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UBS CMBS Strategist Did Not Like UBS's CMBS Strategy

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Investment banks are in large part in the business of creating and selling products to customers. So are lots of other companies. Kia dealers, for instance, sell cars to customers, and part of the job of a Kia salesman is to say to customers "this Sorento is awesome and you should buy it." This can cause problems because the Sorento may not be awesome and you maybe should not buy it, but these problems are not large because everyone knows about them and so nobody buys Kias solely on the salesman's representation that they're awesome.

On Wall Street this dynamic is complicated by at least two factors that don't exist for Kia. One is a veneer of objectivity that comes from treating finance like physics: "commercial mortgage-backed securities will decline in value over the next 12 months" is at least as subjective an opinion as "Kia Sorentos are not in fact awesome," but a ton of apparatus - much of it created by banks themselves - has grown up around the notion that it is not. So expressions of personal opinion are often treated as statements of fact, which can then be right or wrong, particularly in hindsight: 12 months later, you can look back and actually see if the CMBS actually declined in value, whereas you have no more access to the Sorento's awesomeness or lack thereof than you did 12 months ago.

The other is the research settlement, which requires Wall Street research analysts to certify that what they say about stocks really is their personal opinion. That is not a requirement that applies to other industries: a Kia salesman can't tell you that the Sorento's top speed is 350mph and that its exhaust smells like bacon, but I'm not aware of any car salesman ever getting in trouble for saying "you look really cool driving that lime-green SUV" even when, in his heart of hearts, the salesman actually thought the customer looked like a tool.

The settlement is awkward because banks are more in the business of selling products than they are in the business of Being Right About Stuff. So banks sometimes market stock offerings where their research analyst has a Sell rating on the stock, and there's no real conceptual difficulty in that: the research analyst has one opinion, and the salesperson calls the client and offers counter-arguments. But, given the veneer of objectivity, clients don't just want a salesperson saying "Facebook is great," they want something that looks like research or fact or analysis to support that pro-Facebook view. So banks like to have people hanging around the sales desk who are not pure golf-and-handshakefulness "salespeople" but something else - "desk analysts" or "strategists" or whatever. They work for the sales and trading department, not research, and they give clients ideas in the hope of generating business for the bank. This can create controversy* when their ideas are not exactly the same as those of research, but of course that is rather the point.

So let's take a look at this lawsuit filed yesterday by a UBS commercial mortgage strategist named Trevor Murray. He seems not to have gotten along with his boss Ken Cohen, a former Lehman guy now in charge of UBS's CMBS business. From the complaint:

13. Plaintiff was ... the target of a concerted, extended effort by UBS Securities, through Mr. Cohen, as well as others reporting to Mr. Cohen, to influence Plaintiff to skew his published research in ways designed to support UBS Securities' ongoing CMBS trading and loan origination activities.

14. In June 2011 Mr. Cohen implored Plaintiff, in words or effect, to help "improve conditions in the CMBS market" because this was to be a "significant revenue generator" for the investment bank at UBS Securities. In or around September 2011, Mr. Cohen, along with the head CMBS trader, sat directly next to Plaintiff and told him that a person from the market had approached Mr. Cohen about Plaintiff's research. Mr. Cohen stated that he disagreed with Plaintiff's research, and asked Plaintiff, so as not to "confuse" the market, to inform the head CMBS trader about his research ideas prior to publication in order to maintain "consistency" between what he and they were saying about UBS Securities' CMBS products and trading positions.

The complaint uses the word "research" a lot but Murray seems to have been a desk analyst: as far as I can tell he worked for the CMBS business, not the research business.*** So he and Cohen had to deal closely with each other. And how did they manage their disagreements? Passive-aggressively. The answer is passive-aggressively:

17. In or around January 2012, Plaintiff learned from junior members of the CMBS trading desk that Mr. Cohen and his team had arranged a long series of important client meetings in connection with a high-profile commercial mortgage conference in Miami. Even though Plaintiff was the lead CMBS strategist for UBS Securities and the author of UBS Securities' research for precisely such clients, he was neither invited to these meetings nor informed about them in advance. Instead, Plaintiff attended unannounced.****

After some more of this, he was fired, even though "his immediate superiors had appealed to Mr. Cohen personally and to members of his team to retain Plaintiff, given his importance to the business and his stellar record."

What to think here? Well, one place you could start is by imagining a Kia salesman who thinks Kias are lame, and keeps telling customers that. Eventually he'd probably no longer be allowed to talk to customers? And if he kept running out of the back room to yell "hey, guys, don't buy these cars, they suck!," he'd probably be fired?

The counterargument is "if the Kia salesman knows that Kias blow up, he should be telling customers not to buy them," and that is of course true. But there's no hint of that here: Murray is clear that his opinion was that the CMBS market generally and the hotel market in particular would underperform, but the complaint has nothing to suggest that his basis for thinking that was stronger than Cohen's basis for disagreeing - and certainly nothing to suggest that there was some sort of ticking time bomb that he identified and UBS concealed. In fact, Murray seems to have been wrong, at least so far. Here is the Markit AAA CMBX index since December 2011, when he started his rumbling*****:

So if you followed his bearish view you would, it seems, have lost money. Perhaps UBS's heart wasn't pure and they fired him so he wouldn't get in their way of selling more CMBS, but doing so seems to have been good for their clients. Sometimes that happens.

Anyway, do read the complaint, it's a fascinating human drama wrapped up in easily distorted questions about How Evil Is Wall Street. And the answer may surprise you: Wall Street is often viewed as a pool of sharks, but folks like Trevor Murray and Greg Smith are a reminder that a lot of Wall Streeters are adorably idealistic and naïve. If you think Kias suck, you don't become a Kia salesman, and if by force of circumstance you do, you keep your opinions to yourself. There's something charming about an industry where people spend years selling products and then one day wake up personally affronted, to the point of lawsuits and op-eds, that they're still being asked to sell those products even though their heart is no longer in it. Many disillusioned salespeople quit - from jobs at Kia or Facebook, Goldman or UBS - but only financial-products salespeople do it with this much panache.

Trevor Murray v. UBS - complaint
Former UBS Strategist Says He Was Pressured To Mislead [Bloomberg]
Former strategist sues UBS over pressure to bias his research [Reuters]

* Just a footnote to endorse reading that Integrity piece if you're interested in this sort of thing, which is overhyped and undertheorized in most media accounts.

** Also of interest is to me the timeline:

Plaintiff was originally employed by UBS Securities as a Director from approximately May 2007 to approximately September 2009 in the Mortgage Strategy Group and then, beginning in late 2008, in the Special Assets Group ("Stab Fund"). In or around September 2009, Plaintiff was laid-off from UBS Securities. ... In or around May, 2011, Plaintiff resigned his position [elsewhere] and re-joined UBS Securities as a Senior CMBS Strategist and Executive Director (a position more senior than his previous position with UBS). ...

In his new position at UBS Securities, Plaintiff was responsible for performing research and creating reports about UBS Securities' CMBS products that were distributed to UBS's current and potential clients.

First of all, we've talked a little before about how, while investing in the Global Absolute Safety Fund will probably end with all your money decamping to Namibia, investing in something called the "StabFund" isn't a great idea either. However, this apparently was a thing? Perhaps it sounded better in, um, Swiss?

Second, though, between strategizing and stabbing Murray seems to have had no problem with UBS's mortgage activity during the financial crisis: the lawsuit is only about his second tour of duty starting in May 2011. Isn't that odd? You think UBS has gotten worse about peddling bad products to clients since 2007? Actually I wouldn't be that surprised.

*** In any case, he was not subject to the research settlement, which is equities-only: even if he was in the "research department" he was kind of functionally working for the desk.

**** I laughed and laughed at this but then it occurred to me: this is why I was a bad banker. If I wasn't invited to a meeting, I was like "sweet" and stayed home. Sneaking into a meeting just to get client contact would probably be second nature to a lot of successful bankers, but seems totally alien to me. HOWEVER, sneaking into a meeting just to tell clients not to do business with your bank is ... strange, no?

***** Also, here's BBB:

I don't have CMBS data there but here are a bunch of hotel stocks: