Bitcoin Bandits
The Internet has fallen in love with a new celebrity couple - the (alleged) hackers who stole $4.5 billion dollars’ worth of Bitcoin:
Lichtenstein, who went by the nickname “Dutch,” described himself as an angel investor in technology companies, as well as an adviser to multiple startups, according to a public LinkedIn profile. A Twitter account with his name also posted frequently, weighing in on topics such as cryptocurrency trends, the technology sector and the evolution of NFTs.
Morgan, who prosecutors say used the alias “razzlekhan,” promoted herself as a part-time rapper, entrepreneur and media personality on what appears to be her personal website. In one post, the defendant described herself as “the infamous crocodile of Wall Street” and “like Genghis Khan, but with more pizzazz.”
A separate Instagram account that appears to be associated with the defendant included videos of Morgan, as Razzlekhan, rapping and appearing at a wedding ceremony in which she was carried on a throne by roughly eight people.
Ugggggggh. Back in 2016, crypto exchange Bitfinex was hacked and 119,754 Bitcoins were stolen. What happened next was…actually not all that exciting? As Matt Levine points out, the couple were extraordinarily bad at laundering the Bitcoins, and left most of them in the original wallet:
But if you read the complaint, what is striking is how little of the money actually got laundered. Certainly a lot of effort seems to have gone into laundering.
[…]
They allegedly set up seven accounts at AlphaBay and six accounts at a legit crypto exchange to withdraw $186,000 of their millions, and it got frozen anyway. Oh well.
They did have some luck, though; some of the Bitcoins that moved through AlphaBay and VCE 1 got out before the freeze and ended up in their accounts at another exchange (“VCE 5”), where they were allegedly turned into untraceable portable property.
That “untraceable property” was gold that Lichtenstein had sent to his address, so, you know, not really untraceable. It’s easy to joke about how inept the couple was at laundering the funds, but there’s something kind of relatable about it? Upon realizing they’d stolen around $71 million worth of Bitcoin (at 2016 prices), the couple acted almost afraid to move most of it. Would they have acted differently if it’d been worth $3 billion at the time? I don’t know, but leaving 80% of your haul in a traceable crypto wallet doesn’t paint a picture of daring villains on the run. Also, they weren’t on the run at all! They were blogging on Forbes and rapping and trying to do start-ups. I wonder what they thought as they watched their ill-gotten haul grow in value to be worth more than the GDP of a small country.
What they should not have done is try to launder their Bitcoins through AlphaBay and other, registered crypto exchanges using their real identities and only thinly crafted excuses about where the money came from:
As previously stated, although MORGAN advised representatives from VCE 7 that SalesFolk received virtual currency from some of her customers, investigators were not able to locate anything on the SalesFolk website referencing accepting or dealing with cryptocurrency
If I were going to launder a very large haul of crypto - hypothetically! - I would probably leave the United States first, to avoid the FBI or whoever. Then, rather than trying to use regulated exchanges like Coinbase, I’d probably use the sketchy offshore exchanges we talk about around here, and move my Bitcoins there, where the buyers aren’t worried about where they came from. Just thinking out loud!
One more unusual thing about this case is that the government is going to try to give the Bitcoins back to the victims:
In a briefing for reporters, Justice Department officials said they plan to establish a court process for victims to reclaim the stolen Bitcoin.
I don’t know how this would work, but it is an interesting thought experiment - if you had 2 Bitcoins in your Bitfinex account in 2016 and you get those back, you’ve just had a $60,000 dollar windfall. There might be some hacking victims who are about to become very rich. That’s a nice surprise! Or, maybe Bitfinex keeps a bunch of the coins since they did compensate customers somewhat when the hack happened? Would you be mad if you were a victim who received $600 for your stolen Bitcoin in 2016 and the exchange recovers it when it’s worth $40,000? I don’t know. When you’re talking crypto there are an infinite number of possible outcomes, some dumber than others.
Johnson & Johnson
If you are a large company facing legal liability you have a few options. One is you can declare bankruptcy and try to shield your wealth from plaintiffs, but while that is still technically legal, it might not work if the judge won’t sign off.
Another thing you can do is create a secret team at your company to devise a way to create a subsidiary of your company, shift all the legal liability to that subsidiary, and then have it declare bankruptcy:
Johnson & Johnson created a plan last year to limit the financial bleeding from billions of dollars in jury awards to plaintiffs who alleged the company’s Baby Powder and other talc products caused deadly cancers. The healthcare and consumer-goods giant assigned more than 30 staffers to “Project Plato.” In a memo on the project in July, a company lawyer warned the team: Tell no one, not even your spouse.
Another thing you can do, when journalists find out about your secret project, is file a restraining order in court to block publication of any articles about your secret project:
On Thursday, a lawyer for the J&J subsidiary appeared at a bankruptcy hearing and accused attorneys for people who have sued Johnson & Johnson over its talc products of sharing confidential documents with Reuters in a "calculated" effort to try the case "in the press."
Later Thursday, lawyers for J&J and its subsidiary sought a temporary restraining order from the bankruptcy judge to block Reuters from publishing information that, the company claims, comes from confidential documents.
This case shows the many ways the system is rigged in favor of wealthy corporations with extensive legal resources. First, J&J hired Jones Day, a firm so morally bereft they aided Trump’s attempt to overturn the 2020 election. Then, in a not-so-subtle move for such a clandestine caper, J&J contacted Moody’s to make sure the bankruptcy gambit wouldn’t harm their credit rating:
On July 19, the day after Reuters broke the news of the strategy, a J&J official contacted Moody’s, the Wall Street ratings firm, to ask if the subsidiary bankruptcy would harm the company’s pristine credit, according to emails reviewed by Reuters. She was told it likely wouldn’t because the agency would only consider the maneuver’s impact on the finances of J&J, and not those of the subsidiary in bankruptcy.
The exchange underscores why the strategy was so attractive: J&J could create a related-party bankruptcy to limit liability, while avoiding “the burdens” of declaring bankruptcy itself, seven legal experts argued in an amicus brief filed with the court.
Seems good. If this maneuver is approved by a bankruptcy court, J&J will pay only some of the over $3.5 billion in legal judgements against it, and be shielded from any future cases about its dangerous talc product. It would also create a blueprint, following in Perdue’s footsteps, for any company seeking to limit civil liability by filing for bankruptcy despite, and I can’t say this clearly enough, not being bankrupt. J&J has over $31 billion dollars in liquid assets alone. This is a dangerous precedent in a country that rarely makes laws or enforces regulations, instead relying on courts to settle damages.
The details of the complaints against J&J are grim, highlighting why it’s important we have both strong regulations and don’t allow bad corporate actors to wriggle out of paying settlements to those they’ve harmed:
J&J’s bankruptcy strategy is the latest example of the company’s efforts to manage liability amid mounting allegations that asbestos lurks in its iconic Baby Powder and other talc products. A December 2018 Reuters investigation revealed that the company knew for decades about tests showing its talc sometimes contained carcinogenic asbestos but kept that information from regulators and the public.
Tens of thousands of plaintiffs, many with mesothelioma or ovarian cancer, have filed lawsuits alleging that exposure to talc in J&J’s Baby Powder and other company products made them sick. Records J&J produced in response to those lawsuits led plaintiff lawyers to refine their argument: The culprit wasn’t necessarily talc itself, but also asbestos in the talc.
I am sorry but “it wasn’t our product, it was the dangerous asbestos we let get into our product” as a legal defense may explain why the company is facing billions in jury awards. Allowing J&J to pay only a portion of these claims, scheme with its lawyers to thread legal loopholes, and avoid any future responsibility sets an extremely bad precedent. But, just like in the Sackler case, this may all rest on the opinion of a bankruptcy judge in New Jersey, an unsettling prospect.
Meta(verse)
Facebook (Meta, whatever) set an ignominious record last week, when its stock lost 26% of its value after a pessimistic earnings report. Zuckerberg lost $29 billion in net worth as a result, which is bad news for his fake charitable trust. Wall Street analysts and pundits have spilled plenty of ink about the reasons for Facebook’s precipitous fall, but a few factors played a role:
Facebook saw its DAUs (Daily Active Users) decrease for the first time since it went public, despite aggressive growth targets
Apple’s new privacy changes on its iOS phones have impacted Facebook’s ad revenues
The company revealed it had sunk $10 billion into “metaverse” spending, a big money loser, and plans to keep spending more
The DAU drop is interesting, and could continue to be problematic for the company, but today let’s focus on the third point - Facebook’s abrupt pivot into becoming a metaverse company.
The idea behind the Meta rebrand, and Facebook’s siphoning staff away from its core social business, is Zuckerberg’s belief the company can create an immersive digital world that billions of people will hang out in.
In December, the company launched the beta version of their first VR app. It’s called Horizon Worlds, and if it’s a preview of what Meta intends to create, that should worry people:
In theory, kids aren’t allowed in the game. The new virtual-reality app Horizon Worlds, the first foray into the much-hyped “metaverse” for Facebook parent company Meta, is limited to adults 18 and older.
In practice, however, very young kids appear to be among its earliest adopters. The person I met that day, who told me they were 9 and using their parents’ Oculus VR headset, was one of many apparent children I encountered in several weeks on the app. And reviews of Horizon Worlds include dozens of complaints about youngsters, some of them foulmouthed and rude, gleefully ruining the experience for the grown-ups.
I do find it funny that the adults on Horizon Worlds are complaining about those damn kids, because who do you think plays video games? But the bigger problem, obviously, is the platform’s easily-circumvented age restrictions means those kids are in an unsupervised world populated by adults:
But experts say the presence of children in Meta’s fledgling metaverse raises a graver concern: that by mixing children with adult strangers in a largely self-moderated virtual world, the company is inadvertently creating a hunting ground for sexual predators.
It’s impossible to know with certainty that an avatar is a child, but judging by their voices and actions, they’re hard to miss. For a company that is building what it hopes is the future of online interaction, the failure to enforce an age limit — one of its most basic rules — in Horizon Worlds would seem to be an ominous sign.
Of course Meta’s launch strategy was to simply not put any meaningful age verification in place. The company that already has all your data! Not great.
Thus far their moderation of their virtual world is about as good as it is on their core product:
A key difference is that Horizon Worlds is ostensibly adults-only, at least for now. As a result, it lacks the parental controls and guardrails for younger users, such as disabling chat functions, that “Minecraft” and “Roblox” have implemented. Instead, it focuses on empowering users to control their own experience by muting, blocking or reporting bad actors.
You can’t turn off in-game chat, and instead you’re expected to mute, block, and report inappropriate behavior in the game. That’s worked so well on Facebook’s social platform!
A description of how their system works is…I don’t know:
Users who are being harassed, feel uncomfortable or just need a break can raise their wrist — a movement echoed by their virtual avatar — and tap a button with their other hand to activate a “safe zone” feature that pulls them out of their surroundings and brings up a menu of moderation options.
That is awfully close to “safe space” which I’m sure no one will turn into another stupid culture war talking point. In response to criticism of its janky new platform, Meta is rolling out a feature reminiscent of middle school dances:
On Friday, Meta announced a new measure called “personal boundary” that keeps users’ avatars four feet apart by default, with the goal of “making it easier to avoid unwanted interactions.”
Don’t worry, though, Meta is recording your VR experience - with permission? I guess? - so it can send it off to its moderator farms run by outsourcing firms:
The app continually records each user’s experience, storing the last few minutes on a rolling basis for moderators to review if needed. There are also some human “community guides” in the app — represented by specially marked avatars — who can answer questions and help if summoned. But those moderators are sparse except in the app’s few most populated spaces, and some users say they rarely intervene proactively or enforce the app’s age restrictions.
When you have as much money as Facebook - the company made $12.6 billion in profit last quarter - you can say you are now Meta, and you’re building the metaverse, and you’ve got ten thousand employees working on that rather than making sure anti-vax protest group pages aren’t run by hacked accounts, or whatever. You can say and do all that stuff, but you will mostly be judged by the products you build, because you are a software company that is supposed to be good at building products. When your last two big launches were a Craigslist ripoff that has sky-high fraud rates and a Nextdoor clone, you can’t expect tech and game writers to let you off easy when your Roblox ripoff has glaring harassment and child safety concerns. Also, I’d rather play Minecraft than whatever the hell this is:
Perhaps this was always the way it was going to go - the company is run by a deeply uncool CEO who has total control over the company’s tech and direction. The organization has become too big to manage, and it now faces battles on multiple fronts - tucked into the stock-immolating earnings report was a threat to pull Facebook and Instagram out of Europe if regulators don’t let the company store data in its US datacenters. I have been saying for years that countries do not need Facebook - the tech barrier to building a new social platform is lower than ever, and regionalized social networks could be built by non-Silicon Valley sociopaths. A Facebook-free Europe would be a net good for the bloc, in no small part because they’d be spared the weird legless hellscape Meta envisions for our virtual future.
Inflation
We have talked a bit lately about inflation, and today there was a lot more talk about inflation because some reports came out saying it was still high, and prices of consumer goods were going up. So, surely consumer goods companies - food, gas, toys, things of that nature - would be having a tough time?
Nah, the big companies in many consumer sectors are making tons of money. McDonald’s raised prices and profit “soared” 59 percent. Starbucks raised prices, had “skyrocketing profits” last year, and said it’s going to raise them again. UPS posted record-breaking profits and said it’s going to hike prices in 2022. Mattel forecast a great year as “robust demand” is helping it make money despite supply chain hiccups. Gas prices? They’re great for Exxon Mobil, which had its best quarter in seven years, making nearly $9 billion in profit at the end of 2021.
I am not an economist, but when company after company announces record earnings and profits, and politicians and pundits and journalists say inflation is bad and hurting consumers, I feel like a crazy person. Companies are raising prices because they can, not because they need to! Otherwise they wouldn’t be making huge profits! If their costs had gone up in line with “inflation” they’d be making the same or less money, not a lot more. Right?
The problem with what we’ll instead call “opportunistic price gouging” is only large, powerful corporations benefit from it. Perhaps your local convenience store is making a little more money by charging a few cents more for toilet paper, but chances are their distributor has marked it up too and they aren’t setting quarterly earnings records. Restaurants can’t easily hike their menu prices 10 or 20 percent even if their meat distributors are gouging them and pocketing the profits. The places consumers feel those prices largely get blamed for “inflation” - privately-owned local stores working on thin margins. Amazon has not been immune from consumer price backlash, seeing its retail business flatline as revenues fell at the end of last year. In response they’re - you guessed it! - raising prices on Prime memberships by 17 percent.
Housing
Another thing I find confusing as a non-economist is housing prices. We talked a little about the overheated US housing market, but then I listened to an excellent Odd Lots podcast with a housing market analyst who made some interesting points.
Much has been written - including here - about large private equity and investment firms buying up housing stock to turn into rentals. But! They only comprise ten percent of single family rental ownership. The other ninety percent are individual homeowners with one or more investment properties. One reason for this is that mortgages are historically cheap, and less people are feeling the need to sell their existing home when they buy a new one. With low rates - and lower property taxes on older properties - people can cover their mortgages by renting, building two streams of equity at the same time.
The old fashioned way of thinking about a house was you owned one, and paid into it for years, and if you could afford a nicer house you sold yours and bought another, and continued to build wealth by either paying off your mortgage or rolling that equity into nicer, bigger houses. However, with mortgage rates under 4% it is now viable for people to take equity out of their houses and invest in other things, or to buy more than one house, because mortgage rates are lower than property appreciates these days.
So, more people are keeping their old homes rather than selling them back into the market. This, combined with slower-than-expected new home construction and far less foreclosures than the market normally sees - thanks in large part to the government’s mortgage forbearance programs during the pandemic - means housing stocks are unusually low - the podcast guest estimated the US had only around 280,000 single family homes in the market, versus over a million in a “normal” market. When you read about bidding wars and people overpaying for houses, this is because the same number of buyers are competing for one quarter of the available homes. Also, low rates mean people can pay more for the homes that are for sale, because another twenty or fifty grand here or there doesn’t appreciably increase their monthly payment.
This is all the result of long-running, aggressive US fiscal policy to get people into homes at (nearly) any cost. Cheap mortgages combined with fiscal stimulus have allowed a certain class of people to buy a bigger home, or a second home, which concentrates wealth in an already wildly inequitable country.
Why? Because rents continue to rise across the country - as much as 11% last year, most of the increase driven by single family home rentals. Rising rents put more money in the pockets of those 90% of private landlords - their mortgages are locked in for 30 years, so any rent increase is just more equity for them - and keeps renters from getting any closer to being able to save for their own home. Rent control is essentially unheard-of anywhere other than a handful of large US cities. Our existing housing system is designed to funnel an increasing share of the wealth to an upper class of property owners, and it’s been devastatingly effective at keeping the renter class from gaining entry.
Short Cons
The Reload - “The National Rifle Association of America shrank significantly through the first eight months of 2021, according to detailed financial records obtained by The Reload.”
WSJ - “Ford has determined that about 10% of the roughly 3,000 dealerships in its U.S. network are charging above the sticker price, Mr. Farley said. If they don’t stop, Ford plans to take punitive action by shipping them fewer sought-after models, he added.”
WSJ - “With Experian’s new program, called Go, the process in many cases will involve consumers linking recurring nondebt bills to their newly created credit reports. The process is aimed at converting consumers from being invisible to banks to having a credit record and an increased chance of loan approval.”
Detroit Free Press - “The city of Detroit overtaxed homeowners by at least $600 million between 2010 and 2016. After a City Council proposal failed in 2020, Detroit City Council President Mary Sheffield and the Coalition for Property Tax Justice revealed a tentative plan Saturday for compensation and dignity restoration.”
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