Money Stuff

Cargo Blockchains and Deutsche Bank

Also Uber, Bridgewater, satellites, covenants, charisma and crack.

Blockchain blockchain blockchain.

Here's a story about, I guess, the blockchain of things. Specifically shipping containers:

For Maersk, the problem was not tracking the familiar rectangular shipping containers that sail the world aboard its cargo ships — instead, it was the mountains of paperwork that go with each container. Maersk had found that a single container could require stamps and approvals from as many as 30 people, including customs, tax officials and health authorities.

While the containers themselves can be loaded on a ship in a matter of minutes, a container can be held up in port for days because a piece of paper goes missing, while the goods inside spoil. The cost of moving and keeping track of all this paperwork often equals the cost of physically moving the container around the world.

So A.P. Moller-Maersk A/S and International Business Machines Corp. are working to build a blockchain for shipping containers that will track all the approvals and be usable and visible to everyone. ("Because all the participants would be keeping their own live version of all the data, without a central authority, they could immediately see everything that was going on and trust that no one else had tampered with it.")

Sometimes when we talk about highly hyped financial-industry blockchain projects, I point out that you could get a lot of the same benefits from just a regular old database: The Depository Trust Company could (and does!) just keep a list of who owns what stocks, or central banks could (and do!) just keep lists of who has what amounts of currency, instead of setting up proprietary centralized blockchains to do the same thing less efficiently. 

But the shipping-container example is a bit different: Whereas finance already has trusted central intermediaries, shipping doesn't. Maersk has no trouble keeping track of who owns its containers. The problem that blockchain is solving here is not so much a database problem, as it is a messaging problem. The question is not "how do we keep a list of who owns what," but "how do we communicate all our approvals efficiently and in the same format?"

Here again you could imagine that some messaging protocol other than the blockchain could work. (I mean: Maersk could set up a website where customs officials could click "OK" to approve a container.) But the problem to be solved here is not chiefly technological: It's getting all of those agencies to agree to a single messaging protocol. That's hard! They have long experience of using their own protocols (e.g., paper), and little incentive to switch to Maersk's. Calling the new protocol a "blockchain" makes it sound sexier, and so more likely to be adopted.

On the other hand:

What’s more, the system is rife with fraud. The valuable bill of lading is often tampered with or copied to let criminals siphon off goods or circulate counterfeit products, leading to billions of dollars in maritime fraud each year.

Will the blockchain solve that? Blockchain technology can provide a robust way to make sure that the signatures are in order, the ownership information is up to date, the inspections have been done. But if you then drill a hole in the container, take out all the teddy bears, and replace them with cocaine, the blockchain won't catch that. The blockchain is about taming all of the virtual attributes of the container, all of the paperwork that accompanies it. But the boundary between the physical and virtual worlds will always be a bit more lawless.

Elsewhere: "The Potential for Blockchain to Transform Electronic Health Records."

Deutsche Bank.

"The Germans say that the horrible end is better than horror without end," said Credit Suisse AG Chief Executive Officer Tidjane Thiam in a 2015 speech introducing his strategy for the bank. I like to imagine that Thiam is locked in a bitter rivalry with his equivalent at Deutsche Bank AG, John Cryan, over who can be the most depressing CEO of a major bank. This weekend Cryan opted for endless horror:

Deutsche Bank AG Chief Executive Officer John Cryan tore up his own turnaround plan in an admission that the 17-month-old effort flopped.

Germany’s largest bank late Sunday approved measures -- most crucially, plans to raise about $8.5 billion in a share sale -- that effectively restart what has already been the most turbulent transformation in its recent history. Among the moves: naming two deputy CEOs who may now be positioned to succeed Cryan; selling a piece of the asset-management business and abandoning the sale of the consumer-banking unit, which was the linchpin of the blueprint he scrapped.

The old plan was to sell Postbank, the German consumer-banking unit, and keep Deutsche Asset Management; the new plan is to keep Postbank and sell (part of) Deutsche Asset Management. (To be fair, capital raising has been a consistent theme: "Even though they’re being tapped for a capital infusion for the fourth time since 2010, some investors welcomed the developments as a way to end questions about the firm’s financial strength.") But it's the little touches that are the most charming. For instance:

Deutsche Bank also said it would combine its global markets business with its corporate and investment bank. The company had separated the businesses in 2015 as part of a restructuring.

That's not driven by relative strength of the market for Postbank or asset management; that's a pure internal choice. That seems not to have taken.

People Are Worried About Weird Stuff Happening at Uber.

Uber capped off perhaps its weirdest week ever with this New York Times story about how it built a system called "Greyball" to evade local law enforcement: When local authorities declared Uber illegal, and tried to fine drivers or impound cars, Uber would use Greyball to prevent officials from ever hailing an Uber. ("There were at least a dozen or so signifiers in the VTOS program that Uber employees could use to assess whether users were regular new riders or probably city officials," including their credit-card information and the frequency with which they checked the app.)

Uber's response was basically, yeah, what of it:

In a statement, Uber said, “This program denies ride requests to users who are violating our terms of service — whether that’s people aiming to physically harm drivers, competitors looking to disrupt our operations, or opponents who collude with officials on secret ‘stings’ meant to entrap drivers.”

Naturally! "Greyball was part of a program called VTOS, short for 'violation of terms of service,' which Uber created to root out people it thought were using or targeting its service improperly."

The question here is, when local laws and Uber's terms of service conflict, which prevails? The local officials assumed, naively, that laws trumped terms of service. But that is antiquated thinking. In the modern era of global technological capitalism, the terms of service need to prevail universally. Otherwise you'd just have anarchy.

I mean, I guess I am kidding, but Uber probably believes that. It is after all a company built on the belief that the laws of supply and demand should always trump the laws of nations and cities. Techno-utopianism often works best if you assume away local variation, and local law. Uber just built a program to assume them away in real life.

To be fair, you can read Uber's terms of service, and they don't actually say "you can't be a cop, and if you're a cop you have to tell us, and in any case you can't arrest us." It's more ... implied. It's more of a general grant of sovereignty to Uber. Also there's an arbitration provision, which says in big bold letters:

By agreeing to the Terms, you agree that you are required to resolve any claim that you may have against Uber on an individual basis in arbitration, as set forth in this Arbitration Agreement. This will preclude you from bringing any class, collective, or representative action against Uber ....

Does that prevent law-enforcement officials from bringing actions in their official capacity? Hahahaha probably. In any case, it's a valuable lesson for other startups: Make sure your terms of service say "you can't arrest us."

Elsewhere: "Recruiters in the Bay Area and executives at rival companies say they have seen an uptick in job applications from Uber employees, as its workers lose faith in the company’s leadership and start to doubt the value of their stock options." And: "Uber, the privately held ride-hailing company, is considering ways to make its stock compensation policies more friendly to its workers."

People Are Worried About Weird Stuff Happening at Bridgewater.

This New York Times article discusses an episode from five years ago at Bridgewater Associates, in which co-chief executive officer Eileen Murray was accused of lying about who had typed an email. ("Eileen said that she typed an email that her assistant had typed," explains Bridgewater.) The accusation was investigated by James Comey, "Bridgewater’s general counsel at the time and now the director of the Federal Bureau of Investigation," who questioned Murray "over several interrogation sessions that the former employees described as intense." They know because:

Videos of the interrogations were edited and later rolled out in a serialized fashion, a Bridgewater version of a reality TV show, said the former employees, who saw them. The videos also served as a case study as part of “homework,” a firm practice in which employees review and analyze recorded meetings and internal debates.

So the director of the FBI repeatedly and intensely questioned the co-CEO of the world's largest hedge fund about who had typed an email, and then the employees of that hedge fund all got to watch video of the interrogation. Bridgewater's response to the Times includes the sentence "Due to a leak to the media, a mountain has been made out of a molehill." Yes the ... Times ... made a mountain out of a molehill.

There's another story about how Bridgewater founder Ray Dalio fired an employee over email for failing to "complete a homework assignment," but he was just kidding. They have a good time over there at Bridgewater.

Satellite data.

We are still in the very early stages of using satellite data to drive financial decisions. Hedge funds can use satellite images to track global oil supplies and traffic to retail stores, but that is really just the tip of the iceberg. As artificial intelligence and machine learning technology improve, the upside for satellite imaging is that it might be able to integrate a view of the entire physical world into real-time financial decision-making. Satellites will allow investors to be everywhere at once, and analytical tools will allow them to effortlessly transform pictures of the world into investing signals.

Meanwhile the U.S. Securities and Exchange Commission used satellites to catch fraud at a home-builder:

Mexico-based homebuilding company Desarrolladora Homex S.A.B. de C.V. has agreed to settle charges that it reported fake sales of more than 100,000 homes to boost revenues in its financial statements during a three-year period. 

The SEC used satellite imagery to help uncover the accounting scheme and illustrate its allegation that Homex had not even broken ground on many of the homes for which it reported revenues.

Neat! The satellite images are from March 2012, though, while the SEC settlement was last Friday. Homex filed for bankruptcy in 2014. 

Covenant Review.

The best thing about the internet is that, if you can think of a thing, there is a bitter and long-running controversy about it that is fought with all the tools of classical oratory. Someone, somewhere, is right now giving (or typing) a Churchillian speech to rally people to the cause of, like, "Garfield is a boy," or "don't put peas in guacamole." Or: Companies should have to pay the make-whole premium if they default on their bonds. That's the hill Adam Cohen wants to die on:

While his stirring call to arms resonated with bondholders, some market participants - particularly lawyers involved in drafting the contentious clauses - criticised him for being over-dramatic.

In his defence, Cohen paraphrases Barry Goldwater’s speech at the 1964 Republican National Convention.

“Extremism in the defence of bondholders is no vice,” he says, shrugging his shoulders and grinning gleefully. “It worked. We won.”

"Extremism in the defense of X is no vice, for any X," could be the motto of the internet. Cohen runs Covenant Review, a publication that advises investors on bond terms, and earlier this year he donned his shining armor, unsheathed his flaming sword, and led his paladins into battle against bond indentures that explicitly omitted the make-whole on default or bankruptcy. ("I cannot believe the army I have mustered," Cohen emailed a bond lawyer during the battle.) They won. We talked about it here. I don't think I really agree with Cohen's view on the merits, but I appreciate his enthusiasm. 

Elsewhere: Everything You Wanted to Know About Bond Workouts But Were Afraid to Ask.


We talked on Friday about the difficulty of succession planning at hedge funds. The problem, I suggested, is that while hedge funds like to talk about their rational repeatable process, often what the investors are paying for is the founder's quasi-mystical stock-picking ability, and that is hard to pass on to the next generation. It's not easy "to transform charisma into bureaucracy," I suggested. I got a great email from John Erwin in response:

In fact, it's really really easy to bureaucratize charisma, because the kind of charisma that sucks in investors to hedge fund managers (good & bad, across an entire group spectrum composed of this fraction of the financial population) is dependent on those pesky bourgeois secondary properties hedge fund managers incorporate from their family background & schooling (that is, institutionalized & bureaucratized), and investors' fundamental belief in those secondary properties (i.e., distinction, grooming, particular sports, manner, accent, social network, schooling). In other words, it's not Weberian as you suggest (charisma v. bureaucracy), it's Bourdieuan (mass production of the same type as a group) ...

The real interesting question I hear in the background of your blog is what happens when machines challenge the dominance of this kind of embodied charisma to access positions of power. That is, what happens when machines/automation/virtual reality and the like eclipse the human qualities which traditionally give access to power (e.g., playing golf, polo shirts, consecration by certain universities, Econ degrees, charisma)? 

I don't know. There is a notion that hedge funds are for weirdos and misfits, people who don't fit in at traditional banks and had to strike out on their own. This notion is completely untrue: Hedge funds are actually for Harvard and Wharton graduates who've completed two-year analyst programs at Goldman Sachs and then followed a well-trodden path to a more lucrative and prestigious job. But people still sometimes think it, and it was to some extent true of the earlier generation of hedge-fund managers who are now trying so hard to transition their firms to the next generation. That next generation is crammed to the gills with Bourdieuan social capital, but the magic has faded. 

Information asymmetries.

Here's a fun paper (in the current American Economic Review) about crack:

We estimate a model of illicit drugs markets using data on purchases of crack cocaine. Buyers are searching for high-quality drugs, but they determine drugs’ quality (i.e., their purity) only after consuming them. Hence, sellers can rip off first-time buyers or can offer higher-quality drugs to induce buyers to purchase from them again. In equilibrium, a distribution of qualities persists. The estimated model implies that if drugs were legalized, in which case purity could be regulated and hence observable, the average purity of drugs would increase by approximately 20 percent and the dispersion would decrease by approximately 80 percent. Moreover, increasing penalties may raise the purity and affordability of the drugs traded by increasing sellers’ relative profitability of targeting loyal buyers versus first-time buyers.

There are analogies. "In equilibrium, a distribution of qualities persists" is a pretty good summary explanation for why people sometimes want more financial regulation.

People are worried about unicorns.

Here's a story about a startup CEO tweeting a picture of an Uber driver buying a Snap share with Robinhood. I assume that car traveled through the Enchanted Forest in a haze of pixie dust. And here are "the 50 Most Promising Startups You’ve Never Heard Of."

People are worried about bond market liquidity.

People are worried that new Treasury Secretary Steven Mnuchin isn't worried about Treasury market liquidity:

"There’s a big fear that Mnuchin doesn’t care, that he and the administration don’t reform the market," said Jim Greco, a co-founder of Direct Match Holdings Inc., a Treasury-trading firm that’s struggled to break the banks’ death-grip on the market. At Finra’s Rockville office, employees are creating a system to collect data on daily Treasury trading that at first will be shared only with regulators. The idea was that the next step could be that prices would be shared with the public, though Greco doubts that will happen.

Things happen.

Standard Life to Buy Aberdeen in $4.7 Billion Stock Deal. For Alexandra Lebenthal, Sale of Family Business Marks End of Difficult Chapter for a Storied Name. Brett Icahn, Paid $280 Million In 2016, Is Still Negotiating For New Deal With Billionaire Dad. How California Utilities Are Managing Excess Solar Power. After Working With Tech Giants, Logitech Prepares to Fight Them. "A few 'superstar firms' have grown to dominate their industries, crowding out competitors and controlling markets to a degree not seen in many decades." Odd Lots: The Incredible True Story of the Real Life 'Trading Places.' Rod Stewart sorry for IS-style mock execution on wife’s Instagram. We’re All Internet Trolls (Sometimes). Snakisms. Is Consciousness an Illusion? How do smoothies work?

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