Buyers and sellers have skin in the game. They are not just idly weighing the odds, they are placing bets with real money.
Markets have many, many functions, based above all on the use of prices. At their simplest, prices are a mechanism to resolve an unmet need, a driver’s, say, for a new car. That need is satisfied when a purchaser and vendor agree a price that is acceptable to them both. Price can also be used to measure the worth to a buyer or a seller of something more abstract than a car. For example, how much would the CEO of a company hit by a tariff levied under the authority (supposedly) given the president under the International Emergency Economic Powers Act (IEEPA) be prepared to pay to avoid having to wait for the Supreme Court (which could take a year or more) to let him or her know what the final tariff, if any, would be?
Take a highly simplified example involving, say, an IEEPA tariff of $100. A CEO confident that the Supreme Court would overturn the IEEPA tariffs might be prepared to wait for the judgment and the refund that he or she expects would follow. Or that CEO might be prepared to be paid, say, $30 now (a dollar in the hand is typically worth more than its value at some uncertain future date) instead of waiting for the court to award the company the $100 refund on that future date, if indeed the court does decide matters that way. Litigation is never certain. “Strong” cases can always, one way or another, be lost.
Cantor Fitzgerald, a financial services company led by the sons of US commerce secretary Howard Lutnick, is creating a way for investors to bet that President Donald Trump’s signature tariffs will be struck down in court. Traders at the firm’s investment banking subsidiary, Cantor Fitzgerald & Co., say they have the capacity to buy the rights to hundreds of millions of dollars in potential refunds from companies who have paid Trump’s tariffs, according to documents viewed by WIRED. . . .
In a letter seen by WIRED, a representative from Cantor said the firm was willing to trade tariff refund rights for 20 to 30 percent of what companies have paid in duties. “So for a company that paid $10 million, they could expect to receive $2-$3 million in a trade,” the representative wrote. “We have the capacity to trade up to several hundred million of these presently and can likely upsize that in the future to meet potential demand.”
Cantor has already landed at least one major deal, according to the letter viewed by WIRED. “We’ve already put a trade through representing about ~$10 million of IEEPA Rights and anticipate that number will balloon in the coming weeks,” the Cantor representative claimed.
Experts say the deals are a form of litigation finance, an increasingly popular category of investing in which financial firms seek to make money from potential legal settlements. Many lawsuits can take years to resolve, and the structure can allow individuals and companies to get money upfront or their lawyer fees covered. The catch is that investors may only pay a fraction of what plaintiffs could eventually receive, and profit by pocketing the difference.
Secretary Lutnick is not involved with this (in fact, if I had to guess, he probably would have preferred that Cantor have not gotten into this business).
Wired:
“Secretary Lutnick knows nothing about this decision because he has no insight or strategic control over Cantor Fitzgerald,” wrote Kristen Eichamer, press secretary for the Department of Commerce, in an email to WIRED. “He has fully complied with the terms of his ethics agreement with respect to divesture and recusals and will continue to do so.”
Cantor itself is saying that it is taking no view on the outcome of the IEEPA cases.
Wired:
“Cantor is not in the business of positioning any risk or taking views in litigation claims including tariffs,” Erica Chase, a spokesperson for Cantor Fitzgerald, said in an emailed statement.
In other words, it is acting purely as a middleman, by (1) finding a company — a seller — that will accept the “$30” instead of the $100 it believes it is due and, in exchange, assign its rights to the refund to a buyer willing to bet that the chance that the Supreme Court will find against the administration is much higher than the seller thinks. The buyer’s calculation of the price that it is prepared to pay will reflect its assessment of the case, and the time it would take to get paid in the event that it goes against the administration (among the many assumptions I have not made are any concerning interest payable on the refund). The middleman (Cantor) will presumably take a commission on the deal from one or both sides, as it is acting as agent. Its role is to facilitate trade, not to take any view on its outcome.
If such deals catch on and are publicized, the prices paid will also send a signal to other potential buyers and sellers of the “right” price to buy or to sell. They would also deliver a useful message to other parties. Buyers and sellers have skin in the game. They are not just idly weighing the odds, they are placing bets with real money. Of course, such deals may be rare, but if they spread, they will be useful information for other companies deciding how to handle the likelihood of the IIEPA tariffs holding up. Or, to take another example, stock market investors, who might expect a rally should those tariffs be overturned or a slide if they are upheld, will also be watching what the price paid in such deals has to say about expectations of the court’s verdict. The White House will probably watch those deals, too. The more that (relatively) informed participants believe that the tariffs will be overturned, the more likely that the administration will harden its plan B.
Useful things, markets.