Welcome back to the Deep Dive. It is great to
have you with us. Good to be here. Today, we
are opening up a file that it sits right in the
middle of the stack. It's something that feels
incredibly mundane on the surface, but is actually
doing a lot of heavy lifting for civilization.
It's one of those topics, isn't it? It's part
of the plumbing. Yeah. You don't think about
the plumbing until it leaks or until you're buying
a house and someone hands you a massive bill
for it. Exactly. We are talking about the invisible
safety net of the modern world. It's a word most
people associate with, like high stress, confusing
bank statements, and just stacks and stacks of
legal paper. We are talking about escrow. There
it is. And before you reach for the skip button
thinking this is going to be dry financial advice,
I want to promise you something. Okay. By the
end of this hour, you are going to look at a
vending machine completely differently. That
is a bold promise. I like it. But the research
definitely backs it up. Because it turns out
this concept, escrow, is the glue holding together
everything from billion dollar corporate mergers
to, well, buying a bag of chips. It really is.
It is the solution to a fundamental human problem.
The problem of trust. The trust problem. Right.
So let's start there. The mission of this deep
dive today is to decode the different flavors
of escrow and figure out why the system even
exists in the first place. But to do that, we
have to go back to the basics of human interaction.
Yeah, let's strip away the modern economy for
just a second. Okay. Imagine two strangers. They
have absolutely no relationship, no reason at
all to trust one another. Right. One has a high
value item, let's say a deed to a castle. The
other has a chest full of gold. The classic standoff,
the old medieval standoff. It is a standoff,
a huge one. If I hand you the deed first, how
do I know you won't just jump on your horse and
ride off with the deed and the gold? And from
my side, if I give you the gold first, I'm terrified
you'll just lock the castle gates and leave me
standing out there in the mud. This friction,
historically, was a massive barrier to trade.
I mean, it's why things so often ended in violence
or you just ended up only trading with your cousins.
Right. You needed some pre -existing trust. You
did. Civilization needed a patch for this bug
in human nature. We needed a neutral zone, a
demilitarized zone for assets, if you will. And
that is the definition of escrow. That's what
it is. Correct. Based on the sources we have
today, the strict definition is a contractual
arrangement where a third party. known as the
stakeholder or the escrow agent, receives and
disperses money or property for the primary transacting
parties. The third wheel. The most important
third wheel in history, maybe. So they just,
they hold the goods. They hold the goods until
everyone agrees the conditions have been met.
But, and I know this was your favorite part of
the research packet. Oh, absolutely. The word
itself tells the story better than any legal
dictionary ever could. This was my big aha. moment
right out of the gate. I think most of us assume
escrow is some, you know, some Latin banking
term. Something very serious. Yeah, like fiduciary
or something that sounds very serious and expensive.
But it's not. No, it comes from the old French
word escrow. And do you know what that translates
to? A scrap of paper. A scrap of paper or more
specifically, a scroll of parchment. Which just
paints such a vivid picture, doesn't it? In that
medieval context, the escrow wasn't the money.
No. It was the deed itself. It was the scroll,
the physical thing. So the escrow agent was literally
the guy holding the scroll. Exactly. The instruction
was, I am going to hold this scroll, this escrow
in my hand. I will not hand it to the buyer until
I see the coins on the table. Okay. And I will
not give the scroll back to the seller unless
the buyer fails to pay. It's the physical manifestation
of the deal just hanging in a suspended state.
That's the key phrase. A suspended state, it's
a limbo. And that brings us directly to your
promise about the vending machine. Yes, let's
do it. Section one of our outline, the everyday
escrow, because we tend to think of escrow as
this thing you only do when you buy a house or
maybe a business. Some huge life -altering event.
But the research points out that we are engaging
in a form of mechanical escrow all the time.
It's fascinating engineering when you break it
down. Think about the user interface of a standard
vending machine. Okay, I'm picturing it. You
want a soda. It costs a dollar. You put a quarter
in. I hear the clunk. You hear the clunk. But
where is that quarter physically? Well, I assume
it's in the bank of the machine, right? It's
in the pile with all the other quarters that
people have put in. See, that's where you'd be
wrong. And that's the magic. If it went directly
into the vault or the profit bin, the machine
would have already accepted the transaction as
revenue. But I haven't bought anything yet. You
haven't bought anything. You've just proven you
have money. So the coin is sitting in a waiting
room. It is sitting in a physical escrow area
inside the coin mechanism. It is mechanically
separated from the rest of the money. It is being
held in trust by the machine. It's waiting for
a condition to be met. Exactly. The condition
is user presses button B4. So the machine is
the neutral third party. The machine is the agent.
The machine is the agent. Now look at the decision
tree. If you press B4 and the machine verifies
it has the chips, the little coil turns, the
chips fall. Success? That is the closing of the
deal. Yeah. At that exact moment, a little lever
or a gate opens in the escrow area and your quarters
finally drop into the secure coin vault, revenue
recognized. But the real magic of escrow and
the reason it exists is what happens if the deal
fails? Right. Let's say you stare at the machine
and you realize you don't want chips. You want
your money back. So I press the coin return button.
You press the coin return. It gives you your
money back. Yeah. But notice how it gives it
back. It doesn't dispense change from a tube
of random quarters. It usually drops your specific
coins back to you, the ones you just put in.
Because they were sitting in the escrow bucket?
They were in limbo. The machine releases the
escrow back to the depositor because the transaction
was canceled. It's just returning my property.
It's a perfect physical analogy for what happens
with millions of dollars in a corporate merger
just happening with 25 cents. It prevents the
machine from having to refund you, which is an
accounting headache. Precisely. And ATMs do this,
too, which is another great example from the
source material we looked at. Oh, right. When
you deposit a stack of cash. Yeah, if you've
ever fed a stack of bills into a modern ATM,
you know it takes a minute. It whirs, it clicks,
it counts everything up. Right, it's thinking.
And then a screen pops up that says, you inserted
$200. Is this correct? It's the verification
stage. And while that screen is up, your cash
is in escrow inside the machine. It hasn't been
mixed with the other deposits yet. It's sitting
in a temporary cassette. So if you click no,
cancel, the machine can spit those exact bills
back out at you. Because once they are mixed,
once they are commingled, you can't prove whose
bill is whose. And that is the cardinal sin of
escrow, which we will definitely get to later.
Commingling funds. You have to keep the assets
separate. Always. Yeah. Until the deal is done.
It's amazing how much trust engineering goes
into just giving a machine 20 bucks. But okay.
Let's graduate from the snack bar to the biggest
purchase of most people's lives. The big one.
We have to talk about real estate. Of course.
This is where the term escrow usually enters
a person's vocabulary. And usually it enters
it alongside a lot of anxiety and confusion.
It's high stakes. In the U .S. specifically,
the entire residential real estate market relies
completely on this system. But. And this is a
crucial distinction that the outline makes. There
are actually two completely different types of
escrow happening when you buy a house. And they
get confused all the time. Constantly. You have
the closing escrow, which is short term, and
then you have the mortgage escrow, which is very,
very long term. Okay. Let's break down type A,
the closing escrow. This is the standoff solution
we were talking about at the start. Yes. This
is the modern version of holding the scroll.
Yeah. So you find a house. You love it. You sign
a purchase contract with the seller. Yep. The
contract says you will pay. Say $500 ,000. And
you write a check for earnest money, let's call
it $10 ,000, to prove you aren't just wasting
their time. But I don't give that check to the
seller. Never. Absolutely not. Why not? Because
what if the house fails inspection? What if you
find out the foundation is cracked and you want
to walk away from the deal? Right. If the seller
already cashed your check and spent it, good
luck getting it back. You'd have to sue them.
And that's a nightmare. And conversely, the seller
isn't going to sign the deed over to me until
they know for sure that I have the other $490
,000. Of course not. So enter the escrow company
or a title company or a real estate lawyer, depending
on the state. They open a file. They are the
neutral zone. So I send my deposit to them. You
send your deposit to them. The bank sends the
mortgage money to them. They're holding all the
puzzle pieces. They are the gatekeepers. Their
entire job is to look at the contract and just
check off the boxes. Is the title clear of any
leads? Check. Did the inspection contingency
get resolved? Check. Is the fire insurance policy
active and paid for? Check. And only when every
single one of those boxes is checked. They close
the escrow. In one single synchronized moment,
they wire the money to the seller's bank account,
they send the deed to the county recorder to
officially put the house in your name, and they
pay themselves their fee out of the funds. And
that's it. That particular escrow is closed.
The scroll has been handed over. The transaction
is complete. But for most Americans with a mortgage,
that is just the beginning of their relationship
with the word escrow. Right. Because now we enter
type B, the mortgage escrow. This is the one
that confuses people on a monthly basis. This
is the impound account. Right. And to understand
this, we have to understand the acronym P -I
-T -I. P -I -T -I. Principal, interest, taxes,
and insurance. Principal and interest. That's
your loan. That's the part that goes to the bank
to pay off what you borrowed. That's straightforward.
Sure. But the taxes and insurance. The T and
the I. That's where the escrow account comes
in. The question I always had, and I think a
lot of people have, is why does the bank even
care? I mean, I owe the bank money for the loan,
sure. Why do they want to be involved in paying
my property taxes to the county? Why not just
let me write a check to the county myself? Seems
like extra work for them. It's a great question,
and the answer is brutal but simple. They don't
trust you to protect their investment. It always
comes back to trust. Or lack of it. Always. Think
about it. If you start paying your credit card
bill, what happens? You get a bad credit score,
maybe a collection agency calls you. Annoying,
but that's about it. Right? But if you stop paying
your property taxes, what happens? The government
gets angry. Very angry. The government places
a tax lien on your home. And in most jurisdictions,
a government tax lien has super priority. Super
priority. What's that? It means it cuts in line.
It jumps to the very front of the line of everyone
you owe money to right in front of the mortgage.
Wait, so the government gets paid before the
bank? Yeah. Even though the bank gave me the
money for the house? Yes. If the government forecloses
on your house for unpaid taxes, they get their
money first. The bank gets whatever scraps are
left over. The bank could lose their entire collateral.
So they are terrified of this. They are terrified
of task meals. Right. So the bank says, We are
going to give you the option to forget to pay.
They take away the choice. Exactly. They say,
we are going to estimate your annual tax bill.
We're going to divide it by 12, and we are going
to force you to pay that portion to us every
single month. And they put it in a bucket. They
put that money into an escrow bucket, a separate
savings account that's attached to your loan.
And when the tax bill arrives from the county,
they pay it for you. From your money. They're
protecting their position in the line. And it's
the same exact thing with hazard insurance. If
the house burns down and you forgot to pay the
insurance premium. The asset is gone. The asset
is gone. The bank is left holding a loan for
a pile of ash. So they escrow the insurance payments
too. Okay. Now this leads directly to the phenomenon
that drives homeowners crazy. The escrow analysis.
The annual letter of doom. I've gotten a few
of those. You get a fixed rate mortgage. You
sign the papers. You think, OK, great. My payment
is $2 ,000 a month for 30 years. Predictable.
Right. And then two years later, the bank sends
a letter saying, just kidding. It's now $2 ,150
a month. And people feel like they've been lied
to. They feel like the bank just changed the
rules. But the loan is fixed. The P &I part,
the principal and interest, that didn't change.
The T &I changed. The taxes and insurance changed.
Because taxes and insurance, they never, ever
seem to go down. Well, there's inflation. Property
values go up, which means taxes go up. These
costs are variable. And the source material gives
a really clear example of how this math works.
And it explains why the payment increase always
feels bigger than it should be. Okay. Yeah. Let's
walk through the shortage concept. This is important.
Okay. Let's say your homeowner's insurance premium
goes up by $120 for the year. All right. So that's
$10 a month. $10 a month. Logic would say your
total monthly payment should just go up by $10.
Sure. Seems simple enough. But here's what actually
happens. The bank usually has to pay that annual
insurance bill before they get around to adjusting
your monthly payment. Ah. So they pay the insurance
company the new higher rate in, say, January.
But you've been paying the old lower rate into
the escrow bucket all of last year. So the bucket
doesn't have enough money in it? The bucket is
worse than empty. It's overdrawn. from the bank's
perspective, or at least it's below the minimum
balance they're required to keep. There's a shortage.
Okay. So now the bank's analysis says, okay,
for the next year, we need to raise your payment
by $10 a month to cover the new higher price
going forward. But T, we also need you to pay
us back for the $120 shortage we had to cover
for you this year. So they spread that shortage
out over the next year too. They'll add another
$10 a month just to pay back the shortage. So
now your payment is up by $20, not $10. So they
double dip in a way. And on top of that, federal
regulations for ESPA, the Real Estate Settlement
Procedures Act, allow them to keep a cushion
in the account, usually equal to about two months
of escrow payments. A buffer. A buffer. And if
the payments go up, the required cushion has
to get bigger, too. So they might add even more
to your payment to build that cushion back up.
So a simple $10 a month increase in your actual
costs can easily turn into a $25 or $30 increase
in your monthly payment for a year. Exactly.
Until the shortage is paid back and the cushion
is full again. It's an automated reality check.
It's the adulting tax applied automatically by
a bank's algorithm. And for certain types of
loans, like FHA loans, you have no choice in
this matter. That's correct. The source notes
that federal housing administration loans require
this escrow account for the entire life of the
loan. No exceptions. And with a conventional
loan? With a conventional loan, if you have enough
equity, usually 20 percent or more, you can sometimes
petition the bank to cancel the escrow account
and let you pay your own taxes and insurance.
But then you have to be disciplined enough to
save up that huge chunk of money yourself for
when those big bills come due. Which brings us
right back to why the system exists in the first
place. It mitigates risk. For the lender. Okay,
that's a very deep dive into the U .S. model,
but our mission is global. So let's look at section
three, global perspectives. How does this work
in, say, the U .K.? It's interesting. In the
U .S., escrow is an industry. You have escrow
officers and title companies that specialize
in this. In the U .K., you don't really have...
distinct industry. The function absolutely exists,
but it's handled by the lawyers involved in the
transaction. Just solicitors. Solicitors, or
a professional called a licensed conveyancer.
I love that term, conveyancer. It sounds like
someone who moves luggage at a fancy hotel. It's
the person who conveys the title of the property
from one person to another. But effectively,
they do the same thing. They hold the buyer's
deposit in a special client account until the
deal is done. So it's integrated into... The
legal process. Exactly. But the source material
highlights some other uses in the U .K. that
I think are really clever and are becoming more
common elsewhere, specifically for things like
secondhand cars. This stood out to me. Buying
a used car is the Wild West. You meet a stranger
in a parking lot. You kick the tires. You hand
over an envelope of cash. It feels incredibly
dangerous. It is dangerous. It's a classic lemon
market, as the economists call it. You don't
know if you're getting a good car or a lemon.
In the UK, and increasingly elsewhere, they're
using escrow services for this. How does that
work for a car? It's the same principle. The
buyer deposits the money into a secure online
account held by a third party. Okay. The seller
gets a notification that the money is there.
It's verified. So the seller delivers the car.
And then what? The buyer gets an inspection period,
a day, two days. They can take it to their mechanic.
Does it start? Is the engine block cracked? If
it's good, they go online and click a button
to release the funds. And if it's a piece of
junk? They reject the transaction and the money
stays locked until they've returned the car.
It eliminates the scam where the seller just
takes the cash and runs. That seems like it would
solve so many problems on places like Craigslist
or Facebook Marketplace. It creates a trust bridge.
And they use it for construction, too. This is
a big one. Oh, home renovation horror stories.
I paid the contractor $5 ,000 for materials and
he just never came back. We've all heard that
story. It's a classic. In the UK, it's becoming
common to put that money in escrow. The builder
knows the money is there, so they aren't worried
you're going to stiff them at the end. Okay,
so it protects them. But they can't touch it
until the work meets a pre -agreed defined standard.
Like phase one is complete when the foundation
is poured and inspected. Exactly. It aligns the
incentives perfectly. It forces honest behavior
because the money is trapped in that neutral
zone until the promise is kept. Speaking of scams
and the Wild West, we have to talk about the
Internet. Section four, the digital frontier.
This is where escrow went from being a kind of
boring legal term to a critical piece of tech
infrastructure for the entire global economy.
Think back to the early days of eBay. We're talking
late 90s. The Beanie Baby era. The Beanie Baby
era. You were buying a rare collectible from
User 123 in Nebraska. You're in New York. You
have to send them a money order. A physical piece
of paper representing cash. You had to go to
the post office. Yeah, put it in the mail. And
then you wait. And you just pray that User 123
is a decent human being and will actually ship
you the thing you paid for. That friction, that
terror of being ripped off, was a massive limit
on the growth of e -commerce. You couldn't build
a real marketplace on blind faith. You might
buy a $10 book, but you're not going to buy a
$2 ,000 vintage guitar that way. No chance. So
internet escrow was born to solve this exact
problem. Right. Companies like escrow .com, which
the source says was founded by Fidelity National
Financial way back in 1999, they basically digitized
the scroll. They did. Walk us through the mechanics
of a typical online escrow deal. Because it has
that specific feature, the inspection period,
that I think is the crucial innovation. Right.
Step one, the buyer and seller agree on the price
online. Step two, the buyer pays the escrow service.
Very important. You do not pay the seller. And
the service verifies the funds. They verify the
funds are good. It's not a bounced check. It's
not a stolen credit card. Then they notify the
seller. We have the cash. It is safe. You are
cleared to ship the item. So the seller is protected.
They know they aren't shipping their valuable
goods to a deadbeat. Exactly. So the seller ships
the guitar. The buyer receives it. Now the clock
starts on the inspection period. You agree to
that ahead of time? Yes. Usually it's set to
a specific number of days. Let's say 48 hours.
So I have two days to open the box, play the
guitar, make sure it's the real deal and not
a counterfeit. And if you do nothing or if you
log in and click accept, the money is automatically
released to the seller. The deal is done. And
if I open the box and it's just a brick with
strings drawn on it? You log in and click reject.
The money remains frozen in escrow. The process
then guides you to ship the brick back to the
seller. And once the seller gets it back. Once
tracking shows it's been returned, the money
is refunded to you. It neutralizes the risk for
both sides. It effectively removes the risk of
the classic take the money and run scam. But,
and this is a huge but, the scammers are smart.
They adapted. This is the bogus escrow section
of the outline. This is truly insidious stuff.
It is. Scammers realized that people were learning
to trust the word escrow. So they thought, well,
let's just create our own. They started setting
up fake escrow websites. How do you even spot
a fake? It's incredibly hard. They copy the logos
and the design of legitimate companies. They
use all the right words. bonded, insured, secure.
They create a beautiful, professional -looking
website. So the scenario is, I'm trying to buy
a car on Craigslist. The seller says, hey, I'm
in the military and I'm stationed out of the
country, but let's use this great escrow service
to make sure we're both safe. Here is the link.
And that is the number one red flag. Here is
the link. If you click the link provided by the
seller. You go to the fake site they control.
And it looks real. It looks perfect. You register.
You see instructions to wire money to their secure
account. You wire the money. But you aren't wiring
it to a neutral third party. You are wiring it
directly to the scammer's bank account in another
country. And once that wire transfer clears,
the money is gone forever. The website disappears.
The seller disappears. That is terrifying. So
the advice from the source is... To verify. Always,
never, ever trust the link provided by the other
party in the transaction. Do your own homework.
Do your own homework. If they say, let's use
escrow .com, don't click their link. Open a new
browser window, go to Google, search for the
official site yourself. And check the government
registry. That's the most important step. These
companies have to be licensed. In the U .S.,
it's a state -by -state thing. California, Arizona,
Idaho, they have specific licenses for internet
escrow. In California, it's the Department of
Business Oversight. You can look them up online.
You can go to the government website and search
for the company by name. If they're not on that
official list, do not send them a penny. It's
a regulatory patchwork in the U .S., isn't it?
Very fragmented. It really is. The federal government
doesn't have a single unified license for this.
It's incredibly fragmented, which can be confusing.
Now compare that to Europe. The EU seems to have
streamlined this quite a bit. They did. In 2009,
the EU passed something called the Payment Services
Directive. It basically harmonized the rules
for these kinds of services across the entire
continent. And what was the impact of that? It
allowed for very low -cost escrow services to
operate across the entire EU. The source mentions
the cost difference. In the old days, for a big
international transaction, you'd need a bank
letter of credit. Which is very expensive. Thousands
of euros sometimes. The directive made it possible
for services to do the same thing for cents.
It democratized trust. It made it possible to
use escrow for smaller everyday transactions,
not just huge corporate mergers. Which brings
us to a different kind of asset. We've talked
about physical things, houses, cars, guitars,
but we live in an information economy. Section
five, intellectual property and source code.
This is a huge area that most consumers never
see. But it is absolutely critical for keeping
the business world running. The black box problem.
Exactly. Imagine you are a massive bank. You
rely on a specific software platform to run all
of your checking accounts. It's the core of your
business. And you buy a license for that software
from a small, brilliant startup in Silicon Valley.
So software as a service. Right. You don't own
the software. You just rent it. You get the object
code, the compiled program that runs. You do
not get the source code, the human readable instructions,
the secret recipe. Because that's the startup's
most valuable asset. They're never going to give
that to me. Exactly. But now. As the bank, you
have a massive risk. What if that startup goes
bust? What if they run out of cash and just shut
down their servers next Tuesday? My bank's checking
account stopped working. My customers would panic.
It would be a catastrophe. And you can't fix
it because you don't have the recipe. You are
locked out of the black box. So source code escrow.
It's an insurance policy, a very specific one.
The startup agrees. as part of their contract
with the bank, to deposit a copy of their source
code with a neutral third -party escrow agent.
And they keep it updated. Every time they release
a new version of the software, they have to update
the deposit in the vault. And it just sits there.
It sits there, encrypted and untouched. Yeah.
Unless a trigger event happens. A trigger event.
What's that? The contract defines these triggers
very carefully. Things like if the startup declares
Chapter 7 bankruptcy. Or if the startup fails
to provide technical support for more than 72
consecutive hours. Or even if the key personnel,
the main developers, die or leave the company.
If one of those triggers is pulled, the escrow
agent breaks the glass. They're authorized to
release the source code to the bank. So the bank
can then hire its own engineers to read the code,
fix bugs, and keep the system running. It's a
business continuity plan. It prevents the customer
from being held hostage by the vendor's failure.
And the sources point out this applies to a lot
more than just software code. Oh, yeah. It's
called information escrow, more broadly. So what
else can you put in there? Industrial designs,
chemical formulas, manufacturing blueprints,
lab notebooks, even creative work. The outline
mentions TD scripts and musical compositions.
Right. There's something called the International
Creative Registry. Think about if you're a screenwriter.
You write a brilliant script for a movie. You
go pitch it to a big Hollywood studio. And they
say, no thanks, we'll pass. They pass. Five years
later, they release a blockbuster movie that
looks suspiciously like your script. And you
want to sue them, but they just say, nope, we
developed this internally, we never saw your
script. It's your word against their army of
lawyers. Unless you used escrow. If you deposited
your script with a registry before you ever pitched
it, you have third -party timestamp proof. Here's
the script dated and sealed by an independent
agent from five years ago. It's a time capsule,
a notarized time capsule that establishes your
rights and the date of creation. Okay, we are
moving up the food chain now to the absolute
peak of high finance. Section six, corporate
mergers and acquisitions, M &A. This is where
the numbers just get silly. We're talking hundreds
of millions, even billions of dollars. When company
A buys company B, it's not like buying a used
car. The due diligence process is insane. It
takes months, sometimes years. Yeah. But even
with all that checking, there is always a risk.
The seller makes certain promises. They say,
we have no lawsuits pending against us. That
is called a warranty. But promises can be broken,
or people can just be wrong without knowing it.
Exactly. So the buyer asks for an indemnity.
which basically means if it turns out you were
wrong about that promise, you have to pay me
back for any damage it causes. But if I've already
paid you a billion dollars for your company and
you've distributed all that money to your shareholders,
how am I possibly going to get it back from you?
You can't. It's like trying to put toothpaste
back in the tube. It's gone. So big M &A deals
almost always use a holdback. A holdback. They
put a chunk of the purchase price, maybe 10 or
15 percent, so it could be $100 million, into
an escrow account instead of paying it to the
seller at closing. For how long does it sit there?
Usually for an extended period, like 12 to 24
months after the deal closes. It just sits there.
If a surprise lawsuit pops up or a tax audit
from three years ago goes bad. The buyer can
make a claim. The buyer can take the money to
cover the damages straight from that escrow account.
They don't have to chase a seller and try to
sue them. It's leverage and security. It is.
But when you have $100 million just sitting in
a bank account for two years, new problems arise.
Interest. Oh, right. $100 million earns a decent
amount of interest. Millions of dollars in interest.
So the lawyers have to fight and negotiate over
who gets the interest. Does it go to the buyer,
the seller? Do they split it? It's a huge point
of contention. And the credit worthiness of the
bank holding the money? That's a huge point in
the research. You don't want to escrow your $100
million holdback in a bank that might collapse
next year. No. So they fight over which financial
institution. gets to be the agent. They have
to be rock solid. There is one more legal use
case here that I think affects a lot of normal
people. Class action lawsuits. Yes. We've all
gotten those emails or postcards in the mail.
If you bought this specific brand of milk in
2014, you may be entitled to a settlement of
$1 .50. And usually I just ignore them, but someone
has to manage that whole process. Imagine you're
the company that got sued. You agree to settle
the case for, say, $50 million. Okay. You do
not want to be in the business of mailing out
10 million checks for $1 .50. You want to watch
your hands of it and move on. You want finality.
So you wire the entire $50 million to a qualified
settlement fund, which is basically just a big
escrow arrangement. Once that wire hits, the
defendant is out. They are done. Their part is
over. And the escrow agent or the fund administrator
deals with the whole headache. They're the ones
who have to find all the claimants, process the
forms, deal with disputes and cut all the checks.
And often they pay themselves their administrative
fees right out of that fund. It separates the
punishment from the logistics. Correct. And finally,
in this section, we can't talk about stakes without
talking about the origin of the term stakeholder.
Gambling. The oldest form of risk, probably.
If you and I bet $50 on the Super Bowl and we
don't really trust each other to pay up. We give
the money to a third guy. A neutral friend. The
stakeholder. He holds the stakes. It's the purest
form of escrow there is. It is. And it highlights
the golden rule of the escrow agent, which brings
us to the fine print section. The agent must
be absolutely, completely neutral. Neutrality
is key. The agent cannot care who wins the Super
Bowl. They cannot care if the M &A deal goes
through or falls apart. They only care about
the written instructions. If Team A wins, pay
Bob. That's it. They're a robot made of law.
But what if the robot messes up? Being an escrow
agent sounds incredibly stressful if you lose
the money or send a million dollars to the wrong
person. The liability is tricky. You would think
they are held to the absolute highest legal standard,
like a trustee. But the source points out. that
many escrow contracts try to limit the agent's
liability to just gross negligence. So an honest
mistake, a simple screw -up, might be forgiven.
It depends on the contract and the local laws.
But they often include indemnity and hold harmless
clauses. What does that mean? It basically says,
if the buyer and seller get into a lawsuit with
each other over this deal, leave me out of it.
And if you try to drag me into it, you have to
pay all my legal fees. They protect themselves
first. They have to. But the one thing they absolutely
cannot do, the thing that will send an escrow
agent to jail, is commingling. Explain that.
What is commingling? You cannot mix the client's
money with your own business operating money.
Ever. You can't use the money in the escrow account
to pay your office rent for the month, even if
you fully intend to put it back next week. The
money has to remain sacred. It has to be separated.
The moment you touch that client money for your
own use, you have committed theft. It has to
stay in the escrow area, just like the quarters
in the vending machine. So we've gone from the
medieval scroll, the escrow, all the way to the
coin suspended in the soda machine, to the massive
impound accounts for our property taxes, to the
source code vaults of Silicon Valley. It's quite
a journey. It's a journey through the architecture
of trust itself. When you step back and you look
at this whole landscape, what is the big takeaway
for you? What's the core theme? For me, it's
the realization that trust in a complex modern
society isn't a feeling. It's not an emotion.
It's a mechanism. It's an engineered system.
An engineered system. We can't rely on knowing
everyone personally anymore. We trade with people
we will never meet who live on the other side
of the planet. So we have to outsource the trust.
We build a neutral zone. We build systems, whether
it's a simple machine, a law firm, or a complex
bank, that are designed to hold the pieces until
the puzzle is complete. It's what allows the
economy to function at scale without everyone
needing to be best friends. It's the lubricant
of capitalism. It really is. Without it, the
gears would grind to a halt. I want to leave
the listener with a thought today. We are moving
very quickly into a world of smart contracts,
of blockchain, of crypto, and we hear this word
all the time. Trustless systems. Code is law.
That's the mantra. Exactly. And in a way, a smart
contract is just a fully automated escrow agent.
It holds the digital assets and releases them
automatically when the code says the conditions
are met. The ultimate vending machine. The ultimate
vending machine. But it raises a really profound
question for me. If the code is the agent, who
audits the code? Who is holding the scroll when
the scroll is writing itself? That is the billion
-dollar question for the next decade, isn't it?
If there's a bug in the escrow code, there was
no manager to call. There's no court to appeal
to. Something to mull over the next time you
put a quarter in a slot and wait for that clunk?
Thanks for diving deep with us today. My pleasure,
as always. We'll see you on the next one. Stay
curious.