| One job of a bank is to stop crime. If someone is selling illegal drugs or doing terrorism or being Jeffrey Epstein, he will want a bank account to send and receive money; this is called "money laundering." The US government expects banks to check for criminals, stop them from opening accounts and sending or receiving money, and report their crimes to the government. If a bank does not do this, it will get in trouble. The trouble will consist of (1) a large fine, (2) a guilty plea to federal crimes and (3) Justice Department officials giving a press conference in which they say "Bank X became involved in terrorism and drug trafficking." These consequences seem bad. On the other hand, it is impossible for any bank to do this perfectly. Banks do not know exactly the source of funds for every $40 ATM deposit; they don't know exactly what their customers get up to when they're not at the bank. A law like "don't sell cocaine" is relatively straightforward to enforce: If you sell cocaine, you are guilty; if not, not. A law like "don't provide banking services to cocaine dealers" is harder: If you are a big bank with millions of customers, and you do your best to check to make sure none of them are cocaine dealers, but one customer works a legitimate job but also sells a little cocaine on the side, are you guilty of a crime? And the basic answer — not legal advice! — is that you have to try your best. The rules require banks to have robust anti-money-laundering programs, and to report suspicious activities above certain dollar thresholds, but there is no real expectation that banks will catch every criminal. (Thereis no real expectation that the police will catch every criminal.) The goal of anti-money-laundering (AML) rules, writes Patrick McKenzie, "is not to achieve banks having good knowledge of their customers or to prevent money laundering. It is to stochastically manage crime and terrorism at the margins." The emphasis is on "stochastically": A bank needs to make it hard for criminals to get banking services, but not literally impossible. That necessarily creates a fuzzy distinction between "good enough" and "a felony." Some banks have robust compliance programs, do a certain amount of transactions for criminals anyway, and don't get in trouble. Other banks have less robust compliance programs, do a lot of transactions for criminals — or some really egregious ones — and get fines and guilty pleas and bad press conferences. What is the difference? I have always thought that the main difference was something like "ignoring red flags." AML is a little bit like market manipulation, in that what gets you in trouble is not just "processing transactions for criminals" but "having internal emails in which your compliance officer says 'lol we are processing transactions for criminals.'" (The classic example is Binance, whose compliance employees said things like "Like come on. They are here for crime" and "can barely buy an AK47 with 600 bucks.") Last Thursday, TD Bank NA pleaded guilty to money-laundering crimes, paid a total of $3.1 billion of fines, was subjected to a cap on its future growth, and got a terrible press conference in which the attorney general of the US said that "by making its services convenient for criminals, it became one." And there were a lot of red flags. Here's how the Justice Department describes one money launderer, known as "David," who pleaded guilty in 2022: David's suspicious activity was obvious even to the casual observer. For example, the surveillance photograph below depicts David conducting a $372,000 cash transaction at a midtown New York store on July 21, 2020. David transacted in accounts that were not in his name. As depicted below, an account holder sat in the background not participating in the transaction while David, who was not the account holder, conducted the transaction. The account owner's lack of participation makes clear that while the account was opened in someone else's name, David actually controlled the account. That same day, David conducted a $290,000 cash transaction at a different TDBNA store. During these transactions, David purchased 14 official bank checks.
"David bribed Bank employees with more than $57,000 in gift cards in furtherance of the scheme," paying them to look the other way as he laundered money. And some money laundering groups "transferred over $39 million to Colombia through a total of 194,940 ATM withdrawals," including by bribing TD Bank employees by sending them money on Zelle. Also TD didn't monitor transfers on Zelle. Also there were bad internal chats: AML Technologist: what do the bad guys have to say about us GAML Manager: Lol GAML Manager: Easy target AML Technologist: damnit
And: Employee 1: :P why all the really awful ones bank here lol Employee 2: because… Employee 2: we are convenient Employee 2: hahah Employee 1: bahahahaha
Hilarious. But TD Bank's problem — which led to the largest AML-failures penalty ever — was not just about ignoring red flags. The more fundamental problem is that TD Bank tried to do its anti-money-laundering compliance on the cheap, and the prosecutors and regulators hate that. The Justice Department says: [The TD Bank Global Anti-Money Laundering (GAML) group]'s budget was a primary driver of its decisions about projects, hiring, staffing, and technology enhancements throughout the relevant period. GAML executives strove to maintain what TD Bank Group referred to as a "flat cost paradigm" or "zero expense growth paradigm," meaning that each department's budget, including GAML's, was expected to remain flat year-over-year, despite consistent growth in TD Bank Group's revenue over the relevant period. This budgetary pressure originated with senior bank executives and was achieved within GAML and US-AML by [its chief AML officer] and [its Bank Secrecy Act officer], both of whom touted their abilities to operate within the "flat cost paradigm without compromising risk appetite" in their self-assessments. GAML's base and project expenditures on USAML were less in fiscal year 2021 than they were in fiscal year 2018 and were not sufficient to address AML deficiencies including substantial backlogs of alerts across multiple workstreams, despite TDBNA's profits increasing approximately 26% during the same period. In 2019, [the chief AML officer] referred to the Bank's "historical underspend" on compliance in an email to the Group senior executive responsible for the enterprise AML budget, yet the US-AML budget essentially stayed flat. GAML and US-AML employees explained to the Offices that budgetary restrictions led to systemic deficiencies in the Bank's transaction monitoring program and exposed the Bank to potential legal and regulatory consequences.
That, I think, is why the fine was so big. The message that this case is meant to send to banks is "if your compliance team wants more money to build a better AML program, you'd better give it to them, because otherwise we will fine you orders of magnitude more money than you would have spent." The attorney general said: TD Bank chose profits over compliance, in order to keep its costs down. That decision is now costing the bank billions of dollars in criminal and civil penalties.
The deputy attorney general added: We are putting down a clear marker on what we expect from financial institutions — and the consequences for failure. When it comes to compliance, there are really only two options: invest now – or face severe consequences later. As I've said before, a corporate strategy that pursues profits at the expense of compliance isn't a path to riches; it's a path to federal prosecution.
One job of a bank is to stop crime, which means that banks employ thousands of people who essentially work for the US Department of Justice. But the Department of Justice has no direct control over how many of those people there are, how much they get paid or what resources they have. Law enforcement agencies cannot directly set the banks' budgets for anti-money-laundering programs, even though those budgets really are part of law enforcement. It is, perhaps, a frustrating situation: The Justice Department would like banks to spend more money catching criminals, and it can't quite make them. Except obviously it can. The Justice Department can't directly set banks' AML budgets, but it can do it indirectly, and it just did. If you are a bank compliance officer and you want to hire 2,000 people and get some shiny new computers, you can go to your regulators and say "do we need to spend this money on AML," and they will say "that would be better," and you will go to your chief executive officer with a transcript of the TD Bank press conference, and you will get whatever you want. One of the main theses of this column is that "private equity" is a classy way to say "plumbing." "I'm going into the plumbing business," you tell your Harvard Business School classmates, and they look confused and pitying. "I'm going into private equity," you say, and they're like "oh yes of course, fancy." So you go to a private equity firm, where you manage its plumbing business. Or pest control. Those are my two main examples of private equity. Obviously private equity firms do lots of other stuff — tech? medical office rollups? — but there sure is a lot of plumbing. Here is a Wall Street Journal article about private equity rollups of plumbing and HVAC businesses: Private equity … is no foreign player in the skilled trades these days. PE firms across the country have been scooping up home services like HVAC—that is, heating, ventilation and air conditioning—as well as plumbing and electrical companies. They hope to profit by running larger, more profitable operations. Their growth marks a major shift, taking home-services firms away from family operators by offering mom-and-pop shops seven-figure and eight-figure paydays. It is a contrast from previous generations, when more owners handed companies down to their children or employees. … Private-equity investors have purchased nearly 800 HVAC, plumbing and electrical companies since 2022, according to data from PitchBook. And those are just the biggest deals—plenty of smaller-scale purchases aren't tracked, and sellers are reluctant to share exact details about their PE payouts. "Everybody and their uncle owns an HVAC business in the private-equity space today," says Adam Hanover, chairman of Redwood Services. The PE-backed home-services company bought Aaron Rice's business in 2022 and merged it with Rite Way, a larger Tucson-based HVAC operation that Redwood acquired the year before.
My general model of this is that, in the olden days, entrepreneurs would start normal businesses, and some would succeed and get big, and the entrepreneurs would send their children to business school to learn modern management techniques, and then the children would take over the businesses and manage them professionally. And there was a lot of chance and inefficiency there: Maybe the successful entrepreneurs wouldn't have children, or the children wouldn't want to go into the family business, or they'd learn nothing in business school and run the company into the ground. And that informal hereditary economy of small businesses has been replaced by an efficient market, in which the best graduates of business schools are able to raise large amounts of money to be the highest bidders for the family businesses, so they can apply their business-school knowledge as efficiently as possible, while the heirs just get cashed out. But you could have a more specific model, which is "the most useful skills for a private equity investor are financial modeling, people skills and plumbing." Like when you are interviewing for your private equity gig a few months before you start your investment banking analyst program, you won't really have worked on any deals yet, so your discussions with your interviewer about financial modeling will be pretty boring. But if you are really good at installing hot-water heaters then you are an obvious asset to any private equity firm: There probably aren't that many skilled plumbers at Blackstone, but they keep buying plumbing businesses, and if you really know plumbing then you will be able to jump right in. Though the other good move might be to be on the other side of that deal, not working 100 hours a week in private equity to evaluate plumbing deals, but selling to private equity: Given the surging investor interest, [Alpine Investors founder Graham] Weaver says, anyone with entrepreneurial ambitions should take a second look at the trades, which offer steady income via unclogging toilets, fixing boilers and installing new air-conditioning units. "You can build a business that's going to be worth $10-30 million and have a ready list of buyers to sell it to," he says. "Ten years ago, there was no one to sell it to."
If private equity is going to pay up for plumbing businesses, then arguably the move is to be a plumber. I think that a roughly plausible business model these days is: - Buy like $100 worth of shares of hot private companies like SpaceX or OpenAI.
- Put those shares in a pot.
- List shares of the pot on the stock exchange.
- Sell shares of the pot to the public for $300.
- Keep the extra $200.
Retail investors can't get shares of the hottest private tech startups, but they would like to. If you can get that access, you can sell it to them at a large markup. You are charging them for (1) your access and also (2) your work in packaging the stock into a vehicle accessible to the public. Private-company shares don't trade on the stock exchange, and ordinary investors can't buy them in their brokerage account. If you put the shares in a retail-friendly wrapper, that is valuable, so people will pay you for it, and it is also scarce, so they will pay you a lot for it. I just made up that $300 number; I don't really know what people would pay you for this. It depends on what private companies you can buy shares of, how hot and scarce they are, and how good you are at hyping your pot of shares. We talked a few times in April about the Destiny Tech100 fund, an exchange-listed closed-end fund that owns shares of hot private companies and traded, for a while, at almost a 2,000% premium to its net asset value. That has come down, though; today it is trading at something like a 150% premium. Still pretty good work if you can get it. And then there's this: Shares of SuRo Capital hit a 52-week high after it released after the bell Thursday a preliminary update on its investment portfolio for the third quarter, which included continued investments in artificial intelligence. The New York investment fund's stock jumped 22% to $4.72 in Friday afternoon trading. Shares are up about 21% since the beginning of the year. During the recent quarter, Chief Executive Mark Klein said that the company made a $17.5 million investment in AI giant OpenAI. It additionally increased its investment in CoreWeave, an AI cloud computing provider, and invested in VAST Data, an AI infrastructure data platform. As a result, the company has invested nearly $55 million into what it called leading AI infrastructure companies. "Given AI's significant addressable market, we believe dedicating a significant portion of our portfolio to AI infrastructure will prove to be successful for our shareholders," Klein said.
So on the one hand, yes, right, if you run a pot of money, and you can rebrand it as a pot of money with some OpenAI in it, that will cause your stock to jump by 22%. On the other hand, SuRo has a long history as a closed-end fund that invests in hot private startups (including Palantir, Lyft, Spotify andFacebook), and it currently estimates that its net asset value is "between $6.50 and $7.00 per share," which is well above its current stock price (about $4.89 as of noon today). So owning a chunk of OpenAI for public investors is not a sure path to a 200% premium. Here is a Wall Street Journal story about how the chief executive officer of AirX, a private-jet charter company, sent a lot of WhatsApp messages to his executives scheming about "ways they could spread dirt" about VistaJet, another private-jet company. And then someone leaked the WhatsApp messages to VistaJet, which sued. AirX's defense is basically that it's allowed to talk trash about its rival: "It is not only reasonable but also responsible for competitors to raise warnings," says AirX's CEO, John Matthews. Anyway the article has several amazing anecdotes. One is about who leaked the WhatsApp chats: After reading the letter from the lawyers, Matthews said he took out his phone, opened the group chat that was the source of the messages, and quickly tapped out a text: "Vista seem to have my WhatsApp messages, anyone shared the group messages?" Only one member of the group—AirX's head of communications—failed to respond, Matthews said. That employee then requested leave. Within weeks, he resigned. (He declined to comment.)
Having your head of communications leak your trash talk to your competitor is a little like having your head of compliance do insider trading. Another is about how Thomas Flohr, the CEO of VistaJet, "a part-time race-car driver whose primary residence is a James Bond-inspired seven-story mansion in the Swiss Alps," makes his money. It's exactly how you'd expect, if you have ever thought about Adam Neumann: When VistaJet published its first bond prospectus about a decade ago, Matthews combed through the 486-page document. He found a section where VistaJet outlined how the company typically buys its aircraft from Bombardier via a separate entity owned by Flohr, positioning the executive as a middleman in the transactions. Matthews said that made it seem as if Flohr was incentivized to grow VistaJet even if it meant exposing the company to an additional financial burden. It's a risk that VistaJet itself flagged in its most recent bond documents, but it describes the deals as being arranged with "arm's-length terms." VistaJet disclosed an example of the structure, saying that it was required to pay Flohr a $1 million fee for some of the aircraft it decided to buy. Flohr has also typically collected additional money from VistaJet on the transactions, depending on the value of the planes at the time of purchase, the prospectus says. … "It's curious, it's very cozy. It's sort of clever, actually," said Rob Britton, a former American Airlines executive and professor at Georgetown University's business school.
Flohr has "never taken a salary or dividend from VistaJet," and the company "has only two shareholders—Flohr and an investor called Rhône Capital," so paying him to broker plane sales seems fine, but I like that the reporters called a business school professor to ask "is this okay" and he was like "oh, that's cool, I like that." Also Flohr threw the best imaginable "CEO of a private-jet charter company" party: For his daughter Nina's 18th birthday, he threw a party for 300 guests that included a historical re-enactment of the rise of Communism. Actors were hired to dress as Bolshevik peasants and as Soviet soldiers on horseback.
I don't even have a joke here; that's just too on the nose. There is a genre of magazine article that I like to call "is $400,000 a year in New York rich," a genre that exists because people love getting angry about it. For any level of wealth or income, you can find some people who (1) make more than that and (2) nonetheless have complaints, which can seem tone-deaf, which makes for good content. Here is a higher-end version from the Financial Times, "is $30 million ultra-high-net-worth": David Gibson-Moore, president of consultancy Gulf Analytica, says the traditional $30mn level "allows for significant investments across multiple asset classes — stocks, bonds, real estate, private equity" — while also furnishing luxuries such as private-jet travel. But, over time, as the financial world has expanded and the accumulation of wealth has accelerated in certain sectors, particularly technology, "the bar for what it means to be ultra-wealthy has risen" he observes. "The $30mn threshold . . . doesn't carry the same weight or exclusivity it once did. In today's world, $30mn might secure you a luxurious lifestyle but, in the realms of the ultra-rich, it's increasingly viewed as just the starting point," Gibson-Moore adds. "The ultra-rich today are being measured by new standards, with some financial commentators now suggesting $100mn is the new yardstick for anyone who wants to keep their head held high at private equity parties."
I love the idea that "financial commentators" are in the business of telling you how to feel at parties. What else could finance possibly be about. 'King of the geeks': how Alex Gerko built a British trading titan. Elliott Requests Special Meeting at Southwest Airlines. PIK debt. Portable debt. SoFi Strikes Deal With Fortress for $2 Billion of Personal Loans. Private Equity Shouldn't Be Greedy in IPOs, BC Partners Says. Banks and fund managers call on EU to commit to shorter settlement plan. Michael Pettis profile. TPG and Blackstone team up to bid for eyecare company Bausch + Lomb. Nobel Prize Goes to Economists Studying Europe's Colonial Legacy. Inside the Business of Running a Haunted House. Ryan Salame profile. "I'm happy to share that I'm starting a new position as Inmate at FCI Cumberland." OpenAI v. Open AI. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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