few guys you i you may know them so scott miller is an investor that i think very very highly of yep over at uh green green green i can never remember if it's green haven or green road or greenwood because they've got all those he's uh he's green yeah actually it's a good point about greenwood yeah it says green haven road um i'm an lp my kind of disclaimer i'm an lp and his

He runs a partner's fund. Yeah, yeah. Another investor that I think very highly of is Fred Lou of Hayden Capital. Again, it's been fantastic. I love their letters. We've exchanged emails, but yeah, he'd be great. Yeah, he's fantastic. And there's another one who's kind of my neck of the woods,

London-based, Mark Walker, Tollimore, Capital, who's very, very thoughtful. He writes great letters as well, actually. I don't know if he makes them, I don't know if he's on Twitter even actually, but he's big on content and he makes his letters available and he's, he's a very interesting investor also coming from value school, but who's looked at. I think I've heard some of his letters before. Yeah, I can definitely reach out to him as well. Yeah. So, you know, yeah, but keep it from your, keep it going. As I say, this is a fantastic

project and I've loved all of the shows he put out. Well, hey, I appreciate it. Mark, net interest is great. be sure to include a link in the show notes so everybody can go subscribe. You know, it's a free product and I love it. So I think everyone who listens to this will love it too. And Mark, thank you so much for coming on. Great. Thank you. Thanks.