Mouth Noises: 50y, ISS, HF

Katie Greifeld expresses her desire to own a home before turning 40, discussing the recent introduction of 50-year mortgages, which Trump supports following a presentation by Bill Poulsey, head of the federal housing regulator. Matt Levine notes the decline in shares of Fannie Mae and Freddie Mac, possibly linked to Poulsey's diminishing influence. The 50-year mortgage is seen as appealing for lowering monthly payments by 10-15%, but drawbacks include ineffective equity building and the potential for doubling total interest paid. In competitive housing markets, even a slight increase in affordability could lead to rising home prices, negating benefits, similar to trends in the education sector where subsidies raise tuition costs.

Katie is waiting for lower interest rates to buy a home, while Matt points out that lower rates might not lead to increased affordability if home prices rise. An analyst's critical view of the 50-year mortgage likens it to "indentured servitude," noting that most homeowners sell after about seven years, building minimal equity. The conversation shifts to Poulsey's ideas on assumable and portable mortgages, which could increase market inventory but raise concerns about pricing risks for new mortgages.

The discussion then focuses on proxy advisors, particularly Institutional Shareholder Services (ISS) and Glass Lewis, and their influence on shareholder voting, highlighted by the recent Tesla vote on Elon Musk's compensation package. While proxy advisor recommendations are often overlooked, they play a significant role in high-profile cases. ISS and Glass Lewis typically oppose excessive CEO compensation, but Tesla's investors frequently disregard these recommendations, reflecting tension between corporate leadership and advisory influence.

Political bias against proxy advisors, especially from right-wing circles due to their support for environmental and social governance (ESG) initiatives, is also discussed. The Trump administration's consideration of an executive order to limit proxy advisor influence and the Federal Trade Commission's investigation into potential antitrust issues reflect growing scrutiny. The limited number of proxy advisors and their outsized impact on shareholder votes are highlighted as concerns, as many investors outsource their voting decisions.

The conversation emphasizes that while significant votes like Musk's compensation attract attention, most shareholder votes are routine. The influence of larger asset managers, who make independent voting decisions, contrasts with smaller managers that defer to ISS and Glass Lewis. The potential for conflict between ISS and Glass Lewis is acknowledged, as they may have differing governance standards. The role of index fund managers like BlackRock and Vanguard is discussed, noting their significant influence and the criticism they face regarding their voting practices.

The guest proposes that index fund managers could reflect the voting preferences of clients, which might lead to more polarized outcomes. Current practices, where BlackRock generally aligns with management, could shift if they considered the opinions of a small, passionate subset of investors. Vanguard's "Investor Choice" program allows shareholders to express preferences on management voting, though not on every issue. Concerns about skewed results and the rationality of shareholder voting are raised, emphasizing the need for informed participation.

Matt Levine discusses the high financial stakes in hedge funds, noting that a $50 million salary indicates a strong focus on monetary gain, fueling competitive bidding for talent. Katie points out that long gardening leaves create an artificial constraint on available portfolio managers, further driving up their value. Levine compares this scarcity to historical labor market trends, while Greifeld cites Izzy Englander's term "talent bubble."

Levine expresses confusion over the inelasticity of hedge fund talent, despite some funds establishing training academies. Greifeld highlights the contradiction of hedge funds paying exorbitant salaries yet struggling to develop talent. The conversation shifts to broader themes, with Levine noting that talent wars extend to banking and AI, where financial incentives are clear, but AI may attract individuals with altruistic motives. Greifeld mentions the constrained supply of qualified AI professionals, while Levine observes that as the AI market becomes more lucrative, the influx of AI PhDs may come with less idealistic motivations. Greifeld concludes that the talent market for hedge funds should eventually reach equilibrium.