Fun Shiny Object: FTX, Public, ETFs

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Speaker 13 Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

Speaker 14 And I'm Katie Greifelt, a reporter for Bloomberg News and an anchor for Bloomberg Television.

Speaker 13 What do you got today, Katie?

Speaker 14 Today we're going to talk about FTX, has a lot more money than it thought it did. Then we're going to talk about private markets and just how hot they are.

Speaker 14 And then we're going to talk about ETFs and some oxymorons in the industry.

Speaker 13 Fabulous.

Speaker 14 We were really like deliberating over what we were going to record this week. And then the most obvious money stuff story dropped, and that is FTX.
FTX.

Speaker 13 I've written a lot about FTX. I'm trying to get away from crypto, but it keeps pulling me back down.

Speaker 13 FTX found some money.

Speaker 14 A lot. Billions.

Speaker 13 A lot compared to.

Speaker 14 A lot compared to what they had.

Speaker 13 Yeah. Like a surprising amount.
A surprisingly large amount.

Speaker 14 Should we say how much?

Speaker 13 I don't know how much.

Speaker 14 I have it in front of me. I printed out some notes.
$16.3 billion in cash, which it will distribute.

Speaker 13 Yeah. I mean, the answer to how much is like if you had a claim at FTX, if you're a customer depositor at FTX, you'll get back something north of 118 cents on the dollar.

Speaker 13 You'll get back all of your money plus you know two to three years of interest because you'll get your money about two to three years after FTX went bankrupt.

Speaker 14 Right.

Speaker 13 Yeah. Now, there's a big caveat to that, which is if you had dollars at FTX or tether or Euros, you'll get back your money with interest.

Speaker 13 If you had Bitcoin at FTX, you'll get back the value of a Bitcoin on November 14th, 2022 in cash plus interest. So your Bitcoin back then was worth like $17,000, $18,000.

Speaker 13 And so if you were a Bitcoin customer of FTX, you'll get back about $20,000. And a Bitcoin right now is worth about $62,000.

Speaker 13 So you got back, you know, a little less than one-third of your money if you had a Bitcoin on FTX.

Speaker 14 Yeah. And I know that that is a tough pill to swallow for many people, just judging by the reactions on

Speaker 13 right. It's harsh.
It's like the news stories are all FTX has enough money to pay back all creditors at $118,000 on the dollar. And everyone on social media is like, ah, not me.

Speaker 13 I'm getting back less than a third of my money, which is true. It's true.
It's just the sort of

Speaker 13 fact of bankruptcy law and accounting that that's what you get. I will say, though, that most of FTX's customers seem to be owed dollars.

Speaker 13 Like if you look at the numbers that they've put out, something like 70% of the customer claims were in dollars. And like, you know, there's probably 2.5 billion of Bitcoin and Ethereum claims.

Speaker 13 Those are the main crypto claims. There's a bunch of others, but it's like mostly Bitcoin and Ether.
There's like 2.5 billion of that, but there's like 7 billion of dollar and tether claims.

Speaker 13 So most people are getting most of their money back, but then the people who aren't are getting back, you know, 30 cents on the dollar.

Speaker 14 And this is really unique. I mean, in terms of bankruptcy cases, I mean, what, the average is 118% that they're going to get back.
I feel like it doesn't typically work out this way.

Speaker 14 We have had some recent examples, such as Hertz, which actually exited bankruptcy with money left over that they then repaid shareholders with, but this feels pretty unusual.

Speaker 13 Well, yeah, I mean, one thing that's very unusual is like you mentioned Hertz.

Speaker 13 Like it does sometimes happen that a company will go bankrupt and then like assets will recover and it'll have more than enough money to pay the creditors.

Speaker 13 And then, as in Hertz, the shareholders get the extra money back. It's like extra weird here that they have extra money and they're like, we're just going to give that to the creditors.

Speaker 13 Now, part of that is clearly because some of these creditors are, you know, not getting made whole, right?

Speaker 13 Like the Bitcoin creditors, you know, you're like, oh, we'll give you a little 18 extra cents to make up for the fact that you've lost two-thirds of your money.

Speaker 13 Part of it is that like, if there were money left over, it would go to the equity holders. The equity holders in FTX are like incredibly unsympathetic.

Speaker 13 It's mostly Sam Bankman Fried and like also some venture capitalists who enabled them.

Speaker 13 Also, like, in fact, not all of the creditors will be made whole because actually between like the customers and the equity holders, there's this giant claim from the U.S.

Speaker 13 government, which I've never really understood.

Speaker 13 It's like the IRS is like FTX had huge profits and they need to pay us tens of billions of dollars of taxes on those profits, which is very weird because, like, out of the other side of its mouth, the government is saying FTX actually lost all the money.

Speaker 13 So, there's like all these tax claims. There's all these regulators who wanted to fine FTX because it did a lot of illegal stuff.

Speaker 13 So, basically, they all agreed like the fine claims, the taxes, everything like that is going to be subordinated to the customers.

Speaker 13 So, basically, if there's any money left over, it'll go to the government. And the government is like, fine, the customers can have some interest.
So, I think that's kind of how it worked out here.

Speaker 14 So, it feels like a happy end for some people, obviously.

Speaker 13 People, you know, the Vitcoin customers are still real mad. Yeah.

Speaker 13 You know, it's like, it's not that happy.

Speaker 14 But it's better than it could have been.

Speaker 13 Oh, yeah. Oh, yeah.
And the claims have traded the whole time, and it's the price history of the claims trading is incredible.

Speaker 13 Like, they started at three cents on the dollar, and they're now trading over 100.

Speaker 14 Yeah. Well, it's really interesting.
I mean, some people made a business out of that. I'm thinking about there's this FTX creditor project.

Speaker 14 It was started by this guy, Louis Dorini, also with another group of people, which included FTX, former head head of product.

Speaker 14 I remember speaking to him on BTV during the sentencing, Sam Bankman Fried's sentencing. And at that point, that was in late March, he had over $90 million

Speaker 14 of these claims. So, I mean, he's made out pretty well.
Yeah.

Speaker 14 And even at that point, when it was still seen as probably people are going to be made whole, people were, according to this guy, people were still eager and willing to sell their claims because they wanted liquidity now.

Speaker 14 They didn't want to have to wait several months to years to be made whole. They just wanted the money now so they could go buy more Bitcoin and more crypto.

Speaker 13 Yeah, that's reasonable, right?

Speaker 13 I mean, like if you were an FTX customer at the time of the bankruptcy and you had Bitcoin on the FTX and you couldn't get it out, what you might have done is said, I'm going to take all of my cash and buy that Bitcoin somewhere else because like I think Bitcoin prices are going to go up.

Speaker 13 And then you'd be made whole, right? You'll eventually get your cash out and you'll have been able to turn around and put it in Bitcoin.

Speaker 13 but a lot of people didn't do that for one because like some people like all of their money was on ftx and they couldn't get more cash but also like i just think back to the collapse of ftx like

Speaker 13 that felt like a truly like nuclear event for crypto an extinction event yeah just if you looked at that and you were like

Speaker 13 Solana is going to trade up 1,000% in the next 18 months, people would have thought you were crazy.

Speaker 13 It really just seemed like such an end-of-the-world event for crypto that part of why the claims claims were trading at three cents on the dollar is like, you know, FTX had this pile of assets.

Speaker 13 And it's like, well, they're not going to get any money for those assets. Those are all crypto assets.

Speaker 13 And then, of course, crypto recovered and they were able to get back, you know, more than the dollar amount of their claims.

Speaker 13 But if you were buying those claims at three cents on the dollar, you're making it kind of a bold bet that crypto would recover as rapidly and as much as it does. Yeah.

Speaker 14 It begs the question,

Speaker 14 Sam Bankman Freed.

Speaker 13 Great question.

Speaker 14 What if he had another year, Matt?

Speaker 13 Well, I mean, the thing with him is like, you know, his description of this made people so mad. Like, it was like, he's like, we had a run on the bank, right?

Speaker 13 And it wasn't a bank. Yeah.
Like, you weren't supposed to have a run on the bank, right? There were a lot of problems, right? Like, one is that, like, he wasn't running a bank.

Speaker 13 He was definitely telling people things about FTX's balance sheet and about its risk management that weren't true.

Speaker 13 And a lot of the money was being invested into weird stuff like paying Tom Brady a lot of money and buying apartments for his family and things like that.

Speaker 13 But, but, but ultimately, you know, basically like 10 minutes after he signed the bankruptcy papers, he was like, if I had had another week, I could have saved this company.

Speaker 13 I could have made all the customers whole. I could have gotten us back on our feet.
And the worst mistake was signing the bankruptcy papers because I could have pulled it out.

Speaker 13 No one believed that at the time, right? Like he signed the bankruptcy papers because all of his lawyers, all the people who worked at FTX were like, buddy, you got to pull the plug on this, right?

Speaker 13 And like, no one's believed it ever since. And it's not true, I don't think.

Speaker 13 Like, I don't think if he had had another week, he could have like found a big equity investor who would have like underwritten all of these assets and said, we're going to make all the customers whole because we think there's enough value here.

Speaker 13 But like, ultimately, that worked out to be true, right? Like, it worked out that there is enough value there.

Speaker 13 And he couldn't find another investor to come in and underwrite that because like no one trusted FTX, right? No one trusted him. And also it was like crypto winter, right?

Speaker 13 Like crypto prices had collapsed and it didn't look good. But the interesting thing about the bankruptcy system is it like sort of automatically becomes that investor, right?

Speaker 13 Like when you file for bankruptcy, there's a stay on customer claims.

Speaker 13 So the customers can't get their money back, which is really helpful when you're running a quasi-bank and like his big problem was people wanted their money back and he didn't have money to give them, right?

Speaker 13 If the customers just can't ask for their money back, that gives you a lot of time to work things out.

Speaker 13 And then also the bankruptcy process was so slow and deliberate that by the time they got around to selling their tokens, the tokens had rallied, right? So

Speaker 13 probably it would have been more sensible to sell sooner, except that prices went up a lot while they were waiting. So it worked out great.

Speaker 13 The bankruptcy system sort of worked out as like a patient investor who could step in and take over FTX.

Speaker 13 It didn't work out for SPF, but it worked out for, kind of worked out for creditors, understanding that the ones who hold Bitcoin are still mad.

Speaker 14 I'm sure he's just sitting in jail so frustrated.

Speaker 13 Oh, yeah. I mean, he's been frustrated all along.
Yeah. You know, the interesting thing to me is like, when this collapsed, one question that you'd have, that I had was like, what was he thinking?

Speaker 13 What was the end gain here, right? Like, it's like you've taken so much customer money, put it into such, like, no one knew where the money had gone.

Speaker 13 It seemed like a lot had been lost on weird trading things. It seemed like there was these big holes.

Speaker 13 Conceptually, if you have a big hole in a very lucrative business, you can like earn your way out of it by just continuing to print money. And I guess that's what he hoped he would do.

Speaker 13 But it's like, also, I don't know, the hole was kind of like prices fell. The balance sheet didn't work.
And then prices did come back and the balance sheet kind of worked.

Speaker 13 And had no one noticed for a few more weeks, it might have been fine. I don't know.
We'll never know.

Speaker 14 But what we do know is that at least for these creditors, the payouts are several months away. I basically want to get to what do the next couple months look like?

Speaker 14 Because I am not a bankruptcy expert. I'm not afraid to say it.
Where does this go from here?

Speaker 13 Well, I think they have to like confirm the plan. I think there are a lot of people who get a vote on it.

Speaker 13 I think, you know, in general, the majority of the creditors are probably pretty happy with this because they're getting like kind of more than they're entitled to in bankruptcy.

Speaker 13 I think a large minority of the creditors, the ones who hold crypto, are not very happy. But it's also like, it's not really a debate, right? Like, I mean, this is how bankruptcy works.

Speaker 13 And there have been any number of crypto bankruptcies. And I think there was some uncertainty early on.
Like, how do you value these things in bankruptcy?

Speaker 13 Like, how do you decide whether people get back their Bitcoins or their dollars? And I think it's now pretty accepted that this is the way it works.

Speaker 13 And it sucks if you're a Bitcoin holder and Bitcoin prices have rallied. But yeah, I mean, what's going to happen is they'll confirm the plan.

Speaker 13 I mean, the plan is is kind of estimates because they still sell a lot of stuff. They still have billions more of tokens that they're selling.

Speaker 13 But assuming all goes well, they're going to get the money and then they're going to slowly pay it out to creditors. It's a whole process of you send in forms and I don't know.

Speaker 14 I'm just wondering, when is the story truly over, you know?

Speaker 13 I mean, like, they expect the plan to be confirmed in around September. They expect the payouts to take another year after that.
So it's a while. But you'll stop caring about it at some point.

Speaker 13 I'm almost there. It'll be, yeah, right.
It'll be like, like, oh, they've gotten 107 cents and like in six months, they'll get four more cents. Like, okay, fine, thanks.

Speaker 14 Yeah. Imagine if crypto prices actually like break 100,000 by the point where these payouts are actually paid out.

Speaker 13 Yeah, but at this point, you can sell your claim for 100 cents and you can put that money into Bitcoin, right?

Speaker 13 If that's your bet, like you kind of know where you are and just put the money into Bitcoin. I will say that, you know, we talked about Hertz.
Like the closest analogy is actually Mt.

Speaker 13 Gox, which do you remember Mt. Gox?

Speaker 14 Oh, I have to reach far back, but yes.

Speaker 13 Magic the Gathering online exchange. Yeah.
The first big crypto exchange. A lot of its Bitcoin disappeared in a hack.
Yeah.

Speaker 13 There were swirling questions about whether it was an inside job and so forth. But eventually, you know, they got back.

Speaker 13 I don't think they recovered all the Bitcoins, but they got a lot of their Bitcoins. And they went bankrupt when they were hacked.
And then Bitcoin prices rallied so much. This is like from 2014.

Speaker 13 Yeah.

Speaker 13 Bitcoin prices rallied so much that by the time they were ready to exit bankruptcy, they had not only enough to pay off all the claims at 100 cents on the dollar, but they had billions of dollars left over for like the owner of the exchange, which I think ultimately they ended up giving that to the Bitcoin holders because there were a lot of lawsuits.

Speaker 13 But that was the sort of case that kind of set the tone for, if you go bankrupt as a Bitcoin exchange, you only owe the dollars, you don't owe the Bitcoins.

Speaker 13 It just suggests that someone doing it as a trade, like everyone who's actually run a bankrupt crypto exchange has gotten in a lot of trouble.

Speaker 13 Not necessarily like, it's not like a good trade, trade, but someone's going to crack the code of like, you run a crypto exchange, crypto prices are really volatile.

Speaker 13 When they go down, you file for bankruptcy. Then you've crystallized what you owe people.
Then they go back up again and you get all of the excess.

Speaker 13 You get like a free option on the excess of the crypto price appreciation.

Speaker 14 Maybe the person who will do that trade is listening to this podcast right now.

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Speaker 13 Private markets.

Speaker 14 Well, I'm trying to remember. Did we speak about Destiny Tech in a real episode? We did.
Was that our first episode?

Speaker 13 It might have been.

Speaker 14 It was either number one or number one.

Speaker 13 I think it was number one. I think it was number one.

Speaker 14 Is this our fifth episode?

Speaker 13 I don't believe it is. Okay.

Speaker 14 So somewhat recently,

Speaker 14 we spoke about the Destiny Tech 100 Fund, which is a publicly traded fund that says that it invests in hot tech private companies.

Speaker 14 And this is all an inelegant intro to basically say that Aaron Griffiths from the New York Times wrote a really interesting piece this week about private markets and just this boiling point that it feels that we're at, especially because it feels like companies just stay private forever right now.

Speaker 13 Yeah, I mean, there's two things, right? One is like these big private household-name tech companies that stay private forever. Stripe has been private for more than a decade and it's a giant company.

Speaker 14 SpaceX.

Speaker 13 SpaceX has been private forever and is a gigantic company. It's like easier than ever for like these big tech startups to raise money and be big famous companies while staying private.

Speaker 13 So, you know, if you want to own these cool household name companies, you can't get them on the stock market.

Speaker 13 But the other thing that I was thinking about is like sort of technically what private means is that only accredited investors can buy it.

Speaker 13 So like anyone can buy stock of a publicly listed company, right?

Speaker 13 But if you want to buy stock of a private company, they're only allowed to sell it to you more or less if you are an accredited investor. That kind of just means like a wealth standard.

Speaker 13 You need to make like more than $200,000 a year or have more than I think a million dollars of assets.

Speaker 14 Like a dentist. Like a dentist.

Speaker 13 So this is what we talked about last week: that like dentists are like the sort of paradigm accredited investor. But like

Speaker 13 one fact about accredited investors, like the SEC put out a study a while back that found that in 1983, when these rules were set, there are 1.5 million accredited investor households in America.

Speaker 13 In 2022, there's 24.3 million.

Speaker 13 Basically, what that means is that the American investor class, like the people who are going to have investments, you know, who are going to play the stock market, are largely legally eligible to invest in private markets.

Speaker 13 And so what that means is there's just a huge business of selling to them because like if you are a broker or an asset manager and you can sell someone private company stock, then like you can charge a big commission, you can charge a 2% management fee, you can charge all sorts of fees.

Speaker 13 If you are an asset manager, like the paradigmatic public company investment is like

Speaker 13 an asset manager charges like two basis points for an SP 500 ETF and the person buys that from like Robinhood with zero commission, right?

Speaker 13 The economics of public market investing for like the industry are just like not that great, right? Yeah. Whereas like the economics for private investing are amazing.

Speaker 13 So there's all this demand from investors who are eligible to invest in private companies. There's all this demand for them to invest in hot tech startups.

Speaker 13 And there's so little supply because these startups don't want people to buy their stock.

Speaker 14 I'd like to just talk about some numbers because I feel like the accredited investor number probably speaks for itself.

Speaker 14 But I mean, in this New York Times article, another way to put it is that the secondary market right now, it's on track to hit $64 billion this year, which is a record.

Speaker 14 A decade ago, that was about $16 billion.

Speaker 14 The secondary market for these private companies.

Speaker 13 Which is like nothing compared to the daily trading volume of Tesla, right? But like

Speaker 13 you're making 1% on each trade.

Speaker 13 It's a nice little business.

Speaker 14 Well, at the same time, you take a look at the public equity market. In the U.S., there used to be 7,500 public companies, and right now there's about 4,000 today.

Speaker 14 So, I mean, public markets are shrinking. Private markets are getting even hotter and even bigger.
And like you said, there's this scarcity.

Speaker 14 And I mean, hearing you describe that dynamic, I mean, why would a company go public right now?

Speaker 13 I mean, the answer used to be that

Speaker 13 that was where all the money was. I don't think that's really true anymore.
It's still kind of true. Like, it's still like the biggest investors are still in the public markets.

Speaker 13 It's still like, if you need to raise a lot of money, it helps to be public.

Speaker 13 But I do think that the main answer for a lot of tech companies is that you have given all this stock to either employees or early investors or your founders.

Speaker 13 And they eventually want to be able to sell.

Speaker 13 And it is hard for them to sell if you stay private because there's like a relatively tiny secondary market for private stocks.

Speaker 13 And if you're like founder, CEO of a private company, you know, your ability to get billions of dollars and spend it on stuff is kind of limited.

Speaker 13 Whereas like if you go public, you can sell your stock and get billions of dollars.

Speaker 13 But if you've raised money from venture capitalists and if you've given stock to early investors, like they just expect you to do an IPO at some point.

Speaker 13 There's like a sort of traditional expectation within like, you know, five to 10 years, you're going to do an IPO so that all those people who trusted you with their money can get their money back and can, you know, hopefully make a huge profit because hopefully you'll go public at a large multiple of where you raised money but you know for some of these companies like there is a temptation not to do that because going public you have to disclose all your stuff you get sued a lot for securities fraud they're like short sellers and activists it's like a big pain you have to pay a lot of banks so it's tempting not to

Speaker 13 and then you just have to solve the problem of like what about all these people who trusted you like how do you give them their money and there are answers to that right you know the stripe and space access of the world, like OpenAI, will do tender offers where essentially they'll match some big new outside investor with like their early investors and their employees and say, hey, if you want to sell some of your stock, we have someone who's willing to buy $5 billion of stock.

Speaker 13 And so then you can sort of control who buys the stock.

Speaker 14 It's like a closed circuit.

Speaker 13 Yeah. The company is staying in control of who's buying and selling the stock, but you're giving people the opportunity to sell.

Speaker 13 The other option is just like, you can say, look, we're going to stay private because we don't want to do the disclosure stuff.

Speaker 13 We don't want to be a public company, but we're going to let you trade the stock on the secondary market. And then anyone who wants liquidity can like find a buyer and sell their stock.

Speaker 13 You don't see a lot of that.

Speaker 13 It's striking to me how resistant a lot of these companies are to allowing secondary trading.

Speaker 13 In that story, the Erin Griffith story of the Times, she talks about Destiny Tech 100. It has bought some forward contracts on Stripe.

Speaker 14 Which is a no-no.

Speaker 13 Which is a no-no. So a part of the secondary market is these forward contracts because these employees are not allowed to sell stock.

Speaker 13 And so people will come to them and say, well, why don't you sign a contract saying that when you are allowed to sell the stock, you will. And all the companies are like, no, that's not okay.

Speaker 13 That's cheating. That's not allowed.
But so Stripe actually put out a statement saying

Speaker 13 Stripe does not offer opportunities for retail investors to invest in the company, nor are the majority of Stripe shareholders permitted to transfer their shares without Stripe's consent.

Speaker 13 As such, any offer to invest in Stripe that does not come from or through Stripe is very likely a scam. They don't want people trading their stock in the secondary market.

Speaker 13 They want to keep control of what's going on.

Speaker 14 And yet, I mean, Destiny Tech still says that it owns Stripe, by the way. If you go to the...

Speaker 13 I will, you know, at some point, will they litigate that? I don't know.

Speaker 14 If you go to the website, it's still there.

Speaker 13 I was going to mention, do you remember the Carta scandal?

Speaker 14 No.

Speaker 13 Okay, so do you know what Carta is?

Speaker 14 No, I was hoping you'd tell me.

Speaker 13 Carta is a company that helps private companies, tech startups, run their cap tables.

Speaker 13 So like if you're a tech startup, you have like a bunch of employees, you're giving them stock, you have a bunch of venture capital investors, you have all sorts of different classes of stock, which have different rights.

Speaker 13 You probably have a spreadsheet where you keep track of this in a sort of not very good way. Carda's like, no, no, we'll keep track of it for you in a good way.

Speaker 13 So you'll know like exactly how much stock you have outsending and like who has what rights and whatever. And like we'll track who your shareholders are.

Speaker 13 And that's like a valuable service that they provide to companies. But it's also like an incredibly valuable list to have because like there's so much demand for private company stock.

Speaker 13 So Carta knows who all the people are who have the stock, right? So it's like, we just have the list of every private company, every tech startup's shareholders. And like that list is so valuable.

Speaker 13 So many people would want to pitch those people on selling their stock in Ford or for cash or whatever. And Carda got caught

Speaker 13 using that because Carter was running ape secondary market. And they got caught hanging a shareholder of a private company who had not.

Speaker 13 publicly said anywhere that they were a shareholder, but Carter knew from running that company's cap table that this was a shareholder.

Speaker 13 And the company's CEO complained and Carter was very embarrassed. And they actually shut down their secondary market in like a couple of days.

Speaker 14 Yikes.

Speaker 13 And it's like, I very much see where Cardo is coming from because, like, that's a valuable list. Yeah.
People want this stock. I would like to listen.
People want to sell the stock.

Speaker 13 It's a useful service to put those people together. And like, the company was mad, but it's like, who cares?

Speaker 13 Like, why does the comp like these tech companies like really believe that they have proprietary right to like restrict who trades their stock? And like, this is not how public companies think, right?

Speaker 13 Like, public companies can't do that. Like, public companies, if you want to buy their stock, if you want to sell their stock, you can buy it or sell it.

Speaker 13 And in the tech startup world, companies seem to be a lot more proprietary about who gets to own their stock and like offended when someone tries to buy it away from current shareholders.

Speaker 13 I don't know. It's like an interesting new norm.

Speaker 14 Yeah.

Speaker 14 To the point that there's a lot of employees within these companies that would like to sell. There's obviously a lot of investors who would like to buy those private shares.

Speaker 14 I thought it was interesting. There is this little anecdote in the New York Times piece quoting Jeff Parks.
He's the chief executive of Stack Capital, which is one of those platforms.

Speaker 14 He said, quote, you want to be on the golf course, like, hey, I own some SpaceX.

Speaker 14 And I thought that was pretty funny because in February, actually, I was at this fundraising event for a foundation at this swanky New York City apartment.

Speaker 14 And I was in conversation with this guy, and he said, yeah, I own SpaceX. And I was like, oh my God.

Speaker 14 So that was pretty fun.

Speaker 13 I mean, he's right. Like, when Stripe says that any offer to buy Stripe shares is a scam, they're not just talking about people doing forwards.
Like, that is in fact a popular scam, right?

Speaker 13 There was like a rash of these when Facebook was a private company. Like, everyone was offering fake Facebook shares.
Yeah.

Speaker 13 Because, like, it's such a scam because it's not just an investment opportunity. It appeals to people's sense of exclusivity.
It's like, oh, I get to go to a party and say

Speaker 13 total status symbol. Yeah.
And so, like, it is true that one, there's a lot of demand for it as a status symbol. And two, like, a lot of people sell fake shares to meet that demand.

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Speaker 14 So,

Speaker 14 exchange-traded funds.

Speaker 13 Yeah.

Speaker 14 The name implies

Speaker 14 a portfolio of different assets, a lot of different securities. But this interesting thing has happened in the ETF universe where I live.
You have single-stock ETFs.

Speaker 14 You have leveraged single-stock ETFs. They only track one stock and they do it a lot.
And it's fun because it kind of feels like an oxymoron.

Speaker 14 And I remember when these things launched, which was one or or two summers ago time is a flat circle but a lot of people asked who are these for why do these exist these shouldn't exist it's a subversion of the structure and they're actually super popular oh sure by the way it's not really that etfs have to be a fun like other very popular etfs include the gold etf for sure bitcoin etf for sure

Speaker 13 Like it's a structure that I think started as like, let's have a mutual fund that is exchange tradable and tax efficient.

Speaker 13 But like it turns out it's like a box that you can trade on the stock exchange.

Speaker 13 It's useful for lots of things that you can't otherwise trade on the stock exchange, like gold or Bitcoin, or twice the price, or negative two times the price of a stock.

Speaker 14 Yeah, that's a fair point. But I will say there was just so much skepticism about these things.

Speaker 13 I believe there is still a lot of skepticism.

Speaker 14 There is still.

Speaker 13 Not about their retail appeal because they are doing great, but about their usefulness.

Speaker 14 Well, for a while, it looked like, I mean, for every popular single-stock ETF out there, and we're going to talk about some of them, there are a lot of ones with very little money because they track boring stocks.

Speaker 14 But the ones that track interesting stocks, such as Tesla, such as NVIDIA,

Speaker 14 have really popped off. It is like a winner-take-all sort of situation.

Speaker 13 You're the ETF business expert. How bad is it for you to run a single-stock ETF that doesn't attract a lot of money? Like, how much does it cost you?

Speaker 14 How much does it cost to run an ETF?

Speaker 13 That's the thing. It seems like a box.

Speaker 14 It is a box, but I mean, you still have people that need to keep the box alive.

Speaker 14 Actually, I'm so glad you asked me this question because I was just reading this article that I wrote.

Speaker 14 That was an embarrassing sentence. It's like when someone walks by my desk and I'm watching myself on TV.
But anyway, I was reading this article that I wrote in October of 2023.

Speaker 14 Citi had a report, actually, on this, And they found that roughly a third of ETFs that exist right now in the US don't make enough to cover their operating expenses, which is just a reality of the ETF world that costs have gotten so low.

Speaker 14 Like there's so many funds on offer that charge less than 20 or 10 basis points a year that unless you have enormous scale, you're not going to make any money.

Speaker 13 But like the single stock ETFs, first of all, when you say single stock ETFs, like they're all, I think, levered or or inverse. Yes.
So

Speaker 13 you are effectively charging people for like, you can get better margin terms than they can, right? You can borrow more cheaply from your broker to buy twice as much NVIDIA stock or whatever.

Speaker 14 It's a really neat solution

Speaker 14 for the retail investors that are in these projects. Projects

Speaker 14 and products.

Speaker 13 One, you know, the ATF can probably borrow cheaper than they can, so you get like better economics, even with the ETF charging a 1% fee. Yeah.
But then also, like,

Speaker 13 I assume some retail investors are like a little afraid of margin. And like, you know,

Speaker 13 you don't want to go negative, right? You don't want to owe your broker money. This, like, the worst you can do is get a zero.

Speaker 14 So this speaks to one of the big appeals of ETFs, especially for individual investors. It's just convenience.

Speaker 14 I mean, I write about a lot of ETFs and just like pretty vanilla ones too, where, you know, people always grumble and sometimes on Twitter, like, why does this exist? This doesn't need to exist.

Speaker 14 You can do this yourself. And it's like, yeah, you could, or it's really easy to go to Robinhood and buy an ETF with no commission that does it all for you.

Speaker 14 And that's what these leveraged single-stock ETFs do.

Speaker 13 Yeah, I used to be skeptical of like structured products because it's like they've packaged a bond of a bank with like a weird option.

Speaker 13 And like, if you could recreate that on your own and save like the 5% fee the bank charges. But then people are like, what are the odds you're going to recreate that on your own?

Speaker 13 Like, you're charging a convenience fee. And I like, I sympathize with that.

Speaker 13 Now, what I will say is that it's not super obvious that like a lot of people need to be trading nvidia on margin yeah like you're making it more convenient to kind of gambling y trade kind of yeah like do people do retail investors need to make leopard bets on nvidia

Speaker 13 i mean if you wanted to clutch your pearls here you certainly could but it's like it's fine i enjoy a gamble here and there clearly

Speaker 13 like the people doing this Some of them are making money. Some of them are losing money.
A lot of them are enjoying it. They're adults.
If they want to bet on NVIDIA, they can bet on NVIDIA.

Speaker 13 But it's like, it's funny the way these products are described because no one is like

Speaker 13 riding away to make it more fun to bet on NVIDIA stuff. Yeah.
Because for some reason, you can't say that.

Speaker 14 I know. No, the thing is, I interview ETF issuers who offer these products all the time on TV, for example, and they can't say that.

Speaker 13 This is fun for retail.

Speaker 14 Yeah, they can't just say that. Like, this is a fun, shiny object, you know, go wild with it.
They usually talk about it in terms of trading tools.

Speaker 14 Like, you can use this as a trading tool for some trade, which maybe the trade is just having fun.

Speaker 14 I do think it's really interesting to approach this because, I mean, from the perspective of an investor, it's fun to talk about, and they're having fun doing it, probably.

Speaker 14 But also, just from the perspective of the ETF issuer, I can't do math, Matt, so I'm hoping that you can do that. Let's talk about NVDL, that is the Granite Chair's two times-long NVIDIA daily ETF.

Speaker 14 Its market cap is $1.8 billion,

Speaker 14 It charges 99 basis points. That's pretty good.
How much is it making annually?

Speaker 13 It's making $18 million, right?

Speaker 14 Annually? That makes sense.

Speaker 13 1% of 1.8 is

Speaker 13 18. That sounds pretty good.

Speaker 14 Okay, now let's go to Voo, for example.

Speaker 13 I don't know what their expenses are. I guess they have to pay margin.

Speaker 14 Yeah, but we're just doing napkin math.

Speaker 13 Think of a company, an investment fund, where your job is to buy one stock and hold it.

Speaker 13 It does sound pretty good. You can pay $18 million to do that.
It's pretty cool. But there is margin.
Actually, I assume the margin cost is all baked into the price.

Speaker 13 So the 99 basis points is pure profit.

Speaker 14 Wait, I want you to do more math. Vu, it's the Vanguard SP 500 ETF.
Its market cap is, let's call it $440 billion.

Speaker 14 It charges two basis points. So how much do they make annually?

Speaker 13 Like 90 bucks, right?

Speaker 13 That sounds right, too. Is that right? Yeah.
1% would be $4 billion.

Speaker 13 10 basis points would be like $400.

Speaker 13 Yeah, it's like 90 million.

Speaker 14 Yeah.

Speaker 14 So you think about there's not as much daylight between how much these two funds are making versus the AUMs of these funds, which is a long walk to get to my point of if you're an issuer with a stable of these sorts of products that actually do get up to some respectable amount of scale, you're making a lot of money.

Speaker 14 Like the Vanguards of the world, at least when it comes to their ETF business, they have trillions of dollars in assets under management and they just don't make that that much money.

Speaker 14 Vanguard doesn't care because they have their unique ownership structure. They're owned by their investors, et cetera.

Speaker 14 But a lot of issuers in the ETF industry that are trying to compete, they really do.

Speaker 13 This goes back to what I was saying about the private markets thing. People have figured out how to do stock investing.

Speaker 13 It's like you index, it's a competitive market, it costs one or two basis points, right?

Speaker 13 And so a lot of air has been sucked out of the like asset management and investment management and like broker and a financial advisor business because like there are a lot of people who are like, wait, I know how to do responsible investing.

Speaker 13 Yeah. That costs one basis point.
Don't need a financial advisor. Don't need an active mutual fund manager.
All I need is like a Vanguard ETF.

Speaker 13 So at the margins of that, there are a lot of people who are like, you know what's fun? Yeah. Two times NVIDIA.
Right. Because like.

Speaker 13 There's this huge business out there that's like the sort of core of it is being hollowed out. And so people are like, oh, you could buy some Stripe forward contracts.

Speaker 13 But you also have people people are like, you could buy two times NVIDIA. If you buy one times NVIDIA on Robinhood, right? You're paying zero commission, right? Yeah.

Speaker 13 If you're buying two times NVIDIA, you're paying, you know, 99 basis points.

Speaker 14 I mean, it's interesting to see the sorts of ETFs that are launching now to deal with that problem, that things are so cut down to the bone.

Speaker 14 And you basically have the mid-tier being hollowed out, like you said, the death of the middle class, if you will.

Speaker 14 The consequence of that is you have seen new launches in terms of the size of the portfolio become more concentrated because more active ETFs are launching and they're getting more concentrated.

Speaker 14 And actually, there's really interesting data from Bloomberg Intelligence that recently the new launches have been more expensive as well.

Speaker 13 Sappers could launch an SP fund.

Speaker 14 Yeah, but I mean, we're talking about like on average, it's like 61 basis points is the average right now, because you do have more of these relatively expensive ETFs launching because issuers are just like, how am I going to make money here?

Speaker 13 Yeah. I mean, 10 years ago, I would not have said 61 basis points was that much for an active management strategy, but it's like, yeah, the market has completely changed.
Oh, yeah.

Speaker 13 And like, you're not getting paid 61 basis points for like managing a portfolio of one stock, right?

Speaker 13 You're getting paid 61 basis points or 100 basis points for thinking up the idea of like, you know, what people want is two times NVIDIA, right? Like, you're getting paid for like ideas.

Speaker 13 It's like a marketing job almost.

Speaker 13 It's like figuring out consumer psychology and figuring out what to sell people and then they'll pay you for it because like everyone knows the cheap, responsible thing and like you have to find the appealing thing, which is like it's not exactly the casino business, right?

Speaker 13 Yeah. Like, you know, there's a lot of businesses in the world that are like,

Speaker 13 go on, live a little,

Speaker 13 have a little fun, let loose, listen to a podcast called Money Stuff.

Speaker 13 Mailbag. Mailbag.

Speaker 13 How are we setting this up?

Speaker 14 Well, we both sang.

Speaker 13 So I feel like. So it's all set up.

Speaker 14 That's in.

Speaker 13 Should we talk about pudding?

Speaker 14 Yeah. Shall we?

Speaker 14 So, pudding.

Speaker 14 I said on the pod last week that one of my rich.

Speaker 13 I want to go a little further back. Okay.
Years ago,

Speaker 13 I wrote about filling a swimming pool with simple syrup, and I got a reader email explaining that you can swim as fast in syrup as you can in water. And then you.

Speaker 14 I said that one of my rich person dreams is to like fill a swimming pool with pudding or jello and see what would happen, like if I could swim in it or if I would suffocate. And wow.

Speaker 14 We got a lot of engagement.

Speaker 13 It's just like I've been doing this for long enough that I refuse to speculate on whether you would be able to swim in pudding because I knew, I knew that we would hear from

Speaker 13 the world's leading pudding physics experts.

Speaker 14 Well, we got some video too, which was great from

Speaker 14 Chris. Oh, I obviously clicked on the video.

Speaker 13 Well, we'll have to make this a video podcast. Embed the video.
Oh, there it is. The producer is.
Oh, no. This kid is falling into a pool of red

Speaker 13 goo

Speaker 14 pudding. Oh, my God.
It looks amazing.

Speaker 13 Yeah, this is like really.

Speaker 14 Doesn't that look satisfying?

Speaker 13 No.

Speaker 13 So go watch this video. This is fascinating.
You can do this. Go watch the video.

Speaker 14 We're going to link to the video in the show notes.

Speaker 13 This is like truly a thing you're interested in.

Speaker 14 Yeah, definitely. I'm so into this.

Speaker 13 Wait, is he just lying on the floor?

Speaker 13 No, that's the

Speaker 13 jello.

Speaker 14 That's the jell-o, Matt. So

Speaker 13 this kid just cannonballed in.

Speaker 13 Yeah, well,

Speaker 13 okay. Oh, no, that's oh, that's messed up.
Okay. No,

Speaker 14 looks delicious. You could eat as you swim.
Looks so good. But anyway, so we're watching a video from a former NASA content.

Speaker 13 This is great audio content.

Speaker 14 He did fill a swimming pool with jello, and then he had a lot of children try to jump in, and they couldn't.

Speaker 14 They couldn't break through to get to the bottom of the jell-o, which is exactly what I wanted to know. So that's one question answered, but I do want to know about pudding, pudding buoyancy.

Speaker 14 Do you want to tell us about it?

Speaker 13 Oh, I'm going to quote one email from a physics grad student at Harvard. Okay.

Speaker 13 Can I tell you a secret?

Speaker 14 Sure. I've never taken a physics class, which might explain a lot of things, but go on.

Speaker 13 What if your school's physics class offered jumping in jello or pudding?

Speaker 14 I probably would have taken it.

Speaker 13 Charles, a physics grad student at Harvard, wrote, I'm pretty sure that pudding is denser than water, so it would be easier to float in it than normal.

Speaker 13 You can check the relative densities of your pudding of choice versus water by pouring some of it into the water carefully and seeing if it sinks.

Speaker 13 If you are really concerned, you can probably start by standing in the shallow end of your pool of pudding and then try swimming from there. That's good practical advice.

Speaker 13 I do think that's like I was expecting more physics and less, like, maybe don't dive directly into the pudding from the physics grad student perspective.

Speaker 14 I find that really like endearing because I was worried about you. I am pretty concerned.

Speaker 13 What if you just cannonballed into eight feet of pudding? Well, that's the thing. You'd be fine, it turns out.

Speaker 14 I don't think I would float back up to the surface, would I?

Speaker 13 This video suggests that you wouldn't even sink.

Speaker 14 Well, that's jello, Matt. We're talking about pudding now, please.

Speaker 14 Try to keep up.

Speaker 13 And that was the Money Stuff Podcast. I'm Matt Levine.

Speaker 14 And I'm Katie Greifelt.

Speaker 13 You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com.

Speaker 14 And you can find me on Bloomberg TV every day between 10 to 11 a.m. Eastern.

Speaker 13 We'd love to hear from you. You can send an email to moneypod at bloomberg.net, ask us a question, and we might answer it on the air.

Speaker 14 You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

Speaker 13 The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.

Speaker 14 Our theme music was composed by Blake Maples.

Speaker 13 Brendan Francis Newnham is our executive producer.

Speaker 14 And Sage Bauman is Bloomberg's head of podcasts.

Speaker 13 Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.

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