Reintegration With the Default World

0:02Speaker 1:Bloomberg Audio Studios.

0:04Speaker 2:Podcasts.

0:05Speaker 1:Radio.

0:06Speaker 2:News.

0:08Speaker 1:Guys, have you seen Stella Lefty? Do we have opinions on Stella Lefty here? On a train back from Boston.

0:13Speaker 2:That one? I don't get why people like that song. It seems kind of blah, but it's popular.

0:18Speaker 1:I think that that song structurally is the same as a Toby Keith song. So everyone's like, that's Dick Susan. And it's like, no, that's Courtesy of the Red, White, and Blue. A song that everyone has memory hold on purpose.

0:30Speaker 2:Wait, the Toby Keith song is like... Which one is that?

0:33Speaker 1:Oh, it's so bad.

0:33Speaker 2:I know, but it's not the one I'm thinking.

0:35Speaker 1:I can sing the whole thing for you. Would that help?

0:37Speaker 2:Yeah, yeah.

0:38Speaker 1:Hey, Uncle Sam, put your name at the top of his list. And the Statue of Liberty started shaking her fist. And the eagle will fly. And there's going to be hail when you hear Mother Freedom.

0:51Speaker 2:We're going to cut out everything except you singing most of that song. That's just going to be the cold open.

0:56Speaker 1:I'm doing all of this under the assumption that none of it makes it. That was so pitchy. Are you going to auto-tune it?

1:03Speaker 2: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 wrote the Money Stuff column for Bloomberg Opinion.

1:15Speaker 1:I'm Mary Childs, host of the podcast, Mary in America.

1:18Speaker 2:And Mary is guest hosting with me again this week.

1:21Speaker 1:Thanks for having me.

1:22Speaker 2:Thanks for being here. So I got a text the other night from Katie Greifeld.

1:32Speaker 1:A celebrity intervention here.

1:34Speaker 2:Yeah. My regular co-host, Katie, who is out on parental leave with her newborn-ish daughter, Julia, who's been named on this show, which is why I don't feel bad saying it.

1:44Speaker 1:I think you should still feel bad.

1:46Speaker 2:I do feel bad, but she's named her on this show, so I don't feel that bad. But anyway, she texted me a Bloomberg story, tax-slashing holy grail popularized by AQR, Delta IRS warning. And she texted, Julia and I are discussing this on the Baby Stuff podcast this week. which I believe that I have previously joked, at least with my family, if not necessarily in the newsletter, about starting a new newsletter called Baby Stuff about my babies.

2:12Speaker 1:They're not babies anymore, Matt.

2:14Speaker 2:I know, but Katie's baby is a baby.

2:16Speaker 1:Katie's baby is legit a baby.

2:17Speaker 2:She is sitting at home right now playing pretend podcast with her about 350 on Exchange ETFs.

2:24Speaker 1:So she can play this and it'll be like Clubhouse. It'll be a conversation. She can text us her thoughts. Hi, Katie.

2:31Speaker 2:Yeah, it'll be like, you know, like you're supposed to talk continually to your baby so that they like learn language, even if you're just sort of like narrating your day or whatever.

2:38Speaker 1:Totally.

2:40Speaker 2:Katie's baby will just be learning about ETFs from birth. So there's news this week about ETFs, which is that the IRS is cracking down on these like 351 exchange ETFs. And my theory of these ETFs is that ordinarily, if you're a person, and you own some stock and you want to own some different stock, you sell the stock that you own, you buy the different stock, and you have a taxable transaction. Selling stock for cash is a taxable transaction, even if your ultimate goal is just to exchange it into new stock. And for ETFs, that's not true.

3:10Speaker 2:For ETFs, there's a magical sort of pathway through the tax code that allows an ETF to exchange the stock it doesn't want for a stock that it does want without incurring taxes.

3:23Speaker 1:It's like the whole beauty of ETFs, right?

3:25Speaker 2:Right. at first that was like, oh, a neat little feature of index ETFs. And then people realized you could do that for actively traded ETFs where they were just deferring taxes on all of their trading. But then eventually the financial advisors realized like, why can't everyone do that? And so they started being like going to rich individuals and saying, look, if you have a stock portfolio, you can wrap it up in an ETF. And then you can, from then on, do whatever trading you want without ever incurring taxes. And like, The way it works is that there's two trades. There's like, you know, you're a person, you have a stock portfolio, you contribute it to an ETF and you get back shares of the ETF. That shouldn't be a taxable transaction, right? You're just like contributing shares to an ETF and getting back shares in exchange.

4:09Speaker 2:And then the ETF itself can move the underlying stock in and out of the ETF by doing like heartbeat trades with authorized participants that are also in-kind exchanges that never incur taxes. And so the upshot of this is that if you are like, let's say a centi-millionaire, you can trade your stock portfolio without ever incurring taxes. And the threshold is going down so that if you extrapolate this out in five years, everyone will be able to trade stocks without incurring taxes. And the financial industry was kind of extrapolating that out. And I was writing about it. Yeah, that'll be fun when no one pays taxes to trade stocks.

4:45Speaker 2:And eventually, the IRS had to crack down. And they cracked down this week with a revenue ruling saying, basically, if you do this too obviously, then it doesn't work and you have to pay taxes.

4:57Speaker 1:If we notice, we don't like it.

4:59Speaker 2:Yeah. It's basically what it says is that if you contribute appreciated stock to an ETF and as part of the same plan, you immediately heartbeat the stock out and get back a diversified portfolio, then we're going to recharacterize that based on the substance as you've sold the stock and you have to pay taxes. But I don't think anyone quite knows what that means in terms of like how long do you have to wait. Right. And so, you know, we're sort of in early days of cracking down on this.

5:28Speaker 1:It's nice. We're inventing the rules. We're inventing the lines. It reminded me of a 1031 real estate transaction.

5:34Speaker 2:Oh, it's totally a 1031. Yeah.

5:36Speaker 1:It's just so cute.

5:37Speaker 2:Yeah. I mean, the cynical view is that the 1031 exchange is really good for real estate developers. Right. And real estate developers are an important constituency here. In that, for instance, the president of the United States is a real estate developer. But even before that, like, you know, there are a lot of real estate developers. Whereas, like, everyone can avoid paying taxes on stock trades. It's like a, you know, bigger, arguably bigger loophole. I don't know if it actually is a bigger loophole in terms of dollars.

6:03Speaker 2:I know, right? Is it?

6:04Speaker 1:Yeah, probably. But it's empirical. That's an empirical question we could go find out.

6:09Speaker 2:Right. Like, I incur a certain amount of capital gains taxes by rebalancing my portfolio. You do? Yeah. Yeah.

6:16Speaker 1:And it'd be nice not to, but- Yeah, you shouldn't. I don't think you should have to do that anymore.

6:19Speaker 2:I don't think that's as big a ticket as like, you know, if I were doing 1031 exchanges. But yeah, I think the point is that like the sort of broad theory of tax is that if you have an asset and you sell it for cash, then that's a taxable transaction and you have to pay taxes on the appreciation. And if you have an asset and you swap it for like kind of the same thing.

6:37Speaker 1:You're still in the game. You haven't finished playing yet.

6:40Speaker 2:Yeah. And exactly where you set the parameters of that is kind of an open question. So 1031 exchanges, I think a lot of people would say are kind of an aggressive setting of the batteries, but it's in the tax code. Basically, 1031 exchange says if you own like, you know, a commercial property and you sell it for cash and then within a certain amount of time, you reapply the cash to buying another commercial property. then you don't have to pay taxable gains on the sale because it's essentially a like-for-like exchange. Oh, I mean, the other thing is when you take corporate tax in law school, one thing you learn is that contributing property to a corporation is a non-taxable transaction. So if you're a person and you own a lemonade stand or whatever, and you're like, I don't want to own this business in my own name anymore. I want to own it in the name of a corporation. You can take your business assets and put them into a corporation and get back shares of the corporation. And like, obviously that's not a taxable transaction, right?

7:34Speaker 2:Nothing's happened. You're just like changing the form in which you own it. But that's what's happening with an ETF, like with a 351 exchange of the ETF, right? Like you're taking stuff, which happens to be appreciated stock, and you're plopping it into a corporation, which happens to be an ETF. It's like, why is that a taxable transaction? The 351 exchange ETF is like, there are two pieces of it that are like pretty clearly not taxable transactions.

7:56Speaker 2:One is like contributing property to an ETF. where you're getting back shares of the ETF, which is just changing the form of ownership of the thing. And the other one is the heartbeat trade, where the ETF redeems in kind, which is very controversially not a taxable transaction, but it's not a taxable transaction. That's just how all ETFs do all of their stock trading. And so if you combine those two trades, you really should have a non-taxable transaction.

8:21Speaker 2:But if you take that too literally, then it means no one will ever pay taxes on their stock trades. And so the IRS is basically like, look, The first trade works. The second trade works. But if you combine them, it's too cute.

8:31Speaker 1:It's a double negative.

8:31Speaker 2:And we're going to re-characterize it as a taxable transaction.

8:34Speaker 1:They cancel each other out and it becomes a problem for us.

8:36Speaker 2:Yeah.

8:36Speaker 1:That's fair. They've got to draw the line somewhere.

8:38Speaker 2:It's not like all of tax works, kind of.

8:40Speaker 1:Is it?

8:41Speaker 2:That's how a lot of tax works. It's like basically like tax structures are like, well, if you combine this, this, and this, we have like an incredibly counterintuitive tax trade. And this, this, and this all work. So it should work. And then the IRS is like, This, this, and this all work, but the combination doesn't work.

8:58Speaker 1:But you can't do it all at once. I like that because, well, that's what loopholes are. It's just a series of steps, of behaviors that we lump together and then, like, magically it, like, collapses the entire. I mean, buy, borrow, die is just a series of behaviors.

9:13Speaker 2:Right. And, like, in many areas of the world, if you combine seven loopholes that all work, then, like, your combination works.

9:21Speaker 1:Those are just regular holes, okay? They add up to a loophole.

9:25Speaker 2:But, like, tax actually has a doctrine of, like, recharacterizing for substance over form. And so if you combine seven loopholes that work in a way that is too cute in tax, then, like, yeah, it doesn't work anymore.

9:36Speaker 1:It generates, like, an off-gas of too cute. That's really nice.

9:40Speaker 2:I think that's kind of what happened here. But we'll see. Like, I don't... I'm not clear, and I don't think anyone is that clear from, like, this week's rulings what the boundary of too cute is. And I don't think this is, like, the.

9:54Speaker 1:Yeah, it sounds like we're going to find out.

9:56Speaker 2:Yeah. I'm not going to find out, though.

9:58Speaker 1:You physically with your target? are not going to find out?

10:01Speaker 2:I think you should. It's not going to trickle down to me, right? Whereas, like, before this, you might have imagined, and I probably did imagine, like, enough retailization of this such that, like, every individual investor could avoid taxes forever. And that's probably not going to happen anymore. But, like, if you have a billion-dollar portfolio, are you going to try this? Sure, probably.

10:20Speaker 1:It sounds so fun, though. I want to try.

10:21Speaker 2:I mean.

10:24Speaker 1:With my $ 10. With $ 15, okay? I can do $ 15. It would be expensive.

10:29Speaker 2:But this is like a major topic of the Money Stuff podcast is like Katie knows a lot of white label ETF providers and will probably end up starting an ETF for herself. So we could probably start you a tax avoidance ETF too.

10:41Speaker 1:If I were still at Planet Money, I would absolutely pitch this and find someone to advise me for free because otherwise it would evaporate my capital pile.

10:48Speaker 2:By the way, when I say we can probably find you a tax avoidance ETF strategy, that means we no longer can because it's on the record saying that.

10:55Speaker 1:Right now we have intent. The only way to know what the intent is is if you said in a podcast, Matt, you owe me so much money.

11:03Speaker 2:How many 351 exchange ETFs do you think have been undone by podcasts? Probably a lot, honestly.

11:27Speaker 1:I expected more praise for my on-brand.

11:30Speaker 2:Oh, you have a Bloomberg mug.

11:32Speaker 1:So I think I stole this from the set of Tom Keen's show. No one had ever given me any Bloomberg swag, so I took it upon myself.

11:39Speaker 2:Yeah, Mary is remoting in, and on her video screen, there is her. There is a Bloomberg mug stolen from Tom Keen.

11:45Speaker 1:Borrowed. I'll give it back.

11:46Speaker 2:There is a copy of her book, The Bond King, face out on the shelf behind her.

11:50Speaker 1:Actually, like a lot of copies of The Bond King. If you need one, go buy it. But I could give you one. Anyway, speaking of banks... Speaking of.

12:02Speaker 2:Banks, there's like a real vogue for agentic bank runs this week.

12:06Speaker 1:It's a hot topic. It's a viral meme.

12:08Speaker 2:I know. It's a viral meme.

12:10Speaker 1:Did you start it?

12:11Speaker 2:No, I didn't start it. But I have been writing, I mean, like whatever, I've been writing about other people's research and it's about this topic for a while. Like it's, you know.

12:19Speaker 1:It's in the ether.

12:20Speaker 2:Like the broad topic is that as AI agents are rolled out to consumers, those AI agents will be like looking to impress their clients. owners looking to find something to do. And one thing they'll think of pretty quickly is like, hey, buddy, you've got a lot of money in your checking account earning 0.01%. And you could move it to a high-yield savings account and earn more. So why don't you do that? Or you can move to a money market fund and earn more. So why don't you do that? And some portion of the banking system is predicated on on people not doing that. Right. And if everyone does that all of the time, because like, they're just sort of like default opted into like a Facebook AI agent. And then like their agent is like, well, can I get you some more interest on your bank accounts?

13:13Speaker 2:Then like, that'll be weird. Yeah.

13:15Speaker 1:Systemically dangerous.

13:16Speaker 2:Systemically dangerous. You and I memorably talked on this podcast a few weeks ago about like the same worry in mortgage refinancing, which is that like people don't optimally refinance their mortgages because it's too much of a pain. But if mortgage rates drop by a certain amount, then everyone should refinance. And if everyone did do that, then I don't think the consequence of that is the banking system would go bankrupt. I think the consequence of that is mortgage rates would be higher. People would charge for the option.

13:46Speaker 2:And so you would have to pay a higher rate on your mortgage because the refinance option would be more often exercised optimally. And I feel like it's the same thing with banking, right? Like, well, I don't know. I mean, one possibility is like, you know, I've written a lot about like the move to narrow or banking where like banks will no longer be in the business of borrowing short-term and, you know, at low rates and lending longer term at higher rates. And like, maybe this is like one more accelerant to that. And it really will dramatically change the banking system. But another possibility is like just banks are.

14:22Speaker 1:Pay us less in the aggregate.

14:24Speaker 2:Yeah, we'll pay us less in the aggregate, right?

14:25Speaker 1:On our cash.

14:27Speaker 2:Like every bank or many banks have a portfolio where they pay like a market rate on their high yield savings account to attract deposits. And they also pay like a zero rate on their checkings accounts. And like it all kind of balances out. And if you made it so that everyone had to, you know, that everyone put all their money at the bank that paid the highest rate, then the highest rate would be lower, right? Like no one would be like, ooh, I'll pay a high rate on my high yield savings account.

14:50Speaker 1:They're going to price it in, yeah. The portfolio would be worse.

14:51Speaker 2:Unfortunately. But you don't know because maybe the agents would send everyone to money market funds and it really would undermine banking.

14:59Speaker 1:Yeah, so there's the X risk for banks option, which is kind of fun to think about, that AI agents will destroy banking. But I do agree that in the interim, it seems like the less money for normal people with checking accounts who are looking for ways to get paid on their cash, it's going to be worse, which is such a bummer. This is incidentally the other piece of personal finance advice that I give people. There's only two. It's don't refinance your low rate mortgage and put your money in a high yield savings account. That's all. Personal finance advice is going to be, I mean, there's a huge glut right now. It's over.

15:30Speaker 2:Right. I mean, like, you know, there's all this like worrying about what agentic AI will do for finance. And like, I don't know what the personal finance advice business looks like in a world where your Facebook AI gives you the advice. So I wrote this this week. Many banking products are like built and priced on the assumption that customers pay too little attention and agentic AI will make them pay more attention and that will mess up the pricing and everything about these products. But other products are built on wanting customers to pay too much attention. And to me, the most paradigmatic example of that is like retail trading. Retail trading is like the classic financial advice that people will give you. And this is not financial advice.

16:16Speaker 2:It's just I'm noting that this advice is out there, is buy and hold low-cost index funds and don't frenetically trade them. That advice is fine for certain brokers, but it is probably more lucrative for many brokerages if you instead trade zero-day stock options and crypto and sports bets every day. That's probably better for the business of many brokerages. Worse for you, perhaps, unless you're very, very good at trading stock options, which statistically you're not.

16:49Speaker 1:Or if you get a lot of utility out of losing your money that way.

16:52Speaker 2:So that's a real point, right? I mean, like sports gambling provides utility.

16:55Speaker 1:That's for fun.

16:56Speaker 2:And options do too. But the point is that if you do get a lot of utility out of sports gambling and options gambling, then many brokers and sportsbooks and prediction markets would love it if you got even more utility out of doing it even more. And agentic AI is a great way to dramatically increase your trading volume, right?

17:17Speaker 1:That's fun.

17:18Speaker 2:Because if you have some trade idea, then you can just sit at a computer all day long and click that trade idea. But eventually, you got to go to work or go to bed, right? But with agentic AI, you can type that idea into a box and it can trade for you 24 hours a day. And you'll do so many more trades.

17:35Speaker 1:So it's like retail citadels are coming. Like you're going to be your own.

17:38Speaker 2:Like, yes, like Robinhood's like retail citadels are coming, but you're not going to be citadel.

17:43Speaker 1:You don't know that. Also, if I just enjoy my agents losing money that way.

17:48Speaker 2:Right. You're going to enjoy them losing a lot more money.

17:50Speaker 1:That's what I like.

17:51Speaker 2:Like, I do think that there's, this is like two sides of agentic finance where like the businesses that profit on people paying more attention will get so much more attention.

17:59Speaker 1:Right.

17:59Speaker 2:And like, there's a Wall Street Journal story this week about like Robinhood rolling out AI bots that will trade while you sleep. Like, you shouldn't trade while you sleep. But Robinhood really wants you to trade while you sleep.

18:11Speaker 1:There's supposed to be a human in the loop. I will just say you should probably be awake.

18:15Speaker 2:That's not financial advice.

18:16Speaker 1:Not financial advice. That's personal advice. Maybe your agent will be even.

18:18Speaker 2:Better than you are trading. But, like, it's a little, it's a little. So, I don't know. I feel like agentic AI is going to allocate money away from. Financial businesses that depend on inattention to businesses that depend on attention, which is great for the sports gambling business.

18:33Speaker 1:And great for this podcast.

18:34Speaker 2:I guess.

18:35Speaker 1:That transition is going to be a little bumpy.

18:37Speaker 2:If your AI agent listens to this podcast, I guess that counts for our downloads.

18:40Speaker 1:They're definitely listening. This is their favorite podcast.

18:44Speaker 2:I wonder what they're doing with the information.

18:46Speaker 1:They should email us.

18:46Speaker 2:Agent, listen to the Money Stuff podcast and formulate a trading strategy based on it.

18:51Speaker 1:Agent, let me know what you think.

18:52Speaker 2:You should have given the agent a cutesy name, but anyway.

18:54Speaker 1:Did you know they perform better if you're like, you'll get 30 points?

18:57Speaker 2:Oh, the agents?

18:58Speaker 1:Yeah.

18:58Speaker 2:You're like, you get them.

19:00Speaker 1:No, no context.

19:01Speaker 2:Yeah.

19:02Speaker 1:No actual grading, but you'll get 30 points. And they're like, I want that. I know that. I want that.

19:07Speaker 2:It's very human.

19:08Speaker 1:Yeah.

19:09Speaker 2:I said, I joked like, that's like my children, but it's like me too.

19:12Speaker 1:Right. It's like, yeah.

19:13Speaker 2:Right. Like I would like 30 points. Like I play learned league. Like I, I do lots of things. Yeah.

19:20Speaker 1:It's true. You pursue points everywhere.

19:22Speaker 2:Yeah. Right. I love points.

19:24Speaker 1:Yeah, that's good.

19:25Speaker 2:Me and the AI agents are very similar in some ways.

19:27Speaker 1:That's why they love this podcast.

19:30Speaker 2:Should we talk about Automatic?

19:47Speaker 1:Automatic. I went a little deep on him. uh we do have a lot of mutuals you were right yeah i.

19:52Speaker 2:Joked in the chat that you and matt mullenweg know each.

19:54Speaker 1:Other from burning man and i must correct that i've never actually been.

19:58Speaker 2:But you've like spiritually been to burning i mean.

20:00Speaker 1:Yeah i got the burn i deserve which is no burn.

20:03Speaker 2:I also get the burn i deserved which is no burn um.

20:07Speaker 1:Is it the burn you need, though? Actually, let me check the quote.

20:09Speaker 2:Yes. No burn is the burn I need. So Matt Mullenweg is the founder of a company called Automatic with two Ts. The M-A-T-T in Automatic is for Matt Mullenweg. Like, it's his name there. He also kind of invented WordPress. And Automatic is, I wrote it's the company behind WordPress. That's not quite true. WordPress is an open source project. And Automatic provides like.

20:29Speaker 1:It's the operating system of the internet, including long reads, pocket cast, and other things that I didn't recognize.

20:34Speaker 2:It's not quite the operating system of money stuff, but like somewhere in the DNA of everyone's content management system is WordPress. Like I've definitely used a lot of WordPress, but anyway, Automatic is a company that does commercial stuff around the open source WordPress. And it's a private company. Matt Willenberg is the founder and I think 84% shareholder. And this month he went to Burning Man and the board tried to kind of fire him or like put him on a, involuntary leave of absence and then he came back from Burning Man and he was like no and so.

21:12Speaker 1:He did two things wait can I just interject really quick they always say that reintegration with the default world is a big challenge when you come back from Burning Man I.

21:21Speaker 2:Love that like Although you claim to have never been to Burning Man, you're vastly more of a Burning Man expert than me.

21:28Speaker 1:I like lingo. I like jargon. It's a language.

21:32Speaker 2:That is going to be the title of this episode, Reintegration with the Default World.

21:35Speaker 1:That's real.

21:36Speaker 2:That's actually a really good phrase. Anyway, so he reintegrated with the default world in two ways. One thing he did was that as the 84% shareholder, when the board fired him as CEO, he fired the board as board and installed a new board. And made himself the CEO again. The other thing that he did is he came back and he like made himself the sole administrator of the company Slack. Because like the way these things work is like, sure, there's some legal documents that say who has voting control, the flyer, who. But there's also like the Slack. And if you're telling people on the Slack what to do, they're going to listen to you. And if you're locked out of the Slack, they're not going to listen to you.

22:14Speaker 1:You cannot tell them.

22:15Speaker 2:Matt Mullenweg very smartly seized control of the means of communication and took his company back. So he was gone for 33 hours and 20 minutes, apparently, according to some TechCrunch stories about it.

22:25Speaker 1:He had a day off.

22:26Speaker 2:And then he re-seized control of his company.

22:29Speaker 1:I just want to quote you to you. In military coups, it is critical to seize control of television and radio stations. In corporate coups, it is critical to be the admin of the company's slack. So true.

22:39Speaker 2:It's true. The legal and corporate structure elements are all on his side. That's not sufficient. You also need to control the slack.

22:48Speaker 1:That stuff is too slow.

22:49Speaker 2:The other thing is like, I don't know why the board put him on an involuntary leave. There's a lot going on at this company that I'm just not going to talk about. But one person.

23:00Speaker 1:Speculated- My deep dive was confusing. I unlearned a lot, I feel like.

23:03Speaker 2:There's a lot going on.

23:04Speaker 1:A lot going on, yeah.

23:05Speaker 2:Actually, it's a whole situation. But one thing that happened is that someone said to TechCrunch that it might be linked to Burning Man because when he goes to Burning Man, he tends to come back quote, with ideas, close to it, which is truly like.

23:20Speaker 1:The best Boredspeak I've ever seen.

23:22Speaker 2:I don't know that's Boredspeak. That might be like his underling. He's like, he's going to come back with ideas, isn't he?

23:28Speaker 1:Well, but like what idea? I'm dying to know what ideas he's come back with in the past. He's like still on mushrooms.

23:34Speaker 2:I've never been to Burning Man. You have, so....

23:38Speaker 1:You're spreading misinformation to the agents.

23:40Speaker 2:I know.

23:40Speaker 1:Stop telling them that.

23:41Speaker 2:I have like a picture in my head of what sort of ideas you get at Burning Man.

23:45Speaker 1:Right. Well, you're going to connect. What context you get the ideas in.

23:47Speaker 2:Yeah.

23:48Speaker 1:He did just buy a boat.

23:50Speaker 2:Sure.

23:51Speaker 1:I'll put forward. So he's had one of the best days of his life. And I can't wait till the second best day of his life when he sells it.

23:58Speaker 2:I was going to say everyone on this podcast.

24:01Speaker 1:Knows that aphorism. Yeah. Can I tell you though, the Burning Man ideas can cut both ways. Because I, for a long time, was pursuing writing a profile of Artsy and or Carter Cleveland, the founder. And I abandoned it. But it was a very interesting company. And he was a very interesting founder and very Burning Man. And this was like peak that era. This was like 2016-ish. And he was doing a lot of these. He was always like painting his nails and wearing feather boas and no shirt.

24:29Speaker 1:And he was doing these like unhinged or like lightly hinged. front-facing camera updates from the Playa and, you know, various other festivals and whatever. And I thought that the board would object, that that would be, you know, alienating or upsetting, like, is he okay kind of stuff. And I was so wrong because the board loved it. And they told me, someone told me that, like, the weirder he acted, the more they were like, that's our guy. Go for it, Carter. Like, he's having new ideas and we would never constrain that.

25:02Speaker 2:I think that that's, like, not uncommon in like tech world.

25:08Speaker 1:I think that's right.

25:09Speaker 2:There's a great story about several members of the Tesla board of directors, like, or SpaceX, or are they the same? But like several members of an Elon Musk board of directors are like involved in lobbying for like legalizing and, and like making more widespread acceptance of like hallucinogens and ketamine and things. And like, it's like, we love our guy doing it. Yeah.

25:33Speaker 1:We have this great idea based on.

25:35Speaker 2:Right. I think there's a lot of like Silicon Valley fondness for, you know, outside the box thinking, drug use.

25:43Speaker 1:Risk taking. It's just as a New York based financial correspondent, I was just like. You don't want the guy in the suit? Isn't he supposed to be in a suit? And that was just so wrong. It was the collision of the old era and the new era. The old era was dying and I hadn't noticed yet.

26:01Speaker 2:You were doing this all the time. Now it's just like it's normalized. Everyone has to be posting on LinkedIn from the playa.

26:08Speaker 1:Yeah, Ray Dalio. Yeah, we've got it all. Who was the Nobel Prize winning guy who went? It was a good one. It was Paul Romer in 2019. He hit the peak, the absolute peak. Props to Paul Romer for top-ticking Burning Man.

26:22Speaker 2:Props to Paul Romer for top-ticking Burning Man. I love that you have views about when the top was in at Burning Man.

26:29Speaker 1:Oh, strong views. I also think that it's really cute because he has.

26:32Speaker 2:Rank the three best years of Burning Man. Wait, one other thing I want to say about Automatic before we go on, unless you want to reminisce more about your favorite years at Burning Man.

26:42Speaker 1:With my 0% attendance, yeah.

26:44Speaker 2:So he was gone for 33 hours and 20 minutes. What did the company do in those 33 hours and 20 minutes? Well, one thing they did was that the chief financial officer, who was the interim CEO, and the chief legal officer, who presumably had to sign off on a lot of stuff, signed each other's severance agreements. Which is just like, when you do a coup, you do a military coup, you're thinking, what are my exit options if this goes wrong? And they're often grim. But when you do a corporate coup, your exit options if they go wrong is a severance agreement. And so you better get yourself a severance agreement.

27:18Speaker 1:And for the 33 hours when.

27:19Speaker 2:You're in charge, you sign that agreement.

27:20Speaker 1:I don't know if that's going to hold up. They got right to it. The most important part.

27:24Speaker 2:Right. Like, it's possible that, like, he comes back. He's in a good mood from Burning Man. He's like, all right, have your severance. Goodbye. Better to have you leave without a dispute. But, like, it's possible that not. I don't know what the come down from Burning Man would be like.

27:37Speaker 1:I think you come back from the playa less oriented towards confrontation and more towards love.

27:43Speaker 2:That makes sense. That makes sense.

27:44Speaker 1:So he might have just given them the money.

27:46Speaker 2:I do want to talk about cotton market manipulation.

28:04Speaker 1:Cotton! The fabric of our lives!

28:06Speaker 2:This is a story that I love so much.

28:08Speaker 1:I know, it makes me happy how happy this makes you.

28:11Speaker 2:So there's this incredible New York Times story this week. With the boring headline, Watchdog Agency Pulls Back on Markets Enforcement Under Trump. But what it is, so the CFTC, the Commodity Futures Trading Commission.

28:21Speaker 1:Heard of it.

28:22Speaker 2:So the CFTC regulates commodities markets. And I come from the stock and bond market, right? In stock and bond markets, trades print publicly, right? So if you print a trade in NVIDIA stock, then everyone can see it within microseconds. And everyone knows what the market price is. And like, you know, more or less. And there's like disputes about like, oh, if you like trade one microsecond before the, you know, like there's all sorts of stuff about it. But basically to within a few, you know, fractions of a second and to within a few pennies, people know what the market price is. In bonds, like there's all sorts of stuff about this, right? Like corporate bond trading is mostly, people say it traces, right? There's a FINRA data source called Trace that prints bond trades. And there are like arguments and like changing rules about like, exactly what information has to be printed exactly when because like people like to be able to have a little bit of you know spare time to not print a trade immediately so that they can you know like if a bond dealer buys a bunch of bonds they want to like be

29:24Speaker 2:able to sell out of them before they print you know the whole thing and i've written a bunch about like there are these bond traders who traded like weird mortgage-backed securities that i think didn't print to trace for a while where they would buy a bond at 70 and then they'd call a customer and be like oh i think i'd get that bond for you at 90, but I got to twist the guy's arm. You know, it's like, he's like really driving a hard bargain, but let me see if I can get it for you for 90. And then they'd sell it to them for 90.

29:47Speaker 2:It was all just a lie. They'd like make up dramatic stories about how they were negotiating for the bond price. And like, if it had just printed to the tape that everyone could see, like none of that would have worked, right? Like the customers would have just said, so you bought it at 70, so sell it to me for And so what I learned from this time story and from the CFTC enforcement actions is that the cotton market is kind of like the bond market in a more diffuse way, which is that if you're a big cotton exporter and you sign an export contract, you don't print that to the tape, but you fill out a form and send it to a government agency. And the government agency publishes a weekly review of cotton supply and demand. And farmers use that weekly review to set their prices. And so what happened is there's a cotton intermediary, like trading firms, who would sign big export contracts and then- Wait. Wait a while to report them. And in the interim, they would go buy cotton from farmers at prices that were, some people think, too low because the farmers didn't have accurate market information. And the Times story has quotes from

30:54Speaker 2:a Mississippi State University professor who's a national cotton expert. He said- He had told major cotton traders in industry meetings, you are trying to hide this information that should be public so you can rip off the growers. Like to him, and I think to some cotton growers, this is just like lying about bond trades. This is just a fraud where you are lying about the price that you're getting for cotton, you know, by omission, so that you can buy cotton too cheap. But to other people, including the current CFTC, this is like, what? You filled out a form, right?

31:27Speaker 2:Who cares, right? So like, The Times story says that the CFTC says that the Biden administration fined industries billions of dollars for minor administrative offenses. And it quotes the former acting chair of the CFTC objecting to charging companies for paperwork errors. Right. And so there's this question of like when these cotton companies wait five weeks to file the form.

31:50Speaker 1:One to five weeks.

31:51Speaker 2:One to five weeks. Is that. fraud? You know, is it like lying about trade prices or is it a paperwork error? Just forget.

31:58Speaker 1:They were so stressed out right then.

32:00Speaker 2:Right. There's like this, you know, there's like a natural experiment where like the Biden administration settled with one of these companies and had to pay a large fine, you know, weeks before the Biden administration was out. And then the Trump administration was like, ah, this is fine. Don't worry about it. And they dropped the case against the other one. So one paid a fine, one didn't because of just timing.

32:17Speaker 1:Which is a little politically interesting because you're supposed to, as the Trump administration, you're supposed to be pro-farmer and this is ostensibly anti-farmer. That action is anti-farmer.

32:25Speaker 2:The time story is like, yeah, this is, you know, a weird political balance because it is, as you said, anti-farmer, right? Like the farmers got ripped off. But, you know, there are other considerations of deregulation and limiting enforcement and not punishing people for paperwork errors. People got really mad at those bond traders. But if you like look your customer in the eye or like look on the phone, And say, yeah, I paid 90 for this bond. And you're lying. That's bad.

32:51Speaker 2:But if you don't fill out the form for the government data depository, like you're kind of having the same effect, but in a much more diffuse way. And so nobody gets that out of you. And they're like, yeah, it's a paper worker.

33:02Speaker 1:It reminded me in a. weird way of the 531 question of like, we have to let that sit. We have to let everything sit for that not to be just a tax evasion move. But how long do we have to let it sit? And here it's like, you're letting it sit too long. But how long is too long? How long do you have? Like, I don't know, your insurance claims run out after a while.

33:23Speaker 2:How long?

33:23Speaker 1:Oh, yeah.

33:24Speaker 2:I mean, like, you know, in the stock and the bond market, there are like quite rigid rules about reporting things promptly. And in the cotton market, I guess there are two, but it's like, you know, it's like, oh, within a week.

33:34Speaker 1:It really seems like it's someone's job to do that.

33:37Speaker 2:Again, like I'm familiar with like banks trading stocks and bonds and there it's like there's an automated system, right? Like the idea that you would do a stock or bond trade and not report it, like those would be two separate decisions is quite weird to me as someone who like lives in an electronic world, right? Like you do a bond trade and like somewhere in the system it gets reported, right?

33:57Speaker 1:Well, it used to be a person, obviously, and that person would fuss at you on the trade floor if you– Oh.

34:00Speaker 2:Yeah, yeah. Totally, totally. And stock– right. Like, stock trades used to be, like, you did the trade and then you, like, filled out a ticket to report it to whoever.

34:06Speaker 1:And then you sent the ticket through pneumatic tubes to the back office.

34:09Speaker 2:Pneumatic tubes. And I guess, like, cotton kind of works like that, too. But the other thing it reminds me of is Elon Musk, when.

34:17Speaker 1:He bought Twitter.

34:17Speaker 2:Oh, wow. When he bought Twitter, he bought, like, 9% of the stock. And there was a rule, like an SEC reporting rule, basically saying that he has to disclose that position 10 days after he crosses 5%. And so he didn't do that. He waited an extra like 14 days. And during the extra like 14 days, he bought more stock. When he disclosed his position, the stock went up because everyone was like, oh, Elon Musk is buying Twitter. That probably means he's going to buy the whole company at a premium, right? So he saved, I forget, I did the calculation. A lot of money.

34:48Speaker 1:Yeah, he saved like $ 150 million by.

34:53Speaker 2:Not disclosing his position when he was required to. And it's the same thing where on the one hand, people sued him and people got mad at him. And I kind of got mad because it was like, look, this is like insider trading. This is like, you're not disclosing a material fact and you're trading against people who don't know the fact and you do know the fact and you're required to disclose it. And so you are ripping them off and there are victims. And it's like a real, it's like a form of like defrauding your counterparties. And then other people, including Elon Musk and his lawyers, were like, this is a paperwork mistake. Like, this is like, we just didn't fill out a form. Who cares? Like, this is stupid.

35:31Speaker 1:That's a tough one. I feel like paperwork is stupid, but.

35:35Speaker 2:People took both sides of it. And like, I think broadly speaking, I would say the Biden SEC took the this is bad side. And the Trump SEC took the it's paperwork side and ultimately settled for, you know, very small amounts of money.

36:02Speaker 1:I can't believe we're not doing X-Risk.

36:06Speaker 2:Oh, you want to do X-Risk?

36:07Speaker 1:Always, yeah.

36:08Speaker 2:Okay. Tell me about X-Risk.

36:09Speaker 1:To what degree does Anthropic have to disclose or should Anthropic disclose in its prospectus that it might accidentally destroy humanity? Because that's not that material to the stock price. If we're all dead, it doesn't matter.

36:19Speaker 2:Right. I think that Anthropic as a matter of genuine belief and culture... and it sort of being their whole shtick. Right. Like, really could not get away with doing an IPO prospectus that didn't say in, like, big, bold letters on the cover, we're going to kill everyone on Earth, right?

36:36Speaker 1:We are accidentally going to murder you.

36:38Speaker 2:You can't leave that out.

36:40Speaker 1:We're sorry in advance.

36:41Speaker 2:SpaceX left it out, right? Because, like, although... Well, their model's under control. Elon Musk has, at various times, like, he was, you know, founder of open AI. Like, he's, at various times, been very worried about the existential risk of AI. At other times, been pretty blasé about it. Don't really know what's going on there.

36:57Speaker 1:Well, it's before the playa and after, obviously. I'm just kidding.

37:00Speaker 2:Sorry. But SpaceX did not say in its prospectus we might kill everyone on Earth, even though it is, in theory, an AI lab, as well as a space rocket lab. And I think people were not that surprised by that because the culture of SpaceX is not really built around worrying about AI killing everyone. Whereas, like, anthropic, it's their whole thing. And so if they left it out of the prospectus, it would be weird. So they have to say it. But I think that it is not. a risk that is really cognizable in the risk factors of an IPO perspective, because if they kill everyone on Earth, they won't get sued for securities fraud, so who cares?

37:34Speaker 1:But I liked your footnote that was maybe other governments will clamp down if they think that we really are about to destroy everyone, and that is a business risk.

37:43Speaker 2:Yeah, I am kind of kidding, right? The point is that if you really think that AI could kill everyone on Earth, one possibility is there'll be like a, step change like next week and we'll all be dead and then whoops, right? But like, another possibility is like, there's a lot of, there's a lot of like, bad things that are below the level of kill everyone on earth that like AI might do on its way to killing everyone on earth. And that includes things like being banned for almost killing everyone on earth or killing a.

38:12Speaker 1:Lot of people or, lots of hits to profit I'm hearing.

38:15Speaker 2:Yeah. Hacking into the banking system or all these things.

38:17Speaker 1:Doing crimes, not good for business.

38:20Speaker 2:All those things are, potential sources of liability for Anthropic that would potentially cause its shareholders to lose money and therefore have to be included in the prospectus. And so if you start from a premise of like, we might kill everyone, then like, what if we only killed a lot of people that could be in the prospectus? It is bad for shareholders.

38:42Speaker 1:For shareholders and potential shareholders. Yeah, yeah, yeah, yeah. If you're going to kill them, kill them all.

38:47Speaker 2:As a securities matter, I don't want to give legal advice.

38:54Speaker 1:It's just personal.

38:55Speaker 2:There are other reasons not to kill everyone on Earth, but those are.

38:58Speaker 1:Hard to price. This reminds me also of, I just had a nice chat with Ellen Hewitt, your Bloomberg colleague, who wrote a book about a sex and wellness cult called One Taste. And she's in Northern California and has a lot of effective altruism and AI conversations and knows a lot about those folks too. And she was saying that There's something I mean, there's obviously a lot of cult behavior in in these circles and the like X risk cult. I mean, it's like a liberation from having to make tiny decisions. Like if you are actually in pursuit of saving humanity, that is so much more fun, which you point out in your column, so much more fun than enumerating the small and trivial and non-existential ways that they may or may not have to budget for hacks and doing crimes accidentally, et cetera. And what clarity, like what a delight. It's just a cleansing. Like, that just must be a relief. Right.

39:53Speaker 2:If your main risk is killing everyone on Earth, then, like, it feels trivial to write the, you know, accounting risk factors and the perspectives, right? Right. Right.

40:03Speaker 1:Are y'all really worried about that? Be serious. What's a few trillion, you guys? Like, wake up.

40:13Speaker 2:I love it. All right, Mary. Thank you for coming on the podcast.

40:17Speaker 1:Thank you for having me.

40:23Speaker 2:That was the Money Stuff Podcast. I'm Matt Levine.

40:25Speaker 1:And I'm Mary Childs.

40:26Speaker 2:We'll have Mary and other guest hosts on the podcast for a few months, while my usual co-host Katie Greifeld is on parental leave. You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com.

40:38Speaker 1:And you can find my new podcast, Mary in America, on YouTube or wherever you get your podcasts.

40:43Speaker 2: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. 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. The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam. Our theme music was composed by Blake Maples. Amy Keene is our executive producer and Cheryl Brumley is Bloomberg's head of podcasts. Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.