Money Stuff: The Podcast - Episode Summary Title: Generous Portion: FTC, CMG, ETF
Release Date: November 15, 2024
Hosts: Matt Levine and Katie Greifeld

1. Impact of FTC Actions on Merger Arbitrageurs

Discussion Overview:
Matt Levine and Katie Greifeld kick off the episode by delving into the recent challenges faced by merger arbitrageurs due to the heightened scrutiny and regulatory hurdles imposed by the Federal Trade Commission (FTC). They use the thwarted merger between Tapestry and Capri as a case study to illustrate the broader implications for the merger arbitrage market.

Key Points:

• Tapestry-Capri Merger Collapse: The FTC's intervention led to the blocking of the merger between Tapestry and Capri, resulting in a nearly 49% drop in Capri's stock price. This event has significant repercussions for merger arbitrageurs who had heavily invested in Capri's stock, leading to substantial losses and job cuts within the sector.

  Katie Greifeld (04:07): "I didn't look at anything, so I don't know if I did that."
  Matt Levine (03:45): "Affordable luxury."

• Broader FTC Vigilance: Over recent years, the FTC has increasingly been proactive in blocking mergers, a trend that poses ongoing risks for merger arbitrageurs. The hosts highlight a Wall Street Journal article noting job losses in the merger arb industry due to these regulatory challenges.

  Matt Levine (04:23): "The FTC has been gung ho on suing to block deals."
  Katie Greifeld (04:30): "Armageddon potentially is over."

• Political Influences: The conversation touches upon the anticipation that a new administration, potentially influenced by figures like Donald Trump, might unleash "animal spirits" in the merger market. However, Levine expresses skepticism about the efficacy of such changes, citing Lina Khan's strong stance against big mergers.

  Matt Levine (07:19): "JD Vance has praised Lina Khan, the head of the FTC."
  Katie Greifeld (07:43): "How much of a say JD Vance is going to have."

Insights:

• Market Volatility: The increased FTC activity introduces greater volatility and unpredictability in merger outcomes, directly impacting the profitability and stability of merger arbitrage strategies.
• Regulatory Uncertainty: The potential for administrative changes adds another layer of uncertainty, making it challenging for market participants to forecast and strategize effectively.

2. Securities Fraud and Chipotle's Burrito Portion Sizes

Discussion Overview:
The hosts transition to a lighter yet intriguing topic: the emerging securities fraud lawsuits centered around perceived decreases in burrito portion sizes at Chipotle. They explore how minor consumer grievances can escalate into significant legal and financial repercussions for corporations.

Key Points:

• Portion Size Controversy: Social media and consumer complaints have highlighted inconsistencies in Chipotle's burrito and bowl portions, leading to concerns about misleading statements regarding portion sizes.

  Matt Levine (14:33): "Some of these burritos skimp on the rice and beans."
  Katie Greifeld (15:59): "People have posted serious complaints about the size of Chipotle burrito bowls."

• Securities Fraud Implications: Levine explains how these complaints have the potential to be escalated into securities fraud lawsuits, arguing that discrepancies between stated and actual portion sizes could be construed as misleading investors.

  Matt Levine (19:12): "But like, what happens here is that these reports come out and the stock goes down a little bit."

• Legal and Financial Ramifications: The discussion highlights how even minor issues can lead to significant stock price fluctuations and potential class-action lawsuits, benefiting securities lawyers through multimillion-dollar legal fees.

  Katie Greifeld (20:07): "Maybe you settle it for like, you know, pennies on the dollar and you collect a multimillion dollar legal fee for bringing this lawsuit."

Notable Quotes:

• Matt Levine (19:02): "We did a thorough audit of our portions and we found that some stores were not putting enough in, and so we're putting more in everything."
• Katie Greifeld (21:06): "One of the things I think is great about Chipotle is if you come into the restaurant and you want a little more rice or you want a little more pico de gallo."

Insights:

• Consumer Influence on Corporate Practices: The case underscores the significant impact that consumer perceptions and social media can have on corporate reputation and stock performance.
• Legal Landscape for Corporations: Companies must navigate the complexities of public perception and regulatory scrutiny, where even seemingly trivial issues can lead to substantial legal challenges.

3. Leveraged ETFs and the Berkshire Hathaway Example

Discussion Overview:
Levine and Greifeld shift focus to the financial instruments realm, specifically discussing the introduction of leveraged Exchange-Traded Funds (ETFs) tied to Berkshire Hathaway's Class B shares. They explore the viability, marketing appeal, and potential performance of such leveraged products compared to more volatile counterparts.

Key Points:

• New Leveraged ETF on Berkshire Hathaway: A South Korean brokerage, in collaboration with white label issuer Title, is launching a double-leveraged ETF tracking Berkshire Hathaway Class B shares. This is presented as an unconventional choice compared to the typically volatile stocks like Tesla or Nvidia that dominate the leveraged ETF market.

  Katie Greifeld (28:08): "One of South Korea's largest retail brokerages has teamed up with this white label issuer named Title to create a double leveraged fund that will track, if approved, class B shares of Berkshire Hathaway."

• Volatility and Performance Considerations: The hosts analyze how Berkshire Hathaway's relatively low volatility (~19% over 90 days) makes it a less exciting yet potentially more stable option for leveraged ETFs, contrasting it with high-volatility stocks that offer greater profit opportunities but also higher risks.

  Matt Levine (30:05): "With a not very volatile stock, you get less volatility drag."

• Market Saturation and Future Prospects: They discuss the rapid proliferation of ETFs, driven by decreasing launch costs and the ability to offer highly specific or niche products. This trend could lead to a market flooded with ETFs, potentially surpassing the number of publicly listed companies.

  Katie Greifeld (34:50): "We are approaching the point where there's going to be more US listed ETFs than US listed companies."

Notable Quotes:

• Matt Levine (32:12): "You can sue for anything. Not all these cases win, but like enough make money that like, it's a lucrative business for plaintiffs for securities lawyers."
• Katie Greifeld (33:03): "We chat to a lot of white label issuers because they're really interesting."

Insights:

• Innovation vs. Practicality: While leveraging Berkshire Hathaway offers a more stable investment, it lacks the high-octane appeal of more volatile stocks, potentially limiting its attractiveness to individual investors seeking significant returns.
• Proliferation of Financial Products: The ease of launching ETFs has democratized financial products, allowing for diverse and highly specialized investment vehicles, but also raising concerns about market saturation and investor confusion.

Concluding Thoughts

Throughout the episode, Matt Levine and Katie Greifeld provide a nuanced exploration of how regulatory actions, consumer perceptions, and financial innovations intersect to shape the modern financial landscape. From the intricacies of merger arbitrage in a tightening regulatory environment to the unexpected rise of securities fraud lawsuits over burrito portion sizes, and the evolving ETF market, the hosts offer insightful commentary on the dynamic forces at play in finance today.

Final Insights:

• Interconnectedness of Markets and Regulations: The episode highlights the delicate balance between market activities and regulatory frameworks, emphasizing how changes in one can significantly impact the other.
• Consumer Influence and Corporate Accountability: Consumer feedback, amplified by social media, plays a critical role in holding corporations accountable, not just in product quality but also in their financial disclosures.
• Future of Financial Instruments: The ongoing innovation in financial products like leveraged ETFs showcases both the opportunities and challenges in creating investment vehicles that cater to diverse investor preferences while managing inherent risks.

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