The Trump memestock

I don’t usually cover news, but I want to highlight some recent finance shenanigans. Much of what I’m doing here is recapping the Wikipedia article, with some additional context.

Trump Media & Technology Group (TMTG) is a company that owns Truth Social—Donald Trump’s alternative to X. TMTG recently merged with Digital World Acquisition Corp. (DWAC). DWAC is a type of company known as special-purpose acquisition company (SPAC). A SPAC is basically an empty shell company, whose entire purpose is to go public (meaning, publicly traded on the stock market), and then merge with a private company so that the private company can be public. SPACs are a method of skipping the usual bureaucracy required to take a company public. (See: educational video on SPACs.)

In other words, thanks to this merger, it’s now possible to buy and sell shares of Donald Trump’s Twitter clone.

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The Friedman Doctrine and alternatives

One of the big criticisms of capitalism is that corporations are purely profit-seeking. If there’s ever an opportunity for a large corporation to work towards a social good, or to benefit the environment, the corporation won’t do it, except insofar as it benefits their stockholders. The corporation is practically obligated to be as greedy as possible. There’s a name for this: the Friedman Doctrine.

The Friedman Doctrine was coined by a 1970 article by economist Milton Friedman. Friedman argued that the social responsibility of a business executive is solely to increase the business’ profits. To prioritize anything else is to unilaterally take money from stockholders, employees, and/or customers, and spend the proceeds on whatever the business executive thinks is good. As a business philosophy, the Friedman Doctrine is considered to have been dominant from the 1980s to today.

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Capital in board games

In economic strategy board games, it’s very common to have an arc of growth over the course of the game. You start out with few resources, and then you invest those resources to bolster your income, which then gets reinvested to grow even more, following an exponential trajectory. Central to this growth trajectory is the concept of capital.

In economics, capital is understood as durable goods that are used to increase or enable production. The classic example of capital is factory machines, but capital could also be something abstract, such as an education. People commonly understand capital as simply money, which is true insofar as money is commonly invested into capital. And so it is in economic board games, where you invest fictional money into fictional capital in order to increase fictional production.

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Fair lending and discrimination

If a lender offered the same price (i.e. interest rate or APR) to every borrower, then it would only be a good deal for the riskiest borrowers. Lenders would have to raise prices to match the risk, and then it would only be a good deal for the riskiest of the riskiest borrowers. Lenders would have to raise prices further and further until there are no takers. This is called an adverse selection death spiral.

Therefore, lending fundamentally relies on offering different prices to different borrowers—and refusing some borrowers entirely. In other words, lending fundamentally relies on discrimination.

Lenders assess the risk of each borrower, in a process called underwriting, and make the decision whether to decline or approve, and at what price. Traditionally, underwriting has been done manually by human experts. It has also been performed by following pre-determined rules. More recently, many lenders are using machine learning to make underwriting decisions.

When we talk about discrimination, usually we’re talking about “bad” discrimination, such as sexism or racism. But in general, discrimination is just about treating different people differently, and that in itself is not bad. Nonetheless, legitimate discrimination can be used to conceal bad discrimination. Bad discrimination can also occur unintentionally, being concealed even to its purveyors. Fair lending regulations try to delineate and mitigate bad discrimination in lending.

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Silicon Valley Bank collapse

Last week, two major banks collapsed: Silicon Valley Bank (SVB) and Signature. These were the second and third largest bank collapses in US history—the largest being Washington Mutual in 2008. Since I seem to be writing about finance this month, I wanted to try my hand at explaining why, for the reader who doesn’t know anything about finance.

Short answer: SVB placed a big bet long-term US treasury bonds and mortgage-backed securities. However, the prices of these assets went down. Companies with money in SVB were worried about it, so they started withdrawing a lot of money, requiring SVB to sell its assets at a loss until it was wiped out. Bank collapses tend to spread via a process called “contagion”, and Signature appears to be the first victim.

Really long answer: Okay, let’s walk through these concepts one by one.

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What do you think of finance?

Dear readers, what do you think of the finance industry?

Ideally, I would keep this short and give up the floor to commenters. But I’ll start by saying I work in the finance industry. I am not a finance expert, I’m just a data scientist. I am ambivalent about the moral value of the industry.

I know from hanging out in leftist spaces that a lot of people feel much more strongly about the finance industry. Strongly negative. I’m curious to hear more.

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Why doesn’t EA divest from crypto?

After Sam Bankman-Fried (SBF) was arrested for massive fraud in November, there has been a reckoning in the EA movement to which SBF belonged. I’ve linked to several critics discussing how SBF’s actions could have been attributed to EA philosophy and practices, and even offered my own humble commentary.

Of course, it’s very easy to get distracted by philosophical arguments, and miss what’s staring in our face. The much more obvious takeaway from the whole affair is: EA was overinvested in cryptocurrency. Cryptocurrency is evil, why were they invested in it at all?

Yes, fraud can come from any sector, and no, not every person involved in crypto is fraudulent to the same degree as SBF. No, SBF is not “proof” of the depravity of crypto. What SBF proves, is that EA has been supportive of, and dependent on crypto. EA insiders must have already known, and maybe some readers already knew, but I didn’t know! I didn’t know EA had so much crypto in it! Why is that? And why don’t they stop?

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