Cryptocurrency, Coinbase, and Contagion (Feat. Jim Chanos) – Crypto Critics' Corner

Today Bennett and Cas are joined by the absolute legendary shortseller Jim Chanos (who successfully shorted Baldwin-United, Enron, and Luckin Coffee) to talk about his thoughts on cryptocurrency, shorting, Coinbase, and other economic woes and fears. If you want to follow Jim on Twitter, find him at https://twitter.com/WallStCynic This episode was produced by Griffin Davis recorded on Friday, May 20th, 2022.

In this episode Bennett Tomlin and Cas Piancey are joined by legendary shortseller Jim Chanos to discuss his legendary shorts, his thesis on Coinbase, and why this is the golden age of fraud.

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Other episodes mentioned in this episode:

• Episode 15 – Revisiting Enron with David Z. Morris
• Episode 5 – Two Pie Charts and a $60 Billion Stablecoin
• Episode 38 – The World is a Ponzi Scheme, You Just Live in It
• Episode 25 – Remembering Fraud: WorldCom
• Episode 60 – The Foul Financials of Cryptocurrency (Feat. Francine McKenna)
• Episode 71 – Terra, Luna, and Algorithmic Stablecoins
• Episode 72 – We Never Want to Discuss Terra and Luna Again…and yet

Resources from this episode:

• Cas’ article on Michael Saylor

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English Transcript:

00;00;05;16 - 00;00;13;06
Cas Piancey
Welcome back, everyone. I am Cas Piancey, and I'm joined as usual by my partner in crime, Mr. Bennett Tomlin. How are you today?

00;00;13;19 - 00;00;15;03
Bennett Tomlin
I'm doing great. How are you?

00;00;15;15 - 00;00;26;28
Cas Piancey
I am enthralled because we have just an incredible guest today. We have Mr. Jim Chanos. What an absolute pleasure to have you on. First off, how are you?

00;00;27;17 - 00;00;31;23
Jim Chanos
I'm thrilled to be here. Guys from the crypto capital of the United States, Miami Beach.

00;00;32;17 - 00;00;58;24
Cas Piancey
Oh, wow. Yes, indeed. If anyone, for whatever reason, is unfamiliar with Mr. Chanos's he's been at the forefront of just about every fraud that has happened over the past, I don't know. 30 years or so. He called Enron before it happened. He called Lufkin before it happened. He called out the Chinese frauds about a decade ago, before that all collapsed.

00;00;58;24 - 00;01;24;18
Cas Piancey
We want to have him on to talk about the cryptocurrency space, maybe Coinbase, maybe some publicly listed cryptocurrency companies. His thoughts on the market overall To start, though, Jim, I wanted to talk about your first short ever, which I actually was unfamiliar with, or you're the one that put you on the map, which was you Baldwin United you short.

00;01;24;18 - 00;01;38;03
Cas Piancey
If anyone is unfamiliar with this company, it was a piano a piano company turned investment firm. And this is in the eighties. You basically called bunk on this and it collapsed shortly thereafter. Can can I get an understanding of how you found yourself there?

00;01;38;08 - 00;02;03;13
Jim Chanos
Yeah, it was it was it was the old Baldwin Piano Company, and it had morphed by the early eighties into a financial services conglomerate focusing on selling annuities to to little old ladies through Merrill Lynch and a number of other big firms. And it was it was basically a roll up and it was using insurance company funds to buy the other companies, which is usually a no no.

00;02;03;28 - 00;02;33;19
Jim Chanos
And it was hiding some pretty bad performance because it was paying out 14% on the annuities and they weren't earning anything close to 14% on the underlying businesses, which is going to be eerily similar to something we'll talk about later. And and they papered it over with bad accounting and the whole thing was sort of a shaky edifice and came tumbling down when, when the insurance regulators moved in sort of belatedly and shut it down.

00;02;34;13 - 00;02;40;06
Jim Chanos
It was the largest financial bankruptcy the United States history up until that point 1980 to 83.

00;02;40;18 - 00;02;57;22
Cas Piancey
Right. It was, it was $9 billion, something like that. So. So you you run Kynikos and you have two different two different funds in Kynikos. So I'm getting that correctly. You have one that's short for as a hedge for your clients. And then you have one that's usually always long. And I'm getting that right.

00;02;57;22 - 00;03;07;03
Jim Chanos
It's a hedged version of the short fund. So we have that. We have basically the same two short portfolios. One is hedged. One is not Got it.

00;03;07;03 - 00;03;25;22
Cas Piancey
OK, so given that, I guess I'd love to now hear your thoughts on the cryptocurrency space shorting in the cryptocurrency space, the risks involved in shorting in general. I mean, I think most people probably shouldn't get involved in shorting. I assume you would agree with that, right?

00;03;25;24 - 00;03;47;25
Jim Chanos
I mean, it's not for everyone. We do it for primarily institutions and high net worth family offices. And the idea the idea is, is that a portfolio of well selected short ideas of sort of flawed business models and flawed companies allows you to be more long. It allows you to stay long and things that you might find to be good value or the broad market.

00;03;48;08 - 00;03;59;17
Jim Chanos
And so I somewhat jokingly say I'm in the insurance business. A good short portfolio allows you to insure your long portfolio, hopefully get a positive return.

00;03;59;28 - 00;04;16;29
Cas Piancey
My godmother gets really offended when I talk about shorting and how it's actually beneficial for for the system. She consistently says that short sellers are value destroyers and that there there really is no purpose for them. So it's it's interesting. I would love to hear a defensive of short sellers.

00;04;17;00 - 00;04;44;10
Jim Chanos
Well, first of all, first of all, short selling is is basically everywhere in the world of commerce. Anybody that sells you something for cash up front to deliver goods and services in the future is short selling you. And so a farmer who's selling his crops forward because he likes the price he can get for corn and short selling an airline that's selling you advanced purchase tickets is shorting you a seat.

00;04;44;15 - 00;05;08;03
Jim Chanos
And probably the biggest short selling scheme of all, which has been totally crucial for the rise of modern commerce in the last 500 years, is insurance. Insurance is a giant short selling scheme where you basically pay premiums upfront for possible benefits to be delivered in the future. In the case of adverse developments. So, you know, that's the big picture.

00;05;08;19 - 00;05;44;08
Jim Chanos
Obviously, people take it personally when people in public markets express a difference of opinions by shorting stocks or bonds. But I will say the one positive thing that's undeniable in the public securities markets is that short sellers are the only group incentivized real time to ferret out fraud. And the SEC has opined on that. That's a crucial function in the marketplace, that short sellers are sort of unique in terms of of their incentivization to to to do that.

00;05;44;19 - 00;05;56;24
Jim Chanos
You know, I've always joked that short sellers and journalists are financial detectives, and the regulators in law enforcement are financial archeologists. They'll tell you with great clarity what happened ten years after the fact.

00;05;57;07 - 00;06;10;10
Bennett Tomlin
That is their specialty. So in your personal story, was there something that motivated you or was like the point where you made the decision to start trying to find and identify these frauds and short them?

00;06;11;05 - 00;06;38;09
Jim Chanos
Well, I used to joke that I was dropped on my head at birth, but it was I think it really was it was serendipitous because the first major idea I looked at, which was Baldwin United as a young analyst, turned out to be a fraud. And I think that was just luck. And it but it basically gave me an opportunity to market my research because nobody was putting out fundamental short research back in the early eighties.

00;06;38;23 - 00;06;53;07
Jim Chanos
And so it gave me a chance to sort of carve out a market niche institutionally in Chicago, in New York. And so I just took it as a piece of good fortune to sort of build a business around it. I had no predisposed issues. You know, other than that.

00;06;54;08 - 00;07;07;18
Bennett Tomlin
We've talked about Enron previously on this show. And you famously short sold Enron all the way through 2001 What initially drew your attention to Enron and convinced you it was a worthwhile short?

00;07;07;26 - 00;07;27;23
Jim Chanos
So interestingly, there's a tie in to Baldwin United I had I got a phone call in I think it was September of 2000 from a friend of mine who ran a hedge fund in Texas. And he'd asked if I'd seen the Texas Wall Street Journal that week. And of course, I hadn't. And so he said, well, you're going to love this.

00;07;27;23 - 00;07;59;01
Jim Chanos
I'm going to fax you the article, because back then the Wall Street Journal had regional regional editions, and it was an article by a guy who I ultimately hired and became one of my analysts for years, a great guy by the name of John Wile, and he was the accounting columnist for The Journal, and he had written a Hurt on the Street that was only in the Texas edition about how Enron had lobbied successfully, along with some of the other energy merchant banks, for a fairly aggressive accounting treatment of their energy derivatives.

00;07;59;15 - 00;08;30;09
Jim Chanos
Inappropriately called mark to market. It was really marked to model accounting, where they were allowed to basically take the present value of all the expected future profits into the PNL when they did the deal, as opposed to doing it in stages as as profits were earned. And that was something that Baldwin United had used in its annuity accounting back in 82 that enabled them to to frontload inappropriately too much profit from their policies.

00;08;30;19 - 00;09;06;22
Jim Chanos
And so it immediately set off alarm bells and I cracked the 1999 ten K for Enron and began to find just all of these disclosures in the ten K in the subsequent ten Qs about these these partnerships that were set up where a senior executive of Enron was the general partner and they did business with Enron. And then all the things we now know about there were kind of hiding hiding in the ten K but, but what really struck me was just how really unprofitable the enterprise was.

00;09;06;22 - 00;09;31;13
Jim Chanos
It was it was seen as this great innovative company. And by our calculations it was earning about 6% on its capital below its cost of capital. And so it was a very, very sort of my partner at the time said it was an energy hedge fund, you know, sitting on top of a pipeline with crappy returns. And so the more we dug, the more, you know, things started coming out of the woodwork.

00;09;31;21 - 00;09;33;11
Jim Chanos
But that was fall of 2000.

00;09;34;04 - 00;09;45;23
Bennett Tomlin
And for audience who might not be aware. Could you just briefly explain what mark to market is supposed to be and what this what you refer to as mark to model was that Enron was doing was. Yeah.

00;09;46;10 - 00;10;07;29
Jim Chanos
So it ended up it ended up going from Baldwin United to Enron to the Global Financial Crisis, because mark to model is what got the big banks and investment banks in trouble in 07 and eight. In theory, if you're a financial services firm and you have marketable assets, you should be marking to market your assets and liabilities That's the way it should be done.

00;10;08;09 - 00;10;34;25
Jim Chanos
The problem becomes when you have illiquid hard to value assets and there's no public market there's no like a share of IBM or a Treasury bond where you have a national pricing feed and everyone can agree, you know, at the close of business every day what the price of that asset is But if you're Enron and you have a ten year derivative with Intel to provide them electric power at certain prices, what's that worth?

00;10;35;01 - 00;11;14;13
Jim Chanos
Right. I mean, you know, you have to make assumptions on and on electricity pricing, on interest rates, on volatility. And, you know, even then it's sort of you know, put your finger up in the air and kind of guess. And more and more companies, as we saw in the global financial crisis, ended up with, you know, mortgage backed security equity tranches that they couldn't value and they couldn't sell that were multiples of their equity And that was the crisis when Street began to worry about the valuations of these hard to value market model, you know, derivatives on mortgages.

00;11;14;22 - 00;11;29;05
Jim Chanos
Well, Enron did that in energy in 2000 and Baldwin United did it in insurance in 1982. So it's an area fraught with with risk if you're not properly and conservatively accounting for these assets.

00;11;29;23 - 00;11;54;25
Cas Piancey
I think Bennett and I were both kind of nodding and laughing to this because it's so familiar to us what you're talking to talking about I guess I'll just name names right now when when I say that tether the one to one back to stable coin. Yeah seems to have billions and billions of dollars of assets that no one is sure of and that could be liquid, could be illiquid.

00;11;55;18 - 00;11;59;09
Cas Piancey
It just it sounds mighty familiar to what you're referencing with with Enron.

00;11;59;14 - 00;12;19;24
Jim Chanos
Well, I mean, the way I would describe tether and you guys know better than I do is it's if you're outside a door that's red hot or the doorknob is, is you know, red hot to touch the door itself is is is hot. There's smoke coming out from underneath the door. And and yet they're telling you nothing is wrong inside the room.

00;12;21;07 - 00;12;44;24
Jim Chanos
That could be. But boy, oh, boy. You know, there's an asymmetric sort of situation here. If that's not the case and the fact that they could just simply open the door and show you that there's nothing wrong by way of an audit appears to be something that they are studious avoiding the investment world is full of probabilities. There are very few certainties in the investment world.

00;12;45;10 - 00;13;06;23
Jim Chanos
And so you can only look at things and say, OK, what what are probabilities and what are my payoffs under various different outcomes? And, you know, the best, you know, under tether is that it's worth a dollar The evidence seems to be that there's a lot of funny stuff going on and that if it's not worth a dollar, the outcomes are really negative.

00;13;07;04 - 00;13;13;08
Jim Chanos
And that's just a really bad setup for people that are depending on tether and the crypto space.

00;13;14;01 - 00;13;27;20
Bennett Tomlin
Talking more broadly about the crypto space, you recently announced that you or it was recently reported that you are shorting Coinbase. Yeah. What made Coinbase an appealing short.

00;13;28;17 - 00;13;50;28
Jim Chanos
So Coinbase was not a call on crypto prices. It was a call on on what we thought was a sort of ancillary predatory business model. And what do I mean by that? Well, when you get things like crypto, I mean, to me, a lot of the endgame in crypto is just simply sucking fees and ripping off retail clients, right?

00;13;51;12 - 00;14;13;28
Jim Chanos
That at the end of the day, that's what crypto is all about, in my opinion. And so when when crypto when Coinbase went public, we sort of looked at this thing and couldn't couldn't get our hands around the valuation and set it aside. But as Nasdaq stocks began to break in November, December, we revisited it in January, February.

00;14;14;20 - 00;14;43;05
Jim Chanos
And what really kind of struck me was how much they were over earning. This was a company that earned $2 a share in 20, 20, which was not a bad year for crypto. They then earned 17 or $16 last year and of course they're going to lose money this year. But what struck me was that they were the amount of revenue they had relative to the assets that were under their umbrella.

00;14;43;11 - 00;15;10;21
Jim Chanos
And at one point it got as high as 4%. It's now it's now well below that. But, you know, 4% annually on the assets of your clients is just a stunningly large number. Charles Schwab runs a fraction of that sort of 25 basis points and and in the most recent quarter, Coinbase was still well over a hundred basis points.

00;15;11;26 - 00;15;36;27
Jim Chanos
And so there's basically even if you believe in crypto and Bitcoin, what you're going to see is more and more fee compression and commission rates that are just going to go down all the Robinhood and whatever And so the businesses that were feasting on, you know, 304 hundred basis points of assets going down to 100 and probably 50 basis points.

00;15;37;29 - 00;16;18;19
Jim Chanos
Coinbase isn't making any money at at 150 basis points. It's not going back up. And they've told you that. So this is a company that's probably going to have to cut costs as we now know they're doing, you know, faster than revenues because they're losing or losing money at a reasonably prodigious rate right now. And so I think that that's, that's the real problem and money losing broker dealers, if you witness Robinhood, generally trade at one to two, one and a half times tangible book value and the tangible book value right now is in the low twenties at Coinbase.

00;16;18;27 - 00;16;30;16
Jim Chanos
And by the end of this year, it'll be in the mid-teens. So this is still a stock trading between six and $7. And, you know, it's just tremendously overvalued even here.

00;16;31;03 - 00;16;41;14
Cas Piancey
Do you think that this cost cutting maneuver that they're doing, do you think that, like that is a path in the right direction? Do you suspect this is this is what I would want to see from a company?

00;16;41;18 - 00;17;02;01
Jim Chanos
They have to because the the the metrics they've given us for April are well below even the first quarter for revenues. So, you know, they've got to they've got to slash costs and I think they're going to be behind the curve. Revenues are dropping faster than they're cutting costs. You know, and tech firms don't do well in reverse.

00;17;02;10 - 00;17;21;15
Jim Chanos
That's been my history with them. You know, when they have to start shrinking, bad things start happening. And the other problem you have is, is, you know, the day of reckoning we're going to have I tweeted this out today, the day of reckoning that the Silicon Valley and crypto the crypto companies are going to have when share based.

00;17;21;15 - 00;17;54;02
Jim Chanos
Com starts being counted again. And we saw the news with DoorDash last night that DoorDash is going to start buying back stock to offset the dilution. And this is a real problem. For companies like Coinbase. Coinbase had 350 million of share based comp in the last quarter. That's a billion for that that annualize that that's basically a lot of stock right that that's 20 million shares on a 200 million share base.

00;17;55;10 - 00;18;14;26
Jim Chanos
So so a lot of these companies now are starting because their stocks are down the share based comp is going to start to really be dilutive to their existing shareholders and you know if they have to buy that back to neutralize it it basically means for a lot of companies block is another one where the business model doesn't work.

00;18;14;27 - 00;18;23;21
Jim Chanos
They're not profitable. If you if you include share based comp is a real expense. DoorDash even Salesforce.com.

00;18;24;00 - 00;18;32;22
Bennett Tomlin
Related to this. Do you have any opinions on the other Coinbase affiliated company Circle that hopes to go public via SPAC in the coming months?

00;18;33;02 - 00;19;00;24
Jim Chanos
Yeah. Well, keeping an eye to see if that if and when that comes. And then of course, you've got you've got the whole micro strategy, fun and games and then the miners the miners are now you know, they've gotten killed at a pretty, pretty small cap. MicroStrategy, of course, is the high wire act you know, as it is as Bitcoin is now below his average cost and the core business isn't worth a whole lot.

00;19;00;25 - 00;19;10;07
Jim Chanos
So that's going to be an interesting, you know, an interesting exercise to see how that all plays out. That, of course, is a correlation to Bitcoin.

00;19;11;04 - 00;19;23;18
Bennett Tomlin
And of course, recently he had his his conversation with the SEC about how he needs to account for things and what he's allowed to murck to wear, which again returns to her at the beginning of this conversation.

00;19;24;02 - 00;19;34;20
Jim Chanos
Well, you know, and some people who are listening to this or watching this may not realize that Mr. Saylor had a run in with the SEC 22 years ago.

00;19;35;10 - 00;19;52;06
Cas Piancey
Yeah, I wrote a long article about that, if anyone is interested, because I actually I actually find it fascinating that to me that was a failure ultimately of the FCC, where they they I think they ended up finding well, I don't know who did the books for them. If it was Arthur Andersen, or P.W.C. or who. Exactly.

00;19;52;06 - 00;20;03;09
Cas Piancey
But but they find they ended up finding them significantly more than they find Mike MicroStrategy. And Michael Saylor was allowed to just continue on as CEO, which is like, yeah, I don't know what's happening.

00;20;03;11 - 00;20;30;11
Jim Chanos
So my my opinion on that is, you know, I was knee deep in frauds back then. When the dot com era broke and the bodies started coming to the surface like Enron, like AOL and lots of other companies Adelphia Communications. I mean, there were just so many frauds in corporate frauds, Tyco, WorldCom, literally the SCC and the DOJ you know, were overwhelmed.

00;20;30;22 - 00;21;05;02
Jim Chanos
And then the FBI actually got sidetracked because of 911 and a lot of people that they had earmarked for financial fraud cases got to end up putting on domestic terrorism. And so the government, by the time later, one in early 02 when the SEC was referring things to DOJ for criminal prosecution. And I've I've spoken to DOJ people from that era, they just said we we had so much we just basically told, look, get get civil settlements on some of these we have to pick and choose.

00;21;05;26 - 00;21;10;23
Cas Piancey
Do you feel like there's a similar environment right now in, I guess, all markets?

00;21;10;24 - 00;21;36;26
Jim Chanos
Yeah, I've called this the golden golden age of fraud. And I teach a course on the history of financial market fraud. And one of the themes of the course is that the fraud cycle is is a leg of the financial and business cycle, that the longer the business and financial cycle goes on, the more people's sense of disbelief erodes and they begin to believe things that are too good to be true toward the end of it.

00;21;37;03 - 00;22;05;24
Jim Chanos
Crypto is a wonderful example of that. I think that that and when the bubbles burst, that's when basically since most frauds need new capital they're generally variations of Ponzi schemes. When people ask for their money back, that's when the fraudulent business models come to light. You know, we've had a number like we did in the late nineties. There were some previews Sunbeam, Boston Chicken, you know, some major frauds before the dot com bubble burst.

00;22;06;09 - 00;22;25;16
Jim Chanos
We've also had that with valiant and Theranos and some other wire card here that are sort of previews. But I suspect that if and when this bubble completely bursts, that that the amount of stuff that's going to come out is going to shock people. And particularly we're already seeing it in the crypto space.

00;22;26;00 - 00;22;37;17
Bennett Tomlin
Related to that, what kind of things do you think contribute to making this the golden age of fraud? Is it just a lack of political will or the regulators compromise what what contributes to that?

00;22;37;17 - 00;23;05;04
Jim Chanos
And so, again, there's some recurring themes down through history that a joke that that the the best defense attorney and the harshest prosecutor for these types of frauds is is stock prices. When everything's going up, there's no incentive, no complaints, except for maybe some short sellers who are sitting there throwing stones. But but generally, there's no political will to go after corporate wrongdoing.

00;23;05;16 - 00;23;37;03
Jim Chanos
And it isn't until the public starts losing money in a big way that the mood changes. And since a lot of these types of prosecutions end up being political, that that when the public starts losing money and institutions start, you know, saying, why do we own this? What's this accounting again? That's when you tend to see the regulators and lawmakers and law enforcement begin to get active and and I think this cycle will be no different.

00;23;37;19 - 00;24;00;20
Jim Chanos
The difference will be in the crypto space there. Shockingly to me, behind the curve in terms of regulation and whatever. And I think that's going to be one of the big, big reveals is why didn't why didn't global securities regulators insist upon a global framework for for regulating offerings as securities?

00;24;00;26 - 00;24;21;16
Cas Piancey
I listened to an interview you did with CNBC and you specifically said almost every financial fraud right now is a variation of a Ponzi scheme. And I thought that was really interesting because when I look back at previous frauds that I've been fascinated by, like Enron and WorldCom, I wouldn't necessarily maybe, but maybe you would. I guess that's my question.

00;24;21;19 - 00;24;40;01
Cas Piancey
I wouldn't necessarily define those as Ponzi schemes, right. Like that was accounting fraud in my mind where there are actual assets and liabilities underneath the umbrella, they're misreporting them and they're that's the fraud. The fraud is that they're lying about their financial statements. It's not that there is nothing actually there.

00;24;40;04 - 00;24;40;11
Jim Chanos
Yeah.

00;24;40;13 - 00;24;41;14
Cas Piancey
I wonder if you.

00;24;41;16 - 00;25;03;28
Jim Chanos
I should elaborate on that. So but I it's really Ponzi finance, because even in the case of Enron and WorldCom, they were not really profitable and they needed the capital markets to fund themselves. They were not self-sustaining as they claimed they were. So even even though they were committing accounting fraud at the end of the day, they were dependent upon the markets.

00;25;03;28 - 00;25;27;19
Jim Chanos
And when the capital markets shut down for those companies, they went out of business almost overnight. So that's that's what I mean in terms of a Ponzi some of the greatest frauds had real businesses, the credit mobile Yeh, which built the transcontinental railroad for Union Pacific, you know, built the transcontinental railroad. Right. One of the great engineering feats in modern times and it was a massive fraud.

00;25;28;01 - 00;25;57;04
Jim Chanos
WorldCom, MCI WorldCom helped build out the global backbone for the Internet you know, there's still a massive fraud. Enron had real business. Again, the accounting made it appear to be profitable when they weren't encrypt all. And it actually appears that a lot of these things are actual policies, that there's no real business. They're just simply raising money from new investors to pay existing investors, you know, large, large so-called yields and returns.

00;25;57;20 - 00;26;08;17
Bennett Tomlin
And you'll even see major crypto investors go on like the top financial podcast in the world and just, you know, say that to the world. You don't even really try to hide that fact. It's just going to.

00;26;09;27 - 00;26;32;03
Jim Chanos
Know that interview with Bloomberg by buy SPF. I think we're going to look back and say was was kind of a watershed event. You know, if you took the time to actually read that interview, and I had people who kind of always ask me, well, look what's going on in crypto? I told them to read that interview and they came back to me and said, you know, wow.

00;26;33;11 - 00;26;51;14
Jim Chanos
You know, he said the quiet part out loud. And I don't know if you felt that was going to help his business or what, but there it is there. It's all laid out for you right? There by one of the the crypto kings. You know that this is all really dependent on the asset prices going up. And if the asset prices don't keep going up, this doesn't work.

00;26;52;02 - 00;27;20;20
Cas Piancey
This reminds me of that call with Jeff, Jeff Skilling, where he where he called the analyst under. He's like, yeah, thanks for the question, asshole. It's just this whole space. And when I say space, I don't just I don't even just mean crypto. I mean like kind of like the financial markets for the past few years where I do feel like generally anyone who's been critical, anyone who's been like, wait, maybe we should slow down and think about this stuff has been mocked and thrown to the wayside.

00;27;20;27 - 00;27;32;05
Cas Piancey
And everybody's going to lose so much money if it actually is a market wide bubble. It's troubling and scary for everybody. You've been through this before. What are your thoughts? What are your thoughts about it.

00;27;32;15 - 00;27;57;19
Jim Chanos
For any investor? And I've got to even tell people in my own household about this, you know, just don't invest in things you don't understand. That's first and foremost. And the siren song of of investing in tokens or crypto coins or whatever because someone told you this one's going to go up is just simply like going to the casino and you're not investing.

00;27;57;19 - 00;28;32;22
Jim Chanos
You're gambling, you know, less than zero sum game. And I think that a lot of what what lured people to become investors starting in 2019 and that's when this really started in a big way when the brokerage houses cut commissions to zero and we saw a flood of retail investors come in for the first time to directly invest in securities and coins and they were just simply following momentum right whether it was crypto whether it was GameStop or AMC or whatever it was and Wall Street was just happy to create, you know, more securities for them.

00;28;33;00 - 00;29;02;18
Jim Chanos
At one point in February, SPACs were raising $3 billion a night and I pointed out at the time that was equal to the U.S. savings rate. So 100% of the US savings rate in February 20, 21 was going into SPACs that there's never been anything like that even in the IPO boom of the nineties. 1999. We lost our collective minds in the end of 20, 20 and early 20, 21 and I think we're going to be paying for that for a while.

00;29;03;07 - 00;29;30;01
Bennett Tomlin
Both Cas and I love the movie The China Hustle which talked about a group of short sellers who investigated a variety of different companies in China, which they believed were doing accounting fraud or other types of frauds, and tried to release reports to short them. One of the firms profiled in that is, of course, Muddy Waters, and both you and Muddy Waters recently had a successful short Luckin Coffee.

00;29;30;15 - 00;29;48;11
Bennett Tomlin
But along with that, the SEC has recently warned U.S. investors to be very cautious when investing in these Chinese variable interest entities. Yeah. What are your thoughts on what people should be aware of when investing in these Chinese corporations?

00;29;48;22 - 00;30;18;15
Jim Chanos
So we started warning about VIEs back in 20, 13 and 2014, kind of culminating in the Alibaba IPO, which was the largest IPO in history in September of 2014. And the Alibaba prospectus had just a fantastic section in it about the nature of VIEs. This is what we are is our structure. And what you realized was, was that this structure was set up to entice Western capital into China.

00;30;19;01 - 00;30;37;22
Jim Chanos
You buy shares in a holding company typically in the British Virgin Islands or the Caymans whose only asset is a joke is a piece of paper sitting in a safe that says you have a claim on the profits of the actual businesses in China, but you don't own the businesses in China. You can't own the businesses in China.

00;30;37;29 - 00;30;39;13
Jim Chanos
They cannot be owned by Westerners.

00;30;39;22 - 00;30;40;20
Cas Piancey
And of course not so.

00;30;40;20 - 00;31;11;20
Jim Chanos
So there's no recourse. And the sort of skull and crossbones disclosure for us was the realization that the Chinese Communist Party court system does not recognize the value structure. So if there's any problem and there was in Alibaba's case, when they carved out Alipay and Financial out of it to the detriment of their Western investors, there was no recourse to the management team by the Western investors.

00;31;12;03 - 00;31;40;18
Jim Chanos
And so this is all Kabuki theater if you will. It's just a way to entice Western capital to go into China. But the capital never comes out. So the story I tell was the day after the IPO I was asked to do a the keynote luncheon speech, said my friend at Hyman's Conference in New York for ISI and there were a couple of hundred people in the room, and he wanted me to talk about the Chinese economic model and financial system.

00;31;41;20 - 00;31;59;16
Jim Chanos
So at the beginning of my talk I said, Look, the one thing is you should know all these numbers are official Chinese numbers, but that doesn't necessarily mean they're accurate, just that they are official. And China does publish a lot of data and I picked up this big orange phone book and I said, Yeah, speaking of Chinese data, here's a book full of it.

00;31;59;16 - 00;32;19;29
Jim Chanos
Do any of you recognize this? And there was just silence in the crowd. So I put it back down and I gave my talk. And then at the end of the talk, I said, Oh, by the way, last night we had the largest IPO in history. We had the the IPO of Alibaba, the New York Stock Exchange. Can I see a show of hands?

00;32;19;29 - 00;32;39;03
Jim Chanos
How many of you put in for the stock? Yeah, you know, about 30% of the room or so raise their hands. And I picked up the Orange Book. I said, none of you recognize the Alibaba prospectus. Nobody had read it. And of course, it was it had a it had literally a safety orange cover. You couldn't miss it.

00;32;39;22 - 00;33;04;13
Jim Chanos
And so, you know, it just goes to show that nobody understood what they're buying. They're buying narrative. And Alibaba was the Chinese Amazon, and that's all you needed to know, despite the fact that you didn't own the assets and by the way, you still don't own the assets. That's my obligatory warning to people who say they want to invest in Chinese market through the New York Stock Exchange or Nasdaq or the Hong Kong exchange.

00;33;04;23 - 00;33;15;03
Jim Chanos
I said, that's great, but just understand that it's a shell game. You're just playing, hoping someone takes it off your hands at a higher price. You have no claim on the cash flow. Or dividends of the underlying businesses.

00;33;15;11 - 00;33;37;16
Bennett Tomlin
And as you mentioned, then we discussed in a previous episode with Francine McKenna, who's an auditor, there's a wide variation in the quality of the affiliates of even the Big Four audit firms. And so you can be getting audited financials for these firms out of China that are entirely disconnected from the material reality, which makes it even more complicated to make an informed investment.

00;33;38;03 - 00;34;00;29
Jim Chanos
Right? Yeah. I mean, you're just you're just playing with fire if you're investing in Chinese companies. And there's a reason, by the way, you know, so when we put our big short on in China at the end of 09, the Shanghai Composite was at 3400 and the CI, which is the big ETF, China ETF, the New Yorks was at 40 or 41.

00;34;01;09 - 00;34;25;04
Jim Chanos
The Shanghai Composite is at 3000 now 12 years later. And the Fxi I think is somewhere in the low thirties. So it's the only major industrialized market that's gone down in the last 12 years. And the Chinese economy has probably nominally doubled in that time frame. So, so China is a tremendously dynamic economy, we can argue about that.

00;34;25;04 - 00;34;50;12
Jim Chanos
And I would say it's got tremendous risks because of its real estate nature, but the returns do not accrue to shareholders, particularly Western shareholders. So it is an odd form of pseudo capitalism where shareholders provide capital but get no return and rights either. Yeah, so I mean it's just a mug's game. If you're an outside shareholder in China, you're just you're financing everybody else.

00;34;51;13 - 00;35;02;03
Bennett Tomlin
It's kind of like buying a crypto token, no claim on any underlying or real influence over the thing itself. But if enough other people want it, you might be able to sell it for more yeah.

00;35;02;03 - 00;35;21;27
Jim Chanos
So I keep asking them, I keep asking, you know, on Twitter and elsewhere for anyone to tell me what the economic engine is for, for all of these high yields please explain to me how how you you as an intermediary, are earning enough to pay someone 12% or 20% a year. And I always get these vague answers. Oh, it's a basis trade or whatever.

00;35;22;02 - 00;35;22;11
Jim Chanos
I said.

00;35;22;11 - 00;35;23;09
Cas Piancey
Five Arbitrage.

00;35;23;09 - 00;35;25;04
Jim Chanos
Yeah. Show me the tell me the trade.

00;35;26;01 - 00;35;27;11
Bennett Tomlin
Is you put money in a box, you.

00;35;27;12 - 00;35;27;25
Cas Piancey
Do that.

00;35;28;12 - 00;35;32;26
Bennett Tomlin
And then people come along and they put money in the box. And you take some money out of the box.

00;35;32;28 - 00;35;34;17
Jim Chanos
Now, for best explanation.

00;35;34;29 - 00;35;56;25
Cas Piancey
On this note, I do. I think this is a great segue way because I've been reflecting on the role that Ben and I play in this space. And you've been in the financial markets longer than Ben and I have. And I'm I'm wondering if you I'm sure you've had similar reflections where I think at first I felt like we were, I don't know, like a warning signal or something, just like a flare up in the air or something.

00;35;57;21 - 00;36;20;16
Cas Piancey
But as this has progressed, I feel more and more like our role needs to be educating people. And I feel more and more that financial education as a whole for anybody who's like not in college and looking to get educated about finance is few and far between. I was like obsessed with history. I was obsessed with AP Econ in high school.

00;36;21;15 - 00;36;40;27
Cas Piancey
It didn't matter. Like, it didn't matter that I was obsessed. We didn't learn about frauds. We didn't learn about Ponzi schemes. We didn't learn about any of that stuff unless it was maybe like Enron, maybe, maybe like a page. So I'm just wondering, I've been trying to look within because I can see that this is it goes we go through these phases and these waves.

00;36;41;13 - 00;36;48;03
Cas Piancey
And I just want to think about like, what is the way that less people could get hurt next time we get this greedy?

00;36;48;11 - 00;37;06;23
Jim Chanos
I don't know. History is not a good history. It doesn't teach us very good lessons about that because it just says that every generation has to learn the hard way. And if you think about that, most people, most people of the current generation, we're getting their investment ideas from Tick Tock that last year, you know, it's not a good sign.

00;37;08;07 - 00;37;28;07
Jim Chanos
And I think that this generation is going to learn the lesson just like every other generation has, you know, the hard way by losing money and realizing that the you know, with with high returns comes high risk and you need to understand what you're putting your money into. It's kind of same as it ever was going all the way back to the 1600s.

00;37;28;21 - 00;37;32;16
Cas Piancey
It's depressing you know I, I keep wanting.

00;37;32;16 - 00;37;33;10
Jim Chanos
It's human nature.

00;37;33;10 - 00;37;50;11
Cas Piancey
Thank you. I know, I know. But I think that's I think and I think this is part of crypto in a sense is that I think a lot of these people are hoping they can create a better financial system, make people smarter about how they interact with their money. And I think I keep pushing up against that wall as well where I'm like, I don't think it's necessarily possible.

00;37;50;11 - 00;37;51;26
Cas Piancey
Like this is just how we're built.

00;37;52;07 - 00;38;17;09
Jim Chanos
You created this ecosystem where you're basically preying on the ignorant and, and all of the things. The high minded aspects of crypto and blockchain have been directed at extracting money from these people. So it's become as opposed to this decentralized financial nirvana. It's become a predatory junkyard. And that's the real problem with it.

00;38;17;17 - 00;38;42;04
Bennett Tomlin
That's really been part of my struggle with crypto as of late, like especially in watching like the recent terror collapse, which was the third largest stable coin. We did two episodes on it recently. If anyone wants to listen, because afterwards you had certain people who had been investing in this, selling their investments in this, listing their investments in this on their exchange and come out and say things like, well, obviously this was transparently going to falter.

00;38;42;04 - 00;39;15;28
Bennett Tomlin
Everyone knew that. Right? And like, it was so striking to me because clearly someone did not know that. Like, clearly if it had some kind of value in the marketplace, there were people buying it who were not aware that this was transparently going to falter. And so there's all of this high minded rhetoric. And then as soon as the opportunity exists for them to make the money by exploiting the West knowledgeable, they immediately take advantage of it and then tried to justify it afterwards with obviously this was going to fail.

00;39;16;06 - 00;39;21;08
Bennett Tomlin
You didn't think this was going to succeed, did you? That's crazy. It was paying 20% interest.

00;39;21;23 - 00;39;41;09
Jim Chanos
This is this is why, as I said earlier, this is the big policy failing. I think we're facing right now. If the people behind this were subject to the securities laws, you know, this we would see at least more disclosure. We would see penalties for this kind of thing happening and we would see, you know, possibility of criminal referrals.

00;39;41;19 - 00;40;04;07
Jim Chanos
And you're getting none of that. That is why this is truly a predatory junkyard. As I said, you know, it live there's no laws and there's no regs. And and the policymakers, again, because of fear of missing out and stifling innovation, or letting these giant criminal enterprises rip people off. And, you know, when everything's in smoking ruins, we'll see regulation.

00;40;04;19 - 00;40;26;29
Cas Piancey
I think there's a lot of people who have previously told Bennett and I and other people who are skeptical and critical of cryptocurrencies or or stable coins that we should short them that we should go ahead and make moves in this market to put our money where our mouth is. And I'm wondering if you ever look at these markets and go like, oh, that would be great.

00;40;27;07 - 00;40;38;14
Cas Piancey
But like, do you see it as just even for a short seller, just way too much risk and not absolutely not worth it in these kind of emerging markets? Or how do you feel about so what?

00;40;38;16 - 00;41;03;12
Jim Chanos
So people have asked us, for example, back in 06 and seven, we were very negative on credit and the real estate markets but we did not do the credit default swaps that were highlighted in the Big Short. And the reason we didn't was that we we we reason that if what we thought would come to pass, that our counterparties would go under, that we wouldn't get paid.

00;41;04;03 - 00;41;24;13
Jim Chanos
And in fact, if AIG had not been bailed out, you know, a lot of people that had those CDs that held on to them in September, boy, would not have gotten paid. So the problem you have by being short the cryptos directly on the exchanges or whatever is if this comes to pass, the counterparties are going to be there.

00;41;24;27 - 00;41;52;26
Jim Chanos
And and so there's no civic protection, there's no anything. So the way we've expressed it is is indirectly is via Coinbase. And even then, it's not I think Coinbase is a good short no matter what crypto prices do. But if crypto prices go down a lot, Coinbase will will be in trouble. If you're going to directly short these things on the exchanges, you have to understand that the exchanges could fail themselves.

00;41;53;22 - 00;41;56;24
Jim Chanos
You know, if if your trade comes to fruition.

00;41;57;06 - 00;42;01;19
Bennett Tomlin
And FTA is probably less likely to be bailed out than AIG was just.

00;42;02;02 - 00;42;25;01
Jim Chanos
Well, that's, you know, so one of the first people I teach about my class is one of the most interesting people in the history of finance. A guy by the name of John Law and John Law was one of the first people who kind of thought clearly about the nature of fiat currency. And he wrote a very, very important piece of work, a pamphlet 1705 called on Money and Trade Considered.

00;42;25;24 - 00;42;50;13
Jim Chanos
And he was the first person to basically put forth the idea that money was that by which things were exchanged, not for which things are exchanged, meaning that money did not have to be backed by silver and gold. You could have the power of the state behind it. And this was the first kind of thinking through the concept of a strong fiat currency based on a strong state.

00;42;50;28 - 00;43;29;00
Jim Chanos
Now, though, kings and queens had debased currency, you know, throughout history. But he pointed out that that a country with good laws, good good systems, courts enforcement, blah, blah, blah, could could make fiat work. At first, he said it could be backed by other assets, land, taxation, power, whatever. But he also pointed out something really important. He said that that all types of things work in boom times, but in times of fear people actually want fiat because the state has the power to enforce contracts, adjudicate fraud.

00;43;29;11 - 00;43;47;12
Jim Chanos
And he didn't come up with it, but he actually kind of almost got to the border of saying and also could ensure and I keep pointing out that the whole idea about fiat currency is that in times of fear, the state stands behind your money deposit, you know, your money in the bank, you're not going to lose it.

00;43;47;22 - 00;44;17;12
Jim Chanos
That's not the case in the crypto space. And it's a huge difference. So there are big advantages to fiat structurally that that crypto doesn't have that the crypto people will will studiously avoid talking about. And the idea of to adjudicate fraud and contracts as well as offer deposit insurance or money scarcely big assets that the Fiat world has, we won't know that until people are losing money.

00;44;17;25 - 00;44;44;00
Jim Chanos
And again, we need to see the cycle about that job law also then became the greatest financial criminal of all times in the Mississippi scheme. And that was kind of the SEC, which is why I teach you about it. That's the second chapter of his life. But he was one of the greatest monetary thinkers. He predated Adam Smith and others by by decades in terms of his thinking and he was the sort of the moderate, the father of modern fiat currency.

00;44;45;02 - 00;44;58;20
Cas Piancey
Yeah. Yeah. It's quite, quite a story that he has yeah. I think I mean, I think that that does it. If there's anything else you would like to say before we sign off here, Jim.

00;44;58;25 - 00;45;01;16
Jim Chanos
Please we covered a lot of ground for a Friday afternoon.

00;45;02;25 - 00;45;09;18
Cas Piancey
I agree. What a pleasure to have you on. And you are always invited. It's been amazing. Thank you for joining us.

00;45;09;18 - 00;45;12;09
Jim Chanos
It is my extreme pleasure, guys. And keep up the good work.

00;45;13;18 - 00;45;15;22
Bennett Tomlin
Thank you very much. That was that was awesome. Jim.