We are repeatedly frustrated by anti-securities finance bias in the mainstream press. Although press panelists at the Finadium 2016 Conference asked for transparency, we see a continued bias against financing in many forms. The latest negative slant comes from ProPublica and the Washington Post reporting on German dividend arbitrage.
The story in the Post, “The Wall Street tactic that costs German taxpayers roughly $1 billion a year,” is part of the “bad bank” narrative that is favored in parts of the press. The article discusses dividend arbitrage (div arb) and that it takes money away from government tax revenues. The authors gathered data showing that the lost revenues to German tax authorities was roughly $1 billion. We have no disagreement with the facts presented. Although the exact numbers can be debated, the reality is that div arb does take money away from government tax authorities.
Finadium was quoted in this article. The quote was, at best, a side note to the several points we made about dividend arbitrage in a conversation with the reporters. Of all the things we had to say with substance about the practice, this was the one they chose to use as it fit their storyline. The actual quote was that government authorities should harmonize tax rates if they want to stop dividend arbitrage.
The article omitted the fact that investment firms and pensions engage in dividend arbitrage because it helps their retail and retirement savers. That’s why the trade exists: if it didn’t help underlying clients, no one would do it.
Dividend arbitrage in our view is not the best trade in the world; it takes advantage of inefficiencies between tax rates to generate a return. We’d rather see securities financing transactions provide liquidity to underlying markets. But the practice is not illegal nor immoral. It exists because markets look for rationalization and profit-generation opportunities.
In choosing to play up the “banks stealing from governments” angle, the Washington Post has taken a one-sided story and used it for a headline. The reality is that for every dollar not paid to a government in taxes, an individual investor gets that dollar. Div arb is a zero sum game, and the winners are regular people. If governments don’t like that fact, then they are able to regulate away the practice, or better yet, harmonize tax rates to make it an inefficient trade.
Every conversation has two parties. Speakers say what they have to say and listeners decode it in their own way. It would be great, really great, if the popular press heard what securities finance professionals have to say: that financing provides a material, tangible benefit to real investors. That’s why it exists. While specialist reporters at the Wall Street Journal and Bloomberg understand financing’s role, the popular press is still some ways away. Our panelists at the Finadium 2016 Conference will be disappointed that their desire for transparency will be mitigated yet again by popular anti-financing bias in other quarters.
We will keep trying to get a clear message out. For more on how securities lending in particular serves the real economy, please see our publicly available November 2015 research report, “Securities Lending, Market Liquidity and Retirement Savings: The Real World Impact.”