Saturday, August 29, 2009

Thanks, IRS

I'm amazed. Apparently, the IRS investigators and federal prosecutors have decided that the best way to reward whistleblowers is to turn around and issue them longer, more onerous sentences than the tax evaders they helped convict.

Bradley Birkenfeld, a former UBS employee, spent 3 days with the IRS divulging information on UBS's tax evasion schemes, including the names, strategies, and documents that the government would need to make a slam-dunk case against UBS.

After prosecuting, and wringing a $780 million fine out of UBS, the prosecutors turned around and charged Birkenfeld with Tax Evasion Conspiracy. Why? Because Birkenfeld didn't reveal his own role in the scheme.

I'd agree that Birkenfeld not mentioning his involvement should warrant some punishment, but more severe than the people he helped to expose? That doesn't make sense. What's more, as mentioned here but omitted in the first article, Birkenfeld was stuck between a rock and a hard place. If he gave up the details of the clients he assisted as part of this scheme, Birkenfeld would have gone to jail in Switzerland. By keeping silent, he's now going to jail in the US.

The upshot of this whole scenario is that the incentive for helping the IRS is now nonexistent. We have numerous laws in this country designed to prevent corporations from retaliating against whistle-blowers, but apparently if the IRS is involved, it's a whole new ballgame. All this case has done has made it less likely for people to assist the government going forward, and in fact makes it easier for companies involved in tax fraud to use extortion to keep their employees from talking. "If you turn witness against us, it'll just be worse for you. Keep it quiet, and we'll all get off with a slap on the wrist."

Nice going, IRS.

Friday, August 21, 2009


I've recently been watching a great youtube series of tutorials on how to play Japanese chess, or Shogi. The rules are similar to western-style chess, although there are some very interesting complications, such as the ability to re-use pieces that have been captured.

I've played a bit of chess from time to time, but I never really achieved more than a basic level of competency of a teenager - I typically can beat my younger sister, but usually lose to my father. I'm comfortable with the movement of the pieces, but the larger strategies are a mystery to me. This is surprising, since I think one of my strengths is my ability to synthesize information in order to find the big picture.

At any rate, the shogi tutorials are very well done, and are inspiring me to play chess again. I've been concerned lately that, thanks to a combination of my job and frequent use of the internet, my ability to concentrate is slipping. Chess is a game that forces you to focus on a single task for a while. I think it will be good therapy.

Friday, August 14, 2009

Cone Shells and Vermeers

This is a well written article in Smithsonian magazine about history of seashell collecting. Collecting shells is a hobby of mine; although I've never considered myself a serious collector by any means, I do have some nice shells that I've found on the beaches of Sanibel Island, Florida.

Anyway, while seashells are what drew me to the article initially, we're going to take a detour, because what's really interesting about the article involves pricing.

During the 17th century, a Glory of the Seas Cone sold at auction at triple the price of this masterpiece by Vermeer. Today, that Vermeer would cost easily tens of millions of dollars, while a Glory of the Seas cone goes for about $40 on ebay. Seashells, apparently, were once considered more valuable than even the finest works of art. This seems ridiculous on the scale of Dutch tulipomania, and most likely mania had a lot to do with it. However, as the Smithsonian article posits, it seems there was actually some degree of economic justification for this pricing discrepancy:

But what seems common to us could seem breathtakingly rare to early collectors, and vice versa. Daniel Margocsy, a historian of science at Northwestern University, points out that Dutch artists produced five million or more paintings in the 17th century. Even Vermeers and Rembrandts could get lost in the glut, or lose value as fashions shifted. Beautiful shells from outside Europe, on the other hand, had to be collected or acquired by trade in distant countries, often at considerable risk, then transported long distances home on crowded ships, which had an alarming tendency to sink or go up in flames en route.

Eventually, due to a combination of safer transportation, increased global trade, and, most importantly, the discovery of the native habitat of this particular species of shell, the price of the Glory of the Seas Cone has plunged. By contrast, Vermeers have skyrocketed in value as collectors became more discerning, and many contemporary works were gradually lost or destroyed.

The point I'm trying to make is that what seems scarce may not really be so rare, and what seems commonplace may not be so common, especially after the passing of time. (Anyone who's played MMORPGs for a good length of time has probably seen this phenomenon in fast-forward several times, but that's fodder for another post.) I'm not saying you should go out and load up on baseball cards, (the infamous Billy Ripken F*ck Face error is no Vermeer, I can assure you,) but I wouldn't bet the farm either on somethig whose value is based solely on perceived scarcity and mania-driven demand.

Thursday, August 13, 2009


There's an interesting article in Vanity Fair about North Korean counterfeiters. Specifically, about how the production of so-called supernotes remains unchecked, despite efforts to shut down the counterfeiters.

The fact that the US dollar is considered the currency of global trade makes it a prime candidate for counterfeiters, but I think there's another compelling reason. Take a look at a US $100 bill. Now take a look at some Euro notes. It doesn't take much to see that the Euro looks a lot more difficult to forge. Indeed, while the number of counterfeit Euros in circulation is increasing, they're typically of far lower quality and far easier to detect than the North Korean supernotes.

So why doesn't the US completely redesign our paper money? We could add holograms, clear plastic windows, more watermarks and security strips, and change the notes' material to the plasticy stuff that Australian money is already made out of. If, as the VF article suggests, actively pursuing the North Korean counterfeiters was too politically sensitive, a full overhaul of our currency would still accomplish the goal of stemming the flow of fake money. Plus, by cutting off the DPK's source of hard currency, it just may tip the negotiations to our favor.

Addendum: A colleague of mine based in Hong Kong relayed an interesting point that the article just barely mentions: the Macao connection. Macao, while not fully integrated with the PRC, is still controlled by China. It is very unlikely that North Korea would be able to operate a bank in Macao for the sole purpose of laundering supernotes without the Chinese being aware of and, potentially, complicit in the operation. Perhaps greater political pressures came into play.

Wednesday, August 12, 2009


Welcome to The Second Derivative. This blog is a collection of thoughts, ideas, articles, and links with a common goal - to inspire thought and analysis. My goal is not to just to take these things at face value, but to also consider both their implications and their root causes and assumptions. I'm aware this is a very ambitious goal, and I certainly may not succeed. Then again, even if this blog ends up being nothing more than a repository for links that I personally find interesting, that's a failure I'd consider acceptable. If I can provoke some good discussion along the way, that's a failure I'd consider noble.

Ideally, I'd like to write about a very wide range of subjects. There's probably going to be a lot of finance and economics, since that's what I do for a living. Probably not too much US politics - there are many, many people out there who are much wiser about the subject than I, and I have no interest in getting involved in the mud-slinging. Foreign affairs, however, is fair game. As is science, history, literature, technology, and pretty much anything that intrigues or inspires.

Won't you join me?