One week before Halloween, the Wall Street Journal reported that the New York State Attorney General’s office is suing Exxon for failing to make certain accounting disclosures related to climate change. The article’s opening sentence reads, “accusing the oil giant of misleading investors about the risks that climate-change regulations pose to its business.” Let that one sink in. The regulators are complaining that Exxon’s projections about compliance costs are not as damaging as the damage the regulators intended to inflict.
Notice it doesn’t say that Exxon is not in compliance with the regulations. And it doesn’t say that Exxon’s compliance is not having the intended environmental benefit. They can’t even go there; it’s impossible to know if regulatory compliance will have any such benefit, ever.
The Goonies of New York
The lawsuit says only that Exxon’s cost estimates about the future do not fully recognize the power of the state to inflict harm. According to the NY Attorney General Barbara Underwood, “Exxon built a façade to deceive investors into believing that the company was managing the risks of climate-change regulation to its business when, in fact, it was intentionally and systematically underestimating or ignoring them, contrary to its public representations.”
And Exxon spokesman Scott Silvestri responded as follows: “These baseless allegations are a product of closed-door lobbying by special interests, political opportunism and the attorney general’s inability to admit that a three-year investigation has uncovered no wrongdoing.”
Regardless of whether or not Exxon’s accounting methods were intentionally deceptive, or whether this is merely environmentalist political grandstanding, the message is clear. Government wants the harm it inflicts to be respected publicly, or else. Or as the Wall Street Journal’s editorial board commented on October 25, 2018:
Ms. Underwood is charging Exxon under New York’s notorious Martin Act, which doesn’t require evidence of intent to prove fraud in civil cases. She may be hoping that Exxon agrees to settle and pay a fine so she can declare victory. Yet in this case there’s not even evidence of fraudulent conduct, much less intent. The only party guilty of misrepresentation in this lawsuit is the New York AG.
The attorney general’s suit claims that Exxon was intentionally misleading its investors, but the real deception is that the New York AG has any concern for the welfare of Exxon shareholders. For proof, the lawsuit demands that Exxon fully recognize the financial damage that their climate change regulations were intended to inflict. But what if Exxon were to inflate the climate change compliance costs and mislead investors about management’s ability to integrate those costs, would the AG sue? In reality, the justification for the suit is cynical, and the whole thing is merely a highly predictable ploy to assuage the environmental lobby and garner public support.
A Pound Wise and A Foolish Euro
Also on October 24th, Bloomberg reported that CEO Andrew Bailey of the Financial Conduct Authority (FCA), which is the financial markets regulator in the United Kingdom, is investigating the relationship certain hedge funds have with private polling companies. In order to legitimize the investigation, the relationships between the hedge funds and their pollsters are being labeled as secret, with the implication being that the hedge fund managers were leveraging inside information.
Of course bottom-up fundamental market research, is well, fundamental to the business of running your own company, or investing in someone else’s company. The question at hand was the surprisingly successful referendum in the UK to remove Britain from the European Union (EU) in 2016, and the subsequent sharp decline in the British Pound on foreign currency exchanges. It turns out several hedge funds reaped big profits by betting against the British Pound in futures market exchanges. They put their capital at risk based on their speculation that the vote would be successful, with help from private exit polling data, and that the Pound would drop sharply as a result.
It’s bad enough that British voters rejected the administrative state that is the EU, then some clever capitalists made money off of the EU’s embarrassment, and that the hedge funds did it in a market that is the creation of their sacred central banks! And this is where it gets interesting.
Is it ethical for anyone to hire pollsters to conduct exit polling studies? And is it legal? Of course it’s illegal to publicly disclose the results of exit polling results while polls remain open. Accordingly, the results were secret, election laws require it. So the question becomes, is it ethical for investors to have access to exit polling data they pay for? And would the FCA investigate if the exit polling data was wrong or the hedge fund investors lost money? If it is determined that the hedge funds had access to illegal insider information, who should be entitled to their own exit polling data? And who gets to decide, under what authority? Or does the FCA, which has no authority on this, impose a gag order on every voter under penalty of law?
Unmasking the Trick or Treaters
But a much more important question is – why did the results of a political referendum have such a drastic impact on a country’s currency market valuations? And should it? In an ostensibly free society, the answer is absolutely not. So how did this happen? Or better yet, why do we have foreign exchange markets in the first place? As Saifedean Ammous describes in his book The Bitcoin Standard, foreign exchange markets are a huge waste of capital. They exist because of government monopoly fiat currencies issued by central banks. A gold standard for all currencies would eliminate all of this nonsense. It is precisely the contrived complexity of mixed economies (capitalism and the regulatory state) that create the incentives for market participants to seek an advantage.
The New York Attorney General and the Financial Conduct Authority have a lot in common. They claim to be protecting investors while they loot the private business interests of anyone in their crosshairs, for the public good. Personally, they have no skin in the game, they will never bear the risks or share in the costs of their bad ideas. They can safely return to the comfort of their homes, take off their sheep’s costumes, and enjoy a bag full of goodies.