Tag Archives: economics

Financial Reporting

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A little bit in the weeds, here, but necessary for future understandings by some investors. The proximate matter is FTX’ collapse and bankruptcy (with possibly criminal activities associated).

In a footnote to the financial statements, the company said its “primary shareholder is also the primary shareholder of several related entities which do business with the company.” It didn’t say who the related parties were for any specific transaction it disclosed.
The standard accounting rules for disclosing related-party transactions are vague and have long been considered a weakness in the system. There is no clear-cut rule requiring companies to disclose the players in a related-party transaction. The rules do say, “If necessary to the understanding of the relationship, the name of the related party shall be disclosed.”

Some questions arise. Whose definitions of “necessary” and “understanding?” The way the rule is written, those definitions are left to the company—FTX, here—to determine, and what an investor or customer or client needs or wishes for his own understanding is unimportant.

FTX’s new CEO John Ray exposed part of the much larger problem in his FTX bankruptcy-court filing, in which he acknowledged that FTX’s financial information wasn’t trustworthy and that it was controlled by

 a very small group of inexperienced, unsophisticated, and potentially compromised individuals.

That potentially compromised part is key. Compromised by whom? In what way? That would seem clearly related to who those “related parties” are.

There’s more, related to arm’s length transactions, which are statutorily required in many business arrangements. Here’s a working definition of arm’s length transactions that’s good enough for our purposes:

A transaction in which the buyer and the seller have no significant, prior relationship. In an arm’s length transaction, neither party has an incentive to act against his/her own interest. That is, the seller seeks to make the price as high as he/she can, and likewise the buyer seeks to make it as low as he/she can. The negotiations for an arm’s length transaction result in the arm’s length price, which is almost always close to the market value of the asset being sold.

That drive for each party to work toward his own interest, and especially the resulting essentially market price for the things being transacted, also is key. How can an investor or a customer or a client know that a particular transaction within an FTX is legitimate or problematic under arms’ length requirements if the investor or customer or client can’t know who the related party is that’s do[ing] business with the company? And why is the investor or customer or client being actively denied this information? What’s being hidden?

This is, as RG Associates founder and member of the Financial Accounting Standards Board’s Emerging Issues Task Force, Jack Ciesielski, said,

a hole that needs to be fixed. The auditors would have to know who the related party is. Why not just put that in there? How hard can it be? By keeping it purposely opaque it’s defeating the purposes of the footnote.

And so do investors, customers, and clients need to know—hence the footnote, even if carefully vague in the present case. And hence the need to plug that loophole: require the related parties to be explicitly identified. There’s no free speech question here, no political speech would be chilled by this. Documenting business arrangements in a purely investment environment has nothing to do with our 1st Amendment.

NASA Finally Got It Off

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After two failed launch efforts, canceled due to hydrogen leaks during fueling, NASA finally got its Lockheed Martin Corp-built Artemis I to launch Wednesday morning on its multiple-week mission to the moon and back.

But not until after another hydrogen leak had to be fixed.

On Tuesday, NASA’s launch team for Artemis I was able to fuel the SLS liquid hydrogen tank relatively easily. A valve used to top off the tank, however, later began leaking, prompting the agency to send a so-called “red crew” of three people out to the launchpad to tighten the valve’s bolts.

That’s way too much hands-on massaging for what’s intended to demonstrate a routine launch; NASA still cannot handle liquid hydrogen fuel efficiently. Artemis, also, is another government (not just NASA) program that’s billions of (taxpayer) dollars over budget and years behind schedule.

No word yet on whether the rocket’s first stage successfully landed after it separated from the rest of the Space Launch System rocket.

Oh, wait….

Ubiquitous Battery-Powered Vehicles

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These need things; here’s a partial list of Critical Items and some problems associated with their acquisition.

With respect to batteries, the raw materials—lithium, nickel, manganese, cobalt, among others—are expensive to mine and destructive of the environment to mine. Both the metals themselves and the mining tailings are highly toxic and expensive to handle and to dispose of.

Refining those materials comes with its own problems:

[The People’s Republic of China] processes some 70% of the world’s lithium and cobalt, and 99% of the manganese, according to PricewaterhouseCoopers. [The PRC] also dominates the market for the parts that go into batteries, such as cathodes and anodes, as well as the production of batteries themselves.

And this:

[The] majority of motors used in today’s EVs rely on permanent magnets, which produce a constant magnetic field that helps spin a motor’s rotor and, in turn, power the wheels.
But these magnets require costly rare-earth metals such as neodymium and dysprosium. As with battery ingredients, the dominant supplier is [the PRC], and producing the metals can cause pollution

That makes us dependent on an enemy nation for our economic welfare.

On the other hand, there are such things as AC induction motors. These are a 19th century invention and are ubiquitous in today’s household appliances. However.

[They are] less efficient. That can reduce a vehicle’s driving range unless battery storage is boosted.

That increased battery dependence would make us even more dependent on that enemy nation for the materials. Aside from that, induction motors also take a double potful of copper, and copper mining is destructive of the environment.

And this: the electricity distribution infrastructure needed to for recharging the batteries doesn’t yet exist, and the current grid already is nearly fully occupied just handling today’s household and business loads.

And this: the production of electricity depends on inconstant solar and wind facilities, on fossil fuel (reliable and cheap, but currently under attack by the Left), and on nuclear power (currently hugely expensive to produce, with the building of additional nuclear power facilities even more expensive due to enormously expensive over-regulation).

The root problem (to use a phrase), then, is to get government out of the way of fossil fuel use and out of the way of adding nuclear power reactors to the electricity distribution grid. And expanding the grid to handle the increased load.

Red Lines

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President Joe Biden (D) is meeting today with People’s Republic of China President Xi Jinping on the sidelines of the G-20 meeting occurring in Indonesia. Supposedly, on the Biden-Xi agenda will be Biden’s desire to exchange red lines with Xi—each to learn the other’s.

I’m skeptical of the utility of such an exchange.

The problems with Biden and Xi exchanging red lines are two: Biden will respect Xi’s and Xi will not respect Biden’s, and Biden will not enforce his while Xi will enforce his forcefully in the unlikely possibility Biden does stray.

And one more: what would Biden do if his red lines conflict with Xi’s. It’s clear what Xi would do.

Update: In the realization, Biden was too timid even to mention the idea of red lines. All he had were some bland words of concern regarding “Taiwan” and the Taiwan Strait. Not a syllable about the PRC’s seizure and occupation of the South China Sea and the PRC’s seizure, occupation, and militarization of so many South China Sea islands that are owned by other nations rimming that Sea (even if that ownership often is disputed among those nations). Not a minim about the PRC’s aggressive behavior in the East China Sea and the associated threats the PRC makes toward Japan.

Why Do the Workaround?

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NVIDIA Corp is busily looking for ways to circumvent newly enacted rules barring export of computer chips and chip technology to the People’s Republic of China.

Nvidia Corp has begun offering an alternative to a high-end chip hit with US export restrictions to customers in China, after the new rules threatened to cost the American company hundreds of millions of dollars in lost revenue.
Nvidia said the new graphics-processing chip, branded the A800, meets US restrictions on chips that can be exported to China under new rules rolled out last month. The chip went into production in the third quarter, the company said.

On the other hand,

According to a memo Nvidia sent to its channel distributors last Thursday, the A800 has the same computational performance but a narrower interconnect bandwidth, the capacity of a chip to send and receive data from other chips, crucial for training large-scale AI models or building supercomputers.

It’s not the data rates, though, that matter; it’s the computational techniques and the technology used to implement those techniques that are important.

NVIDIA claims,

The A800 meets the US government’s clear test for reduced export control and cannot be programmed to exceed it.

This is disingenuous. The chip can be reverse-engineered to learn how the computational techniques are achieved. Indeed, simply programming the chip—accepting, arguendo, NVIDIA’s claim about programmability—would be a useless enterprise when the goal is to gain the technology itself.

It’s true enough that it takes some little time to relocate manufacturing/assembly sites and to move supply chains. However, why should NVIDIA or any American company, especially our technology-based companies, do business with any PRC company beyond a—adjusted apace—period of transition away from that nation?

Why would an American company be so willing to transfer, or risk transferring, American technology to an enemy nation by doing business with that nation or any business domiciled in it?