The Ab Roller With Wi-Fi Edition

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F1: This ad free podcast is part of your Slate Plus membership. Hello.

M3: And welcome to the ab roller with Wi-Fi addition of sleep money or guides of the business and finance news of the week.

M1: We are back on a timely Slate morning this week no more. Q and A episode or anything like that. We are going to give you all of the analysis you want of everything in the news except for Brexit. Argentina well I mean like there were certain things which are just constant drumbeats of chaos like Brexit and Argentina and we will talk about them occasionally. Let’s just stipulate that Brexit and Argentina Foster clucks and then move on. We are going to talk about Bill Dudley who is this very grand person who apparently doesn’t like Trump very much and certainly doesn’t like trade wars. We are going to talk about peloton going public and also we work which is going public and their whole business model. But most excitingly Emily we are going to talk about the Popeye’s chicken sandwich everyone. We are going to talk about the Popeye’s chicken sandwich. So stay tuned. You want to know what Emily thinks the bug bites chicken sandwich. All of that and a long conversation about General Electric in Slate Plus is coming up on Slate Money.

M2: OK. So let’s talk about Bill Dudley and Bill Dudley is about as grand as grandees come. Am I right. Yeah he’s like chairman of the New York Fed. He was something something at Goldman Sachs. He was vice chair of the Federal Reserve Board. We’ll see. Well I think he certainly sat on the FOMC for many many years. It has a rate setting a long and illustrious history.

M1: He is one of those classic people who move back and forth between the public sector and the private sector and quietly run the planet. He is the epitome of the Goldman Sachs elite. And he has gone rogue. He went rogue and like he wound up writing this piece for Bloomberg opinion which was so let’s just say heterodox that Larry Summers said it was the craziest thing he’d read in a decade. And you know anyway but feel like Stephanie Kelton was probably like what it was kind of awesome I kind of loved it. It was this piece where he basically just came out and said look it’s the Fed’s job to do what’s in the best interest of the country. And if Donald Trump is going to take us into a trade war that’s not in the best interests of the country and we shouldn’t facilitate that by cutting rates we shouldn’t sort of give him our support by like trying to prop up the economy in the face of all of the destruction caused by a trade war because that’s only going to encourage him.

F3: Right. And it’s something we touched on in a previous episode which is basically Trump. He does his trade war stuff. He messes up the economy. So then the Fed has to step in and has to lower interest rates which is what Trump kind of wants and enables the economy not to go totally batshit and enables Trump to continue doing his trade war game.

M1: So so the question is basically does the Fed have to enable Trump by the laws of its mandate or something or if Trump is doing something bad and dangerous. Can the Fed kind of say look we are not going to be helping you here.

F3: No they can’t do. I mean the consensus I I’ve actually not seen something quite like this in a long time where the consensus about one single piece is just everyone hates it so much like on all the sides. Jordan Weisman wrote a piece that was that was like absolutely not. Can we do this because the Fed needs to remain you know independent and independent. What’s an independent and can’t get political because that would change it you know forever and they just they’re obligated essentially to enable Trump. So

F2: I sense so I have kind of slightly mixed thoughts on this. I mean I think obviously this is not the kind of thing you say in public because it actually makes it harder for the Fed to do anything against Trump. But it actually is limiting the degrees of freedom of the Fed. Also the idea of saying that the Fed should consider the upcoming election is just clearly beyond the pale obviously. However I find some of the reaction to it a little questionable because the idea that central banks which have become so important in economic. But let’s also be honest like politics the idea that for them in any way to step their toe into politics is just something we’ve never seen before I don’t think that’s correct.

M1: And I’m reminded of the conversation we had about Christine Lagarde at the ECB and I for one was saying it is awesome that Christine Legarde is at the ECB precisely because she is a politician. And precisely because she has political influence in Europe and she can get the people in charge of fiscal policy to do make the kind of fiscal decisions that need to be made in order for the continent’s economy to thrive. And this is basically you know it’s not what Bill Dudley was saying until. But I think it’s what I am saying which is that it’s ridiculous to pretend that central bankers are completely apolitical. There’s no such thing as completely apolitical when Alan Greenspan sat down in front of Congress and said that the government should cut taxes because otherwise it would have a surplus and surpluses would be dangerous because if you had surpluses for too long then we’d increase spending that no it wasn’t that it would increase spending but it was that like you might have to invest in the stock market and then you couldn’t the government shouldn’t be investing it was this bizarre argument in favor of tax cuts which made no real sense but it was highly political and then everyone kind of went oh yeah everyone knows that Alan Greenspan is a Republican like it. Central bankers are Republican and oh say something because our political most of them are Republican. Many of them are Republican but most of them are political. Everyone knows that Janet Yellen is a Democrat like and it’s no secret.

F5: I think Dudley is kind of wrong and my analogy is I guess to parenting right like you kind of try to make the same argument that Dudley does with your kids like they make a big mess in the kitchen. And but if you clean up after them or if you clean up their rooms for them or their bathroom stuff like You’re just enabling your children to be messy which is I guess at some level true and you can try to get them to clean up. But at the end of the day if you want your house to be like relatively sanitary and safe you have to clean up the mess.

F4: And Donald Trump is a big child and he is making everything filthy with the economy and like the Fed just has to do its job and like try and clean up the mess. I love that metaphor. Mean that’s awesome. Yeah. And I think it.

M4: Has come up with that. What do you think.

F3: Well I was inspired because I think Jared Bernstein or some economist said this is like parenting one to one you can’t you can’t just do it like that or something.

M1: Do you think Bill Dudley was like not very hands on dad.

F3: Well yeah I mean obviously he’s you know doing the revolving door all his life he probably was too busy he didn’t spend a lot of time with toddlers.

M1: He doesn’t entirely know what the best way to deal with total.

F3: Now when he got home the whole house was spotless and someone handed him a cocktail probably.

F2: And I would say that that metaphor is also relevant if you’re thinking of during the eurozone crisis how you had members of the ECB specifically talking about trying to punish governments in southern Europe. So I think that this goes to the idea one of Emily what you said that doing what Dudley said and saying you know what we’re not going to help you is a bad idea. But it also shows that central bankers are political.

M1: So now the toothpaste is out of the tube right. I mean it’s like if Dudley is saying this in public. Now he was surely thinking it in private when he was on the FOMC. And so now like this fiction of high minded public servants sitting on the FOMC and making technocratic decisions is now from here on then going to be much harder to look at the minutes of the FOMC or listen to Jay Palace press conferences and think that they’re not hiding like the real reason that they’re doing something.

F2: My only thought about that though is that this is so similar to how you talk about the Supreme Court right. That there is this fiction that they’re apolitical in their decision right.

M1: But that’s what put that kind of the whole point about the Fed is that the Fed has successfully resisted politicization in the way that the Supreme Court has not the Supreme Court has become political has become incredibly political for many years. And the Fed hasn’t.

F3: That’s what Jordan argued in his piece basically that you go down Dudley’s road then you turn the fed into the Supreme Court and nobody wants that except the Trump drug czar.

M1: I would really love to live love to appoint a whole bunch of like ultra doves to the Fed. So who would do exactly what he wants and be completely political and cut rates under Republican administrations and raise them under Democratic administrations. That’s Trump’s dream. And that would be like the Supreme Court ization of the Fed. And I think even Bill Dudley would say you know we don’t want that.

F3: Oh and I wanted to add because and it got me thinking earlier this this world in which the technocrats like punish the misbehaving governments or whatever to do the right thing or teach them a lesson is not what got us Lehman basically because everyone there was maybe someone was going to step in and they were like No I’ll just let it fail and teach everybody a lesson I’ll be fine. And then it just wrecked the whole economy.

M1: Well yeah.

F2: Or the Herbert Hoover liquidation or the depression whoever it does suggest that we do not like people have this idea that the Fed is this long August body that always has a clear purpose and is always you know doing the right thing. And if you look at Fed history that is simply untrue because it is such an incredible. The U.S. economy and the global economy obviously is such an incredibly complex system that the idea that you can be like I’m just gonna I’m just gonna let this go for a little. You know let a little bit of chaos happen for a while and I’m sure everything will be fine. That’s probably an unwise I have to be a grown.

M1: Okay. Let’s talk about S ones. I feel like I know in my mind people didn’t used to talk about s once when when companies filed to go public. And now everyone’s like Oh did you see the S-1. The investment bankers always. Yeah. So this is a piece of investment banking jargon or S.E.C. jargon which has now made it into the public lexicon. The S-1 is what we always used to call an IPO prospectus and it shows you everything there is to know about a company so you can decide whether or not you want to buy stock in it. And if so how much you’re willing to pay for that stock. And we recently received the prospectuses not only for we work but also for peloton. And it strikes me that even though these companies are incredibly different on a bunch of different levels they fundamentally are selling a similar story which is that they have a core product with relatively high profit margins. And we worked case what they do is they rent out large spaces on long term leases for relatively low amount of money and then they divvy them up into tiny places and lease them out on a short term basis for much higher amounts of money and they make money that way. And in order to grow they have been losing lots of money and investing in this net and the other and buying a surfing company or whatever. But like ultimately what they’re saying is our core economics are great. We can make lots of money. And so you should ignore the losses because that’s just investing in growth and buy stock and you can totally you know analyze. We work on that level and say like you know on one hand your core economics are quite good on the other hand what happens if you know you can’t sell out your short term into rentals. That kind of thing and you can say that we are less good or looks bad on that basis peloton is similar in that way it has massive profit margins. It sells these bikes and these treadmills at 45 percent profit margins. And it also has media subscriptions as a media company and it sells basically and that’s what really it’s like a cable TV company you pay twenty five dollars a month to get like exercise videos on your screen whether it’s an iPad or a treadmill or with the world’s best trainers with the world’s best trainers. And you know and it’s the same kind of thing we have to invest in content. We have to invest in marketing and there are these investments. But like the core product that we sell has massive profit margins. And once again you can make that decision as to like you know will they be able to turn this into a profitable company. And I think what we’re seeing and even Uber is kind of similar on some level they’re like you know we take a cut of every ride and so you know our costs are largely fixed and a cut comes and everything and we grow large enough then eventually we’ll make money. And I feel like on some level this is the crunch point right. Is about now when all of these companies are going public with massive losses like a what point do you kind of look at them and go there’s something wrong here if this is such a great business how come you’re losing so much money. That’s the thing which which puzzles me like peloton losses are going up not down as it’s growing. You would think that in this kind of a model as you grow your losses would go down.

F2: And that’s actually literally what they project and what they promise in their S-1 but they don’t really provide any evidence of why things are going to change from how they have been going.

M1: So and do you have a feeling for like what is causing the losses at peloton to grow.

F2: I think part of the reason that the losses are growing is the well one obviously the revenues are growing significantly as well. And obviously that’s related but I think part of the reason that the losses are growing faster than the revenue it’s growing is because you have a core group of people that you’ve your core customers right. But then once you start to go beyond that and you have to get additional you have to really grow those kind of marginal customers you’re trying to get more expensive sales and marketing.

M1: So yes this comes down to this thing called CAC customer acquisition cost which for peloton is like thirteen hundred dollars. It’s expensive to acquire a customer and so if you are selling a bike for two thousand dollars and you have a 40 percent profit margin on that bike that’s great but if it goes to thirteen hundred dollars to acquire that customer then you’re never going to make money just selling bikes. And so then you need to persuade yourself that you will be able to recoup that thirteen hundred dollars not just on the profit margin of the bike but also on all of your media revenue. Right. And that’s where that mass starts becoming a bit dodgy because no one really knows how long people stay subscribers to peloton.

F3: Yeah I mean fitness is historically very faddish kind of thing and like people go crazy for you know Soul Cycle and now they’re going a little less crazy for a Soul Cycle or there was step aerobics once upon a time or Jane Fonda or I mean I was thinking Palatine is basically like it’s like an ab roller with Wi-Fi basically and like I don’t know it’ll be popular for a while but once the economy goes south a little bit. People don’t want to spend what is it. I think it’s like twenty five hundred dollars for the bike and then it’s forty dollars a month for the streaming like that’s like four times the cost of Netflix. Like I’d much rather have Netflix I think than a two thousand dollar exercise but it’s less painful and it takes less space. So I feel like the like Palestine is just kind of yeah it’s just a fad. I don’t I don’t see it like sticking around for the next couple of decades.

M1: I mean what they’re trying to do Lily is is be you know investing quite a lot of money into you know their yoga programs and treadmills and anything which isn’t bikes. But it’s not clear how much of their total business is non-violent and the issue is not.

F1: And I think one of the problems here is also like they’re their numbers really only makes sense once you’re starting to get to you know millions and millions and millions of consumers right. And part of the problem is if you’re in like the exercise fitness community you kind of know that there are so many products free things on it like available in terms of if you want to exercise at home. And the reason most people do not want to exercise at home is because if you say that you will not exercise right. So you’re trying to target someone who is so into exercise that they will spend all of this money. However they’re also not like everyone else who exercises who goes to classes because that’s the way you actually get yourself to exercise or you just put on your running shoes and get out the door and then once you’re out the door you’re like Okay now I’m going to exercise but you’re you’re right.

M1: I think I think this is one of the key things is that people have wanted to be able to exercise at home for decades and every so often as you know as Emily said there’s a Jane Fonda fitness craze or something and people buy the VHS tapes and they do that aerobics in front of the television and then they stop. And it’s really hard to see you know in a world where like no one has ever consistently exercised at home like in the history of the planet. Like why do we think it’s going to happen now. Just because Internet.

F3: Well to be fair I mean that the Journal actually had a decent piece on. There are more people exercising at home now because there are really good options like Palatine is a fairly good. I like they used to be you just get on that exercise bike and you like strap on your Walkman. I’m just going to go with the whole thing for a while but now you know you can have like a live class in your room and you can be connected to the people in the class on Facebook if you want to. I use like a fitness app that has different like workouts and and like there are so many good options now at home that it is actually viable I think to work out at home if you have the space which is not an upside for Palatine again because there is a lot of competition as Anna was just saying in the space they’re not as unique as Aaron Aaron Griffith had a really good piece in The New York Times basically listing the eight good Jillian peloton competitors who are as good you get better and also much cheaper yeah and eight hundred dollar bike instead of a 2000 bike which adjusts itself rather than when you need to adjust.

M1: I feel like that would be good.

F1: And if you just look at study after study Americans do not exercise right. And so the idea that your business model only works if Americans all of a sudden really start to exercise. I think that that makes little sense.

M1: And yeah I mean if you look at the big multi-billion dollar companies in the fitness space gyms make money when you don’t think about companies like Nike make money because you want to feel fit by buying like expensive sneakers but you don’t actually exercise. Yeah I feel like they all make money from people not exercising. And somehow the idea that you only make money when people do exercise is going to be a little it’s going to be my loves the heavy lift. Yes.

F1: I’d like one last thing. My trick of how I got myself to exercise every day was that I kept everything I needed to get ready in the morning at a locker at the gym. So if I didn’t go to the gym in the morning I literally couldn’t get ready. That is so intense. After doing that for a period of time that I got so used to it that I didn’t need that.

F4: So it’s my dad. You’re one weird trick story pitch that’s a business and we should yeah we should get Charles to hit back on you.

M1: You write a whole book about it. OK. So Emily Yeah what’s up. Hi. I recently just got back from Germany. I had a lovely break and I had lots of like Mel tush and Bret Salzman cares. Spitzer little things like that. And I was utterly oblivious to apparently an amazingly enormous food fad rose and fell in the time I was away. What on earth is going on.

F3: It was pretty incredible. I mean it was a very august event because in August like a slow news month historically weird big news stories tend to be very strange or unusual.

M2: So in the UK we we used to call it silly season.

F5: Nice. So about two or so weeks ago Popeye’s rolls out a chicken sandwich a fried chicken sandwich on a brioche style bun with pickles and a spicy version and not spicy version and it kind of just it was unveiled and it wasn’t a huge deal. And then Chick fil A. You know the famously homophobic but popular chicken sandwich fast food restaurant tweeted something about their chicken sandwich. It was like chicken plus Bon equals love or some kind of tweet like that. And then Popeye’s tweeted back you know embedded the tweet and said something like Chick fil A you okay.

F4: And I might not be all we all 12 whatever Felix. Yes obviously we’re all 12 but we remember Jane Fonda which means we’re a thousand years old. So everyone’s following this. So as soon as Popeye’s does this Tweet Twitter goes bonkers and everyone it seems like in my Twitter feed which is filled with like really snobbish elitist liberals for the most part.

F5: I would say and media types who never tweet about fast food except a market we’re all tweeting about the Popeye’s chicken sandwich. But they were tweeting about it with absolute love and admiration.

M1: And the only two. Or did they love it even before they.

F4: They were talking about how they had to go eat it and some would come back and talk about how they did eat it.

M2: Of course they live tweet that eating.

F3: Oh yeah. Which Slate published a piece of course saying it wasn’t that good. But Helen Rosner at The New Yorker published a piece saying it’s like just what we needed in these partisan times.

F1: You know it was just like so this I actually think what you just said is really interesting because it weirdly does seem like we’re getting the like Democratic chicken sandwich and the Republican. Absolutely yes. And this made me think about the business roundtable the change in saying look I told you I was gonna get like this.

M4: I thought we were going to talk about like the early days of a b and b when they were selling like breakfast cereals like with Obama and McCain and they would try and work out where John as well. Oh I was really getting into this chicken conversation.

F1: I’m just saying like you we’re talking. This is why the idea of companies having politics is I’m not saying it’s good or bad. I’m saying it’s really good for Paul it’s good for them right now.

F3: They had a nemesis in Chick Fillet which I think the thing that you flavors and I don’t know because I’m just I’m sorry.

F4: Slate many listeners I don’t eat chicken sandwiches of fast food restaurants because well chicken is boring but spicy and it has a pickle. Yeah. Pickles I like anyway we have. I forgot what I was saying.

F3: Oh because Chick fil A is like kind of like this e is supposed to be like kind of this evil homophobic corporation right. They famously they fund all this homophobic stuff. So but people still like their sandwiches so they eat the sandwiches but feel guilty. So I feel like Popeye is having this great sandwich now gives people a reason to abandon Chick fil A which they felt bad about and sets up a partisan chicken divide. But this partisanship can divide because the idea that Popeyes is somehow this like progressive company that.

M4: They use Factory Farms chicken just like any other day they’re all using factory farm chicken and that pop I zoned as we were talking about earlier by Restaurant Brands which is 51 percent owned by 3G Capital which is like kind of this like basically when not even your ultimate parent company but you’re like mid parent company hasn’t named like restaurant brands you know that you’re not going to be like a major liberal icon restaurant. I mean could you come up with a plan to name a company even restaurant. Right right.

F3: Sibling to Burger King I think and maybe Tim Hortons. I think Tim Hortons. Yeah. So can I ask kind of it’s all kind of bullshit.

M1: This is where I wish the Jordan were here because I need to ask a basic question does KFC si do a chicken sandwich.

F6: Oh I think they cover everyone looks at the vegetarian.

F3: Well this week KFC unveiled I believe a vegan chicken sandwich. This is true in just select those.

M4: If they have a vegan chicken sandwich they must have a non vegan chicken sandwich I imagine right.

F3: It’s not in my research but apparently the chicken sandwich is kind of like the holy grail of fast food like McDonald’s has been in and out of chicken sandwiches for years and apparently right now Restaurant Brands and Popeye’s chicken sandwich has that the fast food worlds like in an intense race to get more and better chicken sandwiches.

M4: The one thing I know is that I came back and everyone was talking about this Popeye’s chicken sandwich. And so I feel like maybe I should get a Popeye’s chicken sandwich and if I said No Felix you can’t. And I said why can’t I get off Popeye’s chicken sandwich and they did because it is sold out nationwide and no one can get one.

F3: Yeah I mean I mean it’s really all the marketers are studying this and they’re you know there was the inevitable piece and I think Reuters about putting a dollar amount on the free advertising twenty three point two five million dollars in free advertising doesn’t seem like that much now. But it worked because now the sandwich two and a half weeks later is sold out until fall which I understand can’t they just happily make more. I can make a chicken sandwich before the fall.

F1: Did it work though. Because because on the one hand yes they created all of this interest in this chicken sandwich. But you know what pisses consumers off when you go to a place and you can’t get something in there like it’s back ordered for three months and then.

M4: And I like this is this is the opposite.

M1: You have to desire to understand the 21st century the artificial scarcity culture. Why do you think Supreme is such a big brand. It’s precisely because you can’t buy it.

F2: Yeah I guess.

M4: OK. Oh thanks. All right. So it’s so according to Jeremy Molly who is the only person around these folks who knows about fast food and also golf and who also has google KFC does have a chicken sandwich.

M1: I do not understand how they managed to sit out this amazing opportunity to plug their chickens.

F3: And I’ve heard it’s not as good. I mean it’s fun to think about the three ninety nine chicken sandwich in the context of the two thousand dollar exercise bicycle. And think about which brand and which company is doing better. And of course it’s the three ninety nine sandwich. I mean you don’t have to do any exercise you can eat it cheap and tasty. I mean which is the better business.

M1: It’s pretty obvious numbers round. I like my number. Okay well what’s your number.

F2: My number is thirty thousand three hundred and eighteen. That is the undergraduate enrollment at one University of Michigan. And one of those 30000 318 is 1. Sasha Obama was very excited by Sasha Obama is going to University of Michigan.

M2: She has sisters was it went to Harvard.

F4: Yes. OK. I know someone whose son turned down Harvard to go to University of Michigan. It’s better high tech.

M1: I totally believe that. I believe it too. Okay I’m going to do this one just because my co-hosts asked me to in case you hadn’t noticed the last couple of weeks were a little bit less timely than normal. Which may have been something to do with me being in Germany eating metal torsion and KS hash Metzler cases that slow chase is basically it’s basically the German equivalent of the. It’s yeah the chicken sandwich. It’s amazingly good food. And Logan platform and oh my god I was eating well but I was not podcasting. And one of the things I do when a podcast is I have a little stopwatch app which I set to record the length so I can see when we’re going a bit long in the segment. And so at the end of the last podcast I kind of went away and came back and I opened up the stopwatch app to record this one and it said you have been timing this for five hundred and two hours 44 minutes thirty two point one seconds. That is how long we weren’t podcasting for and we missed you. We did. So now we’re back and I’m very happy to be back. And I feel like now we can we can go back to a regular weekly cadence talk about all man of because we missed so much news we missed this business roundtable news with the economy fell apart while we were gone the economy fell apart there was that there was green land there was so much so much so much so much Emily what’s your number I went deep on we worked for some reason cause I couldn’t help myself so I said we work numbers I’ve given you we got a I can I have my I’m going to come in with my we work no first unless it’s yours it’s mine.

F3: Mine is one hundred and sixty nine. OK. There’s a number of times Adam Newman’s name is mentioned in the we work as one. And compared to and ad usually a founder’s name is mentioned an average of 25 times.

M1: My my favorite one is five point nine million which is number of dollars that Adam Newman was paid to transfer the we name to we work.

F3: And I just really I I’m away from a wee work reading feeling like this. Adam Newman fellow might be a bit egotistical and this we were a company might be a bit bro tactic perhaps not a single woman on the board right. Correct. Outrageous. His wife is famous for saying that a big part of being a woman is to help men manifest their calling in life.

F4: What. Oh my God. Oh she’s an executive at the company but did not get a board seat. And isn’t she like a fake teacher. Yeah. And she’s a fake teacher so that is all I have to say. I’m done now.

M4: Emily out. All right. We will will do more. We work. Moaning I just mentioned the private jet. Yeah. Like oh. Well he is like we all we want to do is when we were but we had a whole conversation here on State money about the whole vegetarian thing.

M1: Yeah and how Adam Newman was saving the planet by forcing we work to go vegetarian. Then it turns out he’s got the biggest private jet habit of anyone on the planet and he has his own Gulfstream 650 fully bounces it out with the meeting. Now offsetting it is please email us on Slate Money at Slate dot com if you want to talk about my favorite policy prescription which is courtesy of Isabella Kaminski at FDA Alphaville. She had this really interesting idea which is if you want to be popular and save a planet and do lots of good things at the same time. Ban all private jets and just it would be a wonderful sort of leveller. I kind of want to know why shouldn’t we do this. We are going to have a slate plus discussion on it’s a bigger fraud than Enron.

M2: General Electric and Harry Markopolos. Stay tuned for that.

M5: If you’re a Slate Plus subscriber otherwise. Thanks for sticking with us.

M6: Thanks to just me and Molly for producing and we will talk to you next week on Slate. Honey.

F3: So on CNN I was watching a video on CNBC and then. That’s your first mistake right there. I know. Sorry. And the guy pronounced Markopolos Marco Paulus and Andrew Ross Sorkin was like what the guy was like. That is how they’re telling me to pronounce it. We’ve been pronouncing it wrong the whole time. And Andrew Ross Sorkin was like All right. And then he kept saying it Marco Polo. I don’t know. I don’t feel comfortable saying Marco Polo.

M4: I do you have do you feel comfortable saying Marco Polo sit down. So we play this way. Exactly. Yes. So in the beginning Harry Marco Polo or Harry Markopolos is all of us think of him and apparently maybe CNBC was right and that should be Marco but I don’t know.

M1: No. But you know I’m not sure it’s CNBC that he came to fame circa Bernie Madoff when he put out a big report saying that Madoff was a Ponzi which of course was true.

F3: I mean he was after him for years he went to the S.E.C. and he was like Could you please investigate this guy. He’s a scam and the S.E.C. was like It’s fine. And that went on for like a while.

M1: But he has since turned this fraud detection thing into a major profit center. He’s become extremely rich by taking advantage of whistleblower statutes to basically try and uncover fraud. And it’s a it’s a good business to be in you get to uncover fraud and get rich at the same time if there is actually fraud if there’s actually fraud.

M4: Otherwise there is nothing.

M1: And now he claims that there’s a 38 billion dollar fraud at General Electric. And I love the fact that at the very heart of this fraud is long term care reinsurance contracts. You think about General Electric. You think about refrigerators you think about nuclear power stations. You think about wind turbines. Do you think about long term care reinsurance contracts. No you do not. But apparently what G.E. Capital did for many many years was whenever anyone wrote long term care insurance they said this is a shitty bunch of liabilities to sit on we’re just going to see that all of these liabilities to G capital G capital would write a check for like ten dollars for them or that would get written a check for ten dollars for taking on the liabilities and then the 10 both dollars would all get spent on stock buybacks and everyone thought it was great. Now according to Harry Markopolos or Markopolos one or the other the chickens are coming home to roost and all of these old people with lots of long term care needs are going to start using their insurance policies to get billions and billions of dollars of care. And G.E. is going to be responsible for the most of that if not all of that and this is going to be disastrous for G.E..

F2: Yeah. This is not correct. So it is certainly true that in the past G.E. was using very aggressive accounting in terms of the way it represented the liabilities of this long term care insurance. But they came out with that a while ago and had to put a substantial amount of money in reserves as an offset to these liabilities. And the problem is that when you when you get into reinsurance and when you get into long term care it is actually very complicated in terms of how you properly determine your liabilities. And it is very clear if you look through the Markopolos report that he has absolutely no idea what he’s doing. He’s not acknowledging the fact that you have a significant number of people who are still paying premiums so those premiums can go up you. He doesn’t account for the fact that you this money is invested your earning income on it. That that can be altered like that when you’re talking about assets and liabilities. There are so many assumptions that go in. So the idea that he can come in and just say yep that’s the number like it’s he has no idea what he’s talking about.

M1: Well I think I think he has some idea what he’s talking about. And you can dispute his conclusions and he certainly doesn’t say that 38 billion is some hard and fast number. He’s just saying there is a lot of stuff hidden in mostly public documents like he he it’s not like he’s using any kind of non-public information.

F2: No but that’s the thing is like he’s not he doesn’t seem to be calculating things correctly. So many of these assumptions that he’s talking about it is true Gee this was a bad business for G.E. to get into they they didn’t clearly know what they were getting into but recently they have been altering a lot of the assumptions this idea that they know that they have kind of a bad crop right now in a lot of people are gonna be taking on are going to be using this insurance and so that is going to be costly but that’s already baked into their assumptions. Now this is one of the issues.

M2: OK. So but the bigger question is not whether Gino’s but whether GS shareholders really 100 percent knew because if they knew then the stock price wouldn’t have fallen off a cliff when the report came out.

M1: And last time I looked just yesterday it was even lower than after the report came out.

F1: It’s been recovered so that it is true that when the report came out and people heard Madoff G.E. that affected the stock price then people read the report and they’re like oh this is a lot of nonsense we already knew all of this. It is certainly true that over the next 15 years G.E. may have to set aside additional reserves. It is entirely possible but nothing that would bankrupt them. He also talks about them having like no cash on hand which just isn’t true. Like there’s something like 25 billion in cash on hand. And then if you take into account all of their like credit lines and such it’s probably like 60 70 billion that they have access to. They can also there’s having divestments where they can do asset sales so they can raise money. So OK.

M2: But I have to I have to stamp I have the stock shot in front of me right here before the new report comes out. The share price is about nine dollars just over nine dollars. What comes up immediately plunges down to eight dollars. So a big threat. Amazing. And then and then it bounces back up and then it goes straight back down again. And it’s now eight dollars and 20 cents. It is clearly a lot lower. There was a long term or medium term effects of this report. But the big thing that we need to talk about is that like you know if you go back a few years you know gee I mean even just like two this time two years ago is over 20 dollars like G.E. is it has been hit by scandal after scandal we talked about the whole Al storm thing every light and this is the bigger point the Markopolos makes is that they keep on having to restate earnings.

M1: They keep having to find weird things buried in which they hadn’t disclosed. This happens over and over and over and over again. And whether or not he is right about the specifics of longtime Kerry insurance he is that open about this. He’s like look it almost doesn’t matter. I just found this one thing. You given how frequently G.E. has wound up having to reveal massive losses which is hidden. You know there’s going to be more somewhere because if you go back all the way to the days of Jack Welch when it was beating expectations by a few cents quarter in and quarter out like no company that’s very Madoff like right. That’s what made off the idea that 10 percent return quarter and quote throughout. You know that’s what she was doing is it was way too predictable to be believable back to Markopolos Marco Polo.

F4: So he gave this report to a hedge fund the day before he made it public. Yes. And he has money with the hedge fund too. I mean that just seems like an amazing scam to me like like if I was writing an article about G.E. and then I gave it to a hedge fund the day before an article was going to say real bad stuff and I had money ready to go and I. You make a killing. I don’t see how that’s like ethical in any way.

M1: I wrote the legal I wrote a piece when I was a Reuters blogger once about this big New York Times report about Womack’s there’s a bunch of scandal about well eruption at Wal-Mart. Yeah yeah. And this massive New York Times writer has spent months on drops and The Woolmark share price immediately plunges the minute that it comes out in the New York Times. And I was like would it be bad for the New York Times to tell a hedge fund about that report like the day before the and then for the hedge fund to be able to put a short position on it. The New York Times could monetize this very expensive journalism quite easily and they can actually make a profit off it. And that would be and that would cause more journalism. They could save journalism and all of the journalists. Of course that would be deeply unethical. They could never do it unethical. I and I just do it. Why. Can you explain why that would be unethical.

F5: And this is getting very many good you have an incentive then to write pieces with that can move the market.

M4: Yes but everyone has the incentive anyway. Have you ever worked in a financial news we’re going to write. Now if anyone would like to move.

F4: But like it’s obviously tainted when you’re. There’s

F2: a difference if you’re trying. If you know that you are going to be putting out a piece that is going to almost certainly affect the market and then you go to someone and say we are going to make a position based on this this that I know is gonna be coming out like that is less material non-public information.

F1: And that is totally a violation but it’s what it is.

M4: No no no it is not. It’s a violation for the hedge fund. Now it is not material non-public information because it is not coming from the company.

F1: No that’s a completely no no no no no. March really young couple it’s not.

F3: It wasn’t. None of it was as you said before none of it was not. It was all public information. He just synthesize it.

F1: Yeah well you know so this is the issue though. Like I’m not to in his report. He also discloses that he’s with this fund now. I think he’d that should have been at the top that was not disclosed well. So no I mean I agree with you and I actually think you could you could make an argument here but the MMPI does not necessarily have to come from the company. There are like if if a company has like a drug trial and someone finds out that the drug trial is not going to work out that didn’t come from the company that is still certainly material. So I think that we should not be dating. We should not be encouraging everyone to be making positions based on information that they know is going to be coming out and that they are going to be putting out. Yeah that is going to be a.

M2: But isn’t that the entire like Bill Ackman M.O. that he like puts on the massive short position and he comes out on stage and does a big slide presentation is like this is a fraud and then it’s let the company stock price drops and he makes lots of money.

F1: Well a he believes that he fundamentally believes that the company is a fraud and is known to have a position in the company. And then he comes out and makes a report that is going to be different than someone specifically putting on a position immediately before they’re going to release something. I’m not saying there isn’t like a gray line there yeah. It’s a little complicated in terms of but I think that I would argue on the side of that is not.

M1: I mean I go back all the way to you know Jim Chanos talking to Bethany McLean about Enron. You know like he had you know very well with the short case in Enron and he was Bethany’s like top source for her big take down article on Enron. And he definitely positioned himself to make lots of money when her article came out and that stock price fell. And I think that was good for him and it was good for Bethany and it was good for her. You know getting the truth out into the world.

F1: But Bethany didn’t go to him the day before something was going to like come out and say I am going to add like like I want a cut of that. That’s the difference to me. Of course people always release things that are going to affect the market. That’s not the issue here.

F2: The issue here what starts to make it very very questionable is that idea eight that you’re putting something out that probably in this case in the G.E. case is factually accurate and you’re doing it specifically because you have a short I think I think that shorts in doing this forever.

M1: Muddy Waters. You know this is very common.

F1: It’s this. I’m not saying that this is necessarily illegal but I do think that this is very very unethical. Again it’s questionable because he does disclose but I still think it’s completely unethical.