Money Stuff: The Podcast Episode: Another Great Convergence: 7bps, APO, HOOD
Release Date: February 7, 2025

Hosts: Matt Levine & Katie Greifeld
Publisher: Bloomberg
Description: Exploring Wall Street, finance, and beyond with Matt Levine and Katie Greifeld.

Vanguard's Historic Fee Cuts and Industry Implications

Timestamp: [03:01] – [07:52]

In this segment, Matt Levine and Katie Greifeld delve into Vanguard's unprecedented decision to reduce fees across a substantial portion of its mutual funds and ETFs. Katie outlines that Vanguard has slashed fees on 87 mutual funds and ETFs, bringing their average fee down to an astonishing 7 basis points compared to the industry average of 44 basis points. This move not only underscores Vanguard's commitment to investor-friendly practices but also intensifies competitive pressure on other major asset managers.

Notable Quotes:

• Katie Greifeld [03:22]: "The industry average roughly is 44 basis points. So that tells you just how low Vanguard is."
• Matt Levine [05:10]: "It should be in a world of technology, a world of giant scale for these funds. It should be kind of free to invest in an index fund. And it kind of is."

Vanguard's unique ownership structure, where fund investors own the firm, allows it to prioritize lowering fees without the pressure of external shareholders. Katie highlights that this structure compels competitors like BlackRock and State Street to reconsider their own fee strategies, potentially leading to broader industry-wide fee reductions.

Impact on Active Funds: Vanguard isn't solely focused on passive index funds. Katie notes that Vanguard's active bond funds charge an average of 10 basis points, a strategy that allows managers to avoid taking excessive risks to outperform, thereby ensuring sustainable long-term performance.

Notable Quotes:

• Katie Greifeld [05:33]: "Their active funds are also really cheap. Their bond funds, in particular, their active bond funds charge 10 basis points on average."
• Matt Levine [07:19]: "I would frequently pay more for better experiences."

The discussion also touches upon the broader industry reaction, with some stakeholders questioning whether the relentless pursuit of lower fees might come at the expense of customer experience and service quality. Despite these concerns, the consensus between Matt and Katie remains that Vanguard's approach is fundamentally investor-centric and challenging to emulate by firms burdened with external shareholder expectations.

Apollo's Venture into Private Credit Trading Desks

Timestamp: [13:43] – [23:04]

Matt Levine introduces the next major topic: Apollo's initiative to establish a private credit trading desk. This move signals a significant shift in the private credit landscape, aiming to enhance liquidity and provide a structured marketplace for trading private credit assets.

Notable Quotes:

• Matt Levine [13:54]: "I wrote I don't really know what private credit is."
• Katie Greifeld [15:35]: "They are having conversations that have been highly constructive at the highest levels about this."

Katie explains that Apollo is not merely launching a single trading desk but is contemplating a comprehensive marketplace where multiple trading desks can operate, interact, and provide pricing services for private credit transactions. This ecosystem approach is intended to address the current liquidity challenges in the private credit market, making assets more tradable and accessible.

Matt elaborates on the historical context, comparing Apollo's strategy to the traditional investment banks' roles before increased regulations post-2008. He suggests that alternative asset managers like Apollo are filling the void left by banks, offering services that were previously dominated by less-regulated entities.

Notable Quotes:

• Matt Levine [17:09]: "These big alternative managers are kind of stepping in to do kinds of business that banks used to do."
• Katie Greifeld [19:09]: "How much credit is there in the world? There is this long term push against banks doing a lot of credit on their balance sheet."

The conversation delves into the potential future of private credit, speculating on its growth to potentially $30-$40 trillion. Matt posits that as private credit becomes more mainstream, it may emulate the evolution of public credit markets, introducing more streamlined trading mechanisms and potentially even hybrid products like ETFs for private credit.

Concerns and Predictions: Both hosts express cautious optimism, acknowledging the inherent risks associated with increased liquidity in private markets. The fear remains that the liquidity provided by trading desks and new platforms could lead to volatility similar to what was observed in public bond markets during 2020.

Notable Quotes:

• Matt Levine [21:57]: "I'm really excited for like the first 17 times I can write. People are worried about private credit liquidity because it's just going to happen again."
• Katie Greifeld [22:02]: "It was like, how quaint."

Robinhood's Foray into Event Contracts and Regulatory Challenges

Timestamp: [26:18] – [34:35]

The final major discussion centers on Robinhood's attempt to introduce event contracts, specifically targeting sports betting linked to major events like the Pro Football Championship. Despite initial enthusiasm, Robinhood quickly retracted the offering due to regulatory pushback from the Commodity Futures Trading Commission (CFTC).

Notable Quotes:

• Matt Levine [26:22]: "They launched an events contract on the Big Game you can't say Super Bowl because then you get in trouble."
• Katie Greifeld [28:53]: "We had several assassination attempts on President Trump."

Robinhood's event contracts were designed to allow users to bet on outcomes such as the winning team of the championship. However, the CFTC deemed these contracts problematic, leading to their removal within 24 hours of launch. Matt criticizes the regulatory stance, questioning the rationale behind excluding certain types of bets while allowing others, like political outcomes.

Notable Quotes:

• Matt Levine [30:10]: "It's not an asset class. The stock market goes up over time... The size of the sports betting market does go up over time, but the outcome of the Eagles game doesn't go up over time."
• Katie Greifeld [33:31]: "It's like, very community based."

The hosts explore the blurred lines between financial instruments and gambling, debating whether platforms like Robinhood should be able to offer a broader range of event-driven contracts. They discuss the social aspects that drive both sports betting and certain investment behaviors, noting parallels in community engagement and speculative activities.

Regulatory Implications: Matt predicts ongoing challenges and uncertainties as companies attempt to innovate within the boundaries of financial regulations. He emphasizes the importance of distinguishing between products that support economic activities and those that merely facilitate speculative or gambling behaviors without underlying economic value.

Notable Quotes:

• Matt Levine [31:23]: "It's an emerging asset class. It's a very cynical thing to say."
• Katie Greifeld [34:35]: "They sold their contracts and then pulled them."

Reflections on Market Trends and Convergences

Throughout the episode, Matt and Katie reflect on the broader trends shaping the financial landscape. They observe a "great convergence" where traditional financial instruments intersect with emerging technologies and regulatory frameworks, leading to both opportunities and challenges.

Notable Observations:

• The shift of private credit from being purely private to incorporating more public trading mechanisms.
• The historical parallels between current market innovations and past financial practices, highlighting lessons learned and potential pitfalls.
• The interplay between fee structures, customer experience, and regulatory environments in shaping asset management strategies.

Conclusion: The episode encapsulates the dynamic nature of the financial industry, where innovation continually reshapes traditional models. Vanguard's fee cuts and Apollo's initiatives signal a move towards more investor-friendly and liquid markets, while Robinhood's regulatory hurdles underscore the complex balance between innovation and compliance.

Final Notable Quotes:

• Matt Levine [33:53]: "History just repeats itself."
• Katie Greifeld [34:35]: "Everything hurts."

Listen to the full episode of "Money Stuff" on Bloomberg or your preferred podcast platform to gain deeper insights into these pivotal financial developments.