Money Stuff: The AI Will Vote the Shares

We talked in November about proxy voting at US public companies. My basic point was that, if you own a diversified portfolio of stocks, you will be asked to vote on hundreds of different propositions — annual elections of directors, non-binding social and environmental proposals, the occasional merger — each year. Almost none of these votes will matter to you economically, and your vote is vanishingly unlikely to matter to any of the companies. In the abstract, in the aggregate, shareholder voting is the foundation of corporate democracy, a way to make sure that managers are answerable to the ultimate owners of their companies. But in almost every particular case it’s a waste of time.

I suggested that this tension — shareholder votes are important in the aggregate, but not to most actual shareholders — is most easily solved by outsourcing proxy voting to specialists. It would be insane for millions of individual investors to read hundreds of proxy statements to decide how to vote on hundreds of different questions. But if, like, eight people each read a few hundred proxy statements and decided how to vote, and everyone else paid those people a small fee to vote their shares for them, the problem would be solved. I mean, there would be other problems. (Would those eight people actually vote the shares in ways that align with the interests of the ultimate owners of the companies? Would they have their own agendas? Would the proxy-voting profession attract people whose views on proxy voting are different from those of most shareholders?) But, again, most of these votes don’t matter very much to most of the shareholders. A cheap outsourced system is probably good enough.

This approximately describes the system we actually have, in which a few “proxy advisers” — mainly Institutional Shareholder Services and Glass Lewis — read all the proxies, advise investors (mainly institutions) on how to vote, and do the administrative work of voting for them. This has historically worked okay, though corporate managers have often grumbled about it, because in fact the proxy-voting profession does seem to attract people who care more about “good governance” and social issues than the average corporate executive does. In recent years, it has become more controversial, because the proxy-voting profession seems to attract people who care more about social and environmental issues than the average Republican politician does. There has been a backlash, the proxy advisers have retreated from providing their house views on shareholder votes, and there have been political and regulatory moves to restrict them. 

Again, my basic thesis about all of this is that the market needs some way to cheaply outsource proxy voting, because it’s insane for everyone to do the redundant work of reading proxies and deciding how to vote, but the outsourced voting doesn’t have to be all that good, because it doesn’t matter that much. Historically, the proxy advisory firms were a good enough solution. But it is 2026 and now there is another obvious cheap way to outsource analysis and decision-making in situations that don’t require perfection. The Wall Street Journal reports:

JPMorgan Chase’s asset-management unit is cutting all ties with proxy-advisory firms effective immediately, amping up the pressure on an industry that recently has come into the Trump administration’s crosshairs.

The unit, among the world’s largest investment firms with more than $7 trillion in client assets, has to vote shares in thousands of companies. This coming proxy season, it will start using an internal artificial-intelligence-powered platform it is calling Proxy IQ to assist on U.S. company votes, according to a memo seen by The Wall Street Journal. 

The bank will use the platform to manage the votes and the AI also will analyze data from more than 3,000 annual company meetings and provide recommendations to the portfolio managers, the memo said, replacing the typical roles of proxy advisers.

JPMorgan thinks it is the first large investment firm to entirely stop using external proxy advisers, which provide much of the industry’s plumbing, the memo said. It previously had said it would stop using advisers for vote recommendations, relying on its in-house stewardship team instead. 

Fine! Go to ChatGPT, type “how should I vote all my shares in all of my companies,” do whatever it says, and don’t worry about it too much. Will Proxy IQ be more or less management-friendly than the current proxy advisers? More or less woke? Probably somebody will care about the answers to those questions, but not me. I wonder if all the asset managers will end up training their proxy-voting AIs on the actual track records of ISS and Glass Lewis. Good enough!

The basic way that private equity recruiting works is:

1. College seniors get hired into two-year analyst positions at investment banks, which start the summer or fall after they graduate college.
2. After the two-year analyst program ends, many of the analysts move on to jobs as associates at private equity firms. (For many incoming investment bank analysts, the whole point of investment banking is to get a job in private equity.)
3. The interviewing and hiring process for private equity, naturally, occurs sometime before the analyst programs end: The private equity jobs start after the bank jobs end, but they hire in advance.
4. Also all the big private equity firms do their hiring within like five minutes of each other, to compete for the best candidates. (This is called “on-cycle recruiting.”)
5. I suppose at some point in the distant past, the private equity firms would do their interviewing like a month before the jobs started. But in recent years that has crept earlier and earlier, to the point that on-cycle recruiting occurred during the summer, before analysts even started at their investment banks: They would interview in summer 2024 for a private equity job to start in summer 2026, and then start their two-year investment banking analyst program a week later.
6. Everyone thinks this is stupid but there is a strong competitive dynamic that pushes it earlier and earlier.
7. Investment banks have mixed feelings about it: On the one hand, it is nice to send their analysts to work for clients, since hopefully the analysts will have fond feelings about their banks and send private-equity deal work their way. (Also the banks are essentially pyramids and need most of the analysts to leave anyway, so they might as well leave happy and go somewhere good.) On the other hand, you might worry that an analyst who starts her investment banking career with a private equity job lined up might not be the most dedicated and careful employee, and there are conflicts of interest to worry about if she is working on deals that might involve her future employer.
8. Also, what with AI, nobody knows how many private equity associates the firms will actually need two years from now, or how many analysts the banks will need for that matter.

Last year some banks, led by Jamie Dimon of JPMorgan Chase & Co., complained about all of this. And the consequences were:

• Some banks announced dire consequences for analysts who accepted private equity jobs. For instance, “JPMorgan told incoming analysts in June that it would fire any analysts who took private equity jobs within their first 18 months of joining the bank,” and Goldman Sachs Group Inc. demanded that analysts certify every three months that they had not taken another job.
• Some big private equity firms were like “yes, Dimon is right, this is dumb,” and they collectively held off from doing on-cycle recruiting over the summer.

There is a timing mismatch between those two consequences, though. You could imagine the banks all saying “anyone who accepts a private equity job in the first three months of their analyst program will get fired,” but they didn’t say that. Why three months? That’s still pretty short. Instead, the banks went around saying that analysts couldn’t accept private equity jobs until near the end of the analyst program: JPMorgan bankers need to wait 18 months, for instance, and I guess Goldman bankers need to wait 21 months.

Meanwhile the private equity firms were like “sure, not yet,” but in an informal and unstable way. Nobody committed to waiting 18 months, certainly. This week the detente collapsed. At the Financial Times, Sujeet Indap reports:

First-year investment banking analysts were informed by private equity firms and headhunters on Sunday night to appear on Monday for technical interviews, spreadsheet exams and behavioural questions.

The abrupt January interviews come after the biggest firms halted their “on-cycle” recruitment process in the June window after Dimon said last year that JPMorgan would terminate junior analysts for accepting future-dated jobs. …

An analyst told the Financial Times his interviews at private equity firms on Monday began at 7.30am and he had accepted an offer by 9pm to begin in 20 months’ time. He said most of his banking classmates had skipped work for the day to shuttle between PE firms, with some abandoning one firm on Park Avenue to walk over to another that had just sent a fresh interview invite.

I guess they called Dimon’s bluff. Now do they all get fired from their banking jobs? 

Most long-running financial frauds have a Ponzi element to them. You can probably think up a way to raise money from investors and steal all of it, but you probably can’t keep doing that for a long time. If you want to keep raising new money from investors to steal, you probably have to (1) promise the investors a nice return and (2) give it to them. That means you can’t steal all of the money. You promise people returns of 10% per month, you raise money, you send them statements saying “you’re up 10% this month,” and if any of them ask to withdraw their money you cheerfully give it to them. If everyone does withdraw their money, you’re doomed — the returns are fake, you spent half the money on Lamborghinis, and you have nowhere near enough to give everyone their money back, never mind the 10% returns — but if only a few of them do you’re fine. You give them some of the money you have raised, and everyone thinks (1) “ahh this is working as expected” and (2) “these 10% monthly returns sure are sweet,” so they mostly don’t ask for their money back and the whole thing keeps going.

What this means is that some victims of financial frauds do great. For instance: You put $100 into a fraud, you get 10% monthly returns for two years, you take the returns in cash each month ($240 total), and eventually the fraud collapses and you lose the $100 initial investment. Net, you put in $100 and got back $240 over the course of two years, which is a great return. But at the moment of collapse, you lost $100. You have a $100 claim against the fraud, in bankruptcy. “They stole my $100,” you can almost credibly say, though in practice many fraud resolution processes (1) won’t give you your $100 back and (2) might come after you for the $240.

One conclusion that you might draw from this — though this is extremely not legal or investing advice — is that, if you identify a company that is doing a large and long-running fraud, you might want to become a victim. “Sure, Bernie Madoff, take my money,” you might say, and then make sure to cash out your profits each month. Providing financing to a fraud can be lucrative, because the cost of capital of a fraud should be higher than the cost of capital of a normal business, and you can — perhaps — earn that cost of capital. Obviously you want to get out before the collapse, or at least, you want to clip enough coupons before the collapse to make it worth your while. You have to do the right kind of due diligence before investing in a fraud. But “this is a huge fraud” is not necessarily the end of your due diligence. Maybe it’s a good fraud, for you.

I mean! Don’t do this. There are all sorts of problems with this. But, in the abstract, it is maybe something to think about. In the abstract, if someone came to you and said “I will give you the opportunity to invest in my financial fraud, how much would you pay me for that opportunity,” the answer might be a positive number.

Maybe another way to put this is that there is sometimes a blurry line between the “victims” of a fraud and the “co-conspirators.” 

Anyway, we have talked a few times about First Brands Group Inc., a bankrupt auto parts suppliers whose creditors have been accusing it of fraud. The basic accusation is that First Brands took out all sorts of loans, and it allegedly double-pledged some of its assets as collateral for multiple loans, leaving it bankrupt without enough assets to pay back its lenders. But there are other alleged problems. Here’s one:

A major financier to First Brands Group is accused of orchestrating a kickback scheme with the founder’s brother that loaded the now bankrupt auto-parts supplier with expensive debt.

Onset Financial Inc. was “pillaging” the company through usurious financing arrangements approved by Edward James, the brother of founder Patrick James, a group of creditors said in a court filing Monday. Onset, which advanced the firm no more than $2.5 billion, already has obtained about $2.9 billion and is also seeking an additional $1.9 billion through claims in the bankruptcy case, the filing said.

The loans, typically maturing in less than a year and structured with upfront payments, generated average internal rates of return exceeding 300%, according to the filing.

As part of the arrangements, Onset agreed to pay Edward James hundreds of millions of dollars through additional fees and by granting him the right to personally invest in the financings, the creditors’ committee alleged. Moreover, hundreds of millions of dollars “appears to have been diverted to Patrick James personally,” according to the filing. The committee made the accusations in a brief challenging Onset’s bid to delay depositions of two of its executives.

“The allegations against Onset by the First Brands Creditors’ Committee are unsupported and baseless and strategically made as part of a spurious scorched-earth litigation tactic,” a representative for Onset said in an emailed statement.

Here is the complaint:

Onset is a “net winner” of the First Brands fraud, having obtained approximately $2.9 billion from its financing arrangements with First Brands, as compared to outlays of at most approximately $2.5 billion. And Onset still claims to be owed another approximately $1.9 billion (claims which it appears it may have sold) in unrealized profits from its scheme. Meanwhile, Edward James received (or was scheduled to receive) more than $250 million in “fees” and returns, while “negotiating” and approving Onset’s usurious financing arrangements with First Brands. All of this was at the expense of the First Brands. …

The rates were so obviously exorbitant that First Brands employees themselves knew the Company was being fleeced. By 2022, if not before, all Onset negotiations were handled by Edward James personally. Two days after Edward James agreed to an inventory loan with a triple-digit IRR (179%, agreed to on September 27, 2022), one First Brands employee messaged another to say “dude..whoever sold that onset deal to us is [Onset] employee of the century,” adding later in the thread, “3 months from now.... ‘who signed this f'n agreement???’ LOL.” ... His co-worker responded, “it was Ed taking whatever he could get[.]” 

Was First Brands defrauding its lenders, or were its lenders defrauding First Brands? Could be both.

When we last talked about the bidding war between Netflix Inc. and Paramount Skydance Corp. to buy Warner Bros. Discovery Inc., back in December, there were two odd things about Paramount’s bid:

1. Most of the money to backstop the bid was being put up, not by Paramount, and not by Larry Ellison (the father of Paramount chief executive officer David Ellison), but by Larry Ellison’s revocable trust. The trust, Warner worried, was revocable: If Paramount and the Ellisons changed their mind about the deal between signing and closing, Larry Ellison could move all of his money out of the trust, and there’d be no money left to close the deal (or for Warner to get in a lawsuit). Warner had asked Larry Ellison to personally guarantee the deal, which would completely solve this problem, but he hadn’t done it yet.
2. Paramount was going around on television saying that its bid, for $30 in cash per Warner share, was not “best and final.” If someone tells you “we’re offering $30 per share, but we’d go higher,” it is really incumbent on you to say “okay so go higher.” There is some debate about whether Paramount’s bid is higher than Netflix’s — Paramount will pay more per share in cash, but Netflix will give Warner shareholders both Netflix stock and stock in a separate new company holding Warner’s cable assets (whereas Paramount would buy the whole company) — but there is no debate at all about whether Paramount’s bid is as high as Paramount is willing to go. It’s willing to go higher. So, you know. Go higher.

Since then, the first problem — which was extremely easy to solve! — was solved: Larry Ellison personally guaranteed the $40 billion equity check, so that’s sorted. The second wasn’t — Paramount’s bid is still $30 — so today Warner said “still no.” Bloomberg’s Michelle Davis and Lucas Shaw report:

Warner Bros. Discovery Inc. rejected an amended takeover offer from Paramount Skydance Corp. and encouraged shareholders to stick with a deal it has in place with Netflix Inc., voicing skepticism about the interloper’s ability to pull off what it said would effectively be the largest leveraged buyout in history.

The snub came after billionaire Larry Ellison said he would personally guarantee $40.4 billion in equity financing for Paramount’s hostile offer to buy shares at $30 apiece. Warner’s board said Wednesday in a letter to shareholders that it has doubts that Paramount will be able to close the deal and that its proposal carries significant risks and uncertainties compared with Netflix’s offer of $27.75 per share in cash and stock for a portion of the company.

Paramount’s financing for the deal remains a key sticking point. The Warner Bros. board reiterated concerns about the more than $50 billion of borrowing required. Paramount, with a market value of about $14 billion, is attempting an acquisition requiring $94.65 billion of debt and equity financing, Warner Bros. said in the letter, nearly seven times its total market capitalization.

Even with Larry Ellison’s guarantee, the financing is still a worry: Netflix (a $400+ billion company) can pretty easily pay $95 billion for Warner, but Paramount (a $14 billion company) is a less obvious buyer. Warner notes that “large LBO transactions present additional risk and several of the largest LBOs have failed to close on the initially agreed-upon terms,” and “financing providers could withdraw commitments if there are significant adverse changes in economic or business conditions.” Still I wonder if those concerns could be overcome by price. Davis and Shaw write:

“Warner Bros. Discovery’s rejection of Paramount’s amended $30-a-share bid suggests the M&A saga is far from over,” Bloomberg Intelligence analyst Geetha Ranganathan wrote in a note. “We believe Paramount would need to raise its offer to at least $32 per share to bring Warner back to the table.”

Getting to a best and final offer, or at least better and more final one, does seem like the logical next step here.

A long-running theme around here, for which I occasionally apologize, is poking fun at the investment prowess of dentists. We talked last month about a German dentists’ pension fund — managed by a committee of dentists — that lost half of its money on bad private investments, and I said:

I feel like, if you asked US financial firms to pitch products to an investment committee of dentists, they would rub their hands together and cackle with evil glee. Apparently that is true in Germany as well.

I’m sorry, dentists, but I got some emails, and they were pretty confirmatory. Apparently “German dentists” are proverbial among European financial products salespeople, and not in a good way. I mean, not good for the dentists. Great for the financial products salespeople.

Though not always. Bloomberg’s Arno Schuetze and Karin Matussek report:

A German pension fund whose foray into private markets led to losses that totaled half of the fund’s assets has begun legal proceedings against its former auditor, an adviser and its own managers to recover the damages.

The fund known by its German acronym VZB is suing Dusseldorf-based Apobank, the German unit of Forvis Mazars in Hamburg, the Berlin city government as well as nine former managers, according to a court filing seen by Bloomberg News.

VZB, which caters to more than 10,000 dentists in and around Berlin, has said it’s facing losses of about €1.1 billion ($1.3 billion) after many of its investments went bad. It had about €2.2 billion in assets under management at the end of 2024. ...

The fund had hired Apobank to advise it on investment risks but the lender violated these duties, the pension fund claims. Forvis Mazars audited the fund and provided VZB with “sham opinions” on assets, according to the filing. …

“Had the auditor carried out even a few random checks on the large number of loans, it would have noticed immediately and directly, because it was obvious, that the granting of these loans was inadmissible,” VZB lawyers wrote in the document.

Right, if you are bad at investing, that’s your fault, but if you are really really bad at investing, that’s someone else’s fault. Why didn’t your auditors stop you? The problems were obvious! Anyone would have noticed them! Except, apparently, dentists.

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