I used to write sometimes around here about what I called the “ESG Consultant But Evil.” For instance I wrote in 2022:

A lot of big companies and investors these days are looking for ways to improve their environmental, social and governance ratings, and a lot of them will go to various sorts of ESG consultants who will tell them how to cut emissions or whatever. But some of them will go to ESG Consultants But Evil, who will sort of sneak in through the back door and say “hey I’ve got some carbon credits that fell off a truck, I’ll sell ’em to you for 20 cents on the dollar.” Lots of people want to go into ESG to save the world, so that is a competitive business. Getting into ESG for the financial engineering seems pretty interesting and possibly less crowded.

Or I once described one reason you might get into the carbon credits game:

You are a financial engineer: You are in the business of structuring financial products to address the perceived problems of people on both sides of the trade, and sitting in the middle and taking a cut. Your competitive position depends on coming up with creative new trades to propose, and creative new ways to take your cut. Carbon credits — which involve new and complicated accounting regimes, and which involve selling a product that you don’t create (emissions) to people who don’t use it — are a particularly appealing generator of financial engineering. Your motives are basically profit-oriented, though also somewhat aesthetic. 

I use the word “evil,” but I don’t exactly mean it. There is obviously a special place in my heart for financial engineers, for people who structure complex transactions to achieve regulatory aims and to make a nice profit and to experience aesthetic satisfaction. Many environmental, social and governance regimes are essentially complex accounting systems, and the people who are good at them will not necessarily be committed environmentalists or social justice activists. They might be, you know, derivatives structurers. They might be the sort of people who see a complex accounting regime, one whose users are not entirely economically motivated, and think “ooh I could game this, that would be fun.” 

If you got hired at a big company as an ESG Consultant But Evil in 2022, uh … what are you up to these days? ESG, in the US, is very much out of favor and possibly illegal. You could imagine a seamless pivot to, like, Anti-Woke Consultant And Evil, but that is probably too glib. “ESG” is not simply a vibe, at least not as practiced by ESG engineers. ESG is a specific and complex body of rules, ways to account for carbon emissions and calculate baselines and impacts. Or, rather, ESG is a broad umbrella term for several specific and complex bodies of rules, depending on where you are located and what type of business you are and who your investors are.

A really talented ESG financial engineer has built up a deep and nuanced understanding of these rules and, if evil, how to manipulate them. You can’t just run that in reverse. I mean, maybe you can? Maybe there are companies these days hiring ESG Consultants But Extra Evil to make their carbon emissions numbers look as bad as possible to please US politicians? That would be interesting.

Anyway Bloomberg’s Gautam Naik and Saijel Kishan report that it’s rough out there for ESG experts: 

There’s a course-correction underway among financial firms that went all out on ESG hiring just a few years back, according to recruiters advising banks and money managers.

Firms have had to acknowledge that the goal of generating the highest profits often “isn’t aligned with the social and environmental aspirations of the types of people they hired,” says Tom Strelczak, a London-based partner focused on sustainability at Madison Hunt, where he oversees the firm’s European business. 

After having “overhired in a very evangelical and philosophical way,” many financial companies are now avoiding some of the ESG (environmental, social and governance) profiles they targeted just a few years ago, he said in an interview. …

As a result, many of the climate scientists and campaigners from nonprofits who were hand-picked by financial firms just a few years back are now struggling to adapt to their employers’ renewed focus on financial profits, Strelczak said. 

They’re often “frustrated and disillusioned,” he said. ...

On Wall Street, which has turned its back on net zero alliances, firms are dropping “ESG” from job titles. And globally, less than 7% of people who took on an ESG role in 2020 still retain an ESG title today, according to figures provided by Live Data Technologies.

To be fair that seems to be mostly about the more “evangelical and philosophical” ESG employees, the ones hired from nonprofits, the ones who have “social and environmental aspirations.” The ESG engineers are still okay:

Those ESG professionals still getting jobs tend to be specialized in the minutiae of things like European regulations, with almost 90% of CSOs saying they now spend more time on regulation and compliance than they used to, according to a recent survey by Weinreb Group.

Structuring transactions to optimize for European climate regulations is no longer the cutting edge of finance, but it’s still an honest living.

I assume that everyone who has ever worked as an investment banking analyst has thought: “Most of the work that I am doing on this pitchbook or model could probably be automated, and it is taking me forever, so I should automate it.” Some of them then actually automate some of their work, but there are impediments. A lot of bankers are not particularly talented computer programmers, for one thing, and also if they are working 100-hour weeks to crank out pitchbooks and models on tight deadlines, they don’t have time to stop and automate the process. 

Still, some junior bankers are good at coding and/or hiring coders, and when they quit banking, some nontrivial percentage seem to launch companies to automate the work of junior bankers. Here’s one:

An AI start-up behind a chatbot that replicates an investment banker has raised $50mn from a group of investors led by Thrive Capital, [1] increasing the four-year-old company’s valuation from $80mn to $350mn. ...

Rogo was developed by a former analyst at Lazard, Gabriel Stengel, with the aim of automating some of the laborious tasks done by junior investment bankers.

“I thought, hey, you could make a real AI analyst for Wall Street that can help augment senior bankers, but also really help automate a lot of the grunt work that junior bankers are doing,” Stengel told the Financial Times. ...

Stengel, who worked as a junior analyst covering biotech and pharma companies, said he would spend days triangulating research reports and filings with the US Securities and Exchange Commission to calculate a “peak sales” valuation ratio, a task that now takes Rogo minutes. ...

The company, which employs engineers as well as former investment bankers, believes it can train models to eventually offer insights equal to those of senior bankers.

“We’re training reasoning models that think like investors and investment bankers . . . it is a little scary because you run these big experiments to see, hey, can we be as thoughtful as a partner at Tiger Global? Can we be as thoughtful as Blair Effron at Centerview?” said Stengel, referring to the highly regarded Wall Street executive.

The basic apprenticeship model of investment banking is that you start as a junior analyst, you work 100-hour weeks, you build lots of financial models and pitchbooks, and by endless repetition you gain insight. By doing lots of pitchbooks, you understand what companies are looking for in deals and how industries work and how to win business; by building lots of models, you understand how companies make money and what drives deal returns and what deals make sense. Slowly you abstract away from the grunt work: As an analyst you spend your days in Excel; as a managing director you might never look at Excel, but your previous years of Excel modeling allow you to give wise off-the-cuff advice to senior client executives.

One worry about AI is that if AI models automate all the grunt work, how will the analysts develop the insight and wisdom and tacit knowledge to become MDs? But I guess the solution is that the AIs can follow the same apprenticeship model: Train the AI to do lots of modeling and pitchbook creation, and maybe eventually the AI will be able to give wise off-the-cuff advice to senior client executives just like Blair Effron can. After all, it has had the same sort of training that he had.

Elsewhere in junior investment bankers not loving the grunt work, what:

A team of junior bankers had been regularly working until 4 a.m. for weeks when they were called together for a pizza party last year.

Some of the young analysts and associates assumed it was a reward for their work pitching and closing deals on the industrials team at Robert W. Baird, a Midwestern bank founded more than a century ago. Instead, the managers who organized the gathering in Chicago told the group they needed to step up their performance, according to multiple people familiar with the meeting.

Some bankers objected, noting the long hours they were working. Managers replied that they should be working more efficiently, the people familiar with the matter said.

I just feel like if I were going to yell at my employees about how they needed to do better, I might put an ominous unexplained meeting in their calendar, but I wouldn’t call it a pizza party? Pizza party implies good? I don’t know. Anyway “on Baird’s industrials team, working more than 110 hours a week wasn’t unusual,” and two junior bankers “wound up going to the hospital following long stretches of work,” including one who “was diagnosed with a failed pancreas after collapsing at home from exhaustion” and was then “fired for poor productivity.” Anyway you can see why the analysts keep trying to automate themselves: If you automate half of the work of an investment banking analyst, the other half is still more than a full-time job.

We talked last week about a “closed-door investor summit” where US Treasury Secretary Scott Bessent reassured investors about tariffs, which seems to have led to a stock market rally the next day, though the rally faded when Bessent made further public remarks un-reassuring investors again. This sort of thing is always controversial; Paul Krugman wrote: “What the hell was the Treasury secretary doing giving a closed-door briefing on a significant policy change that hadn’t yet been officially announced?” If you were in that meeting, you got useful information about Trump administration policy, or you thought you did anyway.

I wrote at the time that “economic policymakers have a long history of meeting with financial markets participants and sharing views; it is awkward, but it’s useful for the policymakers too.” If you are in charge of the government’s economic policy, you will want to meet with big investors to get a sense of how they think about the economy and how they think about your policy; you will also want to pitch your policy, so that the investors continue to invest in economically valuable enterprises or at least keep buying Treasury bonds. It is actually pretty natural for meetings like this to occur, though there are obvious risks. The weird thing here is that Trump administration economic policy is so variable and so disruptive: Most economic policymakers do not intentionally go about crashing and reviving the financial markets on alternate days, so their meetings with investors are usually somewhat boring. In this administration the meetings are … again, “useful” is perhaps not quite the right word, but people do seem to pay attention.

Anyway the Financial Times reports about another one:

Donald Trump’s top economic adviser Stephen Miran struggled to reassure leading bond investors in a meeting last week that followed a bout of intense tumult on Wall Street triggered by the president’s tariffs.

Miran, chair of the Council of Economic Advisers, met representatives from top hedge funds and other major investors at the White House’s Eisenhower Executive Office building on Friday, said people with direct knowledge of the matter.

Some participants found Friday’s meeting counter-productive, with two people describing Miran’s comments around tariffs and markets as “incoherent” or incomplete, and one of them saying Miran was “out of his depth”.

“[Miran] got questions and that’s when it fell apart,” said one person familiar with the meeting. “When you’re with an audience that knows a lot, the talking points are taken apart pretty quickly.”

Another person familiar with the meeting was more encouraged by the administration’s approach to deregulation and tax cuts.

The roughly 15 attendees included representatives of hedge funds Balyasny, Tudor and Citadel, as well as asset managers PGIM and BlackRock. The event, convened by Citigroup, was timed to coincide with the IMF’s spring meeting. 

If you went to that private meeting and came away with the conclusion that the Trump administration’s views of tariffs are incoherent, is that material nonpublic information? Uhh.

We talked yesterday about the fact that private markets are getting bigger, and private-market investment managers — like the big alternative asset managers that started in private equity and have expanded into private credit, infrastructure, real estate and kind of everything else — are looking to grow by signing up retail clients. I wrote that traditionally that was the business of public investment managers (mutual funds, etc.), which have been squeezed in recent years, but which have the sales forces and customer servicing capabilities and relationships with financial advisers that the alts managers now need. “There are deals to be done,” I wrote.

We talked last week about the theory that Goldman Sachs Group Inc. is actually an alternative asset manager, because it manages significant amounts of private-market investments for clients. This theory is particularly popular among Goldman executives, because these days alts managers tend to trade at higher multiples and pay their executives more than investment banks do.

There is a synthesis here, which is that the big modern investment banks tend to have both (1) alts businesses and (2) wealth management businesses. If the theory is “investment banks want to be alts managers, and alts managers want to sign up tens of thousands of individual customers,” then that is convenient for the banks. They can sell their own private-markets stuff to their own wealth-management clients. So Bloomberg’s Hannah Levitt reports:

Morgan Stanley is launching a private equity fund for its widest audience yet — investors wielding a few million dollars — as asset managers help broader masses into the once-exclusive realm.

The North Haven Private Assets Fund will offer exposure to co-investments and secondaries in the lower middle market, according to a statement Wednesday. The firm’s $1.6 trillion investment-management arm hasn’t set a fundraising target but it could gather “a few billion dollars in the near to medium term,” Neha Champaneria Markle, head of private equity solutions, said in an interview. …

The fund will be evergreen, meaning clients can periodically withdraw or contribute more capital. It will initially be available only to Morgan Stanley clients, with plans to open it more broadly at a later date, Markle said.

If you’re a pure-play alts manager, you get a higher multiple than an investment bank or a traditional asset manager, but if you want to sell your stuff to retail clients you will have to figure out the right partnership or merger or other strategy to do it. If you are an investment bank or a traditional asset manager who is also getting into alts, you already have the retail clients.

If you buy term life insurance, it will probably be underpriced. The annual premium that you pay for 20 years of life insurance is less than 1/20th of the actuarial value of the insurance; the insurance company will, in expectation, lose money over the life of the trade. Why does the insurance company do this apparently irrational trade? Because the insurance company has actuarial data not just about when you’ll die, but also about when you will stop paying premiums. And it turns out that insurance customers are also pretty irrational: They tend to let insurance policies lapse sub-optimally; they stop paying the premiums before the policies expire, so the policies are canceled and the insurers keep the money. The insurance company will offer you a positive-expected-value trade for you, because it expects that most of its customers will not make positive-expected-value choices. But if you are very rational, this is a good deal for you. (Not financial advice!) 

If you are extra super rational, you might find a way to exploit this, by systematically buying a lot of life insurance on a diversified portfolio of other people, paying the premiums optimally, and getting more money in death benefits than you pay in premiums. (While, preferably, not dying yourself.) This is roughly speaking called “stranger-originated life insurance,” or STOLI, and it was a real trade for a while; we talked about it a couple of times last year because apparently Apollo Global Management Inc. owned some of it.

I am describing features of the insurance market, but there are lots of things like this. The model generalizes broadly. The model is roughly “if you underprice a product, relying on your experience of irrational consumer behavior, you might find yourself selling millions of dollars of it to Apollo, and they aren’t irrational.”

Anyway here’s a great email I got from reader Joe Morse:

I recently took my kids to the American Museum of Natural History in NYC and we happened upon one of those machines where you can turn a crank and flatten a penny to imprint it with a few museum-related image to take home as a souvenir. It cost 50 cents to use, plus a penny.

Next to the crank was a change machine. But the change machine didn’t just give you quarters, oh no. If you put in a dollar bill, it would give you four quarters and two pennies! So presumably if I put in 100 $1 bills, it would give me $102 back (in quarters and pennies). I’m not sure how much change the machine actually holds, and as an arbitrage opportunity, it might be difficult to reproduce at a large enough scale to pay for my family’s museum tickets. Fortunately I got us a membership, so I have a whole year to find out how many quarters and pennies are in there. I’ll keep you posted.

A change machine that gives you $1.02 for $1 is an irrational change machine, but if you put it next to the machine that charges $0.50 to stamp a penny, it’s fine. You know exactly what people are going to do with that $1.02. But what if they don’t?

(Oh, obviously the problem is scale: Even if you can do this 10 times a minute, which seems fast for a change machine, that works out to a profit of $12 per hour, which is closer to “a minimum-wage job” than “an arbitrage.” Morse adds: “One of many potential downsides is that if I spend the duration of our museum visit feeding dollar bills into the change machine, I won’t be able to supervise my kids’ gift shop purchases, the cost of which will almost certainly exceed my profits.”)

Trump Tells Court His Tariff Powers Can’t Be Reviewed by Judges. US Treasury Looks to Revamp Buyback Program After Recent Tumult. Millennium Poaches Balyasny’s Schurr With $100 Million Offer. Tariffs hit home for small US businesses that rely on Chinese imports. Retail Giants Manage to Keep a Lid on Prices but Warn It Can’t Last. Shein explores US restructuring as tariffs threaten to derail London IPO. American Airlines Sues JetBlue as Partnership Talks End. Carlyle Nears Bond Sale Tied to Keith Urban, Katy Perry Music Rights. Private Lenders to Convert IDG Debt to Equity in Restructuring. Grindr Pivots to Anthropic, Amazon to Power AI Wingman Feature. “A self-employed content creator is perhaps the very last person who needs to be up before 4 a.m.” “The worldview expressed in her stuff indicates that she’s not psychologically capable of receiving this review from me.”

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