Public Breakups: Polymarket, Taxes, SMCI

Summary

Money Stuff: The Podcast – Episode Summary
Title: Public Breakups: Polymarket, Taxes, SMCI
Release Date: November 1, 2024
Hosts: Matt Levine and Katie Greifeld
Publisher: Bloomberg

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1. Polymarket and the Integrity of Prediction Markets

In the episode's first segment, Matt Levine and Katie Greifeld delve into the controversial world of Polymarket, an offshore prediction market platform. Katie initiates the discussion by highlighting a significant incident where a user, identified as "Freddie9999," reportedly manipulated Polymarket’s odds on Donald Trump's presidential chances by injecting approximately $45 million into the system (04:22). This action has sparked debates about the susceptibility of prediction markets to manipulation and the broader implications for financial markets.

Matt responds with skepticism about the ease of manipulating Polymarket. He argues that widespread manipulation would require simultaneous actions on both sides of the market, making it inherently challenging to skew odds convincingly. Matt states, “If you think Poly market's prices are too high, you have to do something about that, which means going to trade on Polymarket and like, you know, that's kind of a pain” (07:05). He emphasizes that the synchronization between Polymarket and traditional financial markets suggests that any shifts in prediction market odds are reflective rather than causative of broader market sentiments.

Katie further explores the interplay between Polymarket and conventional financial instruments, noting that institutions like JP Morgan incorporate Polymarket’s probabilities into their long-short equity strategies (08:36). This integration raises questions about whether Polymarket merely mirrors existing market sentiments or actively influences them. The hosts conclude that while the manipulation narrative is compelling, the evidence leans towards Polymarket serving as a barometer rather than a driver of market behavior.

Notable Quote:
Matt Levine (10:30): “But if you thought Poly market is like a little bit more Trump skewed because it’s crypto people and crypto people are more Trump skewed, that makes sense.”

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2. Navigating Tax-Aware Long/Short Strategies

The conversation transitions to the intricate realm of taxation, where Matt Levine provides an in-depth explanation of tax-aware long/short strategies. At 17:14, Matt outlines the basic concept: investors can strategically position their portfolios to realize tax losses without incurring actual economic losses. By simultaneously holding long and short positions, investors can offset capital gains with losses, thereby minimizing their tax liabilities.

Katie seeks clarification, prompting Matt to elaborate on the mechanics and regulatory boundaries of these strategies. He explains the challenges posed by IRS rules such as the wash sale and straddle rules, which prevent investors from claiming losses while maintaining the same market exposure (20:00). To circumvent these regulations, investors diversify their portfolios by buying and selling similar but not identical securities, allowing them to realize losses legally.

The discussion references an article by Justina Lee, highlighting how affluent individuals employ sophisticated tax strategies to defer or reduce their tax burdens. Matt acknowledges the ethical quandaries surrounding these practices, noting that while they are legally permissible, they often exploit the complexity of tax laws for financial advantage.

Katie brings attention to a perspective shared by Professor David Scheisser of Columbia Law School, who criticizes the extensive efforts devoted to tax minimization instead of societal improvement (24:23). Matt reflects on this viewpoint, comparing tax arbitrage to offering clients a financial product that primarily capitalizes on tax benefits rather than market innovation.

Notable Quote:
Matt Levine (19:30): “In brief, you buy like $200 of the S&P, you short $100 of the S&P, net your long $100 of the S&P. But no matter what happens, you have tax losses.”

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3. Super Micro Computing and the Fallout of Auditor Resignation

The final major topic centers on Super Micro Computing (SMCI) and the recent resignation of its auditor, Ernst & Young (EY). Katie introduces the segment by referencing a scandal involving EY's abrupt departure from auditing SMCI, following a critical report from the short-seller firm Hindenburg (31:07). The resignation was accompanied by a terse letter from EY, expressing loss of trust in SMCI’s management and audit committee.

Matt dissects the implications of EY’s resignation, highlighting its rarity and the severe blow it deals to SMCI's credibility. He compares the situation to traditional accounting scandals but notes that the departure of an auditor in such a confrontational manner is unprecedented. Matt muses, “It’s an incredibly fun and embarrassing thing to have” regarding the public dispute between EY and SMCI (34:50).

The hosts explore various motivations behind EY's decision, pondering whether the firm was genuinely disillusioned by SMCI’s accounting practices or if external pressures, such as the negative spotlight from Hindenburg’s report, influenced their choice. Katie emphasizes the broader market ramifications, questioning whether SMCI's inclusion in indices like the S&P 500 may have been based on unsustainable metrics that are now being called into question (37:04).

Matt also touches on the cultural and operational challenges within EY, referencing recent criticisms of the firm’s internal practices, which may have contributed to their stringent stance on audit integrity (34:24).

Notable Quote:
Matt Levine (33:01): “It could be anything. Then the auditor resigns. Ah, there's no limit. It could be anything.”

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Conclusion

Throughout the episode, Matt Levine and Katie Greifeld provide insightful analyses of complex financial topics, blending technical explanations with engaging discourse. From the vulnerabilities of prediction markets to the sophisticated strategies employed in tax deferral, and the tumultuous fallout of auditor-client relationships, the hosts offer listeners a comprehensive understanding of contemporary financial issues.

Listeners new to the podcast will find the discussions both informative and accessible, enriched by the hosts' ability to demystify intricate subjects. The inclusion of notable quotes with timestamps adds depth, allowing readers to reference specific moments in the conversation for further exploration.

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This summary captures the essence of the "Public Breakups: Polymarket, Taxes, SMCI" episode of Money Stuff: The Podcast, highlighting key discussions and providing contextual insights into the topics covered.

Transcript

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[Matt Levine]

Hello and welcome to the Money Stuff podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I write the Money Stuff column for Bloomberg Opinion.

[Katie Greifeld]

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

[Matt Levine]

What are we talking about today Katie?

[Katie Greifeld]

Well first of all I think we should acknowledge that it's Halloween and we are both phoning it in right now.

[Matt Levine]

In the literal sense and the metaphorical sense.

[Katie Greifeld]

Matt's at home, I'm at my parents house.

[Matt Levine]

Neither of us costume.

[Katie Greifeld]

Yeah but wouldn't it be good if we just heard just sitting here. None of our listeners would see it but we could have just lied I guess.

[Matt Levine]

I took my daughter to get bagels today at like 6am and she was wearing her costume which is she's Wednesday from the TV show And she was like, weird that I'm wearing my costume this early. It was like dark out and this guy walked by in a Where's Waldo costume. I was like, no, that guy is too perfect. Perfect.

[Katie Greifeld]

It's weirder if people weren't wearing their costumes. I meant to bring tattoos to the office, but I forgot.

[Matt Levine]

But you've worn tattoos on television previously, right?

[Katie Greifeld]

Probably.

[Matt Levine]

No, you like, you were like, should I wear these on television on Halloween? And I was like, yes. And then you didn't do it.

[Katie Greifeld]

I almost certainly did not actually do that, but I always slip in a lot of Halloween puns. I talk about a monster rally, a spooky setup for stocks, things like that. If you listen to all two hours of the show, I'm sure it was overwhelming.

[Matt Levine]

Well, I hope you'll continue that during this podcast.

[Katie Greifeld]

Yeah, speaking of overwhelming, what we're talking about today, we're gonna talk about. Yeah, speaking of spooky things, we're gonna talk about Polymarket and what's going on in prediction markets.

[Matt Levine]

Something spooky.

[Katie Greifeld]

Yeah. Manipulation. I don't know. We're gonna talk about Tax Aware, long, short strategies. Matt, you're gonna explain that to me. And then we are also going to talk about Super Micro and Ernst and Young. Okay, cool. Jumping into the first one, Polymarket, this was a fun one. And I don't think you've written about this. I feel like I had to really twist your arm to talk about this today.

[Matt Levine]

Yeah, you, like texted me, should we talk about polymarket? And I was like, no. And then you like, kept texting me until I got mad. And then I was like, well, I'm mad enough about this. We can talk about it.

[Katie Greifeld]

Yeah. And I was like, this is the seeds for a great discussion given that it's 7:30 in the morning and we're so passionate. So Poly Market, it's not based in the U.S. u.S. Investors or better can or.

[Matt Levine]

Okay, it's not based in the U.S. it's not based in the U.S. yeah.

[Katie Greifeld]

So the, the big news was basically that there was one person who was pushing up the Trump odds. His username, I assume it's a man, was Freddie9999. And Polymarket's investigation found that, I don't know, he spent like $45 million and just pushed up Trump's odds. But it seems like financial markets question mark ran with that.

[Matt Levine]

Yeah. There's also news today where like some like blockchain analysis company was like a third of trades on polymarket are wash trades.

[Katie Greifeld]

Yeah. I did see that actually.

[Matt Levine]

So I don't know why is this interesting?

[Katie Greifeld]

So the reason I wanted to talk about this is because, so I am on television every day for two hours and there's been this weird vibe shift in the markets and among investors and analysts talking about Trump's odds going up. Even though polls have been 50, 50 basically since Kamala entered the race. You have seen a Trump trade, at least that's what people have been calling it, unfold in markets. You've seen long end treasury yields kind of skyrocket and the US dollar has had a great month and there's disagreement. Some people say it's just the fact that economic data has been really strong. Other people say this is because Trump's odds have been going up in the prediction markets. So I find that interesting because the Poly market experience has revealed that, know what we're looking at is sort of real time chances of which candidate is going to win the election. It can be swayed pretty easily. I mean, $45 million is certainly not nothing, but it's certainly not a lot of money.

[Matt Levine]

So all these stories about Polymarket being like easy to manipulate just feel to me like wishful thinking in a couple of ways. And like I sympathize because I share the wishes, but like I just don't think I share the thinking. Many people would rather not think that Trump has a 67% chance of winning. And if they could say no, no, this is fake, it's really 58% or 50%, then that would make them happier, which I don't really understand because like you'll never know like what the a priori odds were and in a week you'll know what happened. So it's like being like, oh, this market is fake, it just doesn't really do anything for you. But then the other thing is like Polymarket is a very crypto based prediction market. Although by the way, all of the other non crypto markets have kind of followed Polymarket's odds. But anyway, and people love the idea that crypto markets are being manipulated and are full of wash trading. There's a lot of wash trading in crypto markets. But if you thought Poly market is like a little bit more Trump skewed because it's crypto people and crypto people are more Trump skewed, that makes sense. If you think that poly markets prices are too high, you have to do something about that, which means going to trade on Polymarket and like, you know, that's kind of a pain. You have to like go Buy some crypto. You have to pretend to not be based in the US and so like, yeah, there's like some hurdles to jump through. And it's possible that the people who want to bet on Kamala Harris wouldn't want to go through those steps. But this notion that you're going to like find a secret trick that actually Polymarket as fake. Yeah, it doesn't really do anything for me. No one's found that secret trick. The other thing I'd say is like, you're like, people are making enormous bets in the treasury market based on their assessment of Trump's odds. It's not like treasury traders are idiotically following Polymarket.

[Katie Greifeld]

No, no.

[Matt Levine]

The follow on trades in real financial markets are confirmatory. Right. They're not like, oh, Polymarket has tricked everyone. It's like whatever the vibes are that have shifted on polymarket have shifted in broader markets as well. And so that gives you reason to believe that the polymarket odds are correct not in the sense of like, correct about reality, but in the sense of like, correct about reflecting sort of like roughly the market's view of the probabilities?

[Katie Greifeld]

Yeah. So a couple points there. To your point about like, how does this compare with other prediction markets you look at predict it, for example, which, you know, that's been around for longer than Polymarket, at least in my consciousness. Odds of Trump winning were 60% at least at one point this week. So that's not too out of line with what Polymarket is showing right now on Halloween, showing like 55%. But I think, I don't know, there's like a chicken and the egg thing here, which is. Is Poly Market reflecting and like tracking the odds in the broader market or is the broader market. I'm talking about the treasury market following Poly Market to that latter scenario. I mean, you do have part of the sell side community actually taking Poly Market into account. JP Morgan has these baskets, these long, short baskets that are sort of putting together stocks that are expected to rise in whatever outcome. And part of that model looks at moves that align with Polymarket probabilities. So I mean, people in the actual real markets are using Polymarket as a tool. So I think that's interesting. I'm not even saying like polymarkets being manipulated. I'm just saying it would be easy to affect pricing. Yeah, I guess.

[Matt Levine]

But if you're saying everyone in the real markets is paying a lot of attention to Poly Market prices and they're easy to manipulate, that suggests they're easy to manipulate on both Sides. If you want to be long Treasuries, you can go buy some poly market contracts and move the market significantly. If the story here is true that real investors are reflexively pricing based on poly market odds and that poly market odds are relatively easy to manipulate, which I just like, I don't really believe either of those stories. Not entirely. I don't know.

[Katie Greifeld]

It is kind of a fun thought experiment though.

[Matt Levine]

The thought experiment that I love is like so nevermind Treasuries. The stock of DJT Trump Media is kind of a proxy for Trump's odds of winning and like kind of a bigger one than the poly market markets. And so like people constantly email me like, could you make money by manipulating polymarket odds and then selling DJT on the back of that? And I don't know the answer, but like that's a fun little trade. Like DJT is such a stranger proxy for Trump's odds than the poly markets are and definitely one where there is like real money to be made.

[Katie Greifeld]

DJT has been frustrating to talk about on air because every morning I go to like my most function on the Bloomberg terminal. This is at like 6:30 in the morning and I look at what the biggest moves are. It's been DJT this week obviously. And then I look at the biggest volume and it's also djt. So it's not even that. It's just a couple yahoos trading djt. Like there is serious turnover in djt, which is pretty wild.

[Matt Levine]

Yeah, it's like a good way to express an opinion on his election, which is weird because polymarket is a way to express an opinion on his election outcomes because like there's a contract that pays off 0 or 1 depending on whether he wins the election. DJT is nothing like that. And yet it sort of functions as that, which is in itself a fascinating fact about modern financial markets. Like why is DJT a referendum in his election? It just seems like it should be. So it is.

[Katie Greifeld]

It has Trump in the name, you know, and Trump is running for president. So I don't think it's like, I.

[Matt Levine]

Mean he'll definitely go up if he wins. It'll go down if he loses. Right. So like it's a correct thesis. It's just like why.

[Katie Greifeld]

Yeah, we had Nick Kolas from Data Trek on TV this week and one of the things that he emailed over to the team was on the topic of offshore gambling odds. He said that everyone thinks this is an untainted prediction market. Maybe, but these odds are also affecting financial markets. You look at the peso, you look at bank stocks, you look at yields. Could savvy traders move the gambling odds and trade financial assets for profit? Just like we're talking about? You could spend $45 million to move Trump's odds and then also pair that with a short on like 10 year treasuries. That could have been interesting like three weeks ago. And maybe that's what that French national was doing. I don't know.

[Matt Levine]

I hope that's true. One thing about this, like this market is easy to manipulate argument is like that's true on both sides, right? Like I always thought about this with Libor manipulation, like with Libor manipulation you could just like make up a number and that would affect the value of like trillions of dollars of derivatives. And so people would just make up a number because they were like long these derivatives, they wanted them to go up and so they would like make up a high number. And empirically it turned out that people were doing the same thing on the other side. And so like library was like kind of made up, but it's also kind of accurate because like everyone was doing the same thing and they were trying to manipulate the market on both sides. There's a little of that here too, where it's like you could buy $1 million of Trump contracts and like sell $1 billion of Treasuries and make some money. Like maybe that doesn't tell you which way that bet is being made. And it could easily be made both ways. Right. It's not like the, like real financial markets are moving like that dramatically in response to a 5% shift in the poly market odds. Maybe that trade is worth it, but it seems like a risky trade to do.

[Katie Greifeld]

Well, we'll find out in a couple days or we won't.

[Matt Levine]

We'll never know the correct odds, but we'll know the outcome.

[Katie Greifeld]

Yeah, we'll know how close to reality the poly market odds were, depending on how they shift in the next couple days, I guess.

[Matt Levine]

I don't think we'll ever know how close to reality they were. Either he'll win or he won't. But at no point will we know that he was like 65% likely to win. Yeah, the market will resolve to 100 or 0.

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Taxes Taxes. I need you to just explain this to me. I've read it, I've listened to it, and I feel like I still am not grasping it. Yes, Robot told me all about it.

[Matt Levine]

The truth is that you get to decide for the most part when you get taxable gains or losses, right? So if you have stock and it goes up, you just hold onto it and like, you wait and eventually 20 years from now, you sell the stock, and then you pay taxes on the gains. Or, by the way, a hundred years from now, you die, and it passes onto your heirs, and they never pay taxes on the gains because of, like, basis step up, right? If you have stocks that go down, you sell them right now, and you have a taxable loss, capital loss, and that can be used to offset capital gains elsewhere in your portfolio. So if you're like, you have capital gains, you also have some stocks that have gone down. You sell the stocks that have gone down and use them to offset your gains. Obviously, you'd rather buy stocks that go up, right, and not have any taxable losses. But sometimes you want taxable losses because you have gains elsewhere and you would prefer not to pay taxes on them. But you don't want to just lose money for no reason. And the conceptual trick is, conceptually, let's say you have $100, right? You go long, like $500 of the s and P, and you go short, like $400 of the S and P. So your net exposure is $100, right? So it's like you've made the investment you wanted to make, but now you're long a lot and short a lot to offset it, but you're still net long. And then either the market goes up or down. If it goes up, you make money on your $500 long and you lose money on your $400 short. And then what you do is nothing with your long. You just keep it on so you don't pay any taxes on the gains, and you close out your short, and you get a big tax loss on your short, and you can use that to offset your gains elsewhere. And then you put on another $400 short and you do it again. And so every year, you can, like, generate tax losses without any real economic losses because you're long, your short positions are offsetting each other, right? So like, net, you're just long $100 of stock, but you have losses every year. Did you go away? So, Katie, I just explained taxiware long short in a beautiful way that crashed your Internet, caused you to go lie down for a while.

[Katie Greifeld]

It's too bad that I didn't hear that, because that explanation was something that I needed.

[Matt Levine]

In brief, you buy like, $200 of the S&P, you short $100 of the S&P, net your long $100 of the S and P. But no matter what happens, you have tax losses. You realize the tax losses each year, and you use them to offset your gains elsewhere in the portfolio. Like if you've sold the business or whatever, and then you go put on the short again and you do it all over again. That's conceptually the trade, but in reality that's not the trade at all because you're not really just allowed to do that. You're not allowed to just buy a thing and go short the same thing and take the losses and not take the gains. Those are called the straddle rules and the wash sale rules. And so the trick is to do this in a way where you're not long and short the same thing. And also where when you close out the position and then you go put on the position again, you're putting on different positions. So if you have some losses, you sell those stocks and you buy different stocks so that you continue to have the same exposure, but you can realize your losses on the stuff that you got rid of. That's where the secret sauce comes in. But it's not that secret, because there are a lot of stocks in the world and you can sort of create a bunch of different diversified portfolios that give you the exposures you want. And ideally, you go long stocks that are good and you go short stocks that are bad. And maybe you don't have as many losses and you just have a lot of gains, but it's sort of like that's just gravy. What you really want is to have a long, short portfolio where, like, your net exposure is the net exposure you want, and where if you lose money on one side of the trade, you get to deduct it from your taxes.

[Katie Greifeld]

So your column in this conversation is inspired by a great article by Justina Lee of Bloomberg News last week. And I feel like we're learning about a lot of different methods if you're a really wealthy person, to sort of defer taxes. The question I had reading this article, Justina describes an example of this brilliant Apple engineer. He has a million dollars worth of Apple shares. He has years of gains. So basically, he does this strategy, you know, maybe goes 130% long, 30% short to do this trade. But why wouldn't he just do a swap fund in that scenario, which we just talked about, like, two weeks ago?

[Matt Levine]

Swap funds have, like, their own administrative complexities. If you're doing this, you're sort of permanently generating tax deductions. Like, you can keep generating tax deductions every year. Like the swap fund is a way to diversify out of your appreciated asset without immediately paying taxes on it. But you're not like generating any additional tax losses. Swap funds are kind of weird. You're not getting the same diversification as you would by like buying an S and P fund because you know, you're sort of like in a swap fund with other people who have also contributed to the swap fund generally.

[Katie Greifeld]

That makes sense.

[Matt Levine]

You know, writing about this, people have been emailing me with a lot of like other ways that people defer taxes. This is just like a sort of juiced up version of tax loss harvesting, which any financial advisor and most robo advisors at this point will do. Where like just at the end of the year you like sell your stocks that have gone down so that you can take tax losses and then, you know, you go buy some different stocks. And one thing that people have found is that people often don't really want to buy different stocks because different stocks would give them a different risk profile. And so ideally they would go sell their stocks, take their losses, and then go buy the same stocks. But you can't do that because the IRS has rules against wash sales where you sell a stock, take the losses and then immediately buy them back. And so people get arbitrarily close to that in ways that make people mad. And so the classic is like if you are invested in ETFs and you have an ETF that is down at the end of the year, you sell that ETF and you buy back a different ETF with the same theme, right? So it could even be like you sell an s and P ETF and you buy back a different S and P ETF. Whatever theme you had, there's probably 10 ETFs that sort of serve that basic purpose. And you sell one and buy back the other and the underlying holdings might be the same and the basic idea might be the same. But you can say, no, no, I didn't do a wash sale. I sold one ETF and bought back a completely different etf. And people who email me are like, that's not really allowed. And the rules on this are a little bit unclear. If you read the rul, they seem to be quite broad in saying that you can't do this stuff, right? You can't take tax losses when you're sort of hedged the whole time. But if you look at sort of actual enforcement, the rules are kind of enforced more narrowly where like, if you sell one thing and buy back a very Similar thing. You seem to not get in trouble for it. So there's a lot of stuff going on here that people are like, yeah, it seems to work.

[Katie Greifeld]

I mean, it's kind of poetic that, like, the origin story of the ETF wrapper was just a way to defer and dodge taxes. So, you know, it's fitting with the spirit. Anyway, I can't see your face and I don't like that. But something else that I wanted to talk about from Justina's article. Did you see the quote that she had in there from David Scheisser? He's the professor at Columbia Law School. He said that basically this whole business of the tax aware, long, short, it feeds off the complexity of the current rules. And in his view, far too much time and energy is being expended by these sophisticated players to pursue a lower effective tax rate. And I just thought that was funny, you know, like, what if, like, Cliff Asness was directing all of this mental energy and this brain power at bettering society, for example? That seems to be at least what this professor is suggesting here.

[Matt Levine]

I sympathize. But I also used to be a derivative structure. And I tell you that in the abstract, it is hard to go to a client and say, here is a brilliant product for you because, like, the brilliant product comes down to, like, I get you some variation on market returns and you pay me 1%, right? And like, over time, the expectation is that 1% really adds up. So it's really helpful to go to the client and say, the way I'm going to make money for you is not with my special brilliance, but by, like, just taking it from the irs. There's just a rule that says we can take this money from the IRS and give it to you and we'll take half of it. And the client is like, yeah, that's a good deal. When I was a derivative structure at a bank, if you go to a client and you're like, oh, you know, like, we have a thing where you can manage your risk. It's like, not that exciting, right? But if you had a client, you're like, here's a thing where the IRS will just pay you to do the trade, then that's great. You know, they want that. And so on the one hand, being like, oh, these people doing these tax arbs should be doing something else for society. Like, I get it. But on the other hand, like, I don't know if you're a financial engineer. The thing where it's like the IRS gives you free money is A great product compared to the thing where you're like, I have found a way to beat the market. It's hard to beat the market. It's not that hard to figure out a way to generate tax deductions and, like, defer tax gains.

[Katie Greifeld]

Yeah.

[Matt Levine]

It's not easy. Smart people get paid a lot of money to do it. But it's like, more reliable. It's not entirely reliable. Right. You read about these things. There's always someone being like, this is not really allowed. Like, this is going to get someone in trouble. Like, this might not. You know, the rules might change. So it's not like, entirely reliable, but it is a good pitch in a way that will beat the market. It's not.

[Katie Greifeld]

Yeah, there's true. There is a whole community of people who would say the government needs your tax dollars, but that's a different story.

[Matt Levine]

Well, those people probably aren't doing this trade.

[Katie Greifeld]

I would imagine not.

[Matt Levine]

I mean, I actually did hear from a reader who was like, I got pitched this and it felt bad for me to save this much on my taxes. So I said, no, that's a reasonable approach.

[Katie Greifeld]

That sounds like a really conscientious person. I don't think a lot of people.

[Matt Levine]

No, but it's also, it's like, you know, because you're like, oh, like there's a little bit of uncertainty here and it's really complicated. And like, it's, you know, like not everyone who has pitched on a complicated financial product wants to do it. And like, it's not, I would prefer to pay higher taxes. It's. This seems like a lot of brain power to go through to save some money on my taxes. But if you really want to save money on your taxes, then, like, no amount of brain power is too much to. To spend on saving money on taxes.

[Katie Greifeld]

That's true.

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[Katie Greifeld]

Do you want to get to the fun stuff?

[Matt Levine]

Okay.

[Katie Greifeld]

Super Micro Super Micro. So I feel like it's bad. It's just not a good look. When your auditor resigns.

[Matt Levine]

When your auditor resigns in like a real huff, you know.

[Katie Greifeld]

Yeah.

[Matt Levine]

Super Micro's auditor is at ui. The former Ernst and Young resigned with a nasty letter being like we can't trust you anymore.

[Katie Greifeld]

Yeah.

[Matt Levine]

Seems bad.

[Katie Greifeld]

I saw a version of that letter make its rounds on social media. It was pretty short, too. I feel like it was like a paragraph or two.

[Matt Levine]

Maybe you've seen a letter that I haven't seen.

[Katie Greifeld]

It could have been a fake letter, to be totally honest. But anyway. Aha.

[Matt Levine]

So Supermaker filed a disclosure saying that their auditor, EY had resigned because they had sent Sumermaker a letter saying that we can no longer rely on the representations that management makes or trust the audit committee. Which is wild, right? Sometimes there are accounting scandals where the corporate managers are doing bad stuff, and then, like, the board finds out and there's a scandal and the board is shocked and, like, works with the auditors to find the problems, right? Because, like, the board doesn't really have incentives to do accounting fraud, right? They're just there to get paid a yearly fee and get sued when things go wrong. Like, they don't want to do accounting fraud. But, like, this is a somewhat unusual case where EY is like, not only do we not trust management, but we don't really want to talk to the audit committee anymore either. Which is a pretty smooth move right there. This is such a salient story because Hindenburg put out a short report on Supermicro a month ago saying that they were probably getting up to some accounting fraud. When that happens, it's like the very natural limit on how seriously to worry about it is, well, their auditor hasn't resigned. The auditor is still auditing their financial statements. So how bad can their accounting really be? Then the auditor resigns. Ah, there's no limit. It could be anything.

[Katie Greifeld]

You know, I feel like this checks two boxes for you. At least two boxes. One on your campaign to make auditors be cool again. I feel like this does a lot of lifting for you. And then also, it's very cool to.

[Matt Levine]

Do this sort of. I'm like, this is very cool. Like, I would love to resign in a huff like this. And like, you know, because, like, you resign in a huff like this, and you really, like, you're getting your revenge, right? Like, the stock tanked. It's really a bad look for the company. And so EY can just be like. Like, nope, we're going to resign. See you later. And have a really negative effect on the company. That said, you have a different interpretation of this, which is, EY has not had the most amazing run ever in terms of being criticized for its audit quality. And you could say, well, they are doing this out of an abundance of caution. Because they can't be caught standing close to a company with any accounting problems because they've had some criticism of their audit work. And in particular, you know, it reminds me of, I think last week, EY was in the news for firing people who are watching, like, two training videos at the same time. Right. So, like, their auditors have, like, continuing education requirements, and they have to watch videos on their computers to check off the boxes. And some people were watching two videos at the same time so they could check off twice as many hours before getting back to better things.

[Katie Greifeld]

I get that temptation.

[Matt Levine]

No comment. But EY fired them, which seems very harsh until you remember that UI has been, like, fined a lot of money by regulators for things like having its accountants cheat on continuing education exams. And so you can't really do that anymore. And so there's this whole thing where, like, they are very much in a compliance culture because it's kind of, like, risky out there for them to be doing what they're doing. And so they don't have a lot of tolerance for nonsense right now.

[Katie Greifeld]

Yeah, that's a fair point. The other box that I was thinking about for you is that, you know, it seems like you could be cast as sympathetic to the short seller community, which has taken a lot of heat over the past couple years. And here's an example of a short seller potentially doing good for society and the health of markets.

[Matt Levine]

Potentially. Yeah.

[Katie Greifeld]

Yeah.

[Matt Levine]

Like, it's a little, like, this is like, a little bit of an overdetermined case because, like, the things that are going on here is like, one, Hindenburg is putting out a comprehensive report saying this company's accounting is bad. Two, and an employee has apparently gone to the authorities to blow the whistle and is talking to the Justice Department, which is investigating, because an employee has, independently of Hindenburg, come out to say that the accounting is bad. And then, three, I don't know exactly what's motivating ey, but it's not necessarily. They read the Hindenburg report and, like, oh, wow, this accounting is bad. They might have independently disagreed with the accounting. So, I mean, the timing is a little odd. There are definitely some cases where it's like, the short sellers were the market's only line of defense, like, problematic accounting. And here it's not so clear that that's true. But, like, it is potentially confirmatory of what Hindenburg has been saying.

[Katie Greifeld]

I guess we can't say for certain, had Hindenburg not published its short report on August 27, whether we would have seen EY resign as their auditor in late October. But I don't know.

[Matt Levine]

It's a good question, right? There is pressure on them not to be near anything that gets any suspicion. But, like, do they independently decide there were problems or were they like, oh, this is too high profile for us. We got to get out of this. Right. Like, did Hindenburg put the pressure on them? And by the way, like, one possibility here is that this company is like, pure as the driven snow and Hindenburg is wrong. And EY read the Hindenburg report and were like, this is too hairy for us. We got to get out of here. And like, in fact, this is like a very destructive thing that has happened where ey, rather than being a stalwart independent auditor, has felt the public pressure to renounce its client. That's a story you could tell.

[Katie Greifeld]

Yeah. If that plays out, we'll talk about it on this podcast.

[Matt Levine]

Probably I'm not going to mark my calendar for it, but it's like a thing that could happen.

[Katie Greifeld]

It's a watch this space sort of thing. Something that I did want to talk about is that Super Micro's star has risen or had risen so quickly. This company was only just added to the S&P 500 in March, which was kind of a controversial thing. Even though index inclusion is based on rules, there is some discretion on the part of the index committee. And there was this really brief moment in time, just the way that the timing worked out. Where Supermicro was, I believe, in the small cap index while simultaneously being in the S&P 500. So I don't know, it's just like this funny quirk that I don't know. Supermicro is really in the pain locker and it's been dragging. One of many things dragging on the benchmark that it was only just recently added to.

[Matt Levine]

This is definitely a thing that short sellers point to. Like, companies often get added to indices because of like short term price moves that are sometimes, you know, bubbly or based on bad accounting or otherwise not sustainable. And then like, they're in the index and it's particularly embarrassing when the problems are found. There could be some element of that here.

[Katie Greifeld]

Yeah, well, we'll see also if it stays at least like in the NASDAQ 100 in the S&P 500. I mean, it's still a big company.

[Matt Levine]

The other thing I like about it is the EY letter to Supermicro resigning is not publicly filed, although Supermicro quotes it a little bit. But Super Micro's disclosure about it is like, very sad and it includes the lines, although the company recognizes EY's decision as final, it disagrees with EY's decision to resign as the company's independent registered public accounting firm. Someone was like, it's like a sad breakup, right? Like, it's like, we know we can't do anything about it, but we're really sad about it. But then the other thing that is crazy is that when you put out a statement like this, EY gets like, a sort of right of response or like a right of fact checking, where the statement that Supermicro filed comes with a little exhibit that is a letter from EY to the SEC saying, we have read Supermarker's disclosure and we agree with the statements contained in the first paragraph, the first sentence of the second paragraph, the third paragraph, the first three sentences of the fourth paragraph, the fifth paragraph, the seventh paragraph, and the eighth paragraph. We have no basis to agree or disagree with the other statements, which is like, first of all, it's just an incredibly fun and embarrassing thing to have. But secondly, the things they don't agree or disagree with include supermarket. We don't think this will affect any of our financial statements. We don't have to restate any of our financial statements. EY is like, yeah, I don't know. I don't know. Good luck with that. It's really kind of like adding one more kick on the way out the door to send this letter saying that they don't agree with everything in the disclosure.

[Katie Greifeld]

I mean, public breakups are really hard. They're really messy.

[Matt Levine]

I almost have the pop culture reference here, but I don't. There's someone who's watching.

[Katie Greifeld]

You can make another Ben Affleck JLO reference, but if there's another one, there's.

[Matt Levine]

A podcast host, right? Her name is Chicken something.

[Katie Greifeld]

Oh, my God. Brianna Chicken Fry. I can't believe that that's in your head. That is so firmly in my world. Yeah, well, Zach Bryan dumped her on Instagram. Well, they had broken up.

[Matt Levine]

Basically the same thing as Zach Bryan dumping Brianna Chicken Fry on Instagram.

[Katie Greifeld]

Yeah. In a really. Yeah. That's amazing. We should just cut the podcast off here. You know what else has been pretty messy and hard is recording this podcast remotely. This has been a little bit of a nightmare, but I think we got through it.

[Matt Levine]

I think we can end.

[Katie Greifeld]

Goodbye a happy Halloween. This was super spooky.

[Matt Levine]

And that was the money stuff podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Matt Levine]

You can find my work by subscribing to the MoneySluff newsletter on Bloomberg.com and.

[Katie Greifeld]

You can find me on Bloomberg TV every day on open interest between 9 to 11am Eastern.

[Matt Levine]

We'd love to hear from you. You can send an email to moneypodloomberg.net Ask us a question and we might answer it on.

[Katie Greifeld]

You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

[Matt Levine]

The Money Stuff podcast is produced by Anna Mazarakis and Moses Andam.

[Katie Greifeld]

Our theme music was composed by Blake.

[Matt Levine]

Maples, Brendan Francis Newnham is our executive.

[Katie Greifeld]

Producer, and Sage Bauman is Bloomberg's head of Podcasts.

[Matt Levine]

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

[Katie Greifeld]

This was a nightmare. A Halloween nightmare.