Financial Incentive or Implicit Discrimination?

While performing a regular review of its lending practices, Citigroup found that some of its minority borrowers were not receiving earned discounts under a program that provides a break on mortgage rates to customers with large deposits in banks. This “break” acts as a stimulus for customers to expand their business relationships with banks by providing financial incentives. An issue arises in the application of these incentives when a specific subset of the population is strategically excluded from the incentive because the incentive is applied in a discriminatory manner to other subsets. Such practices violate fair lending laws and have had a long, historical effect on the wealth accumulation of communities of color and our economy.

Although such discounts may appear miniscule facially, this exclusivity mirrors many discriminatory practices that fair lending laws and other similar fair housing laws were created to prevent.

In 1963, the United States passed the Fair Housing Act, legislation specifically designed to protect buyers or renters of a dwelling from discrimination based upon race, color, national origin, and religion. This law was passed in the midst of the 20th century, a time of rampant housing discrimination against people of color. Banks refused home loans to many people of color and actively participated in redlining practices. Because many people of color were effectively excluded from receiving the same low mortgage rates as their white counterparts, they were unable to purchase homes and enter the growing middle class. Without these loans, people of color either lacked the sufficient funds needed for home ownership or entered highly predatory loan agreements with third-party lenders. These discriminatory practices created a heightened need for the implementation of fair lending laws to protect marginalized groups in pursuit of owning or renting a home.

Ultimately, although economic ramifications of discriminatory lending vary, these ramifications are primarily caused when people of color are discriminatorily denied a form of economic prosperity that is essential to the American dream. Home ownership within the United States has become a quick gateway to economic stability that not only secures wealth in the present but also for future generations as homeownership translates into intergenerational wealth. By denying people of color the right to homeownership, banks are effectively contributing to an ever-present wealth gap.

As our society increases in heterogeneity along racial lines, laws must be enacted that allow for punitive ramifications when such discriminatory behavior is sustained. Banks must take an active role to ensure lending and everyday business practices are conducted in an equitable manner, which would ensure economic prosperity for all despite racial or ethnic background.

Financial Incentive or Implicit Discrimination

Short-Term Rental Restrictions: Why and How?

Airbnb faces yet another restriction proposal in Washington DC, the likes of which is paralleled only by New York City and San Francisco.  The bill, which went to a preliminary vote on October 16, would bar short-term rentals on secondary homes and place a 90 day restriction on rentals of primary residences when the owner is not physically present. However, there would be no restrictions on short-term rentals if the owner is there.

The bill distinguishes between three groups of Airbnb hosts: those who own secondary homes, those who wish to rent out their home while away, and those who wish to rent out spare rooms. With regards to the latter two groups, the bill seems to recognize that home sharing is not new. The ability to rent out one’s home has existed in the context of lodging throughout American history and can even help to preserve home values because it shares the burdens of home ownership.

The bill does not exercise the same deference toward secondary home owners. This creates two questions: first, why seek such restrictive regulation in the first place; second, are there less intrusive means to achieve the same end?

Secondary home owners seek the short-term rental market over the long-term rental market because it’s more profitable and allows more flexibility. This effect is exacerbated in heavy tourist destinations, such as San Francisco, New York, and Washington D.C. In such an environment, locking yourself into a long-term commitment restricted by rent control becomes unappealing when the alternative enables you to rent your home out at market rates, enjoy substantially the same occupancy rate, and retain your ability to enjoy your secondary home. As market rates for rental apartments continue to rise faster than what is allowed under rent control, more secondary home owners will seek the short-term rental market over the long-term market. Considering Washington’s housing crisis, as a matter of public policy, Washington cannot allow secondary home owners to favor tourists over prospective long-term residents.

Airbnb points out that Washington’s stock percentage of secondary home rentals is less than one-quarter of one percent and, therefore, only has a trivial effect on the housing crisis. However, its argument inaccurately assesses the relationship as a stock rather than a flow. A study done by researchers at National Bureau of Economic Research, UCLA, and USC concluded that on a national basis “a 10% increase in Airbnb listings leads to a 0.42% increase in rents and a 0.76% increase in house prices.” These researchers also found that the effect was smaller in zip codes with larger shares of owner-occupiers, consistent with the view that secondary home renters have a more profound effect on rent and housing prices.

At the very least, the bill seeks to limit the reallocation from long-term rentals to short-term rentals without discouraging home-sharing of primary residences. Because the dichotomy stems from the asymmetric net benefits from renting short-term versus long-term, a less intrusive approach could be to levy an additional tax for secondary home owners seeking short-term rentals, effectively increasing the cost of favoring the short-term market over the alternative. A potential fallback to this preliminary framework could be the complexity of calculating the tax because the efficacy of the tax would depend on how accurately it closes the incentive gap between long-term and short-term rentals.

Short Term Rental Restrictions Why and How


No Taxation without Profit Maximization: The Potential for Proposition C to Disincentivize Corporate Social Responsibility

When it comes to facilitating corporate social responsibility, should businesses be required to contribute to local problems or should decisions about contribution be left to industry leaders discretion? That is the question facing San Francisco voters November 6th.

Proposition C, a measure put together by a local non-profit, would effectively double the city’s budget to combat homelessness by raising taxes from .17% to .7% on businesses that exceed $50 million in annual revenue.

Some moguls, such as Salesforce CEO Marc Benioff, support the tax. But the unsurprising reality, even in liberal San Francisco, is that most companies are against the measure. Leaders of tech giants, including Twitter, Square, Stripe, Lyft, and Dolby Labs have collectively contributed hundreds of thousands to opposition efforts.

Some business leaders, such as Sequoia’s Michael Morris,  are frustrated with Proposition C since their companies already donate millions to social programs. Preclusive to public backlash, businesses have packaged their opposition as concern for whether the new tax is adequately supported by plans to effectively manage the influx of money. Although this apprehension may appear as a desperate distraction from obvious self-interest, San Francisco’s Mayor and various other government officials join in this opposition.

While discussing social problems in market terms is problematic, it is important to analyze the credible concerns and repercussions of solutions like Proposition C. As such, implementing a business tax may be a realistic means to combating homelessness.

However, legislation that turns social responsibility into a tax could disincentivize a corporate culture of caring. Social consciousness, or at least the fear of negative public perception, has made social responsibility a fundamental part of corporate decision making. Further, with most governance models still aligned with shareholder primacy– this change is fragile.

Companies now consider a social agenda to be part of their profit maximization model. They choose initiatives and budgets according to their margins in order to boost public image and profits – all while motivating employees and investors with their purpose. But if the local community sequesters companies to fiscally force a social agenda…what is the incentive for them to fund programs themselves? Is it better to force companies to do good or to convince them that doing good is their idea?

No Taxation without Profit Maximization- The Potential for Proposition C to Disincentivize Corporate Social Responsibility

India’s New Data Localization Regulation Imposes Challenge on Payment Vendors

An order enacted by the Reserve Bank of India (RBI) regarding data localization went into effect on October 15, 2018. This order allows authorities to have “unfettered access” to data, giving them the power to supervise all payment data happening in India. Under the order, all payment system operators must store “full end-to-end transaction details” involving Indians in India. The foreign element of these transactions can be stored in elsewhere, if required by that foreign country. All system providers must comply with this order within six months.

U.S. credit card companies and other payment service providers are struggling to follow the order. Companies like Visa, American Express, PayPal, and Amazon have pointed to their expansive data processing and fraud detection systems, located throughout the world. The companies have argued they need more time to prepare for the localization. In fact, Visa and Mastercard have allegedly requested “an extension of the deadline and a relaxation of the rules, citing operational difficulties and security concerns.”

RBI, however, has ignored these pleas. The agency has made it clear via phone calls and letters that it would impose fines if companies missed the order’s deadline. Facebook’s WhatsApp messaging service is the only major American company that expressed its ability to comply.

The 21st century is known to be an era of data. Almost everything we do on the Internet can be turned into data, which consequently involves some heated issues like individual privacy and national security. Europe implemented the General Data Protection Regulation (GDPR) to protect privacy rights by requiring companies to request individual’s explicit consent before processing data. Apart from this “individual consent” approach, some countries have adopted a “governmental scrutiny” approach. China’s data protection law, for example, also requires a security assessment when data gathered inside the country may be transferred outside of China. For critical information infrastructure operators (CIIOs) such as public communication and information service providers, the security assessment will be conducted by regulatory authorities. For non-CIIOs, this assessment will be conducted by companies and monitored by regulatory authorities, unless the transmission of data may harm the public interest or national security.

India’s New Data Localization Regulation Imposes Challenge on Payment Vendors


Stock Slump Threatens Favorite Presidential Bragging Point…Albeit Too Little, Too Late

Stocks dropped significantly these past two weeks, as market indices recorded major losses. The S&P 500 is down over 5% in October and at the time of this writing recorded its 12th consecutive loss over 14 days. In addition to the imminent threat of rising interest rates and market volatility abroad, the President’s ongoing trade war with China may be a  major culprit for a lack of confidence in future market performance. However, it is unlikely that these losses will phase the President, who has often boasted about market growth during his tenure.

Despite coming a mere two weeks before mid-term elections, this recent downturn appears unlikely to sway voting results, which see Republicans retaining control of the Senate. While a shift in the House may impede some of the administration’s future plans, control of the Senate means current policies are unlikely to be overturned and may embolden the administration to maintain its current course, a proxy of the perceived confidence the American public holds in a President whose approval rating is on the rise. As a result, this current slump seems unlikely to bring an end to the economic policies of the past two years.

This is problematic, as although the cause and duration of this slump are complex and up for debate (however obvious or intuitive it might seem, timing the market is rarely that simple in reality), the dangers of the policies that many credit with its inception are all too real. Although the administration’s corporate tax cuts are at least partially responsible for the long-running stock surge preceding this slump, they could have disastrous effects. Tax cuts increased corporate profits but also increased the budget deficit, now at a six-year high, which endangers the government’s ability to respond effectively if and when a lasting downturn arrives.

Moreover, the administrations inability to curb potential increasing volatility in foreign markets threatens market health. Slowing growth in China moving into the fourth quarter, by no means improved by tariffs on trade, could have a profound effect on U.S. markets. In addition, rising geopolitical tensions, most recently in Saudi Arabia, worry investors, as a long list of power players, including J.P. Morgan CEO Jamie Dimon and BlackRock CEO Larry Fink, have pulled out of “Davos in the Desert” following the murder of Saudi journalist Jamal Khashoggi and what is perceived by some as a complacent response from the President. Even if economic sanctions do not follow, corporate boycotts, both real and symbolic, do little to inspire confidence.

Therefore, this midterm slump, however deleterious to the President’s bragging rights, is unlikely to sway policy in the near future. That being said, how this administration plans to sell a possible down market to voters two years from now when Presidential elections come around, remains to be seen.

Stock Slump Threatens Favorite Presidential Bragging Point… Albeit Too Little, Too Late

EU Approves Microsoft Acquisition of GitHub

On October 19th, the EU Commission approved Microsoft’s $7.5 billion acquisition of GitHub, a leading software development platform based in San Francisco. GitHub is a source repository that enables software developers to host and review code, manage projects, and create software. Since Microsoft’s announcement of the GitHub deal back in June, two major concerns surrounded the potential acquisition. First, there were concerns over antitrust issues. Second, it was unclear whether Microsoft’s control of GitHub would compromise GitHub’s open-nature platform. In giving its unconditional approval, the EU Commission decided that “effective competition in the relevant markets would continue and Microsoft would have no incentive to undermine the open nature of GitHub’s platform.”

This is not the first time the EU Commission has closely monitored Microsoft’s actions and placed them under microscopic investigation for anti-competitive behavior. From the 2007 case Microsoft Corporation v. European Commission(alleging Microsoft’s abuse of its dominant market position) to Microsoft’s 2016 LinkedIn Commitments with the EU Commission, the Commission has long been an active check on the leading technology company.

The EU Commission’s unconditional approval of the GitHub deal signifies the crucial role that regulators and international bodies play in creating accountability and transparency between corporate behemoths such as Microsoft and the international markets in which they operate. In this case, the EU Commission could have given an unconditional green light on the deal, conditioned an approval upon further Microsoft commitments (as with the 2016 LinkedIn acquisition), or launched a detailed investigation that could have hindered the progress of the acquisition. Given the backdrop of the EU General Data Protection Regulation (GDPR) that went into effect earlier this year, the role of regulators around the globe is increasingly significant for technology companies that operate in international markets. For companies like Microsoft, it has become necessary not only to acknowledge the authority of these regulatory bodies, but also to ensure their expectations are met for key regulatory approval of critical business decisions.

EU Approves Microsoft Acquisition of GitHub

Tech Tussle: Apple & Qualcomm

The relationship between Apple and Qualcomm dates back to 2011 when Qualcomm became Apple’s main supplier for modem chips to use in its smartphones. Despite this history, the relationship between the companies has turned bitter.

Last year, Apple alleged that Qualcomm’s patent royalty payments constituted an “illegal business model” which “amounts to a scheme of extortion.” Shortly thereafter, Apple’s suppliers stopped paying royalties to Qualcomm. According to analysts, this resulted in an estimated $2.5 to $4.5 billion of unpaid royalty fees. The fact that Qualcomm is the subject of an antitrust lawsuit pursued by the Federal Trade Commission perhaps adds additional weight to Apple’s claims.

In turn, Qualcomm declared its own allegations against Apple. In a countersuit, Qualcomm claimed that Apple breached their master software agreement by providing Intel, its competitor, with “vast swaths” of its confidential information. Qualcomm filed several patent infringement suits against Apple and asked for an import ban on certain iPhone models, which it claimed contained technology resulting from this infringement. Judge Thomas Pender of the International Trade Commission found that Apple had infringed on one Qualcomm patent, but denied instating the import ban.

In response to being dragged into these claims, Intel’s general counsel, Steve Rodgers, released a press statement. Standing strongly behind Intel’s integrity, he stated “As one of the world’s largest patent holders, Intel respects intellectual property.” Additionally, Rodgers emphasized that moving forward, Intel will instead “respond to Qualcomm’s statements in court, not in public.”

While the conflict between Qualcomm and Apple has persisted for more than a year, it seems that at least one of the companies is hopeful for a possible resolution. In a recent interview with Bloomberg, Qualcomm CEO Steve Mollenkopf alluded to the possibility of a settlement stating, “The environment is such that a deal could get done.” In case the parties cannot come to an agreement, a trial is set to begin in April 2019.

However, a settlement might be a long way off. The legal battle between Apple and Qualcomm is arguably the largest and most influential dispute to occur within the tech industry, given the scope and scale of the controversy. In addition to the litigation within the U.S., the companies have filed suit against each other in countries such as the U.K. and China. In total, they are adversaries in approximately 100 legal disputes around the world.

Overall, the conflict between Apple and Qualcomm stands as a warning for the way in which business relationships and the protection of intellectual property can clash. The outcome of the controversy, whether through settlement or trial, will certainly shape the way product and tech leaders interact in the future.

Tech Tussle – Apple and Qualcomm

Khashoggi Dead, Saudi Arabia Faced with its Existential Question: At What Point Do Payouts Stop Working?

As the world grapples with the grotesque killing of Washington Post journalist Jamal Khashoggi in the Saudi Arabian consulate in Turkey, business leaders worldwide are carefully navigating their relationships with Saudi Arabia.

While some had been optimistic that Mohammed bin Salman represented a relatively progressive face for the notoriously opaque Sunni powerhouse, what looks to be the crown prince’s intimate direction of the abduction and murder of Khashoggi has roiled the diplomatic and business world.

The crisis represents the many ways that Saudi Arabia has straddled its repressive reputation with its recognition that as a rentier state, its existential justification as an absolute monarchy depends on oil money payouts to its citizens. Concerned about the sustainability of this model, bin Salman has made efforts to combat high rates of unemployment, spur creativity, and diversify Saudi Arabia’s economy. The most notable and publicized of these efforts is Saudi Vision 2030, which includes the Public Investment Fund—Saudi Arabia’s sovereign wealth fund.

The plan involves using oil money to garner influence in a different way—through taking stakes in and buying from prominent companies around the world, often in the United States. Saudi Arabia has invested billions in American companies, including WeWork and Uber, via SoftBank, the Japanese multinational holding conglomerate. In fact, Saudi Arabia has invested $45 billion in SoftBank’s Vision Fund.

One outgrown of Saudi Vision 20130, the Future Investment Initiative is set to begin Tuesday. But featured attendees, including JPMorgan’s CEO Jamie Dimon, Blackrock CEO Larry Fink, Uber CEO Dara Khosrowshahi, US Treasury Secretary Steven Mnuchin, and IMF Director Christine Lagarde, have pulled out of the summit in the wake of Khashoggi’s murder and Saudi Arabia’s blatantly inconsistent cover up.

But business leaders pulling out of the conference may ultimately amount to just a slap on the wrist, with the conference enough of a throwaway that publicly withdrawing is the lowest-risk way for companies to manage optics without substantively threatening business as usual. Similar to President Trump’s public lament that distancing the United States from Saudi Arabia isn’t worth the billions of dollars at stake, American companies have mostly avoided making more than symbolic gestures.

With so much at stake, it’s hard to imagine that companies will sever ties. Nonetheless, the Kingdom must reckon with the question that defines it: at what point do payouts stop working?

Khashoggi Dead, Saudi Arabia Faced with its Existential Question

Dieselgate and Volkswagen’s Reemergence

Nearly three years after Volkswagen Group’s (VW) exposure in the notorious “Dieselgate” scandal, the company seems to have rebounded strongly and done away with the bitter taste that the colossal dupe gave consumers. In 2015, regulators discovered that VW had fitted approximately 482,000 cars in the US and 11 million more worldwide with a “defeat device.” The device triggered upon smog inspection of the car and artificially limited emissions during tests, but cars would then emit 40-50 times that amount when driven on the road.

VW indeed felt the sting for its actions; in the months following the scandal, various automobile trend sites showed that interest in VW cars – particularly those with diesel engines – had dropped precipitously. Sales, especially VW’s diesel automobiles, declined somewhat as well.

However, Volkswagen has somehow managed to rapidly overcome this PR nightmare, which included a hefty $25 billion corporate sanction. In the wake of Dieselgate, VW has made strategically crucial decisions that, even now, look like they are paying off handsomely.

VW’s first key move was to assign Scott Keogh as CEO of VW Group North America. In the world of Audi, Keogh is considered somewhat of a legend. Keogh joined Audi of America in 2006 as its chief marketing officer and eventually became its president two years later. Audi had been seriously struggling to penetrate the US market, but Keogh helped nearly triple Audi’s sales across the country during his tenure.

More significantly, however, is VW’s $48 billion investment into a line of affordable electric vehicles under the slogan of “Electric for All.” For a company known for lingering on its obsession with diesel and other fuel-based engines, VW has taken a sharp turn towards the electric vehicle world. Indeed, the company’s massive investment raises questions. Is this just a stunt to overcome the PR nightmare and make the public disassociate VW with notions of dirty emissions? Volkswagen AG CEO, Matthias Muller, has voiced a rather strong opinion saying that he still sees an impending revolution back to diesel vehicles.

Whatever the merits of these claims may be, VW is taking some concrete steps to prove that it’s ready to compete in the world of electric vehicles. It recently displayed its futuristic Audi e-Tron in San Francisco, demonstrating that the company can capitalize on its exterior design while also transitioning to electricity. The company is even requiring its mangers to drive EVs. It projects to make 25% of its sales of vehicles through EVs by 2025, a forecast which would mean about 2-3 million EVs by that time.

While the company’s success in the long run in this area is far from certain, VW undoubtedly has the right pieces in play. It has phenomenal personnel that it’s introducing in strategic avenues, plentiful niche enthusiasts under its Porsche and Lamborghini brands, and the capital to make a strong entrance into the EV world.  The very scandal that seemed to put VW on the brink of disaster may actually have been the forceful push that the company needed towards EVs in order to compete in the rapidly changing auto industry.

Dieselgate and Volkswagen’s Reemergence

Good News for Corn Farmers: Trump Orders the EPA to Allow Year-Round Sale of Gasoline Containing 15% Ethanol

President Trump recently announced an intention to direct the Environmental Protection Agency to lift a summertime prohibition on 15% ethanol gasoline. Trump announced the plan shortly before a campaign rally in Iowa — the largest ethanol-producing state in the country.

Ethanol is a biofuel created primarily from corn. Currently, gasoline containing 10% ethanol is sold year-round in fuel stations across the country. Congress has also approved the sale of 15% ethanol blends for vehicles with model years 2001 and newer. However, the Clean Air Act prohibits retailers from selling E15 from June 1 to September 15 because of environmental concerns. This has long vexed farmers who blame the seasonal prohibition for low corn prices.

Trump’s proposal faces opposition from environmental advocacy groups and oil suppliers who stand to lose profits if demand for ethanol increases. Environmental activists like the Sierra Club argue that the use of E15 during the warmer months of the year will lead to increased greenhouse gas and smog emissions. The American Petroleum Institute contends that the measure endangers consumers because most household vehicles are not equipped to safely use E15. Senators from oil-producing states, including Republicans, sent a letter urging the president to reconsider.

The plan sets the stage for a potential legal showdown about the interpretation of the Clean Air Act. The Act prohibits the summertime sale of gasoline blends that vaporize into the atmosphere at a rate above a certain threshold. The statute allows the EPA to issue waivers for 10% ethanol gasoline, but the EPA has yet to apply such a waiver to 15% ethanol blends. Trump’s proposal directs the EPA to promulgate a rule that would allow the agency to issue E15 waivers.

Opponents of the proposal argue that the EPA lacks the authority to extend E15 waivers without congressional approval. Although the EPA previously stated that it did not have such authority, the agency is confident that it could implement the president’s order. Newly minted Supreme Court Justices Gorsuch and Kavanaugh could be pivotal votes in the event of a legal challenge.

President Trump’s announcement comes just a month before the midterm elections. Political analysts have called it a clear attempt to aid incumbent Republicans in farmer states. Trump may also be trying to restore support among voters that felt scorned by retaliatory tariffs on American crops as part of the president’s trade war with China.

Good News for Corn Farmers