New York usury law makes it illegal to charge very high interest rates on loans. If you charge more than 16% on a loan in New York, the borrower might not have to pay you back; if you charge more than 25%, you might be committing a crime. Some people want to charge higher rates on loans, and so they want to structure loans that don’t look like loans to avoid usury rules.

The classic general way to do this is to structure the loan as a purchase. If the borrower — sorry, let’s use a more neutral word, maybe “customer” — has an asset that will pay $100 in cash in a year, you can buy that asset today for $80. You’ll get the $100 in a year, for a 25% return on your money; the customer gets $80 today instead of $100 in a year. That’s a lot like the customer borrowing $80 today at 25% interest, but you have called it a purchase and sale rather than a loan. Legally, this might or might not work, depending on the details (if the asset turns out to be worthless, does the customer still have to pay you?).

Lots of quite normal high-finance lending works this way — “structuring a loan as a sale” roughly characterizes things like the repo market, asset-backed securities or receivables factoring — but, also, lots of shady usurious low-finance lending works this way. […]

Yellowstone Capital, a pioneer in a form of high-risk lending called merchant cash advance, was sued by New York’s attorney general for $1.4 billion for allegedly making illegal loans to small businesses.

For years, Yellowstone lent money at rates that exceeded usury limits – sometimes more than 800% annualized, according to the lawsuit filed in New York state court in Manhattan Tuesday.

{ Bloomberg | Continue reading }

Tech bubbles come in two varieties: The ones that leave something behind, and the ones that leave nothing behind. […]

cryptocurrency/NFTs, or the complex financial derivatives that led up to the 2008 financial crisis. These crises left behind very little reusable residue. […]

World­Com was a gigantic fraud and it kicked off a fiber-optic bubble, but when WorldCom cratered, it left behind a lot of fiber that’s either in use today or waiting to be lit up. On balance, the world would have been better off without the WorldCom fraud, but at least something could be salvaged from the wreckage.

That’s unlike, say, the Enron scam or the Uber scam, both of which left the world worse off than they found it in every way. Uber burned $31 billion in investor cash, mostly from the Saudi royal family, to create the illusion of a viable business. Not only did that fraud end up screwing over the retail investors who made the Saudis and the other early investors a pile of money after the company’s IPO – but it also destroyed the legitimate taxi business and convinced cities all over the world to starve their transit systems of investment because Uber seemed so much cheaper. Uber continues to hemorrhage money, resorting to cheap accounting tricks to make it seem like they’re finally turning it around, even as they double the price of rides and halve driver pay (and still lose money on every ride). The market can remain irrational longer than any of us can stay solvent, but when Uber runs out of suckers, it will go the way of other pump-and-dumps like WeWork.

What kind of bubble is AI? […]

Accountants might value an AI tool’s ability to draft a tax return. Radiologists might value the AI’s guess about whether an X-ray suggests a cancerous mass. But with AIs’ tendency to “hallucinate” and confabulate, there’s an increasing recognition that these AI judgments require a “human in the loop” to carefully review their judgments. In other words, an AI-supported radiologist should spend exactly the same amount of time considering your X-ray, and then see if the AI agrees with their judgment, and, if not, they should take a closer look. AI should make radiology more expensive, in order to make it more accurate. […]

Cruise, the “self-driving car” startup that was just forced to pull its cars off the streets of San Francisco, pays 1.5 staffers to supervise every car on the road. In other words, their AI replaces a single low-waged driver with 1.5 more expensive remote supervisors – and their cars still kill people. […]

Just take one step back and look at the hype through this lens. All the big, exciting uses for AI are either low-dollar (helping kids cheat on their homework, generating stock art for bottom-feeding publications) or high-stakes and fault-intolerant (self-driving cars, radiology, hiring, etc.).

{ Locus/Cory Doctorow | Continue reading }

• You buy a stock, its value keeps going up, you don’t sell it and you don’t pay taxes.

• If you need cash, you go to your broker and take out a loan, secured by the value of the stock.

• If the stock keeps going up, you never pay back the loan, and you can borrow more money if you want.

• Eventually you die, your heirs get the stock, and they don’t pay taxes on your gains. (This is called the “basis step-up”: When you inherit stock, the IRS pretends that you paid market value for it, so you don’t have to pay taxes on the previous gains.)

This is sometimes called the “buy, borrow, die” tax strategy.

{ Bloomberg/Matt Levine | Continue reading }

Just as mobile unleashed new types of applications through new capabilities like GPS, cameras and on-the-go connectivity, we expect these large models to motivate a new wave of generative AI applications.

{ Seqoia | Continue reading }

The simplest form of investment scam is that you promise people some attractive return on their investment […] There are two basic approaches, which are:

A reasonable return, or
An insane return.

The first approach was made famous by Bernie Madoff […] The advantage of this approach is that it can attract sophisticated investors: Madoff was able to raise money from rich people and funds-of-funds because, in their obviously flawed due diligence, they concluded that the returns he promised were plausible. […]

The second approach […] you mostly don’t want sophisticated investors. It is plausibly harder to trick sophisticated investors than it is to trick unsophisticated ones. This is like why advance-fee scam emails have lots of typos: “By sending an initial email that’s obvious in its shortcomings, the scammers are isolating the most gullible targets.” Promising a 1,000,000% return ensures that you never end up talking to anyone but the most gullible possible marks. […] Here’s a good Securities and Exchange Commission enforcement action against an alleged vaguely crypto-ish fraud: […]

According to the SEC’s complaint filed in the U.S. District Court for the Eastern District of Michigan, Chandran, Davidson, Glaspie, Knott, and Mossel falsely claimed that investors could generate extravagant returns by investing in a blockchain technology called CoinDeal that would be sold for trillions of dollars to a group of prominent and wealthy buyers. […]

Chandran, a recidivist securities law violator and convicted felon, claimed to own a unique blockchain technology that was on the verge of being sold for trillions of dollars to a group of reputable billionaire buyers (“CoinDeal”). Chandran further claimed his business required interim financial support until the sale transaction closed. Together with and through other named Defendants, Chandran targeted mostly unsophisticated investors with false and misleading promises and representations that investments in CoinDeal would soon yield extremely high returns from the imminent sale of his business. Ultimately, there was no sale, and no distribution of proceeds, because CoinDeal was a sham. […]

Chandran typically provided status updates on the supposed deal, including but not limited to: the involvement of foreign central banks and the United States Department of Homeland Security; the latest board meetings of the consortium of wealthy buyers; the role of certain political figures; and the causes of “temporary” delays to the sale closing. These updates were designed to lull investors and induce them to continue investing in CoinDeal. […]

Then of course the “deal” would not close and there would be excuses, which included “the engineer … called in sick yesterday” and “the bank wants a new set of documents.” […] My favorite part, though, might be the section about Linda Knott. According to the SEC complaint, she didn’t know these people, and wasn’t in any real sense a part of their alleged scam. She just used their alleged scam as a substrate to run her own alleged scam:

In February 2021, Knott learned of CoinDeal through one of Glaspie’s teleconferences […] Knott started collecting funds for CoinDeal through an investor group called Together We Profit. Together We Profit was a loose arrangement of individuals interested in participating in CoinDeal. … Knott facilitated investment by lowering the barrier to entry for CoinDeal by allowing prospective investors to participate for as little as $27, which was lower than the amounts permitted by Glaspie. […] While Knott assured investors she would transmit all of their funds to CoinDeal, that was false. She enriched herself by misappropriating approximately $79,000 or more for personal use and purposes unrelated to CoinDeal.

{ Bloomberg | Continue reading }

…Axie is tied to crypto markets. Players get a few Smooth Love Potion (SLP) tokens for each game they win and can earn another cryptocurrency, Axie Infinity Shards (AXS), in larger tournaments. The characters, themselves known as Axies, are nonfungible tokens, or NFTs, whose ownership is tracked on a blockchain, allowing them to be traded like a cryptocurrency as well. […]

Axie’s creator, a startup called Sky Mavis Inc., heralded all this as a new kind of economic phenomenon: the “play-to-earn” video game. “We believe in a world future where work and play become one,” it said in a mission statement on its website. “We believe in empowering our players and giving them economic opportunities. Welcome to our revolution.” […]

Andrew Yang called web3 “an extraordinary opportunity to improve the human condition” and “the biggest weapon against poverty that we have.” By the time Yang made his proclamations the Axie economy was deep in crisis. It had lost about 40% of its daily users, and SLP, which had traded as high as 40 cents, was at 1.8 cents, while AXS, which had once been worth $165, was at $56. To make matters worse, on March 23 hackers robbed Sky Mavis of what at the time was roughly $620 million in cryptocurrencies. Then in May the bottom fell out of the entire crypto market. AXS dropped below $20, and SLP settled in at just over half a penny. Instead of illustrating web3’s utopian potential, Axie looked like validation for crypto skeptics who believe web3 is a vision that investors and early adopters sell people to get them to pour money into sketchy financial instruments while hackers prey on everyone involved.

{ Bloomberg | Continue reading }

Inside, Mr. Pierrat found a literary treasure trove: long-lost manuscripts by Louis-Ferdinand Céline, the acclaimed but equally reviled French author who wrote classics like “Journey to the End of the Night,” published in 1932, as well as virulently antisemitic tracts. […] Céline always maintained that the manuscripts had been stolen from his Paris apartment after he escaped to Germany in 1944, fearing that he would be punished as a collaborator when the Allies liberated the city. […] David Alliot, a literary researcher, said the issue for many French was that while Céline was a “literary genius,” he was a deeply flawed human being. […]

Mr. Thibaudat said he was given the manuscripts by an undisclosed benefactor, or benefactors — he declined to elaborate — about 15 years ago. But he had kept the stash secret, waiting for Céline’s widow to die, at the request of the benefactor, whose wish was that an “antisemitic family” would not profit from the trove, he said in an interview. […]

the manuscripts includes the complete version of the novel “Casse-pipe,” partly published in 1949, and a previously unknown novel titled “Londres” […]

With his lawyer by his side, Mr. Thibaudat met Céline’s heirs in June 2020. It did not go well. Mr. Thibaudat suggested that the manuscripts be given to a public institution to make them accessible to researchers. François Gibault, 89, and Véronique Chovin, 69, the heirs to Céline’s work through their connections as friends to the family, were outraged, and sued Mr. Thibaudat, demanding compensation for years of lost revenues.

“Fifteen years of non-exploitation of such books is worth millions of euros,” said Jérémie Assous, the lawyer and longtime friend of Céline’s heirs. “He’s not protecting his source, he’s protecting a thief.”

In July, Mr. Thibaudat finally handed over the manuscripts on the orders of prosecutors. During a four-hour interview with the police, Mr. Thibaudat refused to name his source. The investigation is continuing.

{ NY Times | Continue reading }

This past winter, Goldman Sachs was closing in on a $40 million investment in Ozy, a digital media company founded in 2013, and there seemed to be a lot of reasons to do the deal. Ozy boasted of a large audience for its general interest website, its newsletters and its videos, and the company had a charismatic chief executive, Carlos Watson, a onetime cable news anchor who had worked at Goldman Sachs early in his career. And, crucially, Ozy said it had a great relationship with YouTube, where many of its videos attracted more than a million views.

That’s what the Zoom videoconference on Feb. 2 that Ozy arranged between the Goldman Sachs asset management division and YouTube was supposed to be about. The scheduled participants included Alex Piper, the head of unscripted programming for YouTube Originals. He was running late and apologized to the Goldman Sachs team, saying he’d had trouble logging onto Zoom, and he suggested that the meeting be moved to a conference call […] Once everyone had made the switch to an old-fashioned conference call, the guest told the bankers what they had been wanting to hear: that Ozy was a great success on YouTube, racking up significant views and ad dollars, and that Mr. Watson was as good a leader as he seemed to be. As he spoke, however, the man’s voice began to sound strange to the Goldman Sachs team, as though it might have been digitally altered, the four people said.

After the meeting, someone on the Goldman Sachs side reached out to Mr. Piper, not through the Gmail address that Mr. Watson had provided before the meeting, but through Mr. Piper’s assistant at YouTube. […] A confused Mr. Piper told the Goldman Sachs investor that he had never spoken with her before. Someone else, it seemed, had been playing the part of Mr. Piper on the call with Ozy. […]

Within days, Mr. Watson had apologized profusely to Goldman Sachs, saying the voice on the call belonged to Samir Rao, the co-founder and chief operating officer of Ozy, according to the four people.

In his apology to Goldman Sachs and in an email to me on Friday, Mr. Watson attributed the incident to a mental health crisis and shared what he said were details of Mr. Rao’s diagnosis.

{ NY Times | Continue reading }

Zillow and other tech firms are in an ‘arms race’ to buy up American homes. […]

increasingly competitive high-tech house-flipping market, otherwise known as the fast-growing “iBuyer” industry. […]

“It’s less about making money off that inventory, at least initially, and more about who can get the most inventory the fastest.” […]

After going public last year, Opendoor has now expanded into more than 40 markets and purchased 8,500 homes in the second quarter, more than any other quarter by almost 50%. The company, which is reportedly searching out a new $2 billion revolving credit facility, also announced this week that it is now willing to purchase the majority of homes in every one of its current markets. 

Zillow announced similarly ambitious plans during its recent earnings call. While it bought only 3,800 homes in the second quarter, Zillow is gearing up to scale massively through the rest of 2021, saying that it expects its Homes division to bring in around $1.4-1.5 billion in revenue next quarter, roughly double what the division made this quarter. […]

“this business model can generate immense profits even if the profit per home isn’t eye-popping to the casual investor or analyst. […] Buying and selling 5,000 homes a month? It gets interesting.”

The spokesperson added that the company has an additional “dream” that people will one day sell one home on Zillow and then buy another on the website too. 

{ Vice | Continue reading }

{ Donald Trump Authentic 24kt Gold Plated Commemorative Bank Note, $4.58 }

unrelated { Japanese whiskey worth $5,800 gifted to Pompeo is missing, State filings say }

It was June 2020, and Mr. Hamamoto, a former Goldman Sachs executive who invested in real estate, was searching for a business to take public through a merger with his shell company. He had raised $250 million from big Wall Street investors including BlackRock, and spent more than a year looking at over 100 potential targets. If he couldn’t close a deal soon, he would have to return the money.

Then, around nine months before his deadline, bankers from Goldman gave Mr. Hamamoto an enticing pitch: Lordstown Motors, the fledgling electric truck maker that President Donald J. Trump had hailed as a savior of jobs. What followed was a swift merger, then a debacle that put two of the biggest forces shaping the financial world on a collision course.

Lordstown went public in October via a merger with Mr. Hamamoto’s special purpose acquisition company, DiamondPeak Holdings. A Wall Street innovation, SPACs are all the rage, having raised more than $190 billion from investors since the start of 2020, according to SPACInsider. At the same time, small investors have become a potent force in the markets, driving up the stock prices of companies like GameStop and lapping up shares of SPACs, which are highly speculative and can pose financial risks.

In Lordstown, those forces eventually collided, highlighting the uneven playing field between Wall Street and Main Street. Small investors began piling into Lordstown shares after the merger closed, attracted to the hype around electric vehicles. That’s exactly when BlackRock and other early Wall Street investors — as well as top company executives, who all got their shares cheaply before the merger — began to sell some of their holdings.

Now Lordstown is flailing. Regulators are investigating whether its founder, Steve Burns, who resigned as chief executive in June, overstated claims about truck orders. The heat is on Mr. Hamamoto. The company has burned through hundreds of millions of dollars in cash. Its stock price has plunged to $9, from around $31. Investors are suing, including 70-year-old George Troicky, who lost $864,201 on his investment, according to a pending class-action lawsuit.

And Lordstown has yet to begin producing its first truck.

{ NY Times | Continue reading }

image { Jackson Pollock at work in his studio in 1950 photographed by Hans Namuth }

An Amazon executive […] “We had beaten publishers into submission. When Amazon asks for a nickel, publishers know to give a dime. We aren’t there yet with the Whirlpools and the Samsungs. We’ll get them under our thumb.” […]

Mr. Bezos’s disdain for taxes […]

Amazon’s yearlong pursuit of a second headquarters […] got results — nearly $600 million in incentives from Virginia officials

{ NY Times | Continue reading }

Canada, one of the most real estate-obsessed nations on earth — and one of the least affected by the 2008 crash — is up 42+% in the past year alone.

Even in Ethiopia, where my wife grew up, a three-bedroom detached house in the capital can cost you $1+ million USD.

Until recently, most people’s house price paradigm looked something like this:

A house’s market price is the maximum amount that a buyer can expect to afford over the next 25–40 years. But because wages are flatlined and purchasing parity is the same as in 1978, the only rational explanation for this current price explosion is a giant debt bubble.

But what if the paradigm — the baseline assumption of what dictates house prices — is changing?

What if the newly-redefined value of shelter is the maximum amount of annual rent that can be extracted per unit of housing? […]

As reader Valerie Kittell put it: “Airbnb-type models altered the market irreversibly by proving on a large scale that short term rentals were more lucrative than stable long-term residents.”

We’re in the middle of a paradigm shift to corporate serfdom.

Stop enriching corrupt banks — pay off your mortgages and never look back. Parents and grandparents with means: Help your kids get a start in housing before it’s out of their reach forever.

{ Jared A. Brock | Continue reading }

{ large, printable PDF }

On Sept. 16, 2008, the day after Lehman Brothers filed for bankruptcy, the Reserve Primary Fund “broke the buck”: Its net asset value fell below $1 per share. The fund — often called the first money-market fund — held $785 million of Lehman commercial paper that was suddenly worthless. Although the paper represented only 1.2% of the fund’s total assets of $64.8 billion, demands for withdrawals escalated, and the fund lost two-thirds of its assets within 24 hours. This triggered a general run on money-market funds that stopped only when the U.S. Treasury issued an extraordinary guarantee of essentially all money-market fund liabilities. The episode underscored how important that $1 net asset value is to investors.

Certain cryptocurrencies known as stablecoins are today’s economic equivalent of money-market funds, and in some cases their practices should have us worried that they could break the buck, creating significant damage in the broader crypto market.

One such stablecoin is Tether. With a market capitalization close to $60 billion, it is almost as big as the Reserve Fund was in 2008. Each Tether token is pegged to be equivalent to $1. But, as with the Reserve Primary Fund, the true value of those tokens depends on the market value of Tether’s reserves — the portfolio of investments made with the fiat currency it receives.

Tether recently disclosed that as of March 31, only 8% of its assets were in cash, Treasury bills and “reverse repo notes.” Almost 50% was in commercial paper, but no detail was provided about its quality. “Fiduciary deposits” represented 18%. Even more troubling: 10% of total assets were in “corporate bonds, funds & precious metals,” almost 13% were in “secured loans (none to affiliated entities),” and the remainder in “other,” which includes digital tokens.

{ Bloomberg | Continue reading }

oil on canvas { Picasso, Still Life with Skull, Leeks, and Pitcher, March 14, 1945 }

Long believed by others to be a copy or the work of Leonardo’s studio, the “Salvator Mundi” was purchased in 2005 by a consortium of speculative art dealers for under $10,000. Eight years later, after the painting had been restored and declared the work of the Renaissance master, Bouvier bought it for $80 million after enlisting the help of a poker player to beat down the price.

The dealer swiftly sold it on for $127.5 million to his then-client, Dmitry Rybolovlev. […] And while Rybolovlev later auctioned off the painting for an astonishing $450 million in 2017, to a secret buyer now widely believed to be Saudi Arabia’s Crown Prince Mohammed bin Salman, he nonetheless alleges that Bouvier defrauded him — a claim Bouvier denies. […]

In the documentary, “The Savior for Sale,” an anonymous high-ranking French official claims that Prince bin Salman was adamant that the “Salvator Mundi” be displayed next to the “Mona Lisa” in order to solidify its place as an authentic Leonardo — despite ongoing questions about whether the work is entirely by the Italian master.

The French government ultimately decided not to exhibit the painting under the Saudis’ conditions, which the anonymous official says in the film “would be akin to laundering a piece that cost $450 million.”

{ CNN | Continue reading }

Recognizing that most are not familiar with decentralized finance, or DeFi, details are in order. DeFi does not use an order book like regulated exchanges. Instead, it has over 72,000 liquidity pools. Anyone can be a liquidity provider to these pools or even start one and earn interest (more coins) for their effort. Traders use these liquidity pools to trade cryptos. The entire protocol is run by computer code called an automatic market maker. No humans are involved in the trading on these exchanges.

The largest decentralized exchange is Uniswap. To access it, one must use an electronic wallet away from a regulated exchange and connect it to uniswap.org. This exchange allows customers to trade several thousand different cryptos. Uniswap founder Hayden Adams tweeted that Uniswap executed $6.3 billion of trades on Wednesday, well above Coinbase’s first-quarter average of $3.7 billion. Uniswap experienced no downtime and no slow service. No customer lost money because the exchange let them down.

{ Bloomberg | Continue reading }

oil on canvas on two joined panels { Ellsworth Kelly, Orange Red Relief, 1959 }

related { Around 4.5% of all bitcoin mining takes place in Iran }

related { Crypto-mining gangs are abusing the free tiers of cloud computing platforms — They have been operating by registering accounts on selected platforms, signing up for a free tier, and running a cryptocurrency mining app on the provider’s free tier infrastructure. }

Twelve years on, cryptocurrencies play almost no role in normal economic activity. Almost the only time we hear about them being used as a means of payment — as opposed to speculative trading — is in association with illegal activity, like money laundering or the Bitcoin ransom Colonial Pipeline paid to hackers who shut it down.

Twelve years is an eon in information technology time. Venmo, which I can use to share restaurant bills, buy fresh fruit at sidewalk kiosks, and much more, was also introduced in 2009. Apple unveiled its first-generation iPad in 2010. Zoom came into use in 2012. By the time a technology gets as old as cryptocurrency, we expect it either to have become part of the fabric of everyday life or to have been given up as a nonstarter. […]

Yet investors continue to pay huge sums for digital tokens. […] Their collective value has, however, at times exceeded $2 trillion, more than half the value of all the intellectual property owned by U.S. business.

Why are people willing to pay large sums for assets that don’t seem to do anything? The answer, obviously, is that the prices of these assets keep going up, so that early investors made a lot of money, and their success keeps drawing in new investors.

This may sound to you like a speculative bubble, or maybe a Ponzi scheme — and speculative bubbles are, in effect, natural Ponzi schemes. But could a Ponzi scheme really go on for this long? Actually, yes: Bernie Madoff ran his scam for almost two decades, and might have gone even longer if the financial crisis hadn’t intervened.

Now, a long-running Ponzi scheme requires a narrative — and the narrative is where crypto really excels. […]

are cryptocurrencies headed for a crash sometime soon? Not necessarily. One fact that gives even crypto skeptics like me pause is the durability of gold as a highly valued asset. Gold, after all, suffers from pretty much the same problems as Bitcoin. People may think of it as money, but it lacks any attributes of a useful currency: You can’t actually use it to make transactions — try buying a new car with gold ingots — and its purchasing power has been extremely unstable. […]

It’s conceivable that one or two cryptocurrencies will somehow achieve similar longevity.

Or maybe not. For one thing, governments are well aware that cryptocurrencies are being used by bad actors, and may well crack down in a way they never did on gold trading.

The good news is that none of this matters very much. Because Bitcoin and its relatives haven’t managed to achieve any meaningful economic role, what happens to their value is basically irrelevant to those of us not playing the crypto game.

{ Paul Krugman/NY Times | Continue reading }

related { Whatever Bitcoin Is, It Isn’t Acting Like Money }