The Super App Dream

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S1: This ad free podcast is part of your Slate plus membership. Hello and welcome to the Super F Dream episode of Sleep Money, your guide to the Business and Finance News of the Week. I’m Felix Salmon of Axios. I’m here with Emily Peck of Fundrise. Hello and calling in from Hong Kong. We have an incredibly special guest welcomes Cezary Podkul. Hello. Thanks for having me. I’m so sorry. Who are you? And tell us what brings you on this show.

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S2: I’m a financial journalist. I write for ProPublica and I just did a piece on unemployment insurance, which you and I both take a look at that. So thanks for having me.

S1: So we’re going to talk about unemployment insurance fraud, which is a big thing. And we all talk a lot about just how big it is. We are going to talk about China and its crackdown on private companies and what has been going on in the Hong Kong stock market and what the S.E.C. is doing with regard to Chinese companies. There’s a lot of action going on with that. Is China a communist country, is a capitalist country. We’re going to get into that. And we are also going to talk about Robinhood, which went public this week in a slightly disappointing IPO. We’re going to talk about that. We’re going to talk about its business. We’re going to talk about the dreams of being a super app like they have in China and in Hong Kong and in Slate plus, which you can subscribe to for an introductory rate of just one dollar. We are going to go even further into Robinhood and its practice of payment for order flow, which may or may not wind up getting abolished if some members of Congress have their way. All of that coming up in Slate money. So, Cesari, you wrote an amazing thing on unemployment insurance this week, which we are going to talk about. But of course, we emailed you and said, will you come on the show to talk about unemployment insurance? And it just so happens you’re in Hong Kong and it just so happens that Hong Kong stocks are way in the news right now, both in Hong Kong and in America. So this is like doubly fortuitous. And I think we should probably start with this, because this is the big news. The S.E.C. has come out and basically said no more Chinese stock listings until we can get our brains around what is going on, which probably won’t make any difference because realistically, no more Chinese companies were going to be listing in the United States anyway, given what the Chinese government has said and done. So can you bring us up to speed very quickly on what is the Chinese government doing with its private companies and. Yeah, what is going on here?

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S2: Yeah, this has been a week where people basically kind of sell first and ask questions later. There’s just been a lot of fear in the markets here about which sectors are going to come under closer regulatory scrutiny, how much regulatory tightening we’ll see, and what that means for shareholders and anyone who’s looking to invest in those stocks. So it’s just been a ton of uncertainty. Investors are still trying to figure out how to parse out exactly. But as you saw from the statement this morning from the SEC, regulators in the US are also beginning to worry about this because they think that maybe some of these risks aren’t being properly disclosed to investors. You know, things such as do the companies that are seeking to list in the US, did they actually have permission from regulators to list abroad? And if not, disclosing that

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S1: they never did? Right. Basically, up until now, it’s been a kind of better to ask forgiveness than permission kind of thing. And they create these weird Cayman Islands shell companies, which are technically the things being listed. And the Chinese regulators have kind of looked at it and not done anything until now when the Chinese regulators have looked at it and said, wait, hang on a sec, no. Is that also the case with Chinese companies listed in Hong Kong because they’ve been plunging in price at those shares, shares in actual companies where they also shares in like weird shell companies.

S2: So a lot of Chinese tech companies are listed in Hong Kong. And so those are actual companies that are listed here. And so they’ve been plunging just because of the uncertainty, because while they’re listed here in Hong Kong, you know, the regulatory structure under which they operate and under which they’re going to be earning, most of their profits are coming from Beijing. And so it’s just been part of the contagion this week and a sell off in terms of just the uncertainty. People wondering if it was the private education stocks again, what’s next? What’s going to be happening to tech, the food delivery companies, health care just really kind of buying all sectors.

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S1: The news on private education stocks is basically the Chinese government came out and said you can’t be a for profit education company.

S2: Right. You have to essentially turn into a non-profit, which makes you wonder, do they still have a raison d’être? Is there still an investment thesis left in those companies? Right.

S3: Can you tell us a little bit about why is the Chinese government just coming in and doing all this stuff and surprising people after years of letting companies? List in the US and doing there Little Cayman Island shenanigans, why this year is this happening? What’s the rationale here?

S2: That’s a good question, I think just to take a step back, I think it has to do with just the broader themes that China is concerned about. Right. One of them certainly is population growth. And we’re now expecting that over the next few years, China’s population will actually begin to decline. And that has broad implications for the economy. Another concern

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S1: as well. Hang on a sec. Let me just stop you there, because this one is not obvious to me. I might be able to be in Hong Kong. What is the connection between China is worried about declining population. How does that turn up in like and so therefore they’re cracking down on private sector companies.

S2: Right. So to reverse that trend, you want people to have more kids. Right. And so to have more kids, you need to be able to afford a child because it’s expensive to have a child. And so even if you live in the one child policy, sure, you can have two or three kids asterisk if you can afford it. Right. And a lot of people can’t. Right. And so one of the reasons behind, for example, the private education crackdown was that he had all these companies that were just producing all this intense pressure on parents to send their kids to these private tutoring programs to make sure that they’re getting that competitive edge. And these companies were obviously for profit entities and just it was great for them, but it wasn’t really great for parents who would have to potentially pay a lot more to get their kids through the system and have their kids risking burnout or feeling and actually manage it. And so that’s the connection there.

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S1: There is a connection there. And more broadly, there has been this longstanding tension for decades or at least over a decade in China, which is like on one level, a communist dictatorship. On the other level, like one of the most rabidly capitalist countries in the world. And there’s always been people have not really understood that tension. And it seems to be resolving itself right now in the direction of much more state control of the economy that they like. Like this capitalist activity was all well and good when it helped the country. But it’s not I mean, it’s not an end in itself. And if there are more important things that the Chinese Communist Party needs or wants in order to really control the future direction of China or even just something like payments, which are entirely privatized pretty much in China, then they will have no compunction in turning around and saying no, actually, like if there’s lots of private money here and lots of private profits here, we are happy sacrificing that in the service of the really big picture, which is just having the economy in the country that we want.

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S3: So it’s like China’s cracking down on companies like Alibaba or DEEDI because China is worried about inequality.

S2: That isn’t the sole reason. That certainly can be part of it and some of the sectors. But I think, for example, indeed, I mean, you see concerns about information security, like the Chinese government doesn’t want information on its citizens being potentially housed abroad and being accessible to regulators, other people abroad. So that concern by itself, I think, was what was at the core of DEEDI. So you’ve got that concern with Dedi. You’ve got more of the quality and equality concerns and economic growth that play into something like the private education crackdown. And even on food being like the news you saw this week with the food delivery regulations to make sure that they share more of the prosperity with the workers and take care of them. So you see that inequality elements coming into play there again. So it’s a range of concerns, but they are really all roads lead back to Beijing, right. In terms of what the government’s priorities are, how they want the economy to run, how they want the system to run. And if there’s any sector if there’s any company that’s running afoul of that, they can bring them into line very quickly. It’s just the risk for investors is do you know who’s next and what’s going to happen when. No, no, that’s it knows.

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S1: Right? Yeah. No big uncertainty so that the stock market is selling off, which like no harm, no foul. Stocks go up, stocks go down. But I love this idea. Like, obviously, the way that nation states work is the independent countries work is that they have a state monopoly on violence. And now we seem to be coming up with a parallel to that, where the CCP is basically saying we want a state monopoly on private information, like we want to know everything. We want all of the data about every single Chinese person. And it all comes through to us. And if you run a company, you need to share all of that information with us. But also at the same time that the flip side of that, if they’re very suspicious about any foreign government or like foreign listed entity having that information because they want that monopoly. And I see a lot of what they’re doing here is basically a part of the twenty first century information economy. They want to really centralize the amount of information and data that they have and make sure that no one else has it. And it’s hard to do that in a sort of vibrant, competitive capitalist system.

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S2: Right. China wants to have information on its citizens and it doesn’t want anyone else to have it, certainly not the United States and its rivals. So. Right. That’s. Part of the concern

S3: this is going to sound kind of obvious, but it just occurs to me that China’s concerns and maneuvers, I mean, that’s what communism kind of is, and that’s why capitalists don’t like it. I mean, they’re taking action against private companies because of other goals and it’s creating instability and people don’t know what’s going on. And this is what free market types have warned about for ever. It’s sort of interesting to me. Yes.

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S1: So the big question for me is put aside what’s happening to the stock market. Right? There are Chinese billionaires, and if the Chinese billionaires become Chinese millionaires, then fine. And there are people who are invested in Chinese stocks and they could lose money if the equity value of Chinese companies goes down. But have we reached the level of Chinese prosperity here, Cesari, at which the point at which the Chinese government can basically say, look, you know, we have this large middle class, we have this growing middle class, it is going to continue growing and getting wealthier, kind of regardless of whether we have like a thriving stock market in that kind of thing. So we’ve used this kind of ultra capitalism to get here, but we don’t need it anymore. And now we can discuss it. I don’t

S2: think so. I don’t think they’re thinking of discarding it. And certainly I think it’s far from clear that that people can have access to that mobility to be able to really climb the ranks society and really improve their lot by getting the better job of moving to a different city and having that sort of mobility. It’s something that is difficult when housing is so expensive, when education, which is so crucial to Chinese society. Right. Getting good education, when that’s becoming more difficult and more expensive. So those path of upward mobility in the middle class, I think they’re far from clear and guaranteed. And I think the stock market, you see a huge retail participation on the mainland in terms of Chinese investors being invested in Chinese stocks. And so that being there is an avenue, I think it’s something that provides at least a little bit of a pressure release valve, if you will, know basically if you can save up some money and put in the stock market, maybe you can get some additional savings back way to Aju. But, you know, one thing you have to keep in mind to what you are saying, Emily the Chinese government, if value stability, it doesn’t want the stock market to be overly volatile. You know, one of the things that happened earlier this year, you know, we saw the warnings about potential asset bubbles earlier this year right after the lunar new year. And then immediately you just start stocks going a huge sell off. And the Hang Seng index here was within correction territory about a month after the lunar new year. And it’s now very close to a bear market. Right. And so it’s been an extremely volatile year, probably more so than the government would want it to be. And that’s why this week you saw some of the warnings from the government like, hey, that the markets actually oversold. We got this, guys, don’t panic. The market is oversold.

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S1: Let me just finish up here by asking you about this concept of the release valve, because I feel like that’s the role that Hong Kong has paid, played for centuries, that certainly at least one hundred and fifty years. The Hong Kong is basically the place where China and the rest of the world overlap. It’s the place where Western investors can come in and buy stocks in Chinese companies in a fully convertible currency is the place where Chinese companies can raise foreign capital without losing the faith of their regulators. And it’s this incredibly special and unique place which obviously now has changed radically. You’ve got this new national security law. The Chinese government is really exerting way more control over Hong Kong than anyone had dreamed possible just a few months ago. And my guess my big question for you is, is that going to change the status of Hong Kong? I wrote an article basically, what, two weeks ago now saying not really. If anything, if Chinese companies can’t live in America, that’s what’s going to make them more likely to live in Hong Kong. Hong Kong is going to remain a financial center. It’s going to be a human rights disaster. Perhaps we can put that to one side, but financially, it’s going to continue to perform the same role. But I was wondering, as someone who lives there, whether you broadly agree with that.

S2: Yeah, I think I broadly agree with you. I think as a financial center, it’s going to be here. It’s going to have that special place because it’s had it for so many decades. There’s so many established pathways for capital to flow into China via Hong Kong. For all the businesses that are established here, all the business connections, it ties, the contracts that flow through here, all of that, I think uprooting all of that and transferring it to a different place, it’s far easier said than done. And so I think given Hong Kong’s proximity and special status, I think those advantages, I think are still here and they’ll continue to be here. I think you’re right from a human rights perspective and other perspectives, it’s going to be far different city. I mean, just in the nine months since my wife and I moved here, it’s just been just it’s amazing to just witness a society and so much transformation and just it’s been so emotional for the citizens to go through everything. And so it’s a society it’s certainly going to transform.

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S1: It’s really upsetting. I mean, obviously, there were massive protests which ultimately failed. I’m sure there will continue to. Protests, but much more dangerous because of the new laws, the thing which really jumped out at me was looking at the vaccination rates of the 70s in Hong Kong, which are incredibly low and bespeak a real mistrust of the government in general and presumably the Chinese government in particular. Right?

S2: Well, they’re low and they don’t surprise me at all, just from anecdotally, just speaking to people that a lot of people do mistrust the government. And if the government tells you to do something, not taking the vaccine is one way in which you can kind of show your distrust, not follow the directions. So I think that’s certainly part of it. Another part of this, you know, people just feeling maybe like they don’t want to take kind of back vaccine. They want to see if wait until others have taken it or other vaccines, see if there’s any side effects that there’s some of that to health concerns, as we’ve seen in the West. And you have that playing into here as well, being compounded by this issue of trust? I think so. You’re right. I mean, the vaccination drive here has been very slow. They’ve now unfolded. There’s now all these lotteries that you can sign up for. However, you can win, not one as of I think this week. It’s two luxury apartment buildings that are up for lotteries. And I think that created an uptick in some of the vaccination drives. But it’s certainly not where the government wants it to be by any stretch.

S3: Can you talk a little bit more about what you were saying earlier about how it’s an emotional time in Hong Kong, just what you’re seeing? I’m curious about that. I mean, aside from the vaccine hesitancy, which we’re seeing that here, too, although the Bush administration is just giving out one hundred dollars to people who get vaccinated and not luxury apartments.

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S2: Yeah, the luxury apartments and then all kinds of other goodies that are out for draw. Yeah, it’s extremely emotional because you’ve got so many changes happening so quickly. And I think that’s one of the things that kind of gives people whiplash, right. Where you have the national security law comes into effect. And it’s very blurry and unclear by design. Right. It’s where the red lines, no one really quite knows exactly where the red lines, what exactly you can see some of the things are absolutely clear, but others less so. And so figure out how to sort of police yourself what you say, what you don’t say, how to act. People are trying to figure that out. And at the same time that they’re doing that, you’ve got the Apple Daily, the pro-democracy newspaper that was forced to shut down by the government last month. And then you’ve got just so many other things. The first person to be tried under the national security law just got sentenced to a nine year jail term today. So all of that is happening at the same time and kind of processing all of that is very difficult for people. At the same time as they’re trying to figure out these states, you go and then you look at the lines of people lining up to leave at the airport and to fly out and kissing their families goodbye. So it’s just been it’s been really raw and it’s just been really amazing to witness that here. Wow.

S1: Let’s change tack completely and talk about unemployment insurance fraud, because somehow, like from Hong Kong, you’ve managed to write the definitive article on this, which can’t have been easy. Give us the top line here. Obviously, I know invested in this story to a certain extent myself. I’ve written about it. My big take was this a bunch of like international criminal syndicates who have been stealing hundreds of billions of dollars from this cash pile that was just released in the middle of the pandemic to try and help unemployed people. And there were just no protections in place to stop them from doing that. Is that broadly what you found?

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S2: I wasn’t in the US while reporting this, but I mean, it could have been done from anywhere because it’s been just such an international phenomenon. Right. So one of the most striking figures that I came across in my reporting was one of the cybersecurity firms that’s working with states to help them combat unemployment insurance fraud, saw applications from one hundred seventy different countries. So these are people who are applying for unemployment insurance benefits and pretending to be residents of the state. And if you trace the Internet traffic, it basically leads you to the United Nations list of pretty much every country on Earth, not just the place they usually show up as hotspots for fraud, whether it’s Russia or Nigeria or China, but really just pretty much every nation you could come up with like that Cuba there, that Monaco, Eretria, when they were really used to me. Wow. Yeah, they were. So they were reading the list to me and they just kept saying, like, we’ve never seen anything like this before, like ever we’ve never seen it’s that broad, that persistent, that many different countries on the list. And so one key takeaway is just this is very international.

S1: How do these people who live in Moldova or Cuba or Nigeria or whatever, like how do they get. What’s the mechanism for them sort of repatriating the the stolen money back into their home countries? What’s that chain of money custody? Presumably it needs to get paid into some kind of and they need to be able to open some kind of an American bank account and then transfer out internationally.

S2: So technology is just never made that easier. And that was one of the other things that I discovered was if you’re looking to do this kind of fraud, if you’re looking to transfer those funds offshore, there’s all these mobile banking apps that exist now that you can use to. Create a checking account on the fly. Have the funds deposited to that say that, hey, this is this person’s account, they might get something in the mail, but they’ll toss it because. Oh, what is this? It’s advertising. I don’t need a new credit card or whatever. But meanwhile, you can just have that money deposited into a checking account and pocket it that way. Or you can hire money. Me, there’s a bunch of messages that I came across, people just looking for money, mules. Hey, get this money deposited. I’ll give you a card. We’ll work out a deal and then send it back to me, whether I’m in Nigeria or wherever. And so it’s truly twenty first century, very modern, very high tech, and really not as hard as it used to be because there’s so many new technologies available to do this sort of stuff.

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S1: That was also a ProPublica investigation. Right, about China, which is one of these apps which allows you to open the checking account was like freezing people’s checking accounts left, right and center in an attempt to try and get on top of this activity. But obviously, when you crack down on on anything like this, a bunch of genuine innocent people wind up getting caught up in the same dragnet.

S2: Right? That’s one of the unintended consequences. My colleague Carson worked on a great story. You might see Chinese or other apps like Green Dot was mentioned has come up in some of the indictments. The companies are obviously aware of this. And Green Dot told us that they’re working with states to help them combat this fraud. But it’s an issue that they have to reckon with because you see just a lot of message traffic where people are specifically talking about some of these apps and saying, hey, you know, how do I use this? Can you work with me? You can help me transfer funds using these. Here’s how I did it, using one of these apps. So that’s something that the fintech industry has

S3: to have so many thoughts about your story, maybe the place to start or the part that really bothers me is that while FinTech has never been more easy to use to steal money from unemployment benefits state by state, these unemployment agencies are using just antiquated technology and software that makes them super vulnerable to all this fraud. And I’m wondering how much of a factor the old sort of broken down UI agencies were in this. And if there’s any movement now to update their systems and upgrade their systems, or if it’s just going to be government hiring these private companies that do security and try and weed out fraud, that causes this other layer of problems where people who actually need benefits can’t get them because their accounts wind up frozen.

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S2: Yeah, it’s certainly a factor. North Dakota last year had to recruit computer programmers from Latvia to service its unemployment insurance system because it was running on technology. So all that was like the only place where they could find people quickly to come in there and help them patch it up. The word that the governor used in his governor’s budget address was miraculously patched together at last at great expense to get it working. So if you’re miraculously patching together your systems while fraudsters are actively trying to take advantage of them, you’re not on an even playing field. Right. And one of the breakdowns that we saw just from some of the reports from the Department of Labor inspector general is states were reporting that they just couldn’t even their mainframes weren’t capable of sending such large batches of claimants for vetting, for cross matching with various databases because they just couldn’t do it. And so a lot of those crosschecks didn’t get paid. And so that was certainly a contributing factor to it, the technology being outdated.

S3: That actually brings me to another question I had, which is it was in our interest to get these benefits out to people as fast as possible, especially at the outset of the pandemic when so many people lost their jobs all at once and a lot of people couldn’t even get their benefits because the agencies were so backlogged. So some of the reason there was this fraud was because they lowered for certain kinds of benefits. It was easier for people to get them. Like you didn’t have to prove unemployment in the same way you would typically do it. So it was both easier for legitimate and illegitimate claims to get through. My question is, that’s probably good. Does the benefit of getting more payments out quickly outweigh the harm that’s been done by the fraudsters?

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S2: That’s a good point. And I think Texas Workforce Commission, in their statement to us, we reached out to a bunch of states for comment on this. And Texas said something that I think really speaks to what you’re talking about, which is that the system is fundamentally trying to do two things that are at odds with each other, which is to try to get money to people quickly, but then also prevent fraudulent payments from being made. And so really, the trade off the Congress made when they designed pandemic unemployment assistance, which is this new program that basically expanded the unemployment insurance system for the first time to a population of people that had never been able to qualify for it before, which are independent contractors, gig economy workers, people without long enough work history to be able to qualify for regular unemployment insurance benefits. So they created that and to make sure that they would be able to quickly get payments, they made the application criteria very loose. You know, yourself a test eligibility. You don’t have to prove your prior employment income. You don’t have to provide proof of identity. They eventually in December, when President Trump signed the extension of those programs into law, that requires states to have a tougher. Identity verification standard in place, and so that led states to hire companies like IDOC me to help them do that. And so you’ve seen some of that being outsourced to try to improve that. But at the beginning, those loose application criteria, they arguably did help people get those payments quicker. But they also, as we have seen inviter, just a ton of fraud.

S3: Yeah, I really worry about a backlash where it’s harder to get. It’s already incredibly hard to get any kind of social assistance or benefits in the United States. Annie Lowrey has a whole big piece this week in the Atlantic about how much time it takes to apply for all the benefits if you’re a poor person. So it was great. I thought I remember in March thinking like, wow, this is awesome. Like, people can get money and they can get it quickly and that’s great. So I guess I am worried about a backlash now that we’re talking about this fraud and there has been this massive fraud that things get really locked down and going forward becomes even harder to get unemployment insurance. Because I don’t see this. I’m not sure.

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S1: But I think you’re right that the states aren’t going to get better. But let’s be realistic here and say that this is a fraud that was always going to be time limited. Right. The idea was it was this exceptional unemployment assistance came out of nowhere, created this vast pool of money. A bunch of fraudsters like stuck their blood funnels into the bus, pulled money and started sucking. Once that pool runs dry, once the government stops paying that pandemic era unemployment assistance, which happens in September. I mean, we’re nearly there. The default just naturally goes away anyway. So I think after September, the need for heightened anti fraud protocols is going to just fall away because the attractiveness of this fraud will plunge.

S2: I actually disagree with that. I don’t think that it’s going to go away because one of the things that has happened is fraudsters have realized how lucrative this can be and they’re going to try to take those lessons learned and try to apply them to the regular unemployment insurance program to try to figure out better ways of gaming, that they’ll try to take it and apply it to other programs. So I think it’s unfortunately and I hate to draw a analogy to the virus and the pandemic, we’ve seen obviously a pandemic of fraud when it comes to unemployment insurance and that pandemic, the virus that’s causing this, you know, the fraudulent activity has sort of mutated along the way where you’ve got fraudsters trying to figure out new and more daring, more innovative methods of doing this. And so I think the government has to really step up their security overall in terms of making sure that whatever they were doing before won’t work and that they won’t take those lessons learned and apply them to the regular unemployment insurance programs, which, of course, continue to exist long after the pandemic programs expire in September.

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S3: I would like these fraudsters to maybe do something for the public good and teach us all how to apply for unemployment insurance. I was really one thing that surprised me was just like I can’t believe how many people were able to rip off the system because I was briefly unemployed in March and I went to the New York State site to apply for unemployment insurance or at least check it out. And I was just like, oh, I don’t need unemployment insurance. That’s bad. They have severance and this is too hard. It was so intimidating. I just didn’t want to even deal with it. So I think these people need to do a public service and just teach us all how to get better at figuring it out or offer themselves as consultants or something. You know, pay like twenty five dollars to have someone do my application.

S1: We need them for fiscal purposes. This is one of the craziest things. If you look at the big infrastructure bill that is being negotiated in the Senate right now, the second largest source of funding, because they have to come up with these things to pay for the infrastructure bill is not stimulus. So it needs, like every dollar you spend has to be raised somewhere in Texas, the second biggest source of money to pay for the infrastructure bill is we’re going to get like 50 billion dollars that we lost to unemployment insurance fraud and get it back. So we’re going we’re just going to get 50 billion dollars that way. And I’m like, yeah, absolutely. You’re just going to, like, run along to Nigeria and ask your 50 billion dollars back. But is this remotely realistic?

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S2: I ask almost verbatim that same question, like, how do you get that money back? And the answer was, here’s how you get back. You don’t that’s maybe that’s why I don’t think that’s quite right. I mean, I think in some cases you can get it back if you act quickly enough and are able to stop it right when it happens and reverse the payments, whatever. So I think they will be able to recapture some of it, whether they’ll get 50 billion or more. Gerri, is going to be out on that. But I think it brings me to an important point I wanted to mention earlier, which is we really don’t know yet the size of the fraud. We know that it’s going to be a big number. Exactly how big it’ll end up being. We don’t quite know yet. The inspector general has said, you know, just using the rule of thumb, metric of 10 percent of unemployment insurance goes to fraud and improper payments in any given year using the 10 percent. If you scale that, if you take the overall size of the program and. Do 10 percent of that, based on what they were projecting at the high, high end, what it might be, eight hundred seventy seven billion dollars by the time the program expires in September and take 10 percent of that gets you. Eighty seven billion of fraud, money lost to fraud identity. As you reported, a Felix has said that it could be upwards of 400 billion. When I spoke with them from my reporting, they stood by that figure and they think it could easily be that much or more other people think it’s somewhere in between. The government hasn’t come out with an official estimate. But here’s the thing. It’s kind of like an irrelevant point to debate. Exactly. If it’s already in the tens of billions, that’s already tens of billions too much. And if it’s in the hundreds of billions, I mean, just whatever it is is absolutely too much. The amount of money that will have gone to fraud will just be especially given the tragic circumstance of the last 18 months and many Americans found themselves in it.

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S1: I have to two points to make about that number situation. The first one is that yet the 10 percent is clearly a lower bound. That was the amount of fraud, to your analogy, like before the virus started spreading, before people understood that there was this ability to steal lots of money that was like how much there was in the before times. It is clearly Exploded from there, if it goes up from 10 percent to 50 percent. And we have and you have in your story examples of it being as much as 90 percent in some cases. So if you average this out at 50 percent, that’s not unthinkable. That gets you to the four hundred billion dollar number pretty easily. And it could be higher than that. But the bigger picture is you’re absolutely right. It’s even like call it two hundred billion. It’s still the largest theft of anything ever in the history of the world. And as it’s become, at least in my sort of Twitter mentions, it’s become incredibly politicized. People feel like if this is publicized, then that’s just going to make it much harder for genuinely unemployed people to get the money they need. And so they’re just like, don’t talk about it and don’t give Republicans ammunition, which will help them to attack the unemployment insurance regime, which is very important for unemployed people.

S3: I wanted to bring this up, but I mean, the reaction when Felix first wrote about this, the reaction was vitriolic, to say the least. I mean, that was crazy. People were really mad at Felix and like would not believe that. No. Thought it was way too high. And exactly what he said, like, how dare you even bring this up. Unemployment insurance in the pandemic was so important it lifted people out of poverty level. And I’m wondering if you had a similar reaction to your story. What is the reaction been?

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S2: To be honest, it’s just been a mix of emails, a lot of people writing to share their stories of being victims of fraud. I’ve gotten a lot of those emails, just individual emails from people talking about how difficult it’s been dealing with that, some emails to get to more political issues of the Democrats who are committing one emails saying something about how it’s all Democrats committing fraud or something, which just, you know, it’s just I have no idea where people try to politicize anything and everything. And it’s just the point here. I mean, fraud is inherently a political issue, right? I mean, these people, they’re not Democrats or Republicans. They’re not left leaning or right leaning. They’re coming from all around the world to try to take advantage of US taxpayers. The United States need to deal. It needs to deal with this problem as the United States. Right, as the federal government to basically make sure that it safeguards taxpayers.

S1: One last question for you, which is, are we ultimately going to have a relatively good handle on how much water was just buy like W nines when the states will start sending out, like, tax documents to the people that they think got unemployment aid and those people will receive those tax documents one way or another or be told about them by the IRS. And then they’re going to be like, wait, hang on a sec, I never got this money. Is this number going to come out one way or another or is it always going to have massive problems and no one’s really going to know?

S2: So that’s a good question. I think one thing to keep in mind is that not every claim gets paid. Right. And so, yeah, the numbers in terms of how many fraudulent claims states have gotten are just absolutely astronomical. In some states. Vermont said it was somewhere around 90 percent of their claims at some point were being marked as fraudulent. But it might mind that every claim gets paid. States have said that they are having more success stopping those before they get paid. So that’s one thing that I think is going to slow down that fraud estimate over time. They were also learning as they were going along. Right. So it wasn’t like all the same. The program itself also changed. The rules changed along the way. They hired cybersecurity and identity verification contractors along the way. So I think the figure itself is going to be hard to really pinpoint with any one source of information. I think, frankly, ultimately, what it’s going to take to get us a firm answer is probably some sort of congressional commission or Congress asking for a formal estimate to be done and published by the Department of Labor, the inspectors general, to come up with an official figure. I think unless you have some sort of concerted effort by the government and Congress to try to get an answer to this question, it’s going to be very difficult and the error bars are certainly going to be there.

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S1: So let’s move on to. Robinhood, which, according to its CEO, Vlad, 10, wants to be the single app where you do everything with your money and we have seen what their internal controls are like and how good they are, making sure that everything works perfectly. I fear to think if Robinhood actually did have a checking account during the pandemic, like you can be sure that those would have been a prime conduit for this kind of fraud. Robinhood, of course, went public this week in one of the most disappointing IPOs that we’ve seen in a long time. They priced at the bottom of the range. The shares had been trading in the 50 to 60 dollar range, like privately owned, like private secondary markets for most of the year. But when they announced the pricing, they said it was going to be thirty eight, forty two dollars. And everyone was like, wow, that’s a lot lower than I could have sold my shares for in March or April. And then they priced at the lower end of that range at thirty eight dollars and then immediately dropped down to thirty for the public markets don’t seem to have faith in Robinhood and that seems to be echoing. I’m going to just come out and say like what most of the press thinks about Robinhood as well as the penny finally dropped here. I mean, it’s still worth 30 billion dollars, right?

S3: I don’t think so. I think long term, it’s still a question mark. How this company does remember the Facebook IPO. I mean, it was disastrous in its own way and it was

S1: even more disastrous.

S3: Yeah. And Facebook is totally fine. It’s good. We don’t know yet, but we can speculate. I think Robinhood let a lot of its users get access to its stock and they all got screwed when the stock fell in the first day of trading because I think a lot of them sold right away. It’s it’s maybe not clear yet. So I feel like it does send this message where Robinhood supposedly is supposed to be the champion of the little individual retail investor. It gives all these little guys a bunch of stock and the stock goes down right away. Seems like that’s a problem with their investors.

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S1: Sold the little guys a bunch of stock at thirty eight dollars a share, didn’t give them the stock it sold for them, and then they lost money and like the name of the company. Right. Just to make this all the way more explicit than it needs to be. The name of the company is Robinhood. It is named after this mythical man who would take from the rich and give to the poor. Now, Robinhood, the company took from the little guys and got thirty eight dollars per share from a lot of its own customers. We don’t know exactly how many, but a lot. And who was on the other side of the trade? Who was selling those shares? The answer is Vlad Tenison Biju Bet, the founders of Robinhood. They were both selling like fifty million dollars each of Robinhood stock at thirty eight dollars a share. So we are literally having a situation here where the multibillionaire founders of Robinhood, they are receiving the money from the poor retail investors who are losing money. It is the most anti Robinhood narrative you can possibly imagine.

S3: It’s like founding a democracy and saying all men are free while having slaves. It’s very similar. No one lives up to their ideals at first. Right. So TBD, I do wonder if other company is seeing this will pull back on that strategy of offering their customers shares before IPOs and things like that?

S1: Yeah, that’s a good question. I have a question for Cesari here, though, which is the dream of the super app, right. In the United States. It’s Robinhood or Square is obviously trying to do the same thing in Europe. It’s resolute, wants to be the super app where you do everything financial in one app. So far, no one seems to have achieved this super app dream in Europe or the United States, but they exist in China. So my question is, is there something unique about China in terms of like there weren’t really incumbents or something like that that makes super apps possible in a way that they’re not possible over here is actually possible? Is it is it a reasonable dream for someone like Ravel or Robinhood or Square to dream that they could be a super app?

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S2: Yeah, you’re right. There is a lot more of sort of cross pollination across these different platforms and services in China and apps that operate here where you’re not just going to be using one app to communicate. You’re going to use it to communicate with other people to have chats. You’re going to use it to shop, you’re going to use it to live stream. You do see a lot of that happening in tech platforms here as to why I think, you know, because first of all, to our earlier discussion, I mean, who knows whether that will change depending on how the regulatory framework evolves. Right. But I think, you know, regulators have wanted to see China and Chinese companies do, well, prosper. And basically they want to become a superpower. So they want to have companies that are really leaders in their field. And I think that’s part of why you’ve seen these companies be able to experiment to do things differently here, whether it’s possible to do it in the United States. I mean, it just depends on how the regulatory frameworks there. Will evolve, and I think consumer tastes will also have to play a part it as well. Consumer tastes in the sense that, you know, not everyone is used to going it alone. What’s happened may be doing your shopping on WhatsApp. Can you get people used to doing that sort of thing? In that sense,

S3: I feel like if any company is going to have a super app, it would be like an Amazon or something, a place where you’re sort of already used to buying tons of stuff from them. If they offered banking, even though no one likes Amazon, I theoretically everyone uses Amazon and really trust them. So that’s the place, not Robinhood.

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S1: And yet what we have seen, if you look at the real tech giants, who would you. Absolutely right. The best place to do this, if you look at Amazon, if you look at Google or even the iOS ecosystem in Apple, they have all been very wary of moving into financial services for what I consider to be incredibly sensible and good reasons like this is an extremely regulated industry is Robinhood has found out to the tune of hundreds of millions of dollars in fines. You can’t move fast and break things if you are in financial services. You need to be completely reliable. You need to be 100 percent on board. You need to be happy with regulators, second guessing everything. You need massive compliance department. And, you know, I just read a story we just saw this week, the massive report on Credit Suisse, which didn’t have internal controls to stop itself losing five and a half billion dollars to Ichigo’s, another Hong Kong. But yes, all roads lead to Hong Kong, all roads lead to Hong Kong. But, you know, it’s really hard to do financial services. Well, it is not something that tech companies really have a comparative advantage at. And so that’s why I’m sort of long term bearish on the idea of a super app or the idea that financial services are going to be become part of the tech industry. I think they’re very different industries.

S3: I think that’s right myself.

S2: Yeah, but they do have certain advantages, right. In terms of being more nimble and being able to do things faster, more easily. I mean, just from my experience here, if either of you move to Asia and set up a new life here in Hong Kong, I can tell you it’s just so much easier to get on a fintech platform like pay and pay bills with that than to try to process that using a traditional bank. I mean, just it’s amazing the speed with which the payments technology here works when you’re dealing with nonbanks, banks versus traditional banks or how long it even takes you to open up a credit card or do those things. I mean, banks are still operating because they’re so heavily regulated, right. They still operate at a different speed, in a different frequency than some of these tech platforms. So I think that’s a distinct advantage. That’s something that isn’t unique, I think, to China. I think it’s just everywhere around the world. When you’re dealing with small upstart competitors, if they can figure out how to do things quicker and better and faster, I think they’re going to give banks run for the money. And certainly in some

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S1: sectors, you know what? Being able to open the bank account easily means? It means unemployment would probably go.

S2: Yes, exactly.

S1: So we have a wonderfully circular show this week. Truly, do we have to close the circle? So let’s do that with the numbers around Emily that you bring a number this week?

S3: I have three numbers and my Google doc, but one, I guess I most want to talk about is, of course, fifty million dollars. What’s that? That is the amount of money that Scarlett Johansson is suing Disney for.

S1: Oh, yes. I love this

S3: story. I was thinking like emailing you guys this morning being like, please, can we just talk about this? So Scarlett Johansson, a.k.a. Black Widow, who has the big Marvel movie this summer, is suing Disney because Disney released the movie in theaters and on Disney plus simultaneously. And that messed up Scarlett Johansson deal with Disney, which she gets fifteen million dollars off the jump and then she gets a big share of box office. But the box office was only eighty million for Black Widow because you could just watch it on Disney Plus and it’s much more convenient and we’re in the middle of a pandemic. And so this is interesting because it’s Scarlett Johansson and Black Widow, which is just obviously interesting to me and millions of other people who watch the movie because

S1: you spent the pandemic watching every single Marvel movie, right? That’s correct. And just for the record, in the pantheon of Marvel movies, where does this one stand? Is it like fair to middling?

S3: Yeah, I would say it’s like high middle. Like Scarlett Johansson really isn’t the highlight of this movie, even though it’s named Black Widow. It’s really Florence Pugh who plays her sister basically and is like just a delight and also. OK, so to get back to you discussing this, which I’m sure you’re all very interested in, two things. It’s interesting because Disney plus and streaming, thanks to the pandemic, has sort of like really changed and moved forward more quickly. The change in the in Hollywood and the film industry where things are going to get released on streaming earlier and earlier. And that changes the financial equation for these big stars who in recent years have been getting all this money from box office. So this is going to be something where there will be more conflict going forward. It’s also interesting to me because the Marvel Cinematic Universe is very it’s very heavily male and. Patriarchical, and there’s been a lot of criticism because in the Marvel Cinematic Universe, Scarlett Johansson as character, this isn’t a spoiler because a lot of people already saw this movie has died already. And the chronology they waited so long to make a Black Widow movie that her character in the universe died before they got around to making her movie, which I think is just like really insulting.

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S1: But also that gives her the opportunity to sue. Right. She wouldn’t be suing if she had a whole bunch more movies coming back. I’m dead anyway. So, I mean, 50 million, even though the counterfactual that the lawsuit is based on is basically like if you weren’t streaming it, then like 10 times as many people would have come out to see the movie in the theaters and I would have 50 million dollars on my share of the box office. Gross. Which no, if you didn’t stream it like maybe some tiny fraction of the people who streamed it would have gone to the theater, but not nearly enough to make Gojo 50 million dollars. That’s clearly a massively exaggerated figure given the pandemic that we’re in. It’s sort of pre pandemic, Max, I would say, and I’m one hundred percent sure that this lawsuit is never going to make it into open court and they’re going to just settle quiet.

S3: No, they’ll definitely settle that. I would push back a little because the 80 million box office was a pandemic record and I personally would have gone to the theater to see this movie. And I think my whole family would have to, even though we all know they don’t want to go to the movies. And I think a lot of people would have gone and seen it. So maybe she might get the full 50, but she’ll settle for some amount. She’s got these emails where

S1: she’ll make like twenty five.

S3: Yeah. Oh. So she’ll be OK with her, with her new husband from Saturday Night Live and their babies on the way. So they need that extra 50 million to be OK,

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S2: especially as we said earlier.

S1: It’s expensive man. My number is five hundred and thirty million, which is a number that comes out of the report. The Credit Suisse make public into its arc, goes first to Clark, and it’s my favorite number in the report. The report is one hundred and seventy pages long, but it’s worth at least skimming. But there’s this number which is associated with every Credit Suisse client. They call it p e, which doesn’t stand for private equity. It stands for potential exposure. And they’re like, what is up is one one way of saying, like, how exposed are we to this client back in August, twenty twenty, which is like six months before the blow up, a few months before the blow up. Anyway, Credit Suisse calculated as P to go five hundred and thirty million dollars. Now they actually had a limit. They had a whole deal with the OCC, US the Ichigo’s could not reach its limit. The limit was twenty million dollars. And somehow, even though the limit was twenty million dollars, they allowed this number to go up to five hundred and thirty million. And what did they do when they saw that the limit, the number we had reached. Five hundred and thirty one. It was not meant to go above twenty. Absolutely nothing. They did nothing at all. And the sort of excuse they gave themselves for doing nothing was we kind of changed the way we are calculating p e we don’t really trust it any more. So probably it’s just like a yeah, we we don’t need to pay attention.

S3: People with money get away with so much stuff, you know. Oh, you’re risky, but it’s fine.

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S1: Yeah, it’s fine. Cesari what’s your number.

S2: My number is sixty eight percent and that is the number of initial claims. If you were to do the math in terms of the initial jobless claims that states reported from March to December of twenty twenty, if you were to take that and calculate as a percentage of the US pre pandemic labor force, which was around one hundred sixty four million right before the pandemic, it gets about sixty percent. So basically we have a number that indicates to you that there was just so much demand for unemployment insurance that somewhere along the lines of two thirds of US workers were applying for unemployment insurance. Now, obviously, every claim isn’t unique. There are some innocent explanations for this. If a person loses their job more than once during a given year, and we know that obviously there was a good amount of churn in the labor market last year with the pandemic, then they can legitimately file for benefits again. And that will get counted as an initial claim. But the figure itself, the reason I calculated this is because I wanted to see just basically to get a gauge of like, OK, we know there’s just been a ton of applications for unemployment insurance. Putting that number in some context, what does it come out to? And it’s just shocking figure when you compare it against the labor force. And then when you drill down into state by state data, I find that there were several states where just from March to December of last year alone, you had five states where the initial claims outnumber the entire labor force of those states. So that’s when you start thinking to yourself, you know what, we know the pandemic was bad, but it wasn’t that bad, right? It wasn’t so bad that literally more people than you have in your state were in the workforce more if you have more people filing for unemployment insurance than you have actual. Labor force people in the labor force, and that’s a problem, right, that shows you’re getting some excess claims from somewhere. And we know now with the benefit of hindsight, that a good amount of that was obviously these fake unemployment insurance claims. And so that was some data analysis that I did for the project, which is still fresh on my mind. And I wanted to share because when I started doing a reporting, one of the first things I wanted to figure out is, is there a way to quantify it? And unfortunately, because the data is in public unemployment insurance claims, you can’t get them under Freedom of Information Act request or anything like that, you would have to make a lot of assumptions to try to figure out a figure. So instead, what I wanted to do was some contextual analysis about how much demand was there for unemployment insurance and did it seem weird? And the answer is clearly yes. I mean, it was so much more demand than people who are actually out of jobs that clearly there were some fake claims being filed. And that’s certainly what we’ve seen.

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S3: It’s like it was the heist of the century, but it would make the worst movie right now. No doubt, this movie. I want to know how to tell the story. Maybe you would Cezary

S1: do you have the film rights to do your story if you if you had interest

S2: yet? But if someone does if you do make a movie out of it, I mean, it actually wouldn’t be that bad, to be honest. Like you would have people all around the world to have this guy from Nigeria. Right, by being arrested at JFK, by FBI agents just about to board a plane bound to Lagos. You know that there would be some action.

S1: Can we take him Scott, Joe, and just make sure we have to go right ahead of time and make sure that you just pay her upfront instead of promising him a percentage of gross? Because no way is she going to do this for a mere 15 million dollars. Come on, people. So so thank you honestly so much for it is I have no idea how data is in Hong Kong right now. As we were getting 13 IPO. Oh my eleven thirty nine pm on a Friday night. This is what society Podkul does for fun at eleven thirty nine pm on a Friday night. We are super, super grateful to you for coming on and having this awesome discussion. Many thanks as well to Jessamine Molli for producing this international episode of Sleep Money and coordinating. Everything has been fabulous and thanks to everyone, all of you guys for writing in the email address is Sleep Money, Sleep Dotcom. Let us know what you want us to talk about and we will be back on Tuesday with another slate. Money goes to the movies. We’re going to be talking about Glengarry Glen Ross with the great Mary child that will be back next Saturday with another sleep money. So, Cesari, we have a bit more to say about Robinhood, which is this whole issue of payment for order flow, which is how Robinhood makes all of its money. There is a bill marked up in front of the House Financial Services Committee right now which would abolish it as a practice. And that could be an existential risk to Robinhood and could be one of the reasons why its shares are underperforming. What is your opinion of this practice of payment for the flow? Because I kind of like it, to be honest.

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S2: You’re absolutely right. I mean, that’s a huge regulatory risk for them. If Congress bans payment for order flow, which is where they take their retail customers order flow and they send it to a company like Citadel Securities or Virtu Financial for execution, and then they pay them for that flow. If that industry practice gets banned, then obviously they’ll have to come up with a whole new business model. And that will probably not only endanger their existing business, but just the dreams of becoming kind of the app for everything. Money, right? It’s certainly I mean, it’s it’s a practice that’s drawn a lot of scrutiny because it gets to the question of do customers actually get the best execution on those trades? Are they getting the best prices? Are we better off or worse off? Those questions are still questions to which we frankly don’t really have firm answers. There’s a ton of lobbying around it, but I feel like we have we ask

S1: relatively good answers to those questions, at least with regard to Robinhood Robinhood accounts. The overwhelming majority of them are tiny and they nearly always get what’s known as price improvement. There is an official best bid and best offer in the market. And when you place a trade on Robinhood, you nearly get if you’re buying, you almost always buy below the best offer. If you’re selling, you almost always sell above the best bid. So you’re you’re already doing better than the best bid or, you know, the best quotes on the tape in the stock market. So that’s pretty good to start with, given the. Yeah, theoretically, you could probably do better still if you traded closer to the midpoint. But the amount of price improvement you get, if you do better still is measured in sort of fractions of a penny. And given the size of these trades on Robinhood, it’s negligible amounts of money now, negligible amounts of money multiplied by millions and millions of trades is Robinhood bread and butter. But it’s worth noting that Robinhood if you look at where it makes its money, it basically doesn’t make any money on stock trading. It makes all of its money on mostly options and a little bit of crypto options and crypto of both much, much bigger in terms of revenue sources for Robinhood than stocks are really honestly, stocks are basically a loss leader for Robinhood. And I’m not worried about payment for order flow. I don’t think it’s bad for Robinhood customers in the stock realm. In the options realm, it’s a little bit it’s a little bit different as like what would happen if payment for the flow was abolished? My guess is that Robinhood would just become a market maker itself. Right. It would try and internalize a lot of those trades, which, you know, yeah, it would lose that revenue source. But given that they’re not making that much money from stock trades anyway, I don’t know how existential of a risk it is.

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S3: Wasn’t is it one of the criticisms of the way Robinhood? Oh, I guess you kind of explain this, but I always thought the criticism was because Robinhood makes money from payment for order flow instead of making money from its users. It’s incentives are misaligned and that’s why it pushes people to trade a lot. One of the things for them. So that’s a

S2: concern. Yeah.

S1: Yeah. This is the real problem with payment for the problem, which people think they have with payment for the flow. It’s like, you know, Citadel is front running retail investors and making money off them. And that’s bad for retail. And we should be upset about this. And that’s kind of bullshit. The real problem with payment for the flow is it gives Robinhood an insane financial incentive to maximize the amount of trading that it’s going to do. And we have decades and decades of empirical research basically saying the less you trade, the more money you make. That is entirely against the interests of its customers. If you if you want your customers to do as well as they possibly can, you want to incentivize them to not trade. And instead, Robinhood has an incentive to make them trade and not only to make them trade a lot, but specifically to make them trade options and crypto, which is where it makes the most money. And so that’s why you see so many Robinhood customers trading a lot of options and crypto because that’s what they’re being pushed into by Robinhood, even though, again, obviously you’re never going to make money trading options and crypto.

S3: Yeah, and I guess we should have mentioned in the main or maybe we should never the amount of money Robinhood makes off crypto is something that scares, I think, institutional investors.

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S1: And like a large chunk of it’s like it made a small profit in twenty twenty, but it wouldn’t have done if it wasn’t for Dogecoin. For Dogecoin is going to stick around

S3: for off of a joke. That’s a problem.

S2: Yeah, if that’s your main profit source, then that’s worrying.

S3: Certainly it would seem so, although I mean, everyone loves crypto right now. Still, I think, except the guy who invented Dogecoin who went on a whole rant about why crypto is bad. But that’s for another episode.

S1: We will have a whole crypto episode coming up on state money in mid-August. That’s coming. But for the time being, thanks for being a slate plus listener.