#pyramid schemes | Explore Tumblr Posts and Blogs

mostlysignssomeportents · 3 months

Text

Sympathy for the spammer

Catch me in Miami! I'll be at Books and Books in Coral Gables on Jan 22 at 8PM.

In any scam, any con, any hustle, the big winners are the people who supply the scammers – not the scammers themselves. The kids selling dope on the corner are making less than minimum wage, while the respectable crime-bosses who own the labs clean up. Desperate "retail investors" who buy shitcoins from Superbowl ads get skinned, while the MBA bros who issue the coins make millions (in real dollars, not crypto).

It's ever been thus. The California gold rush was a con, and nearly everyone who went west went broke. Famously, the only reliable way to cash out on the gold rush was to sell "picks and shovels" to the credulous, doomed and desperate. That's how Leland Stanford made his fortune, which he funneled into eugenics programs (and founding a university):

https://www.hachettebookgroup.com/titles/malcolm-harris/palo-alto/9780316592031/

That means that the people who try to con you are almost always getting conned themselves. Think of Multi-Level Marketing (MLM) scams. My forthcoming novel The Bezzle opens with a baroque and improbable fast-food Ponzi in the town of Avalon on the island of Catalina, founded by the chicle monopolist William Wrigley Jr:

http://thebezzle.org

Wrigley found fast food declasse and banned it from the island, a rule that persists to this day. In The Bezzle, the forensic detective Martin Hench uncovers The Fry Guys, an MLM that flash-freezes contraband burgers and fries smuggled on-island from the mainland and sells them to islanders though an "affiliate marketing" scheme that is really about recruiting other affiliate markets to sell under you. As with every MLM, the value of the burgers and fries sold is dwarfed by the gigantic edifice of finance fraud built around it, with "points" being bought and sold for real cash, which is snaffled up and sucked out of the island by a greedy mainlander who is behind the scheme.

A "bezzle" is John Kenneth Galbraith's term for "the magic interval when a confidence trickster knows he has the money he has appropriated but the victim does not yet understand that he has lost it." In every scam, there's a period where everyone feels richer – but only the scammers are actually cleaning up. The wealth of the marks is illusory, but the longer the scammer can preserve the illusion, the more real money the marks will pump into the system.

MLMs are particularly ugly, because they target people who are shut out of economic opportunity – women, people of color, working people. These people necessarily rely on social ties for survival, looking after each others' kids, loaning each other money they can't afford, sharing what little they have when others have nothing.

It's this social cohesion that MLMs weaponize. Crypto "entrepreneurs" are encouraged to suck in their friends and family by telling them that they're "building Black wealth." Working women are exhorted to suck in their bffs by appealing to their sisterhood and the chance for "women to lift each other up."

The "sales people" trying to get you to buy crypto or leggings or supplements are engaged in predatory conduct that will make you financially and socially worse off, wrecking their communities' finances and shattering the mutual aid survival networks they rely on. But they're not getting rich on this – they're also being scammed:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4686468

This really hit home for me in the mid-2000s, when I was still editing Boing Boing. We had a submission form where our readers could submit links for us to look at for inclusion on the blog, and it was overwhelmed by spam. We'd add all kinds of antispam to it, and still, we'd get floods of hundreds or even thousands of spam submissions to it.

One night, I was lying in my bed in London and watching these spams roll in. They were all for small businesses in the rustbelt, handyman services, lawn-care, odd jobs, that kind of thing. They were 10 million miles from the kind of thing we'd ever post about on Boing Boing. They were coming in so thickly that I literally couldn't finish downloading my email – the POP session was dropping before I could get all the mail in the spool. I had to ssh into my mail server and delete them by hand. It was maddening.

Frustrated and furious, I started calling the phone numbers associated with these small businesses, demanding an explanation. I assumed that they'd hired some kind of sleazy marketing service and I wanted to know who it was so I could give them a piece of my mind.

But what I discovered when I got through was much weirder. These people had all been laid off from factories that were shuttering due to globalization. As part of their termination packages, their bosses had offered them "retraining" via "courses" in founding their own businesses.

The "courses" were the precursors to the current era's rise-and-grind hustle-culture scams (again, the only people getting rich from that stuff are the people selling the courses – the "students" finish the course poorer). They promised these laid-off workers, who'd given their lives to their former employers before being discarded, that they just needed to pull themselves up by their own boostraps:

https://pluralistic.net/2023/04/10/declaration-of-interdependence/#solidarity-forever

After all, we had the internet now! There were so many new opportunities to be your own boss! The course came with a dreadful build-your-own-website service, complete with an overpriced domain sales portal, and a single form for submitting your new business to "thousands of search engines."

This was nearly 20 years ago, but even then, there was really only one search engine that mattered: Google. The "thousands of search engines" the scammers promised to submit these desperate peoples' websites to were just submission forms for directories, indexes, blogs, and mailing lists. The number of directories, indexes, blogs and mailing lists that would publish their submissions was either "zero" or "nearly zero." There was certainly no possibility that anyone at Boing Boing would ever press the wrong key and accidentally write a 500-word blog post about a leaf-raking service in a collapsing deindustrialized exurb in Kentucky or Ohio.

The people who were drowning me in spam weren't the scammers – they were the scammees.

But that's only half the story. Years later, I discovered how our submission form was getting included in this get-rich-quick's mass-submission system. It was a MLM! Coders in the former Soviet Union were getting work via darknet websites that promised them relative pittances for every submission form they reverse-engineered and submitted. The smart coders didn't crack the forms directly – they recruited other, less business-savvy coders to do that for them, and then often as not, ripped them off.

The scam economy runs on this kind of indirection, where scammees are turned into scammers, who flood useful and productive and nice spaces with useless dross that doesn't even make them any money. Take the submission queue at Clarkesworld, the great online science fiction magazine, which famously had to close after it was flooded with thousands of junk submission "written" by LLMs:

https://www.npr.org/2023/02/24/1159286436/ai-chatbot-chatgpt-magazine-clarkesworld-artificial-intelligence

There was a zero percent chance that Neil Clarke would accidentally accept one of these submissions. They were uniformly terrible. The people submitting these "stories" weren't frustrated sf writers who'd discovered a "life hack" that let them turn out more brilliant prose at scale.

They were scammers who'd been scammed into thinking that AIs were the key to a life of passive income, a 4-Hour Work-Week powered by an AI-based self-licking ice-cream cone:

https://pod.link/1651876897/episode/995c8a778ede17d2d7cff393e5203157

This is absolutely classic passive-income brainworms thinking. "I have a bot that can turn out plausible sentences. I will locate places where sentences can be exchanged for money, aim my bot at it, sit back, and count my winnings." It's MBA logic on meth: find a thing people pay for, then, without bothering to understand why they pay for that thing, find a way to generate something like it at scale and bombard them with it.

Con artists start by conning themselves, with the idea that "you can't con an honest man." But the factor that predicts whether someone is connable isn't their honesty – it's their desperation. The kid selling drugs on the corner, the mom desperately DMing her high-school friends to sell them leggings, the cousin who insists that you get in on their shitcoin – they're all doing it because the system is rigged against them, and getting worse every day.

These people reason – correctly – that all the people getting really rich are scamming. If Amazon can make $38b/year selling "ads" that push worse products that cost more to the top of their search results, why should the mere fact that an "opportunity" is obviously predatory and fraudulent disqualify it?

https://pluralistic.net/2023/11/29/aethelred-the-unready/#not-one-penny-for-tribute

The quest for passive income is really the quest for a "greater fool," the economist's term for the person who relieves you of the useless crap you just overpaid for. It rots the mind, atomizes communities, shatters solidarity and breeds cynicism:

https://pluralistic.net/2023/02/24/passive-income/#swiss-cheese-security

The rise and rise of botshit cannot be separated from this phenomenon. The botshit in our search-results, our social media feeds, and our in-boxes isn't making money for the enshittifiers who send it – rather, they are being hustled by someone who's selling them the "picks and shovels" for the AI gold rush:

https://www.theguardian.com/commentisfree/2024/jan/03/botshit-generative-ai-imminent-threat-democracy

That's the true cost of all the automation-driven unemployment criti-hype: while we're nowhere near a place where bots can steal your job, we're certainly at the point where your boss can be suckered into firing you and replacing you with a bot that fails at doing your job:

https://pluralistic.net/2024/01/11/robots-stole-my-jerb/#computer-says-no

The manic "entrepreneurs" who've been stampeded into panic by the (correct) perception that the economy is a game of musical chairs where the number of chairs is decreasing at breakneck speed are easy marks for the Leland Stanfords of AI, who are creating generational wealth for themselves by promising that their bots will automate away all the tedious work that goes into creating value. Expect a lot more Amazon Marketplace products called "I'm sorry, I cannot fulfil this request as it goes against OpenAI use policy":

https://www.theverge.com/2024/1/12/24036156/openai-policy-amazon-ai-listings

No one's going to buy these products, but the AI picks-and-shovels people will still reap a fortune from the attempt. And because history repeats itself, these newly minted billionaires are continuing Leland Stanford's love affair with eugenics:

https://www.truthdig.com/dig-series/eugenics/

The fact that AI spam doesn't pay is important to the fortunes of AI companies. Most high-value AI applications are very risk-intolerant (self-driving cars, radiology analysis, etc). An AI tool might help a human perform these tasks more accurately – by warning them of things that they've missed – but that's not how AI will turn a profit. There's no market for AI that makes your workers cost more but makes them better at their jobs:

https://locusmag.com/2023/12/commentary-cory-doctorow-what-kind-of-bubble-is-ai/

Plenty of people think that spam might be the elusive high-value, low-risk AI application. But that's just not true. The point of AI spam is to get clicks from people who are looking for better content. It's SEO. No one reads 2000 words of algorithm-pleasing LLM garbage over an omelette recipe and then subscribes to that site's feed.

And the omelette recipe generates pennies for the spammer that posted it. They are doing massive volume in order to make those pennies into dollars. You don't make money by posting one spam. If every spammer had to pay the actual recovery costs (energy, chillers, capital amortization, wages) for their query, every AI spam would lose (lots of) money.

Hustle culture and passive income are about turning other peoples' dollars into your dimes. It is a negative-sum activity, a net drain on society. Behind every seemingly successful "passive income" is a con artist who's getting rich by promising – but not delivering – that elusive passive income, and then blaming the victims for not hustling hard enough:

https://www.ftc.gov/business-guidance/blog/2023/12/blueprint-trouble

I'm Kickstarting the audiobook for The Bezzle, the sequel to Red Team Blues, narrated by @wilwheaton! You can pre-order the audiobook and ebook, DRM free, as well as the hardcover, signed or unsigned. There's also bundles with Red Team Blues in ebook, audio or paperback.

If you'd like an essay-formatted version of this post to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

https://pluralistic.net/2024/01/15/passive-income-brainworms/#four-hour-work-week

Image: Cryteria (modified) https://commons.wikimedia.org/wiki/File:HAL9000.svg

CC BY 3.0 https://creativecommons.org/licenses/by/3.0/deed.en

820 notes · View notes

mostlysignssomeportents · 9 months

Text

Private equity ghouls have a new way to steal from their investors

Private equity is quite a racket. PE managers pile up other peoples’ money — pension funds, plutes, other pools of money — and then “invest” it (buying businesses, loading them with debt, cutting wages, lowering quality and setting traps for customers). For this, they get an annual fee — 2% — of the money they manage, and a bonus for any profits they make.

On top of this, private equity bosses get to use the carried interest tax loophole, a scam that lets them treat this ordinary income as a capital gain, so they can pay half the taxes that a working stiff would pay on a regular salary. If you don’t know much about carried interest, you might think it has to do with “interest” on a loan or a deposit, but it’s way weirder. “Carried interest” is a tax regime designed for 16th century sea captains and their “interest” in the cargo they “carried”:

https://pluralistic.net/2021/04/29/writers-must-be-paid/#carried-interest

Private equity is a cancer. Its profits come from buying productive firms, loading them with debt, abusing their suppliers, workers and customers, and driving them into ground, stiffing all of them — and the company’s creditors. The mafia have a name for this. They call it a “bust out”:

https://pluralistic.net/2023/06/02/plunderers/#farben

Private equity destroyed Toys R Us, Sears, Bed, Bath and Beyond, and many more companies beloved of Main Street, bled dry for Wall Street:

https://prospect.org/culture/books/2023-06-02-days-of-plunder-morgenson-rosner-ballou-review/

And they’re coming for more. PE funds are “rolling up” thousands of Boomer-owned business as their owners retire. There’s a good chance that every funeral home, pet groomer and urgent care clinic within an hour’s drive of you is owned by a single PE firm. There’s 2.9m more Boomer-owned businesses going up for sale in the coming years, with 32m employees, and PE is set to buy ’em all:

https://pluralistic.net/2022/12/16/schumpeterian-terrorism/#deliberately-broken

PE funds get their money from “institutional investors.” It shouldn’t surprise you to learn they treat their investors no better than their creditors, nor the customers, employees or suppliers of the businesses they buy.

Pension funds, in particular, are the perennial suckers at the poker table. My parent’s pension fund, the Ontario Teachers’ Fund, are every grifter’s favorite patsy, losing $90m to Sam Bankman-Fried’s cryptocurrency scam:

https://www.otpp.com/en-ca/about-us/news-and-insights/2022/ontario-teachers--statement-on-ftx/

Pension funds are neck-deep in private equity, paying steep fees for shitty returns. Imagine knowing that the reason you can’t afford your apartment anymore is your pension fund gambled with the private equity firm that bought your building and jacked up the rent — and still lost money:

https://pluralistic.net/2020/02/25/pluralistic-your-daily-link-dose-25-feb-2020/

But there’s no depth too low for PE looters to sink to. They’ve found an exciting new way to steal from their investors, a scam called a “continuation fund.” Writing in his latest newsletter, the great Matt Levine breaks it down:

https://news.bloomberglaw.com/mergers-and-acquisitions/matt-levines-money-stuff-buyout-funds-buy-from-themselves

Here’s the deal: say you’re a PE guy who’s raised a $1b fund. That entitles you to a 2% annual “carry” on the fund: $20,000,000/year. But you’ve managed to buy and asset strip so many productive businesses that it’s now worth $5b. Your carry doesn’t go up fivefold. You could sell the company and collect your 20% commission — $800m — but you stop collecting that annual carry.

But what if you do both? Here’s how: you create a “continuation fund” — a fund that buys your old fund’s portfolio. Now you’ve got $5b under management and your carry quintuples, to $100m/year. Levine dryly notes that the FT calls this “a controversial type of transaction”:

https://www.ft.com/content/11549c33-b97d-468b-8990-e6fd64294f85

These deals “look like a pyramid scheme” — one fund flips its assets to another fund, with the same manager running both funds. It’s a way to make the pie bigger, but to decrease the share (in both real and proportional terms) going to the pension funds and other institutional investors who backed the fund.

A PE boss is supposed to be a fiduciary, with a legal requirement to do what’s best for their investors. But when the same PE manager is the buyer and the seller, and when the sale takes place without inviting any outside bidders, how can they possibly resolve their conflict of interest?

They can’t: 42% of continuation fund deals involve a sale at a value lower than the one that the PE fund told their investors the assets were worth. Now, this may sound weird — if a PE boss wants to set a high initial value for their fund in order to maximize their carry, why would they sell its assets to the new fund at a discount?

Here’s Levine’s theory: if you’re a PE guy going back to your investors for money to put in a new fund, you’re more likely to succeed if you can show that their getting a bargain. So you raise $1b, build it up to $5b, and then tell your investors they can buy the new fund for only $3b. Sure, they can get out — and lose big. Or they can take the deal, get the new fund at a 40% discount — and the PE boss gets $60m/year for the next ten years, instead of the $20m they were getting before the continuation fund deal.

PE is devouring the productive economy and making the world’s richest people even richer. The one bright light? The FTC and DoJ Antitrust Division just published new merger guidelines that would make the PE acquire/debt-load/asset-strip model illegal:

https://www.ftc.gov/news-events/news/press-releases/2023/07/ftc-doj-seek-comment-draft-merger-guidelines

The bad news is that some sneaky fuck just slipped a 20% FTC budget cut — $50m/year — into the new appropriations bill:

https://twitter.com/matthewstoller/status/1681830706488438785

They’re scared, and they’re fighting dirty.

I’m at San Diego Comic-Con!

Today (Jul 20) 16h: Signing, Tor Books booth #2802 (free advance copies of The Lost Cause — Nov 2023 — to the first 50 people!)

Tomorrow (Jul 21):

1030h: Wish They All Could be CA MCs, room 24ABC (panel)

12h: Signing, AA09

Sat, Jul 22 15h: The Worlds We Return To, room 23ABC (panel)

If you’d like an essay-formatted version of this post to read or share, here’s a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

https://pluralistic.net/2023/07/20/continuation-fraud/#buyout-groups

[Image ID: An old Punch editorial cartoon depicting a bank-robber sticking up a group of businesspeople and workers. He wears a bandanna emblazoned with dollar-signs and a top-hat.]

#pluralistic #buyout groups #continuation fraud #pe #pyramid schemes #the sucker at the table #pension plans #continuation funds #matt levine #fiduciaries #finance #private equity #mark to market #ripoffs

309 notes · View notes