Photo: Simon Ridgway/HBO
HBO just aired the season-three finale of Industry, and if you’re like me, leaving the subtitles on probably didn’t do much to help you understand the financial jargon. At the London-based Pierpoint, a fictional bank with a bit of a Goldman Sachs vibe, the employees chase highs of the metaphorical and literal varieties with Euphoria-tinged sexual appetites and a penchant for betraying one another. While the interpersonal drama that takes place outside of the office is crystal clear, the intricacies of what’s going on with this bank are less so (at least to the average anticapitalist creative).
In the finale, there was firing, hiring, a big foreign acquisition, and just generally a whole lot of money talk that made me think the bank might not survive to season four. But I still wasn’t sure about the fate of Pierpoint — the finer financial details made my head spin — so I called up Matt Levine, who spent four years working at Goldman Sachs, working his way from associate to vice-president during the ’08 recession years, to explain. After he quit working in finance, he started writing about it; he’s been a columnist at Bloomberg since 2013 and writes the popular financial newsletter Money Stuff. He has the credits of a quintessential finance bro — Yale Law School, a Harvard Classics degree — but is still down to earth. I asked Levine some very “Finance 101” questions, and he clued me in to what exactly went down on Industry’s season-three finale and whether or not any of it would probably happen in real life.
Spoilers for season three of Industry ahead.
You’ve worked in finance, and now you write about finance. Do you tend to consume fictional media about finance, or do you struggle to enjoy it as an expert in the field?
I’ve never seen a second of Industry — don’t make me look like an idiot. I don’t watch a ton of TV generally because I have three kids and a dog. I have nothing against fiction about finance; I get sent a lot of stuff. I find it jarring when stuff that I know about is misrepresented. It takes you out of the suspension of disbelief. I love Margin Call, the greatest finance movie. Very realistic.
What is your general impression of Industry as someone who hasn’t seen it?
People find it very melodramatic, and I think it has a pretty good reputation for being fairly realistic — melodramatic in plot but realistic in detail is my impression.
Okay, let’s get into it. What exactly do analysts do?
There are two types of analysts. “Analyst” is the junior title on Wall Street. When you’re 22 and you come out of college and you start at a bank, your title is analyst. The first title is analyst, then there’s associate, vice-president, whatever. Or if you’re an analyst, you work in the research division as an equity-research analyst. You can be a 40-year-old managing director and an analyst because you’re a research analyst, but your title at the bank is managing director.
Over the course of three seasons of Industry, we get to watch some senior grads work their way up the ladder at their desks. We also watch Eric, a former “MD,” become a partner at Pierpoint in the beginning of season three. In terms of people who sit on the floor, what is the hierarchy?
There are salespeople and there are traders; they’ll both roll up to a manager. Everyone up to a certain level is doing the work. If you run a sales desk, you cover some of the biggest clients and you are the boss of the five junior people who cover smaller clients. If you run a desk, you might be a managing director, and you might have a vice-president under you; you might have an analyst. There are a bunch of different bosses of different people within even a ten-person desk. At some level, you become almost exclusively a manager and you don’t do any trading or sales or whatever. But that’s pretty high up. At some banks, and mostly Goldman Sachs, there is a title called partner, and it’s often a recognition that you’re doing a good job.
What is a “sell-side guy” as opposed to a “private-equity division”? And in general, how are massive financial corporations structured?
There are a lot of kinds of massive financial corporations. I worked at an investment bank that is probably reasonably close to Pierpoint in structure. At a big investment bank, you will have an investment-banking division that consists of people who work with companies to do mergers and also to do IPOs. It’s called investment banking or corporate finance. Another division is what’s called sales and trading. At Goldman, it’s called securities. That’s the division that buys and sells stocks and bonds with customers.
Then there is asset management, which is managing and making investments for clients. There are private-equity funds, but you don’t see a lot of this in the U.S. because of the Volcker rule. A bank could go through a bunch of clients and say, “Give us money, we’ll put it in a pot and buy companies with it, and we’ll make investments for you and you’ll get a return on the investments and we’ll get 20 percent of it.” Or they’ll be like, “Give us money and we’ll buy stocks with it and we’ll run a mutual fund.” That business of buying stocks is called the “buy side.” That’s when you’re in the business of essentially making investments for clients or for yourself.
The sell side is the business of selling those investments. So the sales and trading division of a bank is basically the “sell side.” And there are also people who use “sell side” to refer to the equity-research division of a bank, which is the people writing research reports for the salespeople to help sell the stock.
Okay, so on the Pierpoint trading floor, there’s a guy named Rishi Ramdani who speaks into a microphone and tells these “sell-side guys” how much stocks cost. Where is he getting that number? What exactly is he doing?
I think he’s a trader and they’re salespeople. Traders talk to clients and the clients are like, “I’d like to sell 1,000 shares of XYZ.” And the salesperson calls or waves or shouts to their trader and says, “How much will you pay for XYZ stock?” and the trader gives them a made-up number because it’s how much he’s willing to pay. He’s trying to make money. He’s trying to buy low and sell high. He’s trying to not take too much risk. If he owns a lot of XYZ stock, he will not pay a lot to buy more XYZ stock. Typically if you’re a trader at a bank, you’re trying to stay relatively flat. You don’t want to be long a million shares of XYZ or short a million shares of XYZ. Is it okay to say long and short? Do I need to explain that?
Yeah, can you explain long and short?
Long a million shares means you own a million shares of XYZ and if it goes down, you lose money. If you’re short, you’ve sold a million shares of XYZ that you don’t own, and if it goes up you lose money. If you’re a trader at a bank, you’re going to be long some stocks — you’re gonna own them. And you’re going to be short some stocks; you’ll have sold them and you still have to go buy them to deliver them to the customer. One of your goals is to not be too long or too short in anything because if the market moves a lot, you’ll lose a lot of money. Your job is not “I want to buy a million shares of XYZ because I think this is a good company right now.”
I’m still a little confused by what shorting is, but I feel like that’s a me problem.
Betting against. In financial markets, you can buy a thing to bet that it’ll go up, and you can do the opposite. You can’t do that with private stocks, but in general, there’s some bet that allows you to take the opposite side of buying a company’s stock. That’s called shorting. You borrow the stock, you sell it, and then you’ve sold the stock and you have to go find it to deliver it back.
What is an ESG?
Wait, did I say “an ESG,” or was that you?
I said “an ESG.” Is that wrong?
Yeah. I don’t know, maybe. I’ve never heard anyone say “an ESG.” It’s annoying that in my writing, you have to say things like “ESG factors” or “ESG considerations.” ESG stands for environmental, social, and governance, so they’re all adjectives.
At Pierpoint, they’re really “pushing ESG” this season, whatever that means.
It’s a fund that has criteria for picking stocks that are environmental, social, and governance. If you’re an ESG investor, you care about not only the financial statements of the company but also its carbon emissions and its diversity initiatives and its governance, which means, basically, how much the company is responsive to shareholders as opposed to just letting executives do what they want. Bad governance is paying the CEO too much or making the CEO also the chairman of the company.
Often when people say “ESG,” they mean mainly climate stuff, but not always. There’s a whole growing, fairly young industry of people who are in the business of not only running ESG funds but telling people which companies are good ESG companies and which are bad. There are rating systems so you can have some measure of whether a company is ESG or not.
So an ESG fund would be a fund made up of ESG stock or ESG companies?
An ESG fund would be a fund that cares a lot about ESG criteria. Exactly what that means is somewhat controversial — there’s some room for disagreement. If you run an ESG fund that holds only oil companies, then someone will write an article about you saying that you’re not a very good ESG fund.
It sounds like the category itself is somewhat malleable. Is there a clear standard by which to identify an ESG stock?
Oh, no. It’s not like, “This is an ESG stock; this is not an ESG stock.” It’s like, we get a rating from one to ten, or whatever. But people disagree about things. Tesla is an electric-vehicle company, which is pretty good as an environmental company, but it has some ugly labor relations and very weak corporate governance. One thing I think I know about Industry is I think it’s set in London. Europe is further along on a lot of these things than the U.S. The U.S. has fewer standards for ESG, in part because in the U.S., people hate ESG, and in the rest of the world, that’s not really true. So I hope I’m not leading you astray. But globally, there’s not a single standard for ESG.
In the third-season premiere, a start-up called Lumi prepares for a big IPO launch with Pierpoint. What is an IPO?
An IPO is an initial public offering. There’s a private company — sometimes that’s a big company that’s owned by private equity that wants to go public, but most characteristically, it’s a tech start-up that someone started and got big enough to go public — and then they want to sell their stock to the public so it can trade on the stock exchange. An IPO is a big event where they sell some stock to the public and after that, it trades on the stock exchange.
Is it common for a startup to employ a bank or financial institution to launch their IPO? The IPO launch flopped pretty hard on Industry, and it seemed like Pierpoint was negatively implicated, to the point where later in the season, a new bank has to buy Pierpoint out, ironically on the 150th anniversary of the institution.
It’s the only way to do it: You hire a bank and they lead the IPO. The company, or the founders or VCs — the insiders — sell stock in one big organized trade. The bank will do a marketing process, like a roadshow, where they will take the company’s executives or founders and bring them to meet with mutual funds and hedge funds and investors and say, “Hey, this company is so good.” And then the investors will say, “Okay, I’ll buy a million shares,” and they’ll work out a price and they’ll sell the deal. The bank helps value the company and tell the story to the investors. The bank also just has the investors’ phone numbers, so if you’re gonna do an IPO, the bank has the people who know who to call to do your IPO.
So basically the bank buys a chunk of the company and then sells it when it goes public?
[Laughs.] Is that a plot point? Technically, yeah, that’s true. The bank buys the stock and sells it to these investors. But no one really thinks of it that way. The bank is like an intermediary; they set up a company with investors, they talk to the investors, investors put in orders, and the bank buys the shares for, like, a second to transmit them to the investors. So the bank is not typically buying a bunch of stock and then at risk for more than a week. It’s not impossible to do that, but that’s not how it really works in America. I don’t think it’s how it works anywhere.
The Lumi founder, Henry Muck, gets accused of going public as a cash grab. Why would it be a cash grab to go public?
Typically if you’re a tech founder and you go public, you sell a lot of stock, which is a lot of money. But it’s also frowned upon to sell 90 percent of your stock because they want you to continue to have skin in the game and run the company. Some private-equity firms have a track record of taking the company public just before it loses value. IPO as a cash grab I think of as selling too much stock at what people think is an inflated valuation.
At every start-up, there’s someone who says, “We shouldn’t be doing this IPO; we should be focused on the shareholders. We should be building the product and doing good stuff for the world, and this is going to be bad for the mission and we’re going to be distracted by the IPO. We’re gonna have these outside shareholders.” Look at BuzzFeed — there’s some sense that when you have a mission-driven company and get sold to outside investors, it loses a sense of mission. Some companies don’t go public because they worry about pressure from outside to meet Wall Street expectations.
Right before the IPO launch, one of Henry Muck’s investors starts expressing some concerns about Lumi’s most recent earnings report. What are receivables on an earnings report?
If you sell something on credit and you haven’t gotten paid yet, you have receivables, or money that you’re expecting to get from, typically, customers. Having more receivables means that you’ve sold more stuff and have more money coming in, but having a lot of receivables is worse than having a lot of cash. If you’re doing accounting shenanigans, one possible indicator is you’ve sold a lot of products but not received a lot of cash for them.
What is an EBITDA?
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It’s the measure of earnings that people often pay the most attention to. It is, in some loose sense, the economic earning ability of the company. It’s sometimes more representative of a company’s real economic profile than the accounting item called net income. It’s revenue minus a lot of particular expenses. A lot of times when people are valuing a company, they will value it based on a multiple EBITDA.
Would it be possible to “massage” an EBITDA to make it seem like you have less debt? Henry’s investor, James Ashford, accuses him of doing that with Lumi, and he seems pretty pissed about it.
EBITDA is not an official number. It’s not part of the accounting standards, and companies have some flexibility to calculate EBITDA however they want. There’s a famous problem in credit agreements where companies are allowed to adjust their EBITDA in all sorts of ways. You can list a lot of expenses that don’t get included in EBITDA so you get a bigger number. If your EBITDA is bigger, then you look like you’re more profitable, and more importantly, the higher your debt-to-EBITDA ratio is, the more of a risky company you seem to be. These are things that sound like complaints that people really have, but they’re not like, “You did a crime” or “You’re doing accounting fraud.”
All the Pierpoint guys are really determined to close at a particular stock price on the day of the Lumi IPO launch. Can you explain the importance of that?
The bank is in the business of matching buyers and sellers, getting an IPO price that the company is happy with and that investors will pay. Banks sometimes get criticized for overvaluing companies, most famously when WeWork tried to go public. There were all these pitch decks from banks that had $96 million valuations, and then WeWork couldn’t go public because no one would pay anything close to that price. The bank is mostly in the business of marketing the company. The bank can’t force people to trade at any given price.
If you do an IPO, you price the deal and you get enough orders that you can sell the stock at the price you want. The next day, it opens for trading. If it trades down from the IPO price, that’s embarrassing for the bank, because the early investors, the people who bought from the bank, lose money. Those people are customers, and the bank doesn’t want to lose money for them. It cares a lot about its investor clients.
There’s an episode where Joel Kim Booster guest stars as a research analyst, and it’s all about the report he’s going to publish on Lumi stock. Would it be bad for a research analyst to publish a “hold” on a stock where the bank that employs them handled the IPO?
That’s a real thing. This has its roots in the late-’90s tech bubble. Research analysts are in the business of, among other things, publishing reports and saying, “Buy this stock, sell this stock, or hold this stock.” Buy means “We think the stock is good,” hold means “We think the stock is terrible,” sell means “We think the stock is incredibly terrible.” It used to be that banks employed enthusiastic analysts covering the tech sector and those analysts — mostly Henry Blodget — would send emails saying “This company is dogshit” and then publish glowing recommendations. This got them in trouble, and now the norm everywhere is that there has to be a lot of separation between research analysts and investment banking. The analysts are really supposed to make up their own minds and not be influenced by who the company is underwriting.
Okay, got it. Sorry, I have more questions. Yasmin works in “FX” in season two — what is that?
Foreign exchange.
At one point, there’s a big panic about a government bailout and the value of the British pound, and Eric gets upset with Rishi for betting against GS. What is GS, and what would it mean to bet against it?
Goldman Sachs. It could just mean that they know how Goldman is positioned on something, and they think Goldman is smart and you shouldn’t be on the other side of whatever Goldman has done.
Rishi calls Harper Stern — she’s kind of like the main character who we’ve been following since season one, and she recently got fired from Pierpoint for not having a college degree so she started her own firm. He asks her for some insight, and she tells him, “We took a tiny, low-conviction cable long.” What is a cable long?
Cable is the FX term for the U.S. dollar/British pound cross. I think a cable long would be long the pound, short the dollar, but it might mean long the dollar, short the pound. I’m not sure. But long means you’re betting on the thing. In America, cable long would mean long the pound. I don’t know if it means that in London or not. You borrowed dollars to buy pounds; that is a cable long. Unless it’s the other way around.
Pierpoint is going through a ton of financial troubles this season — many of which are first pointed out by the new grad, Sweetpea Golightly. She lets Eric, her manager, know that Pierpoint is “overexposed in sales and trading.” What might that mean?
It could be the sales division is over exposed to something. It could mean that they’re too risk-taking and they make too many bets. Or it could mean different banks have different emphases, and in recent years, it has been sort of hot for banks to do a lot of fee-generating, stable-income things, like asset management or retail banking. It’s been frowned upon to do a ton of sales-and-trading business that has more ups and downs. Probably some analyst somewhere has written “Goldman is overexposed to sales and trading and you should buy Morgan Stanley; it has more of a retail arm,” or something like that. That might be what it means.
How about if a financial institution issues “a fuck ton of senior secured debt”? What’s that about?
Senior secured debt?
Yeah.
I haven’t heard of that. Maybe in England? I don’t know. Debt comes in two flavors: secured and unsecured. Secured means there’s collateral for it. Unsecured means there’s not. My understanding of financial-institution balance sheets is that they do a fuck ton of overnight collateralized borrowing; it’s called repo. They have a lot of treasury bonds and they use all of that as collateral to borrow money. Usually you would not say “issue a fuck ton of senior secured debt.” When I hear “issue a fuck ton of senior secured debt,” I think of issuing bonds that are secured bonds, and that’s pretty unusual for a financial institution to do. The only exception is they might do covered bonds. The U.K. does have covered bonds.
What’s a covered bond?
A covered bond is like, you take some of the stuff — mortgages or whatever — that you own, and you put them in a pot, and you issue bonds that are like, “We owe you this money back, but also there’s this collateral in the pot that is these bonds.”
So if someone — Sweetpea, for example — is bringing up concerns about a company’s financial health and says that that debt is about to reach maturity, and there’s no bid for it, do you know what that means?
No bid means no one wants it. The “secured” stuff throws me. But banks issue debt, right? And in some sense, the business of the bank is issuing its own debt; banks borrow a lot of money to do what they do. Retail banks borrow from depositors, but investment banks borrow from capital markets, and they have various maturity profiles.
When banks borrow money, they don’t plan to get out of debt. They’re always going to operate in debt. So their plan, when they borrow money for five years, is that five years from now, they’ll go borrow money again. And if they can’t borrow money in five years, ordinarily that’s the end of the bank. If there’s no bid for a bank’s secured debt, that’s really bad.
Okay, I have one last scenario from the show to puzzle out with you. Basically, Harper figures out that Pierpoint has all these ESG stocks and none of them are valuable.
Right, so Pierpont has been buying equity stakes in all these ESG companies as part of a push to become a leading underwriter, and then all those companies are crap. Not only is Pierpont not going to get the IPO fees from all these deals, because it turns out this was a bad business decision, but it also has put a lot of money into those stocks, and they’re all worthless.
You’ve explained it perfectly. I think that’s what’s happening. So Harper then uses this information and hatches a plot to short Pierpoint.
I take it that what is happening here is that Pierpont is buying stakes in pre-IPO companies, because it wants to lead their IPOs. So if they’re not public, they can’t be shorted.
Their plan is to go to other banks and buy CDS protection on Pierpoint before the disaster is fully priced in the CDS to maximize their upside. So what is CDS protection in that context, and what is an AUM?
AUM stands for assets under management. Think of a hedge fund that runs $10 billion of client money; it has a $10 billion AUM. It’s a buy-side number. CDS stands for credit default swaps, meaning shorting a company’s debt. It’s structured differently, but you’re making a bet with someone else, like with another bank, that you pay them some money now, and if the company defaults, you get money back. If it doesn’t default, you just lose the amount you paid. People say it’s like buying insurance on debt. When a bank, or any company, runs into financial trouble, the price of their CDS goes up, and these are tradable instruments. CDS is fairly inexpensive — until it becomes really, really expensive, because banks are supposed to be very safe, but also very levered. Banks don’t get gradually worse; they kind of go from perfect to bankrupt, and so if people don’t know that Pierpont is in trouble, and then it is in trouble, then its CDS will rapidly go from a small number to a very large number, and you can make a lot of money.
Well, thank you so much for your explanations and your patience. Does this make you want to watch the show?
Yeah, kind of, it does. But also, I’m mostly worried I’m gonna look like an asshole in the Cut.
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