Money Failed!: Death bets, Paramount and Archegos

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Speaker 15 Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

Speaker 15 I'm Matt Levine. I write the Money Stuff Colum for Bloomberg Opinion.

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

Speaker 15 What do we got today, Katie?

Speaker 14 Death bets. Death bets.
We're going to talk about Apollo and we're going to talk about a really interesting asset class.

Speaker 15 Death. Death.
The final asset class.

Speaker 14 We're also going to talk about a Messi merger. We're talking about Paramount and Sherry Redstone and what is going to happen there.

Speaker 15 And we're going to talk about Bill Wang. and Arkegas and how money failed him.

Speaker 14 Money failed.

Speaker 15 And

Speaker 15 we might talk about reader mail.

Speaker 14 We have a lot of it.

Speaker 15 We have a certain amount of reader mail.

Speaker 14 Death bets. Specifically, you said that Apollo had some death bets.
Really interesting case. I'm going to need you to just give us a quick summary here.

Speaker 15 Okay.

Speaker 15 So you can buy life insurance. If you buy life insurance, you can sell that life insurance.

Speaker 15 If you have like a 20-year life insurance policy and after five years, you're like, I don't need this life insurance policy anymore. There are investors who will buy it from you.

Speaker 15 One of the the biggest investors that owns these policies is Apollo, or it's funds run by Apollo. And when you do this, then they take over the policy.
And then if you die, they get the money.

Speaker 15 But the estate, the son, I think, of a woman who died, well, Apollo owned her life insurance policy, sued Apollo saying, you shouldn't get that money. And he actually won.

Speaker 15 And now he's suing Apollo some more.

Speaker 14 Which is crazy. We're going to get into the specifics.

Speaker 15 All the bits of it are crazy.

Speaker 14 In that case, I have to say, before you even wrote about this, because I think the original story was from April 26th, and there were immediately so many memes on Twitter about like how this is the perfect money stuff story.

Speaker 14 There was a meme of Matt Levine reading this headline, and it was like this cartoon guy like being reanimated. I really enjoyed it.
And then you did write about it.

Speaker 15 I did write about it. There is a sense in which it is not news.
This is a trade that happened in 2006. The woman died several years ago.

Speaker 15 The lawsuit they won against Apollo last year, but it purvoled up into consciousness this week when they filed this other lawsuit. And although it is not very newsy, it is very money stuffy.

Speaker 14 It is very money stuff. And I'm going to need you to just explain to me what they're alleging that Apollo did wrong here.

Speaker 14 Because as you lay out in your column, you can sell your life insurance policy. If you have one, you can sell it.
And it seems like that is somewhat common.

Speaker 15 Somewhat common. It's common.
It's a very small fraction of the life insurance market, but it does happen a lot. So they're actually not saying Apollo did anything wrong, weirdly.

Speaker 15 I mean, they are because they're trying to be inflammatory. But what happened here is that for a long time, you could sell your life insurance policies.

Speaker 15 And at some point in the early 2000s, people realized, hey, this could be a big business. So they started funds.

Speaker 15 So they'd raise money from investors saying, we're going to go buy all these life insurance policies from people. And they raised all this money.

Speaker 15 And then they're like, oh, we got to go find all this life insurance. It's actually not that easy because all these people have life insurance and they don't want to keep paying the premiums.

Speaker 15 It's hard to find them. Like they don't know that there's a secondary market where they can sell their life insurance.

Speaker 15 And so what happened in the early to mid 2000s is that there is a boom in insurance brokers saying, wait a minute, there's all these investors looking to buy life insurance policies.

Speaker 15 I'm trying to sell life insurance policies to people. There's a trade here where I sell a $5 million life insurance policy to like an older person.

Speaker 15 I get my commission for selling the life insurance policy. She turns around and immediately sells the policy to an investor and she gets cash for selling the policy.

Speaker 15 I get cash for originating the policy and the investors get life insurance policies that they want to invest in.

Speaker 15 So this became a big business in like the early, mid-2000s, and it's called Stoley, which is Stranger Originated Life Insurance. That's how this policy came into being.

Speaker 15 Like an insurance agent went to this woman and said, hey, I've got a trade for you. You can get paid $150,000 to sign your name to some papers, and then I'll sell the life insurance to investors.

Speaker 15 The investors were not Apollo. Like, Apollo, like several years later, bought this policy in a big pool of policies from other investors.

Speaker 15 So, Apollo didn't have anything to do with the apparently illegal origination of this policy.

Speaker 15 Because it turns out that if you're a person and you take out life insurance and you then change your mind years later and decide to sell it, you can do that. There's a secondary market.

Speaker 15 It's sometimes controversial, but basically it works and it's legal.

Speaker 15 But if you do this, if you do the thing where you just take out a policy planning from day one to sell it to investors and you're not paying the premium, the investors are sponsoring the premium from day one, then

Speaker 15 that doesn't work.

Speaker 14 Why not? Is it just because the insurance company doesn't like that?

Speaker 15 Insurance companies don't like it. And so like states regulate it.
I don't have a good answer to why not. Yeah.

Speaker 15 But the rough answer is that insurance

Speaker 15 is

Speaker 15 supposed to be insurance. You're supposed to be buying it for what they call insurance purposes, which is a kind of vague term, but it means like you're trying to protect your family if you die.

Speaker 15 You're trying to do some estate planning. You have some sort of personal reason for buying the insurance.
If you're just doing it as a bet on your mortality, then it's frowned upon. And

Speaker 15 this trade, where it's just an investor buying life insurance for you, is just a pure bet on your mortality. And so they don't like it.

Speaker 15 It's kind of illegal, by which I mean not that you go to jail necessarily, but the result here is that the investors bought this policy for this woman. They gave her money.

Speaker 15 They paid her like $150,000 to sign the papers and do this thing. They paid all the premiums on the policy for her entire life.
And then she died and the policy paid out $5 million.

Speaker 15 And the investors were like, okay, that's the insurance we paid for. And her estate was like, no, no, we get that money because you weren't allowed to do this in the first place.

Speaker 15 And turns out the estate is right. And so the estate gets the money.
She got paid to take out the insurance and then she got the proceeds of the insurance. It seems kind of unfair.

Speaker 14 I have two points to make here. The first being on why insurance companies don't like this.
I mean, you make the point that this is an insurance product.

Speaker 14 It's not necessarily supposed to be financialized in the way that it has been.

Speaker 14 But I was talking to someone in the insurance industry, and they also said that these insurance companies count on there's going to be a certain percentage of people who let their life insurance lapse.

Speaker 14 Like, they're not going to pay the premiums. They can't keep up with it.
And then obviously they don't have to pay it out, the insurance company.

Speaker 14 And this whole model that we're talking about removes that.

Speaker 15 Yeah, that's exactly right. That's sort of what it means to say it shouldn't be financialized.
Like the insurance companies sell you the insurance, understanding that you're a person and like

Speaker 15 your circumstances can change. You might forget to pay the premiums.
You might not be able to afford to pay the premiums.

Speaker 15 You might decide, actually, I don't need this life insurance anymore because my kids grew up or whatever. And if you do that, you will

Speaker 15 stop paying the premiums. and so they can price that.
And the insurance is cheaper because they know some people won't pay the premiums and will then die and won't get the death benefit.

Speaker 15 But if you sell your insurance to a financial investor, the financial investor is just going to make a rational calculation about what the expected value of the policy is, and they're going to keep paying the premiums as long as it has positive expected value.

Speaker 15 And so the insurance company is underpricing its insurance.

Speaker 15 Like, that's why this trade worked because you could go to all these people and buy underpriced insurance because the insurance companies were pricing it, expecting the policies would lapse, but they didn't know or they didn't think about the fact that they were selling it to financial investors.

Speaker 14 I have to say, from the investor's point of view, it seems like a great trade. I mean, you're thinking about uncorrelated returns.
How much more uncorrelated can you get?

Speaker 15 That's how this worked. People were like, realize that this was an asset class, that, first of all, there's tons of life insurance out there.
And secondly, it's uncorrelated.

Speaker 15 And so it's a great product to pitch to investors.

Speaker 15 I will say that my understanding is that the size of the market is limited by the fact that a lot of investors in a lot of investors everywhere, but particularly in the United States, find this gross.

Speaker 15 They're like, oh, I don't want to buy a life. I don't want to because.
Grow up. Yeah, well, the reason I use the word death bets is because like, it's funny.

Speaker 15 Well, yeah, because it's funny, but also because the estate suing Apollo, in their complaint, they had a lot of rhetoric about how Apollo is secretly betting on people's deaths and people don't know who has an incentive to have them dead.

Speaker 15 And it's like, this is true. The reason for a lot of these like rules is it's called the insurable interest stream.

Speaker 15 It's like you can only take out insurance on someone who you have some connection to you have some incentive you have some reason to want them to stay alive right so you can have insurance on like your parents because like hopefully you're not going to kill your parents right um you can have insurance on your employee because like you care about your employee's production right and if your employee dies you'll be sad and the insurance will compensate you for that but you can't have insurance on a stranger because if you go and try to take out insurance on a stranger why are you doing that is it because you're trying to kill them the insurance law is really based in part in like not creating incentives to murder people and as one investor pointed out there are no cases, no cases we know of, of financial investors killing the insureds on their contracts to get the payout.

Speaker 15 There are many cases of husbands, wives, children killing their loved ones to get insurance payouts. So really, this is not that gross at all, right? Yeah.

Speaker 15 Really, this is like, sure, they're betting on deaths, but they're like more moral than the sort of tail end of the spouse distribution.

Speaker 14 I was wondering how quickly we would get to the fact that this does create incentive for murder.

Speaker 15 I mean, when I wrote about it, I think I got to it immediately. It's the most

Speaker 15 important thing about insurance.

Speaker 14 I mean, I have the entire column in front of me. And yeah, you're right.
Murder did get brought up pretty quickly.

Speaker 15 How did you not think about murder when you think about life insurance?

Speaker 14 Let's talk a little bit, though, about this actual case. Her name, I feel like we've referenced her a few different times.
Martha Barots, I hope I'm saying it correctly. She died in 2018.

Speaker 14 Like you said, the estate wants the payout back. They got it.
And I don't know. Is that entirely fair? Because Martha knew what she was doing.

Speaker 15 Martha knew what she was doing. Yeah.
She never paid a penny for this insurance. She got paid to fill out the forms.
And then when she died, her children were like, hey, we'd like the money.

Speaker 15 I would think that if you decide that this policy is invalid because it was like a bad, evil betting on lives, it didn't have an insurable interest, whatever, I would think that you would say, well, then the insurance company doesn't have to pay.

Speaker 15 But in fact, the law seems to be that if the insurance company pays, the estate can get it back rather than giving it to the investors because they want, basically, the law wants to punish the investors so that the investors don't do this.

Speaker 14 One more point on investing. One of the stupid thoughts I had while reading this and thinking about this was to the point that this has become an asset class.

Speaker 14 I feel like just the evolution of markets is that somehow this is going to be an investable asset class on Robin Hood. Retail will be involved and it'll trade 24-7.

Speaker 15 So

Speaker 15 there

Speaker 15 I would worry more about

Speaker 15 murder? Murder. Oh, my God.

Speaker 15 Because it's like there's a limited number of investors in this asset class. They're all institutional.
They have careers. They don't want to go to jail.

Speaker 15 They care about the reputation of the asset class. And they're doing it in scale so that like murdering one person wouldn't change the returns that much.
It'd have to be.

Speaker 15 I don't know, man.

Speaker 14 It'd have to be totally blind.

Speaker 15 If you invested in a big pool, then you wouldn't have much incentive to go.

Speaker 14 Well, you'd want to diversify, obviously.

Speaker 15 Unless you're planning to do murder, then you wouldn't want to diversify.

Speaker 14 Well, I feel like then it'd be easy to track.

Speaker 15 Like, who just has a really concentrated portfolio? A lot of insider trading is pretty easy to track, and people do it anyway.

Speaker 15 So, like, if you had a lot of this, you'd have at least one murder, I think.

Speaker 14 I think it'd be a really interesting psychological and market structure experiment. So, maybe someone will do it.

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Speaker 14 Let's talk about a messy merger, potentially. Tricky, messy.
I don't know. What word do you want to use?

Speaker 15 Something's going on. It's a classic boardroom battle.
Ho-ho.

Speaker 14 Or something. That's a good one.
Yeah.

Speaker 15 Why don't you tell us what the merger is?

Speaker 14 We're talking about Paramount and the fact that it's in exclusive conversations with Skydance, which is owned by David Ellison.

Speaker 14 But there's a lot of investors who would like them to consider also a deal coming from Apollo and Sony as well. So that's one tricky element.

Speaker 14 Then the other tricky element is, of course, Sherry Redstone, who owns 77%

Speaker 14 of the Class A shares, which is what Skydance is after. And then you have the vast majority of outstanding shares or Class B shares that have no voting power.
Yeah.

Speaker 15 So it's like this weird situation where Paramount is a big company with a lot of shares outstanding, most of which which don't vote. And so basically,

Speaker 15 Sherry Redstone controls about 5% of the stock, but that 5% of the stock has 77% of the voting power, which means that if you buy her 5% stake, you control the company, which creates a lot of incentives for mischief.

Speaker 15 The other weird thing is that Sherry Redstone doesn't actually own that stock. What she owns is a company called National Amusements.

Speaker 15 National Amusements is a chain of movie theaters that also owns this 5%

Speaker 14 124 theaters.

Speaker 15 124 theaters. But they also own this chunk of Class A voting stock in Paramount.
That company controls Paramount and Shire Redstone controls that company.

Speaker 15 And so if you want to buy Paramount, one thing you could do is you can go to the board of directors and say, we'll pay $12 a share in cash for all the shares of Paramount in a merger.

Speaker 15 And that's kind of more or less what Apollo seems to have offered.

Speaker 15 Another thing you can do is you go to Shire Redstone and say, hey, we'll take national amusements off your hands for like $2 billion, which is like a fraction of the price of Paramount.

Speaker 15 Paramount is the equity value of something like $12 billion is what people seem to be talking about.

Speaker 15 If you could pay $2 billion for National Amusements and then you control Paramount and then you can do what you want. And I don't know what they want, but the deal structure is very complicated.

Speaker 15 Basically, Skydance wants to buy national amusements and then have Paramount buy Skydance for stock and then put their own people in charge of Paramount.

Speaker 15 And they're like, this is going to make Paramount be worth $30 a share, but it's like a complicated merger structure.

Speaker 15 But step one of the structure is we're going to buy national amusements and then we'll control Paramount.

Speaker 14 So that was a gorgeous explanation.

Speaker 14 I don't know why I had to try.

Speaker 14 So that's very tricky. And I have to say, the disparity, the discrepancy in pricing between the Class A and the Class B is interesting.
I mean, there's just a wide gap there.

Speaker 15 There's lots of companies that have dual class shares, but it's often like a founder company where like Mark Zuckerberg isn't going to sell Facebook, right? Like here, you really can buy control.

Speaker 15 of a $12 billion company by buying 5% of the stock. And it's like just an unusually sharp case of the difference in the value of the two types of shares.

Speaker 14 So that's tricky. That's one of the messy things.
The other messy thing, they fired the CEO. Now it's a CEO committee run by Office of CEO, right?

Speaker 15 It's like three guys? Yeah.

Speaker 15 Yeah. I was looking at the announcement.
They say the Office of the CEO is working with the board to develop a comprehensive long-range plan to accelerate growth and develop popular content.

Speaker 15 But you know they don't mean that, right? You don't install three guys as your office of CEO if you're planning to like have them run the company for 10 years and develop new content, right?

Speaker 15 That's like we are selling this company in the next two weeks. We don't really care who's running it for like two weeks, right? Yeah, yeah.

Speaker 14 As Bloomberg Intelligence put it, the replacement of Bob Backish puts Paramount a step closer to a deal with Skydance Media. Backish obviously opposed the acquisition.

Speaker 14 It feels like there's a lot of people who vocally oppose this.

Speaker 15 Yeah. Well, so shareholders,

Speaker 15 some shareholders oppose it. Backish seems to have opposed it.
Several directors stepped down last month because they seem to be not super comfortable with the deal.

Speaker 15 One person who really opposes it is Mary Gabelli, who who runs Gam, who's the biggest holder of Class A shares other than national amusements.

Speaker 15 He's in this weird position where like he has these shares that are like theoretically worth more than the class B shares, except that like Skydance doesn't have to go buy up all the Class A shares.

Speaker 15 They don't have to pay a premium for the Class A shares. All they have to do is buy national amusements.
And then they get a majority of the vote and they're done.

Speaker 15 So they don't have to pay him any premium, right? They don't have to pay the other class A holders a premium. They just have to pay Sherry Redstone for national amusements.

Speaker 15 So he's in this weird position where he's like, I think I have these super voting valuable shares, but actually they turn out not to be that valuable because they're a minority.

Speaker 14 I mean, where does this go from here? Is this like a done deal? Is there any way that some of these vocal people who don't like this deal could actually stop it?

Speaker 15 Oh, yeah. I mean,

Speaker 15 you can't literally

Speaker 15 buy the 77% voting stock,

Speaker 15 fire the board, and say, okay, we're like taking over this company and we're not going to give the public shareholders anything.

Speaker 15 there's a special committee of paramount directors who have to approve any transaction now it's tricky because they don't have to approve any national amusements transactions yeah they don't run national amusements the class a shares don't have to change hands right like national amusements which is its own company could just be acquired and then national amusements can come into the board meeting and say okay we're still we still have our 77 control nothing has changed except who owns national amusements it's also tricky because the special committee in thinking about paramount will think about how much value did Sherry Redstone get for her Class A shares, how much value are the other shareholders getting for their Class B shares.

Speaker 15 But they don't know how much value she's getting for her Class A shares because Skydance will presumably write her a check for national amusements.

Speaker 15 And, you know, her Class A shares have a market value of $700 million. And the check for national amusements is like supposedly...
the reporting is like going to be around $2 billion.

Speaker 15 So that's a big premium. But there's all those movie theaters.
We don't know how much they're worth, right?

Speaker 14 All 124 of them.

Speaker 15 You can make like AMC, MemeStock, like maybe movie theater companies are really valuable right maybe they're paying her the two billion for the movie theaters so like the special committee of the board has the job of making sure that whatever deal is done for paramount is fair to the class b shareholders to to like the regular public shareholders and so one thing it can do is say no to any acquisition of skydance for instance that it thinks is not fair to shareholders but what it can't do is like say to sherry redstone you have to sell to the person we pick right if they like the apollo deal and she doesn't like they can't can't make her sell.

Speaker 15 And she can block the Apollo deal because she has 77% of the vote. So it seems like there's going to be a deal because they have no CEO.

Speaker 15 And it seems like any deal would have to be one that's acceptable to Sherry Redstone.

Speaker 15 And you have to thread this needle of like, whoever's going to buy the company has to give Sherry Redstone enough that she wants to take the deal, but it also has to be fair enough to the public shareholders that the special committee agrees to take the deal.

Speaker 15 And by the way, there's history here.

Speaker 15 Before it was Paramount, the predecessor Viacom CBS was also the structure where Sherry Redstone owned a majority of this voting stock through national amusements.

Speaker 15 And at some point, the board of Viacom CBS tried to take away her voting rights or make it so that all the shares were voting to block her from doing some merger that they thought was bad.

Speaker 15 Didn't work.

Speaker 15 They got in a lot of trouble for it, but they were like, we can't have this dynamic where there's one shareholder who has a minority of the economic interest, but who has a controlling voting stake and who can just force through a merger that we think is unfair to the shareholders.

Speaker 15 So they tried to take away her super voting rights. Didn't work.
Now here they are.

Speaker 14 I crave that kind of power.

Speaker 15 Which kind of power? The super voting rights or the super board tried to take away the super voting rights.

Speaker 14 The super voting rights.

Speaker 15 I know it's good. It's really, it's so unusual.
Yeah. It's so unusual.
Like it's not that unusual to have super voting rights, but like usually people try to not

Speaker 15 have so little of the economics and have so much of the voting rights. It just sort of looks weird.
Many of the companies that you talk about it a lot, the founders are still around.

Speaker 15 They're still running things. You know, you think about like Facebook, they're huge companies or they're unlikely to sell, right?

Speaker 15 Like here, it's like Sharia Redstone is an heir to like the sort of mogul who ran it. She's interested in cashing out.
You know, usually the super voting shares, people are like, that's designed.

Speaker 15 to keep control with the people who care the most about the company, even if they have a minority economic interest. But here, that's not what it's doing.

Speaker 15 Here, it's like just the cash benefit for someone who wants to get rid of the company.

Speaker 14 What I find amusing about this episode is that we're all so interested in sort of the theater and the drama of what this merger is actually going to be that there hasn't, at least in my circles, been a lot of discussion on,

Speaker 14 okay, but what about the future of Paramount? What about the actual business? Because they're in a very tough industry.

Speaker 14 And it's funny that they reported earnings this week, Paramount did, and it was a total non-event. It was a complete afterthought, the actual numbers.

Speaker 15 Because the stock is not going to trade on earnings, right? Yeah. If you look at like the two bids, like it's unclear like what businesses stay, what businesses go.
Yeah.

Speaker 15 It's in a bit of a limbo about what its actual going forward business is going to be.

Speaker 1 How many vendors does it take to meet all your organization's food needs?

Speaker 3 Just one. EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100,000 nationwide, all through a single vendor.

Speaker 10 In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform, EasyCater, your business tool for food.

Speaker 11 To learn more, visit easycater.com slash podcast.

Speaker 17 From providing extra support during busy seasons to replacing vacant roles, you need Express employment professionals on your team.

Speaker 17 Express can handle everything from contract placements to finding the right full-time team member.

Speaker 17 Solve your workforce challenges when you let Express deal with the workers' compensation, payroll, benefits, and more so you can concentrate on what really matters, growing your business.

Speaker 17 Go to ExpressPros.com.

Speaker 17 If you've never used a staffing company, here's how Express has helped businesses like yours to balance their workforce to meet production demands, reduce stress and burnout, which reduces turnover, access a local talent pool ready to work for all types of jobs and a variety of reasons.

Speaker 17 Choosing Express Employment Professionals is the move to make this year. With more than 870 locations, find the one near you at expresspros.com.
That's expresspros.com.

Speaker 14 Speaking of Viacom CBS.

Speaker 15 Are we?

Speaker 15 Bill Wang. Bill Wang.

Speaker 15 What was that transition? Archegos. Okay.
One of their physicians was Viacom CBS. I made it was Viacom CBS.

Speaker 15 That's what brought him down. Jeez, I had forgotten about that.
I made a gorgeous. That was a great transition.

Speaker 15 I am sorry. That's fine.
Bill Wang brought down by Viacom CBS. Go on.
Bill Wang. He's a guy.

Speaker 15 He's a former Tiger Cub hedge fund manager who then left hedge fund managing after an insider trading incident and then ran his own family office called Archegos Capital Management that briefly became like a $30 billion portfolio because he bought like 12 stocks, one of which was Viacom CBS.

Speaker 15 He bought them with like huge amounts of margin borrowing or like total return swaps from like a collection of banks. All these banks loaned up lots of money to buy stock.
He bought all the stock.

Speaker 15 The stock went up because he was buying so much of it. Then he had a profit.
He was able to borrow more money against the profit from the banks to buy more stock.

Speaker 15 And this kept going in like a sort of like virtuous cycle where the stocks went up and up and up and he got to buy more and more until Viacom CBS was like, our stock price has gone on this incredible run.

Speaker 15 We should sell some stock. So they sold some stock.
The stock gapped down. He had a loss.
His banks issued margin calls. He was like, I don't have any money.

Speaker 15 I put every penny I have into these 12 stocks. And they blew out.
The stocks all went down. He lost everything.

Speaker 15 And then he was arrested and he's going to be on trial next week for market manipulation.

Speaker 14 I am so interested in this trial. I feel like that's going to be

Speaker 14 so interesting to follow. We also have to talk about his charity as well.
One of the things actually that I was going to use to lead into this was I have a new name for your newsletter.

Speaker 15 Oh, money failed. Yeah.

Speaker 14 Which is a biblical reference. That's Genesis 47.

Speaker 15 Money failed. Money failed.
Right. It's a biblical reference, but also not what you want when you're a hedge fund manager or a family office manager.
That was your job was to not have money fail.

Speaker 15 Yeah. Money did fail.

Speaker 14 Okay. Money failed, but the word of God doesn't fail.
That is a quote that was used to describe this situation, which we don't have to get into.

Speaker 14 But the trial itself, so the trial going on trial next week, I wanted to talk a little bit about the judge. Judge Alvin Hellerstein, he oversaw lawsuits arising from the 9-11 attacks.

Speaker 14 He's also 90 years old, which I found extremely impressive. You know what I won't be doing at 90 years old?

Speaker 15 I feel like this is tying back to the life insurance point, but

Speaker 14 I will be selling my life insurance to Apollo. Go on.

Speaker 15 What will you be doing at 90 years old, not podcasting?

Speaker 14 Yeah, and I definitely won't be

Speaker 15 presiding over criminal trials.

Speaker 14 Yeah, I mean, this is going to be a big one.

Speaker 14 Do you think about some of the charges that have been brought against him, including RICO charges?

Speaker 15 There's two sort of types of charges against him. There's market manipulation charges, which

Speaker 15 I think is fascinating because his defense, it seems like, is

Speaker 15 I just liked these stocks. I thought they were undervalued, so I bought as much as I could of them.
And then the stock shot up and then that all blew up. But they don't have a lot of,

Speaker 15 as far as I've seen so far from like the charging documents, they don't seem to have a lot of evidence against that. It's like a crime of intent, right?

Speaker 15 Like if you bought these stocks because he thought they were undervalued, then that's not market manipulation.

Speaker 15 If you bought them because he wanted to push their prices up in order to like get some benefit elsewhere, then it is market manipulation.

Speaker 15 He didn't go around saying, I'm going to buy these stocks so I can push their prices up. What would be the point of the market manipulation?

Speaker 15 I think we talked on this podcast about the Mango markets guy. We did

Speaker 15 that was our first

Speaker 15 episode. Best day of our lives.

Speaker 15 The Mango Markets guy, he like did some stuff in crypto where basically he pushed up the price of this token and then extracted like a hundred million dollars from the token exchange and then ran away laughing, right?

Speaker 15 Bill Wang pushed up the price of these stocks and like borrowed more money against them to push up the price of the stocks more.

Speaker 15 And then at the end, it all collapsed and he ran away with nothing, more or less. He ran away with something, but we'll get it to that.

Speaker 15 But the thing that you do in market manipulation is one, you push up the price of the stock, and then two, you take the money out, and he didn't take the money out. What was the market manipulation?

Speaker 15 It's a very strange case. He's got a real defense of I wasn't manipulating the market.
And the way you know that is because I didn't make any money.

Speaker 15 Now, to be fair, he gave this talk about how money failed with this incredible slide.

Speaker 15 The Bloomberg story about this, there's a picture of him standing in front of his charity talking about how money failed with a big slide behind him saying, money failed, explanation.

Speaker 14 Beauty and simplicity.

Speaker 15 It's so good. It's like the level of PowerPoint that I aspire to.
He gave that talk at his like charitable foundation, which runs $500 million of assets, which is like... It's a lot.

Speaker 15 He didn't walk away from Arkegos with no money. He walked away with $500 million in this charitable foundation.

Speaker 15 And in fact, the Bloomberg story mentions that several of the old traders from Archegos are now working as traders at the charitable foundation.

Speaker 15 So it's like a little bit he like scrolled away part of the hedge fund into the Charitable Foundation.

Speaker 14 Yeah, and apparently its asset screws significantly in 2023.

Speaker 15 Because it's run by some hedge fund traders.

Speaker 14 Yeah, I want to know what they're doing.

Speaker 15 Probably buying a concentrated portfolio of stocks that are going up.

Speaker 14 There you go.

Speaker 15 I will say the other charges against him, though, are like about lying to banks. And that's much worse because there's like an email chain.
And it's mostly not from him.

Speaker 15 It's mostly from his like, his like underlings. But like, it's, you know, saying, oh, no, we don't have a concentrated portfolio of 12 stocks that we couldn't sell out of.
We're very diversified.

Speaker 15 And then like, that's not true. So, there's some bad stuff there.
And the bad stuff, it's one, like, that's a crime. And lying to a bank is a crime.
You can go to jail for a long time.

Speaker 15 But then, also, just like if you're asking the question of, was he manipulating the stock market? Was he manipulating these stocks? Like,

Speaker 15 just by the shape of his trades, you'd be like, maybe not. Maybe just like the stocks because he didn't withdraw any money.
But then you're like, oh, and also he was lying to the banks.

Speaker 15 It's like, okay, he's probably doing something.

Speaker 14 And just to put some numbers on it, when it comes to how much the banks actually lost, we're talking about how Viacom Viacom CVS brought down Arkegos.

Speaker 15 Well,

Speaker 15 Credit Suisse as well.

Speaker 14 Yeah, it was one of the things that brought down Credit Suisse or in the chain of dominoes. It was somewhere in there because Credit Suisse lost $5.5 billion.
Nomiro lost $3 billion.

Speaker 14 Morgan Stanley more than $9 million.

Speaker 14 So, I mean, it's not chump change that we're talking about. This caused really widespread damage.

Speaker 15 Yeah, I mean, he had like a $36 billion portfolio that went poof. And like, he lost whatever equity he had, but like a lot of banks lost a lot of money, too.

Speaker 14 That was a wild moment in time i mean it was also what was that 2021 yeah march 2021 that was just a very upside-down time for everyone it was a wild time that was like

Speaker 14 hey this thing you've never heard of called archegos is like the biggest hedgephone in the world for like a week no one knew how to pronounce it i remember i would have to go on and do like telephone phoners for television and trying to be googling and youtubing how do i pronounce this archigos was something i'm pretty sure I said a few different times.

Speaker 15 Understandable. Understandable.
Yeah. Yeah.

Speaker 15 I'm always sort of allergic to the financial trope of like this company who've never heard of Controls the World, right? Because it's, no, you've heard of Jane Street, or you've heard of whatever.

Speaker 15 Yeah. I feel like really people had not heard of Archegos because it really was like one guy's family office.
And then it was a gigantic hedge fund that, or family office.

Speaker 15 By the way, I would call it a hedge fund. And people from the hedge fund industry would be like, you're slandering us by calling Archegos a hedge fund.
It is not a hedge fund.

Speaker 15 It is just the family office. It is not held to the same ethics.

Speaker 14 I can tell that you've been chewing on that, like what to call it, just in this conversation.

Speaker 15 It's a $36 billion fund run by a hedge fund manager. It feels like a hedge fund, even though it was only his money.

Speaker 14 It was only his money.

Speaker 15 Mailbag. Mailbag.

Speaker 14 We need a musical cube for you. We should just both sing.

Speaker 15 Perhaps only you should sing.

Speaker 14 No, no, it could be cute if we harmonized.

Speaker 15 It would be less cute if I harmonized.

Speaker 15 You go high, I'll go low.

Speaker 14 You did get a lot of

Speaker 15 mail. We got some mail this week.
We got emails at the moneypod at bloomberg.net email address. And now we will read some of them.
If you want your your email to be read,

Speaker 15 send it to moneypod at bloomberg.net and we'll see what we can do.

Speaker 14 Phil the jeweler had some facts for us.

Speaker 15 I don't think he signed his name, Phil the Jeweler, but he's a fact.

Speaker 14 But his name is Phil, and he is a medals and jewelry design professor.

Speaker 15 Okay.

Speaker 14 So Phil writes, I'm going to imagine that you are going to get a lot of this, but an ounce of gold does not weigh an ounce.

Speaker 14 Or more specifically, gold is typically described and sold in troy ounces and not the normal ounce we are used to. I can't pronounce that word.

Speaker 15 Avoir de pois.

Speaker 15 Ounce? I don't know. That's pretty good.

Speaker 14 So an ounce of gold weighs almost 1.1 ounces.

Speaker 14 I'm guessing you probably already know this, but just because you mentioned that an ounce of gold weighed an ounce, I thought I would just send it in case.

Speaker 14 So I can't remember exactly how this originated.

Speaker 15 Okay, so you were talking about how gold is heavy. Yes.
And you were like, it costs like $40 to mail an ounce of gold. And I was like, that's not that heavy.

Speaker 15 Like, it's dense, but an ounce of gold weighs an ounce and now we have received a reader correction pointing out that an ounce of gold does not weigh an ounce which is really wild let me clarify what i was

Speaker 15 what i was trying to say is that it's expensive to mail gold i know do you want to talk about old-fashions a little bit so getting a correction from a reader that an ounce of gold does not weigh an ounce is one of my better corrections but it reminds me of my very favorite probably

Speaker 15 reader mailbag of all time, which is that years ago, I was writing about some article that described like a quantity of sugar.

Speaker 15 And they were like, that's enough to fill 3,000 Olympic-sized swimming pools. And I was like, how is that a helpful description? Yeah.
Like, who puts sugar in swimming pools?

Speaker 15 And so I wrote, jokingly, like, if you combine 3,000 Olympic-sized swimming pools of sugar with 3,000 swimming pools of water to form 6,000 Olympic-sized swimming pools of simple syrup, having Katie Ledecky swim through them, and then use the syrup to make 3 trillion old-fashioned cocktails.

Speaker 15 And I got

Speaker 15 so many emails.

Speaker 14 I mean, that's just bait.

Speaker 15 I got emails that were like, actually, if you combine 3,000 pools of sugar with 3,000 pools of water, you wouldn't get 6,000 pools because the sugar dissolves in the water.

Speaker 15 The syrup that it makes is denser than the water. And so you'd only be able to fill about 4,500 pools with the combination of those 3,000 pools.

Speaker 14 I'm kind of shocked that you would make such an error like that.

Speaker 15 In retrospect, it seemed obvious, and I was embarrassed.

Speaker 15 I also got Irida emails. It was around the time of the Olympics.
Kitty Lidecki was in the news.

Speaker 15 I wrote about her swimming through these pools of syrup, and I said something like, it would probably take her longer than her usual time to swim through a pool of syrup because it's thick and gooey.

Speaker 15 And you were kind of wrong on that. I was wrong on that too.

Speaker 15 Apparently, Isaac Newton wrote about this because it's like it's harder to get through the pools. I'm making swimming motions that you can't see on this audio-only podcast.

Speaker 14 They're very convincing.

Speaker 15 It's harder to move through the pool because it's thick, but you also get more force because you're pushing off on thicker stuff and they cancel out. And actually, professors have done experiments.

Speaker 15 And it turns out to be true. You can swim just as fast in syrup as you can in water.

Speaker 14 So, one of my rich person fantasies is

Speaker 14 a little sort of is to fill up a pool with pudding or jello and see what that would be like, but a little worried about suffocating. Right.

Speaker 15 I don't want to give you any advice,

Speaker 15 but it does seem like you could swim as fast through pudding as you could through water, but I don't know what the sinking situation would be.

Speaker 15 We're going to get an email about that, too. Good.

Speaker 14 No, please, someone write in about that because obviously in water you float. I don't think you float in pudding.

Speaker 15 I'm not going to speculate, but our readers won't like that.

Speaker 14 You learned your lesson. Seriously.

Speaker 15 Okay. Now bag.

Speaker 14 Moving swiftly along. So Alex writes in, a version of the great consumer financial arbitrage I've heard goes as follow.
One, get a no-limit credit card from a bank. Two, using that card by the bank.

Speaker 14 Three, have the bank forgive your credit card debt. Four, profit? Question mark? You own a bank now.
Can't be that hard.

Speaker 15 So why can't you buy a bank with a credit card? Because merchants have to agree to accept credit cards, right? Because it costs money to accept the credit card, right?

Speaker 15 Every time you do a credit card transaction, you have to pay the credit card company like one and a half percent or two percent of the transaction.

Speaker 15 So, a lot of businesses want to accept credit cards so they can increase their sales, but MA bankers are not one of those businesses, right?

Speaker 15 They're like not going to pay two percent to the credit card company, and also like

Speaker 15 if you get a credit card to buy a bank, the credit card is not going to have a sufficient limit to buy the bank.

Speaker 15 You're not going to have like a hundred million dollar or ten billion dollar credit limit on your credit card.

Speaker 15 That said, the basic idea of like step one, borrow money, step two, buy a bank, step three, forgive the loan is like kind of a really deep one.

Speaker 15 A lot of finance, a lot of financial companies work this way where you have a giant pool of assets that is very levered.

Speaker 15 So a bank with $10 billion of assets will probably have stock that's worth $1 billion or less, right? It'll be like a 10 to 1-ish ratio of like assets to stock.

Speaker 15 If you could get a billion dollars and buy the stock, then you would control $10 billion of assets. Then you could just lend it all to yourself and forgive the loan, and then you have a huge profit.

Speaker 15 This works financially. It's a good idea, except that it's like wildly illegal because you're stealing the money from the bank's customers.

Speaker 15 But much of bank regulation is cured around preventing people from doing that, right?

Speaker 15 Like the rules regulating related party loans so that the president of a bank who controls the $1 billion of bank stock doesn't lend himself $10 billion and then forgive it.

Speaker 15 There's rules around that because it is a good idea.

Speaker 15 You don't see it that much in banking, but you see it a lot in insurance where smart investors will say, let's buy life insurance policies.

Speaker 15 So that, but no, what I was thinking of is smart investors will say, I have a million dollars. I would like to make investments.
I'm really good at making investments.

Speaker 15 I'd like to make $10 million of investments. How can I do that? I only have $1 million.

Speaker 15 I will buy a life insurance company for $1 million.

Speaker 15 And then I will have the life insurance company. You know, life insurance is also a very levered company, right? It has all this like policyholder assets that it can invest.

Speaker 15 I will buy the life insurance company's stock for a million dollars. I'll take over the life insurance company and then I will have $10 million to invest in all my other good ideas, right?

Speaker 15 Sometimes people get arrested for this when like their good ideas are like their other weird companies that they are making concentrated risky bets that sort of run afoul of life insurance standards.

Speaker 15 Other times people who do this are

Speaker 15 Warren Buffett. Like Warren Buffett, right? Like bought a life insurance company and now he like controls a life insurance company and he gets to make investments.

Speaker 15 And everyone's like, oh, he's so good at making investments. It's good that he has this giant pool of life insurance money to invest.
And that's true.

Speaker 15 But like, taking over a levered financial institution in order to control the money of that levered financial institution is a great idea. And people do it sometimes.

Speaker 14 So, Alex, sounds like you're on the right track.

Speaker 15 Except for the illegality.

Speaker 14 Right, for sure. But keep thinking.
So, Steve writes in with some stern words for you.

Speaker 14 He says, from time to time, you mention dentists in your commentaries, certainly with more frequency than one would expect from a financial writer.

Speaker 14 Sometimes you use dentists as the archetypal rube's getting scammed for an unsophisticated financial crime.

Speaker 14 I want to be shocked and offended by such a portrayal, perhaps having the American Dental Association brand you as an anti-dentite.

Speaker 14 My discussions with colleagues seem to bear that out that, sure enough, dentists are greater rubees than the average well-educated professional.

Speaker 14 Could you comment on what you think uniquely qualifies dentists to be such ruves? And more generally, what makes a good target for financial criminals?

Speaker 15 I'm sorry to the dentists. I don't think I ever really thought about it much as like dentists specifically.
In fact, I think I once wrote that the general rule of U.S.

Speaker 15 securities law is that you're not allowed to invest in like risky, weird private companies unless you're a dentist.

Speaker 15 But then I qualified it and said, or a radiologist or a retired professional football player. I mean, the point is that there are rules that say

Speaker 15 only qualified investors, any accredited investors,

Speaker 15 can invest in certain like private offerings, right? Private offerings typically have less disclosure,

Speaker 15 weirder financials, more fees, more hidden fees than like public market investments.

Speaker 15 And so there are a lot of people in the world whose job it is to find people to invest in not very good privately marketed investments. And so those people are looking for accredited investors, right?

Speaker 15 They're looking for people who make more than a certain amount of money.

Speaker 15 And dentists are a nice target because they all pretty much make more than the accredited investor threshold, which I think is like $200,000 a year, but they're not typically billionaires.

Speaker 15 So they don't have like a family office that vets investments for them. They're not like tech startup.

Speaker 15 People who've exited tech startups are good targets for private investments, but they're like connected to venture capitalists and they have access to good venture capital investments.

Speaker 15 If you're just like a dentist in the middle of the country, you have no like necessary like connections to high finance, but you have enough money to be put into really bad investment decisions.

Speaker 15 So people are targeting you.

Speaker 15 It's not that you're bad, it's that you're in that like narrow band of rich enough to have access to like the worst possible investments, but also not so rich that you have access to the best possible investments.

Speaker 15 So I think that's the main reason.

Speaker 14 Well, thank you for that.

Speaker 15 Sorry, dentists.

Speaker 15 Mailbag. Yeah.
You can send emails to moneypod at bloomberg.net if you want to be a participant in a future mailbag segment.

Speaker 14 So you did sing.

Speaker 15 We're going to cut that out though.

Speaker 14 Mash them together, like the harmonized. You did go high, so that was perfect.
Should I go low?

Speaker 15 Anyway, that was the Money Stuff Podcast. I'm Matt Levine.

Speaker 14 And I'm Katie Greifeld.

Speaker 15 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 15 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 15 The Money Stuff Podcast is produced by Anna Mazarakis and Moses Adam.

Speaker 14 Our theme music was composed by Blake Maples.

Speaker 15 Brendan Francis Newnham is our executive producer.

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

Speaker 15 Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.

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