Multiplication, Gaming and Writing
Yesterday was my birthday, and the U.S. Attorney's Office for the Southern District of New York got me an amazing present, this alleged Ponzi scheme in which a former math teacher named Jason Nissen allegedly scammed several big investors out of $70 million by falsely claiming that he was using their money to buy and resell tickets to "Hamilton" and other events. It should not be confused with the alleged Ponzi scheme from earlier this year in which the operators allegedly scammed several big investors out of $81 million by falsely claiming that they were using their money to buy and resell tickets to "Hamilton" and other events. That case was fine, but it's now distinctly the second-best eight-figure fake-"Hamilton"-tickets scam of 2017.
What makes Nissen's alleged Hamilponzi so superior is that he apparently got sad about it, visited one of his victims ("Executive-1"), confessed everything, and then went home to think about what he had done. At which point the investor called him up to clarify a few things, on a recorded line, leading to this exchange:
Executive-1: Let me understand something. The Hamilton [referring to a deal to purchase tickets for the musical, Hamilton] ... The reports that you showed us in the return, it was all fake?
NISSEN: No. Some of it was real and some of it was fake.
Executive-1: Some of it real, some of it fake. And -
NISSEN: The numbers are just all multiplied. It's the real numbers, but multiplied.
It's the real numbers, but multiplied. Vast new fields of legal-mathematical theory open vertiginously beneath us. It's not fraud; it's multiplication. Everything he said was true, up to a linear transformation. Of course all numbers are the real numbers (in the legal sense, not the math one) multiplied by other numbers. Is it a defense if your numbers are divisible by the real numbers? Do they have to be integer multiples? Do you need a constant multiple for all the numbers, or can you multiply each real number by its own other number? What if the real number is zero? You can't multiply that by anything to get an appealing number; is it okay to resort to addition?
Executive-1 then invited Nissen in to his company's office to discuss the Ponzi scheme in more detail, on video, with some of his colleagues, including "CFO-1." It turns out that Nissen's methods extended beyond arithmetic:
CFO-1: So let me ask you a question. The bank statement that you sent us last week, has 400 [inaudible]. What, the guy from the bank helped you to forge it?
NISSEN: No, I did that.
CFO-1: You did that?
NISSEN: Oh yeah, I had a [inaudible] before balanced checks, so I just changed it.
CFO-1: You changed it?
NISSEN: Yeah, I changed it.
CFO-1: How did you change it?
NISSEN: Photoshop. You ever hear of it?
Ever hear of multiplication? It seems to have taken an understandably long time for the facts to sink in on the victims; they kept asking Nissen variations on "wait really you ripped us off?" Though at least they had the presence of mind to tape everything, and he apparently had the absence of mind to keep confessing:
CFO-1: You were running a Ponzi scheme.
NISSEN: I guess you want to call it ... I was borrowing from Peter to pay Paul.
CFO-1: Yeah. That's the definition of a Ponzi.
The exchange ends there, in the complaint. CFO-1's characterization has no legal relevance; it's not like CFO-1's zinger is evidence against Nissen. The FBI agent writing the complaint just wanted to give CFO-1 the last word. And it's a good line! I have recently been cited in a federal criminal fraud complaint myself, so I'm an old pro at this sort of thing, but I didn't get a cool speaking role like CFO-1. I am a bit jealous. Of course I also wasn't defrauded by the second "Hamilton" Ponzi scheme this year.
We are at the doorstep of a truly modern age of investing, and it is boring. Some day soon, most people will index. Others will buy factors and stuff; there will be math, and computers. The giants of the earlier, more romantic age of investing are on their way out -- retired, running family offices, reinventing themselves as quant managers, or just reeling off consecutive down years. Everyone knows now that frantic day-trading of individual stocks is dumb, and that buying and holding low-cost index funds is virtuous. Everything is becoming rational and orderly, low-cost and low-vol. It is the right thing to do; you know it is. And yet it is dull.
But while modern technology helped to create this clean, sensible, rational, boring approach, it also helped to create the reaction, the excrescences of zany irrationality that pop up to relieve the dullness of our basically sensible world. Do you know how many Ponzi schemes there are on Ethereum? So many! Also here is a guy who has set up a game on Twitch where people can tell him what stocks to buy:
On new Twitch channel Stock Stream, Amazon engineer Mike Roberts entrusted his $50,000 savings to the chaos that is Twitch chat, where thousands of anonymous users invest it in what they please.
Roberts says it’s the world’s first co-op, multiplayer game that uses real money to play the stock market. Over 170,000 viewers have watched his funds rise and fall with the whims of Twitch chat. Participating is as simple as writing “!sell” or “!buy” and whichever stock you want. Every five minutes, the game executes the top-voted action with Roberts’ funds.
Here is the Twitch stream. There is a blippy-bloopy soundtrack. The most popular votes when I looked at one point yesterday were, first, Sell Tesla, and second, Buy Tesla. He will probably end up a billionaire. "The wisdom of the crowd," people will say. "Why index when you can gamify your investing," people will say. "Whee this is fun let's make him buy more Tesla," people will say. It's not exactly less boring than indexing, for my tastes, but it is boring in a new way, and seems to satisfy both the players' urge to make baseless hair-trigger investment decisions and Roberts' urge to hand his savings over to inscrutable chance. Both of those urges feel like understandable reactions to the modern world.
A major but unheralded problem in banking is: Where can you write things? Sure, you have paper, but what if you run out of paper? What if you write something on paper, and then lose the paper? What if your handwriting is too big to fit on the paper? Or what if you want to signal that you're really, really cool? Like, much cooler than the conventional squares who write on paper? Well, Goldman Sachs Group Inc. has always been at the cutting edge of financial innovation, and now it has broken new ground in finding places to write, also nose rings:
"You know, our chief architect has a nose ring, people wear jeans so there are definitely aspects that look different relative to folks that work in the investment banking division," said Ismail.
"We write on everything, we write on our walls, we write on our tables, we write on our windows, again, that's very new."
It's true, I used to work at Goldman, and I only wrote on paper and whiteboards. (Also sometimes I used a computer?) That quote is from Omer Ismail of Marcus, Goldman's consumer lending business, whose logo really should be a sepia-toned portrait of its 19th-century namesake, but with a nose ring. And maybe some equations scrawled on him.
I blame the index funds.
Exxon Mobil Corp.'s shareholders voted yesterday, over the opposition of the board of directors, to require the company to produce an annual report on "the long-term portfolio impacts of technological advances and global climate change policies." These proposals are of course partly about useful financial disclosure -- investors want to know what the impact of climate change policies will be on the bottom line -- but that is not their only purpose; there's a reason that the people pushing for climate-change disclosures also seem to be the people most substantively concerned about climate change. The point is to fight climate change; to force oil companies to think about and respond to and disclose the risk of climate change, and hopefully to change their own activities in ways that mitigate it.
But the people voting for this particular proposal weren't traditional activists:
The shareholder rebellion at the ExxonMobil annual meeting in Dallas was led by major financial advisory firms and fund managers who traditionally have played passive roles. Although the identity of voters wasn’t disclosed, a source familiar with the vote said that major financial advisory firm BlackRock had cast its shares in opposition to Exxon management and that Vanguard and State Street had likely done the same.
A story that we talk a lot about around here is that broadly diversified institutions don't just care about profit maximizing at any one firm: They own whole industries, whole economies, and so have interests that diverge from those of concentrated shareholders in a single company. The negative spin on that is that the diversified investors can create antitrust problems: They disfavor competition and favor fat-margined oligopolies; they promote shareholder interests at the expense of workers and customers.
But there are positive spins too. If you're an indexer, you internalize the externalities! If you just own Exxon Mobil, you might want it to sell a lot of oil and make a lot of money. If you also own, I don't know, coastal real-estate companies, you might care more about the environmental effects of your Exxon investment. Fund companies that own the whole economy might be better stewards of that economy than concentrated investors are. Obviously a world in which BlackRock sets all industrial policy for the entire economy would be weird. But BlackRock does have some good incentives.
Investing involves rigorously and quantitatively analyzing mountains of information in order to come to dispassionate disciplined decisions, so you would think that computers would have some advantages over humans. On the other hand investment advising involves soft skills, befriending clients and getting them to trust you, so you would think that humans would have some advantages over computers. And you might think that a human-computer combination would be an unbeatable team for investment advising, with the computer contributing its cold rationality and the human contributing her people skills. Morgan Stanley seems to agree, except that it's counting on the computer to provide the people skills:
At Morgan Stanley, algorithms will send employees multiple-choice recommendations based on things like market changes and events in a client’s life, according to Jeff McMillan, chief analytics and data officer for the bank’s wealth-management division. Phone, email and website interactions will be cataloged so machine-learning programs can track and improve their suggestions over time to generate more business with customers, he said.
“We’re desperately trying to pattern you and your behavior to delight you with something you may not have even been asking for, but based on what you have been doing, that you might find of value,” McMillan said in an interview. “We’re not trying to sell you, we’re trying to find the things you want and need.”
The computer is definitely going to be better at remembering the client's birthday:
“Technology can help them understand what’s happening in their book of business and what’s happening with their clients, whether it be considering a mortgage, to dealing with the death of a parent, to buying IBM,” McMillan said. “We take all of that and score them on the benefit that will accrue to the client and the likelihood they will transact.”
The thing about investing is that, while the work is complicated, the goal is pretty simple: You should buy stuff that will go up. The basic dream of artificial intelligence in investing is to get a computer to figure out what stuff will go up, and various quant hedge funds are working on that problem. But the investment advising business has a slightly different objective: not to find the things that will go up and buy them, but to find the things that you'll buy and sell them to you. That's a different problem from just finding what will go up, probably an easier problem, and one that has traditionally relied on the human touch. But perhaps it too is susceptible to computerization.
Blockchain blockchain blockchain.
Ian Bogost is worried that "Cryptocurrency Might be a Path to Authoritarianism": "Instead of defanging governments and big corporations, the distributed ledger offers those domains enormous incentive to consolidate their power and influence." Does it? I am not sure that distributed ledgers, or cryptocurrency, do all that much for centralized power. But it is true that corporate and governmental skepticism of bitcoin has quickly morphed into corporate and governmental interest in the blockchain, and "blockchain" there means less "decentralized trustless distributed ledger" and more, like, "ledger." It does seem empirically true that a lot of hyped blockchain projects seem to be about concentrating information in centralized intermediaries, rather than the reverse. If the interest in blockchain becomes an interest in just having better databases, and running smart contracts automatically, then yes I can see how that might consolidate the power of corporations and governments.
Meanwhile, Ethereum is gaining cryptocurrency market share from bitcoin.
People are worried about unicorns.
Here is Priya Anand on Uber Technologies Inc.'s efforts to popularize UberPool, which involved losing "sometimes well over $1 million a week in San Francisco alone" by discounting fares. It also almost involved this:
To ensure Pool’s viability, Uber needed to cultivate an endless supply of repeat customers. So that fall, it doubled down on its attempt to woo commuters away from their cars and public transportations — and to the Uber app. To do that, Uber considered an idea from Kalanick himself: a multicity “Give Up Your Keys” campaign through which people would exchange their old cars for Pool credits. That idea never came to fruition.
You have to sort of admire Uber's bluntness. "Give Up Your Keys," as a slogan, manages to be both boring and menacing. The focus is not on what Uber can do for you, or even on what you can do for Uber, but on what you can sacrifice to demonstrate your loyalty to Uber.
Anyway, Anand calls Pool "a case study of the ride-hail juggernaut’s burn-now-and-figure-it-out-later corporate ethos at a moment when it is still struggling to pinpoint a sustainable business model." Elsewhere, Uber's "first-quarter loss was $708 million, shrinking from the $991 million loss in the previous period," and revenue increased to $3.4 billion. I guess they are still burning it, but also slowly figuring it out.
People are worried about bond market liquidity.
This worry is a ghost town recently, but no one seems to be trading bonds:
JPMorgan Chase & Co. and Bank of America Corp., the two biggest U.S. banks, said second-quarter trading revenue is on pace to drop at least 10 percent because tranquil markets are curbing demand.
Morgan Stanley Chief Executive Officer James Gorman indicated his firm is seeing similar trading declines as competitors JPMorgan Chase & Co. and Bank of America Corp., which said second-quarter trading revenue is on pace to drop at least 10 percent.
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