Slate Money – The Prudential Managers Edition (October 20, 2018)

Host: Felix Salmon
Guests: Emily Peck, Anna Szymanski
Theme: Weekly roundup and analysis of business and finance news, with a sharp focus on the demise of Sears, the business model of Robinhood, and the deregulation of “Too Big to Fail” non-bank financial institutions.

Episode Overview

In this episode, Felix Salmon, Emily Peck, and Anna Szymanski break down several major financial stories from the week, including the bankruptcy of Sears, how the Robinhood app profits from order flows, and the Trump administration's move to remove Prudential’s “Too Big to Fail” status. Their discussion weaves financial nerdiness with playful banter, delivering sharp critiques and illuminating background on each topic.

Key Discussion Points

1. Sears Bankruptcy: The Fall of an American Institution

Segment: [02:24 – 13:44]

• Background:
  Sears, the 125-year-old “original everything store,” filed for bankruptcy as expected. Once a retail behemoth, Sears declined over decades, culminating in widespread store neglect under hedge funder Eddie Lampert’s leadership.

• Eddie Lampert’s Role:

  • Lampert, via his hedge fund ESL Investments, initially succeeded with AutoZone/AutoNation and tried to replicate success with Sears and Kmart.
  • Merged Sears and Kmart in a “tie two rocks together, then maybe they’ll float mergers.” [02:56, Felix]
  • Engaged in financial engineering—sale-leasebacks, asset sales—that “clearly underinvested in all of the stores to the point at which absolutely no one wanted to walk into them anymore.” [03:06, Felix]
  • “He was starving them that much.” [03:44, Emily]

• Analysis of Lampert’s Strategy:

  • Lampert “may be a good investor... but he's a pretty lousy CEO and it doesn't seem like he had much of an interest in being a CEO.” [04:21, Anna]
  • Seritage, a real estate spinoff, is arguably the only lasting value Lampert managed to create for himself.

• Bankruptcy and Creditors:

  • ESL was both largest shareholder and biggest creditor, creating an unusual incentive structure.
  • Lampert's attempt to swap debt for equity was rejected by creditors as self-serving. [08:37, Anna]

• Historical Impact of Sears:

  • Sears democratized consumer access, especially during the Jim Crow South—its catalogs allowed Black Americans to bypass discriminatory local stores. [10:24, Emily]
    • Quote: “It was actually this, like, very political thing and this very democratizing thing. … Capitalism can be really wonderful sometimes.” [11:47, Emily]
  • Comparison made to modern Amazon and Uber’s accessibility.

• Debate on Saving Sears:

  • “What was happening with Sears was a really great innovation at the time. Now times have changed. … There was no reason Sears couldn’t have adapted to the times.” [12:10-13:44, Anna/Emily]

2. Robinhood – Zero-Fee Trading and Revenue Controversy

Segment: [14:13 – 23:58]

• Robinhood’s Market Position:

  • “When everyone else was charging $5 to trade stocks, Robinhood would allow you to trade stocks for $0.” [14:33, Felix]
  • Targeted millennials and undercut legacy brokerages like Schwab and E*Trade.

• Revenue Model Under Scrutiny:

  • Half of Robinhood’s revenue comes from selling customer trades to high-frequency traders—payment for order flow. [15:36, Anna]
    • “It's not a Robinhood thing. It is, everybody does it thing.” [15:45, Felix]

• High-Frequency Trading Explained:

  • Exchange landscape: 13 stock exchanges plus dark pools, all quoting best bids/offers.

  • Orders routed to market makers like Citadel, who profit off the bid-offer spread from “unsophisticated” retail order flow. [17:54-19:34, Felix]

    • Quote: “If I just match all of those at [the national best bid and offer] or maybe a tiny bit better, then … the difference … is my profit.” [19:06, Felix]

  • “The only person it’s almost unambiguously good for is the little guy.” [21:35, Felix]

• Critique of Transparency & Incentives:

  • Robinhood’s branding as populist is undermined by opaque revenue disclosures and prioritizing the highest bidder for order flow.
    • “What they're doing in reality is not what they say that they're doing in public. And that's never a good look.” [23:04, Felix]
    • “There's something incredibly cynical about calling yourself Robin Hood and being in the business of trading stock.” [23:39, Emily]
  • Hosts warn that active stock trading is gambling for individual investors. “Normal human beings … should not be doing that. They should be like buying money that you know you can lose. … It’s like playing golf.” [23:58, Felix]

3. The End of “Too Big to Fail” for Non-Banks (Prudential’s SIFI Status)

Segment: [24:24 – 29:34]

• Background of Financial Stability Oversight Council (FSOC):

  • Created post-2008 crisis (Dodd-Frank) to designate “systemically important financial institutions” (SIFIs, i.e. “too big to fail”).
  • Four non-banks originally designated: AIG, MetLife, GE Capital, Prudential. Prudential’s designation removed this week, leaving zero.

• Regulatory Weakening:

  • MetLife successfully sued to drop the designation; Trump administration did not contest.
  • “This is just the Trump administration again, just weakening financial regulation and sort of like picking away at Dodd Frank like little termites in the House.” [28:30, Emily]

• Risks Posed by Large Insurers:

  • Prudential’s liability: $3.7 trillion in life insurance, with only $42 billion in market cap.
  • “If 1.1% of those people died, that would wipe out all of Prudential’s market cap.” [27:20, Felix]
  • U.S. insurance regulation is state-based (Prudential is mainly regulated in New Jersey), which the hosts find inadequate.

4. Numbers Round: Insights into Trends in China, Social Security and New York Retail

Segment: [29:41 – 34:43]

• Anna:

  • 80% decline in home sales in Shanghai/Beijing during China’s “Golden Week”—a sign of softening real estate. [29:41]

• Felix:

  • 2.8% is the 2019 Social Security cost-of-living increase—the largest since 2012. [31:02]

• Emily:

  • 20% of retail space in Manhattan is vacant due to sky-high rents; a trend affecting iconic independent stores like McNally Jackson. [31:35]
    • “The rent is too damn high.” [31:56, Felix]

Notable Quotes & Memorable Moments

• On Sears and Capitalism:

  • “He tried to replicate that [investment success] with both Kmart and Sears. … But he’s a pretty lousy CEO.” [04:21, Anna]
  • “It made me kind of think ... capitalism can be really wonderful sometimes.” [11:47, Emily]

• On Robinhood’s Reality:

  • “The news here is really like the sort of two-facedness of Robin Hood… what they’re doing in reality is not what they say that they're doing in public. And that's never a good look.” [23:04, Felix]
  • “Human beings should not be trading stocks.” [23:45, Felix]

• On Prudential and SIFI Deregulation:

  • “If 1.1% of those people died, that would wipe out all of Prudential’s market cap.” [27:20, Felix]
  • “This is really a bad thing that was just done. ... This is just the Trump administration again, just weakening financial regulation.” [28:30, Emily]

• On Manhattan Retail:

  • “The landlord raised the rent ... to $150 a square foot, which is insane. The national average is about 17.” [32:20, Felix]

Episode Flow and Tone

• Lively, collegial, and candid, mixing deep wonkery (“geeking out about market structure”) with occasional sharp wit.
• Hosts regularly check each other’s assertions, provide personal anecdotes, and maintain skepticism toward business hero-worship and simplistic policy narratives.

Timestamps for Major Segments

• [02:24] – Sears Bankruptcy Analysis
• [14:13] – Robinhood: Zero-Fee Trading & Order Flow Business
• [24:24] – Financial Stability Oversight Council & SIFI Deregulation
• [29:41] – Numbers Round (China, Social Security, NY Retail)

Final Notes

This episode stands out for its detailed case studies of business disruption and financial regulation in practice. Listeners will leave with a nuanced understanding of how iconic businesses can fail, how supposed fintech “democratization” isn’t always what it seems, and what’s at stake when financial oversight is eroded.