The SmartBrief 7 for 2021

From the rise of ESG and meme stocks to the fall of China’s property sector, 2021 was a wild ride for the financial services industry. In the latest episode of Modern Money SmartPod, Sean McMahon and Colin Hogan look back on what we’re calling the SmartBrief 7: the seven most-memorable financial news stories of the year, as we see it.

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The 10 Most-Clicked Stories from Modern Money SmartBrief for 2021

1. "Pandora Papers" expose hidden wealth of the powerful
2. Newly appointed SEC enforcement head Oh resigns
3. Sen. Warren asks Fed to break up Wells Fargo
4. JPMorgan ranked as top G-SIB
5. Citi loses fight to reclaim $500M lost in error
6. Robinhood seeks $1B to weather trading storm
7. Credit Suisse takes $4.7B Archegos loss; execs exit
8. Dimon: Economy approaching "Goldilocks moment"
9. China outlaws all crypto-related transactions
10. Retail trading army sends hedge funds into retreat

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Transcript

(Note: This transcript was created using artificial intelligence. It has not been edited verbatim.)

Colin Hogan  00:14

Hello, everyone, and welcome to another episode of The Modern Money SmartPod. I'm Colin Hogan.

Sean McMahon  00:19

And I'm Sean McMahon.

Colin Hogan  00:21

You know, we thought we'd take a different approach with this episode as we wind down the year and take a moment to look back on the seven most interesting stories we've seen as finance editors at smartbrief this year.

Sean McMahon  00:33

That's right, we're gonna call this the smartbrief seven. And as Colin mentioned, these are the stories that we found most interesting, we're not going to claim that these are the most important stories in finance, or you know, the most clicked on stories, or the most scandalous. These just stories that when we look back on 2021 Colin and I will remember these stories the most.

Colin Hogan  00:52

Yeah, this is gonna be fun. But before we get started, here's a quick word from the exclusive sponsor of today's episode, ICE

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Environmental, social and governance issues are in the spotlight. Investors need the markets, data and indices to understand how their decisions impact the planet, people and their portfolios. ICE provides data markets and analytics to help you measure performance, manage risk, and connect opportunity. For more information, visit ICE.com/ConnectToESG or click on the link in the show notes.

Sean McMahon  01:29

Alright, everyone, thank you for joining us. As we mentioned during the intro, today, we're gonna have a little bit of fun, Connor and I are going to wrap up 2021 With a look back at the seven stories that we think were the most interesting of 2021. Are you ready for this column? I'm ready. All righty. So looks like I'm first up number seven, remote work in financial services. Needless to say, the pandemic started a trend of remote work that some people thought would be temporary, but it seems to last a little longer than that gone?

Colin Hogan  02:07

I would say so. Yeah. I think a lot of companies are really reexamining where they're going to go from here in terms of hybrid work or remote work or back to the office and Wall Street, especially a little wishy washy on that.

Sean McMahon  02:22

Yeah, it seems like there's been some false starts in terms of returning to the office. And then maybe not. One thing I did notice, though, is a lot of the big banks were kind of on the leading edge of vaccine requirements, you know, either making their staff get vaccinated, or I think it was Goldman Sachs that even told clients, like, if you want to set foot in one of our buildings, you got to be vaccinated. So that was interesting. Another aspect of the remote work that I'm kind of keen to keep my eye on is compliance. I mean, we're talking about an industry that had employees who had trouble following the rules when they were working in the office. And now we're supposed to all believe that, you know, suddenly working from home, you know, they might have resisted the temptation to do some things they weren't supposed to do. And anyone who works in compliance will tell you that it's been more difficult to track everyone's activities remotely. So division to see if there's any, you know, follow up investigations or probes into into misconduct during the pandemic. Or if, you know, the regulator is just going to take what we call a light touch and kind of look the other way except for the most massive and the most important misdeeds. So that's remote work. That's number seven, call and number six on our list, I'll throw it over to you.

Colin Hogan  03:23

Yeah, for number six, I think we need to take a look back on the paycheck protection program. You know, this was, of course, something that rolled out in 2020, in response to the pandemic, but reopened again really early in 2021. And then was extended even, you know, supposed to run through the end of March got extended through May. And this time around, smaller banks were kind of given a leg up after the program had faced a bit of criticism in the first iteration that bigger banks had the advantage. This really matters because, you know, at that point, small businesses still needed to be submitting their applications through a bank that changed later on this year. But they were really given kind of a head start to smaller lenders with bigger lenders shut out of the first few weeks or so. So that was a really interesting development. And interesting how the government kind of tried to level the playing field there. The story that started to emerge, though, is how fintechs, were able to really kind of start processing these applications faster, and get these applicants their money faster than traditional lenders. And so you started to see at a time when fintechs are really battling it out with banks for market share a story about how they may have a competitive edge over the traditional lenders.

Sean McMahon  04:33

But wasn't there a little bit of trouble on the back end of that in terms of the due diligence from some of these fintechs and then get a little bit of trouble?

Colin Hogan  04:39

They did. So you fast forward to August, and you see a study published by the University of Texas at Austin that found found about 15% of loan applications probably had fraudulent information, to say the least and that fintechs had processed about half of all those suspicious applications. And what's more, you know when it comes to specific lenders who had a high rate of suspicious loans, nine of the top 10 were fintechs.

Sean McMahon  05:06

So you're telling me that some of the fintechs don't quite have the massive army of underwriters and compliance officials that some of the legacy banks do.

Colin Hogan  05:14

Right. You know, the tech brings speed, but does it bring thoroughness? That's kind of an open question. You know, that's a big deal. In this case, especially because as we know, you know, about three quarters of paycheck protection loans have been forgiven now. So this isn't even just potential fraudulent applications for money that was going to need to be paid back. But just complete government handout that was not really having much due diligence, in some cases, just kind of vanished into thin air 

Sean McMahon  05:41

Hmm, well, we'll see if the fintechs get things under control and optimize their processes going forward. Maybe they learn from it, or maybe they'll just wait to get bought by a big bank and let the big bank handle the underwriting. Right. Yeah. All righty. So number five, on the smartbrief, seven here, and we're just gonna call this the the push and pull between Wall Street and China. Throughout the year, there were a number of stories where it seemed like there was more engagement with US banks in China and then pull back, you know, and then more engagement, and then pullback. We saw that in the exchange space where a lot of us exchanges, issued warnings to Chinese companies about disclosure and kind of telling them that they needed to see more information about their operations. But then we also saw on the Chinese side of it, where, you know, China made it very clear here towards the end of the year that they would just perhaps very much appreciate the Chinese banks would list on Chinese exchanges. So a little bit of back and forth there. Also, you know, over the years, there's been a lot of these joint ventures between US institutions and Chinese entities. And now we've seen some of those US institutions get the green light from Chinese regulators to set up their own operations. So I think that's, you know, an opening of China more than a pullback. 

Colin Hogan  06:50

Yeah, I mean, we've seen a lot of some Wall Street banks starting to get approval to join a Chinese company and a securities venture there, others are now getting full control of their existing joint ventures with Chinese companies. So it's like Wall Street had its foot in the door in 2020. And is now kind of pushing a little further in, though at the same time, like you said, with exchanges and on the US, and we're kind of cracking down on Chinese companies listing in the US as well. So, and maybe one of the biggest developments to come out of Chinese markets that's affecting us companies and companies all over the world is the default of these major companies in China dealing with China's real estate sector, which is really had a worldwide impact on markets.

Sean McMahon  07:31

And finally, the last note on China that, you know, again, we're talking about the open closing part of it, is people forget that Jack Ma, just kind of disappeared for a couple of weeks there, right are gone. There's a period of time where the face of one of the biggest companies in the world, no one could find it.

Colin Hogan  07:47

Can you imagine if Jeff Bezos got into a sort of, you know, little public dispute with the US government, and then all of a sudden disappeared for a month or however long, really huge story that you know, we certainly followed, but still don't have a ton of answers on where he went for that time. Or you know, why he laid low and what prompted him to lay low for that long,

Sean McMahon  08:06

Colin, I do have to point out I do think that Jeff Bezos disappeared from the face of the earth for at least a few minutes there that

Colin Hogan  08:12

We do know that he left the earth for a while he did disappear from the face of the earth for a while, but with TV cameras on him the whole time and his unique spacecraft. 

Sean McMahon  08:23

Yeah exactly. So obviously, we will continue to keep an eye on the relationship between you know, Wall Street and China. It's going to continue to evolve for years and decades, but this year, you seem to have a few big stories coming out of that relationship. We're gonna take a quick break. But when we come back, Colin, I will continue our countdown of the smartbrief seven.

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Sean McMahon  09:26

And now back to the smart brief seven for 2021.

Colin Hogan  09:30

In our number four spot, I think we need to talk about the end of spec mania, which came to a head this year after a lot of momentum since 2019. You know the the frenzy of spec deals that that we saw last year kind of continued into the first quarter, but then we saw a pretty sharp drop off in the second and third quarters. And a lot of it probably stemming from news about litigation issues and the potential for more scrutiny from regulators on these deals.

Sean McMahon  10:00

It seems like especially in recent weeks, some of the stories have been based on Spax being started up for entities that let's just say, the market viability of them is is in doubt, by many, many large sectors of investors. Some people might think I'm talking about the Trump administration and their tech and media spec. But we can also talk about BuzzFeed, right most needs a media entity, they went to SPAC route. Recent reporting is indicating that a lot of employees there who were in a major stockholders, because they, you know, were working for this cool hip, upstart media company and for not as much money as they could be making, you know, they were hoping to get paid out on the back end with equity. There was a lot of troubles just in executing the trading of their shares. Continental I think was the company that was handling it and some fiery words from the CEO of BuzzFeed about, essentially, their employees having their stock locked up, because they couldn't get the paperwork done in time to trade it. And by the time they did pricing, those shares had plummeted quite a bit. So definitely seems like there's some lessons learned there especially is one of the reasons these entities go the SPAC route is to cut costs and speed the process, but maybe they're cutting too many corners, don't you think?

Colin Hogan  11:03

It was certainly a raw deal for the BuzzFeed employees. And you see now, you know, a lot of the anticipation of potential new rules and stuff starting to materialize with the SEC, saying this month that calling on SEC staff to put together some new rules to ensure that spec investors have the same information at their disposal and the same protections as traditional IPO investors.

Sean McMahon  11:28

Exactly. So I think that's a trend that we will see definitely tail off. You know, we've seen the rise. And now I think we are in the middle of witnessing the fall of that spec trend. So moving down the list to number three on our list of the top seven stories of 2021. We're going to call it the rise of ESG investing. Now obviously ESG investing started before 2021. But this year, so I gather momentum at a blistering pace. In fact, some estimates say that by 2025, the ESG market will be worth $50 trillion. That's trillion with a T. So really, the question is, is this boom going to last? What do you think?

Colin Hogan  12:04

Well, I mean, there's no denying the growth spurt of this year. And with the developments we've seen come out of cop 26. It's hard to imagine it doesn't continue whether there could be a plateau. That might make sense to a lot of people. But, you know, this is definitely the year where ESG investing and concern over greenwashing became top of mind for everyone, whether institutional or just individual investors, or companies looking to raise money. Everyone's now got it right on the front of their mind.

Sean McMahon  12:35

That's exactly it. Anyone who's listened to this podcast knows that all of our episodes are pretty much had some kind of angle on ESG or sustainable investing. And so it's a hot area of the market. Lots of murkiness there, though, in terms of what constitutes, you know, an E, an S or a GE investment. Seems like there's a lot of people in there trying to take advantage of that by attracting money without much accountability. And truthfully, on the back end, there's not really a punishment apparatus for companies that don't meet these goals. They said they lured the money in right or the punishment is such a small dollar amount that they're better off just taking the money and attracting the investors and then paying, you know, a fraction of the cost on the back end if they ever get held accountable at all.

Colin Hogan  13:13

Yeah, definitely still a lot of cracks to fill in. But we know we can expect to see more rulemaking and more standardization in the coming year after always seen come out of cop 26. And just from the industry and regulators this year. 

Sean McMahon  13:29

All right now Colin, we're shifting into the top two on our list of the top stories of 2021. And I gotta be honest, I kind of went back and forth on these two, it was pretty close.

Colin Hogan  13:38

Really, really tough to pinpoint, which is bigger, and which is more important. But you know, for number two, I gotta say it is the crypto market and how it has matured in 2021. Obviously, it was gathering a lot of steam in 2020, the price of Bitcoin leading the way. But this was the year it really hit a growth spurt. And while individual investors have been huge drivers of this all along, I think we need to point out that this was the year we saw major institutions on Wall Street and elsewhere, start to change their tune on this asset class.

Sean McMahon  14:13

Yeah, you know, someone who's been to a lot of the industry conferences of the last decade or decade and a half. I can remember back to the early days where you know, a lot of evangelists of crypto would show up at these events. And the more tenured attendees would kind of roll their eyes and mock them a little bit. And they'd be stuck on some side panels, some small room way away from the main stage. And that all changed a few years ago. And now I think it's completely changed. I think your main headliners at some of these events. And the most, you know, the the panels and discussions that draw the most attendees will be based on crypto, there's a knowledge gap there and I was trying to learn more. Like you said a lot of the institutions are now kind of coming into it and coming into it kind of in a big way. But the industry itself is kind of starting to evolve as well. I mean, Coinbase went public. That's big. Huh, bye Nance has exploded, you know, and they're kind of in this, this gray area to where they were trying to be decentralized, you know, and now they're understanding that, you know, from a compliance and legal perspective, that's not really going to work. A lot of regulators around the world, I've let them know that that's not going to work. And so they're trying to locate a headquarters and, and I gotta say, I was kind of surprised that news came out that looks like they're not gonna end up in Singapore, I was putting a little bit of money on Singapore being one of the places that it would end up I know, they're looking at Ireland and a couple other places, but it just seemed like Singapore would be a good fit. So we'll see where we're binance ends up setting up a HQ. But that's just another example of an industry that's maturing, as you said, and also the acceptability of it. I mean, 2021 was the year when Tesla and Elon Musk they started accepting bitcoin payments for Tesla's and then when the the backlash came from the environmental side about how you know, the damage and how unfriendly the environment Bitcoin mining is, you know, Elon stopped taking payments for Tesla's in Bitcoin, and then very quickly started taking payments again. So it's just this this headline grabbing thing where people first can and then can't, and then can, again, buy a car with Bitcoin?

Colin Hogan  16:05

Well, you know, it's not just Tesla to you know, Pay Pal visa, other companies are starting to offer it in a way that that almost starts to legitimize it as a currency and not just an asset for speculation, you know, if you can buy it on your payments, apps, and then conduct payments on your payments, apps, that's almost like using Bitcoin as a currency, many big strides this year for that.

Sean McMahon  16:27

And I think we've seen the derivatives market kind of step in as well. I mean, we've seen We've seen some cryptocurrency, ETFs, and stuff to get launched. And so there's all kinds of momentum. But then the flip side of it is there's other jurisdictions where it's there's been a lot of pushback. I mean, China has just outright banned purchase of some goods and services with cryptocurrency. So just to see how the world continues to have altering views on cryptocurrency,

Colin Hogan  16:51

 Yeah, meanwhile after China decides that crypto activity is illegal. El Salvador adopts it as a legitimate currency. So the contrast is huge, but also really kind of signals that There are jurisdictions out there that really want to take this seriously. And that's gonna lift the time for a lot of other jurisdictions, too. So that brings us now to our number one story from the past year. Are you ready, Sean?

Sean McMahon  17:17

Drumroll please. I'm ready, Colin. Reveal the big winner to our listeners.

Colin Hogan  17:26

Okay, I think they could probably deduce by now since we haven't talked about it. But we have to talk about the Gamestop frenzy and meme stocks and what that is meant for markets. This, I think we have to call the biggest story of the year because of what it means for the democratization of markets. And also on the institutional side, how they are going to adapt to, you know, a new or maybe a little less discipline trading happening in markets in a big way.

Sean McMahon  17:55

You nailed it with that term democratization of markets. You know, I've been working with a couple of big exchanges around the world for a number of years now. And many of them have been working to try and educate retail investors on things like options. A couple years ago, they said, Hey, we're gonna push options and bring retail traders into this marketplace, because we think there's room for growth. Well, guess what? Retail Investors found out about options. And so that really kind of drove things crazy. I remember friends of mine, just walking around checking their phones, checking their, you know, their AMC and their Gamestop holdings. And asking me what's going on? I'm like, Well, you know, I'm not gonna say if it's going up or down, but it was just crazy. These are not professional traders. He's not even day traders. These are people that have other jobs, and they just kind of want to get in on this frenzy. And there was all kinds of stories about, you know, the Red Army. And you know, the Wall Street Journal did a big feature on one of the people they think was what the generals of that army. But at the end of the day, like that whole side of the equation in the markets as now, you know, the more institutional side has to pay attention, because they're going to jerk them around like this, the hedge funds are going to get hit pretty hard if they don't play it the right way. So, you know, I think long term, I'm not sure, well, it'll never get back to the frenzy it was I don't think we'll suddenly have the next you know, meme stock will be as big as you know, GameStop was back then. But it doesn't have to be for it to change the way markets operate. You know, they can, it can have an impact without taking over the headlines of every paper.

Colin Hogan  19:17

I mean, definitely a new power dynamic there in the investing world and institutions having to kind of take note, but then there's also the policy ramifications of what happened. And since then, now, we're hearing a lot more about payment for order flow, that is the wholesaling of trades on mass through market makers to help do so as cheap as possible. That's getting a lot more scrutiny in the US, and especially so in Europe, but whether we'll see any big policy changes here that remains to be seen. I think the other big thing though, of course, is as we have just seen from the SEC, there's going to be demand for more disclosure and transparency with short selling and That's probably going to be a pretty big implication for institutions.

Sean McMahon  20:04

Yeah, just getting back to the payment for order flow aspect of it. I don't think that will change much in the US here. But, you know, there are some pretty honest questions being asked about it. Like you have these entities, entities paying money for information. And we're supposed to believe that they're not benefiting from that. These are smart people paying money for information, why would they pay money for that information if they weren't going to be able to monetize it in some way? Like that whole premise is, is pretty crazy. There's also some folks I mean, that there was an investigation into the relationship between, you know, Robin Hood and Citadel and some of the other entities and whether they colluded and all this whole thing. And when Robin who was freezing, you know, retail traders out of their accounts, that investigation found that there was no collusion. But there are people out there who still kind of think that, you know, where there's smoke, there's fire, you know, you don't have to have, you know, the text thread or the email or the phone records of the actual communication. If your neighbor's house is on fire, you look out the window. You don't have to wait for him to call you or send you a text, please help. You know, it's in your best interest to go help. So but yeah, the investigation found there was no wrongdoing there. You know, and, and Robin Hood and other you know, platforms like that are still wildly popular and gonna get even more popular,

Colin Hogan  21:15

You do at least see their users now, understanding a little better what commission free trading really means, and where the money comes from to actually conduct such a business. 

Sean McMahon  21:28

So that's a wrap up our top smartbrief seven stories that Colin and I like the most this year, we will in the show notes include a list of the Top 10 stories from the Modern Money SmartBrief. And that's just determined based on clicks from readers like you, Colin, any other thoughts as we wrap up the year here. 

Colin Hogan  21:45

It's definitely been a big year for individual investors. It's definitely been a big year for crypto investors. We're still coming off the effects of the 2020 pandemic, but I think we've got a lot to look forward to in 2022 and a lot of policy developments to be watching.

Sean McMahon  21:59

Yeah, we definitely have an exciting 2022 to look forward to. I'm gonna keep my eye on the sustainable investing side of it. And climate finance is a big puzzle that we all have to work out and you know, watching some of the leading firms and how they tackle that is something I'm going to keep a keen eye on. But for now, happy holidays, our listeners we look forward to coming back to you in 2022 with more episodes of The Modern Money Smart pod.

Colin Hogan  22:21

That's our show for today. But before we get out of here, we just want to say a quick thank you to the exclusive sponsor of today's episode, ICE.

Sean McMahon  22:30

If you like this podcast, please share it with your friends and colleagues. And be sure to follow us on Apple, Google Spotify, or wherever you get your podcasts. You can also follow us on Twitter, where our handle is at @ModernMoneyPod. And if you'd like a daily dose of modern money news delivered to your inbox, head on over to smartbrief.com and sign up for the Modern Money smartbrief. The Modern Money SmartPod is a production of SmartBrief a Future company