Regulatory Doughnuts and FX Fees
Who runs the CFPB?
"This doing of something about disputes, this doing of it reasonably, is the business of the law," wrote Karl Llewellyn. "And the people who have the doing of it in charge, whether they be judges or sheriffs or clerks or jailers or lawyers, are officials of the law. What these officials do about disputes is, to my mind, the law itself." This idea is called "legal realism" and I think about it a lot these days.
Who is the acting director of the Consumer Financial Protection Bureau? One way to answer that question would be to look at the competing provisions of the Federal Vacancies Reform Act of 1998, which authorizes the president to appoint an acting director when the previous director resigns, and of the Dodd-Frank Act of 2010, which established the CFPB and which provides that its deputy director shall serve as the director "in the absence or unavailability of the Director." You might parse the language and legislative history of those statutes and conclude that Mick Mulvaney, the president's choice, is in charge, or alternatively that Leandra English, the deputy director picked by outgoing director Richard Cordray, is in charge.
But this seems to me to slightly misunderstand what the law is, or rather what the acting director of the CFPB is. To me, the person who is acting as director of the CFPB is the acting director of the CFPB. If Mulvaney tells CFPB people to do things and they do it, then he is the acting director; if English does, then she is.
There are other constituencies, of course: If a court declares that English is the acting director, then that will significantly increase her chances of getting the CFPB to do what she tells it to. But the essential point is that the way you become acting director of the CFPB is by convincing most of the relevant people that you are the acting director of the CFPB. Statutory interpretation is one tool that you can use to do that, but it is not the only one, and it does not strike me as the most important one. For instance, it seems to me that Mulvaney very convincingly won round one yesterday by:
- Showing up at the CFPB; and
- Bringing doughnuts.
English is playing a longer and more complicated game -- she sued for the job on Sunday, and seems to have spent yesterday on Capitol Hill building congressional support -- but one should not underestimate the importance of the doughnuts. The CFPB is in a weird place right now -- "Rumors that I'm going to set the place on fire or blow it up or lock the doors are completely false," Mulvaney found it necessary to say -- and a few well-timed breakfast pastries can probably go a long way. I myself contemplated on Twitter showing up at the CFPB with bagels and trying to mount a coup. If you work at the CFPB, and you have the choice of following Mulvaney (who as a congressman called the CFPB a "sick, sad" joke and tried to eliminate it) or English (whose appointment as deputy director seems like a bit of a stunt, and who apparently did not show up yesterday) or me (who will bring multiple kinds of cream cheese and also have a sense of adventure about the whole thing), who would you follow? Come on, everyone, let's regulate some payday lenders together.
But realistically I am not moving to D.C., so all the action will be between Mulvaney and English. Mulvaney's current plan seems to be to spend three days a week at the CFPB and three days a week at his other job, running the Office of Management and Budget, so if I were English I would show up at the CFPB on the days when he doesn't. We could have a regulatory regime in which payday lending is banned on Mondays and Wednesdays, and encouraged on Tuesdays, Thursdays and Fridays. If I were Mulvaney, on the other hand, I would always tell everyone at CFPB that I was at OMB, and tell everyone at OMB that I was at CFPB, and spend the day at the beach. Honestly, how hard can it be to run a regulatory agency if you don't plan to do any regulating?
Oh, Wells Fargo.
The Wall Street Journal has a terrific story about how Wells Fargo & Co.'s foreign exchange business seems to have overcharged a lot of middle-market corporate clients on foreign-exchange transactions. There is a lot of gory detail about the culture of the FX business -- in which employees were paid cash bonuses based strictly on revenue, and in which one manager who "said it wasn't right to celebrate high fees by ringing a bell" and "warned that Wells Fargo could become known as a 'bucket shop'" was demoted and "told to apologize to other managers for her unprofessional behavior." Most of us would say that the bell was the unprofessional behavior, not the criticism, but I guess most of us don't run FX at Wells Fargo.
But as a former seller of complex financial products myself, I most enjoyed the details about how Wells Fargo FX employees rationalized higher-than-agreed fees to their clients. There's the old "the computer did it":
“And if anybody did complain, it was an easy tap dance,” one former employee says. He says employees would say the pricing had been done automatically by the bank’s computer system so “there’s no accountability for the spread.”
Or there is "time fluctuation":
One former Wells Fargo manager says employees would tell customers who expressed surprise at the size of a trading fee that market prices were different at the moment when the transaction was executed and blame “time fluctuation” for any difference.
The basic notion there is straightforward enough -- the client doesn't know exactly when you executed the trade, so you effectively get a lookback where you can sell to the client at the highest price within some window -- but I like the name. It is so pleasingly general. It can explain anything. Time fluctuates, and your money disappears. "Why did you charge me so much?" "Oh, time fluctuation." "What?" "Look, human life is fleeting and our pleasures are ephemeral and so is your bank account."
How's Uber doing?
You know, I said last week that Uber Technologies Inc. might be best thought of as "a regulatory-evasion company." And of course it turns out that there's a literature. Here is "Regulatory Entrepreneurship," by Elizabeth Pollman of Loyola Law School and Jordan Barry of the University of San Diego:
This Article examines what we term “regulatory entrepreneurship” — pursuing a line of business in which changing the law is a significant part of the business plan. Regulatory entrepreneurship is not new, but it has become increasingly salient in recent years as companies from Airbnb to Tesla, and from DraftKings to Uber, have become agents of legal change. We document the tactics that companies have employed, including operating in legal gray areas, growing “too big to ban,” and mobilizing users for political support. Further, we theorize the business and law-related factors that foster regulatory entrepreneurship. Well-funded, scalable, and highly connected startup businesses with mass appeal have advantages, especially when they target state and local laws and litigate them in the political sphere instead of in court.
And here is "Strategic Law Avoidance Using the Internet: A Short History" by Tim Wu of Columbia Law School, about "the idea that the Internet might provide profitable opportunities at the edges of the legal system." As I said last week, I am used to notions of regulatory engineering and regulatory arbitrage, which are popular in finance. But the financial approach is usually to optimize within the constraints of the current regulatory system. The tech approach is to ignore the current regulatory system and hope -- with some theoretical and empirical basis! -- that you can make it go away.
Meanwhile, Uber's market capitalization is apparently about $48 billion:
SoftBank and partners including investment firms Dragoneer Investment Group and General Atlantic are offering to spend more than $6 billion for a stake that would value the ride-hailing company at $48 billion, or about 30 percent lower than the valuation it fetched in its most recent round of fundraising, according to people familiar with the deal.
If SoftBank Group Corp.'s consortium succeeds in buying 14 percent of Uber from willing sellers at a $48 billion valuation, then Uber's valuation will be $48 billion, notwithstanding that SoftBank is also buying $1 billion worth of Uber stock from the company at a $70 billion valuation. (Er, I mean, "notwithstanding that SoftBank is also buying about $700 million worth of Uber stock from the company and paying $1 billion for it.") I suppose you might still see articles that say "Uber's last private valuation was about $70 billion," though.
And then when Uber goes public, what valuation will it expect? There is a norm in venture-backed companies that the initial public offering is supposed to make the private investors rich, that a down-round IPO is a fiasco. On the other hand, there is a norm in public companies that if your stock price is $50 on Monday, and you do a stock offering to raise cash on Tuesday, the stock offering will come at a price of, you know, $50 or $48 or $45 or something -- certainly not $70. You don't get to just make up the price that you like when you offer shares: There is a market price for your shares, and if you sell more shares you will do so at some discount to that price. My model for Uber is that it is a large public company that happens to be private, and its IPO will be an interesting test of that theory. If there is an active private market for its stock, and that market values it at $50ish billion, then you'd expect it to IPO at a price of $50ish billion. (Obviously the market price can change between now and the IPO -- and I am probably overstating the degree to which there is an active private market now; SoftBank's tender is really a one-off deal.) IPOing at a premium to its "last private valuation" -- that is, at $80 billion or whatever -- fits less well with that theory.
Well, here is a story about moon unicorns:
As these companies go where no businesses have gone before, they raise questions only fuzzily addressed by the Outer Space Treaty: What are private companies allowed to do in space? Can a company mine the moon or an asteroid and then sell what it has pulled out? How are countries to regulate these businesses?
Internationally, countries have been discussing how to answer these questions. In the United States, Congress has begun tackling regulatory issues. Some warn that if the United States does not set up business-friendly policies and policies, then the start-ups could move elsewhere — including such seemingly unlikely places as Luxembourg.
There is something satisfying about the fact that the path to conquering the moon runs through Luxembourg. Sure there are lots of real physical engineering problems to be solved, in putting your startup on the moon. You have to build a rocket and fly it to the moon. But there are problems of financial engineering, regulatory engineering, tax engineering to be solved as well. You have to build a legal entity and put it in a friendly regulatory jurisdiction.
It is conventional to think that the physical engineering problems are the hard and interesting ones, and the regulatory engineering problems are the dull red tape. Flying a rocket to the moon is literal rocket science; it expands mankind's knowledge and capabilities. Setting up a limited liability company in Luxembourg in order to take advantage of favorable tax treatment does not capture the imagination in the same way. A society that spends more time and energy on financial engineering than on rocket engineering is a society in decline.
And yet. I want to suggest that conquering outer space -- building a rocket to fly to the moon -- is in some ways a less impressive human accomplishment than is altering the fabric of reality in such a way that the (fine, a) great challenge of space exploration becomes the choice of regulatory jurisdiction. The impressive thing is not setting up a Luxembourg legal entity; the impressive thing is setting up a world in which even our grandest and most improbable accomplishments depend on the social choice of regulatory systems. It is the purest imposition of human categories on physical reality, a form of transcendental idealism in which everything is mediated through legal entities and regulatory regimes. You can do anything you can imagine, as long as you first get the tax treatment right.
Anyway I look forward to the moon as an offshore financial center. They can't tax your bitcoins if you earn them in space!
How do bribes work?
Here is a story about a former Russian government minister who "told a court on Monday he thought a bag holding $2 million in cash which he took from Rosneft chief executive Igor Sechin held a gift of expensive alcohol." He is charged with taking a bribe, and his defense is: Well, I thought it was a smaller bribe. Which I guess would be fine?
I mean, I don't actually know the gift rules for Russian government officials. But apparently accepting "a little basket with sausage," "alcoholic drinks," "a wine he 'had never tried before in his life" -- the stuff he thought he was getting -- from a corporate executive with business before him would be "a norm of etiquette," but $2 million in "cash inside a lockable brown bag" would be an illegal bribe. That is a perfectly reasonable position! Obviously a sack of $2 million in cash is a bribe; it goes well beyond anyone's expectations of the gifts demanded by etiquette. And on the other hand, while different institutions have different policies, I think most fair-minded people would agree that a senior government official probably wouldn't violate his public duties by favoring one client in exchange for just a bottle of wine, even a pretty good one. It's just that any line-drawing exercise is going to feel a little arbitrary.
But what does the end of net neutrality mean for you, a bitcoin miner?
I don't know and don't care and don't want to find out, but the headline of this article -- "The End of Net Neutrality Means ISPs Could Crack Down on Cryptocurrencies" -- leads me to believe that it might contain information that is relevant to your interests, if your interests include cryptocurrency mining, and odds are that they do. As the last human being on earth who is not currently mining cryptocurrency, I am looking forward to getting faster and cheaper internet than the rest of you.
People are worried about bitcoin market liquidity.
Here is a strange post from Preston Byrne about the coming "Great Bank Run" in bitcoin:
In Bitcoin’s case, holders are effectively like depositors, whose holdings are dollar-denominated and need to be convertible into dollars on demand. This is the case no matter how high the price of a bitcoin soars, and despite the fact that nothing about this “decentralized” arrangement guarantees that there is an increase in the aggregate number of dollars available to satisfy vastly inflated (dollar-denominated) claims, either systemwide or by reference to particular depositaries.
Holders expect that Bitcoin intermediaries/exchangers (exchanges, wallets) will be in a position to provide them with dollar liquidity when they wish to take their profits ... The most obvious way, in my view, that Bitcoin mania could turn into Bitcoin panic is when a Bitcoin depositor goes to sell their BTC for dollars – and there are no dollars available to satisfy that sell request.
I do not think that anyone actually thinks of bitcoins as dollar-denominated deposits at bitcoin banks. You can tell because people buy bitcoin thinking that it will go up (in dollars). But this is a line of thinking that you see a lot, and not just about bitcoin. The idea is:
- People have bought a thing.
- If they all decide to sell the thing, its price will go down.
- That's a bank run.
But that's not a bank run! The defining feature of a bank run is that people have claims with a fixed dollar value, but the underlying assets may not be enough to support the full amount of the claims. If you sell early, you get the full amount of your claim paid off; if you wait, you might get nothing. On the other hand, in the case of bitcoins or bond funds or really most other financial assets with fluctuating dollar values, if you sell the thing, you will get the market price of the thing at the time you sell it. If you wait, the market price might go down, or up, but there is no structural advantage to getting out early. Yes, absolutely, if bitcoin speculators want to sell their bitcoins for dollars and nobody wants to buy bitcoins for dollars, then the dollar price of bitcoin will go down and the bitcoin speculators will be sad. But that is always true of everything; it is a feature of markets, not of bank runs.
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