The super-rich love South Dakota

Friday, December 6th, 2019

Money has poured out of traditional offshore jurisdictions, such as Switzerland and Jersey, and into a small number of American states, such as Delaware, Nevada, Wyoming, and, above all, South Dakota:

A South Dakotan trust changes all that: it protects assets from claims from ex-spouses, disgruntled business partners, creditors, litigious clients and pretty much anyone else. It won’t protect you from criminal prosecution, but it does prevent information on your assets from leaking out in a way that might spark interest from the police. And it shields your wealth from the government, since South Dakota has no income tax, no inheritance tax and no capital gains tax.

A decade ago, South Dakotan trust companies held $57.3bn in assets. By the end of 2020, that total will have risen to $355.2bn. Those hundreds of billions of dollars are being regulated by a state with a population smaller than Norfolk, a part-time legislature heavily lobbied by trust lawyers, and an administration committed to welcoming as much of the world’s money as it can.

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At the heart of South Dakota’s business success is a crucial but overlooked fact: globalisation is incomplete. In our modern financial system, money travels where its owners like, but laws are still made at a local level. So money inevitably flows to the places where governments offer the lowest taxes and the highest security.

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When Citibank based its credit card business in Sioux Falls, it could charge borrowers any interest rate it liked, and credit cards could become profitable. Thanks to Janklow, Citibank and other major companies came to South Dakota to dodge the restrictions imposed by the other 49 states. And so followed the explosion in consumer finance that has transformed the US and the world. Thanks to Janklow, South Dakota has a financial services industry, and the US has a trillion-dollar credit card debt.

Fresh from having freed wealthy corporations from onerous regulations, Janklow looked around for a way to free wealthy individuals too, and thus came to the decision that would eventually turn South Dakota into a Switzerland for the 21st century. He decided to deregulate trusts.

Trusts are ancient and complex financial instruments that are used to own assets, such as real estate or company stock. Unlike a person, a trust is immortal, which was an attractive prospect for English aristocrats of the Middle Ages who wished to make sure their property remained in their families for ever, and would be secure from any confiscation by the crown. This caused a problem, however. More and more property risked being locked up in trusts, subject to the wishes of long-dead people, which no one could alter. So, in the 17th century, judges fought back by creating the “rule against perpetuities”, which limited the duration of trusts to around a century, and prevented aristocratic families turning their local areas into mini-kingdoms.

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Then Governor Janklow came along. In 1983, he abolished the rule against perpetuities and, from that moment on, property placed in trust in South Dakota would stay there for ever.

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In most jurisdictions, trusts have to benefit someone other than the benefactor – your children, say, or your favourite charity – but in South Dakota, clients can create a trust for the benefit of themselves (indeed, Sun Hongbin is a beneficiary of his own trust). Once two years have passed, the trust is immune from any creditor claiming a share of the assets it contains, no matter the nature of their claim. A South Dakotan trust is secret, too. Court documents relating to it are kept private for ever, to prevent knowledge of its existence from leaking out. (It also has the useful side effect of making it all but impossible for journalists to find out who is using South Dakotan trusts, or what legal challenges to them have been filed.)

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When a whistleblower exposed how his Swiss employer, the banking giant UBS, had hidden billions of dollars for its wealthy clients, the conclusion was explosive: banks were not just exploiting poor people, they were helping rich people dodge taxes, too.

Congress responded with the Financial Assets Tax Compliance Act (Fatca), forcing foreign financial institutions to tell the US government about any American-owned assets on their books. Department of Justice investigations were savage: UBS paid a $780m fine, and its rival Credit Suisse paid $2.6bn, while Wegelin, Switzerland’s oldest bank, collapsed altogether under the strain. The amount of US-owned money in the country plunged, with Credit Suisse losing 85% of its American customers.

The rest of the world, inspired by this example, created a global agreement called the Common Reporting Standard (CRS). Under CRS, countries agreed to exchange information on the assets of each other’s citizens kept in each other’s banks. The tax-evading appeal of places like Jersey, the Bahamas and Liechtenstein evaporated almost immediately, since you could no longer hide your wealth there.

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But the US was not part of CRS, and its own system — Fatca — only gathers information from foreign countries; it does not send information back to them. This loophole was unintentional, but vast: keep your money in Switzerland, and the world knows about it; put it in the US and, if you were clever about it, no one need ever find out. The US was on its way to becoming a truly world-class tax haven.

The Tax Justice Network (TJN) still ranks Switzerland as the most pernicious tax haven in the world in its Financial Secrecy Index, but the US is now in second place and climbing fast, having overtaken the Cayman Islands, Hong Kong and Luxembourg since Fatca was introduced.

Swedish conditions reach Norway

Thursday, December 5th, 2019

This year, for the first time, Norway’s statistical agency reported on the relationship between crime and country of origin:

Immigrants from certain backgrounds—particularly Palestinians, Iraqis and Afghanis—were many times more likely to commit violent crimes than other Norwegians (including other immigrant groups). In 65 out of 80 crime categories, non-Norwegians were over-represented. The largest discrepancy was in regard to domestic violence: Immigrants from non-Western countries were found to be eight times more likely to be charged for such crimes. Rape and murder were also heavily skewed toward these immigrant groups. Worryingly, the figures showed that second-generation immigrants were more likely to be criminals than their parents.

These are svenske tilstander — Swedish conditions.

You’ll be accused of some form of heresy

Wednesday, December 4th, 2019

If you discover something new, Paul Graham says, there’s a significant chance you’ll be accused of some form of heresy:

To discover new things you have to work on ideas that are good but non-obvious. If an idea is obviously good, other people are probably already working on it.

One way for an idea to be non-obvious is for it to be hidden in the shadow of some mistaken assumption that people are very attached to. Anything you discover from working on such an idea will tend to contradict the mistaken assumption that was concealing it. And you will thus get a lot of heat from people attached to the mistaken assumption.

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So it’s particularly dangerous for an organization or society to have a culture of pouncing on heresy. When you suppress heresies, you don’t just prevent people from contradicting the mistaken assumption you’re trying to protect. You also suppress any idea that implies indirectly that it’s false.

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There is a positive side to this phenomenon though. If you’re looking for new ideas, one way to find them is by looking for heresies. When you look at the question this way, the depressingly large dead zones around mistaken assumptions become excitingly large mines of new ideas.

There’s a simple rule of simul-climbing

Tuesday, December 3rd, 2019

Rock-climber Emily Harrington was making a one-day free attempt on the 5.13 Golden Gate route up Yosemite’s El Capitan, when her foot slipped, and she fell:

Having Honnold on board as a belay partner was only one part of a strategy that would need to work perfectly in order for Harrington to become the first woman and fourth person to free climb Golden Gate in a day. She’d been working through the moves of the route for years. In 2015, she freeclimbed it in six days. And on November 7 of this year, she came heartbreakingly close, climbing all but the last 30 feet of the final 5.13 pitch before exhaustion overtook her. “It’s not about the hard pitches,” she explains. “It’s about the accumulation of fatigue. Even the 5.10 pitches are really physical, so it becomes this huge endurance challenge that a lot of climbers don’t quite grasp.”

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To stack the deck in her favor, she and Honnold planned to use a technique called simul-climbing, a time-saving high-risk endeavor in which the leader and follower both advance at the same time. The leader places gear sparingly, “running it out,” as they say, while the follower cleans the gear. By leaving huge gaps between placements and climbing simultaneously, a team can cover four pitches with the amount of gear and time that it typically takes to finish one. The tradeoff is, of course, safety. If the follower slips, he pulls the leader off with him. If the leader falls, she takes an enormous fall that must be caught by a belayer who is focused on climbing.

“You have to conserve your gear,” says Harrington. “Instead of climbing the Freeblast in 12 pitches, we planned to climb it in four pitches.” The Freeblast, for people who remember the movie Free Solo, is the lower, less-than vertical-section of Freerider/Golden Gate where the climbing isn’t technically as difficult as the upper sections, but it’s slabby, slippery, and what Harrington generally characterizes as “insecure.”

“It’s dark. It’s cold. It’s easy for your fingers and feet to be numb and to slip unexpectedly,” says Honnold. When he made his abortive attempt on Freerider early in Free Solo, it was the Freeblast section that turned him around rather than the most difficult sections up high. Harrington is a 5.14 climber. When she slipped, she was making the last move of a 5.10c pitch while navigating a pair of twin cracks. Just a few feet above her was a fixed bolt she could have clipped for ultimate safety.

About 150 feet below, Honnold was belaying Harrington when he heard her scream. “I was sitting on the ground tying my shoes, getting ready to start simul-climbing,” says Honnold. “Tons of slack just pools on the ground, which is consistent with huge falls.” The phenomenon occurs when the leader is falling but still above her last piece of gear. “The rope is falling at the same speed as the climber,” says Honnold. “It’s just physics.”

Honnold was belaying with a gri-gri, a mechanical device that’s a little bit like the cams in a car seat belt. Its mechanism allows the rope to slide smoothly through it at low speeds but locks down tight if you try to pull the rope through it with any kind of jarring motion. But the energy of the fall never actually reached the gri-gri. In most circumstances, a belayer’s hand is never supposed to leave the rope. But at the highest echelons of simul-climbing, that’s just not an option. The follower has to climb and remove gear from the wall while also belaying the leader. That’s why there’s a simple rule of simul-climbing: don’t fall.

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At the hospital, her injuries proved to be gruesome but largely superficial. Most shockingly, Harrington had somehow managed to get her neck caught in the rope during the fall and was left with a long bruise that made it look like she’d been strangled. Ultimately she was able to walk out of the hospital a day later.

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Honnold, who is famously dry when it comes to assessing risk, doesn’t view it as a cautionary tale: “In a lot of ways, this shows that the techniques actually work,” says Honnold. “She took one of the worst possible falls on the whole route and still wound up basically fine.”

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Ultimately, though, Harrington herself sees the accident as a validation, if a painful one: “The system worked. The rope caught me. My gear held,” she says. “I’ll try again in spring.”

But a household is just a house if it has no slaves

Monday, December 2nd, 2019

The Roman Guide to Slave Management presents itself as a treatise by Nobleman Marcus Sidonius Falx — with the help of a northern barbarian:

In order to write for a non-Roman audience I have been compelled to use the services of a certain Jerry Toner, a teacher in one of our miserable northern provinces, who knows something of our Roman ways but shares few of our virtues. Indeed a man so soft I have never encountered outside the servile class: he has not once fought in battle, can scarce drink a small amphora of watered wine, and even stoops so low that he himself will clean his baby’s backside rather than leave such foul tasks to the slaves and womenfolk. He is, however, most blessed to be married to a wife of great beauty and intellect (though she is perhaps more forward with her opinions than a woman ought to be), to whom I am most grateful for ensuring that the meaning of my text is clear for you barbarian readers.

Slavery had a competitive advantage over free labor:

And the beauty of it was that none of these slaves was liable for military service, since the army naturally cannot rely on slaves to serve in defence of the state.

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As to the threat of slaves, the worry was not so much that they would revolt, but that they would eradicate the freeborn peasant, on whom the Roman elite relied to serve in the army and keep them in power.

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So it was decreed that no citizen over twenty years of age and under forty should serve in the army outside of Italy for more than three years at a time in order to give them a chance to keep control of their smallholdings at home.

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Thankfully, the slave owner today need not trouble himself with such concerns. The army is now professional and it is many, many years since there has been a great slave revolt.

“But a household is just a house if it has no slaves,” Falx reminds us.

It frequently bred confidence but not skill

Sunday, December 1st, 2019

In Range: Why Generalists Triumph in a Specialized World, David Epstein notes that many different kinds of specialists make high-stakes decisions under time pressure:

Psychologist Gary Klein is a pioneer of the “naturalistic decision making” (NDM) model of expertise; NDM researchers observe expert performers in their natural course of work to learn how they make high-stakes decisions under time pressure.

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Kasparov said he would bet that grandmasters usually make the move that springs to mind in the first few seconds of thought.

Klein studied firefighting commanders and estimated that around 80 percent of their decisions are also made instinctively and in seconds.

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When he studied nonwartime naval commanders who were trying to avoid disasters, like mistaking a commercial flight for an enemy and shooting it down, he saw that they very quickly discerned potential threats. Ninety-five percent of the time, the commanders recognized a common pattern and chose a common course of action that was the first to come to mind.

One of Klein’s colleagues, psychologist Daniel Kahneman, studied human decision making from the “heuristics and biases” model of human judgment. His findings could hardly have been more different from Klein’s. When Kahneman probed the judgments of highly trained experts, he often found that experience had not helped at all. Even worse, it frequently bred confidence but not skill.

Kahneman included himself in that critique. He first began to doubt the link between experience and expertise in 1955, as a young lieutenant in the psychology unit of the Israel Defense Forces. One of his duties was to assess officer candidates through tests adapted from the British army. In one exercise, teams of eight had to get themselves and a length of telephone pole over a six-foot wall without letting the pole touch the ground, and without any of the soldiers or the pole touching the wall.* The difference in individuals’ performances were so stark, with clear leaders, followers, braggarts, and wimps naturally emerging under the stress of the task, that Kahneman and his fellow evaluators grew confident they could analyze the candidates’ leadership qualities and identify how they would perform in officer training and in combat. They were completely mistaken. Every few months, they had a “statistics day” where they got feedback on how accurate their predictions had been. Every time, they learned they had done barely better than blind guessing. Every time, they gained experience and gave confident judgments. And every time, they did not improve. Kahneman marveled at the “complete lack of connection between the statistical information and the compelling experience of insight.”

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In those domains, which involved human behavior and where patterns did not clearly repeat, repetition did not cause learning. Chess, golf, and firefighting are exceptions, not the rule.

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Narrow experience made for better chess and poker players and firefighters, but not for better predictors of financial or political trends, or of how employees or patients would perform.

The domains Klein studied, in which instinctive pattern recognition worked powerfully, are what psychologist Robin Hogarth termed “kind” learning environments. Patterns repeat over and over, and feedback is extremely accurate and usually very rapid.

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Kahneman was focused on the flip side of kind learning environments; Hogarth called them “wicked.”

In wicked domains, the rules of the game are often unclear or incomplete, there may or may not be repetitive patterns and they may not be obvious, and feedback is often delayed, inaccurate, or both.

In the most devilishly wicked learning environments, experience will reinforce the exact wrong lessons.

Hogarth noted a famous New York City physician renowned for his skill as a diagnostician. The man’s particular specialty was typhoid fever, and he examined patients for it by feeling around their tongues with his hands. Again and again, his testing yielded a positive diagnosis before the patient displayed a single symptom. And over and over, his diagnosis turned out to be correct. As another physician later pointed out, “He was a more productive carrier, using only his hands, than Typhoid Mary.”

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Expert firefighters, when faced with a new situation, like a fire in a skyscraper, can find themselves suddenly deprived of the intuition formed in years of house fires, and prone to poor decisions.