Is Matt Levine a modern-day Horace? Like Matt, Horace has a preoccupation with wealth and the law. There’s a playful humor as he segues from topic to topic. An ability to read Latin. And many of Horace’s letters are about the length of a Bloomberg View column. QED, says Tyler.
So Matt, the Latin teacher turned lawyer turned investment banker turned finance writer, recently joined Tyler for a conversation on Horace and more, including cryptocurrencies, Buffy the Vampire Slayer, Nabakov, New York, Uber, financial regulation, market volatility, M&A, whether finance is nerdy, and why panic is central to the Matt Levine production function.
Listen to the full conversation
Read the full transcript
TYLER COWEN: I thought we would start with Matt Levine’s greatest hits. Then with Matt, having been a classics major, we’d move on to the Latin classics and maybe tie the two together a bit.
On derivatives markets and CryptoKitties
Think about derivatives markets — you’ve worked in that sector. By some measures derivatives are over a quadrillion in value outstanding, but there’s another way you can measure the net positions and turn it into zero.
So what’s the right way to think about how large derivatives markets are, and what’s the risk associated with that size?
MATT LEVINE: The right way to think about it, in the way that you would do it if you’re actually working in the derivatives market, is to think about the risk exposures of it. If you have an interest rate swap, the right way to think about it is the DV01, or the right way to think about an equity swap is the delta of it.
Often, you see these quadrillion dollar numbers. They’re a quadrillion dollar notional of short-term interest rate swaps, where the idea that you could lose a quadrillion dollars on it [laughs] is quite low. The risk of that is quite low.
The systemic question, I don’t know the answer to. How risky are derivatives in general is . . . There was a time when it was, “Derivatives are weapons of mass destruction.” Obviously, there’s a sense in which that came true, but I worked in equity derivatives, and total return swaps didn’t blow up the world.
A specific set of exposures to specific risks were bad and were perhaps magnified by the ability to make zero-sum bets on them, but the idea that a notional of derivatives is somehow itself a risk factor was never super compelling to me.
COWEN: There’s a certain centralization of risk with derivatives, so you put a lot of risk into a clearinghouse. Maybe you can bail out the clearinghouse — if you have to — more efficiently than individual investors, but that also increases moral hazard. At the margin, do you think we’ve centralized derivatives risk too much or too little?
LEVINE: We’re a little bit in early phases of doing it. I’m among those who are a little skeptical of the notion of centralizing derivatives risk into clearinghouse. Seems to me that a clearinghouse has more moral hazard than a bank. A clearinghouse is often a member association, where you’re ultimately relying on the members for your capitalization and for your protection against blowing up.
Whereas a bank, if you’re on a desk, obviously banks have a lot of moral hazard. Those notions that banks have moral hazard is a lesson that has been learned and probably overlearned from the financial crisis. If you’re on a desk, you don’t want to lose a lot of money. If you’re a clearinghouse, your concerns about losing a lot of money are a little more attenuated, I think.
COWEN: Does your experience with derivatives make you feel better or worse about CryptoKitties being priced at 117,000K per pop? Were they just a derivative?
LEVINE: CryptoKitties, I don’t really understand.
COWEN: Isn’t CryptoKitty a derivative on Ether? [laughs] Is there a fact of the matter?
LEVINE: Yeah, sure. In the naive sense of did it come from Ether? Sure. All those markets are so immature.
I think of derivatives markets as being a mark of maturity and of the ability to understand what exposures exist in some instrument or in some economic reality. Then say, “We’re going to pick of these exposures and hedge them out, and we’re going to pick these exposures and magnify them. We’re going to have the ability to fine-tune all of our exposures because we’ve been doing this for a long time. We’ve been trading currencies or equities or whatever for a long time.”
There’s the beginning of a thing that you could call a derivatives market in cryptocurrency, but it’s not that. It’s the opposite of that. No one knows what Ether is, in a sense. The idea that you’re fine-tuning your exposures to it is just not . . . CryptoKitties are the opposite of that. They’re like making your exposures weirder and more complicated.
On Bitcoin and cryptoassets
COWEN: We have a good idea of how to price most futures and options. But when it comes to pricing, say, Bitcoin or other cryptoassets, what do you think is the best model we have — however bad they may all be — for thinking about what that value should be?
LEVINE: I actually think you’ve said it, which is there’s a pool of world financial wealth. Then you pick a random small number and you say, “That percentage of world financial wealth should be Bitcoin.”
I was persuaded by the notion that you could use a currency model and say, “The amount of transactions that you do with Bitcoin is this, and the velocity of it is that, and so this is what the total value of Bitcoin there should be.”
I’m no longer persuaded by that because I don’t think that people’s claims for Bitcoin now are that it’s a currency, right? It’s that it’s their store of value. It’s a store of value that isn’t tethered to anything else.
Some percentage of people’s wealth is in gold. If they shifted half of that to Bitcoin, Bitcoin would be worth X. That is the bad but best available model.
There are other cryptocurrencies. You could imagine a currency model where you say, “How big is the file storage market?” and then, “What would the velocity of a file coin be?” But I’m not sure that you could answer that because I think that the intuitions that you’d have around velocity of money are not necessarily the right intuitions for velocity of a token that you use to spend on files.
COWEN: How well Bitcoin does as a hedge or store of value relative to gold . . . what variables do you think of when you try to figure that out?
You’re trying to project 10, 20 years in the future, cryptoassets competing against gold, or maybe even stores of fine art that’s held in warehouses. What does that depend upon? Is it transactions uses? Do they matter at all any more?
Will the dominant cryptoasset be one that people also use to buy things, or are those two functions totally separate?
LEVINE: I don’t know. I was talking to someone today who argued that if Bitcoin hadn’t been invented, or if the whitepaper had been out there but if people hadn’t started using Bitcoin, what would have made more sense to happen first would be the utility tokens would come first.
Because you can explain you use file coin to buy file storage, or you use whatever to buy whatever, whereas with Bitcoin, you can use it to buy anything, but there’s no tethered store of value to it. You could imagine a world where all the ICOs work and where all of the coins that you use to buy useful things work, and then Bitcoin, because it doesn’t have an obvious utility value, it loses value.
But I don’t buy that. I think that people’s desire to use 100 different currencies to do 100 different activities is probably overrated by the crypto community. Bitcoin’s first-mover advantage and its fame has the potential to entrench it.
To answer your first question, I have no idea what valuables you look at, but I think it’s if Bitcoin stays above X thousand dollars for a year, then that increases its likelihood of staying above X thousand dollars for another year. Eventually it, by force of repetition, becomes a store of value.
COWEN: Since almost every store issues gift certificates, and this seems to be a profitable activity, can we not imagine a future where almost every business issues cryptocurrency in some form? Maybe the velocity or volume will be low, but there’ll be a cryptocurrency for every business and an ICO, just like now we have gift certificates, and this is perfectly fine. We shouldn’t think it’s weird.
The real question is why not more CryptoKitties? I’ve never heard of a CryptoDoggy. I’ve never heard of a CryptoTurtle. Yes, no?
Do you want a CryptoDoggy?
LEVINE: No store quintuples its market value by issuing gift certificates. The crypto frenzy is not . . . If this were a story of gift certificates, it would be a lot less interesting.
If you say, “Look, it’s true that people don’t want a hundred currencies, but they use gift certificates,” I don’t know how much people use those gift certificates every day. If that’s the story, then I suppose it’s true, but that’s a sad outcome for the thousand cryptocurrencies if it’s just Starbucks accepts Starbucks tokens.
LEVINE: I’m tempted to say I’d take the PonziCoin because I suspect that they’re probably equally connected to a viable blockchain in Laos, and at least the PonziCoin says it on the tin.
LEVINE: I want to be careful with that because the reason I’d take either of them is to resell them. Clearly, the frenzy of saying that you have a utility, saying that there’s a blockchain somewhere probably does increase the resell value in the extremely short term in which I’d be holding these coins.
On the future of Uber
COWEN: We’re in New York. We have Uber. We have taxis. They compete against each other. There at least appears to be a long history of the taxi sector being somewhat of a natural monopoly.
What’s the final equilibrium in New York City and elsewhere? And does the company Uber have positive value, given that right now it’s losing money per ride? Chinese investors are subsidizing us at the margin. If the price goes up, I would prefer to shift back to taxis. How do you think about that market?
LEVINE: As a consumer, I really like Uber. I think that Uber addressed some technological failing in terms of being able to hail Ubers without going out on the street and waiting for them, and being able to hail them around the world. Hailing taxis in New York is nice, but it’s nice to have an app on your phone where you can do it wherever you go. So as a consumer, I’m a big fan of Uber.
Are taxis a natural monopoly? They’re certainly a seeker of regulatory rents in New York. By Uber’s rhetoric about breaking down . . . There’s clearly some taxi-protective regulation that is not pro-consumer. To the extent Uber is fighting against that, they make a good case for their flagrant disregard for the law.
LEVINE: The big question is, they continue to be subsidized by investors. What is the long-term outcome of that? And I don’t know.
Their bet is that the long-term outcome of that is self-driving cars, and that they have some sort of advantage in being the provider of the self-driving car app, which I’m not sure if that is super compelling because it seems to me it’s hard to build a self-driving car. It’s relatively easy to build a routing app to send the self-driving car to you.
If Tesla or Apple or whoever built the best self-driving car, I’ll download Tesla’s app. So it’s a risk for Uber.
As a strategy, bootstrapping by getting a $70 billion market cap and then spending a lot of money to be the leader in self-driving cars is not a crazy strategy. They built from an app to being a $70 billion company.
Uber’s bet is that the long-term outcome of that is self-driving cars, and that they have some sort of advantage in being the provider of the self-driving car app, which I’m not sure if that is super compelling because it seems to me it’s hard to build a self-driving car. It’s relatively easy to build a routing app to send the self-driving car to you.
COWEN: The so-called moat for the company — it starts with the app, but over time it shifts to owning a fleet of self-driving cars?
LEVINE: Maybe. It doesn’t seem like a routing app is that great a moat. It’s not bad because it’s a network effect around the world, but it’s not a . . .
COWEN: But the network of drivers, they’ll work for Lyft and Uber. That doesn’t seem like much of a moat. Consumers will stick with Uber insofar as they’re happy, but they’re probably not intrinsically that loyal to Uber.
LEVINE: You need someone else to get significant name recognition. If Apple builds a self-driving car, and Apple builds a ride-hailing app, then it can take on Uber pretty quickly. If some random interloper comes, it’s harder.
On not being worried enough
COWEN: Let me ask you a very Matt Levine question. Are you worried that people aren’t worried enough?
COWEN: If we look at mortgages and security prices, there are plenty of signs that volatility has been quite low. By some measures it hasn’t been this low for 50 years [NB: this conversation was held in January before recent market volatility].
The world seems slightly unusual. Not only the CryptoKitties — there are other strange features of our country and world.
This decline in volatility, is it driven by investors getting smarter, by more ETFs, fewer shares out there to trade, by more indexing, foreign investors with nowhere else to go? What’s your best hypothesis?
LEVINE: The general background answer to that . . . in my personal life, I’m such an efficient markets guy. The answer to the question — “Are you worried that people aren’t worried enough about anything?” — is I’m not because I assume that there’s a giant pool of people who are smarter than I am, and they’re coming to a reasonable conclusion.
COWEN: They’re reading you, of course, and thinking, “What does Matt Levine say?”
LEVINE: In general, if people are like, “Are stock prices too high? Is the VIX too low?” I’m like, “If it was too high it’d be lower.”
LEVINE: The volatility thing — it’s a thing that I find incredibly weird because, like you, I find the world right now incredibly weird, and one wants to explain it. I don’t know the right explanation.
The explanation that I like is that the prices of financial assets have somewhat decoupled from human emotion about the world that is not financial assets. Why would that be? I would love it to be a story — and there’s probably some argument for it to be a story — of markets have become more technological.
Famously, stock prices overreacted to news, as measured by subsequent dividend changes forever. Eventually that’s an anomaly that someone will exploit. Eventually you’ll build the thing that reacts correctly to news. I don’t think that’s a wholly compelling case.
What I’d like the story to be is that financial markets have gotten smarter and they reacted less to news. So even though the news is noisier, they react less to that noisy news because it turns out not to affect asset prices in as noisy a way as you’d think by watching TV.
I think that there is something compelling to that because we actually have seen smart people build smart things that do a good job of making investing decisions. So you’d expect over time, as people build more rational investing tools, investing would become more rational.
The good counterargument to that is that investing is not a technological problem in the world that can be solved. It’s an interpersonal fight. Trading, in particular, is an attempt to be better than someone else. You can never make trading more rational because as you get better, someone else gets better. The residue will ultimately still be your human biases.
I’m biased towards the view that we have gotten smarter at decoupling our emotional reactions to the news from financial asset prices. Part of that is — whether or not that’s true globally — there’s a local sense in which the first day of Trump’s election everyone panicked. Then he said another crazy thing, and then he said another. Eventually you tune it out. That’s a form of this thing of financial assets reacting less to human reactions to the news.
COWEN: There are three sets of market prices that bug me. One is Bitcoin and other cryptoassets. Another is all the negative real yields on government securities, and sometimes even negative nominal yields. Then there’s blue chip stocks being so high.
Could it be those three are part of the same general phenomenon, namely that good stores of value are relatively scarce compared to growing global wealth, and that money flows to each of those — it has nowhere else to go?
They all look high. They’re going to stay high. It’s a sign of our paucity of insurance markets and other ways of protecting wealth, and in some ways it’s a pessimistic sign. So the price can be permanently high, and we should be worried about our own inability to deal with risk. Yes or no?
LEVINE: Sure, it’s a transmuted story of the financial crisis. The supply of low-risk assets was insufficient to meet the demand, and so people built things that were low-risk financial assets that turned out to be risky.
Now it’s Bitcoin can replace CDOs maybe. There’s a lot of money-chasing assets that are good stores of value.
COWEN: Investors who index. Again, a Matt Levine question. First, how worried are you about the spread of indexing?
Also, if you think of indexing as somewhat endogenous . . . so if more market research is needed, you would expect fewer people to index because there’s a high return to learning something. The flow of funds in and out of indexing — how rational or efficient a process do you think that is at the end of the day?
And as we move more and more to indexing, how will this affect securities markets? Please address any combination of those you care to.
LEVINE: The thing that I like is that US public markets . . . there are fewer companies, they’re older, they’re bigger, they’re more profitable. That’s an interesting fact about the composition of markets.
One straightforward thing to take away from that is that, in a world like that, it makes sense to index more. In a world where you can’t find the next Facebook in public markets, in a world where all companies are the same — they’re established, they’re profitable, the spread between companies is narrower — the returns to the stock picking are going to be a little lower, and it’s more rational to index.
The next question is which side of it is causal. I think that there’s probably some story you could tell about the rise of indexing, and the focus on cost and investing generally, leading to a real focus on scale in investing.
When investment funds are trying to operate at enormous scale, the attractiveness of a $100 million IPO is lower. The attractiveness of a weird company that doesn’t fit into the index is lower. You have the rise of indexing driving the phenomenon of there being fewer, larger, and more profitable public companies. You have a feedback loop in that sense.
I feel like I’ve trailed away a little from your question.
On what makes an activity “nerdy”
COWEN: Some activities are what we might call nerdy and others are not. Country and western music is not very nerdy. There are plenty of bars, say, in Lower Manhattan that are not very nerdy.
Finance has become pretty nerdy. What makes an activity nerdy?
LEVINE: Has finance become pretty nerdy?
What makes an activity nerdy, there are two clusters of factors. One is having some sort of academic barrier, where you have to be smart to do it, or you have to learn something to do it.
The other, traditionally, is unpopularity, right? You’re a nerd because you’re not cool.
What’s happened with finance . . . finance in the last 10 years has become nerdier in the academic sense. The threshold to be hired on a trading floor in the days of Liar’s Poker was you needed to be a fun guy to hang out with, and maybe you’ve gone to high school. Now it’s like you need a PhD in physics. So in that sense it’s become nerdier.
Computer programming when I was a kid was quite nerdy because it was academic, but also people were like, “Why are you doing that? Go play sports.” Whereas now you see enough Mark Zuckerberg stories, and it’s like computer programming is the way to become a billionaire who has not just power, but controls the world’s social relationships.
Finance is at that weird point where in New York, if you go out to the club, there are a lot of finance people there. It doesn’t have quite that, the pure nerdiness component.
COWEN: Has finance become less unpopular because of passage of time since the crisis? Or is it, in part, because tech is now so unpopular with the media and some intellectuals that it’s taken over that pride of place? Finance is pushed to the side, and we can be ignored a bit, maybe like highly skilled carpenters but nerdier?
LEVINE: There is some of that. I was taking a broader view of your question. Finance was unpopular in the sense of niche. Then it became extremely central to the world in like 2005, and then it became extremely unpopular. Extremely unpopular is almost as good as popular, in terms of not being nerdy. If you’re a villain, you’re not a nerd.
LEVINE: No, there is some of that. They say memories are short in finance, but it’s actually been 10 years since the crisis. There’s some reason for the world to have found new things to be interested in.
On the next financial crisis
COWEN: Here’s a question from a reader. I quote, “Are there huge bets being made on Wall Street now that could end in something like the CDO-MBS financial crisis debacle?”
LEVINE: Maybe that I don’t know about. My general impression is that the reform of financial regulations since the financial crisis has had a lot of its intended effects.
One of those is that systemically important financial institutions, by some reasonable definition, probably aren’t making huge directional bets on things — like huge, levered, directional bets on things that aren’t traditional banking products, anyway.
You never know what someone’s getting up to, but I’d be surprised if there are huge, levered, directional bets existing at regulated financial institutions.
COWEN: Do you have a single biggest worry, however tiny, tiny, tiny it may be?
LEVINE: I don’t think I do. I don’t think I do. The thing that I find weirdest is the lack of volatility in the face of a very strange and volatile world, but I’ve reconciled myself to that. This is my efficient markets optimism, where I assume that if something bad is happening, it would happen.
COWEN: But efficient markets is also a pessimism, right? It’s harder to make the world better than it already is because you can’t see past what others are seeing very easily.
LEVINE: Sure, it’s an efficient markets conservatism or something.
COWEN: If you were running the division of enforcement at the SEC right now, what would you be telling your people to concentrate on?
LEVINE: ICO frauds is the simple thing.
COWEN: They’re all informed investors, right? Grandmas in this country are not buying ICOs so much. Let them lose their money to each other, or not?
LEVINE: I have an aesthetic objection to ICO frauds. If you’re the division of enforcement at the SEC, very high on your list is protecting uninformed retail investors from fraud.
Also, pretty high on your list is protecting dumb retail investors from egregious frauds that make you look bad. You don’t really want to be the country where people are committing fraud, running pump-and-dump groups, talking about it, having articles written about it, and high-fiving each other. It doesn’t seem to encourage confidence in the markets.
The other thing, as the SEC division of enforcement, you might consider is larger, more systemic things than retail fraud. I’ve gone back and forth on this.
I think that the grandmas losing their pensions to boiler room operators in Florida is a very clear harm. There’s a lot of interest among regulators in the people lying to their customers about large structured credit trades because those are bigger trades, and you can get bigger penalties because you’re defrauding a bank. You have to weigh the bigness of the potential harm and the overall size of the transaction with how morally and aesthetically abhorrent the transactions are.
The person defrauding the grandma in the boiler room is very clearly doing something wrong. There’s a lot of gray-area behavior in institutional bond markets that has gotten a lot of focus because it is gray area, so it’s more interesting to bring a case if you’re a prosecutor or an enforcer.
And it’s institutional, so it’s a sexier thing to deal with than retail fraud in Florida. In some ways, it’s less bang for your buck because you are tweaking the rules in a market that is essentially among informed investors who can take care of themselves.
On price discovery and IPOs
COWEN: Like you, I’m mostly an efficient markets guy, but when I look at initial public offerings I’m very baffled because investment banks take such a huge cut.
If you needed to argue, “Well, they need the cut because they talk up the security, and in the absence of their efforts, no one would be interested, and it’s worth it,” maybe that argument works. But it seems somewhat to stand in tension with an efficient markets hypothesis, which suggests the thing will find its appropriate level without any particular investor having to talk it up.
Furthermore, attempts to get around the current mainstream system of IPOs have not always been successful. Auctions have been tried. Israel has tried other methods. Spotify is giving it a go. We’ll get further data, but they’re not obviously doing better.
How do you reconcile IPOs in their current form continuing, the investment banks taking such a huge cut, and some version of efficient markets hypothesis actually making sense? Do you see what I’m asking?
LEVINE: How do I reconcile? One version of efficient markets is that, in the absence of news, the price yesterday is going to be the price today, or whatever. There’s some sort of continuity of prices.
The IPO is a huge discontinuity. You don’t have a price and then you have a price. If your notion of efficient markets is a straight line of the price not moving very much or of the price instantly incorporating information, it’s not unintuitive that you’d have a big squiggle at the start, that you wouldn’t really know what the price is for three days, and then you would.
I don’t think it’s unusual that the first trade of a stock would not be the price that it settles to in a week, but then, the second week would be pretty close to the first week.
COWEN: The direction is so predictable, though. That’s odd. The pop, right?
LEVINE: One thing that’s happening is that the banks are doing the work they’re getting paid for, which is going out to a bunch of buyers and talking about the stock and trying to generate a price. That work is non–efficient markets work. It’s M&A work. There’s no visible price and you’re negotiating one-off with big investors.
Then, once they have that price, they sell it for less. Well, that’s not really true, but that’s kind of intuitively what’s happening, is that once they have that price, they sell it for less for a variety of reasons. The stories for it are, I think, somewhat compelling. You want a pop because you want the early investors to be rewarded for taking a leap of faith in the company.
That’s, maybe, a little silly on a giant IPO, but it’s not that silly on a tiny IPO, where there’s some hair on it, and where it’s a small company, and you have to give someone some expectation of returns to get interested.
The other thing is, that work before the pop, figuring out what the thing is worth and selling it to investors and doing research and everything, that’s what the banks are getting paid for.
The pop is not the same thing as the bank’s fee. The bank is doing work to try to get to a reasonable price, and then they’re selling it for 15 percent less than that price. The other thing about the pop is that investors in the IPO have an interest in the stock going up. The sellers in the IPO have no interest in the stock going down. It’s bad for them.
It’s bad for them for a variety of reasons, the main one being that they are keeping most of the stock, and they don’t want the stock to go down. When you have that set of dynamics, no one is sad when the stock goes up. Everyone is sad if the stock goes down. Why would you overprice it?
On the classics
COWEN: Now, Matt speaks Latin, and he was a classics major as an undergraduate at Harvard.
LEVINE: I don’t really speak Latin. [laughs]
COWEN: You once told me that law was easier than classics. What did you mean by that?
LEVINE: I mean that the activity that you do in your academic job as an undergraduate or a law student is sitting around, analyzing dense texts, but in law, they’re mostly in English.
LEVINE: It’s very straightforward. If you’re not raised speaking ancient Greek, it is much easier to read even a 19th century legal decision than to read Thucydides. I don’t know. Law is so embedded in our society. You grow up watching Law and Order or whatever. It is very much a part of the fabric of how we live.
Whereas reading Greek poetry when I was in college was an extremely niche activity and required a little bit more investment to come up to any familiarity with it.
COWEN: Now, I brought my copy of Horace’s Epistles for this conversation.
LEVINE: It’s been terrifying me all day.
COWEN: I actually think of a lot of your Bloomberg writings as being a kind of modernized Horace. You read Horace, there’s a preoccupation with wealth, with law. There’s a humor in it, the way he segues from one topic to another. There are even mixed feelings on how the pursuit of wealth would translate into happiness.
The length of a lot of Horace’s letters is actually, I bet, the same as the length of some of your Bloomberg columns. So this little quiz here . . . I’m going to read a few sentences, and you need to tell me, were they written by Horace or were they written by Matt Levine?
LEVINE: This had better be easy.
LEVINE: Are you going to read them in Latin?
COWEN: In English. Here’s the first one. Quote, “I store up and organize material so that I may be able to draw upon it before long.” Horace or Matt?
LEVINE: I’ll say Horace.
COWEN: That’s Horace. Very good. From the Ars Poetica. [to audience] And he’s trying to tell you he doesn’t speak Latin.
LEVINE: That was in English.
COWEN: That was in English.
COWEN: “What is to prevent one from telling the truth as he laughs?”
COWEN: Horace. OK, very good. Two for two.
COWEN: Here’s another quote. “Football player derivatives are the best derivatives.”
LEVINE: [jokingly] Horace?
COWEN: [jokingly] Three for three.
COWEN: Finally, quote, “In laboring to be concise, I become obscure.”
LEVINE: Wow. Horace. Thumbs up, Horace.
COWEN: Thumbs up, Horace.
LEVINE: When you’re an undergraduate classics major, you read Horace and Catullus, which are paired with each other. Catullus is the hotheaded young romantic who wrote quasi-pornographic love poems, and Horace is the older, wiser, backed away from the world.
The famous Horace love poems are more cynical and better removed from the world. That’s something I also admire and attempt to emulate [laughs] in my own work. I tell people I’m an opinion columnist and I don’t have any opinions. I try to be a little more removed from the passionate engagement.
COWEN: As is often the case in some of the Latin classics.
What’s the best thing you’ve read or reread in Latin in the last five years?
LEVINE: I don’t read a lot of Latin in the last five years.
LEVINE: The answer honestly is, because I don’t read a lot, is Horace Odes, 1.5, the famous “Quis multa gracilis te puer in rosa.” It’s the most famous world-weary, renunciatory Horatian love poem. It’s good stuff.
COWEN: What do Latin speakers and readers get about ancient Rome that non-Latin speakers miss?
LEVINE: I don’t have a substantive answer. What I took from my classical education is this sense of direct engagement with humans who lived 2,000 years ago. Cicero’s letters are a classic piece of Latin literature because Cicero is this famous, stern orator who wrote these very serious law court speeches.
But he also has a lot of letters that have come down to us. Some of them are for publicity, and some of them are much more personal, but they’re all, at least ostensibly, personal. You get this sense of this actual human who’s this famous figure and this famous lawmaker. You experience his consciousness more directly in his language.
That, to me, was the weird and interesting part of being a classics major, being able to sit with people from 2,000 years ago and see how many of their concerns are similar and see how many of their concerns are so different and so weird, in a pretty direct way.
On things under- and overrated
COWEN: Now, as you, Matt, know, in every conversation with Tyler, there’s a middle segment called “underrated versus overrated.” I toss something out. You tell me if it’s underrated or overrated. You’re always free to pass, of course.
The first one is writing in legalese. Underrated or overrated?
LEVINE: It’s not great but underrated, I would say. I don’t know what that means, but in general, people are too quick to criticize jargon and legalese and all these things.
There’s often a set of technical meanings that are just easier and more efficient to use when you’re using the jargon of a field. I think aesthetic criticisms of legalese are often overblown. That said, I’ve read some really bad legal writing . . . some mixed feelings, but I’d say under.
COWEN: Legal realism, overrated or underrated?
LEVINE: It feels like it’s gone from the academy. It’s not something that people talk about in their daily life. To me, it explains everything, so I’d say under.
COWEN: Buffy the Vampire Slayer.
LEVINE: Oh, my god, underrated.
LEVINE: Well, highly rated but comparative . . . among the most important American cultural products and not rated that way.
COWEN: What makes it special?
LEVINE: Part of it is, you go back and watch it, and it’s not as good as you think because it has had such an influence on later things that its shockingness has been attenuated. Part of it is its influence on subsequent television.
It’s a perfect example of dealing very intelligently with serious themes in a way that, on its surface, and particularly in its title, is silly and is not presented as serious, which I think is, obviously, something that I often aspire to do.
I also think it’s something that the internet aspires to do. I think a lot of modern internet culture has that vein of using colloquial language and being casual but attempting to address more serious issues. Buffy didn’t invent that, but Buffy is a cultural touchstone for some of that approach.
Buffy the Vampire Slayer is a perfect example of dealing very intelligently with serious themes in a way that, on its surface, and particularly in its title, is silly and is not presented as serious, which I think is, obviously, something that I often aspire to do.
LEVINE: Yeah, sure. Overrated.
LEVINE: I told you when I was in college, I did a summer program in Rome run by Father Reginald Foster, who was the Latin secretary to the pope. He was a Carmelite friar from Wisconsin. He would have a program for whoever wants to come would come and read and speak Latin.
We read some gorgeous passages of Ovid, and he concluded, he said, “Isn’t that nice? Isn’t that better than Virgil? Virgil is gray and wicked.”
LEVINE: I was always biased against Virgil after that. It’s not true, but he’s a propagandist. I don’t know. He’s overrated.
COWEN: What’s the most underrated neighborhood of New York City?
LEVINE: I was going to say, I don’t have an answer to that because I’ve only lived in extremely highly rated neighborhoods.
LEVINE: I live in Park Slope now, which some magazine, a few years ago, declared the best neighborhood in America, which it would be hard to argue . . .
COWEN: It may be better yet.
LEVINE: I don’t know. Park Slope has adjacent . . . Gowanus. Maybe I’d say Gowanus is underrated. It’s a great food destination. It’s got great industrial chic architecture. Sure, Gowanus.
COWEN: Footnotes, overrated or underrated?
LEVINE: I feel like they’re underrated but fairly rated now. I don’t know. People have come around on footnotes. [laughs]
COWEN: A lot of footnotes started in medieval times as commentary on the Latin classics, of course, including Horace.
LEVINE: The notion of an intertextuality, like having multiple lines of the text, having a main line and having asides, is a valuable notion and one that, I think, has been valorized by internet writing in a way. You have links.
The notion of having a single narrative with no distractions and having that be the highest achievement of writing is, I think, a little diminished by the internet. Therefore, footnotes have become more appropriately valued.
On the weird world of banks
COWEN: What financial stories or issues do you think are not getting enough coverage and why?
LEVINE: It’s hard for me to answer questions like that because I am such a creature of coverage. [laughs] I wake up and I read the news and I write about it. I rarely take a step back. I don’t know.
The thing that I would like to read and hear more about is . . . I came to this from a bank. I think banks are interesting objects. Banks and hedge funds are not perfect substitutes for each other. Banks do something interesting.
There’s a lot about it, but I’d be interested in seeing more because I don’t feel like I have a good answer on what will happen to banks. We’re in the early days of, seems to be pretty wholesale financial deregulation. Obviously, banks in 2006 were different places from what they are now.
One possibility is they’ll go back to doing exactly what they did in 2006. Another possibility is they’ll go back to doing something precisely analogous to that but in totally different instruments and ways but will be similarly freewheeling, fascinating, dangerous places.
Another possibility is a switch has been effectively flipped within the culture, and they won’t go back. I just don’t know.
I think that banks have become very boring. I think the coverage of what banks are doing to be more interesting. Things have moved on to more interesting places. There’s a million articles about Bitcoin. It’s possible that banks will be becoming more interesting, and I don’t have a handle on the ways in which they’re doing that.
COWEN: Bloomberg aside, who would you say is underfollowed as a writer, not counting our colleagues?
LEVINE: I always want to pass on these. I just forget people. [laughs]
On Iliad and Nabokov’s Pnin
COWEN: Ovid once wrote, “In our leisure, we reveal what kind of people we are.” Do you agree?
LEVINE: I guess. Yeah, sure. In my leisure, I read the internet and do crossword puzzles.
LEVINE: Hang out with my daughter. I’m pretty boring in my leisure, [laughs] which is probably accurate.
COWEN: You once wrote — I think this was a speculation rather than a definitive pronouncement.
LEVINE: Everything is. [laughs]
COWEN: But you wrote, “I think more and more about how all of Western culture is a footnote to Iliad, Book 9. What did you mean?
LEVINE: I have an idiosyncratic take on Book 9 of the Iliad. The Iliad is the story of Achilles is the great warrior on the Greek side in the Trojan War. He gets mad at some slight, and he goes back to his tent to sulk, and the Greeks start losing.
So then they send emissaries to his tent to say, “Please come back.” And he says, “No.” Then, the Greeks start losing some more.
Eventually, he comes back, and he gets killed. That’s basically the story of the Iliad. Book 9 is where they send the emissaries to say, “Please come back,” and he says, “No.”
He gives this speech, this response that is weird, where he says, effectively, “The prophecy is that if I go back to fight here, I will die here. My name will be immortal. If I don’t go back to fight, I’ll go home and live a long life and will be forgotten.” He chooses to go back and be forgotten. Then, later, he changes his mind because his friend gets killed.
I think the existential examination of this Greek warrior and this heroic culture that clearly valorizes heroism and deathless fame and everything, and who is, canonically, the most famous heroic warrior and the one with the most deathless fame, he’s the one who says, “Nah, I’d rather go back and live a long life on my farm.”
The forcing of that choice is the central point of the highest work of Greek art, sort of prefigures a lot of existentialist thought in the future, I think.
LEVINE: [laughs] You’ve been reading my secret Tumblr. Which I’m not going to link up to. It’s just very Nabokovian. He’s just this great esthete of almost pointless pleasure in writing.
There’s this scene that I love where Pnin, the absentminded professor character, is heartbroken after a run-in with his ex-wife. He’s dejectedly walking through the park on the way home, and he’s pondering the meaning of life.
Nabokov says something like he’s almost come upon a solution to one of the great mysteries of life. Then he’s interrupted by a squirrel who runs up on a water fountain and demands that he help the squirrel drink from the water fountain. So he helps the squirrel, and then he moves on.
It’s just this random interlude of gorgeous writing and bizarre scenery and just random pileup of weird delightfulness with no point that I find very appealing. [laughs]
Nabokov’s Pnin has this random interlude of gorgeous writing and bizarre scenery and just random pileup of weird delightfulness with no point that I find very appealing.
COWEN: If we think about mergers and acquisitions, one of the standard results in the empirical finance literature is that acquiring firms do fairly poorly. That is, acquisitions don’t seem to pay off. Yet, of course, acquisitions persist.
You’ve done M&A work in your life. How do you think about this process? If it doesn’t pay off, is it about empire building? Is it about winner’s curse?
Do you somehow not trust the data? You would challenge the interpretation of the result? Or how good are acquisitions for the acquiring firm? And what goes wrong?
LEVINE: I wouldn’t challenge the data. It’s a similar story to active management in some ways. The fact that M&A is bad doesn’t mean that your merger will be bad, right?
LEVINE: One, there’s obviously a bias towards empire building. Two, you don’t say that. You’re not like, “Well, I’d like to have a bigger company to run.” What you say is, “This merger will be good.” And you believe it.
The data is not overwhelming that all mergers are bad. The data is like, on average, they’re a little bad. So you say, “Here are the reasons why we are better.” Everyone can say that, and 49 percent of them will be right. You throw in some empire building, and it’s a . . .
People want to do stuff. [laughs] It’s very similar to the active management story. You want to do stuff. You see an active manager who seems smart, has a good reading. You see a charismatic banker or charismatic corporate development guy or whatever, and you want to do some stuff, and then you can persuade yourself that you’re in the 49 percent.
COWEN: The Shad-Johnson agreement. Should the SEC and CFTC be independent agencies, or should they be combined into one?
LEVINE: I don’t have a strong view on that. I don’t see a compelling difference among them. If you combine them, there’d be departments for commodities and departments for equities.
If you split off the SEC into equities and the bond department tomorrow, I’m not sure what the institutional dynamics are that matter very much.
I suspect that most of the time, the agencies are roughly on board with each other in a broadly “how much regulation should there be” perspective. Obviously, there are times that they aren’t. The CFTC fighting against derivatives in the early 2000s is a famous example of that. In general, I’m not sure what the dynamics are where it matters that much one way or the other.
COWEN: Is American financial regulation too federalistic and too fragmented or not?
LEVINE: In my experience, the existence of state financial regulation was only a weird footnote. But I think, in general, it is almost certainly too federalistic and fragmented. The example that was not core to my experience as a person in finance is insurance regulation.
It’s very clearly too state-based and fragmented and gameable, and I think that there are probably some securities cases that are similar. But insurance regulation is kind of the big one.
Then you could argue that corporate law should be federalized. I don’t think that there’s a huge case for that, just because in practice, corporate law is a creature of Delaware. It’s essentially there’s only one corporate law anyway.
COWEN: What’s the most overrated neighborhood in New York City?
LEVINE: I don’t know. [laughs] Pass.
COWEN: Why is William Gaddis an interesting writer?
LEVINE: Why is William Gaddis an interesting writer? Because he’s part of that . . . I don’t know, there’s a period of interesting modernist experimentation that’s . . . I feel like the peak of it was from Joyce through mid-’50s or something, and I think Gaddis is the most contemporary weird writer. Like weird midcentury, esoteric, yeah.
On the Matt Levine production function
COWEN: I sometimes like to say, “Matt Levine, only you can do what you do.” So my final question is about what I call the Matt Levine production function. So many days in the week, early in the morning typically, you have produced something that is perfectly clear and lucid and witty and informative and original.
So many days over the course of a year — more than anyone else I know — spanning law, economics, finance, history, other things. There are many facets of your day in your work routines, but if you had to explain to someone what is the Matt Levine production function, what is it you would draw our attention to?
LEVINE: I think, like a lot of people, a lot of it is panic.
LEVINE: I tell you what, I at various points thought of being a law professor. I thought of being a classics professor, and I never could write papers. I turned in my final paper in law school two weeks after graduation. When I thought about leaving my job as a banker to become a blogger, my girlfriend — now wife — was like, “Remember how you didn’t write your papers in law school? Are you sure you want to do this?”
What I think is, people have their proper metabolism for producing stuff. For me, I wouldn’t say it’s easy. It’s incredibly difficult, but it is reliable that I can produce something in a panic every day. Whereas, I think if I had to produce something every week — and I have some experience with this — if I have to produce something every week, I do it about every three weeks. That’s one thing, is just the drive of panic.
What I think is, people have their proper metabolism for producing stuff. For me…it is reliable that I can produce something in a panic every day. Whereas, I think if I had to produce something every week, I do it about every three weeks.
The other thing is, I try to be pretty ruthlessly focused on places where I have an advantage or where I can add value. One nice thing about working at Bloomberg is that if I don’t write about something, someone else will write about it.
I don’t ever write about things because someone needs to write about it. If I write about it, it’s because I have something to say about it. That, I think, is a rare and valuable flexibility to have. My beat, I’m not doing things because I have to do them. Those are main things.
The other thing that I have is, I worked on this weird derivatives desk at a bank where I was an investment banker, so I covered corporate clients. I went to meet with corporate clients with coverage bankers who did M&A.
I was also selling them equity derivative products, which were booked against our trading desk and where we were acting as a principal. I was also underwriting convertible bonds. I was seeing a lot of different sides of a bank and exposed to a lot of different ways of being in finance.
The life of an investment banker is very different from the life of a VAL trader. I was, to some extent, bridging those lives, which was helpful. The other thing I was doing is, I was explaining fairly complicated products to smart people who did not know anything about them.
You’d go to a CFO and be like, “What you want to do is an uncapped collared ASB with variable maturity.” They’d be like . . . Then you’d have to explain to them, not what the thing was — because they don’t care what the set of legal documents are — but what the economic intuitions behind it are.
That explaining economic intuitions to a smart person about a thing that is complicated is, I think, valuable in my current job. The other thing that was valuable about that is that the economic intuitions I was explaining to the CFO were not necessarily the economic intuitions that we had.
We were doing the trade for something, for some exposure that we wanted or some set of payoffs that we got. They were doing the trading for some other set of payoffs, and it wasn’t like we were betting against them. It was like we had two overlapping sets of interests in the trade.
Having some awareness of that is useful in looking at complicated financial things, that different people can be getting something different and complicated out of a trade that is not necessarily described in the public documents for that trade.
COWEN: Matt Levine, only you can do what you do. Thank you for the conversation.
LEVINE: Thank you.
AUDIENCE MEMBER: Hey, thanks a lot. On the topic of efficient markets and cryptoassets, I wonder if you think it’s possible that the prices of many of these assets are far too high now and if that might be because the risks of buying and the risks of selling are very different.
In particular, whether there’s other assets like, say, binary options or something that might result in more accurate, lower prices?
LEVINE: I’ll preface by saying, in general, I’m an efficient markets believer. I never want to be like, “All these cryptos are too highly valued, and they’re all going to crash to zero.” Because what do I know?
That said, do I think that there are some, let’s say, technical reasons that a lot of cryptoassets are too highly valued? I do think that there are some obvious limits to arbitrage. One is that there’s a perception that it’s hard to short a lot of cryptoassets. Some people tell me that’s not true and you can borrow Bitcoin, no problem.
But there is a perception that it’s hard to short them. Even if it’s easy to borrow them, it’s always more dangerous to short something super volatile than to long something super volatile.
The other thing that I don’t really understand about Bitcoin is exchange withdrawal limits that make it seem like there are a lot of places where you can buy bitcoin and then not sell them, never mind shorting. Where it is very easy to put as much money as you want into an exchange to buy as many bitcoins as you want, but selling those bitcoins and taking your cash out is a more complicated and lengthier process. I don’t know that that’s true at all exchanges, but it’s clearly true at some exchanges.
So yeah, there are some technical factors that probably lead to Bitcoin overvaluation. Can technical things solve that? Maybe.