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Prosecutors Appreciated Panama Papers

Also the CFPB/BCFP, clean coal, goblin treasure and bond market liquidity.

Prosecutors Appreciated Panama Papers

Also the CFPB/BCFP, clean coal, goblin treasure and bond market liquidity.

Programming note: Money Stuff will be off tomorrow, because I will be watching a Federal Trade Commission hearing on whether index funds should be illegal. I’ll be back on Friday and I guess I’ll let you know what they decide? Elsewhere, here is “Why Common Ownership Is Not an Antitrust Problem,” by Judge Douglas Ginsburg.

Panama Papers!

Back in 2016, a bunch of documents from a Panamanian law firm called Mossack Fonseca & Co. were leaked to journalists, “showing how lawyers from Mossack Fonseca worked with European banks to create more than 200,000 offshore shell companies for rich clients, including world leaders, 140 politicians and public officials, star athletes and criminals that were used to hide wealth.” It was a big deal at the time, and since then a number of important people (and Deutsche Bank) have been tripped up by Panama-Papers-related troubles, but mostly not in the United States. Presumably some U.S. citizens are hiding money from the Internal Revenue Service, and presumably some of them were doing it through Mossack Fonseca, but in the aftermath of the Panama Papers you did not really see a lot of prominent Americans exposed as tax evaders. And I sort of forgot about it. 

But yesterday U.S. prosecutors brought their first Panama-Papers-related charges, and the indictment reveals something interesting about what did happen in the U.S. in the aftermath of the Panama Papers: The U.S. government sent an undercover agent to the Bahamas to meet with Mossack Fonseca and see if he couldn’t get them to do some dumb incriminating stuff for pretend clients. For U.S. law enforcement, the Panama Papers didn’t (just) expose actual crimes; they (also) presented an opportunity to create new ones. You can see how the temptation there, for prosecutors, would be irresistible. Not only is it a free trip to the Caribbean, I mean, but also with most actual financial crimes there is an element of uncertainty about proof and intent: Who can say whether an offshore company is a sham, or whether the primary purpose of a transaction is to evade taxes? But if you send an undercover agent wearing a wire and he says “I would like to do sham transactions for the primary purpose of evading taxes,” and the target of your investigation says “yes I love doing shams to evade taxes,” then your proof is a lot simpler.

And so one U.S. citizen (who died in 2017, and whom the indictment refers to as “Client-3”) “started cooperating with the DOJ” after the Panama Papers leak, though I am not sure who approached whom. Client-3 brought an undercover agent to the Bahamas to meet with Dirk Brauer, an investment manager affiliated with Mossack Fonseca:

On or about June 23, 2017, at the direction of law enforcement, Client-3 introduced DIRK BRAUER, the defendant, to the Undercover at a meeting between Client-3, BRAUER, and the Undercover in the Bahamas. The meeting was monitored and recorded by law enforcement. The Undercover posed as a U.S. financial advisor to Client-3. At the end of the meeting, after Client-3 had left, the Undercover told BRAUER, in sum and substance, thatthe Undercover had additional U.S. clients who - like Client-3 – wanted to open offshore bank accounts and invest in offshore properties for the purpose of evading United States income taxes, including any potential inheritance or estate taxes. The Undercover also pitched to BRAUER the idea of laundering money for U.S. clients who had been involved in a pump and dump securities fraud scheme.

I assume by the way that the undercover agents in this line of work are trained to escalate things as much as possible:

Undercover: I have clients who would like to set up offshore accounts to evade taxes.
Target: Sure I can do that.
Undercover: I have other clients who would like to set up offshore accounts to hide pump-and-dump proceeds.
Target: Great.
Undercover: And drug smuggling.
Target: Wave it in.
Undercover: Kidnapping ransoms.
Target: That’s fine.
Undercover: Murder-for-hire.
Target: No problem.
Undercover: Selling nuclear weapons to ISIS
Target: Sure.
Undercover: Wow I’ve never gotten through that whole list before, cool, thanks.

The indictment continues:

Thereafter, DIRK BRAUER, the defendant, and the Undercover communicated for several weeks over BRAUER's personal email account and over the phone to discuss further details of a potential deal between them. During one of those telephone calls, on or about July 31, 2017 - which began with BRAUER indicating that he preferred to speak via Skype or WhatsApp because those communication mediums are "a little more discrete" than the telephone - BRAUER proposed having the Undercover's U.S. clients send money overseas and setting up a fake investment for them. Then, BRAUER would create a fake "loss" to the clients from the investment, so that if anyone questioned where the money had gone, it would look like the money had been placed in an investment that had done poorly. BRAUER then stated, in sum and substance, that after he created the fake "loss" for the money, he and the Undercover could move the money back to the United States for the Undercover's U.S. clients without the IRS discovering it. Under this proposal, as explained by BRAUER, the heirs of the U.S. clients would also be free of any "inheritance issues." 

This is all more or less just an amusing anecdote; the undercover doesn’t seem to have gone any further in inventing crimes for Mossack Fonseca to commit, presumably because prosecutors found enough actual crimes—the indictment mentions several U.S. residents whom Mossack Fonseca allegedly helped to evade taxes—that they didn’t need to go to the trouble of building new ones. (The U.S. residents are all unnamed except for Harald Joachim von der Goltz, a German who lived in the U.S. for a while and who is charged in the conspiracy.)

The allegations are sort of what you’d expect: Mossack Fonseca would allegedly set up shell companies and sham foundations to pretend to own the clients’ assets, and then when the clients needed money the shell companies would allegedly send it to them in faked transactions. One client allegedly pretended to sell a company to his offshore account in exchange for $3 million. A Mossack Fonseca lawyer allegedly asked a U.S. accountant “whether Client-1 would have to pretend to sell all of the company or just some of it,” which seems weirdly fastidious: If you’re just pretending to sell a pretend company, why bother to pretend to hang on to some of it?

Von der Goltz, meanwhile, allegedly kept a lot of his money in accounts that supposedly belonged to his 102-year-old mother, though prosecutors argue that this was a sham. So there is this story about a meeting in London between von der Goltz and Ramses Owens, a Mossack Fonseca lawyer, about what to do with the foundation supposedly controlled by von der Goltz’s mother:

At the meeting in London, United Kingdom, RAMSES OWENS, a/k/a “Ramses Owens Saad,” the defendant, gave a Power Point presentation. In his presentation, OWENS proposed that upon the death of the Mother, the Revack Holdings Foundation be restructured to put a new foundation in place that OWENS - who is not a U.S. taxpayer - owned and controlled. OWENS suggested that if the Revack Holdings Foundation was restructured in this manner, von der Goltz and von der Goltz’s children would be able to evade paying U.S. taxes on the Revack Holdings Foundation’s earnings.

I tell you this story not because the alleged tax evasion is all that interesting, but because I have never previously heard of anyone receiving a PowerPoint presentation about their mother’s impending death. The rich really are different from you and me; they get more PowerPoint presentations.

Anyway the alleged tax evasion isn’t that interesting, but there is a lot of it, and it is all laid out fairly clearly and helpfully. If you want to hide a few million dollars from U.S. tax authorities, you will find like a dozen ideas for how to do it in this indictment. That is not legal advice—it is an indictment, after all—but there does seem to be something accidental about how these people were caught. If Mossack Fonseca had done a better job of keeping its files away from journalists, and of not talking to undercover law-enforcement agents after those files leaked, some of this stuff might have kept working.


You know how Mick Mulvaney, the unenthusiastic part-time head of the Consumer Financial Protection Bureau, is on a kick of calling it the Bureau of Consumer Financial Protection for some symbolic reason that is too subtle for me to understand? Well this is pretty weird:

Changing the name of the Consumer Financial Protection Bureau (CFPB) could cost the businesses it regulates more than $300 million, according to an internal agency analysis obtained by The Hill.

Banks, lenders and other financial services firms subject to CFPB supervision could be required to spend millions of dollars if the agency goes through with a rebranding proposal from acting Director Mick Mulvaney. …

A CFPB analysis of the proposed name change projected additional costs for banks, mortgage providers, payday lenders and credit card companies under the agency’s watch.

The CFPB enforces dozens of financial regulations meant to protect and inform consumers who have purchased loans or lines of credit. The agency’s analysis found that firms would be forced to spend roughly $300 million total to update internal databases, regulatory filings and disclosure forms with the new name in order to comply with those rules.

I have some trouble believing that that number is true, but I want it to be. It is sort of majestic, that a pure formatting change—just moving two words around—could cost companies hundreds of millions of dollars, one spreadsheet entry at a time.

Really, you can’t look at that number and not think that it represents something deeply wrong with the world. That something is not really “overregulation” or “red tape” or whatever; presumably if JPMorgan Chase & Co. changed its name to Dimonia Bank tomorrow, it would impose similar database-updating costs on its counterparties. (The Coase theorem tells you that it should threaten to do that and demand a payment from them to keep its name, but never mind.) The problem is just a profuse redundancy of computer systems each of which is independently maintained and each of which needs to be updated for every dumb name change that occurs in the world.

You can see why people like blockchains, you know? Like: What if everyone’s database was just seamlessly linked up with everyone else’s database, so that if one entity validly changes its name, that name change would be instantly updated in everyone else’s database without millions of dollars’ worth of manual inputting? Surely that is just a … thing … that computers … should do? And “blockchain,” in the financial industry, has become sort of a shorthand word for describing how they might do it. The alternative does, when you think too hard about it, seem dumb. 

Elsewhere, the Washington Post has an in-depth story about Mulvaney’s effect on morale and enforcement vigor at the CFPB/BCFP, which is about what you’d expect (bad). It also has more about the name change stuff:

The change created still more work that career staffers said distracted them from the consumer protection mission. Some were instructed to begin altering the name on PowerPoint presentations, white papers and other documents. About a dozen staffers were asked to serve on a “Name Correction Working Group,” internal records obtained by The Post show. 

Oh man, if you are ever thinking about changing the name of your government agency and you need people to serve on your Name Correction Working Group, I am 100 percent available for that, sign me up. Also here is Mulvaney on the $300 million cost estimate:

“I will note that cost to date of adherence to the statutory name has been negligible,” he wrote. “I also welcome newfound concern from some quarters about the potential burden of Bureau activity upon regulated industry; I’d call that progress.”

Reading that, you can almost imagine that this was all part of his plan. “How can we make the work of consumer financial protection unpopular,” he might have asked himself. “Perhaps we can do it by creating an incredibly dumb and trivial regulation and telling people that it will cost businesses hundreds of millions of dollars,” he might have answered. And then: “What is the dumbest and most trivial regulatory change we could possibly make?”

Tax generation

The idea of “clean coal,” or “refined coal,” is that you take some coal, you do some stuff to it to increase its energy efficiency and remove some pollutants, and then you burn it in power plants instead of regular coal. The refined coal should be more energy efficient than regular coal, so it should be worth more to the power plants. It should also pollute less than regular coal, so it should be better for society if the power plants burn the refined coal. Putting those two things together you might imagine a system of subsidies like this (numbers entirely made up):

  1. Utilities buy regular coal for $75.
  2. Refined coal would burn more efficiently and so would be worth $80 to the utilities.
  3. Also it would cause less pollution, in an amount worth say $10.
  4. So all in all burning refined coal, instead of regular coal, should be worth an extra $15.
  5. But the utilities only internalize $5 of that gain.
  6. It costs $10 to refine it.
  7. So the government pays the utility, say, $7 to use refined coal.
  8. Then the utility pays $10 to refine the coal, gets $5 of efficiency benefit and $7 of subsidies, and is up $2.
  9. And taxpayers get $10 of pollution reduction for $7, and are up $3.

That is not how refined-coal subsidies work.

Instead, according to this Reuters article about Wall Street investments in refined coal tax credits, it’s more like this (numbers closer to  real-ish):

  1. Utilities buy regular coal for $75.
  2. They sell the regular coal to coal refiners for $75.
  3. The coal refiners refine it.
  4. They sell it back to the utilities for $73 or $74.
  5. So the utilities get some efficiency benefit—from burning more energy-efficient coal—but also pay less for the refined coal than they would for regular coal.
  6. The government gives the refiners $7 per ton in subsidies.
  7. It costs the refiners considerably less than $5 to do the refining.
  8. The refiners pocket the difference ($7 of subsidies minus up to $2 of discount to the utilities minus whatever it costs them to do the refining) as profit.

The weird part here is that the coal refining plants—“which are situated next to coal-fired power plants and typically cost about $4 million to $6 million to develop”—sell the refined coal back to the power plants for less than they pay (the power plants) for the unrefined coal. From a strictly cash flow perspective, it looks like the coal refiners are in the business of buying coal, making it worse, and then selling it back again. That seems like a bad business to subsidize? And in fact, “as originally drawn in 2004, the refined coal tax credit required producers to increase raw coal’s market value by 50 percent to qualify for the subsidy”—as opposed to the current system in which producers apparently reduce the market value by 1 to 3 percent. 

But then the law was changed and now coal refining is better than free for utilities, because it is so lucratively tax-subsidized for the refiners. And because utilities are not allowed to do their own refining to get the tax credit, there is a whole industry of tax-motivated investors who are investing in clean coal. It is a funny list. “Goldman Sachs, one of the world’s most powerful banks, is currently generating estimated annual gross tax credits of about $50 million from two Missouri power plants alone.” Insurance brokerage Arthur J. Gallagher & Co. “has accumulated about $850 million worth of tax credits, mostly from its side business in taxpayer-supported refined coal”; its chief executive officer told analysts “It is our machine. We developed it. We pioneered it.” Mylan NV, the drug company, makes a ton of money on clean coal for some reason. These are not, it seems reasonable to say, firms whose big advantage is their skill at refining coal. They are firms whose big advantage is their skill at refining tax subsidies.

Treasures of goblins

If you’re looking for an amazing Christmas present for the billionaire hedge-fund manager in your life, or for me I guess, “on Tuesday the first book known to be written about a stock exchange went on sale at Sotheby’s Rare Books and Manuscripts online auction, carrying an estimate of $200,000 to $300,000.” It is Joseph Penso de la Vega’s 1688 “Confusion of Confusions,” and it includes such good advice as: “On the off chance that you’re wrong, never give anyone advice to buy or sell shares,” and “Profits on the exchange are ‘the treasures of goblins,’ meaning a profit today could be a loss tomorrow.” If I ever set up a hedge fund I might have to call it Goblin Treasure LP.

People are worried about bond market liquidity

Oh yeah it’s back:

Get ready for a rocky ride in bond markets. The price of a safer banking system is more danger for investment institutions.

U.S. and U.K. regulators last week sounded warnings about the knock-on effects for corporate debt markets when large institutional investors face demands for liquidity. These demands could cause more turmoil than in the past because investors now provide much more corporate funding and are more exposed to collateral calls from derivatives. … The Fed is also concerned about the potential for runs from open-ended mutual funds. A drop in corporate debt prices could prompt a rush to redeem funds, sparking further falls and so on.

Elsewhere: “Price Impact of Trades and Limit Orders in the U.S. Treasury Securities Market.”

Things happen

Nasdaq moves into ‘alternative data’ with Quandl acquisition. SoftBank’s Vision Fund sets up investment team in China. Takeda Wins Shareholder Approval for Its Shire Megadeal. It’s the Worst Time to Make Money in Markets Since 1972. How Ghosn May Have Hidden $70 Million — From the Company That Paid Him. Italian companies and banks cut back bond sales. “Barf burger.” Senator count arbitrage. Sheriff Howard Buffett. Best Jokes of 2018. Dog goalkeeper.

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