Jeremy Strickler 

Good Governance

My family lives on a nice street in a pretty good neighborhood in Greenville. However, we had a house on our street slowing falling in. The neighbors wanted that eyesore torn down. I really got a kick out of how much it bothered everyone. 
About two years ago, someone bought the house with plans to renovate or rebuild. They started the project, and we got excited, but apparently someone at the city design review put the kibosh on their plans– certainly for Reasons– and that house sat there the past two years, tying up someone’s money and time, growing ever more dilapidated. 
Then, one morning this past week, there was a backhoe and people, and 4 hours later there was a pile of rubble ready to be hauled off.  It took 2 years to get permission to actually do what could always have been done in one afternoon at any time over the past 8 years we’ve lived on the street.
Fortunately, it never fell in on someone’s child or cat, and if it had– that would have been another round of grief and frustration and lawyers- a needless and preventable tragedy. 
This is one version of what people mean by “bureaucracy,” and it’s one illustration of why we don’t have enough houses, and one story of why the government is in the way of progress and why “what the government can do, the private sector can do better.” 
All of that stuff is partly true, and stories like this are illustrations of why people become disenchanted with their jobs at big corporations or are discouraged from investing or making changes that make the real world better. 
Seriously, any given person might have the skills to knock down a house and rebuild it but also not have the skillset to navigate the layers of permissions, legalities, insurances, and social skills to legitimize their project. To succeed in this case, someone has to be part lawyer, part insurance agent, part realtor, part financial advisor, part urban planner, part accountant- a bunch of stuff that has nothing to do with fixing that house.
Or they have to pay all those people to help them navigate a bunch of complex systems.
And then, on the other hand, we have the Icarus story Sam Bankman- Fried and the collapse of the FTX cryptocurrency exchange, 
which is a story partly about young people making promises they didn’t have the skills or interest to fulfill. They acted as a custodian, holding people’s digital money and facilitating trades. But they didn’t want to do a lot of the things that go into custodianship of assets. After the exchange collapsed and the forensic accountants started piecing the story together, it reads like a lot of ponzi-scheme stories of a quasi-legitimate business that breaks bad.  Bernie Madoff was legit, until he wasn’t. 
With the FTX story, it’s tough to sort out where the inexperience and incompetence ends and where the outright fraud begins. The story ends, and a new one begins with rich, young people sweating bullets in a rented villa in the Bahamas, trying to scrounge up one last round of capital, to cover up all the sordid stuff they did before.  You can put lipstick on a *dead pig, but it’s still tougher to sell than a live pig. So, when they invited slightly better managed crypto businesses to come in and buy their problems, it took about 4 hours for their peers and competitors to say “no thanks” and “where exactly is your supposed crypto capital?” and oh shoot I wonder if this will put us out of business too. 
So, this story is about one business that failed, but it’s also a story about capital controls and systems that don’t exist yet in that industry. 
When you think about our business– the financial advice and securities business– the regulatory framework began to be built in the 1930’s– after a lot of regular people lost money in the unregulated stock markets. The governance in mainstream finance was developed and added to after significant failures negatively impacted the public. And by now, we certainly do not have perfect systems, but the traditional US financial system is very regulated, and as a consequence, it’s pretty trustworthy. In other words, you can reasonably assume the brokerage is going to keep your money where you put it and not do things you didn’t give them permission to do. You can expect someone to be looking over your financial advisor’s shoulder. 
So, while the public always bear market risk, it’s relatively unusual for someone to be able to just take your stuff, whether that’s cash on deposit in a bank or stocks in a brokerage account or a house on a nice street in Greenville. 

Probably, probably, the US government is not going to nationalize the company you invested in, and your regular brokerage is not going to collapse because they managed to borrow waaaay too much money against your assets that they were holding for you. A good bit of risk taking and Invesment is made possible because we can basically trust the systems to work. Trust is one of the most important components to high functioning systems. 

So, on the one hand, we have frustrating levels of bureaucracy that prevent progress, and on another we have a move fast and break things philosophy that allows some people to take a crack at getting obscenely rich but also to not be able to pay for the problems they created. This is a textbook “moral hazard,” a fairly predictable and preventable series of events. We’ve been watching that crypto house decay for years.
It’s frustrating to me that the SEC also played a game of legalities without, you know, actually acting in the public interest.  They dillied about, asking whether crypto is a security or not and whether they had a right to regulate it. Excuse me, who else has the right to regulate crypto? The nonsense debate about whether it’s a “currency” or an “asset” or a security is simply a way of passing the hot potato: well it wasn’t my responsibility!  
Over my entire career the organizations I’ve been affiliated with defined a “security” as pretty much any investment that does exist or *might exist, up to and including– I’m not kidding you- a colleague of mine being reprimanded for an email conversation about whether Osage oranges might be able to be turned into cosmetics. It might be a company one day!
My point about this is that neither unregulated capitalism nor over-regulated systems work all that well. 
We really need modern, fast, high functioning governance in order to trust our risk taking– to be able to take on known risks but to reduce the other variables. 
We also need the government to also understand that nobody wants to watch the referees during the futball game. They exist to facilitate a high level of play within the rule framework, and some of that is the governance being in tune with the point of the endeavor. Referees still need to make a lot of judgment calls. Not everything can be reduced to rules. 
Political frameworks that polarize tend to argue for tons of regulation or too much de-regulation.  But markets don’t work un-regulated, because people don’t like to put money into things that are costs, and we don’t generally like being told what to do. 
Left to ourselves, the most aggressive people tend to take big asymmetrical risks: how many times would you roll the dice on a chance to be a billionare but at the risk you might go bust? You might not do that, but some people will answer that a billion is a lot of dollars, but how bad is it really to go back to having zero dollars? You can try again to get more than zero.  A billion is worth the risk to some people. 
There are an awful lot of things society needs that cannot be justified by return on investment, and governance is one. There a lot of functions only government can do, and they are the reasons government exists.  In general, the United States has struck this balance fairly well, and it is one reason we have the largest market capitalization, the best functioning and most trustworthy systems in the world.  
There are a lot of functions only government can do. We should start around questions of housing and healthcare, because these are the most fundamental building blocks of society, and they are necessary enable a high functioning economy. 

Jeremy L. Strickler, CFP®

Portfolio Manager