Money Stuff

Juice Hacking and Mortgage Tech

Also the Dortmund bomber, a Volcker violation, an ETF ETF and a sovereign citizen.

Juice.

Someday Juicero Inc. will fade from the news, and a bit of the enchantment will go out of the world. We'll go back to our humdrum everyday lives, and most of us will go weeks at a time without thinking about the machine that reads QR codes and connects to the internet in order to squeeze juice out of bags of wet produce. "The Human Condition," writes Chad Harbach, is "that we’re alive and have access to beauty, can even erratically create it, but will someday be dead and will not," and you could say much the same about Juicero.

But today is not that day, because yesterday Juicero's Chief Executive Officer Jeff Dunn published a note on Medium responding to Wednesday's Bloomberg article about how you can just squeeze the bags with your hands, and it is a thing of great and terrible beauty:

So when I saw this week’s headlines about hacking and hand-squeezing Produce Packs, I had a one overriding thought: "We know hacking consumer products is nothing new. But how can we better demonstrate the incredible value we know our connected system delivers?"

Yes, in our modern world squeezing juice out of a bag of vegetables is "hacking." Well, it is! Circumventing the computerized systems that surround us, and venturing out to touch the physical universe directly with our own hands, has to violate some terms of service somewhere. Actually that is literally the plot of "The Matrix." Anyway Dunn goes on to talk about the incredible value of the system -- "The value of Juicero is more than a glass of cold-pressed juice. Much more." -- and I guess you'll have to decide for yourself if you find it convincing. Apparently the QR codes are really important.

But there is also a video embedded in the Medium post, and it is something else. It shows someone's hands cutting open a Juicero bag, pouring some pulp onto a plate, and then sort of kneading it aimlessly. The hands look about as befuddled as hands can look. Contrast this to the video that accompanied Ellen Huet and Olivia Zaleski's Bloomberg article, which shows one of them striding confidently up to a table, plopping down a Juicero bag and a cup, and squeezing juice out of the vegetables while -- this is crucial -- they are still inside the bag. You get a lot more juice that way! Juicero is not entirely wrong about the incredible value of its system. The bag adds a lot of value. It keeps the vegetables together, and your hands clean. It's a good technology!

Ocwen.

It has become trendy for banks to say that they are tech companies. Of course it has become trendy for juice companies to say that they are tech companies; tech is just trendy. But there is a deep important truth to the banks' claims: Banks really are the informational underpinnings of our society. Their technology is the platform that runs global capitalism, and your morning coffee purchases, and everything else. Their databases are the databases that organize the world. They know where the money is. If Juicero's database is broken, well, you have hands. If Google is broken, in a pinch, you could look stuff up in books. But if the banks' technology breaks -- if they forget where the money is -- then it's anarchy. 

So, I mean, I don't know, they should probably get their software right? Here is a very stern Consumer Financial Protection Bureau action against Ocwen Financial Corporation, "one of the country's largest nonbank mortgage servicers":

The Bureau alleges that Ocwen’s years of widespread errors, shortcuts, and runarounds cost some borrowers money and others their homes. Ocwen allegedly botched basic functions like sending accurate monthly statements, properly crediting payments, and handling taxes and insurance. Allegedly, Ocwen also illegally foreclosed on struggling borrowers, ignored customer complaints, and sold off the servicing rights to loans without fully disclosing the mistakes it made in borrowers’ records.

There are various accompanying state regulatory actions, many of which are trying to prevent Ocwen from acquiring more mortgage servicing rights. If you just open the CFPB complaint to a random page you will find an alleged horror. "In March 2016, 90 percent of the loans Ocwen verified contained errors or incomplete information that required corrections," says paragraph 45. Ocwen made "5,000 corrections to loans’ interest rates," says paragraph 46. "An absolute train wreck," says Ocwen's Head of Servicing about its technology in paragraph 50; "I know there’s no shot in hell, but if I could change systems tomorrow I would." "Ocwen has failed to properly credit full periodic payments that borrowers properly made to Ocwen as of the date of receipt, wrongly resulting in late fees, negative credit reporting, and inaccurate loan delinquencies," says paragraph 83. "It is very embarrassing to come home and see a notice on my door of an impending foreclosure especially when I have made and continue to make my mortgage payments to Ocwen," says one borrower.

None of these alleged horrors are about intentional wrongdoing; there's no claim that Ocwen didn't credit payments to borrowers' accounts because it intended to steal their payments, or their houses. It intended to do its mortgage servicing correctly. But, the CFPB alleges, its systems were so broken and poorly integrated that it just couldn't do it; the systems kept messing up. That's much worse! You gotta get that stuff right! It seems so weirdly trivial for a financial regulator to tell a mortgage servicer that, if someone sends in a mortgage payment, you have to credit it to her mortgage account. But this stuff is the basic trivia that underlies all higher-level functioning of the financial system. Any thought you might have about money or banking or finance or business just assumes without discussion that banks -- and their nonbank helpers, like mortgage servicers -- have technology that works perfectly to remember where the money is. When you pay your mortgage, you expect your mortgage to be paid. When somehow it isn't, you catch a glimpse of the abyss beneath the financial system. It's enough to make you whisper the word "blockchain." 

Or maybe not; Ocwen denies everything:

Ocwen strongly disputes the CFPB’s claim that Ocwen’s mortgage loan servicing practices have caused substantial consumer harm. In fact, just the opposite is true. Ocwen believes its mortgage loan servicing practices have and continue to result in substantial benefits to consumers above and beyond other mortgage servicers. The substantive allegations in today’s suit are inaccurate and unfounded. Indeed, the Company is unaware of the CFPB conducting any detailed review of Ocwen’s loan servicing files. Rather, the CFPB suit is primarily based on the CFPB’s flawed review of data and its self-serving conclusion about isolated instances where Ocwen self-identified ways we can do better.

Bombs.

Well, here you go, time to formulate a Fifth Law of Insider Trading: Don't insider trade by planting bombs at a company and buying put options on its stock.

In what seems like a plot from a James Bond movie, police arrested a man on suspicion he attacked the bus of German soccer team Borussia Dortmund GmbH last week as part of a scheme to profit from a slump in the club’s share price.

The 28-year-old, who has both German and Russian citizenship, was apprehended in the southern city of Tuebingen on Friday, the Federal Prosecutor’s Office said. On the day of the April 11 attack in the team’s home city, he bought 15,000 options on Borussia Dortmund shares betting they would drop sharply after the attack.

One player was injured by the bomb, though the stock went up the next day. That was not the plan

“A massive fall in the stock of Borussia Dortmund would have brought a profit representing a multiple of the investment,” the prosecutor’s statement said. “A significant fall in the stock price would have been expected if after the attack players were seriously injured or even killed.”

Here are the other four Laws of Insider Trading that I've come up with so far (don't do it, don't do it with short-dated out-of-the-money call options on merger targets, don't text or email about it, and don't do it in your mother's account), none of which are legal advice. Sadly, we have actually talked about the Fifth Law before, when someone allegedly tried to place bombs in Target Corp. stores to bring down the stock price. But I didn't call it the Fifth Law then. "I have never thought it necessary to formulate a law like 'don't insider trade by planting bombs in a store so you can short the company's stock,'" I said at the time. I guess I was wrong. Apparently the idea keeps occurring to people. It is not a good idea! 

A Volcker violation.

Yesterday the Federal Reserve "announced two enforcement actions against Deutsche Bank AG that will require the bank to pay a combined $156.6 million in civil money penalties." The bigger and less interesting action is a $136.9 million fine "for unsafe and unsound practices in the foreign exchange (FX) markets." That just seems ... late? There have been over $10 billion in FX fines from various regulators over the past few years, and the Fed's order doesn't tell us anything new about the FX scandal.

But the other consent order is a $19.71 million fine for violating the Volcker Rule, and you don't see that every day! In fact, I've never seen it before: Bloomberg reports that it was the Fed's first Volcker Rule enforcement action. The consent order alleges that Deutsche Bank did not have the proper systems in place to prove that its trading was "designed not to exceed the reasonably expected near term demands of clients, customers, and counterparties," a standard known as "RENT-D":

Significant weaknesses existed in Deutsche Bank’s demonstrable analyses showing that its proprietary trading is not to exceed the reasonably expected near term demands of clients, customers, or counterparties, required for permitted market-making activities, and Deutsche Bank did not subject trading desks’ RENT-D methodologies to sufficient review or challenge by internal control groups;

Deutsche Bank’s metrics reporting and monitoring process suffered from weaknesses which, together with the absence of sufficient internal controls, limited the Bank’s ability to adequately monitor trading activity to detect impermissible proprietary trades;

The Fed is not saying that Deutsche Bank housed a secret proprietary trading desk that was making big risky illegal bets. Instead, it says that Deutsche Bank had regular flow trading desks that made markets for clients, but it didn't do a good enough job of making sure that those traders only made markets for clients without ever taking a proprietary flutter of their own. (Or at least: It didn't do a good enough job of documenting that it made sure of that.) It suggests that the Fed is taking Volcker Rule enforcement seriously, expecting banks to abide by the letter of the complex regulatory requirements, rather than just going after egregious cases of prop trading. Good for them I guess, getting this case in under the wire before Congress revisits the rule.

ETF of ETFs.

Sure, why not:

The ETF Industry Exposure & Financial Services ETF (NYSE Arca: TETF), will begin trading today, April 20, 2017, providing investors with a single point of access to the companies driving and participating in the growth of the Exchange Traded Funds industry.

TETF will seek to track, before fees and expenses, the price and yield performance of the Toroso ETF Industry Index (the Index), which is designed to provide exposure to the publicly traded companies that derive revenue from the ETF industry. This includes ETF sponsors, index and data companies, trading and custody providers, liquidity providers, and exchanges.

It's a nice logic puzzle: If you believe that passive indexing is the best way to invest and will eventually take over the world, should you buy this fund? On the one hand, it gives you a concentrated bet on the rise of passive indexing, which you believe in. On the other hand, if you are just buying ETF companies, you're not really passively indexing, are you? I guess you can justify it because it is an index of ETF companies. It's passive-ish.

Dark pool.

I love this story about a toy dark pool:

From his base near Boston, Tony Weeresinghe is trying to get customers to quit online brokerages and trade via his fledgling trading system at Ustocktrade LLC.

Weeresinghe, a former executive at the London Stock Exchange, says his pint-size pool is cheaper than the E*Trades of the world. It offers $1 stock trades -- compared with $4 to $7 at the established companies -- as well as no minimum account size.

Plus, Weeresinghe says, Ustocktrade provides a bit of adventure -- and operates primarily as a philanthropy. All that appeals to one of his target audiences, college students, who make up a fifth of customers. The CEO views inexpensive investing as a way to help clients pay off school loans.

Do u stocktrade? Apparently not:

Ustocktrade tells customers on its website they will be trading with their peers, but there often aren’t enough to make that work. Unlike other exchanges, Ustocktrade never sends orders to other venues for trading. So, as the company discloses in its user agreement, clients end up doing business with a single sophisticated pro, a so-called superuser, Weeresinghe himself. 

This is a recurring story for dark pools: They are set up and advertised as a way for fundamental investors to trade stocks with each other, without the interference of grasping middlemen and evil high-frequency traders. And then buyers can't find sellers, and sellers can't find buyers. And then their sponsors think, well, what if we had a few high-frequency traders, but didn't talk about them? Or what if we took the other side of some trades ourselves? There is a perennial dream of natural liquidity: college students, happily trading stocks with each other, leaving Wall Street out of it. But it never works out that way.

Sovereign Citizen.

I can never resist a "sovereign citizen" like Winston Shrout, who is a leader of that "loosely affiliated group of Americans who claim to be emancipated from the government":

Sovereign citizens may believe local sheriffs to be the highest valid form of government, or that they can evade taxes in perpetuity by misspelling their names, or that all Americans are secretly owed $630,000, which was placed in a federal bank account upon their birth. From his popular YouTube channel, an expensive series of DVDs, and a lecture circuit, Shrout espoused all manner of theory on how Americans could allegedly free themselves from the federal government on wild technicalities.

And now he's on trial "for allegedly issuing more than $100 trillion in fake financial documents," things like "International Bills of Exchange" and "Non-Negotiable Bills of Exchange" and other random concatenations of finance-ish words with big numbers stamped on them. 

What I love about guys like this is that they really do expose deep fundamental mysteries about the financial system. Money, financial instruments, the right of the state to tax its citizens -- at some level these are delusions. It's just that they are collective delusions; because we all believe in them, they work. They are what Yuval Noah Harari calls an "imagined reality": "something that everyone believes in, and as long as this communal belief persists, the imagined reality exerts force in the world." "Politics," writes David Graeber, "is that dimension of social life in which things really do become true if enough people believe them." Money shares in that character. That means that Shrout's project is not purely silly. "If you could convince everyone in the entire world that you were King of France," writes Graeber, "then you would actually be the King of France." If Shrout could convince enough people that the state has no power to tax them, then the state would have no power to tax them. If he could convince enough people that his $100 trillion of paper was money, it would be money.

Things happen.

Virtu Agrees to Buy Speed-Trading Rival KCG for $1.4 Billion. Should DeVos Block an Embattled Student Loan Giant's Attempt to Expand? Cincinnati Sues Seller of Foreclosed Homes, Claiming Predatory Behavior. Citizens Defends Financial Checkup Program for Customers. (Earlier.) Trump Administration Launches National-Security Probe on Steel Imports. GM Ceases Operation in Venezuela as Plant Is Seized. China Shakes Up Financial Regulators in Scramble for Stability. Coffee and Thin Liquidity on Traders' Menus for French Vote. Europe Is Counting on Trump to Stand by Global Bank Regulations. Activist Investor Marcato Seeks Ouster of Buffalo Wild Wings CEO Sally Smith. Virtual Reality Companies Navigate ‘The Trough of Disillusionment.’ "If you don’t read the disclosure, you don’t get confused about it." The marijuana nuns of California.

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    To contact the author of this story:
    Matt Levine at mlevine51@bloomberg.net

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