Bitcoin Dividends and Marxist Indexing

Also shareholder rights, Goldman millennials, Venezuela, and the battle to defeat death.

Does bitcoin pay dividends?

The way dividends work is, you own shares of a company, and the board of directors of the company meets, and they decide to pay a dividend, and then they mail you some cash as a dividend on your shares. This is the way spin-offs work too: The board meets, they decide to do a spin-off, and they mail you some shares of a new company as a dividend on your shares of the old one. All of these mechanics work because the company is a thing, and it has collective decision-making processes, so you can say things like "the company decides to pay a dividend" or "the company spun off its widgets division" or "the company mailed me a check" or whatever.

Meanwhile the way bitcoin works is, there is no central decision-making body, but there is a public blockchain listing who owns bitcoins, and if anyone in the world gets it in her head to mail every bitcoin holder a present then she can. I mean, the blockchain doesn't actually list names or mailing addresses, so she can't really mail out the presents, but it does list blockchain addresses, so she can give out any sort of present that can be conveyed over a blockchain. Typically that means a new cryptocurrency. She can just set up a new blockchain -- a "fork" of the bitcoin blockchain -- and announce that, as of today, everyone who holds one bitcoin also holds one Newcoin. 

And this actually happens from time to time, and it can be a sensible economic move for the person handing out the presents. If she invents Newcoin, and gives out 16.6 million Newcoins to the holders of existing bitcoins, that costs her essentially nothing. (She has to cut and paste some blockchain code, and maybe write a white paper.) While she's at it, she can also give herself 10 million Newcoins, since they are free, or a Newcoin-creating machine, or whatever. And if her innovation takes off -- if lots of people who got Newcoins as presents decide that they are a good store of value or medium of exchange or distributed computing solution or whatever -- then the Newcoins will be valuable, and, since she was in on the Newcoin ground floor, her Newcoins will be valuable. (This is not exactly the typical reason to give out Newcoins -- the main reason is that you are a bitcoin miner who disagrees with some aspect of the bitcoin protocol and wants to move everyone to a slightly different bitcoin blockchain -- but it is a helpful one to consider.) 

This can lead to kind of weird results. Everyone likes getting a present. But it can be hard to keep track of your presents. If you just own bitcoins, this is not a huge problem: If someone gives you a new coin that you like, then you can hop on over to its blockchain and contemplate it and use it and acquire more and whatever; if someone gives you a new coin that you don't care for, you can sell it for some free money; if someone gives you a new coin that is dumb and worthless, you can ignore it and it won't bother you.

But if you own bitcoins indirectly, as many people do, through an account at a cryptocurrency exchange, then the exchange actually gets the present, and has to decide what to do with it. This requires creating infrastructure and dealing with short sellers, and can generally be a mess, as exchanges found after the Bitcoin Cash fork. Back then, we talked about the concept of "forkiness": Some Newcoins feel like real forks in the bitcoin blockchain, in which a lot of value goes with the new fork, and so exchanges should really try to pass them on to bitcoin holders; other Newcoins feel like random presents and are easier to ignore. But, really, why ignore even random presents? People do like getting presents.

Anyway here's a story about how "Bitcoin Is Paying Out Dividends Now -- Just Not to Everyone." They're not really dividends, but close enough I guess:

A split in the blockchain created a new offshoot in the form of bitcoin gold on Tuesday, with bitcoin holders receiving one unit for every bitcoin they own, according to the offshoot’s developers. The cryptocurrency fell from a record high after the so-called hard fork, just as stocks typically drop after going ex-dividend. Other major digital currencies including ethereum gained, as investors sold bitcoin and moved the cash to alternatives, said Gavin Yeung, chief executive officer at investment company Cryptomover.

“It’s very healthy for the ecosystem to be able to say, I am an investor, I collect my dividend, and then I can do what I want with my investment,” Yeung said on Tuesday.

Sure why not. "In order to get the additional bitcoin gold, investors have to be using a wallet or exchange that supports the new asset. Coinbase, one of the largest exchanges, has said it won’t."

Elsewhere: Bitcoin Fibonacci. And: "Is an ICO an Investment or a Donation?"

Should index funds be illegal / Are index funds Marxist?

Here is a Jacobin interview with leftist economist J.W. Mason about "finance's role in capitalist society" that is fascinating throughout. Mason endorses a "functional view of finance, as the enforcement arm of the capitalist class as a whole":

There are people and institutions whose job it is to ensure that corporations remain within capitalist logic, that they remain oriented towards production for sale and for profit. On some level, this is the fundamental role of shareholders and their advocates, and of institutions like private equity.

I think that a lot of quite mainstream financial people would agree that one thing that shareholders do is ensure that the corporations they own "remain within capitalist logic," sure. But Mason also points to the rise of index funds as undercutting capitalist logic: If all the companies are owned by the same handful of big diversified investing institutions, and if those institutions have no interest in competition between the companies they own, then what is the point of capitalism?

If you take competition out of the mix, it’s unclear what function private ownership is supposed to accomplish. If the evolution of finance gets you to a situation where you have a single set of institutions — or in the long run, maybe a single institution — that owns all of these firms, then pressure from shareholders is going to be against competition. They don’t want to see these firms trying to gain market share or anything else at each other’s expense.

Seth Ackerman, the Jacobin interviewer, responds:

It’s hard to listen to what you just said without thinking of the debates that took place in the late nineteenth and early twentieth centuries, where many people — arguably including Marx — predicted either that firms would be consolidated into the hand of a very small number of controllers or that the underlying wealth would be concentrated into the hands of fewer and fewer people. And in either case, it would undermine the basic logic that made capitalism an economically and politically successful system in the first place.

Virtually no one that I talk to in or around the financial industry really believes the "common ownership of companies by mutual funds undercuts competition" theory. It just seems too attenuated: Sure, it might be in BlackRock's and Vanguard's interests if the companies they own don't slash prices to compete with each other, but it's not (usually) like they call up executives to tell them that. Plus "competition" is usually a more nebulous concept than price-cutting: It might be in shareholders' interests to keep prices high, but it is also in shareholders' interests to see more innovation and more competition on quality. If you own the entire economic pie, your interest is in growing that pie, not in keeping each company's slices the same. And the way the pie grows is through the normal capitalist processes of innovation and competition and creative destruction and so forth.

Still I am so desperately fond of this theory. What I love -- what is made so clear in Jacobin's discussion -- is how it wraps capitalism all the way around to socialism. Index funds are in many ways a perfection of financial capitalism: Not only are they the result of scientific finance (modern portfolio theory, the efficient markets hypothesis, etc.) replacing earlier and less rigorous forms of investing, but they also concentrate and align shareholders with each other, and corporate managers with shareholders, in a way that seems like it would be well suited to "ensure that corporations remain within capitalist logic." And the result is something that both Marxists and also financial analysts think is quasi-communist, that "undermines the basic logic that made capitalism an economically and politically successful system in the first place." What if Marx was right that capitalism would ultimately destroy itself, but the way that it does so is through index funds? 

Anyway, happy 100th anniversary of Red October, I guess.

Elsewhere: "David Einhorn Is Wondering If Value Investing Even Works Anymore." And here is an excerpt from his letter to Greenlight Capital investors:

What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis, the equity holders are doing just fine.

That is an alternative perfection of capitalism, I guess, if the capitalist class is subsidizing consumers without actually losing any money. 

Shareholder agreements.

One thing that I think about a lot is that the default form of public-company organization is increasingly optional. If you want to be a public company but you don't want to give shareholders voting rights, the market will more or less accommodate you. If you want to raise lots of money from diverse public-market investors but not technically be public, the market will accommodate that too. If companies want to change the rules in ways that give shareholders less power, there are ways for them to do that, and if shareholders are okay with it then they probably will.

But you'd expect there to be another side of this coin: If the default rules of public-company governance are no longer mandatory, then sometimes that will mean that managers/founders/entrepreneurs will have more power, but other times it should mean that shareholders will have more power. Why not? If it's all free bargaining not constrained by default rules, the actual results will depend on the particular circumstances of a company and the bargaining power of its managers and shareholders. 

Here are a blog post and related paper by Jordan Schoenfeld of the University of Utah on "Shareholder-Manager Contracting in Public Companies." "One implication of my findings," he writes, "is that shareholders can control managers through contracts that bypass conventional governance channels such as directorships." And:

It also appears that shareholders prefer to control managers through shareholder agreements when the firm has more cash on hand and when managers have more decision-making latitude, for example, in firms where managers have more influence over the board. Shareholder agreements are also more prevalent in less profitable and younger firms, which suggests that shareholder agreements serve to correct or preempt mismanagement of the firm.

Goldman is cool now.

David Solomon, the co-president and co-chief operating officer of Goldman Sachs Group Inc., told a Securities Industry and Financial Markets Association conference that "about 50 percent to 60 percent of the company’s workforce is 30 or younger" and that Goldman is working to "make sure it remains super, super attractive" to millennials:

“I love Millennials, and one of the reasons I love Millennials is Goldman Sachs is a very young workplace,” he said. “You can talk about the way the world is evolving but Millennials work hard, they care passionately about who they are working for, and they are interested in what the organization stands for and what it’s doing.”

Huh. Look, disclosure, I used to work at Goldman Sachs. I like Goldman Sachs; I think it has a lot of good people and does a lot of good work. I think that the popular perception of Goldman as a values-free place of mercenary evil is not accurate. At the same time, I am not convinced that people whose main interest in a career is "what the organization stands for" are flocking to Goldman Sachs? Like, I mean, it stands for making lots of money with clever financial engineering. Nothing wrong with that! I enjoy clever financial engineering, and money, myself. But it's not exactly the Peace Corps. 

Also, like many millennials, David Solomon seems not to know how grades work:

Ultimately, Goldman Sachs must ensure it has a diverse workforce and the right people to help clients solve problems, he said. “I give ourselves a grade that’s improving, but still more work to do.”


Here are Lee Buchheit and Mitu Gulati with some more free advice for Venezuela. "The next administration in Venezuela," they write, "will not want for suggestions about how to minimize or neutralize this holdout creditor threat. This short article is another contribution to that growing literature." Their suggestion here is to have the state-owned oil company, Petróleos de Venezuela SA, "pledge all of its assets to the Republic in consideration for the Republic's assumption of PDVSA's indebtedness under its outstanding bonds and promissory notes," to encourage PDVSA bondholders to exchange into new Venezuelan government bonds as "the preliminary to a generalized debt restructuring of some kind affecting all outstanding bonds."

Death and taxes.

"It’s bad enough that you have to die," septuagenarian billionaire and, somehow, Commerce Secretary Wilbur Ross told Bloomberg Television yesterday, in the course of complaining about the estate tax. "You shouldn’t be fined for doing so."

This is specious reasoning. Of course we should fine people for dying! You tax -- or fine -- behavior that you want to discourage. Taxing a thing reduces the amount of that thing. "The power to tax is the power to destroy." If we are going to get serious about defeating death, the first thing to do is to tax it heavily. If there's one thing that rich people love, it's evading taxes, and if you tax death heavily enough they'll find a way around that too.

Please do not email me about this. 

Hidden cells.

I wrote yesterday that UniCredit's accidental earnings release was the first corporate spreadsheet error that I could think of that was caused by hidden columns, but Joel Fleming pointed out on Twitter that there's a previous example of one caused by hidden rows: Barclays Capital Inc. accidentally acquired 179 Lehman Brothers Holdings Inc. contracts out of bankruptcy because they were in hidden rows on a spreadsheet. So there you go. The moral of the story, there is no moral of the story, life is an accumulation of pure random contingencies, and any meaning you impose on them is illusory. 

Things happen.

Congress Votes to Overturn CFPB Arbitration Rule. SEC ignored years of warnings about cybersecurity before massive breach. Clearinghouses Push Back Against Worries Over Their Size. Top investors want Deutsche Börse chief to resign. Wealthier Depositors Pressure Banks to Pay Up. Carlyle Group Lays Out Succession Plan, Promotes Pair to Co-CEO. Chinese investment banks face new headwinds. "I find that loan modifications weakened household balance sheets by adding $20 billion to household debt, with the net amount of debt added per modification doubling from 2010-2014." The Fed-chair reality show is going great. Warsh vs. Quarles Feud Has Been Renewed by Trump Fed Search. Forget ECB’s Taper, Investors Want to Know When Rates Go Up. Big Mall Operator Does the Unthinkable—Builds a Mall. Martin Shkreli’s Legacy Upends a Creative Financier. Michael Bloomberg: Brexit is stupidest thing any country has done besides Trump. Robot dog. Noise-canceling ramen fork.

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