Now that Russia seems to have formally annexed Crimea, no one can possibly expect Ukraine to repay Russia the $3 billion it borrowed back in December. The money was given directly to kleptocratic Ukrainian president Viktor Yanukovych in order to buy his fealty; now that Yanukovych is an international pariah and Russia has seized Crimea instead, in what you might call the geopolitical equivalent of a debt-for-equity swap, Ukraine has no legitimate reason to make its payments on the loan.
But there’s a problem here: the loan was not, technically, a bilateral loan from Russia to Ukraine. Instead, it was structured as a private-sector eurobond. As Stephen Gandel says:
There are a lot of other Ukrainian eurobonds out there that look similar to the ones Russia is holding, so not paying the ones Russia is holding will have larger implications for all of Ukraine’s debt, causing prices to fall and interest rates to rise. What’s more, Russia could sell its bonds to the market… That may make a court less likely to invalidate the debt, and Ukraine less willing to do so, if it is held by a private investor, especially a non-Russian one.
This is a notorious vulture-fund move: a hedge fund buys bilateral debt from a sovereign, and then sues not as a sovereign but rather as a private-sector creditor. I can think of a few hedge funds which would be interested in Russia’s debt, if they could buy it at a discount to where the rest of Ukraine’s debt is trading. After all, to use a term you might have seen on this blog in the past, this loan is, legally, pari passu with all the rest of Ukraine’s bonded debt.
(In fact, this bond is arguably senior to the rest of Ukraine’s bonds, thanks to a very unusual provision which allows Russia to accelerate the debt if Ukraine’s GDP falls. But since there now seems to be no chance that Ukraine will pay the coupon on this bond, it’s going to be in default very soon anyhow.)
So, if Ukraine defaults on its $3 billion Russian eurobond, how can Ukraine’s allies prevent that default from having massive negative repercussions on the Ukrainian economy? Anna Gelpern has the answer: The United Kingdom, she says, should make the bonds unenforceable under English law.
Yanukovych’s good-bye bonds would not have to get bogged down in the doctrinal mess of Odious Debt precisely because they took the form of simple English-law contracts, freely tradable in the capital markets and enforceable in English courts… English courts may not have much sympathy for Russia. They may decide that invading a country, bankrupting it, and trying to collect would be too distasteful with or without Odious Debt. Supreme Court Chief Justice (and former President) William Howard Taft offered similar reasons when he refused to enforce claims by private creditors complicit in the escape of another kleptocrat in an international arbitration against Costa Rica in 1923…
To stop the debt from migrating to private hands and showing up in court, now is the time for the UK government to make the Yanukovych bonds unenforceable under English law.
If the UK parliament passes this kind of a law now, before Russia can sell its debt to a vulture fund, that would severely reduce any fund’s appetite for the bond, and therefore minimize the likelihood of the default getting litigated in London.
Gelpern adds — quite rightly — that now is also the perfect time to implement a general ban on countries selling their bilateral debt into the private markets. I’m unclear on what form such a ban would take, or how it would ever be enforced, but as a principle it’s a really good idea.
Even if the UK passes a non-enforcability law, however, the problem of the Russian bond is not going to go away for Ukraine. I’m sure there are cross-default provisions in the rest of Ukraine’s debt, which means that Ukraine’s existing bondholders are likely to be able to accelerate whenever they feel like it. Again, think vulture funds here: a small group of aggressive funds could quite easily buy up 25% of one of Ukraine’s other bond issues, and then declare the whole amount due and payable immediately. As a result, even if Russia never gets its $3 billion back, and never sells any of its bonds, the structure of the December deal could still come back to haunt Ukraine.
All of this was entirely deliberate on Russia’s part. And of course the damage that Russia caused to Ukraine by structuring its loan as a bond is pretty much nothing, compared to the damage it’s causing by seizing Crimea. But it is a reminder that wonky sovereign-debt distinctions can have real geopolitical importance. As Argentina, for one, is well aware.
Back in 2000, Warren Buffett published “a fanciful thought experiment” in the NYT, showing just how cheap it was to buy the US government:
Soft money contributions jumped from $86 million in the 1992 election cycle to an expected $360 million in the current one. That’s a growth rate worthy of Silicon Valley: 20 percent annually.
And the game has barely started. For most supplicants, cost still lags ridiculously far behind value. American business spends $200 billion a year on advertising to influence consumers. In many industries — communications, tobacco, banking, pharmaceuticals and insurance among them — political influence can sometimes be of similar commercial importance. It also matters critically to such professionals as lawyers, doctors, and teachers…
Suppose that a reform bill is introduced, raising the limit on individual contributions to federal candidates from $1,000 to, say, $5,000 but prohibiting contributions from all other sources, among them corporations and unions. These entities could still encourage their employees, stockholders, or members to contribute personally, but could do no more — a ban, incidentally, that applied to them until the ”soft money” dodge was introduced in 1978. Such a bill would be far from a panacea for all campaign finance ills, of course, but it would at least be a start. Why should this bill stand a chance in a Congress enraptured with the status quo? Well, just suppose some eccentric billionaire (not me, not me!) made the following offer: If the bill was defeated, this person — the E.B. — would donate $1 billion in an allowable manner (soft money makes all possible) to the political party that had delivered the most votes to getting it passed. Given this diabolical application of game theory, the bill would sail through Congress and thus cost our E.B. nothing (establishing him as not so eccentric after all).
America, it seems, doesn’t have eccentric billionaires — instead, it seems to specialize in the old-fashioned type, billionaires who just want to make even more money. People, that is, like Bill Ackman. And, of course, people like Todd Westhus, as well, who if they’re not billionaires already, aspire to reach that milestone soon. The worrying thing is that the Ackmans and Westhuses of this world have discovered what you might call the Buffett Arbitrage. Rather than investing in advertising or capital stock, they invest instead in lobbying, with the aim of getting very specific legislation passed which will make them very rich.
There’s nothing new, of course, about spending lots of money lobbying the government to get what you want, financially. Steve Coll wrote a 700-page book about just one company’s use of such methods. But what is new, or at least seems to be getting more popular, is the tactical short-term use of political lobbying to create a single windfall gain in the financial markets.
Yesterday’s NYT article about Ackman makes for a great read, partly because of what Jonathan Weil calls the “hilariously inept” nature of the campaign, and partly because Ackman is so open about his tactics:
“The risk we took in making this investment was could we get the world to focus on a company, could it get enough of a spotlight so that the S.E.C., the F.T.C., the 50 attorney generals around the country, the equivalent regulators in 87 countries, if any one of them, or at least any powerful member of that group, could we get them interested?” Mr. Ackman explained at the investors conference in February, 14 months after he made his bet on Herbalife public. “And I think that was the biggest risk we took in going short” on Herbalife.”
In other words, Ackman has a billion-dollar bet that he can bend public servants to his will, and, by announcing an investigation, send Herbalife shares plunging. He’s Buffett’s eccentric billionaire incarnate, except that instead of trying to reduce the influence of money on politics, he’s trying to turn it into a trading mechanism.
The big risk here is not particularly that Ackman’s campaign is going to work. Rather, it’s that hedge fund managers will take the wrong lesson from what he’s doing, and conclude that his big mistake was just being too open and public about what he is trying to achieve. Much more effective to work in the shadows: one of my favorite examples of that is the way that Elliott Associates invisibly lobbied lawmakers in Albany to tweak the rules surrounding compound interest on court judgments, thereby increasing the amount they were owed by Peru from $42 million to $58 million. That piece of lobbying was done so quietly that Peru’s lawyers didn’t even know it was happening until it had already happened.
Which brings me to Frannie, and the massive amounts of money — tens of billions of dollars, maybe more — at stake with respect to seemingly worthless old pieces of paper representing the housing agencies’ preferred and common stock. I wrote about this campaign last year, saying that the main reason to buy shares of Fannie Mae and Freddie Mac is as a bet that well-connected Washington types have inside information about what the government is going to do, and/or are likely to influence the outcome. The campaign has only intensified since then: recently Gretchen Morgenson even devoted an entire column to the plight of the poor hedge-fund managers who bought securities at very near zero and who are now lobbying the government to grant them billions of dollars’ worth of Frannie profits.
There is no good reason why the government should do that, of course — no good reason, that is, beyond what Bloomberg calls “one of the biggest potential paydays in history”. Right now, the agencies are effectively part of the US government, which means that the US government is explicitly standing behind all of their trillions of dollars in liabilities. Yes, the two companies are profitable, for the time being, and are dividending their profits back to the taxpayer. But if at any point in the future they start losing money again, it’s going to be the taxpayer — again — who foots the bill. Since the government is on the hook for all future Frannie losses, it makes perfect sense that the government should keep for itself any possibly-temporary Frannie gains, at least until the agencies are wound down.
But the amounts of money at stake here are so enormous that the Buffett Arbitrage, scarily, might end up working. Buffett was talking about $1 billion; that’s the size of Ackman’s bet, too. But at Frannie we’re talking about at least $33 billion in preferred stock, and possibly even more in common stock. If the government ends up giving the hedge funds any money at all from Frannie’s profits, you can reasonably consider all of that cash to be a direct return on lobbying expenditures. Which will surely prompt any number of similar attempts in future. Buy securities cheap, change the law, see them soar. There are surely dozens of ways that can be done; I suspect we’re still in the very early days of seeing that tactic adopted by the hedge-fund world.
Jim Surowiecki is absolutely right about the IPO of King Digital Entertainment, the makers of Candy Crush Saga. The point of an IPO is to raise permanent capital for a company which intends to exist in perpetuity, while King will realistically last only as long as the Candy Crush fad. King will probably never again make the kind of money ($568 million) it made last year, and yet it issued options in January at a crazy $9.4 billion valuation.
It’s easy to see why King’s founders want to go public: money. But the money isn’t worth the hassle. As a public company, King will have to show shareholders consistent results and ever-growing profits. Such expectations are, frankly, silly in crazily competitive, hit-driven industries, and trying to meet them is a recipe for frustration. If King stayed private, it could milk its cash cow and build games without having to worry overmuch about hatching a new cultural juggernaut. We expect companies to constantly be in search of the next big thing. But, for one-hit wonders, the smartest strategy might be to just enjoy it while it lasts.
There are two different pieces of advice here. The first is entirely sensible: if you have a business throwing off massive amounts of cash, and you have no real assurance that you can build a similar business or replicate your past success, then probably the best thing to do is to just pocket the cash, rather than trying to reinvest it. After all, Candy Crush Saga itself was not the product of hundreds of millions of dollars of investment: it was the product of good luck, basically.
The second piece of advice is that if you’re just going to cash checks from Candy Crush, you’re better off doing that as a private company, rather than having to deal with public shareholders. This is probably also true. Public companies are bad at managing decline: they always want to show growth. The result is all manner of attempts at “pivots”, or at investing cashflow into longshot attempts to build a new business from scratch (for a prime example, see the way that AOL took the hundreds of millions of dollars flowing from its dialup service and poured them into Patch). Which, needless to say, rarely works.
But here’s the problem: all companies have a valuation, and right now the market is placing a valuation on King which is somewhere in the $10 billion range. If the present value of Candy Crush Saga’s cashflows is less than $10 billion (which it almost certainly is), then it is entirely rational for anybody who might be inclined to live on those cashflows to instead sell the company to people who think it’s worth more than that.
And there’s another great reason to go public: it gives King’s current shareholders — employees and VCs — the ability to cash out easily, rather than just waiting for a ever-diminishing series of dividend checks. Like it or not, this is the way of the current technology world: you start up a company, you sell it, you get rich. Even if going public sucks.
The main reason to go public, however, could just be that the IPO market is so frothy right now that companies have to have the credible threat of an IPO in order to get the best possible price from a strategic acquirer. Right until the day before the IPO, King is going to retain the option to simply sell itself to some company which wants proven expertise at making enormous profits in the world of mobile-native apps. By moving towards an IPO, King is forcing those companies to get serious about making an offer — both in terms of timing (they’d better do it quick) and in terms of valuation (they’d better meet the likely IPO share price). Because buying King after it’s gone public is going to be a lot more difficult.
Sometimes, capital markets are inefficient at allocating capital. When debt markets are frothy you see a lot of debt issuance; when equity markets are frothy, you see a lot of IPOs. We’re seeing a lot of IPOs right now, including some pretty crazy ones. And if you sell into a frothy market, you’re being rational, not stupid. Let the buyers of King shares worry about where their return is going to come from: no one is twisting their arm. So long as there are people out there willing to buy at a $10 billion valuation, markets demand that the current owners should be able to sell.
— Anil Dash (@anildash) March 9, 2014
I had a 2-hour phone conversation with Leah McGrath Goodman yesterday. Goodman wrote the now-notorious Newsweek cover story about Dorian Nakamoto, which purported to out him as the inventor of bitcoin. At this point, it’s pretty obvious that the world is not convinced: in that sense, the story did not do its job.
As Anil Dash says, the geek world is the most skeptical. Almost all of the critiques and notations attempting to show that Dorian is not Satoshi are coming from geeks, which makes sense. If the world is what you perceive the world to be, then there is almost no overlap between the world of geeks in general, and bitcoin geeks in particular, on the one hand, and the world of a magazine editor like Jim Impoco, on the other hand. As a result, there’s a lot of mutual incomprehension going on here, which has resulted in an unnecessarily adversarial level of aggression.
As befits a debate which is centered on bitcoin, a lot of the incomprehension comes down to trust and faith. Bitcoin is a protocol which requires faith in no individual, institution, or state — all you need to believe in is cryptography. Dorian Nakamoto could have told Goodman explicitly that yes, he invented bitcoin — and still a lot of the bitcoin faithful would not be fully convinced unless and until Dorian proved that assertion cryptographically.
Goodman, on the other hand, is a proud journalist, who gets personally offended whenever anybody raises questions about her journalism, her techniques, or her reporting. In a reporter’s career, she says, “you check facts, you are building trust and building a reputation”. Goodman feels that her own personal reputation, combined with the institutional reputation of Newsweek, should count for something — that if Newsweek and Goodman stand behind a story, then the rest of us should assume that they have good reason to do so. There’s no doubt that a huge amount of work went into reporting this story, very little of which is actually visible in the magazine article itself.
In aggregate, says Goodman, an enormous amount of evidence, including evidence which is not public, persuaded her that Dorian Nakamoto was her man. Goodman has not decided whether or how she might publish that evidence. When she appeared on Bloomberg TV, she said that she would love for people to look at the “forensic research” and the public evidence in the case — but, talking to me, she made it clear that she didn’t consider it her job to help out other journalists by pointing them to that evidence. What’s more, she also made it clear that she was in possession of evidence which other journalists could not obtain.
In other words, Goodman spent two months following leads and gathering evidence, both public and private. Eventually — after confronting Dorian Nakamoto in person, and getting what she considered to be a confirmation from him, both she and her editors felt that she was able to say, on the front cover of Newsweek, that he was the guy. The article itself was the culmination of that process, but it did not — could not — contain every last piece of evidence, both positive and negative, public and private, about both Dorian Nakamoto and every other candidate she looked at. The result is not the process, and Goodman feels that she should be given the respect due a serious and reputable investigative journalist, working for a serious and reputable publication.
Newsweek, it’s fair to say, has not been getting that respect, although it has been getting a lot more attention than most purely-digital publications would have received had they published the same story. Jim Impoco, cornered at a SXSW party, said that he finds criticism of his story to be “phenomenally offensive”, and then went on to make the highly ill-advised remark that “we eliminated every other possible person”. But that’s really a messaging failure: he was on the back foot (SXSW is, after all, geek HQ this week, and the geeks are gunning for Impoco right now). Clearly, this was not the time or the place for a considered discussion of evidentiary standards.
That said, both Impoco and Goodman should have been smarter about how they talked about the story, post-publication. Both have been largely absent from Twitter and Reddit and RapGenius and other online places where the debate is playing out; instead, they have been giving interviews to mainstream media organizations, which are often unhelpful. TV interviews devolve into stupid fights; interviews with print or online journalists result in just a couple of quotes.
Goodman spent a lot of time, with me, walking me through her journalistic technique: she started, for instance, by trying to track down the person who initially registered the bitcoin.org domain name, and then followed various threads from there. And yes, she did consider and reject the individuals who are considered more likely candidates by the geek squad. Nick Szabo, for instance, might well look like a good candidate if you’re looking only at the original bitcoin paper, and asking who is most likely to have written such a thing. But when she looked at Szabo’s personal life, nothing lined up with what she knew about Satoshi Nakamoto and his communications. Instead, she found the Dorian Nakamoto lead — and didn’t think much of it, at first. But the more she kept trying to dismiss it, and failing to do so, the more she wondered whether Dorian’s very invisibility — “contextual silence”, she called it — might not be sending her a message.
Towards the end of Goodman’s investigation, when she was preparing to try to meet with Dorian Nakamoto in person, Goodman told Impoco that if it didn’t turn out to be Dorian, then “we’ve got nobody”. That’s what Impoco was most likely talking about, when he talked about eliminating people. Goodman — and Impoco, more recently — was just saying that this was her last open thread, and that if Dorian didn’t pan out as the guy, then they didn’t have a story.
From my perspective, then, there’s a big disconnect between what I now know about Goodman’s methodology, on the one hand, and how that methodology is generally perceived by the people talking about her story on the internet, on the other. With hindsight, I think that Goodman’s story would have elicited much less derision if she had framed it as a first-person narrative, telling the story of how she and her team found Dorian and were persuaded that he was their man. The story would surely have been more persuasive if she had gone into much more detail about the many dead ends she encountered along the way. The fateful quote would then have come at the end of the story, acting as a final datapoint confirming everything that the team had laboriously put together, rather than coming at the beginning, out of the blue.
That storytelling technique would not persuade everybody, of course: nothing would, or could. And, more importantly, it isn’t really what Impoco was looking for. Even the piece as it currently stands was cut back a few times: the final version was pared to its absolute essentials, and, like all longform magazine journalists, Goodman wishes that she might have had more space to tell a fuller story.
But here’s where one of the main areas of mutual incomprehension comes into play. Impoco and Goodman are mainstream-media journalists producing mainstream content for a mass audience; Goodman’s article was probably already pushing the limits of what Impoco felt comfortable with, given that he couldn’t reasonably assume that most of his readers had even heard of bitcoin. Impoco was interested in creating a splashy magazine article, for the print reincarnation of a storied mass-market newsweekly. Of course, seeing as how this is 2014, the article would appear online, and would reach the people who care a lot about bitcoin, who were sure to make a lot of noise about it. But they weren’t the main audience that Impoco was aiming for. Indeed, in early 2012, when Impoco was editing a much smaller-circulation magazine for Reuters, I sent him a draft of what ultimately became this article for Medium. He passed: it was too long, too geeky. Even if it would end up reaching a large audience online (it has had over 200,000 page views on Medium), it didn’t have broad enough appeal to make it into a magazine.
Similarly, while Goodman has done a lot of press around her article, most of it looks like a tactical attempt to reach the greatest number of people, and build the most buzz for her article. So she’s been talking to a lot of journalists, especially on TV, while engaging relatively little on a direct basis with her online critics. There’s no shortage of substantive criticism of Goodman’s article online, and of course there is no shortage of venues — including, but not limited to, Newsweek.com — where Goodman could respond to that criticism directly, were she so inclined. But instead she has decided in large part not to join the online debate, and instead is pondering whether or not to write a self-contained follow-up article which might address some of the criticism.
There’s a good chance that follow-up article will never come, and that Goodman will simply cede this story to others. And you can’t necessarily blame her, given how vicious and personal much of the criticism has been, and given how many of her critics seem to have made their minds up already, and will never be persuadable. Goodman has said her piece, and there are surely greatly diminishing returns to saying a great deal more.
Still, it’s just as easy to sympathize with the frustration being felt by the geeks. Appeals to authority don’t work well on this crowd — and neither should they. If the US government can lie about the evidence showing that there were weapons of mass destruction in Iraq, it’s hard to have much faith in an institution which, 18 months ago, slapped “HEAVEN IS REAL” all over its cover. (That story, interestingly enough, was demolished by another mass-market magazine, Esquire.)
Indeed, both sides here have good reason to feel superior to the other. From Newsweek’s point of view, a small amount of smart criticism online has been dwarfed by a wave of name-calling, inchoate anger, and terrifying threats of physical violence. And from what you might call the internet’s point of view, Newsweek is demonstrating a breathtaking arrogance in simply dropping this theory on the world and presenting it, tied up in a bow, as some kind of fait accompli.
The bitcoin community is just that — a community — and while there have been many theories as to the identity of Satoshi Nakamoto, those theories have always been tested in the first instance within the community. Bitcoin, as a population, includes a lot of highly-intelligent folks with extremely impressive resources, who can be extremely helpful in terms of testing out theories and either bolstering them or knocking them down. If Newsweek wanted the greatest chance of arriving at the truth, it would have conducted its investigation openly, with the help of many others. That would be the bloggy way of doing it, and I’m pretty sure that Goodman would have generated a lot of goodwill and credit for being transparent about her process and for being receptive to the help of others.
What’s more, a bloggy, iterative investigation would have automatically solved the biggest weakness with Goodman’s article. Goodman likes to talk about “forensic journalism”, which is not a well-defined phrase. Burrow far enough into its meaning, however, and you basically end up with an investigation which follows lots of leads in order to eventually arrive at the truth. Somehow, the final result should be able to withstand aggressive cross-examination.
At heart, then, forensic analysis is systematic, scientific: imagine an expert witness, armed with her detailed report, giving evidence in a court of law. Goodman’s Newsweek article is essentially the conclusion of such a report: it’s not the report itself, and it’s not replicable, in the way that anything scientific should be. If Goodman thinks of herself as doing the work of a forensic scientist, then she should be happy to share her research — or at least as much of it as isn’t confidential — with the rest of the world, and allowing the rest of the world to draw its own conclusions from the evidence which she has managed to put together.
A digital, conversational, real-time investigation into the identity of Satoshi Nakamoto, with dozens of people finding any number of primary sources and sharing them with everybody else — that would have been a truly pathbreaking story for Newsweek, and could still have ended up with an awesome cover story. But of course it would lack the element of surprise; Goodman would have to have worked with other journalists, employed by rival publications, and that alone would presumably suffice to scupper any such idea. (Impoco was not the only magazine editor to turn down my big bitcoin story: Vanity Fair also did so, when the New Yorker story came out, on some weird intra-Condé logic I never really bothered to understand. Competitiveness is in most magazine editors’ blood; they all want to be first to any story, even if their readers don’t care in the slightest.)
Instead, then, Newsweek published an article which even Goodman admits is not completely compelling on its own terms. “If I read my own story, it would not convince me,” she says. “I would have a lot of questions.” In other words, Goodman is convinced, but Goodman’s article is not going to convince all that many people — not within the congenitally skeptical journalistic and bitcoin communities, anyway.
Goodman is well aware of the epistemic territory here. She says things like “you have to be careful of confirmation bias”, and happily drops references to Russell’s teapot and Fooled by Randomness. As such, she has sympathy with people like me who read her story and aren’t convinced by it. But if there’s one lesson above all others that I’ve learned from Danny Kahneman, it’s that simply being aware of our biases doesn’t really help us overcome them. Unless and until Goodman can demonstrate in a systematic and analytically-convincing manner that her forensic techniques point to a high probability that Dorian is Satoshi, I’m going to remain skeptical.
Newsweek wanted a scoop for its relaunch cover story, and boy did it deliver: it uncovered the identity of Satoshi Nakamoto, the inventor of bitcoin. Who then promptly came out and denied everything. Which means that one of the two is wrong: either Nakamoto is lying through his teeth, or Newsweek has made what is probably the biggest and most embarrassing blunder in its 81-year history.
But before we try to work out what the answer is, it’s important to separate out the various different questions:
- Is Dorian Nakamoto the inventor of bitcoin, Satoshi Nakamoto?
- Do we, and/or Newsweek, have enough evidence to conclude, with certainty, that Dorian Nakamoto is the inventor of bitcoin?
- Is it reasonable to believe that Dorian Nakamoto is the inventor of bitcoin?
My tentative answers to the three questions are “we don’t know”; no; and yes.
One way to look at this problem is to try to calculate probabilities, and do some kind of Bayesian analysis of the question, given that either Dorian is Satoshi, or he isn’t. (To make matters even more complicated, Dorian’s given name is, actually, Satoshi. But you know what I mean.) But here’s the problem: if you believe either of the two possibilities, you have to believe in a reasonably long series of improbable propositions. Call it the Satoshi Paradox: the probability that Dorian is Satoshi would seem to be very small, and the the probability that Dorian is not Satoshi would seem to be just as small — and yet, somehow, when you add the two probabilities together, the total needs to come to something close to 100%.
The place to start is the Newsweek article, which brooks no doubt about the matter, and which is told using all the power of narrative journalism. The author, Leah McGrath Goodman, has constructed her 4,700-word article as a case for the prosecution, taking us with her on her quest for evidence and ultimately trying to persuade us that there can be no doubt: Dorian is Satoshi.
Goodman adduces lots of evidence, starting with the crazy coincidence of Satoshi’s name. Dorian’s name is Satoshi Nakamoto. He is an accomplished engineer and mathematician: “brilliant”, according to his brother. He was happy to correspond with Goodman until she asked him about bitcoin — at which point he stopped replying to emails and even called the cops on her. Dorian’s brother even predicted his response to Goodman’s article: “He’ll deny everything. He’ll never admit to starting Bitcoin.”
Goodman says that Dorian, “for most of his life, has been preoccupied with the two things for which Bitcoin has now become known: money and secrecy”. He’s a libertarian, whose daughter says that he is “very wary of the government, taxes and people in charge”. He’s 64, which would help explain slightly old-fashioned aspects of Satoshi, like his use of reverse Polish notation and his worrying about saving disk space. And then there’s the smoking gun — the quote that he gave to Goodman when she arrived at his doorstep.
“I am no longer involved in that and I cannot discuss it,” he says, dismissing all further queries with a swat of his left hand. “It’s been turned over to other people. They are in charge of it now. I no longer have any connection.”
This fits exactly with what we know about Satoshi: that he was deeply involved in bitcoin at the beginning, but has had basically nothing to do with it in recent years. It’s well short of an outright confession, of course — but if you add up all of the circumstantial evidence, it’s pretty hard to believe that everything is some bizarre coincidence. Goodman has presented a lot of pieces of the puzzle — and they fit elegantly together, at least at first glance.
On the other hand, even within the article there are signs that it’s not as clear cut as all that. There’s Goodman’s admission, in the article, that she “plainly needed to talk to Satoshi Nakamoto face to face” — something she never really did, except for a few quick words spoken in front of police officers while he was trying to make her go away. Goodman also quotes Gavin Andresen, the person most publicly associated with the development of bitcoin, as saying that even in the early days, Satoshi “went to great lengths to protect his anonymity”. Which hardly squares with the thesis that he was using his real name.
Then there are the duff notes in the piece. “This is the guy who created Bitcoin? It looks like he’s living a pretty humble life.” That, supposedly, is a verbatim quote from a Temple City cop: it’s possible that a cop uttered those words, but that doesn’t stop them from sounding like very bad expository dialogue. And Goodman can certainly overstretch, as for instance here:
There is also the chance “Satoshi Nakamoto” is a pseudonym, but that raises the question why someone who wishes to remain anonymous would choose such a distinctive name.
Remember that the pseudonym theory was not a mere theory, up until yesterday — it was almost universally accepted as the truth. In terms of Bayesian priors, you need very strong evidence to be persuaded that “Satoshi Nakamoto” is not a pseudonym. And this argument doesn’t even come close.
There’s also the whole question of Satoshi’s English, where Goodman can be seen placing a very hard thumb on the scales. Dorian’s English is not good: you can see that in his Amazon reviews, or in the letter he sent about a proposed Los Angeles rail project: “good secruity system against usage of rail as a get away means from the low income generated theives/criminals from area of east LA et. al must be also put in place regardless of the rail passage chosen.”
That kind of language can be seen too in Dorian’s email correspondence with Goodman: “I do machining myself, manual lathe, mill, surface grinders.” Goodman uses this as evidence for her case: she characterizes Satoshi’s original bitcoin proposal as being “somewhat stiffly written”. She also says, reading the original bitcoin paper, that “the punctuation in the proposal is also consistent with how Dorian S. Nakamoto writes, with double spaces after periods and other format quirks.”
But in fact the proposal is written in deeply fluent English:
Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.
What is needed is an electronic payment system based on cryptographic proof instead of trust.
How is it possible that Goodman would notice double spaces after the periods, here, but would not notice that the sheer fluency of the language is quite incompatible with everything we know about how Dorian writes and speaks? She even quotes an email from Satoshi to Andresen: “I wish you wouldn’t keep talking about me as a mysterious shadowy figure. The press just turns that into a pirate currency angle. Maybe instead make it about the open source project.” This is breezy, colloquial English — and it’s entirely incompatible with Dorian’s language. The discrepancy is hard to square — and is all the more glaring for the fact that Goodman doesn’t even attempt to address it directly.
Then there’s the whole question of finances. Dorian “fell behind on mortgage payments and taxes” in the 1990s, reports Goodman, and lost his home to foreclosure; what’s more, he doesn’t seem to have had a steady job in well over a decade. And yet, famously and notoriously, he has never sold a single one of the million bitcoins he’s credibly assumed to own, despite the fact that, according to Goodman, he and his family “could really use the money”.
Because all bitcoin transactions are public, and because the specific coins Satoshi owns have been identified, selling or spending those coins would give the world a huge clue as to Satoshi’s identity. But with hundreds of millions of dollars at stake, it begs credibility to believe that Dorian couldn’t have found a way to sell at least some of his coins.
Even within Goodman’s piece, then, there are reasons to doubt her thesis. And in the wake of Dorian’s interview with the AP, there are more. His lack of fluency in English is clearly real; he has a credible explanation for the words he said in front of Goodman; and he has a guilelessness to him which would be very hard to fake, especially over the course of many hours with a skeptical reporter.
Put all that together, along with various other problems surrounding things like the time zone of Satoshi’s postings, and there would seem to be a lot of doubt that Dorian is, in fact, Satoshi.
At this point, it’s easy to fall down a rabbit hole of second-order second-guessing. It’s not particularly credible, for instance, that a libertarian engineer named Satoshi Nakamoto would never have heard of bitcoin until three weeks ago, and would, even after today’s news, “mistakenly” call it “bitcom”. What’s more, Dorian’s deny-everything reaction (and the official denial from Satoshi) is entirely consistent with Goodman’s article.
But the fact is that if you believe that Dorian is Satoshi, you have to accept that there are still a lot of things which don’t really add up. And conversely, if you believe that Dorian is not Satoshi, then you at the very least have to wonder at the astonishing number of coincidences that Goodman has uncovered.
Which means that the responsible thing to do, from Newsweek’s perspective, would have been to present a thesis, rather than a fact. For instance, when Ted Nelson attempted to reveal Satoshi’s identity last May, he put together a video where he put forward a theory which he said was “consistent, plausible, and, I believe, compelling”. He then took a step back, and let the bitcoin community more generally come to their own conclusions about whether or not to believe him; in the end, they (generally) didn’t.
Newsweek could have done that. It could have said “here’s a theory”, and then let the world decide. Many people would have believed the theory; others wouldn’t. And lots of us would probably have changed our minds a few times as we weighed the evidence and as Dorian’s own words came out.
But Newsweek didn’t want a theory, it wanted a scoop. And so, faced with what was ultimately only circumstantial evidence, it went ahead and claimed that it had uncovered Satoshi — that, basically, it was 100% certain.
That decision was ill-advised. Newsweek certainly got lots of buzz for its return to print — but it’s now getting just as much buzz for going to press with what is looking increasingly like a half-baked theory. Personally, I don’t know whether Dorian is Satoshi — but I think I can be pretty safe in saying that the probability is somewhere in the range of, say, 10% to 90%. In other words, it’s possible; it might even be probable; but it’s not certain. And anybody who says that it is certain is wrong.
I believe that Goodman believes that Dorian is Satoshi. I believe that Jim Impoco, my ex-boss, who’s now the editor of Newsweek, also believes that Dorian is Satoshi. But belief is not enough. Dan Rather believed that the Killian documents were genuine; Hugh Trevor-Roper believed that the Hitler diaries were genuine; Lara Logan believed that Dylan Davies was telling the truth about Benghazi. Big scoops are dangerous things.
It would have been less satisfying, for Newsweek, to leave a bit of wiggle room — to present the Dorian-is-Satoshi theory as just a theory, rather than as fact. But it is only a theory. And ultimately, it’s always better to be Ariel Dorfman than it is to be Paulina Salas.
Once upon a time, remittances, especially to Mexico, were the next big thing. In 2002, for instance, Bank of America bought 24.9% of one of Mexico’s big three banks, Serfín, mainly for the remittance business:
Bank of America says it will compete with Citigroup for Mexican and Mexican-American customers in the United States. It particularly hopes to win a larger share of fees from the $10 billion in remittances they send to Mexico each year…
Kenneth D. Lewis, Bank of America’s chairman and chief executive, made it clear today that a primary goal of the deal was to gain more Mexican-American customers in the United States and ”dramatically increase our market share” of their remittances.
BofA’s purchase was in large part a defensive move — a reaction to the 2001 acquisition of Mexico’s largest bank, Banamex, by Citigroup. That deal, too, had a significant remittances component to it, and by 2004 Citi and Banamex had launched their Access Account, a product allowing Mexicans to easily send money from any Citibank branch in the US to any Banamex branch in Mexico.
The Access Account competed against a consortium of Mexican savings banks, who had teamed up with US Bank to create a similar product in 2003. But that wasn’t the end of the dealmaking: later in 2004, the third big Mexican bank, BBVA Bancomer, bought Texas bank Laredo National Bancshares for $850 million, with the aim of increasing Bancomer’s 40% share of the remittance business.
The banks were racing into the remittance market because it held a huge amount of promise: it was growing fast, the incumbents (Western Union and MoneyGram) were easy to undercut, and the potential profits were huge: after all, to a big bank, the marginal cost of moving money from the US to Mexico is essentially zero.
The promise of cheaper, next-generation remittances was so great that the World Bank, in 2009, set what it called a “5X5 Objective”: that it would reduce the cost of remittances by five percentage points in five years. By 2014, remittances would cost only 5%, rather than the 10% prevailing in 2009.
The objective was entirely achievable — and indeed, last year, looking at the depressed MoneyGram share price, I blithely declared that “money transfer is in the process of being disrupted”.
Certainly the growth in remittances, over the past five years, would more than allow for economies of scale. While international capital flows have fluctuated, remittances have been growing steadily, and have remained above all debt and portfolio equity flows every year since the financial crisis. Here’s the flows chart, from the World Bank:
But here’s the chart showing whether the 5X5 objective is going to be met — and it’s not pretty. The reduction to an average cost of 5% isn’t even close to being achieved.
In Mexico, remittance flows are falling, up even as the number of migrant workers in the US now comfortably exceeds the levels seen before the financial crisis. And the banks, who were once so excited about this market, are packing up shop:
Banamex USA underwent a downsizing last year. The company had a sizable business in taking money from third-party agents in the United States and then remitting the money back to an extensive network of Banamex bank branches in Mexico, industry experts say.
But now Banamex USA will transfer money from the United States to Mexico only from its own customers, a spokeswoman said. Last year, Banamex USA also reduced the number of its branches in California, Arizona and Texas, three states with large Mexican immigrant communities, to three from 11.
Citigroup said the changes at Banamex USA are part of the bank’s global restructuring of branches and businesses. But industry participants suspect that the moves may have more to do with avoiding the costs and risks of trying to meet anti-money-laundering regulations.
The problem with remittances, it turns out, is that such operations have a habit of getting hit by anti money laundering probes. The current problems at Banamex, for instance, come in the wake of similar issues at Western Union, which stopped using thousands of agents in Mexico who couldn’t meet regulatory-reporting requirements. On top of that, because there’s no shortage of smaller companies trying to compete on price, busy corridors like US-Mexico are now actually pretty cheap: the World Bank’s Dilip Ratha told the NYT last year that the cost of a $300 transfer is now only around 2%.
Indeed, if you look at the World Bank report, a curious phenomenon emerges: remittances seem to be growing fastest where they’re most expensive, and falling where they’re relatively cheap.
What this says to me is that if the World Bank wants to maximize remittance flows, maybe concentrating on bringing the price down is not the best way of doing that. Financial services to the poor are nearly always expensive, and the rich tend to have a very understandable and predictable reaction when they see that: they want to bring the price down, for the sake of the poor people. All too often, when that happens, the supply of that service tends to dry up — or the poor continue to pay more than they strictly need to.
Here’s a theory: when the cost of remittances is high, the providers of those remittances have every incentive to make it as easy as possible for as many people as possible to remit as much money as possible back home. And when the cost of remittances falls, those incentives weaken, and it’s easier to sever ties to merchants and generally discourage the use of services which you formally pushed aggressively. Maybe remittance services are sold, just as much as they are simply purchased. As a result, when they’re cheaper, and not sold as hard, the migrants end up spending more money where it’s earned, and sending less back home.
Most of the new companies competing on price against Western Union are doing so with mobile apps and the like: they try to make it as easy to send money home as possible. Maybe it’s as easy as just pressing a few buttons on your phone. But I suspect that what such services are not doing is adding much in the way of behavioral layers: they’re not giving people an incentive to send as much money home today as they possibly can. After all, if it’s that cheap and easy, why not send less today, and then more tomorrow, if it’s still there?
There are still a lot of areas of the world where the cost of remittances is too high, of course. But when it comes to Mexico flows, I don’t think that’s necessarily the problem. Not any more, anyway. Instead, if anything, the cost of remittances might be too low: it doesn’t give banks an incentive to be active participants, given (a) the headaches involved with respect to money-laundering regulations, and (b) the up-front cost of enticing migrants to use the service in the first place. So the banks will keep the product in place — they just won’t make it particularly easy to use, and they won’t promote it aggressively. And they won’t be too upset if usage declines.
Update: Timothy Ogen replies.
Puerto Rico, which is already junk-rated and which is facing yet another downgrade to its credit rating, is in no position to call any shots when it comes to raising new debt. If it wants to borrow new money — and it looks like it wants to borrow a hefty $3.5 billion in the next few weeks — then it’s going to have to make whatever concessions its lenders want. That means paying a very hefty interest rate in the 10% range, of course. But it also means changing the governing law of the bonds, from Puerto Rico to New York.
Notably, the Puerto Rican government was very careful to ensure that it would not waive its sovereign immunity, except as regards “legal proceedings with respect to such bonds”. The result is that Puerto Rico seems, on its face, to be setting itself up for a nasty, drawn-out stalemate a la Argentina, where bondholders sue a sovereign nation in New York, trying to claim all the principal and past-due interest that they’re due, while the sovereign in question responds that all of its assets are immune from attachment. That’s definitely not the kind of fight that the hedge funds lending Puerto Rico money would ever want. So why are they insisting on New York law?
The answer is that the hedge funds lending to Puerto Rico basically look at bond contracts, and New York law, in much the same way that Argentina does. In fact, they would be very upset if Puerto Rico treated its new debt in the way that Argentina’s opponents — and a number of New York federal judges — like to think.
At stake, of course, is the fate of Puerto Rico’s bondholders if and when the territory ever defaults on its obligations. Already, some Puerto Rican lawmakers are saying that’s exactly what should happen, and there’s no obvious fiscal track to debt sustainability, so default is a very real risk, and the main thing that lenders want to protect themselves against.
Historically, default protection has come mainly in the form of asset-backed bonds. Most of Puerto Rico’s debt is backed by some revenue stream or other: even if the government defaults, the state-owned utilities and the like will still have revenues which can be attached (at least in theory) by bondholders. But here’s the problem: if I held one of those revenue bonds today, I would not feel particularly confident in my ability to continue to get my coupon payments, even in the face of a government default.
The problem is precisely that so much of Puerto Rico’s debt is collateralized in this way. If we reach the point at which Puerto Rico needs to default in order to get its fiscal house in order, then it will have to restructure (which is to say, default on) its revenue bonds. If those are untouched, then the problem doesn’t get solved, and there’s really no point in defaulting in the first place. No one knows exactly how Puerto Rico would do such a thing, but legislation would probably be involved — if Greece can do it, then there’s a decent chance that Puerto Rico can, too. The idea is to pass a law which, in effect, makes it legal to default on your debts. And since those debts are issued under domestic law, there might not be much that bondholders can do about it.
Conversely, if Puerto Rico defaults with a relatively small quantity of New York-law debt outstanding, it’s probably easier for Puerto Rico to just continue to pay the coupons on that debt, rather than try to restructure it. Again, Greece is the precedent here: while debt under Athens law was restructured, debt under London law continues to be paid in full. Puerto Rico could default on its New York-law debt, of course — but doing so would severely cripple the island’s ability to do business with the mainland; would involve paying massive legal fees for years to come; and probably wouldn’t move the needle very much when it came to debt sustainability.
The point here is that the concept of seniority doesn’t really make a lot of sense when you’re not operating in the context of a formal bankruptcy regime. A bankruptcy judge can ensure that a debtor pays senior creditors first, and junior creditors last. But in a sovereign context — which includes Puerto Rico — there is no such thing as bankruptcy. In the Argentina case, the New York courts are trying to enforce an idiosyncratic reading of the formerly-obscure pari passu clause to try to bring back some semblance of seniority into the sovereign debt world, but it’s a knock-down, drag-out fight, and no one knows how it’s going to end. The overarching principle in sovereign debt remains the principle that has governed Argentina’s behavior ever since it defaulted well over a decade ago: a sovereign government can and will pay whomever it likes, whenever it likes, wherever those people think that they might stand in terms of some theoretical seniority chart.
As a result, creditors in Puerto Rico aren’t looking for de jure seniority; they’re looking instead for de facto seniority. And the way to get that is to be part of a small group of bonds which is more trouble than it’s worth to restructure.
That strategy generally works very well. When most of Latin America was busy defaulting on its sovereign loans in the 1980s, for instance, the countries in question generally stayed current on their sovereign bonds — just because the loan stock was big, and mattered, while the bond stock was small, and didn’t. Similarly, when Russia defaulted on its debt in the late 1990s, it defaulted on its large stock of domestic bonds, but stayed current on its much smaller stock of international-law bonds, for exactly the same reason.
So when you see hedge funds demanding that their new Puerto Rico bonds be issued under New York law, don’t kid yourself that they particularly value the protections that New York law gives them, or that they think that New York courts will allow them to recover most of their money in the event of default. Rather, they’re just hoping that Puerto Rico won’t bother defaulting on those bonds in the first place. And they might well be right about that.