Regulatory Armies and Bitcoin 12,000

How’s the CFPB doing?

The people at the Consumer Financial Protection Bureau, who signed up to work there because they wanted to protect consumers from financial companies, are a little bummed that the CFPB’s new acting director Mick Mulvaney has been cutting back on the agency’s enforcement and regulatory actions:

One small group calls itself “Dumbledore’s Army,” according to two of the people who were familiar with their discussions. The name is a reference to a secret resistance force in the “Harry Potter” books.

An atmosphere of intense anxiety has taken hold, several employees said. In some cases, conversations between staff that used to take place by phone or text now happen almost exclusively in person or through encrypted messaging apps.

Read another book,” sure, but also I love that the financial regulators are now communicating with each other by encrypted messages. Isn’t that the sort of thing that they’re supposed to be preventing bankers from doing?

One general rule of regulation is that deregulatory firebrands who are put in charge of agencies they loathe tend to get captured by those agencies. There you are, sitting at a desk all day, surrounded by people who have made a career of regulating, who come to you asking you to regulate stuff. They’ve put a lot of work into the proposal, and they make some good points. If you say yes, they will be happy and grateful, and your day-to-day experience of sitting at the desk will be more pleasant. Also, if you say yes, your personal power and prestige in the government will expand, because you will be running a big agency that does a lot of things rather than a minor agency that does nothing. If you always say no, you will be disliked within the office, and irrelevant outside of it. 

I have been critical of Mulvaney’s appointment as acting head of the CFPB while he keeps his day job as the director of the Office of Management and Budget, but you can see the cleverness of it here. Mulvaney’s personal prestige isn’t bound up in making the CFPB important: He already has another important job, so when he’s at the CFPB he is free to focus on making it irrelevant. And if he constantly disappoints his staff, that doesn’t really make his day-to-day life worse. He doesn’t have to make awkward conversation with them around the water cooler. He can go hang out at the OMB water cooler instead. The CFPB staff can stand around their water cooler, complaining about him and pretending to be wizards, but that is not his problem.

Elsewhere, here’s Bloomberg’s Zeke Faux with “Millions Are Hounded for Debt They Don’t Owe. One Victim Fought Back, With a Vengeance.” It begins with an anecdote about a debt collector threatening to rape a woman because her husband refused to pay a payday loan that, as it turns out, he never actually owed. And here is “Plan to Prevent Banks From Seducing Regulators Dies Under Trump“:

For years, the Office of the Comptroller of the Currency intended to remove hundreds of examiners who work inside the offices of JPMorgan Chase & Co., Citigroup Inc. and other lenders. In just his second week on the job, OCC chief Joseph Otting nixed the effort.

“Upon review, it is not practical to continue the agency’s efforts to move resident examiners out of on-site locations,” Otting, a former banker, said in a statement to Bloomberg News.

It’s the water-cooler thing: If you have to hang out with the bankers all day, then you want to be nice to them; if you let things slide here and there, your day-to-day experience will be more pleasant. On the other hand, if you hang out with the bankers all day you have a better chance of getting more useful information out of them, so this is kind of a mixed bag.

So much bitcoin.

Happy Bitcoin 12,000 Day, first of all, but do not expect me to keep celebrating $1,000 milestones in bitcoin. It’s like the Dow: They keep coming thicker and faster. The interesting question these days is whether we’ll get Bitcoin 25,000 before Dow 25,000. We hit Dow 22,000 in August, Dow 23,000 in mid-October, and Dow 24,000 last week. We hit Bitcoin $10,000 last Tuesday, Bitcoin $11,000 one weird day later, and Bitcoin $12,000 today. So about eight days to add two new $1,000 increments, versus four months for the Dow. (Also bitcoin has actually more than doubled since mid-October, when the Dow hit 23,000.) At those paces, we should be about seven weeks away from Bitcoin $25,000, and about eight weeks away from Dow 25,000. I am calling it here: Bitcoin $25,000 before Dow 25,000. I’ll get some hats made. This is of course not investing advice. It is possible that this is not how you are supposed to do technical analysis.

I am going to get emails about this aren’t I.

Anyway tether! Here is a fun article from Bloomberg’s Matt Leising about tether, a cryptocurrency whose distinguishing feature is that it is worth a dollar. I have always vaguely thought that tether was nonsensical on its face: The point of cryptocurrency is to be a store of value independent from debased fiat currency, etc. etc. etc., so why make a cryptocurrency that is worth a dollar?

But actually it makes a lot of sense. I sometimes scoff around here about how annoying it is for normal humans to actually go and buy bitcoins. But bitcoin is a currency, and so you should think of it symmetrically: Sure it is hard for people in the U.S. to buy bitcoins with their dollars, but it is equally hard for citizens of Bitcoinia to buy dollars with their bitcoins. (You have to go to a bitcoin exchange, sell your bitcoins, and then arrange for a wire transfer or some other antiquated fiat-based way of getting your money.) So if you’re a bitcoin investor with a lot of money in bitcoin, and you want to reduce your bitcoin exposure and increase your dollar exposure, tether is a way for you to buy dollars without having to deal with the dollar system. (Just as bitcoin futures are a way for dollar investors to buy bitcoins without having to deal with the bitcoin system.) You sell your bitcoins for tether, and then the tether sits in your account at a cryptocurrency exchange, giving you price exposure to dollars without actually converting into dollars. “It’s a way to park your gains,” one tether user tells Leising. “It’s what you do temporarily.”

Anyway the way tether is supposed to work is that to buy a tether you give Tether, the company sponsoring it, a dollar, so it should always have enough dollars to back its tether liabilities. “Since there’s $814 million of tether circulating, there should be $814 million parked in bank accounts somewhere.” There are … skeptics, is the basic gist of the article. One reason for the skepticism is that some people are having trouble cashing out their tethers into fiat currency. Here is an announcement from Tether explaining that “Tether is currently expecting continued delays in processing international wires to and from users.” It ends, memorably, with the line “First they ignore you, then they laugh at you, then they fight you.” That’s not even the fake quote! That’s bad! Fighting you is bad! You want the thing at the end to be a good thing! “First they ignore you, then they laugh at you, then they fight you, then you win”: Fine, good, yes. But just stopping at the fighting is no good. What if they win? 

Elsewhere, he sighed heavily: “Bitcoin miner: ‘I haven’t paid for heat in three years.’” “But my electric bill is $4,000 a month!” is the obvious joke reply, but actually he says his electric bill is just $6 a day. Also he gets all those bitcoins. I feel like a bit of a chump, paying for heat, in dollars.

Oh and remember Rentberry? It’s the Uber-for-apartment-rentals-unfettered-capitalism-auction-site-what-have-you that made people angry last year and earlier this year. It is somehow crypto now

Are kitties securities?

The other day we talked very briefly — and yet still for too long — about CryptoKitties, “the most popular application on Ethereum, accounting for over 15% of all transactions on the network.” It’s like, you can buy a cartoon cat, and then … I don’t know, I guess you can sell the cat? Please do not tell me how it works; I genuinely do not want to know. The point here is that Coin Center’s Peter Van Valkenburgh has a post — actually it’s labeled a “Hot Take” — arguing that “Ethereum’s CryptoKitties are probably not securities.” Delightfully he cites to a real legal case that was really called SEC v. Weaver Beaver, and that was really about real beavers. (Well, securitized beavers, sort of.) But the rough intuitive sense is something like:

  1. A crypto-token that represents an investment in some sort of blockchain business scheme, and that you expect to do well if the business does well, is probably a security under the “Howey Test,” which holds that a security is “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
  2. A crypto-token that is a “utility token,” usable to purchase goods or services in some inchoate blockchain business scheme, but whose value fluctuates based on how optimistic people are about that business, is … a hard question? Perhaps a security? Perhaps not? Quite fact-dependent? Not legal advice?
  3. A crypto-token that is just a dumb cat thing, that explicitly admits that there is no underlying business, is probably not a security. (Also not legal advice!)

This creates … incentives. CryptoKitties — like Beanie Babies or baseball cards or other real-world non-securities — really are speculative investments. (I gather.) There is a pyramid-scheme-like element to their pricing. (“The starting price of ‘Gen 0’ CryptoKitties is determined by the average price of the last five CryptoKitties that were sold, plus 50%.”) But because there is nothing — explicitly nothing — behind their trading price, they are not regulated as securities. The same is true, roughly speaking, of bitcoin. (It is not true of PlexCoin, the initial coin offering that the Securities and Exchange Commission shut down the other day, not because PlexCoin had an operating business, but only because it claimed to have an operating business.) If you can develop a crypto-asset that is worth millions of dollars without promising an operating business, not only is that probably easier than building a business (though someone has to draw the cats), it is also less legally risky

Taxes and accounting.

One effect of Congressional Republicans’ tax plan is to cut taxes on corporations. If corporations have to pay lower taxes, then they will have higher profits. The math on this is fairly straightforward. (Pretax profits minus taxes equals net income, is the math.) Higher profits are good. But the accounting math is slightly more complicated. “Bank of America Corp. Chief Executive Officer Brian Moynihan said his firm would also take a hit, having to decrease the value of its deferred tax assets.” The rule is that if you lost money in the past, that means you can pay lower taxes in the future, but if taxes go down in the future then the future value of your past losses to offset taxes also goes down. By lowering taxes, the bill will lower the value of Bank of America’s past losses to offset future taxes. That is … a bad thing, accounting-wise … but it requires a certain amount of mental gymnastics to conclude that it is a bad thing economically. Accounting says your past losses are good and your future lower taxes are bad. Common sense might disagree.

Another effect of the tax plan is to immediately tax multinational companies on certain income that they previously earned overseas. If corporations have to pay a big tax next year, then they will have less money next year, even if in the future they will have higher profits. Here, again, the accounting is not quite the same as the naive math. Apple Inc., for instance, “would immediately have to pay an estimated $31.4bn on its past overseas earnings, according to Richard Harvey, a tax professor at Villanova University who has testified before the Senate on Apple’s tax affairs.” On the other hand, Apple “estimates that it would have to pay $78.6bn in taxes if it brought the money back under the current regime.” (“However, with Apple choosing to defer the tax indefinitely, that bill is unlikely ever to come due in full.”):

The difference between the two numbers is at least $47bn, a figure that exceeds the annual profits of any other US company.

Unlike most other US multinationals, Apple has already taken billions of dollars of charges in past years to reflect its potential taxes. It has set aside $36.4bn for those bills — more than the tax charge it is now likely to face — and would likely record the difference as a one-off profit.

The cash-flow impact is: Next year Apple will have to pay $31.4 billion that it wouldn’t have had to pay under the current regime. That is a huge new one-time expense, which seems bad.

The impact under U.S. generally accepted accounting principles is: Next year Apple will have to pay $31.4 billion, but it had already reserved $36.4 billion for that expense, and will be able to release the reserve. That is a $5 billion one-time profit, which seems good.

The economic impact is: Next year Apple will have to pay $31.4 billion, which is $47 billion less than the $78.6 billion that it sort of expected to have to pay, but the $31.4 billion is now and the $78.6 billion was indefinitely deferrable, so the actual economic goodness or badness is a somewhat subjective and debatable matter. The GAAP approach — using Apple’s reserve as its best guess about the expected present value of that $78.6 billion — is as good as any I guess. 


The proposed tax changes would also make debt more expensive for companies by lowering the corporate tax rate and placing a cap on the corporate interest deduction. Those changes could stress some of the most highly indebted companies, which typically write off interest payments to ease their debt burdens.

Well, placing a cap on the interest deduction, sure. But lowering the tax rate only makes debt more expensive from a certain perspective. If the tax rate is 35 percent and you make $150 in earnings before interest and taxes and pay $50 of interest, you have $100 of pretax income and pay $35 of taxes, leaving you with $65 of profit. The debt cost you $50 of pretax income, but it also saved you $17.50 of taxes (i.e. the tax on your $150 of EBIT would have been $52.50 without the interest payment), so its net cost was $32.50. If on the other hand the tax rate is 20 percent and you make $150 in EBIT and pay $50 of interest, you have $100 of pretax income and pay $20 of taxes, leaving you with $80 of profit. The debt cost you $50 of pretax income and only saved you $10 of taxes (i.e. the tax on your $150 of EBIT would have been $30 without the debt), so its net cost was $40. The debt has gotten more expensive. But also you have more money. Eighty dollars is more than $65. It is a strange sort of burden.

“Morgan Stanley analyst sees CEO devoting more time to rockets”

Here’s an article about “Why Tesla Could Merge With SpaceX,” and while it may be of interest to those of you who like tech or Tesla or SpaceX or Elon Musk or thorny problems of corporate governance (really, another conflicted all-Elon-Musk merger?), my particular interest is in the sub-headline “Morgan Stanley analyst sees CEO devoting more time to rockets.” It’s just … cute. Morgan Stanley Analyst Sees Eight-Year-Old Boy Devoting More Time to Rockets. Morgan Stanley Analyst Sees CEO Devoting More Time To Trucks, Construction Equipment, Dinosaurs. Actually come to think of it Elon Musk really has been devoting more time to trucks and construction equipment lately, so you never know. People should write children’s books about Elon Musk. (Obviously they have.) “Here is a man who worked really hard and did well in school, and now his job is to play with trucks and construction equipment and rockets and sports cars.” 

Things happen.

SEC Probes If Banks Helped Hedge Funds Inflate Returns. Disney Said to Be Nearing a Deal With 21st Century Fox. JPMorgan, Bank of America Say Trading Revenue to Fall in Fourth Quarter. Why Wall Street’s Finally Pushing to Add Women on Boards. Banker Pay Will Probably Fall When Robots Take Over: Nordea. HNA Is Being Probed Over Reporting of Deutsche Bank Stake. Aetna’s Outgoing CEO Set to Reap About $500 Million if CVS Deal Closes. How Ackman Hopes to Beat Insider-Trading Lawsuit: QuickTake Q&A. Ray Dalio: Watch Out for the Effects of Tax Reform on Tax Migration, the Fiscal Conditions of Affected States and Cities, and Polarity in America. David Rockefeller’s Rolodex. Meet Tatsuo Horiuchi, the 77-Year-Old Artist Who ‘Paints’ Japanese Landscapes With Excel. Airport Novella. How Vladimir Lenin Became a Mushroom. …

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at

To contact the editor responsible for this story:
James Greiff at



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