Tag: finance

Less than zero

All this discussion of Donald Trump’s nearly-billion-dollar losses and multiple bankruptcies reminded me of my own intellectual debt to Mr Trump. I remember reading about his bankruptcies back in the 1990s, and being genuinely confused and shocked. A mathematician inclines to think of wealth as a number, in a well-ordered place on a number-line. Positive numbers represent assets and negative numbers debts, and total wealth is the sum of all of them. A person with a million dollars has a lot more than a person with nothing, but the person with nothing — I thought — has much more than the million-dollar debtor.

That was wrong, and the Trump bankruptcy first made me realise this.

Wealth isn’t a line, it is a circle, with the large positive and large negative numbers much closer to each other than they are to zero. The person with nothing cannot get to a million or minus a million (except by fluke chances, like winning a lottery). The mogul is used to talking in units of millions, and everyone around him takes it for granted. When Trump found himself unable to meet his obligations in 1990, the banks didn’t just seize his assets. They loaned him more money, on the condition that the banks name someone to actually run his business, and he constrain his personal spending to a $450,000 a month allowance.

Imagine that: A formerly rich man finds himself with less than nothing, and the banks give him the money with which to keep paying them their interest, and himself a monthly stipend of $450,000. The condition is that he stop doing any work. And then he managed to flee his creditors into bankruptcy five years later anyway, while cheating a load of equity investors.

It’s like Napoleon being allowed to take a retinue with him to become ruler of Elba. Just because he had been a sort-of king, you couldn’t leave him with nothing. It would be too cruel, even though there are millions of people who never had anything, and didn’t have the guilt of having plunged the Continent into chaos.

And you can’t expect a rich man to suddenly get a cashier job at the supermarket. Even while you recognise that his contribution to his companies and the wider world has been purely negative. It would be too cruel. He’s one of “us”.

I suppose, as with Napoleon, they worry about the danger of a scorched-earth defense if they try to take what is owed to them in a frontal assault. The person with millions in debts (or better, hundreds of millions) can move his assets and debts around so that the positive never collides with the larger negative. And the creditors, afraid that they’ll end up with nothing, will be eager to make a deal that lets most of the negative disappear.

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(Free parking)

A proposal for a partial unified theory of Trump scandals.

There has been considerable speculation about whether Donald Trump’s $916 million loss from 1995 may be something other than unadulterated “economic genius” (as Rudolf Giuliani called it, because that’s what you usually call it when someone manages to lose nearly a billion dollars in a single year). In particular, some commentators have suggested that these were not real losses, but an example of  “debt parking”: Instead of allowing the losses in his bankruptcy to be written off (in which case, the debt write-down would count as income, cancelling the tax benefit of the loss) it got transferred to an offshore entity controlled by Trump

But here’s another possibility: What if the offshore entity is not controlled by Trump, but by Vladimir Putin and/or the Russian state. Since he hasn’t gone through personal bankruptcy, the debt remains valid, and the creditor can choose to demand repayment at any time. They would essentially own him. That would explain a lot.

Big notes

I remember reading, back in the late 1990s, an article in Spiegel, about the dubious decision of the Euro finance ministers to create a 500 euro banknote. Since the only people who use cash in significant quantities in this millennium tend to be shy people eager not to be singled out for their achievements by prosecutors, the question was raised, why would you want to create a unit of currency that enables law-abiding citizens (and others) to pack five times as much currency into a suitcase as the former favourite $100 bills?* The answer given by Edgar Meister, one of the directors of the Bundesbank, was that Germans had gotten used to having a 1000 Mark banknote, and that if the largest Euro banknote were worth less, people would think this new currency was a weakling.

Eine Währung, die es sich leisten kann, mit so hohen Noten herauszukommen muß wertbeständig sein.

A currency that can afford to produce such large banknotes must be solid.

As everyone knows, that’s why Germany produced this 50 million Mark note in 1923: Continue reading “Big notes”

The masks come off

I think a lot of people — a lot of foreigners living in Britain — are feeling like this character in Paul Murray’s wonderful satire of the financial crash, The Mark and the Void:

“But if you write the truth about our time? How can the truth ever be obsolete?”

“People don’t want the truth,” he says, waving a hand at the streets around us. “They want better-quality lies. High-definition lies on fifty-inch screens. I wrote the damn truth already, Claude. Maybe I didn’t write it well, but I wrote it. And not only did no one want to see it, they made me feel like a fool for even trying. They laughed out the window at me as they sped away on the gravy train.”

“That was during the boom. Now the gravy train has stopped.”

“Yeah, well, I can’t unsee what I saw. The money poured in, and it was like suddenly everyone in Ireland took off their masks, and they were these horrific, rapacious alien beings who if you fell down in the street would just leave you there to die.”

Complete impartiality

Conservative advocates of Brexit are angry that experts whose job it is to protect the stability of the British economy are proving so stubbornly… conservative. Their narrow-minded equations only respond to the boringly conventional changes in tariffs, consumer confidence, investment flows, and the like, and seem to have no place for the growth-multiplying effect of exuberant national sense of purpose and untrammeled Britishness. The most recent offender is Bank of England governor Mark Carney (himself dangerously colonial), last seen protecting Britishness by warning the Scots of the financial implications of their own leap into national autonomy. He warned that a vote to leave the EU could devalue the pound and initiate a recession.

The Conservative Brexit response:

Andrea Leadsom, a Conservative energy minister, accused the Bank’s governor, Mark Carney, of disrupting the markets and jeopardising his independence… “It is institutional ganging up on the poor British voter who is trying to get a decent primary school place and doctor’s appointment.”

The Bank of England governor had “come out with some nonsense that is totally unjustifiable, totally speculative stuff” and predicted that he would be wishing that he had not done it, she said…

Jacob Rees-Mogg, a backbench Tory MP, said Carney should be fired and had become highly politicised in what was meant to be an impartial role.

Yes, we need to protect the impartiality of the Bank of England by firing its governor when his advice supports one side in a political argument.

Cyber Sutton

Asked about the motivation for recent cyberattacks on the Swift (Society for Worldwide Interbank Financial Telecommunication) system, banking security consultant Shane Shook said

These hacks specifically target financial institutions because smaller efforts result in much larger thefts. It’s much more efficient than stealing from consumers.

Shades of Slick Willie.

Taking the lead

The BBC has a surprising headline:

Screenshot 2016-04-15 11.30.25

Leading financial institutions welcomed a crackdown on tax dodging? That’s a surprise. Which institutions are these? Goldman Sachs? Deutsche Bank? Maybe UBS? Well, no. What they mean are International Financial Institutions (capitalised), which is a different thing from financial institutions (such as banks) that happen to act internationally and have the world economy by the throat. Government institutions. Somewhat less surprising.

Even the reference to “financial institutions” (plural) is misleading, since the only institution that is mentioned by name in the article is the IMF. Maybe the World Bank requested anonymity.

 

The value of a reputation

I strongly appreciate the importance of a reputation for probity.

Good name in man and woman, dear my lord,
Is the immediate jewel of their souls.
Who steals my purse steals trash; ’tis something, nothing;
‘Twas mine, ’tis his, and has been slave to thousands.

So many vague accusations and suspicions can float around in everyday life where the best basis for judgement is to appeal to prior probability. But this goes too far:

Mossack Fonseca says it has operated beyond reproach for 40 years and never been accused or charged with criminal wrong-doing.

Mossack Fonseca has just mislaid 11 million documents that show its complicity in a vast web of tax evasion through secret accounts in Panama. Even to say that it has operated legally would be stretching credulity. To say that it has been “beyond reproach”… well, I suppose it’s technically true, since no one knew enough about them to reproach them. Similarly a master burglar, when finally caught with his home full of stolen jewels and cash, could say, “This is an outrage. No one has ever cast such aspersions on my good name.”

Shut it down!

From John Holbo I got this link to weird libertarian rantings by a financial journalist I never heard of. I was particularly struck by this Randian comment

Maybe we should shut Wall Street down for 24 hours, see how everybody who blames Wall Street for everything likes that.

Well, what would happen? I think I know a fair amount about the role of financial markets in the economy, and while I don’t consider them useless, I really can’t see what the problem would be if they were shut down for 24 hours. Not only that, I’m not even sure what their staunchest defenders might claim the problem would be.

In fact, didn’t we try this experiment already? The NYSE, and pretty much all the New York financial industry got shut down for several days or a week after the 9/11 attacks. Did anyone mind? I’ve heard a lot of commentary about the impact of 9/11, and I’ve never once heard anyone even suggest that there had been negative consequences to closing the financial markets for a week.