Welcome to our 128th edition. Here’s what’s in store for this week:
- We’re too long on financial execs and too short on cannabis ones
- Is Goldman’s consumer emphasis for real?
- Is there upside in California splitting three ways?
- Deals: Imperative Execution; Coverwallet; Basis; Tala
- GDPR; Mastercard & Visa; Telegram
- Banking culture; The TOS reckoning; Alt data in online lending; JP Morgan & Palantir; Artificial general intelligence
Note: We will be taking a publishing break next week. We’ll be back on May 5th.
Bankers, ex-pols pivot to pot.
"I'm convinced de-scheduling the drug is needed so we can do research, help our veterans, and reverse the opioid epidemic ravaging our communities." That’s a quote from GOP stalwart and former Speaker of the House John Boehner in explaining his recent decision to join the advisory board of Acreage Holdings. Acreage isn’t a household name yet, but the New York cannabis company is staffed primarily by nattily dressed MBA types who put in time at firms including Lazard, Bankers Trust, Blackstone, Warburg Pincus, Goldman Sachs and Apollo. In Canada, meanwhile, a more colorfully dressed ex-merchant energy banker named Sonny Mottahed has pivoted away from financing oilfields to the marijuana fields of Alberta (See the Bloomberg article here). And with greater legitimization recently bestowed on the industry courtesy of President Trump, Hewlett-Packard, Tiger Global and a first-ever listing of a pure-play cannabis company on a US exchange, we think other financial services pros looking to turn over a new career leaf (sorry) should follow Boehner’s lead and seek opportunities in America’s fastest growing employment sector. Because in our view, no matter what happens in the markets or economy down the road, the total number of professionals needed in finance is going to drop. But that drop can and should help meet the demand for more institutional talent in pot.
No major Wall Street firm has done more since the financial crisis to change its perception on Main Street than Goldman Sachs. Proof of the firm’s progress can be seen in its Marcus division, which is on fire. And the firm’s recent, widely expected purchase of 25-person Clarity Money for an eight-figure number looks to be another solid step in Goldman’s effort to build a sustainable consumer business. But in the grand scheme of things, Marcus and adjacent digital businesses (either purchased or home-grown) are still a modest contributor to Goldman’s overall narrative. In fact, despite the firm reporting a blowout Q1, questions surrounding Goldman’s business model (and plans not to buy back too much stock) continue to linger, which explains why the market shrugged off Goldman’s quarter. Leaders like CFO Marty Chavez, of course, realize that more steps are needed to foster balance in its business model, which is why other meaty deals to bolster Goldman’s retail game should follow. Still, when it comes to Main Street, Goldman, although very well positioned today, is a newcomer to Ma and Pa. As such, its ability to back up its posture as a patient, empathetic financial giant that “gets” everyday folks will be tested when the credit cycle turns and shareholders grow as cranky as Squidward. We think Goldman’s consumer pivot is genuine, but still, it’s no fun when the black ink turns red.
California tumbles into the sea.
That’s what investing legend Tim Draper is trying to avoid with his most recent proposal to split the Golden State into three smaller states that are actually governable. Although some traditional press outlets have derided the Cal 3 initiative, we give Draper credit for his steadfastness in advancing a disruptive idea. Are there huge legal, political and water rights obstacles that would await Cal 3? Of course, but last week, Draper announced that his plan had generated over 600,000 signatures — almost double the number needed to qualify for a place on California’s November ballot (See below). Plus, let’s not forget that in recent years, UK and US voters have confounded conventional wisdom by supporting “unthinkable” ideas and platforms that have prevailed. In commenting on Cal 3’s recent progress, Draper told The FR’s Gregg Schoenberg that the plan could lead to a better business climate for the region, citing departures by Sony, Occidental, Toyota and Tesla to more nimble states as Exhibit A. Unsurprisingly, Draper also prophesied that Bitcoin and blockchain would play a meaningful role in making the three governments more effective and fair. When asked if Cal 3 would be comparable to a breakup of a large corporation that ultimately enables the smaller parts to grow more dynamically, Draper — who has backed disruptors including Skype, Hotmail, Tesla, Baidu, DocuSign, Coinbase and Robinhood — agreed enthusiastically: “I have seen start-ups with three people accomplish things that large companies with 300,000 people can’t accomplish. It makes sense that three new streamlined start-up states can accomplish more than one bloated one.”
Deals around the world.
This week, word hit that Steve Cohen’s Point72 had backed dark pool start-up Imperative Execution, which is akin to a missile defense system for institutional investors seeking to defend against high-frequency trading outfits. Also this week, crypto-giant Coinbase (which just plucked Och-Ziff’s CFO) announced that it had purchased Earn.com, and Mumbai-based Coverwallet raised $22 million courtesy of the IFC and Transamerica. Also, Basis, which is seeking to bring stability to the crypto monetary system, announced a hefty $133-million financing. Finally, Tala, a Santa Monica-based mobile-first microlender in emerging markets, announced a $65-million Series C that was led by Revolution Growth.
US financial institutions face GDPR uncertainty.
As the deadline approaches for GDPR compliance, US banks, fund companies, insurers and smaller financial institutions are all racing to put into place compliance solutions that will protect them from receiving a red card from Brussels. For a great overview of the challenges facing American firms with EU customers, we recommend the American Banker piece below by Penny Crosman.
Big payments players look to move past the NASCAR effect.
NASCAR fans don’t seem to mind the myriad of logos, ranging from Monster Energy to Pennzoil, tattooed on the cars of their favorite drivers. However, consumers viewing a retailer’s online checkout page aren’t as tolerant. That’s why this week, arch rivals Visa and Mastercard (the Richard Petty and Dale Earnhardt of payments networks) have teamed up (along with American Express and Discover) to offer a single-button payment option. The reason? The thunderous roar of PayPal.
Pre-sale ICO riot.
It’s no wonder that Telegram, which, according to ICOWhitelists, was used by 99 percent of ICOs to communicate with investors (as of October 2017), has had two hugely successful pre-sales. It’s also not a surprise that Russia has followed Iran’s example and banned the app, which plans to launch payments and communications services. Russia also proceeded to arrest the brave souls who actually had the temerity to toss colorful paper airplanes at its security headquarters.
Is culture a problem in banking?: In our view, the answer is hell yes, even if the word culture is hard to define. Will Beeson stirred an interesting discussion on related topics in his latest podcast featuring Duena Blomstrom, Sharon O’Dea and Alessandro Hatami.
The genius of Madman Muntz: Got a bad impression of used car salesmen? We did too, until we heard Planet Money’s recent podcast on Earl Muntz. As we subsequently learned, salespeople and innovators everywhere owe a debt of gratitude to the engineer/inventor/celebrity Muntz, who also sold lots of used cars.
The terms and conditions reckoning is coming: Last week, The FR’s lead story was on the impenetrability and importance of terms of service agreements. This week, Bloomberg’s Nate Lanxon has written a great piece connecting these miserable and dishonest legal documents to GDPR. Bravo, Nate.
Alt data in online lending: This month, the Philly Fed (in cooperation with the Chicago Fed) updated its previously published working paper that examined Lending Club’s use of alt data and machine learning to establish borrower ratings. The report found that thanks to “non-traditional methods,” some borrowers were slotted into “better” loan grades. As a result, they were able to obtain lower-priced credit and pay smaller spreads on loans vs. credit card borrowing.
JP Morgan’s misadventure with Palantir: Kudos to Bloomberg Businessweek for a its fascinating investigative piece on a former JP Morgan forensic investigator. According to the authors, the ex-employee used access to Palantir’s Metropolis product to become a one-man NSA inside the bank. That employee, Peter Cavicchia III, is now a senior vice president at First Data.
Artificial general intelligence for dummies: Firstmark VC Matt Turck recently attended a workshop ahead of the Canonical Computation in Brains and Machines event held at NYU. The summary he provides below offers a useful overview of various AI methods (e.g., deep learning, unsupervised learning, generative adversarial networks) that doesn’t take a PhD to comprehend.
Superstar engineers in finance aren’t happy: According to a recent study by two researchers from Indiana University’s Kelley School of Business, the finance sector is great at seducing engineers to switch over to the financial industry. But once there, they engage in “less innovative entrepreneurship” vs. those who stayed behind.
QUOTE OF THE WEEK
“The Titanic was built by professionals. The Ark was built by volunteers.”
~ Barbara Bush