The Nation Depicts a Mortgage Vulture Who Foreclosed on Homeowners as an FDR-Like Hero To Demonize Chase When It Was Actually Helping Homeowners

Introduction

The Nation, in its issue of October 23, 2017, announced a “Special Investigation: How America’s Biggest Bank Paid Its Fine for the 2008 Mortgage Crisis – with Phony Mortgages!” A complementary piece, “Behind JPMorgan Chase’s Bait-and-Switch,” ran the same day. Both articles were written by David Dayen.

These stories are so fundamentally wrong that they require extensive revision or, more likely, retraction. Not only was I unable to verify a single new claim in the piece, and found numerous, significant errors, but the entire framing is a misrepresentation. Dayen presents “vulture debt” speculator Laurence Schneider as a Michael Lewis-style creative maverick who bravely takes on a corrupt banking behemoth, JPMorgan Chase (Chase).

In fact, even a cursory look into court records will show that, contrary to the article’s wild assertions, Schneider is no benefactor of homeowners. Nor was Schneider substantively victimized by buying the small package of mortgages that is the sole focus of this story, as Dayen bizarrely and insistently claims.

To illustrate the alternative universe these pieces inhabit, here is what the Special Report asserts:

…. [Schneider’s] business model resembled what Roosevelt did in the 1930s with the Home Owners’ Loan Corporation, which prevented nearly 1 million foreclosures while turning a small profit. [His] model exemplified how the administrations of George W. Bush and Barack Obama could have handled the foreclosure crisis if they’d been more committed to helping Main Street than Wall Street.

As even a modest investigation makes clear, this account is false. In reality, how could Bush and Obama have better handled the foreclosure crisis? They could have rewritten the bankruptcy code to force servicers to write down distressed first-lien mortgages to the fair value of the houses. They could have let banks and trusts fail by refusing to prop up reckless counterparty risk, and then purchased their mortgages for next to nothing in bankruptcy, refinancing at the lower principal amounts. They could have provided a real incentive for banks to write down or write-off loans.

Selling loans to Larry Schneider, at a deep discount, is about the worst thing banks could have done for homeowners.

It is difficult to overstate how wrongheaded these stories are. This is not an “ordinary guy vs. bad banker” tale: it is one banker, Schneider, fighting a bank, Chase. To bring public pressure to bear on an otherwise hopeless case, Schneider is trying to spin his interactions with Chase as somehow sinister, when, at the very most, his allegations boil down to a garden variety breach of contract claim. Big bank screws over vulture debt buyer? Since when?

Schneider’s narrative, and The Nation’s stenographic amplification of it, would be bad enough if Chase and Schneider had treated homeowners equally poorly. But as detailed below, Schneider has in fact treated homeowners significantly worse. This core narrative – that Schneider is somehow noble – is arguably even more misleading than the myriad of factual errors and omissions in the piece.

I had assumed that David Dayen was simply unaware of Schneider’s checkered business history, and that The Nation’s editors were on vacation when his stories were published. But actually, Dayen declared in his response to me (see below) that he knew full well that Schneider has been involved in “numerous” foreclosures that are “morally dubious,” but that he doesn’t “need people who uncover abuse and misconduct to be angels.” I am mystified at why Dayen then chose not to write a story about how the non-angelic Schneider had uncovered “misconduct,” but instead swept all of Schneider’s dubious behavior under the rug and thus wrote a very different story.

After reading a preliminary version of this article, The Nation, while not saying much about the rest of Dayen’s articles, explicitly stood by his claim that Chase “received settlement credits for forgiving loans it no longer owned.” The Nation evidently assumes that this charge, at least, can be made to stick.

However, the claim in question is once again based only on Schneider’s interested testimony. Schneider alleged that many of the loans in a big bundle he had been sold in 2009 were forgiven by Chase for settlement credit. A Federal judge pointed out that regardless of who owned the loans, they were forgiven a full two years before the National Mortgage Settlement even existed, and therefore Schneider’s theory could not possibly be correct; she dismissed virtually all the claims in Schneider’s lawsuit with prejudice.

Many others who have considered Schneider’s claims have found them less than credible. Most recently the Department of Justice, which declined to join Schneider’s suit, stated that “[t]he United States […] does not take the position that Chase failed to comply with the terms agreed to in the National Mortgage Settlement” (see note [6] below). It’s hard to be much clearer than that.

If any improper forgiveness occurred with loans not in Schneider’s big bundle, there is no reason to assume that it involved substantial amounts of money, no reason to assume that it was not rectified as soon as the matter was brought to Chase’s attention, and no reason to assume that it was used to claim settlement credits.

In his response to me, Dayen jackknifes from the confident assertions in his published articles (“when [Chase] needed to provide customer relief under the settlements, [Chase] had paperwork created saying it still owned the loans”) to protesting that you can’t prove a negative (“there is no record of whether Chase still took credit for these inactive loans […] there really is no definitive answer”).

I will now give an overview of the major errors in Dayen’s stories, before going on to explain each of them in greater detail:

I. The Nation Has Perversely Acted as a Propagandist for a Mortgage Vulture

There is extensive, readily accessible evidence that Schneider routinely buys severely discounted mortgages and forecloses on the affected homeowners, even in cases where he could easily modify their mortgages instead, while still making handsome profits.

  • The Nation further alleges that Chase victimized homeowners by writing off their mortgages, which in fact is an action borrower advocates and homeowners regularly advocate. On the other hand, Schneider often vetoed or protested these writeoffs because he was holding out for a bigger payoff and could keep collecting from homeowners in the meantime.
  • Dayen glorifies Schneider’s repeated failed lawsuits against Chase as “landmark,” “blockbuster” cases. This is a remarkable exaggeration.

II. Dayen Makes Ludicrous Claims that Chase Writing Off Mortgages Hurt Borrowers and Government Bodies 

Dayen makes the false assertion that Chase’s forgiveness of these mortgages, a pro-homeowner action, violated the National Mortgage Settlement. He makes other ludicrous claims as to how the Settlement supposedly harmed homeowners which demonstrate a fundamental lack of understanding of how homeownership works.

I do not like being put in the position of appearing to defend a malefactor like Chase, but I have seen again and again that the only hope of succeeding against powerful vested interests is to be accurate. False charges, particularly obviously false charges, serve as ready evidence that critics are uninformed and ready to go off half-cocked, and thus can be safely ignored.

Dayen’s claims about the National Mortgage Settlement are in the one of the story titles and so, in some sense, the centerpiece of his article. However, all disinterested parties that have weighed in on Schneider’s “whistleblower” claims have rejected them, including government bodies that would be expected to join his lawsuits if they had any merit. [1]

Dayen goes on erroneously to accuse Chase of foisting costs on homeowners for which they are in fact always responsible, such as the payment of property taxes.

III. The Articles Mainly Amplify Schneider’s Repeatedly Rejected Claims that Chase Harmed Him

One has to wonder why The Nation has published not one but two articles which focus primarily on the complaints of a dubious hedge fund vulture – complaints about an insignificant commercial dispute, which have been repeatedly rejected in court.

Schneider asserts that he is entitled to an unheard-of 1500 times (not 1500%, 1500 times) damages on a mere $200,000 investment in mortgages – mortgages, furthermore, that Schneider and Dayen acknowledge were described to Schneider as deeply defective. To put matters into perspective, Schneider made from a few Chase buybacks alone significantly more than he spent on the so-called “toxic waste” deal (see below for greater detail). He rejected Chase’s proposed buyback of 10 more mortgages that would have benefited homeowners and let him instantly realize additional gains equal to 50% of what he spent on the “toxic waste.” This evidence alone upends Dayen’s assertion that Schneider is benevolent and has only modest profit goals.

* * *None of the information I provide here was difficult for me to obtain, working as a single individual in my spare time from my living room with a $25 research budget. None of it is from controversial sources. All documents are from public records, and many were filed by Schneider himself. Even focusing only on the titular lawsuit, it is clear from just the docket entries that Dayen botched that part of the narrative.[2] The Nation had the resources to verify its own reporting but simply neglected to do so.

I am forced to add reluctantly that this is not the first time that Dayen has made substantial errors in his reporting on foreclosures. Lynn Szymoniak, one of the three focal characters in Dayen’s book Chain of Title, has stated in Figueroa v. Szymoniak et. al., Broward County Case No. CACE13006883 that “Author Dayen’s book is not a credible source for the court’s consideration.” Since I was working closely and actively with Szymoniak and the other protagonists in Dayen’s book, I can independently attest that there are significant errors in that work. I am prepared to discuss those as well.

Below I describe the problems in The Nation’s reporting in greater detail (although not every error, since The Nation makes so many unsupported claims in this two articles that it would overburden most readers to discuss them all. I can provide more backup for each point above than I present in the balance of this document).

I believe that any objective reader of the discussion below will conclude that a retraction is warranted. The Nation’s refusal to do so only reinforces my concerns about the breakdown in editorial quality control that has occurred here.

I. The Nation Has Perversely Acted as a Propagandist for a Mortgage Vulture

According to The Nation, Schneider’s business model “was a win-win-win: Borrowers remained in their homes, communities were stabilized, and Schneider made money.”

Schneider was however “enticed” into bad deals by Chase, which “spun its trickery,” setting up a “shell game” that “looks like a criminal racket” – in fact, “Jamie Dimon and his underlings” have “perfected” the “dark art” of “mak[ing] a killing” while “using other people’s money.” Still quoting The Nation, “Schneider managed to be one of the few investors with the means and determination to fight back.”

After receiving the preliminary draft of this article, The Nation protested that “the point of the article is not that Larry Schneider is a hero.” Reading passages like these, however, it is clear that The Nation explicitly and enthusiastically praised Schneider and his business model.

In reality, Schneider’s practices are starkly at odds with those normally supported by progressives.

We know that Schneider bought distressed mortgages for a pittance. I show below that, despite paying pennies, Schneider has in many cases foreclosed on these mortgages, throwing borrowers out of their homes. This is not a secret: examples are easy to find.

Indeed, Schneider himself complains in his lawsuits that Chase’s loan forgiveness had made it harder for him to foreclose on borrowers! In a 2013 case (Ruiz v. 1st Fidelity Loan Servicing, LLC), Schneider tried to foreclose with botched paperwork but the Minnesota Supreme Court ruled against him. This case is widely cited and has significantly strengthened the position of Minnesota homeowners contesting foreclosure.[3]

A. Examples in Dayen’s own story show Schneider harmed borrowers. Any informed reader of Dayen’s story would know that his homeowner anecdotes don’t fit his “Schneider hero/Chase villain” Procrustean bed.

As a typical example of homeowners that Dayen depicts as “victims” of Chase’s “shell game,” he selects a family, the Warwicks, whose loan was improperly forgiven by Chase. Later, Chase bought back their loan from the mortgage holder and forgave it properly. As a result, the Warwicks got a house free and clear. This makes them victims how, exactly?

According to the story, Chase bought back twelve similar mortgages and forgave them correctly – that’s twelve more homeowners helped by Chase, and in a very big way too.

In November 2012, in fact, Chase offered to buy back all loans that had been incorrectly forgiven of which Schneider was aware, and to pay Schneider a 50-percent premium above what he paid. However, Schneider refused to sell some of the loans back. Schneider insisted that Chase tell at least some of the affected borrowers that the loan forgiveness was a mistake, and that those borrowers, including the Warwicks, should continue to pay Schneider. This allowed Schneider to continue collecting from the Warwicks, apparently for three entire years. Schneider purchased the $160,413 loan on Sept. 29, 2009, for $10,500. Chase eventually repaid Schneider the full $160,413.

Someone here was working at cross purposes to the interests of borrowers, but it wasn’t Chase.

Not only does Dayen’s own reporting contradict his central framing about who was the good versus the bad guy, but he failed to inform readers about what he himself knew about Schneider’s business practices: see below for Dayen’s statement to me that he was well aware of Schneider’s frequent foreclosures when writing the pieces.

B. Dayen left readers in the dark about how Schneider regularly and ruthlessly forecloses on homeowners . According to The Nation, Schneider’s model of doing business involves “being flexible and dealing with homeowners directly” while “work[ing] out new repayment terms, allowing borrowers to stay in their homes.” The Nation thus depicts Schneider as modifying mortgages so that the terms become reasonable, and so making it so everyone can win.

But in county after county, I found foreclosures from Schneider’s companies attempting to toss families from their homes. For instance, in Florida, there are Schneider victims in Palm Beach County, Broward, Miami-Dade, and Orange County at least. There are cases in Ohio, Indiana, Illinois, Minnesota. There’s one in New Jersey active as of February, this year.

I kept finding foreclosures from Schneider companies in state after state until I gave up. There are so many, and they are so widespread, that it’s not feasible without significant resources to figure out how many mortgages he forecloses versus how many he modifies and on what terms. Dayen could have obtained actual evidence bearing on this point by asking Schneider for a list and then analyzing the resulting data. He did not.

We can, however, look at particular cases. We have seen that Dayen interviewed the Warwicks, victims of Chase’s “shell game” who after all was said and done, ended up with a free house from Chase. Now let’s look at a second family, from Schneider’s county; their surname is redacted here for reasons of privacy.

C. An example of  Schneider’s business model: A mortgage buy resulting in Christmas eviction instead of a profitable modification. Willie and Edrica lived in Palm Beach Florida in a squat house with a mowed lawn – not a mansion, but nevertheless a home for their family.

On April 13, 2007, Willie and Edrica took out a $140,000 mortgage from Chase Bank USA NA. They agreed to pay 7.125% over LIBOR, with the rate adjusted every six months subject to certain restrictions. Even by subprime standards this was a terrible deal.[4]

Chase sold Willie and Edrica’s mortgage to Schneider for $7,500, so for 5.4 cents on the dollar. It’s easy to see why The Nation is so impressed by Schneider’s business model – he then modified their mortgage, asking them to pay $900 a month. Consider Schneider’s generosity – he was only asking them to pay a mere 144% interest (not44%) on his $,7500 investment (taking the $900 as the monthly P&I payment on a 30-year mortgage).

Larry foreclosed on Willie and Edrica on Feb. 8, 2011, demanding $138,743.28.

On Feb. 25, Willie and Edrica both filed handwritten letters letting the court know they were seeking an attorney and asking for time to respond to Larry’s foreclosure.

On April 5, Edrica filed this handwritten notice with the court:

Please accept this response although it is past the time allotted time for a reply. We were in court for an extension but the case was heard, before the time we given. We have attempted on many occasions to reach out to the lender and also make arranges including a loan modification without sufficient luck. We disagree with the filings brought against us and the attempt to foreclose. With all due respect to the courts please accept this response to the Notice of Lis Pendens.

Willie filed his own handwritten notice the same day.

In a county where contested foreclosures routinely take 2-3 years, and ten-year foreclosures are not uncommon, Willie and Edrica’s flew through the system like an aggressive cancer.

On August 23, 2011, a Final Judgment was entered against Willie and Edrica for $178,829.56 (so for $40,000 more than was originally demanded). Willie responded with a typed motion and affidavit asking the court to reconsider, stating that he paid until he was no longer able, then was working on a modification, and in any case was never properly served. His motion was promptly denied.

On October 7, Schneider bought Willie and Edrica’s house at auction for $2600. On November 15, Schneider filed for a Writ of Possession to evict them. Willie responded with an affidavit stating that Carmen Mertin, on behalf of Schneider’s company, had offered him $1200 to move. According to Willie:

Because the previous sale date had been cancelled and I was conducting good faith negotiations with plaintiff’s representative, Ms. Mertins to vacate the premises, I was surprised to learn that plaintiff was moving this Court for a writ of possession… I will accept Ms. Mertins offer and voluntarily vacate the premises. I did not vacate the premises as yet because I have two young children and it has been somewhat difficult to find a new location near their school. I am attempting to not let this terrible situation affect them too drastically by moving far away and disrupting their school routine.” [emphasis mine]

Six days later, judge Diana Lewis granted Schneider his eviction order. Willie, Edrica, and their two young children were to be evicted on or after December 28.

There were other ways the story could have gone. Schneider could have written a 5-year mortgage for triple what he paid at 6% interest. The P&I payment on a 5-year $22,500 mortgage ($7500×3) at 6% would have been $435, just under half what Schneider was charging.[5] Willie and Edrica and their kids would still be in their home, and Schneider would have tripled his original investment. He would have done well.

But perhaps not as well as he actually made out. Three years after the Christmas eviction, after presumably renting the house to tenants, Schneider sold the house for $107,500. A respectable profit, considering the $,7500 he paid to Chase and the few thousand in fees he paid to foreclose (even without taking into account the amount Willie and Edrica and other tenants paid him in rent).

D. Dayen offers only a half-hearted defense of Schneider’s business practices. In his response to me, Dayen confirmed that while writing the two articles, he knew about “numerous instances that come up in public records and the body of his complaints of his companies pursuing foreclosures, which while technically legal […] are certainly morally dubious considering the low price paid.” Dayen added that “I would pursue Schneider’s business far differently if I was the business owner but I’m not.”

II. Dayen Makes Ludicrous Claims that Chase Writing Off Mortgages Hurt Borrowers and Government Bodies 

Dayen claims that Chase committed fraud in order to fulfill its obligations under the National Mortgage Settlement of 2012 and he furthermore accuses Chase of harming homeowners and cities in the process. In fact, Chase was forgiving mortgages, which was not only permitted but encouraged by the National Mortgage Settlement. Dayen has to tell a “white is black” tale to depict a pro-homeowner action as somehow detrimental.

A. Contra Dayen, Chase’s mortgage forgiveness program did not violate the National Mortgage Settlement. These claims by Dayen, once again, uncritically repeat allegations made by Schneider. In addition to Schneider’s preposterous $300 million lawsuit for damages on his mortgage purchase, he has also filed a whistleblower (qui tam) suit, alleging that Chase defrauded the federal and state governments in its efforts to meet the terms of the National Mortgage Settlement.

The Nation neglects to inform the reader that, thus far, whenever disinterested parties have weighed in on Schneider’s lawsuits, they have been dismissive. In December 2016, a federal judge threw out his claims under the National Mortgage Settlement, and did so with prejudice (Schneider has appealed). In New York, courts have found three times that, even granting Schneider’s version of the facts, his case was hopeless, leading each time to Schneider amending his complaint and trying again. Already in January 2014, the Obama Department of Justice, invited to support Schneider’s case, declined; its decision has since been reiterated by all relevant state attorneys general and by the Trump Department of Justice.[6]

The Nation charges that “federal appointees” are actually “complicit.” We are to believe there is a conspiracy between the Department of Justice under both Obama and Trump, federal judges and magistrates, and every relevant state Attorney General, along with California’s much praised independent mortgage settlement monitor, Professor Katie Porter, as well as with Chase, and including CEO Jamie Dimon personally, all working together against Larry Schneider. Oh.

Actually reading the cases – instead of listening to Schneider and his lawyers – shows that the courts and other relevant officials have determined that Schneider’s accusations are simply wrong.

The only evidence that The Nation offers for the government’s supposed “complicity” is that “[e]-mails show that the Office of Mortgage Settlement Oversight […] gave Chase the green light to forgive its loans.” Once again, Dayen is complaining that borrowers had their loans forgiven (presumably instead of being foreclosed on).

This is stunning as well as perverse. Dayen of all people should know that one of the major rationales for this part of the National Mortgage Settlement was to keep homeowners in their homes. Forgiving mortgages does that. What Chase did in this case was exactly what the National Mortgage Settlement was designed to do. Yet Dayen falsely depicts this as a bad outcome and an abuse. What is going on here?

B. Contra Dayen, Chase’s mortgage forgiveness did not harm homeowners. The Nation claims that homeowners were “burned” and “exploited” by Chase’s “scam” in forgiving loans that it did not own. Generally homeowners are not hurt by having their loans forgiven – what, then, is The Nation asserting here?

The Nation also claims that a different set of homeowners were harmed by the loan forgiveness program, namely, those who had “abandoned the[ir] homes years earlier.” The Nation asserts that in these cases loan forgiveness “transferred responsibility for paying back taxes and repairs back to the homeowner.” In a flight of poetry, The Nation evokes a “recurring horror story in which ‘zombie foreclosures’ were resurrected from the dead in order to wreak havoc on people’s financial lives.”

I would like to emphasize here that Dayen is claiming that forgiving mortgages is often bad for mortgage borrowers. Since this flies in the face of common sense, it would be interesting if Dayen were onto something here. However, this theory is nonsense. Would any reader object to their bank tearing up their mortgage, a 100 percent unconditional principal write-down? The answer is obvious enough – it sounds like a trick question but it’s not, except to Dayen.

The responsibility for paying property tax and maintaining one’s house lies with the owner of the property. Whether the property is mortgaged, and whether the mortgage loan is forgiven, has nothing to do with it. If a family abandons a home, thinking it will lose it in foreclosure, and later the mortgage is unexpectedly forgiven, the family has two options. It can return home, paying property taxes and doing the necessary maintenance – it then gets what is essentially a free house. Or it can simply walk away, and then the municipality will take the property. In no case is the family worse off when its mortgage is forgiven.[8]

Once again, what does common sense tell us? Are people more likely to take care of a property if they own it outright or if they believe a lender will soon seize it?

Dayen responds to me on this point by specifying that when he called out “zombie foreclosures,” he was referring to “the scourge of unoccupied and un-maintained properties abandoned by banks […] after the former borrowers vacated in expectation of foreclosure.” Dayen asserts that “forgiving liens on these uninhabitable homes does nothing for the former owners,” but does not defend the depiction in the Special Report, where he characterized loan forgiveness in such cases not as neutral, but as positively harmful, producing a “recurring horror story” that wreaked “havoc on people’s financial lives.”

C. Contra Dayen, Chase’s mortgage forgiveness did not harm local governments.The Nation urges its readers to become indignant: “If you pay taxes in a municipality where Chase spun its trickery, you helped pick up the tab.” The tab for what? As a result of Chase’s “shell game,” “abandoned properties deteriorated further, spreading urban blight,” and costing cities money (difficulties ascertaining who owned the property, increased costs to maintain or demolish the buildings, increased police presence to maintain order in such areas).

Does any of this make sense? It is large scale abandonment of houses that contributes to blight, not loan forgiveness, nor does forgiving mortgage debt encourage borrowers to abandon homes.[9]

Let’s consider a real example, a home in Columbus, Ohio.

The owner did not pay their 2016 property tax of $595.14. Nor their delinquent tax of $8,013.11, penalty of $515.03, or back interest of $1,195.25. Finally, the city levied a six-month special assessment of $10,055.94 for maintenance. Since the owner did not pay the city, the mortgage holder could have made these payments instead in order to retain rights for the property, but declined to do so. The city tried to auction the property but, failing to find any bidders willing pay the full amount of taxes, took the property for itself on Oct. 6, 2017 (just a few weeks ago). The mortgage owner that declined to pay the property tax or the special assessment is Mortgage Resolution Servicing, Inc., a company owned by Larry Schneider.

In a particularly bizarre part of the Phony Mortgages article, The Nation insinuates that Chase must have been up to something sinister by (1) investing $100 million in Detroit, (2) waiting until after the investment before forgiving loans in the Detroit area, (3) subsequently forgiving 10,229 liens in Wayne County. I have criticized Chase in the past, but for harming borrowers, not for forgiving their loans.

III. The Articles Mainly Amplify Schneider’s Repeatedly Rejected Claims that Chase Harmed Him

More than on any other topic, The Nation spends its column inches trying to work its readership into a lather over how Chase treated Schneider; the Behind JPMorgan Chase’s Bait and Switch article is, in fact, almost exclusively devoted to this topic. Let us look at these accusations.

Chase sold Schneider multiple bundles of loans. In the first, from 2003-2010, Chase sold Schneider bundles totaling 1003 loans with a face value of $54.1 million. He paid $6.4 million, averaging just under 12 cents on the dollar. The Nation doesn’t indicate Schneider had any problems with this set of loans; it concentrates its criticism on the other bulk deal.

In that second batch of loans, Chase sold Schneider 3259 mortgages with a face value of $156.3 million for $200,000. That trade closed February 25, 2009.

In Schneider’s New York lawsuit, which is a commercial suit on his own behalf, he claims:

“As a direct and proximate result of Defendants’ acts as alleged above, Plaintiffs have been damaged in an amount to be proven at trial of no less than $300 million.”

If Schneider is referring to both sets of loans, Schneider is demanding $300 million in legal damages on an investment of $6.6 million. But if the controversy is mostly over the second deal, then he wants $300 million on an investment of $200,000, more than the face value of this entire bundle of severely impaired loans. Surely, given this level of damages, Schneider must have been treated horribly. Let’s look.

The Nation alleges that Schneider was tricked into believing that the $200,000 package of “toxic waste” was better quality than it turned out to be. Schneider was acquiring loans at 0.13 cents on the dollar, a little more than one thousandth of face value. He was buying them at the height of the worst financial crisis since the Depression.And we are supposed to believe that he thought he was receiving good quality mortgages?

For its part, Chase was unambiguous that this batch of loans was terrible – the disclaimers in the sale agreementare unusually forceful:

While The Nation waxes eloquent over the hardships Schneider experienced with this paltry $200,000 investment, Schneider’s subsequent actions were hardly those of a buyer who thought he had been cheated. He continued to buy mortgages from Chase for the next two years, and the amount he bought was larger than he had ever bought before, both in terms of price and face value.[10]

To give Schneider the benefit of the doubt, there is only one independently verifiable case in which Chase demonstrably screwed up in ways that affected Schneider’s interests: They released about 40 mortgages they had already sold to Schneider. But was Schneider actually harmed by this mistake?

Recall that Schneider purchased the entire “toxic waste” package of 3259 loans for $200,000 plus another 1003 loans for an average of about 12-cents on the dollar. The Nation’s Special Report offers only specific criticisms of the “toxic waste” package. A casual reader would assume that the mistakenly forgiven loans were simply further evidence that something was wrong with the “toxic” package. In fact, this assumption would be wrong: At least some of the loans, including the Warwicks’ loan highlighted in the article, were not from this deal.

In any case, Chase bought back the package of 13 loans for $105,375. The bank offered to buy back and forgive 10 more loans, including the Warwicks’ loan for $100,759; Schneider however refused, evidently assuming he could make more from those mortgages in borrower payments and foreclosures. Chase eventually agreed to buy back the Warwicks’ mortgage and another with similar characteristics for full face value, namely $428,053.61. Altogether, Chase paid Schneider $533,428 to buy back 15 loans.

Summing up, for just 15 loans, Chase paid Schneider more than twice (267%) what he had paid for the entire “toxic waste” bundle which the Nation highlighted, while leaving Schneider in possession of at least 3244 of the original 3259 loans. If he had accepted their offer for the 10 additional loans forgiven in error, he would have realized 317% of the price of the “toxic” deal on which he was supposedly victimized, all the while still owning at least[11] 3234 of the original loans.

Words fail me. This is the abuse that The Nation considers worthy of a Special Report? If this is what The Nation considers victimization, I would like to be victimized, too.

Conclusion

When The Nation states that “[t]elegraphing to executives that they will emerge unscathed after committing crimes not only invites further crimes; it makes another financial crisis more likely,” I absolutely agree. The way to raise awareness of the problem of financial crime is, however, to highlight instances of real wrongdoing, not to bill flimsy accusations largely dictated by a single source as groundbreaking exposés. Doing so trivializes and discredits efforts to illuminate the flaws in our financial system.

The Nation owes its readers better.

NOTES

[1] It is true that the National Mortgage Settlement allowed banks to take credit for modifying or forgiving mortgages that had been securitized and sold off to investors – a rule that richly deserved criticism, and in fact both Dayen and I criticized it at the time. Schneider/Dayen’s accusation in the Special Report is completely different: they do not criticize Chase (along with other banks) for taking advantage of technicalities in the NMS, but incorrectly allege that Chase committed outright fraud, forgiving mortgages with which it no longer had any legal relationship.

[2] Did The Nation run an expose based on lawsuits without pulling an official record of those lawsuits? Their story links to a partial docket, for one of the three cases, at a website called the “Fraud Investigation Bureau,” whatever that is. Why not link to the vastly more credible Court Listener, a free archive derived from the government’s official PACER court case repository? Or link to PACER itself, despite the paywall?

[3] When searching “1st Fidelity loan servicing” (1st Fidelity is one of Schneider’s three companies) – Google returns the Ruiz case first. It’s difficult to understand why this was entirely omitted from the story.

[4] Each adjustment period the loan could increase or decrease no more than 1.5% but could never be lower than 10.313% nor higher than 17.313%.

[5] The P&I for tripling his money on a 30-year mortgage – with, say, a ten-year balloon that assumed that they would be able to refi and Schneider would be able to cash in – would have been $134.90.

[6] Schneider already lost his whistleblower lawsuit. “[Schneider] intimates no facts that could rescue his [False Claims Act] allegations relating to the National Mortgage Settlement and the undisputed facts show that an amendment would be futile,” ruled Federal Judge Rosemary M. Collyer on Dec. 22, 2016, dismissing the core claims with prejudice. With prejudice means case closed: Schneider loses. Moreover, in a brief filed in the whistleblower appeal, docketed June 14, 2017, the government wrote “The United States declined to intervene in this suit and does not take the position that Chase failed to comply with the terms agreed to in the National Mortgage Settlement.”

  • In January 2014, Obama’s Justice Department declined to participate in Schneider’s whistleblower suit. The Nation wrote “…Schneider is also aiding the federal government in a related case against the bank.” No, he is not aiding the government because the Department of Justice, like Judge Collyer, does not believe that Chase committed fraud.
  • Schneider has appealed his whistleblower case: there is an entire appellate case unmentioned by The Nation. In that case, the US government reiterated they do not believe Schneider’s core claim that Chase fraudulently took National Mortgage Settlement credits. Here is the relevant docket, including elections to decline intervention by the US and by over 20 states (every state that filed a notice declined to participate).
  • The “blockbuster” racketeering case is on its fourth amended complaint: that means a judge has found three times that Schneider’s case makes no sense, even granting all of his statements of fact, and three times Schneider has modified his complaint and persisted. Here is the relevant docket.

[7] In fact, many of the loans that Schneider alleged had been forgiven in order to claim settlement credit under the NMS, including the RCV1 loans (the ones in the “toxic waste” bundle), were actually forgiven two years before the NMS even existed.

[8] Dayen might have been attempting to argue that borrowers who have their mortgages forgiven suffer because the IRS regards forgiveness of debt as income and the borrowers therefore face a significant tax liability. However, looking at 26 U.S. Code § 108 – Income from discharge of indebtedness, it’s clear that mortgage borrowers have two outs:

(B) the discharge occurs when the taxpayer is insolvent…

(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged—

(i) before January 1, 2017, or

(ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 2017

[9] In his response, Dayen does not claim otherwise – he there says “blighted properties” often arose because “banks delayed many years before foreclosing on these abandoned properties and failed to maintain them,” which has nothing to do with loan forgiveness and nothing to do with the specific accusations against Chase that are ostensibly the subject of the Special Report.

[10] In the four years leading up to the “toxic waste” deal, Schneider bought 530 loans from Chase for $2,185,227 (face value $16,446,709); in the two subsequent years, he bought 472 loans from Chase for $4,227,229 (face value $37,675,106). See here for a spreadsheet containing all of these loans.

In his response to me, Dayen says that according to Schneider, he continued to buy loans from Chase “because he was trying to establish trust with another point of contact at the bank, so he could resolve the issue with the MLPA [Mortgage Loan Purchase Agreement],” and that Dayen regrets that The Nation’s editors cut this information from the final draft. This is ridiculous – Schneider bought $4 million worth of loans from Chase because he thought he had been cheated on a $200,000 deal?

[11] “at least,” here and above, because we do not know how many of the forgiven loans were actually from the “toxic waste” deal.

What Role Does Tech Play in Blue Ocean Strategy?

I’ve been a certified Blue Ocean Strategy consultant for ages. I used Blue Ocean Strategy years before the book, back when it was a series of articles in Harvard Business Review, and I used it to actually create products and businesses. I used Blue Ocean Strategy at small startups and at Fortune 500 companies.

I didn’t jump in as a theorist: I used Blue Ocean Strategy to make stuff. Working sometimes alone but often in teams, I worked through the value innovation process to formulate strategies then create prototypes, sometimes making them myself and sometimes with others. I focused mostly on software using whatever worked best: LAMP stacks for websites then, later, XCode for apps. I’ve used Java since the earliest releases. Hour for hour I’ve spent more time in various IDE’s than PowerPoint but have spent a lot of time in both.

Given that, I’m often asked what is the role of technology in Blue Ocean Strategy. The official answer is that technology doesn’t matter. Why? Because any Blue Ocean Strategy offering is about buyer value, not technology.

This is correct but overlooks that technology often unlocks buyer value: the value is impossible without the technology. Other times technology genuinely doesn’t matter. It’s often counterintuitive when tech plays a vital role and when it doesn’t so let’s look at two examples. Both are offerings that used the Value Innovation process to develop the offering.

First check out an example from the book that inherently sounds low-tech, Yellowtail, the bestselling Australian wine. Wine? Goes back to the ancient Greeks, Romans, and earlier: nothing new there. Except that Yellowtail is arguably a tech company, using high-end food technology borrowed from the beer and soft-drink industry. Let me explain.

Consider this quote from John Cassella, founder and CEO of Cassella Wines, the maker of Yellowtail:

“We go to great length to make sure that Yellow Tail is consistent from year to year and from bottle to bottle, and that it delivers against our consumers’ expectations,” he told the Chicago Tribune. (emphasis mine)

Of course, a reader might think: every bottle of Yellowtail is the same. Year after year, season by season, it doesn’t matter. Every bottle of Yellowtail Chardonnay tastes just like every other one.

Consider the key factors of Yellowtail from the book. “Use of enological terminology and distinctions in wine communication,” “Above-the-line marketing,” and “Aging quality” are eliminated. “Vineyard prestige and legacy,” “Wine complexity,” and “Wine range” are lowered. “Easy drinking,” “Ease of selection,” and “Fun and adventure” are created.

But how does one eliminate the terminology, specialized marketing, and aging quality for a product that is custom made and differs year-by-year, region-by region? How does one make wine that is always easy to drink, easy to select, and fun?

By eliminating variability.

There is no difference between bottles of the same type of Yellowtail just like there is no difference between batches of beer. One of the founders of modern statistics is William S. Gosset, former lead brewer at Guinness, who developed his statistical theories in the early 1900’s to make beer consistent. Meanwhile, his winemaking counterparts further south, in France, decided old-school is best and to this day some consider any change beyond the methods used by the Romans, updated with steel vats, to be “adulterated.”

Most vintners around the world struggle painstakingly with their grapes and processes whereas beer makers struggle with t-distributions. Adulterated, in winemaking, means quality controlled in beer making.

This type of quality control, along with the agricultural practices that enable it, are technology. But for technology, there would be no Yellowtail; the key factors that add value are not possible without technology. Conversely, the technology is entirely invisible, expressed only in buyer value. How, exactly, does Cassella produce high volumes of consistent wine that taste the same year-after year? Few people know and nobody cares. More to the point, when formulating a strategy, it doesn’t matter, except to the extent that those creating a strategy must know this type of product is possible.

Now let’s pivot to Blue Ocean Strategy mega-hit Nintendo’s Wii. Whereas wine is thought of as low-tech, game consoles are high-tech, right? Actually the Wii is really two Blue Ocean breakthroughs in one. The most important of them, the “casual games” movement, is essentially a no-tech solution.

As part of their noncustomer study, Nintendo strategists famously went into retirement homes when developing the Wii. Did they hope to sell consoles to centenarian’s? Maybe, but the volume would have been negligible. What they really wanted to do is see how the residents passed their time. Nintendo found them playing traditional games: cards, board games, etc… Most of these games were relatively easy to start playing: straightforward, basic rules, but as gameplay advanced they became brutally difficult.

From this insight Nintendo realized their new system had to be approachable, built not for gamers but for non-gamers (noncustomers in Blue Ocean Strategy terminology).

Besides casual games the console had to be approachable. Central to this goal is the second strategic move, which does use high-tech albeit in a different way: a console featuring an easy to use magic wand, the Wiimote. At it’s core is an inexpensive device that was used primarily in airbags called an accelerometer. Airbags use accelerometers to carefully track motion and decide whether it was necessary to deploy. Erring either way — deploying at the wrong time or failing to deploy at the right time — could be fatal. So the accelerometers were highly accurate. Nintendo embedded these accelerometers into their controller. Invisible high-tech, no new chips involved.

There were three consoles for sale at the time. Microsoft’s XBox 360 sold at a loss of about $126 per unit. Sony’s PS3 sold at a loss of about $241 per unit for the expensive version and a loss of $306 for the cheaper one. Nintendo, whose prior console was a distant third, never sold the Wii at a loss.

With Microsoft, Sony, and Nintendo competing who won? Nintendo, and they did so by not competing. Nintendo effectively messaged that traditional gamers should buy an XBox or PS3: either is fine. But they should also buy a Wii because Wii’s are different. More importantly, they messaged to traditional non-gamers to also buy a Wii. Nintendo outsold Microsoft and Sony combined for years. I recently spoke to a Microsoft product manager from those days in the game group and he said, paraphrasing, “Nintendo was a tough competitor; we were blindsided.” Actually, Nintendo wasn’t a “tough competitor” – they didn’t really compete with the XBox 360 at all, and he didn’t realize this years after the fact.

Getting back to tech, the Wii gives us two examples. Despite being a high-tech device — a gaming console — one of the Wii’s primary offerings, casual games, had no technology involved at all. It was a concept about how to make games that appeal to more people. The other, the use of airbag controllers as a magic wand, repurposed existing technology. Without the airbag controllers there would be no magic wand but Nintendo never messaged, and buyers never cared about, airbag controllers.

To buyers the technology is invisible but the value the technology unlocks is vital. That is how technology is used in Blue Ocean Strategy, as a means to unlock value. Oftentimes the value cannot be unlocked without the technology but, even in these cases, we still focus solely on the value.

These are two examples out of countless more. If there is interest I will write more articles about how Blue Ocean Strategy and technology intersect and interact.

Cryptocurrency: Birkins for Geeks

Women bring pawnbroker Tabach-Bank their Birkins as collateral for loans. “We get socialites and a lot more divorcees in Beverly Hills than New York for some reason,” Tabach-Bank, CEO of New York Loan Company, told the New York Times.

Birkin’s are apparently a handbag by Hermès that cost thousands of dollars and can run into fix-figures. Unlike most hedge funds, Birkin bags consistently outperform the S&P 500 as an investment. Also, like hedge funds, only the rich and famous can buy them.

Google returns 567,000 results for “knockoff hermes birkin” which, predictably, cost slightly less and are more democratically distributed. Expert Tabach-Bank says he can usually tell a fake but “if you haven’t bought a fake, you haven’t been dealing in enough bags.”

Which brings us to cryptocurrencies. Assuming that you’re not trying to, say, channel large amounts of money out of China, purchase illegal drugs, or launch a libertarian enclave what’s the point? What’s wrong with the dollar? Or Euro? Or Renminbi? Or Venezuelan Bolívar. OK – pretty much everything is wrong with the Venezuelan Bolívar. But the rest are usually alright.

The whole fiat currencies suck argument doesn’t resonate because there are plenty of currencies to choose from and there’s a whole smorgasbord of stocks and other financial products if you don’t trust government regulators.

I have a theory: Bitcoins are digital bling.

Like most products based on brand value, Birkin handbags have an origin story. In 1983 Hermès CEO Jean-Louis Dumas was seated next to Jane Birkin on a flight from London to Paris when her straw bag fell to the deck.. Voila — a leather version, with a latch, at 1,000 times the price — seemed like a great idea. Sure they could’ve put a latch on the straw bag, or tied it with a string, or used a regular carry-on, or a grocery sack, but let’s run with the story.

Bitcoin also has an origin story. It appeared essentially out of nowhere, on message boards and in IRC chats, a series of theories and code to make and track a new cryptocurrency.

Researchers had theorized about making a type of digital gold but nobody ever seriously advanced the project. On Aug. 18, 2008, the domain name bitcoin.org was registered and on November a link to a paper by the mysterious Satoshi Nakamoto describing a peer-to-peer electronic cash system was distributed on a cryptography mailing list.

By January 2009, with the world economy melting, Nokamoto mined the first block of bitcoins and sent ten to programmer Hal Finney. In 2016, Australian Craig Wright claims to be the real inventor, and had the cryptographic keys to back the claim up, but nobody’s entirely sure.

By now everybody knows the rest. Bitcoin came out of nowhere and went from worthless to, according to Google, $5,670 per bitcoin today. I’ll admit to telling my brother-in-law not to waste his money when it was at $200. Sorry about that Alex.

I was wrong then and I’ll admit to the possibility that I’m wrong now. Maybe it’s just me, or maybe I run contrary to the Winklevoss twins, but bitcoin seems like a digital tchotchke, ideal for illegal drug deals but not much else.

Then again, Birkin bags aren’t much more useful than the straw one’s they sprung from.

Bitcoins, bling for the digital age.

Think about Wired’s guide to interviewing at Google: leave the Rolex at home. More updated versions say millennials especially favor casual dress and work environments.

Stripped of an ability to impress with bling or family background what’s an aspiring techie to do? Create and embrace digital bling, then crank the volume of it to 11. Sure the blockchain technology has genuine value, and the Birkin bag can no doubt hold lots of stuff, but the price of either far exceeds the utility value.

Does that mean Bitcoin and the rest will crash. I’d say yes but, after what I did to poor Alex, I wouldn’t listen to myself on this subject. I believe that Bitcoin is genuinely worthless but others don’t. You can buy a Tesla with it in Eastern Europe, certain forms of travel or hotels, or a college degree from Cyprus. Lots of links say Howard Johnson’s used to accept Bitcoin but a Reddit poster says they stopped when their bitcoins vaporized in 2011, one of the few times I’m willing trust Reddit because who could make something like that up. I didn’t even know HoJo still existed, though I digress.

Apparently Bitcoin still works great for it’s original killer idea, buying pot.

At $5,600 per bitcoin, an early investor could buy an enormous amount of pot. Smoke enough of it and you might even believe there isn’t a bubble. Having lived through the dot-com bubble in CA then the housing bubble in FL I wouldn’t be surprised to see the price of bitcoin evaporate in a cloud of smoke.

Wal-Mart, Profits Shrinking, Bets Big on Buybacks Rather Than Growth

Wal-Mart’s 2016 net income was $14.7 billion, over a billion dollars less than the prior two years which was a billion less than the year before, 2013.

Full disclosure: I don’t like Wal-Mart. Their relentless push to commoditize destroyed countless local stores and small brands that sold through those channels. Their employee compensation stinks except at the C-Suite. Their stores are depressing to visit. I don’t currently live in the US but, back when I did, would go there with visitors from foreign countries who wanted to see what it looked like, an anthropologic exercise.

Founder Sam Walton’s billionaire heirs donated essentially nothing to their own Walton Family Foundation which has about $2 billion in assets thanks to tax shenanigans. Family values. They did support Hillary over His Orange Highness, despite that they normally support Republicans, but that just shows they’re not psychotic. Besides, Hillary used to act like she is from Arkansas and even had the accent. Alas, I digress.

Besides Wal-Mart’s $14.7 billion profit they have $6.9 billion in cash. There is $198.3 billion in assets and $118.3 billion in liabilities so, unfortunately, they’re not going bankrupt anytime soon. They also collected $485.9 billion in gross revenue, an enormous amount of cash. Financials show a five-year R&D investment of zero.

Wal-Mart announced a $20 billion stock buyback and the market went bananas, bidding their stock up about 4.5 percent. Investors must assume that buybacks are going to get customers flying through the front doors somehow.

OK, I’m honesty not sure investors why are so enthused. Wal-Mart has bought back $95.7 billion (inflation adjusted) of their own stock, $19.3 billion of that in the last five years alone. The company is not new to stock buybacks.

But are buybacks for Wal-Mart a good idea? They claim to be making leaps in eCommerce but those claims feel hollow. Everybody knows the top three eCommerce companies are, in order, Amazon, Amazon, and Amazon. Now that Amazon is buying physical stores they can ring up more of the relatively low-margin grocery business that makes up a lot of Wal-Mart revenue. While Wal-Mart is buoyed by their 4.5 percent bump it’s more than offset by a 6 percent drop in June after Amazon announced their Whole Foods acquisition. Amazon is so far ahead in eCommerce that Costco’s stock went down when they announced a new eCommerce initiative: investors don’t like even the thought of competing with Amazon.

Rather than trying to compete with Amazon or buying back their own stock — on track to become the next Sears — why doesn’t Wal-Mart try something different?

It’s a radical idea but how about, as a start, making the stores a pleasant places to visit and work. Invest in infrastructure and employees instead of stock buybacks. Do something different in eCommerce rather than sell the same range of cheap stuff. There is still eCommerce innovation: Alibaba’s AliExpress is, if nothing else, different.

Wal-Mart’s revenue is still much higher than Amazon’s; they sell a massive amount of merchandise. But buying that stuff in a Wal-Mart store remains a serious pain point. To shop at Wal-Mart, the way most people do, first, drive to a store. Park. Deal with the “greeter” — a security guard — and the grunge. Walk around to search for whatever it is you’re looking for under harsh lights. Their employees look oppressed with the creepy dated blue vests. Wait in line to checkout. Bag your stuff. Carry it back to the car then from the car to your house. The experience has the personalization, comfort, and warmth of a DMV, a machine that craps you out with a little more stuff and a little less money than when you walked in.

Buybacks are theoretically for companies that have nothing better to do with their money. Apple, with their $260 billion stash, is an example. But even Apple could, and probably should, buy a European carmaker, avoiding the repatriation problem while fulfilling their strategic desire to create an iCar (and still have a bundle leftover).

Unless the corporate treasury is literally overflowing, Apple-style, managers who say they have nothing better to do with the corporate treasury than buyback their own stock are either incompetent — unable to create new businesses — or dishonest. In either case good corporate governance demands that Board’s have a responsibility to find better managers.

It is unfathomable to believe that Wal-Mart, with declining profits and increasing competition, has nothing better to do than spend an entire year’s worth of profits plus their entire cash reserves buying their own stock. Before their buyback bump Wal-Mart was trading at $79. Five years ago Wal-Mart was trading at $75.81. It’s also impossible to believe that management thought the stock is currently discounted. If anything their relatively flat share-price has escaped the retail armageddon but won’t forever: it’s overvalued, even before the buyback announcement.

The only believable narrative is that Wal-Mart executives do not know what to do about Amazon so they’re buying time and bumping their own bonuses with a pathetic buyback. OK, there is a certain poetic justice in watching Wal-Mart writhe in the same cauldron of disruption they dished out to local stores way back when but that doesn’t mean they shouldn’t at least try to genuinely grow their business rather than play games to jack up EPS.

Prof. Robert Ayres and I proved that the higher a ratio of inflation-adjusted buybacks to market cap results in lower long-term growth. Before this latest announcement, Wal-Mart purchased $95.7 billion. When we ran our study, Wal-Mart had a market cap of $227.7 billion, a 42% ratio of buybacks to market capitalization. Not bad, especially for a retailer; they’re one step above lackluster McDonald’s. But as their market cap declines along with that of other retailers, and their buyback program increases, they can easily slip into the danger zone, a high growth to market cap ratio that signals slower growth.

It’s unclear whether Wal-Mart’s Board asked CEO Doug McMillon if there really weren’t any growth opportunities for the company before agreeing to the buybacks. Whether Wal-Mart might create better long-term value for customers, employees, and shareholders by  investing the $20 billion in something more interesting than buybacks? I’m virtually certain this conversation never took place, which is almost as depressing as shopping at Wal-Mart.

Sneaky Trump Tax Subsidizes Coal & Nuclear Power Plant Owners

Robert Ayres & Michael Olenick

The libertarian bible is Ayn Rand’s Atlas Shrugged. There are two groups of villains in Rand’s dystopia, looters and moochers. Heroes are producers, who create products and services.

I’ll reserve judgment on my own feelings on the book other than to say it’s a perennial  favorite for conservatives. The Library of Congress ranks it as the most influential American book ever written.

Rand’s looters are government officials who rig markets to favor various constituent groups, chief among them existing industries faced with disruptive technology. For example, one of her heroes builds a new type of steel and sells it to the heroine, who runs a railroad. Existing steel companies successfully pressure the government to nationalize the processes and patents “for the common good.”

Rick Perry is Trump’s appointee to the Department of Energy, an agency Perry once vowed to eliminate. Given the excitement in Trump-land many have forgotten about Perry. Sure, Perry is a bona fide idiot but in an administration where somebody called “The Mooch,” discussed, on-the-record, being “cock-blocked” by Trump’s now former Chief of Staff, Perry begins to look almost normal.

But make no mistake, Perry is the typical parasite we’ve come to expect from Trump.

Perry has started a pre-ordained process to subsidize coal and nuclear plant operators, taxing people through artificially high electricity rates to subsidize costly coal and nuclear plants.

What’s the problem with coal and nuclear plants, besides that they’re expensive? Coal pollutes. Badly. Nuclear, when it works well, leaves radioactive waste behind that has a half-life of 24,000 years. When it does not work well, like it didn’t at Three Mile Island, Chernobyl, and Fukushima, it tends to create ecological disasters.

Besides that the two sources of power have serious environmental problems they’re more expensive than alternative energy sources that do not. The US Energy Information Administration released a report on the various costs of energy, here. Spoiler alert: nuclear power costs a fortune to generate. Coal comes next. Then solar. Then wind. Then natural gas. Hydroelectric is marked “N/A” in 2015 but, in 2013, it was cheaper than coal.

The price of wind declined 25% from 2013 to 2016 and the price of solar declined 67%. Assuming those price declines continue — and with the newfound Chinese enthusiasm for renewables that seems a given — it won’t be long before renewables cost less than any fossil fuel.

For Perry, the former Governor of Texas — who works for a guy that promised to Make Coal Great Again — this is a meltdown (I couldn’t resist).

Perry’s still-in-existence Department of Energy has asked the Federal Energy Regulatory Commission (FERC) to begin the rule-making process to subsidize both the cost and profits of coal and nuclear plants.

Perry’s puppet-master’s constituents, with their aging nuclear and coal plants, argue that renewable energy from wind and solar is variable so that backup generators are sometimes needed for days with calm winds or cloudy skies.

For now, let’s ignore the rapid pace of battery progress (which I’ll get to later) and take this assumption as true. There is an easy solution: turn on the inexpensive natural gas plants to make up the difference. In fact, right now, that is exactly how things work: energy companies constantly sell backup energy capacity to one another.

But, under Perry’s scheme, companies would be required to purchase a certain amount of this backup energy from fuel plants that store 90-days or more of fuel on-site. Why 90-days? Because it’s completely impractical to store 90-days of natural gas on-site but easy enough to store that much coal and nuclear fuel.

This is an old-school Rand-style looter giveaway from a bunch of self-described “conservatives” trying to rescue a dinosaur industry that’s choking the world.

Just to clarify: Republicans, through Rick Perry, are working to increase electric bills to subsidize and protect coal and nuclear plant owners. Trump and Perry specifically require people to pay not only for plants but guaranteed profits to the owners of filthy old generation technology. Knock knock to objectvists Rand Paul and Paul Ryan, you’ll both be introducing veto-proof legislation to block this, right?

Now let’s return to the subject of standby electrical power generation. Of course it is needed and natural gas works just fine. End of argument. But even natural gas won’t be needed indefinitely.

There is plenty of capacity that either exists or is in the works and renewables are rapidly dropping in price and being installed. Germany, on average, produces 35% of overall electricity from renewables. But much of the remaining 65% is for factories so on weekends, where fewer factories operate, the percentage is even higher. On Sunday, April 30, 2017, Germany produced 85% of electricity used from renewables.

Longer-term, the solution might come from cars. The price of electric cars is dropping quickly. Electric cars are simpler than internal combustion engines and experts agree will last far longer. More to the point, they already have enormous batteries. So cars can be charged from solar, during daylight hours, then used to power houses during evening hours, then be recharged, from wind power, during sleeping hours. Plus, the economies of scale will make batteries, for battery farms and in-home storage, both cheaper and more efficient over time.

There are other systems to store renewable power and one or more will eventually be perfected.

So the US already has plenty of back-up generation from low-cost natural gas and new technologies are likely to add more as they evolve. Perry’s alleged problem isn’t even real and his solution, subsidizing coal and nuclear plants, is a form of pure theft, a transfer from the most deserving, clean renewable and safe plants, to the least deserving, filthy and dangerous one’s.

Trump and his cronies cabinet are on-track to go down in history as the worst in US history, both individually and as a group. Thanks to Congressional dysfunction much of what they’ve done is by decree and can be expeditiously undone once sanity is returned to the White House. Until then be prepared for higher electric bills to pad the pockets of people who built filthy coal plants decades ago.

This isn’t to say the original engineers were bad — they used the technology they had — but it’s been disrupted and that’s how disruptive innovation works. Low-cost alternative technology that is not ideal is invented. It matures and eventually replaces the existing tech. This is almost always a good thing.

Channeling Gandhi, first they ignored the new tech. They they laughed. Now they’ve enlisted Rick Perry. But the fight is hopeless; it is only a question of when renewables will dominate, not if.

By the way, for anybody interested here is how Rick Perry signs his name to official correspondence.

rp

 

Robert Ayres is a Professor Emeritus at INSEAD.

GM Creates the Perfect Blue Ocean Commuter Car

The top speed between home and work is 90 kph. My daughter I are rarely able to go that fast. Sometimes we’ll stop on the way home, trying to fit our SUV — big enough for the guests we frequently have — into small parking spaces. Recharging every night or two is no problem. Plus my employer has vehicle plug-in spots so I could recharge at work.

Our newest friends just came to Europe from the US. They’re looking for cars but don’t want to spend too much. Their needs are similar to ours.

Fuel prices here are about double what they cost in the US. That SUV that we like, and that we do frequently fill with people and things (though not always), seems to have a hole in the gas tank. Plus there are the fuel strikes.

In the Baojun E100 GM has created the perfect car. For some reason they’re only selling them in China and, even then, only selling 200 of them. Maybe it’s a loss leader though they can jack up the price and I’m sure they’d sell countless of them in Europe. Even Americans with short commutes might buy them.

This car is a no-brainer. Limiting distribution to one country is … well, GM.

The Daily Mail reports the Baojun is supposed to “take on” Tesla’s Model 3.

When I’m not pontificating about buybacks and economics I’m studying innovation and growth; that’s my day job. More to the point the growth I study is at the INSEAD Blue Ocean Strategy Institute where I am an Institute Executive Fellow, a senior research fellow.

The Baojun is not going to “take on” the Tesla Model 3, or the Chevy Bolt. It could compete with a SMART Car but that’s iffy since entry-level SMART cars, powered by internal combustion engines, start at $12,000, over twice the price. Electric SMART cars, that have about the same range and a similar feature set, start at $23,800.

The Baojun does not compete with Tesla, or the Bolt, or the SMART Car: it’s in a category by itself. It renders the rest of them irrelevant.

This is an example of growth, of substantive innovation. Looking at the Baojun it’s unclear how GM produces it at a low enough price to sell for $5,000 but — unless they’re taking a massive loss on every car — they’ve made some change to enable this.

It’s not features: the Baojun is tiny but big enough for two people, a computer and school bag, and a couple bags of groceries.

There is a full-blown GPS system plus it works with Apple CarPlay and Android Auto. The GPS “screen” is your phone. This makes sense: there’s no need for an expensive separate GPS screen.

It’s top speed, ten kph above the fastest speed limit for our daily commute, is just fine. It’s range is more than enough. I’m not sure about safety but nothing moves fast enough during our morning and afternoon commute to do much damage anyway.

The only problem with the Baojun is that it’s impossible to buy one.

Silicon Valley Rejects Shareholder Value Theory: Disrupting the IPO

I’ve written about problems with Shareholder Value Theory (SVT). The constant need to pump an ever-appreciating stock price to anonymous shareholders, the vast majority who contributed nothing to a company, rewards short-term thinking. Buybacks and other financial tricks tower over innovation and growth initiatives.

It looks like Silicon Valley has tired of the nonsense.

Here is an article about a new public company, Social Capital Hedosophia Holdings Corp. (SCH): Fixing the ‘Brain Damage’ Caused by the I.P.O. Process. Their prospectus is here: Social Capital Hedosophia Prospectus.

Missed the IPO? Don’t worry; you were supposed to. Trading on the NYSE the company’s ticker is IPOA.U. Trading opened on September 14 at $10.31; a week later they’re at $10.63. The company has a $600 million pile of cash but no products or services; they exist to buy tech companies.

SCH is a combination of two firms, the well-known Social Capital and stealthy Hedosophia.

Social Capital is founded and managed by Venture Capitalist Chamath Palihapitiya. Their portfolio includes Slack, Forge, Box, Brilliant, and a sizable group of unusually high-quality companies. Palihapitiya sounds like somebody you’d want to stranded on an island with: he’s be interesting company and probably figure a way off. He tends to make a lot of money for himself and the people he works with.

Less is known about co-founder Hedosophia, a venture firm founded in 2012, that filings state has over $1 billion in holdings. The firm’s webpage is retro 1990’s, appearing on the second page of a Google search for the company name and referencing a street address which, on Google Maps, is a nondescript building with no signage. Hedosophia’s founder is 34 year-old Ian Osborne, of Osborne & Associates and Connaught. These firms have apparently acted as financial advisers “for eight of the fifteen most valuable private companies in the technology sector.” It’s unclear why the secrecy is necessary; it gives off a Le Carré vibe.

SCH is a Special Purpose Acquisition Company, or SPAC. The last and only time I came across a SPAC it was used to take the law firm of David J. Stern public. Stern is the crooked foreclosure lawyer who fabricated paperwork to expedite foreclosures, earning himself two yachts, a mansion and, eventually, permanent disbarment. That SPAC initially traded under the ticker CACA (there are some things you can’t make up) then changed to DJSP, David J. Stern Enterprises. DJSP worked out great for the shorts at least: Stern’s firm quickly went bankrupt. Though, I digress…

The purpose of SCH is to to enable flexibility in the cumbersome IPO process. On one hand, it’s impossible to feel bad for 30-something tech executives flying private jets and repeating the same Power Point dozens of times to potential investors. Especially since, absent a disaster, they will reap a fortune at the end of the process. But those rules can also harm ordinary employees who are subject to rules, because of their tiny stock grants, that are meant for Masters of the Universe.

I watched this happen with a number of companies during the first dot-com boom. Regular employees held locked out stock and watched their chance to finally buy a house or pay off student loans vaporize. Many were taxed on phantom income that never materialized under rules I won’t pretend to understand much less explain. These were not top-tier b-school alum; they were writers, computer programmers, online forum moderators — people who knew nothing about capital markets — and ended up owing a fortune. Their bad for not studying the rules more? Maybe, but since the rules exist to protect the clueless those same rules could have done more to protect them.

SCH’s SPAC is supposed to change this. The idea is that one or more companies would be backed into the SPAC and skip the normal IPO process. No roadshow, no lockouts, and fewer worries about pricing. One bucket of capital goes to the company or companies, a controlling batch of stock goes to the SPAC, lawyers prepare lots of paperwork and, voila, the company is public sans IPO.

Another potential model would be multiple businesses put limited shares in the SPAC and it functions more like a publicly traded private equity firm. Social Capital’s hiring of private equity guru Marc Mezvinsky (yes, Hillary’s son-in-law) as vice chairman, and the use of plural verbiage in filings, suggests they might pursue this route. Plus, they explicitly call out purchasing only one firm as a risk factor although that is normally how SPAC’s work.

Like I said, the only time I’ve seen a SPAC in real-life it was a disaster. During it’s short life I communicated daily to DJSP investors, warning them. At first they weren’t thrilled. “I’ll kill you – no, I’ll have you paralyzed from the waist down,” is how one eloquently put it as I explained my data showing DJSP to be garbage. “Knock it off, look at the data, and direct your anger towards Stern,” I answered.

We continued communicating after the failure — they eventually became more friendly — and said it hadn’t worked out well in the past either. Their business model was to use SPAC’s to take Chinese companies public in US markets. But a disproportionate number of the companies turned out, in hindsight, to have elements of fraud. They purchased Stern’s operation because the two-year window to acquire a company was closing and they wanted to avoid fraud by focusing on a US business. Of course, instead of avoiding fraud, they ended up with arguably the worst SPAC in history. There are benefits to SPAC’s but also risks.

Which brings us back to SCH and Social Capital. Chamath Palihapitiya has the magic touch for a VC. He was an early Facebook employee, introduced to Zuckerberg by Sean Parker. His motives, an ability to focus on long-term value, is exactly what we like to hear. He says the right things, has the right history, and sounds like a person you want to trust. As an added benefit there is nothing that I’ve come across which even hints that you shouldn’t. With the market price of their empty SPAC increasing, despite no news, somebody else agrees.

But is it a genuinely good idea to ditch the traditional IPO path? There’s no question the as-is method is disruptive (in the traditional sense), cumbersome, expensive (though SCH charges 20% of the acquisition cost), and lengthy. Great for investment banks and their insiders; not so great for everybody else. Palihapitiya points out the need to disrupt his own VC industry in the same way tech firms have disrupted and upended dinosaurs. Further, an ability to better protect employees and more equitably distribute stock and options sounds like an improvement, especially after seeing those Silicon Valley employees financially drowned in the undertow of upside-down options.

There are a substantial number of companies rejecting the as-is path to an IPO. SCH’s prospectus highlights that there are 150 private tech companies valued at more than $1 billion but only 200 public tech companies. Firms are actively rejecting the as-is solution for initial public offerings though it remains unclear if that is because they wish to avoid investor pressure or whether they want to avoid the hassle of the IPO process. If their concern is investor pressure are they worried about an unwelcome letter from Carl Icahn or worried about turning into the next Snap or Twitter, with a languishing stock price?

I’m not a finance person but there seems to be a math problem. SCH has $600 million cash. They’re required to buy a controlling interest in voting, and at least 50 percent of outstanding shares, of at least one business worth more than $1 billion — their preference is to buy a company valued at $2-3 billion. Normal IPO’s deal with inadequate demand in the capital markets by selling a lower amount of stock. Need to raise $500 million but require a $2.5 billion valuation? Then sell 20 percent of the business to the public. But SPAC’s have different requirements; they must acquire controlling interests so they cannot take this route. I’d imagine somebody has thought this through.

Disrupting the IPO process to enable a long-term focus rather than short-term financial shenanigans seems worth the risk of innovation, though the risk of blindly betting on an acquisition should not be underestimated.

SCH has the potential to grow into a Y-Combinator like entity for mature companies; the premier go-to place for firms that need an exit but don’t want the hassle and expense of a regular IPO. If so, it’s shares are a chance to buy into a Berkshire-Hathaway at $10. Or it can end up like DJSP. While Stern’s demise was spectacular — everything he does seems to be large — SPAC’s do tend to historically underperform. Still, given Palihapitiya’s reputation and history, I’d bet on the former. But his management team must remain wary to ignore demands from the inevitable parasitic “activist investors” (formerly and more accurately known as raiders) to “derive value” with buybacks and other worthless financial gymnastics.