Money, Money, Money

How to make money from bureaucracy.

The King of Bureaucracy: How Mark Hertz Group Became A One-Stop Shop of NYC’s RE Community

In securities markets, sometimes you want to buy the companies that are selling “picks to the miners.” You buy companies that make GPUs instead of investing in their AI clients, for example. That works until it doesn’t work. Semiconductors are notorious for their inventory and product cycle volatility.

The equivalent of selling picks to the miners in bureaucracy is to sell compliance and litigation services to companies subject to a byzantine complex of regulations. The more convoluted and difficult to understand the regulatory regime, the more money there is to make from being an outside consultant.

‘After decades spent working on every kind of violation, Hertz and his team began to slowly expand their business to give clients help not only clearing existing violations but also bringing their properties up to code to prevent future violations from being written. That’s how Mark Hertz Associates was born, giving owners the ability to hire one entity to handle the process from start to finish.’

China Puts Power of State Behind AI—and Risks Strangling It

China wants to lead on the GenAI front, but it is constrained by its regulatory impulse.

Also, note how regulators make money coming and going. They regulate and they also moonlight to help the companies navigate the regulation. Consultants abound, too.

‘Most generative AI models in China need to obtain the approval of the Cyberspace Administration of China before being released to the public. The internet regulator requires companies to prepare between 20,000 and 70,000 questions designed to test whether the models produce safe answers, according to people familiar with the matter. Companies must also submit a data set of 5,000 to 10,000 questions that the model will decline to answer, roughly half of which relate to political ideology and criticism of the Communist Party.

‘Generative AI operators have to halt services to users who ask improper questions three consecutive times or five times total in a single day. 

‘The requirements have spawned a cottage industry of consultants seeking to help private companies get the green light for their models. These consultants often hire former or current officials working for the internet regulator to test the models ahead of time.’

Europe’s rushed attempt to set the rules for AI

European startups face obstacles in AI innovation, too. The regulatory tax favors the large. Regulators claim that they want to ensure that AI products don’t lead to public revulsion. They claim to be helping the AI companies. What they really want is to influence, if not dominate, the debate on AI globally in the same way that GDPR and the Digital Markets Act reverberate today.

Same as it ever was.

‘The costs of compliance — which European officials admit could run into six-figure sums for a company with 50 employees — amount to an extra “tax” on the bloc’s small enterprises, Cleve says.

‘“I worry about legislation that becomes hard to bear for a small company that can’t afford it,” he says. “It’s a daunting task to raise cash and now you’ve had this tax imposed. You also need to spend time to understand it.”’

California’s Controversial AI Bill: A Cheat Sheet

In the Chevron litigation and the ensuing Loper interpretative blitz, there has been plenty of pearl-clutching about the diminishment of the role of the expert. California, determined to lead the world in the signaling of its nobility, has proposed legislation that experts find to be vague and impossible to implement. Cue entanglement conflicts with other jurisdictions.

‘As Andrew Ng, the head of Google Brain and a professor of computer science at Stanford, notes, many of these requirements are vague and leading AI scientists would likely disagree about how to meet them. And, as Ng points out, how can researchers sign a sworn statement (under penalty of perjury) affirming their models don’t pose an “unreasonable risk” of harm if they disagree about what harms the model could theoretically enable?’

Small businesses concerned about digital privacy regulation

Legislation to curtail data collection is coming now that small businesses have become reliant upon digital marketing. Why do governments loathe small business so much?

‘Congress is considering legislation called the American Privacy Rights Act, which would regulate the data websites collect. Connected Commerce said a national privacy law is needed to supersede the current patchwork of state laws, but is concerned if companies are barred from collecting certain information targeted advertising would become far less effective. 

‘"The challenge that we're finding as an industry is that the folks drafting the legislation don't truly understand how the digital advertising ecosystem works, therefore they're not taking into consideration the real-world ramifications of small businesses needing to adhere to the structure that they have in place under the current guidelines," Egan said.

‘According to the survey, about 20% of small and medium-sized businesses anticipate they would have to close if they could no longer use targeted digital ads and roughly the same proportion would anticipate layoffs. Landress said he is a big supporter of privacy and won't even collect credit card information over the phone, but he needs to be able to reach his customer base.’

FSB targets cross-border payments regulation

Finance textbooks typically explain the concept of arbitrage with the contrived example of markets. Speculator Bobby can buy silver in London at $90.00 and sell it in Chicago at $91.00 at the same time. It costs him $0.25 to arrange the delivery at settlement. So, he executes the trade and locks in $0.75 in profit.

Regulatory arbitrage is similar. Company A is regulated. Company B isn’t. Company A has significant additional compliance costs to execute activity X. Company B doesn’t. Company A reduces its activity. Company B steps up to fill the void. Company B has the opportunity to make money where Company A does not.

This is common when it comes to cutting-edge businesses or where the statute is unclear. (Statutory ambiguity is the original sin.)

In an effort to reduce the risk of regulatory arbitrage and level the playing field between banks and other players, the Financial Stability Board (FSB) is proposing recommendations for the supervision of cross-border payments.

‘The FSB launched a consultation on its proposals that aim to promote consistency between bank and non-bank providers of payment services when it comes to the oversight of their provision of cross-border payments.’