Ticket Schemes and Fed Positions

Also communist index funds, securities fraud, mortgage fraud, QE and lending, bitcoin adoption and florists.

Concert tickets.

The Federal Bureau of Investigation usually has a pretty deft comedic touch, and you can see where they're coming from here:

WRIGHT listed eight possible options for re-paying the debt, including "Run to Costa Rica, change name, and start life all over again - may not be an option."

Obviously the "run to Costa Rica" option was the funniest choice, which is why the FBI called it out. But the option that Michael Wright, Craig Carton and Joseph Meli allegedly hit upon, according to the federal prosecutors and the Securities and Exchange Commission, was to run a Ponzi scheme in which they raised money from investors to buy and resell concert tickets, and then used that money to repay their own casino and other debts instead of actually buying the concert tickets. So that is another funny option. But that leaves six more options, all of which were apparently less plausible than running a ticket-resale Ponzi scheme, though possibly more plausible than fleeing to Costa Rica. Probably some of them were funny too? And yet the FBI omits them all. It is, I have to think, a lapse.

I don't really understand why ticket-resale Ponzi scheming is such a thing? But it is; we have talked about two previous alleged ticket-resale Ponzi schemes, both of which involved tickets to "Hamilton," and one of which also involved Joseph Meli. And they are not little retail-scale Ponzis: One of the previous schemes tricked Paul Tudor Jones and Michael Dell, while in this case the schemers allegedly got a $10 million credit line from hedge fund Brigade Capital Management to fund their ticket purchases. (Carton himself is a prominent sports radio personality. "'I thought he called in sick this morning, but unfortunately my partner was arrested," his co-host Boomer Esiason said on air yesterday.) I suppose everyone has a vague sense that the concert-ticket industry is really inefficient and ripe for disruption, and so is flattered to be asked to help disrupt it. 

My favorite part of this case may be this text message that Meli allegedly sent to Carton and Wright, in which you can see him begin to realize the central problem with a Ponzi scheme:

We use [the Hedge Fund’s] money to repay debts. Where do we get the money to buy tickets and furthermore what deal do we offer the money provider for the tickets? We cannot pay [the Hedge Fund] with other people’s money right away because it does not work. We need [the Hedge Fund] to buy deals with long lead times and earn money in the interim and use the earned money to replace the [Hedge Fund] funds in ticket deals on [sic] the future. That is the math we have to figure out and work it into a schedule to get down to zero.

If you use Brigade's money to buy concert tickets, and then you resell them at a profit, you can give Brigade its money back and split the profits and generally make everything work out. But if you use Brigade's money to pay off earlier investors and casino debts, then you haven't bought any concert tickets. You have to find someone else to buy the concert tickets, and even if you do that, you have the problem that you have promised the profits from those tickets to both Brigade and whoever else you found. It all seems exhausting; surely actually buying the tickets in the first place, and never starting down the Ponzi path, would be more pleasant, though less lucrative. 

Gary Cohn.

Would Gary Cohn be a good chairman of the Federal Reserve? The conventional answer is "eh, whatever, he'd be fine, considering." The normal Trump administration approach is to nominate the most hilariously inappropriate possible person to lead each controversial agency -- often a person who wants to shut down that agency -- and you could easily imagine a Fed nominee who wanted to return to the gold standard and get rid of the Fed. Relative to that baseline, Cohn looks great: He's not an economist, true, but he's not the opposite of an economist either. 

And so for instance here is Lloyd Blankfein joining the chorus of people who agree that Gary Cohn is a person who, if he became the Fed chair, would be the Fed chair:

“Gary is very, very capable,” Blankfein said in an interview from his bank’s New York headquarters as part of a conference hosted by German newspaper Handelsblatt. “There’s nobody who has a better sense of markets or the consequence that decisions will have on people’s behavior who act and are guided by market forces. No one’s perfect, but he’s the best I know.”

In case that wasn't tepid enough, Blankfein toned it down a bit:

“He’s not an academic. I don’t know that he reads a lot of policy papers, let alone writes them,” Blankfein said. “He’d be much less theoretical, much more practical. We haven’t gone in that direction in a few generations as far as the Fed, but we used to. And who’s to say what’s better or not.”

Sure, whatever. Good enough!

But it turns out that Cohn lacks one essential qualification to be the next Fed chair, which is that he is ... insufficiently fond of Nazis? "President Donald Trump is unlikely to nominate Gary Cohn, his top economic adviser, as the next Federal Reserve chairman," reports the Wall Street Journal, and "the shift in Mr. Cohn’s prospects for the top Fed job arises largely from his criticism of Mr. Trump’s response to the violence in Charlottesville, Va."

Asked if he considered resigning after the news conference, Mr. Cohn told the Financial Times that he was “reluctant to leave my post.” He also said the Trump administration “can and must do better” to condemn hate groups. “Citizens standing up for equality and freedom can never be equated with white supremacists, neo-Nazis and the KKK,” Mr. Cohn told the newspaper.

That does not sound especially disqualifying to me, but I have never claimed to be an expert in the subtleties of monetary policy. Elsewhere in Fed news, Vice Chairman Stanley Fischer announced his resignation yesterday.

Are index funds communist?

Ahahaha yes precisely:

BlackRock and Fidelity backed China’s Communist party writing itself into company law this year, according to disclosures that show some of the world’s largest asset managers voted in favour of ranking the party above the boards of state-owned companies.

More than 30 Hong Kong-listed state-owned enterprises, representing more than $1tn in market capitalisation, have so far amended their articles of association to embed the party, rather than the Chinese state, at the heart of each group.

Actually to be fair "funds controlled by Vanguard and Norges Bank voted against the party's inclusion," so it is not like all the broadly diversified investors decided to support the Communist Party. "We vote in the best interests of our clients to protect long-term shareholder value," said a BlackRock executive, and what do you think Marx would say about a Communist Party that protects long-term shareholder value?

Everything is securities fraud.

We talk from time to time around here about how every bad thing that a public company does is also securities fraud, so why not drug dealing? Here's a roundup of securities fraud lawsuits against opioid drugmakers: Various government agencies have sued these drugmakers claiming that they fraudulently marketed their drugs in ways that increased the opioid-addiction crisis, and shareholders quickly jumped on the bandwagon to say, well, if you did that, it is also securities fraud. The shareholders sometimes even get out ahead of the government agencies:

The third of the opioid-related securities lawsuits was filed on August 25, 2017 in the Southern District of Florida against PetMed Express, Inc. and two of its officers. PetMed Express is a veterinary pharmaceutical company. The complaint, a copy of which can be found here, alleges that on August 23, 2017, a research analyst released a report stating that the company is pushing a “dangerous and addicting synthetic opiate” named Tramadol, a drug that is prescribed by vets to animals as well as by doctors to human cancer patients. The analyst’s report also stated that PetMed is exploiting the opioid crisis through a broad marketing blitz that features Tramadol in ads that specifically target human opiate users. 

I suppose it is no laughing matter, but I would like to see an ad for PetMed Express aimed at human drug users. I feel like that is a difficult trick, crafting ads to convince people to get high off pet medicines. 

Elsewhere, here is the chairman of the Securities and Exchange Commission pointing out that, if you get hacked, that's also securities fraud:

Jay Clayton, speaking at an event sponsored by New York University’s School of Law, said investors still don’t fully appreciate the threat posed by hackers. “I am not comfortable that the American investing public understands the substantial risk that we face systemically from cyber issues and I would like to see better disclosure around that,” Mr. Clayton said. ...

Mr. Clayton said the SEC would investigate companies that mislead investors about material cyberrisks, but said the battle against hackers is much broader and shouldn’t be waged in government “silos.”

A JPMorgan complaint.

When JPMorgan Chase & Co. settled its giant mortgage-fraud lawsuit with the government in 2013, a lot of people, including me, were a little disappointed by the boring brevity of the "statement of facts" accompanying the settlement. It just wasn't that juicy: a bunch of generic statements about failures in underwriting processes, without any of the fun details contained in, for instance, the Federal Housing Finance Agency's original complaint against JPMorgan, which included -- this is true -- a second mortgage made to O.J. Simpson, despite a large civil judgment against him, because "there was a letter in the file from O.J. Simpson saying 'the judgment is no good, because I didn't do it.'" This disappointment led some people to speculate that the government had some really good material on JPMorgan, and particularly that the unfiled Justice Department complaint was so explosive that JPMorgan settled just to keep it from being filed.

Maybe! But now William Cohan has a copy of that complaint and it is ... it's like everything else? "Despite knowledge at the highest levels that underwriting had deteriorated across the industry and early payment defaults were spiking, JPMorgan continued to purchase and securitize subprime loans without addressing the known breakdown of its due diligence practices and without disclosing its knowledge to investors," that sort of thing. There is no smoking gun of senior executives emailing their subordinates to say "hey let's do fraud"; everything is just statistics, samples of mortgages with unacceptably high rates of red flags nevertheless being waved through due diligence because it's what everyone else was doing. It's bad, sure, but it's bad in a boring way that seems to have been adequately summarized by that statement of facts.

"Did QE lead banks to relax their lending standards?"

That's the title of this Federal Reserve Board discussion paper about the effect of quantitative easing on bank lending, and the answer is yes. In particular, in the first and third rounds of quantitative easing, when the Fed bought mortgage-backed securities, banks with more mortgage-backed securities made more risky loans:

Our results show that QE induced banks not only to lend more, but also to re-shuffle their lending activities towards more risky loans, reminiscent of findings on reach for yield behavior (see, e.g., Di Maggio and Kacperczyk (2017)). We find that banks with more MBS holdings chose less tight lending standards after QE1 than banks with low MBS holdings, and that banks with more MBS holdings were more likely to ease their lending standards compared to unaffected banks after QE3. Moreover, consistent with our identification strategy, we find that there was no change in lending standards and risk-taking on new loans across bank MBS holdings after QE2, during which the Federal Reserve bought exclusively Treasuries.

Blockchain blockchain blockchain.

Hey bitcoin is really catching on:

Bitcoin’s merchant adoption has actually gone down this year, according to the Bitcoin ABC lead developer.

In an episode of BitTopia, Amaury Séchet mentioned Bitcoin merchant adoption and its present status. He sees a decline in adoption in 2017, with more and more merchants formerly comfortable with supporting Bitcoin now choosing to no longer do so. The connection between this trend and ongoing high fees is fairly clear as merchants no longer find it viable to accept Bitcoin transactions for smaller payments, and consumers no longer finds the novelty of the transaction to be worth the fees.

Oops! Of course the purpose of cryptocurrencies is not actually to use them to purchase goods and services. It's to use them to purchase initial coin offerings, though here is a Quartz article about how ICOs that show huge dollar returns look less impressive when measured against ether. And here, via Tyler Cowen, is "An Economic Analysis of the Bitcoin Payment System" by Gur Huberman, Jacob Leshno and Ciamac Moallemi of Columbia Business School.

People are worried that people aren't worried enough.

I don't know if this exactly counts, but here's Lloyd Blankfein, who is worried about a non-specific feeling that there's not enough worry:

"The biggest problem, the anxiety that people have, is non-specific to what asset we are pointing to but the general feeling that things have been going up for too long," he said.

People are worried about unicorns.

Some researchers surveyed about 600 tech-industry "elites" and discovered that they are generally pretty liberal, except for being anti-regulation and anti-union. That's not all that surprising; much of the work of the tech industry is automating jobs away while calling for universal basic income. What I did find surprising was that only a minority of Americans -- 36 percent of Democrats and 41 percent of Republicans -- think that "florists raising prices on holidays" is "fair." (For tech elites, it's 97 percent.) Those numbers are actually lower than the percentages of people (42 percent, 51 percent) who think that Uber's surge pricing is fair. One possible moral here is that deflecting blame for price changes onto an algorithm actually works, a little: If people know that you are deciding to raise prices to accommodate higher demand, they'll get mad at you, but if you can say "I'm not doing it, my algorithm is," then they'll be more understanding. "Oh, right, the algorithm, well, nothing you can do about that." In the limit case you could imagine humans outsourcing all of their rational behavior to algorithms, and then getting mad any time they see a person choosing to behave rationally.

Things happen.

How Standard Chartered Lost $400 Million on Risky Diamond Debt. Goldman Sachs Halts Work on IPO for Unit of China’s HNA Over Ownership Concerns. Trian Details Its Case for Changes at P&G in White Paper. Flush With Cash, Private Equity Rainmakers Set Out on Their Own. Trump Sides With Democrats on Interim Debt-Limit Fix, Harvey Aid. Puerto Rico’s Finances Add to Vulnerability in Hurricane. Deutsche Bank's Cryan Sees Increasing Signs of Asset Bubbles. Football Champs and CEOs Alike Sidestep Taxes With Private Jets. Former Turkish Minister Of The Economy, Former General Manager Of Turkish Government-Owned Bank, And Two Other Individuals Charged With Conspiring To Evade U.S. Sanctions Against Iran And Other Offenses. Oil exploration in Norwegian Arctic faces sea of opposition. Do Free Business-School Courses Have a Payoff? Thinx Founder Gave Away Her Breast Milk at Burning Man to Make Lattes. 

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