The Lex Newsletter: regulation red in territorial tooth and claw

Dear reader,

Groups of humans have an innate drive to seize territory, according to Robert Ardrey’s 1966 book The Territorial Imperative. Ardrey was extrapolating from the behaviour of other primates, notably baboons. The comparison persuaded many. It offended a minority.

A furious private email from a senior Bank of England official reminded me of The Territorial Imperative. I had dared to suggest in a column that the bank and peer regulators in the US were using recent banking turmoil as an excuse to occupy new territory.

The UK may increase deposit insurance beyond its current £85,000 limit. The US may jack up bank capital buffers. Neither measure would have forestalled the collapse of Silicon Valley Bank and its ilk, as Lex wrote this week.

The moves would, however, extend regulatory fiefdoms further into the realm of private capital.

Regulators have a public duty to stabilise the financial system. This remains wobbly, not least because the US Treasury is expected to borrow about $1tn from markets in the coming months. That could trigger further deposit flight from regional banks.

But regulators do not like to admit that ambition infects their motives as it does those of ordinary mortals. Investors, after all, are acutely aware of this agency problem as it applies to the management of large companies.

Wall Street is more alert to regulatory mission creep than the City, partly because the Securities and Exchange Commission is an acknowledged stepping stone to political office.

US financiers were, therefore, suspicious of the timing of this week’s clampdown on crypto. The SEC accused crypto exchange Binance of diverting customer money and using secret trading firms to prop up trading volumes. It also sued Coinbase, another platform, for allegedly operating as an unregistered securities exchange.

These actions may be necessary. Lex has always assumed large volumes of crypto dealings are covert price support operations. But the SEC could have cracked down long ago.

Maximum political advantage is available now, however. The failings of the crypto industry have been brutally exposed by the collapse of FTX. What better time for a raid into this disputed regulatory territory? Arguably, this does not belong to the SEC because digital tokens are not really securities.

Politics is thankfully explicit in the UK Labour party’s aspiration to tax carried interest paid to private equity executives as income rather than capital gains. Labour donor Dale Vince, the founder of Ecotricity, is applying for a judicial review of the legality of the current lenient treatment.

Lex thinks carried interest is a performance bonus rather than an investment payout and should be taxed accordingly. But we also believe Vince is jumping the gun. This is a reform for legislators, not wind turbine tycoons, to pursue.

Eyeing up AI

There is a natural drumbeat for the emergence of a transformative new technology such as generative artificial intelligence. First, there is indiscriminate bullishness. Second, investors start categorising opportunities according to their proximity to the main event. Third, comes a hangover in which some ventures fail and negative disruptive effects trigger a backlash. Fourth, the technology is assimilated into everyday life.

We are midway between the first and second phases of this sequence for GAI.

This week, Lex pondered the benefits and dangers of chatbot therapists. GAI has obvious potential to improve mental health apps such as Calm and Headspace. These apps are a technology in its third phase in current form, judging from the slowing pace of financing.

We also suggested that open-source large language models (LLMs) would dent the market for the proprietary kind developed by the likes of OpenAI and Google.

We reckon enterprise users may find there is little functional difference between the two.

The anglophone bias of big LLMs and the US domiciles of their developers may take some more wind out of their sails. Google is training its Bard chatbot in Korean. But it faces competition from Naver and Kakao. Language fluency aside, their local domiciles may make them more attractive partners for big South Korean organisations.

Smaller nations fear that US and Chinese tech may be used for spying by the governments of the two superpowers.

Data security is the main selling point of Sweden’s Evroc. The business, which is backed by EQT, is seeking to raise €3bn for building “hyperscale” data centres in Europe. Lex wishes it luck in its unequal struggle with America’s cloud computing oligopoly.

Spare a thought for businesses washing up from the last wave of AI optimism, meanwhile. These include California’s C3.ai. Rather like the British trains that could not cope with the “wrong kind” of autumn leaves on the line, the business is trading in the wrong kind of AI — the non-generative sort. Its third pivot, towards the latter, may be its last roll of the dice.

Virtual reality, in contrast, is a technology that never took off in the first place. Apple’s expensive mixed reality goggles are unlikely to change that.

Things fall apart

Journalism concerns itself primarily with mishaps. The optimistic implicit assumption is that when everything is going to plan, normality is occurring.

The flops Lex delved into this week included:

• A profit warning at Swedish streaming group Viaplay. Its offer, leaning heavily on Scandi noir crime dramas, is too limited to compete with the likes of Netflix.

• SBB, another needy Swede, is struggling with deflating residential property prices. Lex supports a defensive merger with rival Akelius.

• We made the same prescription for Harbour Energy, a North Sea oil group whose shares have dropped 40 per cent in the past two years.

• US used car seller Carvana has destroyed billions of dollars of value. The business shows signs of stabilising, but investors should stay away.

The week’s standout success was Inditex. The Spanish garment retailer reported a 54 per cent rise in quarterly profits to €1.2bn, beating expectations. The market capitalisation has risen above $100bn. Chair Marta Ortega is for the moment defying cynics who doubt the competence of second-generation dynasts.

Lex’s own coup this week was to herald the advent of a new El Niño weather pattern one day before the story was all over the mainstream media. Impacts on agricultural commodities will include higher palm oil prices, we reckon.

Stuff I enjoyed this week

The FT’s Jim Pickard and George Parker produced a compelling Big Read on Sir Keir Starmer’s ruthless remaking of the UK Labour party. I suspect most businesspeople are rather glad he has crushed the leftists who wanted to nationalise swaths of business.

This smart piece in The Economist explained the deficiencies of Brent crude as a benchmark for the global oil price.

Outside work, I’m enjoying listening to birds such as whitethroats out on the Thames marshes.

Enjoy your weekend,

Jonathan Guthrie
Head of Lex

[email protected]

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