As I’ve gotten older, I’ve noticed that people who work in the financial industry often give very poor advice to their clients. Unfortunately, various government regulations make our financial system extremely complex—too complex for many people to navigate on their own. I have a PhD in economics, and even I struggle with basic questions involving the dense thicket of retirement account options.
This Bloomberg article caught my eye:
Milwaukee Bucks superstar Giannis Antetokounmpo had more banks than letters in his name before Avenue Capital Group founder Marc Lasry stepped in.
The National Basketball Association’s two-time most-valuable player had accounts open at 50 different banks, with each of them holding up to the Federal Deposit Insurance Corp. coverage limit. That shocked Lasry, who co-owns the Milwaukee team.
“I spend a lot of time with them explaining where they should invest,” he said of his players on Thursday at the Bloomberg Wealth Summit in New York. “I’m like, Giannis, you can’t be having accounts at 50 different banks. Let me tell you something, if JPMorgan goes under, your little dinky banks are going to go under too. Let me explain what you should buy, you should buy U.S. Treasuries, you should buy this.”
I suppose the average reader might assume that a billionaire Wall Street investor like Marc Lasry knows more about investing than does a basketball player that grew up selling trinkets on the streets of Athens. In fact, if this article is correct then Lasry is giving inaccurate advice. By investing no more than $250,000 in each of 50 banks, Antetokounmpo is fully protected against a future financial crisis that took down JPMorgan and much of the remaining banking system. Lasry seems to think that Antetokounmpo’s strategy would not work if these smaller banks were to go under. But that’s not true. Might FDIC also fail? Yes, but in that case even Treasury bonds would likely default. While nothing is 100% safe, US politicians would be far more worried about several hundred million Americans losing money because FDIC failed than they would be about a much smaller number of irate T-bill holders.
Antetokounmpo lived through the Greek financial crisis, and thus it makes sense that he would prefer insured bank deposits over other investments. So why didn’t the Bloomberg reporter point out Lasry’s mistake, which is pretty obvious? I suspect it has to do with a form of prejudice that I call “credentialism”. At first glance, it seems as though someone like Marc Lasry ought know more than the typical NBA player about investing. As a result, our first impulse in these cases is to trust the view of the more credentialed individual.
The media has a reputation of being highly critical. In many cases, however, I find media reports to be excessively deferential to the pronouncements of credentialed individuals working in places such as the CDC, FDA and Federal Reserve.
READER COMMENTS
MarkW
Apr 8 2022 at 7:34am
I find that that media report to be excessively deferential to the pronouncements of credentialed individuals in general. This applies to both incorrect information (as in this case) and also to completely banal observations that would not be considered newsworthy otherwise. And it doesn’t really matter much if the pronouncement is an area of the credentialed individual’s expertise or not. (It’s just another one of those things that seem embarrassing about our species to those of us skeptical weirdos to whom deference to authority and status does not come naturally).
On top of the natural human tendencies you have to remember that most journalists aren’t really experts in any domain and that they want to retain access to the experts they ring up for quotes, so it’s not in their best interest to challenge them or make them look bad.
I’m with you on the retirement account thicket. We’ve been mostly extreme simplifiers (index funds and chill), but now we’re getting closer to questions about when to start withdrawing and how much (and when to plan to take SS) and that’s all highly complex — there don’t seem to be any obvious answers.
Kevin
Apr 8 2022 at 7:37am
I can’t help but add that most financial advisors are little more than thieves. They take a percentage of investor’s money in order to offer a practically guaranteed lower return (over the long run) than just buying the S&P or a total stock market index fund. It’s completely embarrassing.
MarkW
Apr 8 2022 at 9:02am
But those of us who are index fund investors need the active investors (including their advisors) to set the market prices, so don’t discourage them too much.
Lizard Man
Apr 8 2022 at 11:25am
I think that index investors should actually make money from the mistakes of active investors, if active investors react too strongly to new information.
MarkW
Apr 8 2022 at 1:32pm
I think that index investors should actually make money from the mistakes of active investors, if active investors react too strongly to new information.
If active investors made any kind of consistent errors, far more sophisticated traders than your or me (or their algorithms) would already be exploiting those. I’m not counting on active investors to make exploitable mistakes, but rather to establish market prices so that when index funds buy and sell, that market price is reasonable. If index funds get to be too big a fraction of the market, then they may become vulnerable to market manipulation.
Kevin
Apr 8 2022 at 8:24pm
It’s true. We do need some price discovery in the markets.
Dylan
Apr 8 2022 at 9:21am
I don’t disagree with your overall point on reporters and credentialism, but I don’t think this is the best example of it. I think you’re taking the quote a little too literally, yes, even if the little banks go under, the 250K is protected by FDIC insurance. However, even when WaMu went under, depositors that had more than the FDIC limit didn’t lose any deposits. And Lasry’s larger point is a good one, I’d wager that Antetokounmpo has a far higher likelihood of losing money just by poor record keeping with money kept in 50+ banks than he does with a more diversified strategy.
zeke5123
Apr 8 2022 at 10:49am
I too think Scott is taking the guy too literal. He is saying that if JP and a few other major banks crash, the whole system is FUBAR. Sure, maybe FDIC gets paid out but it is probably effectively pennies on the dollar because of the broader economic situation.
His argument is FDIC is giving a false sense of security. There may be some incremental protection, but that increment is probably quite small.
TMC
Apr 8 2022 at 11:48am
When banks are offering 1% interest in a 7.9% inflation rate environment, yes he’s losing money.
Vivian Darkbloom
Apr 8 2022 at 12:26pm
“Let me explain what you should buy, you should buy U.S. Treasuries, you should buy this.”
Also, the above quote seems to suggest that the advice was “why spread your money among 50 different bank accounts when you can get the same protection (or better) by purchasing US Treasuries directly”. Wouldn’t that provide the same protection with a lot less hassle and cost? Or, am I mistaken in thinking that US Treasuries provide equal or better protection than cash and time deposits held in FDIC insured bank accounts?
Vivian Darkbloom
Apr 8 2022 at 12:33pm
In fact, there’s no need to hold those US Treasuries directly as long as you re-invest the proceeds in new Treasuries:
“Treasury securities include Treasury bills (T-bills), notes and bonds. T-bills are commonly purchased through a financial institution.
Customers who purchase T-bills at banks that later fail become concerned because they think their actual Treasury securities were kept at the failed bank. In fact, in most cases banks purchase T-bills via book entry, meaning that there is an accounting entry maintained electronically on the records of the Treasury Department; no engraved certificates are issued. Treasury securities belong to the customer; the bank is merely acting as custodian.
Customers who hold Treasury securities purchased through a bank that later fails can request a document from the acquiring bank (or from the FDIC if there is no acquirer) showing proof of ownership and redeem the security at the nearest Federal Reserve Bank. Or, customers can wait for the security to reach its maturity date and receive a check from the acquiring institution, which may automatically become the new custodian of the failed bank’s T-bill customer list (or from the FDIC acting as receiver for the failed bank when there is no acquirer).
Even though Treasury securities are not covered by federal deposit insurance, payments of interest and principal (including redemption proceeds) on those securities that are deposited to an investor’s deposit account at an insured depository institution ARE covered by FDIC insurance up to the $250,000 limit. And even though there is no federal insurance on Treasury securities, they are backed by the full faith and credit of the United States Government – the strongest guarantee you can get.”
https://www.fdic.gov/consumers/consumer/information/fdiciorn.html
Scott Sumner
Apr 8 2022 at 1:54pm
You said:
“I think you’re taking the quote a little too literally, yes, even if the little banks go under, the 250K is protected by FDIC insurance. However, even when WaMu went under, depositors that had more than the FDIC limit didn’t lose any deposits.”
I don’t follow your argument. Lasry is saying that small bank deposit investments are risky. You seem to be saying they are even safer than my post suggests. How does that make Lasry correct?
zeke5123
Apr 8 2022 at 3:09pm
I don’t think he is saying they are risky. He is saying the FDIC benefit is a bit illusory because if multiple big banks collapse, the entire economy would have been in massive turmoil so maybe FDIC gives you your money back but is that money really worth much at that time?
So why park your money in numerous small banks? Why not try to get a bit more yield and reduce admin costs without incurring significantly more risk
Dylan
Apr 8 2022 at 3:15pm
Another poster said this better, but that post disappeared. But, essentially I don’t think he is saying that small bank deposits are risky.* I think the sentiment he’s trying to convey (admittedly, with a poor choice of words) is that if a big bank like Chase goes under and takes your deposits with it, without some other entity stepping in and making you whole, then we’re in a very bad world and the fact that the 50 other banks you keep your money in are FDIC insured probably isn’t going to matter that much. However, it was the second part of the quote that matters more, where he’s arguing for being invested not just in treasuries but in general diversification. Because that is the other big risk, it sounds like Antetokounmpo is 100% invested in U.S. dollars, which is subject to inflation and currency risk, even if he is FDIC insured.
*As I touched upon in my earlier post, I think there is a real risk with having that many bank accounts in simply losing the paperwork for one of them, or having some of them start charging account maintenance fees or something else. At one point a couple of years ago I had 4 bank accounts for around 6 months, and it took a fair amount of effort to keep up with event that many, I can’t imagine the nightmare it would be to have 10 times that many.
Michael Rulle
Apr 8 2022 at 10:05am
Proof that Giannis has, at the very least, great common sense, is that he knows it is possible for economies to crater. And whether one has 2 bank accounts or 200, technology makes it easy to use. He has made 150 million (from NBA—-Plus probably another 25mil+ from sneakers etc—maybe much more) thru 2021-2022. He is locked in to age 31 (4 more years) for another almost $200 million. Then, assuming he avoids injuries, he will have another 5 year deal probably worth 250 mil.
It is remarkable how sports have created revenue growth that can make the top players (the amusing aspect of NBA is they have capped salaries!!) like Giannis will make 700 million plus another 100 or 200 in endorsements during his career. After tax—-as of now at least —-he will have netted 540 million. Plus another 100-200 earned on investing—call it 700mil!
Yet he still cares about not being careless. He was born in Nigeria, and fellow super star Joel Embid is from Cameroon (who remarks that the amount of money he and other stars make is ridiculous——and says he has no idea what he could possibly ever need that much money—-I hope he does not stop going for the max).
Still, even the wealthy have to invest, and one cannot escape risk (100 banks for Giannis is only 25mil). I have no idea how anyone should invest. But it’s always stocks plus bonds and the lowest fees possible.
Jordon took advantage of the Clipper Sterling fiasco and ended up doubling his net worth in 3 years by buying out his co-owners cheap. He had some stupid business gambling problems but sold part of his team at the still current high point——but lost a few hundred mil. He is still makes 150 mil a year from Nike—-which is amazing to me.
As an owner I find him amusing. He will not go over cap——and he does not really care if Hornets win. Compare him to the morons who run the Nets
The world is “worth” X. Have fun trying to “out perform”! The only true arbitragers are politicians 🙂
steve
Apr 8 2022 at 10:49am
“So why didn’t the Bloomberg reporter point out Lasry’s mistake, which is pretty obvious?”
Probably a Nets fan.
Steve
Henri Hein
Apr 8 2022 at 12:46pm
I agree 100% with your concluding paragraph, but I want to make a “benefit of the doubt” about Lasry. I see financial advisors using the term “risk” not just in terms of losing principal, but also in terms of losing opportunities for yield. If your money is growing by less than the inflation rate, you are losing money, which is a form of risk. Although to your point, his statement about “dinky little banks” do seem wrong on the face of it (he’s probably right that the banks would also go under if JP Morgan goes under, but the statement side-steps the issue of whether Antetokounmpo ‘s money is safe). The safety of stocks and bonds are also not tied to the brokerage firm that hosts them: you lose the principal if the issuing company goes under, but you keep the ownership if the brokerage firm goes under. Even your money market holdings are most likely protected by SIPC. So Lasry is largely correct that Antetokounmpo would have roughly the same level of risk with his money invested through a broker, with a much better yield.
Scott Sumner
Apr 8 2022 at 1:49pm
You said:
“So Lasry is largely correct that Antetokounmpo would have roughly the same level of risk with his money invested through a broker, with a much better yield.”
I disagree. If you want a much higher yield then you must be willing to accept a higher level of risk.
steve
Apr 8 2022 at 3:54pm
I would bet those bank accounts have been paying almost zero interest. Treasuries have not been paying a lot but still better. I would think the risk of the two would be about equal.
Henri Hein
Apr 9 2022 at 12:36am
Sure. I should not have said “much better yield.” I stand by my larger point. As Steve said, the risk spread between cash and treasury notes is negligible.
John S
Apr 8 2022 at 1:46pm
Nice comment, but since it’s Giannis surely you meant to type:
“but the statement side-steps the issue” –> “Euro steps the issue”
Spencer Bradley Hall
Apr 8 2022 at 3:13pm
The financial industries’ profits are generated by the turnover of investments. The mistake is made by churning. “The Warren Buffett strategy is a long-term value investing approach passed down from Benjamin Graham’s school of value.”
Mark Barbieri
Apr 8 2022 at 3:32pm
Investing is easy. It’s hard to outperform a simple portfolio of index funds. 2 or 3 funds will do. Without tax considerations, I could teach someone enough to be a good investor in an hour or two.
The hard part, and where you can make the biggest delta, is in tax planning. To do well, you either need to know a ton of rules or have someone you can trust guide you. Off the top of my head, it helped me to know about Health Savings Accounts and High Deductible Health Plans, 529 College Savings plans (both pre-paid tuition and savings), IRAs, Roth IRAs, 401(k), Roth 401(k), catch-up contributions, Backdoor Roths, Megabackdoor Roths, the trade-offs between selling appreciated financial assets vs borrowing against them, matching kid’s high school income with Roth contributions, Roth Conversions to lower Required Minimum Distributions, and when to start taking Social Security.
Jim Glass
Apr 8 2022 at 8:39pm
I’ve taught continuing professional education to lawyers and financial professionals.
One one occasion a working investment professional with an impressive certification that many clients reply upon (which I won’t name) explained to me:
“It’s difficult to pick stocks that will beat the market. But it’s easy to build a portfolio that will beat the market by selecting a diversified portfolio of stocks and then eliminating the bad ones.”
Okaaay … On another occasion, decades ago back amid the tech stock boom, I had a working dinner with the investment manager of one of the then-biggest, hottest mutual funds in the country (which I won’t name). This was the night before he was going on Wall Street Week with Louis Rukeyser — which those of us of a certain age will remember as TV’s top investment show before the rise of cable TV business channels. Part of our conversation:
Me: “I’m very impressed at your stock picking, since you have to be right so much more often than a market timer, which is tough enough”. Him: “Uh?” Me: “A market timer has to time the market. How many people can do that? But you have to time the market and also pick individual stocks, and time them going into and out of the market too”. I was just kinda trying to flatter him, butter him up a bit. He looked back at me, paused, and said: “Yeah … I never thought of that.” Like, puzzled.
That saved me money. I had some in his fund but sold it right after. Then it epically cratered when the tech stocks crashed. He had just concentrated it in all the most volatile tech stocks on the way up, which were the same on the way down.
Who can ya trust?
Scott Sumner
Apr 9 2022 at 9:32pm
Contrafund?
Yes, I recall Wall Street Week. Also Washington Week in Review. Another era—before America became a banana republic.
Pemakin
Apr 9 2022 at 5:11pm
Wow, that is nieve on everyone’s part. G is a young wealthy investor with a “guaranteed” NBA contract and tons of endorsements. The PV of his future income exceeds his current investments by a lot. He needs very little low risk assets anyway and FDIC insured deposits offer poor returns among those. I am sure this is what Lasry told him. He might have also suggested hedge funds, given his business. Not terrible advice, look at KD’s inestments!
Jim Glass
Apr 10 2022 at 3:15pm
Contrafund?
Janus…
Half … that was one whole lot of dumb money buying high chasing yesterday’s returns — including the “professional” fund managers drowning in their own Kool Aid.
I got a good steak dinner out of them, though!
Another era—before America became a banana republic.
The whole Janus thing wasn’t near as bad as the Bernie Madoff thing.
Capitalism is as per Sir Winston’s observation about democracy — it sucks, yet thrives because it is less bad than all alternatives.
bb
Apr 11 2022 at 11:02am
Scott,
I started my career in finance back in the 90s, working directly with brokers and financial advisors. They are salespeople. Some of them took the time to learn enough to provide actual advice but many of them didn’t bother. Building a book is the only way to succeed, and that requires sales skills. It does not require deep knowledge of finance.
I’ve bought nothing but indexed funds since. I do have a broker, but not for advice.
Tom M
Apr 19 2022 at 2:23pm
I know this is an older post, but Marc Lasry is not a financial professional. He’s a hedge fund manager 😀
As someone who works in the Family Office space, I can tell you hedge fund managers generally know very little about personal wealth manager. In most cases they are just great salespeople w/ a nice MBA/Law Degree that do an excellent job of raising funds.
The other side of that is, think of most hedge fund managers as the point of a needle- a lot of their knowledge might be very long and deep in one VERY small and very specific area of capital markets.
In the case of Marc – it looks like distressed debt was his business which is far more of a “legal” business than it is an “investment” business.
Giannis should listen to his advisor/family office. The only issue with having $250K at 50 different banks is keeping track of it- but that’s what you hire an advisor/family office to do…
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