The article buried the mitigating factor in the middle of the article. Hedge fund managers don’t coordinate with consultants, and 90% of MIO’s capital is managed by outside funds, including this one the article is about.
The problem mckinsey faces is that they consult for everyone.
Eh? A few dropped words during a social dinner, or even a knowing glance, you call that a huge risk? And a hedge fund getting (even only 1 bit of) information from some well-informed people, allowing them to adjust their position on a firm, can lead to substantial gains, obviously.
> Most consultants won’t even know what other people on their team is working on, and most are in and out after 2 years.
This is not about junior guys.
> Hedge fund managers don’t coordinate with consultants.
Well, yeah, officially, of course. But that's precisely what the article is about.
The same thing happened in the Libor scandal, those involved took a very big risk for not such a big gain and look what that caused: a market worth hundreds of billions of dollars (if not more) being manipulated in exchange for stuff like Champaigne bottles and some fancy dinners out (all of the latter worth at most $10,000).
The only evidence of badness within this they could find was a pharma company invested in by an outside firm.
The NYT has also released another article about why they’re writing these hit pieces.
Basically it boils down to them having a hunch that a big private company is bad. And have they really found anything? No, not really. They just keep churning out pieces that say this could be bad if the firm has no internal controls though they can’t find anything to suggest it’s true, or one off studies that are linked to bad outcomes. Their reporting isn’t factually incorrect, but it’s being written with their own stated bias to find bad things. They’re not hearing leads and digging further. Given that this is true, their investigation has found basically nothing.
Interesting data science exercise...visualize all the MIO LinkedIn connections to McKinsey people.
There's no smoking gun and the Times did seem to be fishing around for one in this piece. It's a bit of a lurcher.
On the other hand:
> Internal documents examined by The Times show that from 2000 to 2010, MIO’s flagship fund, the Compass Special Situations Fund, had an average annual return above 9 percent, compared with a 1.6 percent loss in the S&P 500 Index. In 2008, when the broader United States stock market fell more than 36 percent, the Special Situations Fund lost about half that amount.
It's possible to get that kind of return with nothing but public information. But it's a lot easier if you have miraculous hunches every now and then.
Let's not kid ourselves, people have been caught in stuff like insider trading for peanuts before.
I doubt there is an on record scheme with company memos and other communication discussing inside info. It's probably much closer to work friendships and casual partnerships that pass much of this information along.
As long as you can build a reasonable model to line up with the information you get, it's pretty difficult without a smoking gun to get caught.
Knowing that a public company is about to be taken private by a friend's PE firm is material non-public information (MNPI).
Knowing that a PE-backed company is about to be bought by a public strategic acquiror is MNPI.
Knowing that sales of a private company's products to a public company are changing rapidly is MNPI (think of knowing the order pipeline for an electronics manufacturer who sells to Apple).
Trading on any of this MNPI would absolutely count as insider trading, and is watched closely by PE/VC firms, who are all regulated by the SEC and FINRA (in the US, at least)
This MOI story seems to come up every few years, but McKinsey has kept everything so private that typically all the articles can say is "MIO seems suspicious, and may be conflicted"
A few past articles:
Here is a New York Times story about the “McKinsey Investment Office, or MIO Partners,” the in-house hedge fund of consulting firm McKinsey & Co., which invests employee money, including in companies that McKinsey advises. “That web of relationships underscores the unusual nature of McKinsey’s hedge fund, and the potential for undisclosed conflicts of interest between the fund’s investments and the advice the firm sells to clients,” says the Times, and I suppose there are some shady elements: When McKinsey advises on a bankruptcy, for instance, and its hedge fund owns one or another slice of the capital structure, then there’s a clear potential for conflicts of interest.
Mostly, though, it’s hard to get too worked up about this. For one thing, most of the fund’s money seems to be run by outside advisers, and even the stuff run by McKinsey employees seems to be mostly walled off from the consulting business. For another thing, the incentives are mostly good: McKinsey’s consultants are trying to make the company better, and its hedge fund is invested in the company and wants the company to get better, so there is no problem here. “The firm’s partners stood to profit from their own advice,” says the Times about McKinsey’s indirect investments in Valeant Pharmaceuticals, but why would that be bad? If they do stuff to make the stock go up, then they make money, but that is also what the company wants. (In the event, Valeant’s stock went down, which was bad for both Valeant and McKinsey.) Really companies ought to demand that their consultants buy some of their stock, so they have some skin in the game with their advice.
Of course, what would really be scandalous is if McKinsey’s hedge fund shorted companies that the firm advised, and then the consultants tried to give those companies ruinous advice. You couldn’t advertise that strategy, but much of the Times story is about how secretive MIO is, and if you can be secretive enough then maybe you could pull off this trade.
The problems would be:
1) McKinsey learns about non-public good things on the inside, and so buys even more stock than they otherwise would (pretty much the definition of insider trading) and/or sells competitors' stock
2) McKinsey learns about non-public bad things on the inside, and so sells stock they otherwise would have held and/or buys competitors' stock
I don't see how Matt Levine can possibly just brush that aside?
This is a pretty softball take by Matt Levine.
That's a lot of words to say "sketchy-ass shit."
You are an adviser? Good. Here's your consulting fee and that should do it.
I don’t see how McKinsey would not be an “access person” held to the same insider restrictions as their client company’s executives.
Either way this snippet from Bloomberg seems to completely miss the point.
It does McKinsey, as a firm, very little good if their clients' business goes down in flames. They, obviously, cannot bet against their clients (it would be catastrophic to their core business if this was ever publicly disclosed) and so they can only bet with their clients, even if they (unethically and possibly illegally) used their clients proprietary information to trade.
It feels to me that there are some corporations that newspapers can just bash confident that most of their readers will nod along without applying much critical thinking. I understand the skepticism. I used to share it before I got to see the inner workings of organizations like this. There is much to criticize about organizations like McKinsey but violating clients' trust is not one of them.
One last argument against the insider trading inference, the results I have seen, while good, are not indicative of what is possible if smart people were truly trying to take advantage of their knowledge of the inner workings of the largest corporations in the world.
This is not a generic "all I-banks or management consultants are evil" - there are still plenty of specialized firms out there without these anti-patterns.
Then if things ever go wrong, you always have the out of "I hired the best, what did you want me to do?"
It's like if you paid someone $50,000 to help you find a good car. Client wants a fast car. Oh you want a fast car? Buy a ferrari they have big engines and can generate tons of horsepower. Job done, can i collect my 50k now?
Mind you this guys linkedIn and resume read like a CEO wet dream. AI and machine learning data science all over...
We spent months dilly dallying with different tech before they just left cold turkey , havent heard from em since. And our 20% complete projects experimenting with all kinds of DB tech have done nothing.
It may very well have simply done research on drugs for Valiant as requested. Valiant was making ultra-risky moves in buying up things it shouldn't have.
Even if there were 'insider moves' in the McKinsey fund (which I doubt but maybe it's true in some indirect way), it's easy to see independant investors somewhere else seeing that Valiant is doing some dumb things.
Goldman was involved in helping the Greek government clean up it's balance sheet in order to get into the Euro. It'd seem that in this case, it was the Greek government that likely hired Goldman due to their very prowess in 'doing whatever it takes' to get the job done. In this particular scenario, my hunch is that Goldman probably told Greek officials that the presentation of the information in such and such a way would likely cause problems, but 'the client' did it anyhow.
Also note that McKinsey in particular is not a highly centralized entity, it's almost like a 'franchise brand' with a lot of fairly independant entities that operate differently. Not exactly Subway sandwiches but it's not like Amazon either.
I'm not really defending GS or McKinsey, it's just that these things aren't black and white.
Maybe it's better to think of them as 'consiglieres' for the powers that be.
Goldman has a history of doing terrifically by their clients. They aren’t the best counterparty to trade against, however, in the same way that one would rather play poker against a bad player than a great one. (McKinsey, on the other hand, is a consistent dumpster fire.)
Here's the delicious summary from Matt Levine's "Money Stuff" Bloomberg column:
All else equal, would you rather hire an evil investment bank to underwrite your stock offering, or a good investment bank? I think there are good arguments both ways. An evil investment bank might do evil things to you, which you won’t like. On the other hand, it might do evil things to investors on your behalf, which you might like; if there is evil in the world, you might as well hire it so it’s on your side. Also an evil investment bank might hang out with all the evil investors, who have a lot of money and will buy your stock, while a good investment bank will only hang out with good investors, who have less money.
Or whatever, I don’t know, it’s a model. More generally, if your model is “the whole financial system is evil,” then evil investment banks should be preferable and more successful, because they will be better plugged in to the (evil) networks of the financial system.
Here’s a fun paper from Thomas Roulet of Cambridge’s Judge Business School, whose model really is kind of “the whole financial system is evil”; as the school’s blog summarizes it:
The study concludes that negative coverage actually helped banks gain IPO business from corporate customers, as those corporates view certain banking practices widely criticised after the financial crisis (such as appetite for risk, short-termism and big bonuses) as consistent with industry norms, thus suggesting quality of service.
“This study shows how divergence in audiences’ perception of typical industry behaviours can make wrongdoing beneficial,” says the paper authored by Dr Thomas Roulet, University Senior Lecturer in Organisation Theory at Cambridge Judge Business School. “Most audiences tend to disapprove of wrongdoings, but specific stakeholders may interpret this disapproval as an indication of the focal organisation’s level of adherence to professional norms.”
The model is roughly that “professional norms,” in business, are evil, and so businesses looking to hire qualified professional investment banks tend to look for the ones who are most evil. And so winning IPO mandates is correlated with negative press coverage. What kind of negative press coverage? These delightfully specific kinds:
The media coverage was evaluated based on a list of 204 words built on a qualitative analysis of a sample of opinion articles. The articles were then coded on the basis of how those words were associated with the banks. The words were grouped into four factors that have been heavily criticised since the financial crisis:
Greed: words such as “obscene”, “excess”, “selfish”, and “shameless”.
Violence as in a battleground: “assault”, “frenzy”, “vicious”, “fierce”.
Opacity as in fostering secrecy: “covert”, “cryptic”, “dubious”, “hazy”.
Risk-taking behaviours: “casino,” “tempt”, “daring”, and “gamble”.
“This study suggests that the coverage of misconduct can actually act as a positive signal providing banks with incentives to engage in what is broadly perceived as professional misconduct.” It is broadly perceived as professional misconduct, but it is narrowly perceived—within the profession, and its target audience of businesses—as proper professional conduct.
Obviously you can tell this story without using the word “evil,” and I am joking at least a little bit when I use it. The work of finance is esoteric, and its norms are specific and contextual; in many cases, those norms look bad to outsiders but are sensible and useful in their context. Trading ahead of a client order for a foreign-exchange fixing can be perfectly appropriate hedging, but looks like bad bad front-running when it is exposed as an FX scandal. Taking large risky positions in derivatives can be a perfectly appropriate way to facilitate clients’ hedges, but looks like bad scary prop trading when it loses money. Pricing and allocating an IPO so it is likely to trade up probably serves the goals of banks and investors and issuers, even though outside commentators regularly describe it as “leaving money on the table” for issuers. Sophisticated clients tend to understand what banks are doing and why, and not to take the criticisms too seriously, although I still find it a bit counterintuitive that they’d think more criticisms would be good.
I used to work at Goldman Sachs Group Inc., including during a period when it was heavily criticized for being, um, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” We did fine. There was a distinct sense that clients thought we were evil but smart, and that they’d rather have us on their side than against them. Also I would sometimes go pitch oil companies, and they would welcome us warmly and thank us for being so widely hated, because it made them look good by comparison. I suppose this is evidence for the “the whole financial system is evil” view.
While Birnbaum and the other individuals involved in Abacus acted especially douchey in front of Congress, the point that was apparently lost on many people was that when a market maker sells something off their prop books, they are inherently short that thing
Isn't this something similar to insider trading?
They provide a service that is supposed to improve some aspect of a business, then they can internally do predictions on how successful they think their services will benefit/harm the firm and then make a bet either for or against that firm.
- It's based almost entirely on self-reporting. If a MIO employee has access to material non-public information (whether from a McKinsey consultant or elsewhere) MIO's compliance department has virtually no way of knowing that investment needs to be restricted unless the employee tells them.
- Insider Trading is one of the most difficult allegations to defend against. You're innocent until you can prove otherwise. How do you prove you didn't do something? Typically through records outlining the rationale for your investment decision. The quality of the notes, and investment decisions for that matter, of Portfolio Managers varies significantly from PM to PM.
Rather than simply rely on policies and procedures it seems MIO has contracted most of the investment responsibilities out to sub-advisers and/or has some sort of fund-of-funds structure to their investments. Whether that's to make sure the transactions are actually untainted by inside information or whether that's to obscure transactions that are tainted by inside information is anyone's guess. It seems most of the issues outlined in the article stem from McKinsey failing to disclose their ultimate beneficial ownership of securities (by looking through to the fund's holdings) rather than anyone being able to demonstrate (yet) MIO has acted on insider information.
I also did a brief stint as an accountant at a big four firm. There's a reason accountants aren't permitted to invest in their corporate clients. Not only is there potential for insider trading but it could cloud their professional judgment. As the lines between the big accounting firms, law firms, and consulting firms blur it no longer makes sense that they operate under vastly different regulatory and ethical obligations.
Edit: Others might also be interested to know that while McKinsey's setup is apparently unusual for the consulting world, there are many large law firms who are also SEC-Registered Investment Advisers and deal with the same conflicts of interest. The potential for insider trading in those cases might be even higher as the law firms are often filing disclosure documents with the SEC on their clients' behalf.
The substance of the article strikes me as, "potentially really bad, but no obvious smoking gun".
MIO is a special situations hedge fund, meaning that it looks for companies that desperately need capital for one reason or another, and who have been poorly served by the market for capital because some aspect of their story is messy and/or tough to understand, and provides them capital on terms that give MIO a lot of upside if the company gets back into good shape.
An important thing to understand about special situations investing is that it's usually very active relative to other types. That is to say, I can run a successful long-short equity fund and literally never once interact with any of the leadership of any of the companies in which I take positions; I can, for example, go long Verizon and short T-Mobile and never have to deal with either of those companies' management teams. For special situations on the other hand, the entire value proposition of the fund manager is what they can deliver through their active involvement with the portfolio company that takes the fund's money. So, you'll see special situations funds get super involved in issues like renegotiating long-term leases, or investing in sales teams, or reconfiguring operations to run on a single ERP system, etc -- activities which are right in the wheelhouse of former Big 3 consultants, whose work consists of bouncing from tough problem to tough problem at high-paying clients.
So it's not hard to understand why McK made the decision to found MIO. It kills multiple birds with one stone:
- Makes partners more money through an asset class that tends to post good returns
- Helps their recruiting pipeline because it makes it easier to capture aspiring buy side bigwigs out of college (perennially McK's Achilles heel vs. i-banking)
- Provides outgoing partners with something to do in semi-retirement; MIO employs a shit-ton of semi-retired McK partners to do deep dives on various topics. This importantly has the positive effect on McK's culture of helping clear out the top of the pyramid so young partners don't feel like their career is going nowhere
Anyway, much of what's in the article sounds concerning. For example, the still-serving head of McK's bankruptcy practice was on the board of MIO when it was considering an investment in a coal company that was going bankrupt. On the one hand, this raises hackles; on the other, it's really only a PROBLEM problem if McK was advising that coal company, or had advised them recently prior to the MIO investment. And that might have been the case, but the article does not say whether it was.
The description of the McK's interactions with Guo Wengui is....I'm not sure what point they're trying to make? And similarly, with Valeant, the NYT's gripe is that another fund in which MIO invested went long Valeant at the same time that McKinsey was advising Valeant to increase the price of certain medications.
If I had to guess I'd say that McK has advised 90% of the F500 at one point or another and is actively advising about 30 or 40% of the F500 on something at any point in time. So, I really don't think that McK giving Valeant pricing advice through a consulting project at the same time that a fund MIO invested in was buying Valeant -- with both parties expressly prohibited from communicating with each other and no evidence they did -- as incriminating, though a multiple-hundred percent increase on pricing for any drug is obviously icky.
Anyway, there could be other shoes to drop here, and they could be really bad (e.g. if there were secret backchannel communications regarding the coal company). But I don't see anything in this article that's incriminating on its face.
And the attempt to make Guernsey look like some shady nefarious offshore destination that confers fishiness on anyone whose business dealings go through that jurisdiction? GIVE. ME. A. BREAK. Probably almost half of the hedge funds in Europe are domiciled there, it's like the Caymans or Delaware, talk about a red herring.
This isn't an insider trading scandal; that is not what McKinsey is accused of here. But thanks for calling me a wanker!
> “You can’t be advising people and have a fiduciary interest in the people you’re advising,” Mr. Peters said in an interview.
That's weird, though, in a sense. Wouldn't you want the people consulting you to have a stake in your company? Wouldn't that "align incentives"? Shouldn't you pay the consultants in shares that vest over the next 5 years?
Unfortunately the site seems dysfunctional now.
The Times actually ran an article today about the McKinsey investigation:
> We were intrigued by a company that seemed to be everywhere — and nowhere at the same time. As a private company, it had no obligation to report information to the public. And as a consulting company, it wasn’t regulated. Other types of companies, especially accounting firms and investment banks, have similar client rosters, but they are overseen by government agencies. This lack of accountability, particularly for a firm as influential as McKinsey, beckoned us to dig deeply into its conduct around the world.
> The most basic question we set out to answer was this: Did McKinsey’s pristine reputation as the foremost purveyor of “best practices” match its record? After nearly a year of reporting, we found that the answer was often no.
> That point was driven home in startling fashion when we recently reported that the Massachusetts attorney general had accused McKinsey of fanning the flames of the opioid epidemic. In legal papers, the attorney general alleged that McKinsey had instructed the maker of a powerful opioid on how to “turbocharge sales” of the drug, how to counter efforts by drug enforcement agents to reduce opioid use and how to “counter the emotional messages from mothers with teenagers that overdosed” on the drug.
This guys suggestion is to put our data in redis b/c it's fast and in memory. Looking up hosted REDIS solutions, (redislabs, we use for other smaller cache redis things). To put 1 TB of data in standard redis server would be ~50k/month :p
“The job of the newspaper is to comfort the afflicted and afflict the comfortable.”
This is a non-issue.
> A Chinese wall is an ethical barrier that prevents communication between members of an organization that might lead to conflicts of interest. For example, a Chinese wall could exist between departments where the exchange of information could unfairly influence trades. The "wall" is figuratively erected to safeguard insider information and protect private data that could create negative implications and legal consequences if improperly shared.
BREAKING DOWN Chinese Wall
> Protecting client data and confidential information is critical to any business but is especially important to companies with diversified services, such as insurance companies, banks, and other financial services firms.
> The Gramm-Leach-Bliley Act (GLBA) of 1999 repealed the Glass-Steagall Act that prohibited banks, insurance companies, and financial services companies from acting as combined firms, such as banks offering insurance products. The Gramm-Leach-Bliley Act resulted in a surge of mergers and increased diversification of services, as well as an increase in fears and public scrutiny. One concern was the protection and sharing of confidential information and personal consumer data with those of contrary interests. In response to growing concerns, many companies adopted the Chinese Wall concept.
If there were evidence that there was insider trading on behalf of the hedge fund, it would probably result in one of the largest SEC fine in recent years. It would be a massive blow to their reputation. I tend to believe (maybe naively) that firms act in their own best interest and that McKinsey wouldn't dare do something as egregious as collude with their hedge fund.
I know I probably have more faith in the financial services industry than most of HN, but McKinsey is a reputable firm with good people and I don't believe that in a million years (will that might be an overstatement) they would do anything like what the NYT is suggesting.
Not to mention that if your standard for impropriety is the investment bank, you're lost already.
I know people here don't think highly of the financial services industry, but let's talk about self interest. The fines from the SEC if there were collusion would be massive, this would be one of the biggest cases of insider trading in the past decade.
I know people from McKinsey, and while I don't know about top management, I believe that they are a reputable firm and wouldn't touch anything like this with a ten-foot pole.
Now it’s McKinsey.
Yahoo source: http://mobile.nytimes.com/2013/03/06/technology/yahoos-in-of...
>”Mar 5, 2013 · “In the tech world it was such a bummer to say you worked for Yahoo,” said a former senior employee”
I understand though taking issue with The NY Times as a source though, they do have their issues, with the recent Jill Abramson plagiarism case being a good example.
Ugly news reports about what senior partners at a highly selective professional services company did != meaningful career repercussions for its alumni, most of whom were there as junior grinders rather than decision makers.
I'm not a McK alum but would definitely still recommend a talented young person with a job offer there to take it.
I get that it wasn't run well but that doesn't really mean the folks working there aren't good at what they do / didn't do interesting things.
Yahoo, McK, GS, FB, Uber, etc. might not hold the prestige it used to on your CV, but these things ebb and flow. Microsoft used to be "lame" but now it's cool again.