Audible Frustration: C, ME, ETF

Summary

Money Stuff: The Podcast – Episode Summary
Title: Audible Frustration: C, ME, ETF
Release Date: March 7, 2025
Hosts: Matt Levine and Katie Greifeld

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Introduction

In the episode titled "Audible Frustration: C, ME, ETF," Matt Levine and Katie Greifeld delve into a trio of financial missteps and industry practices that have stirred both frustration and intrigue within the financial sector. From colossal banking errors to the turbulent journey of a genetic testing giant and the dubious sales tactics of an ETF issuer, the hosts provide a comprehensive analysis of recent events shaping Wall Street and beyond.

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Citigroup’s Monumental Fat Finger Errors

One of the primary discussions centers around Citigroup's series of "fat finger" mistakes—significant erroneous transactions resulting from simple input errors.

Katie Greifeld introduces the topic by highlighting Citigroup's troubling history:
“What is going on over at Citigroup? It seems incredible.” [03:27]

Matt Levine elaborates on past and recent incidents:
“Citigroup has had a series of very public and very comical mistaken payments... For example, they mistakenly sent $81 trillion to a customer’s escrow account instead of $280.” [04:45]

Despite the staggering figure, Levine reassures listeners that the error was contained:
“It's an internal transfer. They reversed the payment the next day and reported it as a near miss to regulators.” [05:02]

The hosts dissect the implications of such errors, emphasizing the systemic issues within Citigroup's operational frameworks. Levine sarcastically remarks on the absurdity of the $81 trillion mistake:
“It's very funny to imagine these being material risks to the bank, right? Like a bank going bankrupt because it accidentally wired out $81 trillion.” [10:25]

Katie underscores the recurring nature of these errors and questions Citigroup's internal controls:
“They seem to have implemented new warnings for large transactions, but with the volume of alerts, it's easy for employees to become numb and ignore them.” [09:13]

23andMe’s Downward Spiral and Privatization Bid

Shifting gears, the hosts explore the decline of 23andMe, a once-popular genetic testing company, and its recent attempts to go private.

Katie provides context on 23andMe’s trajectory:
“Last time I thought about it, it was going public via SPAC in 2021. It was 2021 at a $3.5 billion valuation.” [16:31]

However, the company has since plummeted in value, with shares trading below a fraction of their IPO price. Matt discusses the CEO's controversial bid to take the company private:
“She’s offering $10 million for the company, which is like $0.41 per share... It’s a tough deal because she’s offering much less than the current trading price.” [18:01]

The negotiation dynamics are explored, highlighting the challenges faced by the board in balancing shareholder interests against the CEO's intentions. Matt notes the CEO's strategic maneuvers:
“After the original directors resigned over her offer, she appointed new independent directors who also rejected her bid.” [20:03]

Katie reflects on the broader implications for 23andMe:
“The company needs to raise cash or find some solution, or else it won't be around for much longer. It’s fascinating to follow.” [21:56]

First Trust's Dubious ETF Sales Tactics and FINRA Investigation

The episode then transitions to a deep dive into First Trust, an ETF issuer embroiled in questionable sales practices and under regulatory scrutiny.

Katie introduces the First Trust saga:
“A really great deep dive into First Trust, which is an ETF issuer based...” [27:44]

Matt explains the sales channels of ETFs, distinguishing between advisor-led and self-directed retail investments. The focus is on First Trust's high-fee ETFs and their aggressive sales tactics: “Their average fee is 78 basis points, which is pretty high compared to the industry average of 58.” [30:37]

The hosts highlight the company's under-the-radar strategies to entice financial advisors through perks and incentives. Katie references internal emails revealing First Trust's emphasis on entertainment:
“We've always been about entertainment. That's our one leg up on our competition.” [35:33]

Matt critiques these methods, drawing parallels to potential bribery:
“They’re paying attention to the advisors and creating good feelings, which could lead advisors to prefer their expensive ETFs over cheaper alternatives like Vanguard.” [38:18]

Furthermore, Katie discusses the FINRA investigation prompted by First Trust's practices:
“According to our reporting, First Trust is actually under investigation by FINRA for their sales tactics.” [31:16]

The conversation extends to the personal corruption of First Trust’s managing director, Jim Bowen, whose extravagant expenses came under legal scrutiny during his divorce proceedings:
“He spent $147,000 at Sea Salt and $70,000 on seafood at the Ritz Carlton, which were related to entertaining financial advisors.” [40:23]

Matt underscores the depth of mismanagement:
“He took financial advisors out to dinner at hotels and restaurants in Chicago, giving Hermes scarves to waiters to ensure high maintenance clients are well-treated.” [41:44]

Conclusion

Throughout the episode, Matt Levine and Katie Greifeld provide incisive commentary on the systemic issues plaguing major financial institutions and corporations. From Citigroup's laughable yet potentially catastrophic errors to 23andMe's faltering business model and First Trust's ethically questionable sales practices, the hosts shed light on the complexities and repercussions of financial mismanagement. Their discussion not only informs listeners about these specific cases but also prompts a broader reflection on accountability and integrity within the financial industry.

Notable Quotes:

• Matt Levine on Citigroup's $81 trillion error:
  “It's very funny to imagine these being material risks to the bank.” [10:25]

• Katie Greifeld on 23andMe’s privatization challenges:
  “The company needs to raise cash or find some solution, or else it won't be around for much longer.” [21:56]

• Matt Levine on First Trust’s sales incentives:
  “They’re paying attention to the advisors and creating good feelings at the advisors.” [37:55]

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This episode of "Money Stuff" effectively combines detailed reporting with sharp analysis, offering listeners a vivid portrayal of recent financial debacles and the underlying issues that enable them. Whether you're a seasoned financial professional or simply curious about the intricacies of Wall Street, Levine and Greifeld's insightful discourse provides valuable perspectives on the ever-evolving economic landscape.

Transcript

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[Katie Greifeld]

Studios podcasts radio news two things I'm wearing glasses. You are, which does not matter to our listeners. I kind of feel like I am wearing a costume. I don't know.

[Matt Levine]

Totally different person wearing those glasses Feels like it.

[Katie Greifeld]

The other point that I wanted to make is that I'll be wearing these glasses at a party tonight.

[Matt Levine]

A party?

[Katie Greifeld]

Yeah, specifically.

[Matt Levine]

Not my party.

[Katie Greifeld]

No, at your party. Okay, at my party. I'm going to your party.

[Matt Levine]

Party hopping. Yeah, briefly stopping by my party. By the time this airs, the party will have happened.

[Katie Greifeld]

That's true. So it's a debacle. We're gonna cut all this out yeah, exactly. If things go dramatically south, this will not be included in the podcast. But if you're hearing it, assume that it went well and we had a great time.

[Matt Levine]

It was great. What a great party.

[Katie Greifeld]

This is sort of a birthday party in that sense for moneysuf, which turned 10 years old.

[Matt Levine]

Right. It's not my birthday. It's not even really Moneysuf's birthday. It was just like a month ago. And even that is, like, the accounting is a little fuzzy, but we're gonna say it's the 10th anniversary of money stuff. Yeah, it's 10th anniversary observed 10th anniversary party. What a great time it has been. All right. Hello and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I write the Money Stuff for Bloomberg Opinion.

[Katie Greifeld]

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

[Matt Levine]

What are you talking about today, Katie?

[Katie Greifeld]

The fattest fingers in the world. 23andMe and Wheaton, Illinois.

[Matt Levine]

Wheaton, Illinois. I have a fondness for Wheaton, Illinois, because I have a Wheaton terrier, but that's not really related at all. No, never mind. All right. Fat fingers.

[Katie Greifeld]

Yeah, man. What is going on over at Citigroup? It seems incredible.

[Matt Levine]

Yeah, I don't know. Citigroup has had a series of very public and very comical mistaken payments, of which the greatest, honestly, was a few years ago in 2020, they sent out $900 million to some hedge funds. And they were like, sorry, we didn't mean to do that. And the hedge funds were like, we're keeping it. And there was a court case appeal. That was great. But recently there's been reporting on a couple of times, last year, they sent out extremely comical mistaken payments. But. But they got those back. That was fine. That was like a typo. It was like, in one case, they meant to pay $280 to some customer's escrow account, I think, in Brazil. And they put in $81 trillion, which is much, much more money than Citigroup has. So you can't do that. But, you know, it's not like, then the money left and the customer fled. It's like they reversed the payment the next day, and they told regulators it was a near miss. So they had some near miss.

[Katie Greifeld]

A near miss?

[Matt Levine]

A near miss. It's an internal transfer. Right. Like on Citi's books and records, they briefly credited the customer with $81 trillion, but the money left the bank and then they took it back the next day. So, you know, Citi has gotten grief from regulators about its systems and processes and technology.

[Katie Greifeld]

And it's been sort of like, understandably so.

[Matt Levine]

Yeah, it's been like trying to kind of turn the page and be like, we're really good at not making mistaken payments. So when they very publicly make or almost make mistaken payments and when they are very comically large, that's embarrassing for them. It sort of puts them in an ill light with regulators. But it's not like they lost $81 trillion, which would be amazing.

[Katie Greifeld]

Well, there was $81 trillion, which was amazing in and of itself. That actually made the $6 trillion fat finger that came.

[Matt Levine]

Six billion.

[Katie Greifeld]

Six billion.

[Matt Levine]

I'm sorry. The next day, Bloomberg reported on a $6 billion mistake and transfer that they had actually done like a week before the $81 trillion one. So like they had this private wealth customer, they had to send this customer, my impression is like a few million dollars. But they typed the account number into the amount field. So instead of typing like $3 million, they typed a 10 digit account number that began with a 6, and they sent $6 billion to this customer instead of a few million dollars and then again quickly discovered that it was a mistake and took it back. And it was all fine, but it's a near miss. They had to report it to regulators. And the Bloomberg story reported that the head of wealth management who had just.

[Katie Greifeld]

Started it, provoked audible frustration.

[Matt Levine]

Provoked audible frustration, which is a great way to describe swearing. So they were pretty sad about that until a week later when they did the $81 trillion thing and they're like, ah, 6 billion is nothing.

[Katie Greifeld]

Not so bad, not so bad. I tweeted a joke that a great way to make this stop happening is just not let citizen get the money back. And several people brought up Revlon that they tried to.

[Matt Levine]

They really didn't get the money back. Well, they did, but they took a while.

[Katie Greifeld]

I actually forget how Revlon ended. I remember the headline.

[Matt Levine]

The headline, they got the money back. They did. So Revlon was interesting because first of all, it wasn't an internal transfer. They actually sent the money out of a bank to people's accounts at other banks. But secondly, the accidental payment was part of an actual intended transaction that was a sort of aggressive debt restructuring by Revlon that was basically hosing some of its creditors. And so the creditors who were getting hosed randomly got $900 million. And we're like, sweet, we're keeping this. And then Citi's like, no, no, I have to give back and they're like, nope, we're not giving it back. Because, like, you are trying to restructure this debt in a way that was bad for creditors. And so they sued or they kept the money, and Citi sued them, and they defended themselves, saying, we were actually owed this money because, like, they were owed the money, just not right then. And Citi made the payment on behalf of Revlon and we're keeping it. And they actually won in the trial court, but then it was reversed on appeal. It was like, the right answer, but, yeah, it was, like, fun for all.

[Katie Greifeld]

So we weren't around when Revlon happened. But I was trying to remember why. Have we discussed city fat fingers on this podcast before? And then I was reminded of a different type of fat finger incident that was uncovered back in May. Do you remember that fat finger stock trade refined by the UK, like, 62 million euro? If you round up in that situation, a trader had intended to sell a basket of equities that was valued at $58 million, but made an error while inputting that, and as a result, the basket was actually valued at $444 billion being created instead.

[Matt Levine]

So this is the thing, all these things, it's like screens with, like, a big box with, like, 75 different fields, and you can fill in different fields. So if you want to sell $58 million worth of stock, there's some field that's like, sell $58 million. If you want to sell 58 million shares, there's a different field that's like, sell this many shares. And this person, I think, put like, the dollar number in the shares field. So the shares are worth hundreds of dollars. And so you multiply the amount by hundreds of dollars. But it was just like going fast in a complicated interface and just put it in the wrong box. Same thing with the account number person who put the 6 billion account number into the amount field and sent out $6 billion. It's just like there's too many things on the screen.

[Katie Greifeld]

Well, if I had prepped better for this podcast, I would have gone back and listened to the episode we recorded in May. Because I recall fuzzly, that at the time, we talked about how there were a bunch of warnings that popped up, at least when it came to the stock trade.

[Matt Levine]

There are too many.

[Katie Greifeld]

There are too many, and you kind of get numb and you just click through them. How do you fix this? It seems to happen uniquely often at Citi, so I don't know if their processes differ greatly from some of their peers.

[Matt Levine]

One thing they seem to have done is like, this is in the $6 billion story. The wealth Management Group has a new set of. Actually, I think the whole firm has a new set of warnings where, like, there's some threshold of, like, large anomalous transfer where, like, someone not pressing the button gets an alert. Like the head of Wealth Management gets, like, hey, we're sending $6 billion to someone for no reason.

[Katie Greifeld]

The man who expressed the audible association.

[Matt Levine]

It might not actually be him, but like, someone gets a warning. So it's not just the person pressing the button ignoring the warnings, but someone gets a. You know, you got to do it judiciously, right? Like, you can't pop up 200 warnings for everybody transaction because then everyone's gonna ignore them. But like, you know, there's some level of, like, it should not be possible for anyone at Citi to wire or to send $81 trillion to anyone, because that's more than they have.

[Katie Greifeld]

Yes.

[Matt Levine]

But even $6 billion, like, there should be someone checking that maybe.

[Katie Greifeld]

I want someone to ask Jane Frazier about this. I want this. I don't think it necessarily will come up on the next earnings call, but I want to see this in an earnings transcript.

[Matt Levine]

It's very funny to imagine these being material risks to the bank, right? Like a bank going bankrupt because it accidentally wired out $81 trillion. But they're not really. They're symbolic risks. They're like, you should have better tech so that you don't mess stuff up. But it's not like any one of these was like that serious risk. The Revlon was bad, but not that bad.

[Katie Greifeld]

You have to imagine that this is certainly a symptom of something that maybe is.

[Matt Levine]

Yeah, like a symptom of bad computer screens. The $81 trillion transaction, the reporting on that is wild. That wasn't like putting the wrong thing in the wrong field. That was they used some sort of rarely used backup screen to make the payment that was Pre populated with 15 zeros. So you had to delete the 15 zeros to type in the amount. And if you just typed in the amount, you overwrite some of the zeros and you sent out trillions of dollars. And that's what happened. Which is just like, you could just not do that. You just not have it automatically populate with 15 zeros. And then like, you've saved yourself a problem right there. Some of it is just like a lot of it, I think, is software design. And it's not always a priority for the CEO of a bank to be like, we need the internal software to be more user friendly. But it might be for Jane Fraser at this point.

[Katie Greifeld]

I would imagine it's moved up the priority list a few notches.

[Matt Levine]

Right. Someone is asking Jane Fraser about the user interfaces on the payment software.

[Katie Greifeld]

Maybe we'll get some answers.

[Matt Levine]

Maybe a regulator, maybe like, yeah, I.

[Katie Greifeld]

Do love the point that you made in money stuff that maybe this is a reason actually to bank with Citi. You're basically by opening up an account with them, buying a lottery ticket.

[Matt Levine]

Stereotypically banks sometimes make mistakes. Yeah, I read about a bank doing some error and people be like, I think you're being too generous to the bank. They never make errors in the customer's favor. It's always in favor of the bank. I was like, well no, Citi makes errors in the customer's favor all the time. They don't like necessarily get to keep the money. You probably shouldn't try to bank with a bank that makes mistaken payments all the time. That's more likely to end badly for you. But it would be kind of Fun to get $81 trillion in your account.

[Katie Greifeld]

And what if it's like a really small amount, you know, like what if it's just a little bonus, a casual like half a million dollars that they. Would they even notice? I don't know.

[Matt Levine]

Yeah, well, I'm just thinking about my account number at my bank, which has nine digits, which would be nice.

[Katie Greifeld]

Do you want to say them here? Should be cool.

[Apollo Representative]

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[Katie Greifeld]

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[Katie Greifeld]

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[Matt Levine]

My account number is 23 and and me.

[Katie Greifeld]

What a segue this is.

[Matt Levine]

Look at that.

[Katie Greifeld]

I really like this story. Mostly because, and we were talking about this at my desk before we recorded this podcast. Then I was like, you know what, don't talk to me. We'll just talk about it in 90 minutes. 23andMe is a really fascinating story because I think it's still a household name.

[Matt Levine]

It kind of is.

[Katie Greifeld]

And last time I thought about it, it was going public via SPAC. It was 2021. Things were great. The market was frothy and I didn't realize that it's been slowly in a death spiral since then.

[Matt Levine]

Yeah, I don't entirely understand it, but my impression is that the recurring revenue of selling genetic tests, you kind of only need to find out your ancestry once.

[Katie Greifeld]

Yeah, but there's so many people in the world.

[Matt Levine]

There are a lot of people. But I also think that it's become less popular as people get worried about privacy concerns. And they were hacked. It's like a bad database to get hacked, you know?

[Katie Greifeld]

Yeah. Specifically in 2023, they were hacked and I think they were in the decline.

[Matt Levine]

Before Then they've never made money.

[Katie Greifeld]

Yeah, that's true. Yeah. And I was searching for a reason why, because you think about. I feel like it was really peak 2017, 2018. They were really popular as gifts around the holidays. Remember, Elizabeth Warren took a genetic test to prove that she had Native American heritage. That was basically the peak, actually, because apparently 23andMe and also their competitors, ancestry being one of them, have just seen sales steadily decline since then.

[Matt Levine]

Yeah. And to their credit, they went public.

[Katie Greifeld]

At the top and the halcyon days.

[Matt Levine]

Went public in like 2021 at a $3.5 billion valuation.

[Katie Greifeld]

I don't know.

[Matt Levine]

Anyway, I think they did the SPAC merger in 2021 and they had like a $3.5 billion valuation. It's currently in the ballpark of 1% of that. Yeah. So not great.

[Katie Greifeld]

I mean, the shares are trading under $2 right now. I think the absolute high was well above 300. About 300.

[Matt Levine]

Yeah. There's been a spike split, but yes, that's. That's right. Yeah. But so anyway, the founder and CEO and 49% shareholder and Wojcicki wants to take it private. I don't actually know how much she cashed out of this, but took it public at $3.5 billion. Wants to take it private at not $0, but quite close to zero. She wants to pay public shareholders something like $10 million for the company, which is like $0.41 per share. And that is an interesting negotiation because she's the controlling shareholder and the board of directors is in charge of negotiating with her and trying to get a fair price for the public shareholders. I don't know what they think about the future of the business. She clearly thinks it's worth something because she wants to buy it and put some more money into it. But she's offering $10 million to the public shareholders. By the way, that's much less than the current trading price of the stock. She's offering 41 cents per share. It's now at a buck 50 or something like that. So she's offering a take under. She's saying shareholders are deluded about the value of this company. I want to pay you much less for it. If I were a director, I'd have a really hard time accepting a deal like that because you're going to get sued. You're saying, I want to sell this company for a big discount, not only to its all time high, not only to its IPO price, but to its price today. It's a tough deal to take and so she offered not that deal, but a similarly sort of low to negative premium deal last year, and the directors said no. And then they all quit because she's the controlling shareholder and she could fire them. And so they were like, well, we're not gonna take this deal. And so there's nothing we really can do here as directors. And so they all quit. And so she was the only director of the company, and she went and appointed new independent directors and offered a new, much lower price to take the company private. And they all said no again this week. So they're back to square one. They haven't resigned.

[Katie Greifeld]

I was thinking she should do an Elon Musk and just get really friendly board members who maybe are related to her.

[Matt Levine]

Well, right. When all of the directors quit, she got to appoint the new directors. And there are two ways you can go with that. You can appoint your relatives who will then sell you the company at 41 cents a share and get sued, or you can appoint reputable independent directors who you've had conversations with. You hope that they will take your proposal seriously. You hope that they will see the reasons behind your wanting to pay much less than the current price of the company and will take your deal. But you haven't specifically signed up to that because that looks bad. And so then if they agree to your deal, you look good, right? Like, when you get sued, you can say, no, no, these independent directors really did their due diligence and accepted my deal. So I think that's what was happening here is like, these directors are not her relatives. They come from real places. Like, they look like good independent directors who could consider her deal, and if they signed off on it, it wouldn't be a rubber stamp. But then they didn't sign off on it, so, oops.

[Katie Greifeld]

Yeah. And I mean, I don't know where this company goes. Obviously, there's some deep fundamental flaws here.

[Matt Levine]

You occasionally see these take unders. You see these deals where a company is not viable and someone will buy it for much less than its stock price and say, we're going to put a little bit more cash on the balance sheet. We're going to keep the company alive. But the shareholders are deluded and they're not getting that much money. And the board will be like, yes, that's true. Sucks for the shareholders, but we're doing it. But it's like, that's a tough thing for a director to do, particularly if you were just appointed to do the deal. Right? So it's like a tough spot. Like, if she's Right. That it's kind of a melting ice cube and it's not worth what the public shareholders are paying for it. It's going to be hard for her to persuade directors of that, even if it's true. And then where do you go? Yeah, I think they're exploring other strategic alternatives. Right. But it's tough to do that when you have a 49% shareholder.

[Katie Greifeld]

Yeah. I was thinking maybe they could pivot into dog DNA test kits. I know that that's still a very popular market. I think the company has warned that it needs to raise cash or find some solution or else it won't be around for much longer. So, I don't know, it'll be fascinating to follow. I mean, it just feels like a company that would naturally want to go private right now. And also, I was surprised, but the.

[Matt Levine]

Question is the price. And, like. And Wojcicki does not think it's worth $40 million.

[Katie Greifeld]

Yeah, for a little bit. I mean, she had a partner and that's also part of the problem.

[Matt Levine]

Yeah.

[Katie Greifeld]

Yeah. New Mountain. And I think, like, the bid that she offered, the 41 cents a share was not 84% or something below the New Mountain bid.

[Matt Levine]

Yeah. Which in turn was lower than the bid last year that the directors resigned over. Her bids have been getting lower, probably for reasons.

[Katie Greifeld]

Yeah.

[Matt Levine]

Like. Yeah, it looks bad. It's a bad process. Normally the board, like, negotiates you up here. They're negotiating her down.

[Katie Greifeld]

Yeah.

[Matt Levine]

Not great.

[Katie Greifeld]

I don't know. I mean, I hope that the genetic testing universe continues to exist and perhaps thrive is because you think about true crime. I listen to a lot of true crime podcasts, and there have been instances where, like, these sort of kits where you can find your family members, long lost family members, have been uncovered through little kits like this.

[Matt Levine]

I think I read an interview with her where she talked about that as a negative for sales because, like, you know, if you're a serial killer, for sure, it's good.

[Katie Greifeld]

But if you're like, you know, you.

[Matt Levine]

Do a little genetic testing and then, like, your cousin gets arrested as a serial killer, you're like, ah, I wish I hadn't bought that kit.

[Katie Greifeld]

It's good for society, maybe bad for sales.

[Matt Levine]

Bad for sales.

[Katie Greifeld]

But again, as someone who, I don't know, maybe I am related to a serial killer, but I think that these should exist in some form. I think it was the Golden State Killer who was found through something like this, which was wild.

[Matt Levine]

Yeah.

[Katie Greifeld]

It definitely didn't help the share price.

[Matt Levine]

Right. It's not like a good advertisement for like the privacy practices of the genetic testing industry.

[Katie Greifeld]

You wouldn't offer up your saliva to potentially help capture a murderer, even if.

[Matt Levine]

Depends how close a family member this murderer is. Cousin, I feel like I don't know in advance which family member of mine did this murder.

[Katie Greifeld]

I mean, you'd probably have some suspicions, honestly, if you were in this scenario. I mean, I could probably guess, you.

[Matt Levine]

Know, which of your family members are most likely to be serial killers. I don't really have a problem with it, but I'm guessing none of my family members are serial killers. But they can bet everyone's like that until their cousin is the Golden State Killer.

[Katie Greifeld]

I can't wait to revisit the next city fat finger where 23 and me goes when one of your cousins gets arrested. Yeah.

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[Katie Greifeld]

Moving swiftly along I love this story from Emily Griffeo and Max Abelson. I know that they've been working on it for a long, long time. A really great deep dive into First Trust, which is an ETF issuer based.

[Matt Levine]

In the ETF story.

[Katie Greifeld]

This one actually you led money stuff with it, so this wasn't even my.

[Matt Levine]

Influence of an ETF story. ETF Sales channels, right? One is advisors where like a financial advisor has a client and the advisor says this is the menu of stuff that I'm going to put you in. And the client is like sure, whatever, right? And so the Advisor just picks ETFs and the advisor is a fiduciary for the client and has an obligation to try to put the client in ETFs that are good, right? But the advisor's picking the ETF and then the other kind is like Robinhood, right? There's an enormous mass of self directed investors. A lot of them buy vanguard S&P 500 ETFs right? Like huge business of self directed investors buying cheap index ETFs but also clearly a huge business or some business of like Robinhood people buying triple levered ETFs and like weird stuff to make weird bets. And I don't really know how that gets sold. I don't know if that's like you're like searching Robinhood for fun tickers or if it's like you're on Reddit reading about the latest cool etf. But I don't have a great sense of like what the split is like away from like the Vanguard S&P 500 like a weird ETF. Is that like always mostly an advisor product or is that like Reddit boards are selling that to Robinhood people?

[Katie Greifeld]

A weird etf like the triple Triple.

[Matt Levine]

Levered the buffers Buffer feels like an advisor product. I don't know.

[Katie Greifeld]

Yeah, I think that that's fair to say that buffers are popular with advisors, but sort of the shiny stuff, the funky high octane, the thing that's like.

[Matt Levine]

We double lever you and we put like one times your money in gold and one times your money in bitcoin. Crazy product that seems like it could sell on Robinhood.

[Katie Greifeld]

Yes, that's probably where you're finding it. And even, I mean, some of the bitcoin.

[Matt Levine]

Right. Your advisor's not doing that. Well, maybe your advisors, I don't know.

[Katie Greifeld]

But for example, I mean I wrote up BlackRock added iBit, their Bitcoin ETF to their model, a portion of their model portfolios for the first time. That was really advisor driven financial advisors asking BlackRock to add it. Because I want to put my clients in this.

[Matt Levine]

I understand that I can see an advisor wanting to put their clients in ibit, but like when they launched, I bet it was a self directed retail product.

[Katie Greifeld]

Their clients, if they couldn't get it through their advisors, they would then they would probably go to a platform to buy it.

[Matt Levine]

Right. I think of a bitcoin ETF as being in the first instance, a product for self directed retail. First instance of like people want to buy that, they'll buy it on Robinhood. And then like, you know, later an advisor might add it in. But it's not like an advisor product. Yeah, the buffer I can see being an advisor product.

[Katie Greifeld]

Yeah, big time. And an endowment product, apparently. First Trust. First Trust.

[Matt Levine]

Oh yeah. Got us distracted. But like First Trust that makes advisor products, I think it's fair to say.

[Katie Greifeld]

Exactly. They have about, the last I checked, about $200 billion in AUM. Their average fee though is 78 basis points, which is pretty high. The industry average is 58, the industry average. So that includes all the funky expensive leverage stuff in addition to the stuff that costs like three basis points. It's not dollar weighted. No, no, it's just pure.

[Matt Levine]

Okay.

[Katie Greifeld]

Yeah, yeah.

[Matt Levine]

It's like take a list of funds.

[Katie Greifeld]

And like I prefer this podcast like an hour before I have time to do that. But the point being that the dollar.

[Matt Levine]

Weighted average is like three basis points.

[Katie Greifeld]

The point being that it's a relatively small issuer, but it makes a lot of money for its size because it has a pretty high fee. And there's just great quotes in here about the sales tactics that have been employed by First Trust, which according to our own reporting and some other outlets is actually under investigation by FINRA for them.

[Matt Levine]

Right. Because like, the way you sell Advisor products is some combination of to give the advisor something cool to show to their client. A buffer ETF is like, oh, look, I've given you stock upside with no downside. How nice, right?

[Katie Greifeld]

Yeah.

[Matt Levine]

But the other way is to take the advisor out to dinner and be like, hey, why don't you sell my ETFs instead of Vanguard's ETFs? Because Vanguard doesn't take you out to dinner. Maybe they do, but probably not that much. And the implication of the FINRA investigation and of the Bloomberg reporting is that First Trust leans heavily on entertainment. There are like quotes from the First Trust salespeople saying this company was built on entertaining. It was and still is the one leg up on our competition. And another guy says, you're selling the most expensive ETF with mediocre performance, you better do something different. And that's what we did. And something different is like, so they took them out to dinner. They had conferences in nice places. Also, if you're an advisor who sold a lot of their ETFs, you could go to the nice conference and they'd pay for you to go to the nice conference.

[Katie Greifeld]

Also a performance coach.

[Matt Levine]

Performance coach. I love the performance coach.

[Katie Greifeld]

Yeah, I'm not familiar with the concept. What is a performance coach in this context?

[Matt Levine]

One negative mean way to characterize what's going on here is they're bribing the financial. They're giving the financial advisor stuff for the financial advisors that benefits the financial advisors. And then the financial advisors are putting the clients into these ETFs that charge very high fees and don't have amazing performance. But that's too mean. What's kind of going on here is you're a financial advisor. You're sort of holistically trying to be good at it. One thing that being good at it means is putting your client in investments that go up or whatever that you expect to go up. But there are other things, and one of them is sales and being personable and answering your clients questions when they have questions and just being like a good, effective financial advisor. And how do you do that? Well, a variety of things, but there are coaches who can tell you how to do that, who can tell you how to get better at your job. And so first trusts will go to these advisors and be like, we have this performance coach who will help you be a better financial advisor. And the financial advisor. That's great. That's great for me. It's great for My clients, if I'm better, right. If my performance is better. So they take the coaching. And is it possible that a condition for getting the coaching is that they put their clients into the First Trust ETFs? No, that's not what you're. That's regulatory. That's not allowed. But like, there's some implication in some internal emails that maybe there is some hint of that. But the coaching, if you're a financial advisor, you're not experiencing that as like I'm taking a bribe. Right? If you're experiencing that, it's like I'm trying to do a good job for my clients. And one way to do a good job is this coach will coach me. And like, you know, like, as part of doing a good job for my clients, I'm putting them in this expensive etf. But it gets me this coaching that makes it so good.

[Katie Greifeld]

Yeah, don't worry about the performance.

[Matt Levine]

We've talked about this actually, like, like Vanguard cutting fees.

[Katie Greifeld]

Right.

[Matt Levine]

And you have mentioned there are people like financial advisors who are like, I don't like Vanguard cutting fees because they don't invest in having a good website.

[Katie Greifeld]

Exactly.

[Matt Levine]

For like answering questions like, that's a real legitimate concern for a financial advisor. Right. Is like, my clients are in this etf. Like, if I have questions about the etf, they have questions about the etf. If I can't get an answer, like, that's bad. Whereas a really expensive etf, like, they've got customer service people, they answer the phone when the advisors call. That could arguably be good for the clients. It's expensive, the clients are paying for it. But like, you could imagine an advisor making a fiduciary decision saying, I want the client in this more expensive thing because the customer service is better. And like, the client needs that too.

[Katie Greifeld]

Yeah, no, it's a, it's a super fair point. And an easy to use, intuitive website goes a long way with some of the folks that are in these ETFs.

[Matt Levine]

I should say the Bloomberg story talks a little trash about the website for First Trust 2, but that's not the point.

[Katie Greifeld]

Looks like a pixel hasn't changed since, you know, it was first put up. This story is a joy to read though, because it's so deeply reported. So let's talk about some of the emails that Max and Emily dug up. I liked this one in particular, I was thinking of you as I read this. Apparently in one email five to six years ago, a managing director chided colleagues writing that pay to play is obviously illegal, but we have wholesalers, which means salespeople doing it repeatedly. So there you have it.

[Matt Levine]

I wrote about this with some sympathy because if you're a person at a financial firm and you notice that your colleagues are doing bad stuff, it's very tempting to email your colleagues to say you are doing bad stuff. Please stop it. It's illegal. Right? Yeah, that's a good email to send, but it's not really, because then you have on email, you have a record of your colleagues are doing bad stuff. Even if they knock it off immediately, it's a bad thing to have on email. And if they don't knock it off immediately, it's much worse.

[Katie Greifeld]

Yeah, I hope I never.

[Matt Levine]

You pick up the phone and you say, hey, guys, knock it off.

[Katie Greifeld]

I always think I would hate to get my email searched for so many reasons, but also for telling my editor it's illegal for you to edit my piece this much. It's a crime, actually, to limit. Yes, exactly. But some things look different under different lights. I don't think that this email was a joke, though.

[Matt Levine]

I don't think it was a joke either. Yeah, I think the rest of the reporting is like, you know, I'm not.

[Katie Greifeld]

Saying it's a joke just to be clear, just to draw. I'm just drawing a contest between what I said and what this email said. I think geography is really important here. I think it came through in the piece as well. But certainly, you know, talking to Emily about this, we sit back to back and a lot of the OGs in the ETF world happen to come from Wheaton, Illinois or around it. And I think that is also very important too. As that person you quoted said, we've always been about entertainment. The fact that First Trust was located in sort of a flyover zone allowed First Trust to just really run this industry when it comes to places like Dayton, Ohio, Wichita, Kansas, et cetera, which I think is interesting. I think about geography a lot. Because also the vanguards of the world, like Vanguard specifically isn't on Wall Street.

[Matt Levine]

Yeah. But like, again, like, the thing they're doing is covering the financial advisor in Dayton, right?

[Katie Greifeld]

Yeah.

[Matt Levine]

They're like going to that person and they're buying them steak or whatever. But they're also like talking to them and being like, yeah, how can we help you? And that advisor is going to naturally be inclined to put their clients into the ETFs of a firm that talks to the advisor and listens to their concerns than a Vanguard fund where Vanguard never talks to him. But, like, you know, they charge one basis point.

[Katie Greifeld]

So it's like, yeah, or, you know, BlackRock isn't flying out to the coverage.

[Matt Levine]

Is not a straightforward pay to play. It's something a little different. It's coverage. It's paying attention to the advisors and creating good feelings at the advisors. Arguably, that's bad. Arguably, the advisor's a fiduciary for the client and they should only be concerned with very specifically what is the best ETF for the client's portfolio. But they could take a more holistic view and be like, well, I'm getting service that allows me to help my client and so I'll put them in the more expensive etf. I don't know.

[Katie Greifeld]

Well, we'll see.

[Matt Levine]

I do want to say a reader emailed me to remind me of a Charlie Munger anecdote. Charlie Munger would ask business school students, is it possible for a company to raise the price of its service and thereby increase sales? And people will think about it and they'll be like, well, raising the price can signal higher quality. And so people might buy more of it. And there's examples of that in beer marketing. But I think Charlie Munger points out also that raising the price can give you more money to effectively bribe the sales channel to pay more to salespeople or pay more to intermediaries who will then put the ultimate buyer into the product. And you see that here. Vanguard has a good business of selling ETFs at very, very low prices. But there's also a business to sell ETFs at very high prices and invest the money into a sales process. And that's kind of what's arguably happening here.

[Katie Greifeld]

Well, that's the thing. If there's one takeaway from this, other than maybe don't do pay to play, also don't get divorced. The reason that this came to light, the man who runs First Trust, his name is Jim Bowen, he got divorced and it came to light in his ex wife's lawyers asking for more money that he's apparently making a ton of money. Like Jamie Dimon level money.

[Matt Levine]

Yeah, he made like $34.8 million in 2022. It's the thing, there's like wild money, like in weird pockets of asset management.

[Katie Greifeld]

So apparently her lawyers honed in on his expenses at restaurants in Naples, Florida in 2021, asking about more than $147,000 spent at sea Salt, an additional a hundred thousand dollars spent at continental steakhouses, also $70,000 spent at seafood places. And he explained that I'm dining I'm entertaining in 2022 in a court appearance. And then his ex wife's attorneys asked him on the stand in the same year whether that $70,000 alcohol bill at the Naples Ritz Carlton was related to First Trust. He answered. Mm. Is that a yes? The lawyer asks. That's a yes. The judge asked. Yes, bowen said. So that was kind of the smoke around this fire.

[Matt Levine]

That's going to be like the alcohol bill for the Money Stuff party tonight. So my favorite expense from the divorce proceedings is that he spent like $4,800 at Hermes one year on a haul that included scarves, he said were for workers in Chicago's hotels and restaurants. So not for financial advisors? No, this is like he takes financial advisors out to dinner at hotels and restaurants in Chicago. And he says, some of my best customers are high maintenance and these people, meaning the hotel and restaurant workers, are the ones that handle the high maintenance issues. So like basically he takes high maintenance customers to fancy restaurants in Chicago and the waiters take care of these people and then he gives the waiters Hermes scarves. It's like a third level business expense.

[Katie Greifeld]

It's very generous. Gotta give it to him.

[Matt Levine]

No, it's very smart. It's like, okay, I want to sell ETFs to retail investors in Dayton, Ohio. How should I do that? I should buy fancy scarves for waiters in Chicago because I'm going to take the advisors of those people in Dayton to restaurants and I want them to be well treated. And so like it's like the sort of third level of paying for like the people to that will ultimately trickle down to like the ETF sales.

[Katie Greifeld]

I'm not much of a seafood gal, but I would have loved to be at one of these dinners. Sounds like a blast.

[Matt Levine]

Really good service. And that was the Money Stuff podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Matt Levine]

You can find my work by subscribing to the Money stuff newsletter on Bloomberg.com.

[Katie Greifeld]

And you can find me on Bloomberg TV every day on Open Interest between 9 to 11am Eastern.

[Matt Levine]

We'd love to hear from you. You can send an email to moneypodloomburg.net Ask us a question and we might answer it on air.

[Katie Greifeld]

You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

[Matt Levine]

The the Money Stuff podcast is produced by Anna Mazarakis and Moses Ondom.

[Katie Greifeld]

Our theme music was composed by Blake Maples.

[Matt Levine]

Brendan Francis Newnham is our executive producer.

[Katie Greifeld]

And Sage Bauman is Bloomberg's head of podcasts.

[Matt Levine]

Thanks for listening to the Money Stuff podcast. We'll be back next week with more stuff.

[Katie Greifeld]

I have a party to go get ready for, actually, so you do too.

[Matt Levine]

I'm not going to make it.

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