The exuberance of financial engineering

SPAVs, the Ex-IM bank, 1MDB and Bitcoin Suisse

This week

There were a bunch of stories this week about financial engineering as applied in our new high-tech world. We haven’t all switched to bitcoin yet, but there is some evidence of a new global financial infrastructure in the making.

On the blog, I published my older paid post on Girardian television. The first video content has been hard to get right but is hopefully coming next week! I’ve also been a little busy with writing sponsored content, so had less time this week to spend on blogging.

Podcasts

I talked to Laura Westring, a Scottish speechwriter who previously worked at the EU Commission — at the time the youngest speechwriter there. We talk about the future of Scotland and the EU, and also how the internet has changed communication. I wanted to talk to someone from Scotland to understand the appeal of the SNP, and how the high-tech economy is affecting Scottish universities.

Unfortunately only one podcast to publish this week due to logistical issues, but I have some exceptionally interesting guests lined up for next week, so hopefully that makes up for it!

Anglosphere

Schools remain closed in many countries due to coronavirus lockdowns, despite most health experts agreeing that the risks to children and teens are not high enough to justify a closure. The main opposition to reopening in most districts has come from the teacher's unions. Not only are the next generation falling behind in their learning, but working parents have the additional stress of childcare during a pandemic as well as having to work from home.

The only silver lining is that now neighbourhoods are rising to the challenge to reinvent schools from scratch. Small groups of parents are hiring tutors for their children, and this may end up being a better education and childcare solution than the schools that exist already. What's especially interesting is the role of online education. Online content allows for extremely high quality education at a low cost. Already Higher Ground Education, one of the largest Montessori school chains in the US, has released a summer course about progress, aimed at teenagers. The missing piece now is operational, and that is probably the hardest part: how to set up schools that serve their local communities and create space that motivate kids to learn.

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UK trade secretary Liz Truss promotes an export loan scheme. The finance scheme has a similar rationale to the Export-Import Bank in the USA, and shares many of the same flaws. Free traders and nationalists can debate whether a government scheme for "promoting exports" is a good idea for mature products, but in this case, it seems like a very good idea for brand new high-tech industries.

The press release mentions financing R&D for electrification, "smart" vehicles and reducing emissions, as traditional car companies race to modernise in the face of competition from Tesla. This seems like a rare example of interventionist industrial policy that could really work: for a totally new industry, it doesn't matter too if the government is "picking winners", it just needs to spur initial investment in the field somehow. Guaranteeing a loan for R&D and complex manufacturing, is one way to incentivise companies to pay for the skills and training that could kickstart a new manufacturing cluster.

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Protests in Portland have been going on for weeks now. There has been a violent escalation between the protesters and police, as federal agents were deployed over the last two weeks. For those of us who have visited Portland and remember a twee, college town atmosphere, it's strange that Portland has ended up as the hotbed of political violence, rather than e.g. somewhere like Los Angeles.

Having spent some time with leftist activists in the Pacific Northwest, the only explanation I can come up with is that being away from large cities and centres of political power, combined with a highly educated population, is more likely lead to a delegitimisation of national and state political systems. From that perspective, what's happening in Portland is another instance of the Revolt of the Public. Perhaps also a consequence of the US population shifting west, and a political system which hasn't yet caught up in representing that population.

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The future of universities is here, as a Harvard professor creates a computer science course that is extremely popular worldwide. It came out of his own personal obsession with creating great video content, and it seems like an early example of what online education should be. I joked on Twitter that the new universities will be "online course + research lab + hedge fund + public relations arm".

The official purpose of universities before the neoliberal era was: financing research, educating the young, imparting professional norms so that the young can work together, and an enclave for nerds to associate with each other. The promise of alumni donations made it seem natural to bundle these things together.

However, since the rise of the knowledge economy, more university-like things are now done by businesses. Research financing might be better done through initiatives like as OpenAI or DeepMind, or even a grant platform like FastGrants. Education can be done online, and professional norms can also be done in the workplace, or at institutions like Pioneer or YCombinator. What hasn't yet been replaced is the university as a community for intellectuals — unless you count WhatsApp groups and some parts of anon Twitter.

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The Chinese consulate in Houston, Texas has been closed down, over allegations of espionage and intellectual property theft. The crazy story seems to revolve around IP relating to medical and scientific research.

It's interesting that today, so many cases of IP theft are related to actions that happen in person, and involve recruiting and relationship-building, rather than through hacking datacenters and reading books. It's unclear what specifically happened in this case, but it seems that maybe more widespread, sophisticated KYC-style screening of researchers and engineers could go a long way to protect against the risk of intellectual property theft.

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Asia

Japan is paying its companies over $500 million total to move out of China. This seems like a move of last resort, as China is Japan's largest trading partner, and Prime Minister Shinzo Abe has been trying for years to improve Japan-China relations. If this is a sign of anything, its evidence that Japan believes relations are likely to deteriorate, whether that is because of the pandemic or unresolved tensions in the South China Sea. It seems like a smart move to reduce dependence on Chinese companies, and it’s notable that Japan is the first country other than Taiwan to institute an official policy of this kind.

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More details emerge on BNO visas for Hong Kongers. The move seems to have been widely appreciated in Hong Kong, but as the visa is too expensive to be available to everyone, it is not a complete solution. It almost feels like Hong Kong has become the Berlin of the 21st century, caught in the crossfire between liberalism and authoritarianism — but does that mean we will see it free again within our lifetimes?

Even as a cynic about the UN, I really was surprised at how little action was taken the international community, and the non-existence of diplomacy at every level. It reminded me of how the WHO responded to the coronavirus. On the business front, you might expect a trans-national embargo against corporations that support authoritarian regimes. In Europe, an important step would be convincing EU member states take a clear stand for liberty over trade with China. Mostly surprisingly, even as many countries (and large business interests!) oppose this move, there seems to be a very weak co-ordinated response.

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Some iPhone 11s are now assembled in India. To avoid supply chain disruptions from deteriorating relations with China, many companies are searching for alternative locations for their factories. The Indian government has made an effort to capitalise on this opportunity, by setting up the Production Linked Incentive Scheme specifically to subsidise companies to move their large-scale electronics manufacturing.

This could be very positive for India's manufacturing sector, allowing them to follow a path similar to Taiwan in the 1980s and 1990s, a period of high growth in East Asia, when India was still recovering from decades of socialism. Taiwan used export-driven manufacturing as a stepping stone to developing home-grown competitive hardware brands such as Asus and TSMC. Already Indian smartphone manufacturer Lava has become a popular brand, and it looks like there are more to come.

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Europe

The European Union has all-time-high approval ratings in nearly all its member states. The difficult crisis period of the 2010s seems to have made the institution stronger, by making politicians more willing to confront and decide on difficult issues. The upcoming ‘coronabonds’ program shows that states are willing to participate in a fiscal union, and the emergence of pro-tech liberal and green parties shows that Europeans are willing again to think about a concrete and positive vision of the future.

This success makes it even more important for tech-optimists to think carefully about how to use the EU courts to help European companies, and to make the case against arbitrary regulation of high-tech.

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Bitcoin Suisse raises at a ~$350 million valuation. It seems to be like one of the few legit crypto brokerages out there to make it to such a high valuation. The firm may use to use the money to "go mainstream" — the company is already in the process for applying for a banking license in Switzerland.

It's taken many years, but people are finally beginning to understand how to integrate crypto — that is, programmable money — into usable financial infrastructure. The regulatory angle here is that Switzerland is European without being in the EU, and its interesting to see how the company interacts with the EU's financial regulation.

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Business & Finance

Many companies are going public using a SPAC, rather than gearing up for an IPO. This week, Velodyne, a LIDAR technology company, was acquired by Insurance Acquisition Corp, a publicly-traded SPAC. The new special purpose acquisition company (SPACs) can be used to buy out private companies, and handle themselves the regulatory and liability burden of being a public company.

This trend is another sign that financial engineering is finally coming to Silicon Valley. Throughout the 80s-00s, the financing of high-tech was just starting to be understood, and venture capital, to the extent it worked at all, depended a lot on trust and personal relationships. After a wave of experimentation in the 2010s, venture capital and high-tech financing is showing signs becoming professionalized. Financial engineers are developing sophisticated algorithms to price early stage companies, and instruments to handle mergers, IPOs and corporate liability. The ‘blunt force’ financing deals for growing companies, like that of SoftBank and WeWork, may soon be a thing of the past.

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Goldman has reached a $3.9bn settlement with the government of Malaysia over the 1MDB scandal. The fraud allegedly involved the former Malaysian Prime Minister Najib Razak and sketchy dealings with an investment fund intended to accelerate Malaysia's development. Goldman Sachs has denied any role in the money laundering, saying they were misled by the former Malaysian government.

Regardless of how much of this story is true, the fact that such a story is plausible is worrying by itself. If you think about obstacles for liberalism worldwide, the scale of corruption and money laundering remains a huge problem and is probably up there. Corruption helps entrench illiberal regimes, and makes rule of law more difficult to achieve in growing countries. While trade in general is a force for liberalism, money laundering, unsurprisingly, generally enables bad actors. One step towards rebuilding international institutions would be for the business community to push for stricter global standards for transparency in finance.

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Culture

A designer in California has re-engineered the chocolate chip cookie! Aside from being delicious, he makes the very interesting point that chocolate chips were designed for ease of mass production, but with today's complex manufacturing techniques, we can do a lot better. Who says there's no innovation in the world of atoms!

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