Money Rehab with Nicole Lapin - Something is Rotten in Rotterdam

Episode Date: March 29, 2023

It's been a wild week on Wall Street and it's only Wednesday. Nicole brings you three ginormous stories dominating the financial news cycle, that reach from drugs to a bag of rocks masquerading as nickel to a Binance Compliance Officer with a dubious point of view: "I HAZ NO CONFIDENCE."

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only rehab. I don't know if it's the interest rate hikes or something in the financial stars, but right now is a wild time on Wall Street. We've got a lot to cover with today's weekly news update, two new and evolving stories, plus some updates on SVB. But when the news is super full like this, there are always stories that fall through the cracks and get lost in all of the excitement and hullabaloo. We're going to talk about one of

those stories at the end of the episode. So hang around because I think it's a real treat if you're a nerd like me and you think financial news stories are a treat. But before we get to our main stories about crypto bros and some juicy, juicy financial gossip, let's check in on the situation over at Silicon Valley Bank. On Sunday, regulators arranged for First Citizens Bank out of Chex Notes, North Carolina, to buy Silicon Valley Bank. SVB is back to being a normal bank. For a while, the FDIC was fully protecting all deposits at the bank. But now that it has been purchased, they aren't doing that anymore and are only insuring deposits up to $250,000.

For a couple of weeks, it was the safest bank in America. Now it's just a normal bank run out of North Carolina. And it remains to be seen if the folks over there at First Citizens can continue SVB's reputation of being the startup investment bank of choice, or if they even want to. However, this purchase has been great for First Citizen's stock price, which has shot up on the news of this purchase. In things that have gone down in the news, it finally happened. On March 22nd, Hindenburg Research dropped a hint that had my group chats blowing up. Now, we've talked about Hindenburg Research before. They're the short-selling group. The way they make money is that they identify companies that are deeply flawed or criminally corrupt.

They borrow shares of their stock to sell. They release their information on what's wrong with the company. Then they buy back their borrowed shares at a lower price and pocket the difference. Then they return the borrowed shares. and pocket the difference. Then they return the borrowed shares. Now, you may not agree with this business model, but it only works if your research is on point. You have to have receipts for your receipts for this to work. And Hindenburg, their receipts all the way down. This time, the target of their investigation is the company Block, formerly known as Square, and its CEO, Jack Dorsey. There are many different allegations.

Hindenburg is saying that Block has misled investors, uses predatory practices that profit off poor people, and knowingly allows their app to be used for crime. The fraud aspect of this story is central. Block claims to have 51 million active users a month. But Hindenburg reports say that up to 75% of those accounts are fraudulent accounts. Hindenburg learned this by studying all of the available records and also talking to former and current employees. But during their research, they also discovered just how easy it is to set up a fake

Cash App account and credit card. To prove this, they got accounts in the name of Elon Musk and Donald Trump. They sent money between the accounts and even managed to get Cash App to send them a Donald Trump credit card. Even Jack, the CEO of the company, isn't safe from fraud. Hindenburg found five different fake accounts for him. They also looked at some issues with the way Block is being valued and how far out of alignment it is with its peers. Not only that, but what profits the company is making are often a result of some pretty sus decisions. For example, there are caps on how much large banks can charge interchange fees or merchant fees. Despite essentially being a large bank, Block

avoids the limits on those fees by routing a lot of its transactions through smaller banks so that they can charge merchants far more in fees than they would be allowed to otherwise. Block also purchased Afterpay, which is one of those buy now, pay later companies. They technically don't charge interest in the same way a credit card does, but by Hindenburg calculations, they are charging some of the most vulnerable users, those who cannot access traditional credit or afford to pay for things in full with cash, upwards of 289% in interest when you calculate what all of the late fees mean for users. And all of those fake ghost accounts on Cash App? A large number of them are being used for nefarious means.

In particular, a lot of them are for receiving payments for drug and sex trafficking. This tees us up, depressingly, to talk about our next big story, the U.S. Commodity Futures Trading Commission's, or the CFTC's, lawsuit against Binance. There are two main points of this complicated lawsuit. The first is that it's illegal in America to allow people to trade unregistered derivatives, and no one in America has ever been given permission to sell registered crypto derivatives. Crypto derivatives are like options for crypto and other ways to profit off the price change of crypto without actually owning the asset you're making money off of. The charge here is that Binance was subtly telling customers how to use a VPN or software that obscures their location to get around American laws and trade crypto derivatives on Binance's global crypto exchange. This is a no-no. You cannot tell your customers to break local laws. But a lot of Binance's customers, the second prong

of the suit alleges, didn't need any tips on breaking the law because they were, in fact, criminals. Or as the money laundering compliance officer said in an internal chat, quote, I has no confidence. All in caps. End quote. That line, by the way, is directly from the federal case. A few lines down, it has the chief of strategy discussing how Hamas limits its deposits to avoid money laundering suspicions. And when discussing, Russian users says, like, come on, they are here for crime. Again, direct quote. To which the cheeseburger compliance officer replies, quote, we see the bad, but we close two eyes, end quote. Which, yeah, that is not what a compliance officer is supposed to be doing. They are supposed to have both eyes

open preventing crimes. The crimes here are all processing crimes. It does not appear that Binance is mishandling anyone's money, but I has no confidence in anything about the situation. Our final story is another crime, but this is kind of a whodunit one. It fits nicely because it's about derivatives as well. This one is about buying futures. Basically, these are the rights to buy a commodity at a set price. For example, let's say you buy a $5 coupon that will let you buy MAC lipstick for $10 and it expires at the end of April. That's a good deal since they cost $20. Using that coupon, you'll pay $15 altogether for $20 lipstick. Now, you could go out and buy that lipstick,

or you could sell your coupon for its face value and make $5 profit. If the price of the lipstick, though, goes down $5, you may decide to not buy the lipstick at all and just eat the $5. This is sort of how commodity futures work, except the underlying asset here is 100 drums of oil or tons of corn, or as is the case in this story, $2 million worth of nickel. All a lot less practical to the average person than that new tube of velvet teddy lipstick, but far more valuable. Now, these commodity futures get traded around. Sometimes companies use them as a hedge to get better prices on raw materials, and other times

they're just traded as an investment asset. This was the case with tons of nickel in a JP Morgan warehouse in Rotterdam. But something was rotten in Rotterdam and these bags of nickel turned out to be just rocks. I guess nickel is a type of rock, so maybe the wrong type of rock is a more accurate way to phrase it. That's right, for some period of time, J.P. Morgan had been involved in a Schrodinger's cat commodity trade. Since they were mostly just trading the paper with no intention that anyone would ever claim that particular pile of nickel because of the way fulfillments were done. As long as no one went to the warehouse and actually kicked open the bag, they were fine and trading a valuable asset. But as soon as someone did kick the bag open and discover that they were filled with the wrong rocks, J.P. Morgan's futures were worthless.

This also meant that now there's a massive scramble to kick bags at warehouses around the world to make sure that the nickel is all where it should be. And I do mean literally kick the bags. where it should be. And I do mean literally kick the bags. Steel-toed boots are recommended, and apparently you'll know that you've kicked nickel because it hurts more. That's real life. At this time, the suspicion is that persons unknown stole the nickel from the warehouse, as the records show that it was checked and found to be correct when it came in initially. No word yet on who will be selling the futures on those movie rights. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes.

Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.