The Bad Eggs Edition

Summary

Slate Money Podcast: "The Bad Eggs Edition" (July 29, 2017)

Hosted by Felix Salmon, with Anna Szymanski and Jordan Weissmann

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Episode Overview

This week’s "Slate Money" dives into a trio of offbeat but revealing stories from the world of business and finance. Hosts Felix Salmon, Anna Szymanski, and Jordan Weissmann begin with Anthony Scaramucci’s tangled financial dealings and the challenging SkyBridge Capital sale. From there, they dissect the mystery of stagnating productivity growth in the economy, then pivot to some high-drama startup shenanigans at vegan foodmaker Hampton Creek. The episode concludes with an ultra-wonky bonus segment on the mechanics of sovereign debt litigation, focusing on Argentina and vulture funds.
Tone: Irreverent, wonky, conversational, sharp, and skeptical.

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Key Discussion Topics & Insights

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1. Anthony Scaramucci, SkyBridge, and Shady Dealings (00:10–15:26)

The Mooch’s Dubious Hedge Fund Credentials (02:08–06:53)

• Felix sets up Scaramucci’s hiring as White House Communications Director and connects it to his questionable business persona.

• "He likes to portray himself as a hedge fund manager. Or as I like to say, he plays one on TV." – Felix Salmon (03:46)

• SkyBridge Capital’s Precarious Value

  • Scaramucci owns a fund-of-funds but wasn’t actually selecting investments.
  • SkyBridge’s best returns were years before he bought it (from Citigroup post-crisis).
  • Felix: "[He] picked up SkyBridge on the cheap... then went out and started selling it to mom and pop investors who had absolutely no business investing in hedge funds, let alone funds of hedge funds." (06:12)

The HNA Sale and Possible Conflicts (07:04–15:26)

• Scaramucci had to sell SkyBridge to take the White House job—but the purported buyers (China’s HNA and Venezuela’s Ron Transatlantic) are mysterious, and the offer price is suspiciously high.
• Anna: "SkyBridge without the Mooch is... almost completely worthless and has already seen like $1.6 billion of outflows." (07:31)
• No transparency or clarity about who controls HNA.
• CFIUS (government review board) is slow-walking the deal.
• Jordan: "It looks very much like someone is trying to suck up to the Mooch by overpaying for his company." (08:07)
• There’s little likelihood of another, legitimate buyer.

Broader Worries: Chinese Overextension, Systemic Risk

• The panel veers to China’s aggressive overseas buying and risks to its financial stability.
• Jordan: "These companies that are so enmeshed in so many parts of the Chinese economy right now and have become so huge that if they can't pay back their debt... That could create a tremendous amount of instability." (12:26)

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2. Why is Productivity Growth So Lousy? (15:26–26:37)

Definitions & The Real Economic Mystery (15:29–17:12)

• Jordan briefly defines "productivity" as "output per hour of work" (15:46).
• US GDP growth relies on productivity, but improvements have stalled since the 80s.
• Felix: "This productivity growth which made the planet wealthy seems to have disappeared." (16:37)

Demand-Driven Productivity Theory (17:19–19:48)

• Recent economic research suggests flat wage growth and slack labor markets discourage business investment in productivity-boosting technology.
• Anna: "If you think that productivity growth just comes out of nowhere... you can't really factor [it] into your economic analysis. But if a really tight labor market... actually drives up productivity, that creates all sorts of interesting possibilities..." (19:28)

Policy Implications & “Overheating”

• If strong demand tightens labor markets, governments should pursue policies that push unemployment super-low, even if inflationary. (20:51)
• Anna: "Is this 2% inflation target we have... keeping us from becoming more productive because it's keeping unemployment too high...?" (21:24)

Contrasting Productivity Models (21:34–26:37)

• Felix’s factory comparison: German robot-driven efficiency vs. Apple/Foxconn-style human assembly lines. (21:34)
• The hosts debate tech vs. labor-intensive models, with Jordan noting, "Every day you look at the newspaper, there’s another article about the robots are taking our jobs... and then this would suggest that we need more robots." (22:29)
• Foxconn’s new Wisconsin factory and the shrinking wage gap with China comes in for scrutiny.

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3. Hampton Creek: Startup Dysfunction (26:45–35:17)

The Board Quits, CEO Goes Rogue (26:45–32:57)

• Vegan mayo maker Hampton Creek loses its entire board and most executives after founder Joshua Tetrick repeatedly overrules and fires anyone dissenting from his "moonshot" ambitions (lab-grown meat).

• Anna: "It seems like the conflict... is that [Tetrick] has really big ambitions... and a lot of his executives are like, we should really focus on the eggs. And he's like, you're fired." (28:15)

• Board tries to claw back control but had previously ceded it in 2015.

• Legendary firing story: Executives summoned to a fake investor meeting in Spain, only to be dismissed over video chat.

  • Anna: "The board is sitting there being like they're dealing with a dog that won't stop eating the roast beef..." (30:06)

Fake It Till You Make It – Silicon Valley Style

• Jordan: "This company essentially misrepresent[s] itself. Pretending that it's a tech company when ultimately it's no different than... a company where I make vegan cookies and then I try to pretend... I'm going to develop this product..." (30:58)

• The panel compares it to Theranos and Juicero—a Silicon Valley pattern of message over substance.

  • Felix: "What matters is the message more than the reality. Because it's only the message which is going to allow you to realize the reality." (33:45)

• Likely endgame: an established food giant buys Hampton Creek for (just) its vegan mayo and other real products.

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4. Numbers Round & Notable Stories (37:42–43:02)

• Anna: 19% – Altria’s stock plummet after the FDA moves to reduce nicotine in cigarettes—huge public health and regulatory story. (37:42)
• Jordan: 50,000 – Number of asylum seekers from Venezuela to the US; Venezuela faces a constitutional/authoritarian crisis. (40:51)
• Felix: 2 billion – Facebook’s monthly active users (and $3 billion quarterly profit); the hosts muse about regulating it like a utility. (41:45)

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5. Bonus Segment – Wonkfest: Sovereign Debt Restructuring (44:39–70:18)

Special Guest: Sadie Blanchard, Yale Law School research fellow (44:38–45:18)

• Sadie asks: Why do vulture funds keep suing sovereigns when wins are so rare?
  • Felix: “Bond is just a contract, and contracts are legal documents. If you want to collect... the only way you can do that is by using legal mechanisms…” (46:51)

Legal Pressure as a Negotiation Tactic

• Jordan: "Often when you're suing, you understand that you're not going to be able to reach the sovereign itself. But what you can do is influence third parties…that can have a significant impact on pressuring the sovereign and making it more likely they'll pay.” (47:42)
• Litigation is a "sanction"—not to win, but to make default expensive and complicated.
• Anna: “It’s like trench warfare.” (51:53)

The Role of Discovery & Publicity

• Sadie: “They got discovery all over the world, not only about the Congo’s assets but also about the assets of the leader... Then the hedge funds, like, leaked the information to Global Witness and caused a big scandal.” (56:09)
• Felix shares a personal anecdote about reporting on the Congo case, where vulture funds wanted to be painted as anti-corruption crusaders, not profit-seekers. (57:26–58:43)

Why Don’t Creditor Committees Work?

• Felix: “There has never, ever, ever been a creditor committee that actually worked... Because bondholders are everywhere and they're fungible…” (60:27)
• Litigation (or the threat of it) serves as a coordination point for otherwise scattered creditors.

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Notable Quotes & Moments

• On the Mooch:
  “He plays [a hedge-fund manager] on TV.” – Felix Salmon, 03:46
  “SkyBridge without the mooch is... almost completely worthless.” – Anna Szymanski, 07:31

• On Productivity and Robots:
  “Every day you look at the newspaper, there’s another article about the robots are taking our jobs... and then this would suggest that we need more robots.” – Jordan Weissmann, 22:29

• On Hampton Creek:
  "Fake it till you make it" is “deeply ingrained” in Silicon Valley, giving rise to Theranos and similar startups. – Felix Salmon, 33:45
  “The vegan alpha bro may be the worst of all possible types.” – Jordan Weissmann, 35:17

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Timestamps for Key Segments

• Anthony Scaramucci & SkyBridge: 00:10–15:26
• Productivity Stagnation: 15:26–26:37
• Hampton Creek Mayhem: 26:45–35:17
• Numbers Round: 37:42–43:02
• Venezuela Crisis Note: 40:51
• Bonus: Sovereign Debt/Vulture Funds (with Sadie Blanchard): 44:38–70:18

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Summary Takeaway

The episode skewers the commodification and messaging-driven nature of modern finance and Silicon Valley, calls out murky international finance maneuvers, and argues that productivity—and even debt crises—are often more political and psychological than strictly economic or legal. As always, "Slate Money" mixes sharp economic insight, cynicism, and offbeat wit, topped this week by a delicious (and egg-heavy) cake recommendation.

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Contact the hosts: [e-mail]
Bonus: For the Torta de Santiago egg cake recipe, email Felix!

Transcript

[Anna Shymansky]

The following podcast contains explicit language.

[Felix Salmon]

Hello, and welcome to the Rotten Eggs edition of Slate Money. You are in for a treat this week.

[Jordan Weissman]

Yes.

[Felix Salmon]

Because, oh, my God, we have so much. Because we are going to talk about eggless mayo. I don't know. Honestly, that story is completely bonkers. We are going to wonk out a little bit about productivity. I'm Felix Ham and a few. I'm here with Anna Shymansky and Jordan Weissman.

[Anna Shymansky]

Hello, Felix, your friend.

[Felix Salmon]

Last week we announced, or I announced, that we weren't going to talk about Anthony Scaramucci. And this, like, vow of, you know, taking the high road managed to last exactly one week. We are going to talk about Anthony Scaramucci. Of course we're going to talk about Anthony Scaramucci. But there is a business angle here. It's not just about auto fellatio.

[Anna Shymansky]

The.

[Felix Salmon]

The.

[Anna Shymansky]

But it's partly. It's a little bit about auto fellatio.

[Felix Salmon]

Yeah, but the. But also, not only do we have all of the moochie goodness coming up, but if you hang out until the very end of this show, we have another one of our ultra Wonk bonus segments at the end, which, for those of you who've been listening to Slate Money for a while, will know that the only thing I really care about in this life is sovereign debt restructuring.

[Jordan Weissman]

And Argentina.

[Felix Salmon]

And Argentina. And we've got a call from a listener all about sovereign debt restructuring in Argentina. She's at Yale and she wants answers. And Anna Shymansky has answers because she knows about this stuff. So we are going to wonk the. The out about, you know, vulture funds and that kind of stuff. So that is a treat for the ultra wonks among you. But, yeah, no, we can't really talk anymore without mentioning the mooch. The mooch.

[Jordan Weissman]

Mooch.

[Felix Salmon]

All right, so the mooch has been offered. I think this is the best way to put it, he has been offered the job of White House communications director. Right now, technically, he's in this kind of limbo right now. Technically, Sean Spicer is still employed by the White House and still works at the White House, although I don't think he's been seen there.

[Anna Shymansky]

No, he's deep in the bushes.

[Jordan Weissman]

Yes.

[Felix Salmon]

Right now, Anthony Scaramucci does not officially work at the White House, even though he's there every day. He's hanging out with the President all the time. And apparently he now has a White House telephone.

[Jordan Weissman]

It's kind of like the Trump sons who don't work there. They're just there all the time.

[Felix Salmon]

And um, and of course, he is on every single news show you can mention and is phoning up as many journalists as he can think of, including Ryan Lizzert of the New Yorker.

[Anna Shymansky]

Okay, I think we just have. Before we get into the finance stuff, I just have to ask you, Felix, were you at all surprised as someone who knows the Mooch, who has dealt with the Mooch, who has dueled with the mooch, Was there anything in the Steve Bannon was trying to suck his own cock interview that you were surprised by in the New Yorker?

[Felix Salmon]

The only thing that surprised me was the mooches seeming inability to go off the record for that bit.

[Anna Shymansky]

See, I think that was on purpose. I have a theory, but we can talk about this another.

[Felix Salmon]

But yeah, I feel like we have to make at least a vague, colorable attempt to try and talk about the business angle here, is that the Mooch is. He likes to portray himself as a hedge fund manager.

[Anna Shymansky]

He.

[Felix Salmon]

Or as I like to say, he plays one on tv. He's on TV a lot. He's on CNBC a lot. He always used to be. And he would go on wearing his suits and ties and talk about the markets and which asset classes were going up and which asset classes were going down and all of this kind of stuff, and everyone. And he'd be like, I'm from Skybridge Capital, which sounds like a hedge fund. He's not a hedge fund manager.

[Jordan Weissman]

It's a fund defense.

[Felix Salmon]

But he's not even managing the fund of funds. He has someone else to manage the fund of funds for him. He's the owner. He's not the owner. He's the majority owner of the fund of funds. And he's the kind of face of it.

[Anna Shymansky]

Did he ever have a role picking the funds in his fund of funds? Was there ever a point where he was actually. The fund. Yeah. The fund selector. I don't know what your title is there.

[Felix Salmon]

So the people making the asset allocation decisions were never hit him.

[Anna Shymansky]

Okay.

[Felix Salmon]

But I think he almost certainly did have a role in doing. Basically the only thing, the only value that funded funds add. Yeah. Is that they get you into funds, which you wouldn't be able to get into yourself. So you want to invest money with Stevie Cohen, and you phone up Stevie Cohen and he's like, who the fuck are you? Going away? But if you invest in the fund to funds, then maybe they can invest in.

[Jordan Weissman]

Because there's. Normally you can't get into a lot of these funds if you don't have a million or 5 million. I mean, those are the limits. So this kid's for.

[Felix Salmon]

So one of the things that the Mooch almost certainly did do would be to schmooze the likes of Stevie Cohen and say, please let me invest in your fund.

[Anna Shymansky]

And then having things like the Salk conference and whatnot probably helped too, because he was a known entity in the industry.

[Felix Salmon]

Exactly. So. So he had access to maybe slightly more of the like top tier funds than other funder funds do. But you know, I don't think it made that much of a difference. But yeah, and so that was like the, the work bit, but in terms of asset allocation, like one of the, the other thing that he said that skybridge did, the main thing that he said the Skybridge did beyond just getting you access to certain hedge funds.

[Anna Shymansky]

Yeah.

[Felix Salmon]

Was like market timing, basically. He, he was like, we are going to invest in the hedge funds which are doing well right now, and then when they stop doing well, we're going to take our money out of those hedge funds and put them into other hedge funds which are going to start doing well.

[Anna Shymansky]

And that basically worked once, right? Like he made a bet on housing, essentially, if I recall correctly.

[Felix Salmon]

No. Okay. It worked really well in the three to five years before he bought Skybridge. That was the high point of Skybridge's performance or outperformance back when Skybridge was owned by Citigroup. And then after the financial crisis, Citigroup was forced to divest a whole bunch of assets and he picked up Skybridge on the cheap and then took this extremely impressive performance history that he had bought and he could take no credit for and then went out and started selling it to mom and pop investors who had absolutely no business investing in hedge funds, let alone funds of hedge funds.

[Anna Shymansky]

Yeah, right.

[Jordan Weissman]

Because not understanding the different strategies of, I mean, of the even one fund, let alone the multiple funds and why you would be moving between these funds at different times.

[Anna Shymansky]

So now the Mooch is trying to sell off, you know, skybridge. He's trying to cash in, he's trying to take profits, or has to, and he's trying to sell it to this company. Hna.

[Felix Salmon]

Okay, so, okay, so what's happening now, you're absolutely right, is that if he wants to go into the government, he's not allowed to own skybridge. That would be a massive conflict. So he has to sell skybridge. The problem is Skybridge is, I believe the technical term is a shitty fucking company and no one wants to buy it.

[Anna Shymansky]

Yeah.

[Felix Salmon]

So what, what to do what he does, especially without the Mooch like Skybridge has a pretty shitty fucking company with the mooch. The Skybridge without the mooch is. Is almost completely worthless and has already seen like $1.6 billion of outflows. So why anyone would want to own it, no one knows. But there are these two mysterious entities which have stepped up and said that they're willing to buy it for way more than anyone would credibly pay for.

[Jordan Weissman]

Seven times EBITDA is right now, what.

[Felix Salmon]

They'Re pricing it at, that's seven times earnings, which will never again be replicated. Skybridge is never ever going to get those kind of earnings ever again. And funder funds never sell for seven times earnings anyway. And so, yeah, it's kind of crazy. So in any case, it looks very much like someone is trying to suck up to the Mooch by overpaying him for his company.

[Anna Shymansky]

Yeah.

[Felix Salmon]

And who are these people? Funny you should ask.

[Anna Shymansky]

That's what I was gonna ask, but. So it's this kind of mysterious Chinese firm. Two oh, two. Okay.

[Felix Salmon]

Mysterious firms. It's a mysterious Chinese firm called HNA and an even more mysterious Venezuelan firm called Ron Transatlantic. Ok. And no one really has a fucking clue who owns either of them. HNA is now going around saying it's majority owned by a pair of charities.

[Anna Shymansky]

Yeah, there was they recently. I was reading, they recently made an effort to make it clearer who owned them and kind of failed.

[Jordan Weissman]

Exactly, because you had a few businessmen and then one of the businessmen who had a larger stake now apparently appears to have no stake. So. And this is also part of the reason why Bamell said they wouldn't lend to HNA is because.

[Felix Salmon]

Okay, so now we have to do some translation. Bammel is bank of America.

[Jordan Weissman]

Yes.

[Felix Salmon]

And it's not just bank of America. Whenever a Chinese company or a foreign company wants to buy an American company, it needs to get papered by this wonderful entity called the Committee on Foreign Investment in the United States, or CFI us. And HNA has bought a bunch of American assets in the past, including the Waldorf Astoria. And it has spent a lot of money and it did pay actual real cash for them. So it had. It has the money from somewhere. No one knows where it comes from.

[Jordan Weissman]

Cheap debt, cheap credit.

[Felix Salmon]

Cheap credit. But the upshot of the whole thing is that CFI US has started saying, excuse me, who are you and why should you be buying American companies? And most recently, just a few days ago, they vetoed Basically H&A's acquisition of just a minority stake in something called Golden Eagle, which is this like in flight, WI fi company. So now, on the one hand, no one is going to make the case that there's a bunch of, like, valuable proprietary technology inside skybridge or that it's a particularly systemically important company strategic interest.

[Anna Shymansky]

In a fund of funds with a sketchy track record.

[Felix Salmon]

But on the other hand, treasury is notoriously understaffed. It's taking a very long time for the approvals to come through. And it's obviously a little bit weird now that Anthony Scaramucci, who is, you know, who's quacking like a communications director and looking like a communications director, and it's all BFF with the president, is now basically going to have to talk to Steve Nooshin at the Treasury Secretary and say, like, you better make sure that this thing gets approved, otherwise I won't get this job. It's all very weird. And it's not entirely clear who can recuse themselves or avoid a conflict here.

[Anna Shymansky]

So, I mean, do you, you were talking to me a little earlier about HNA and sort of the role it plays in China. Aside from the fact that there's just a Chinese company apparently trying to suck up to the White House, is there any reason why people should be concerned about this as a potential conflict of interest?

[Jordan Weissman]

Well, again, I am frankly, like, less concerned about the, the fears that somehow, like maybe this is owned by the Chinese government and then they're going to have a connection with the head of communications. I'm less concerned about that. I'm actually more concerned about this firm and a lot of the, these other big acquiring firms like Angban and.

[Anna Shymansky]

Yeah.

[Jordan Weissman]

In terms of what these types of acquisitions represent as a threat to the Chinese economy and thus the global economy, I actually think that's one of the most interesting stories about H and A. I realize that's 10 to this particular story, but it's true.

[Felix Salmon]

They are, they, they do seem to have overpaid for a bunch of American assets. And if and when they mark those assets to some realistic.

[Jordan Weissman]

Well, in the other. The other issue is that they've. They've taken on a tremendous amount of debt to do this.

[Felix Salmon]

They become insolvent.

[Jordan Weissman]

Yeah, exactly. And then you have these, these companies that are so enmeshed in so many parts of the Chinese economy right now and have become so huge that if they can't pay back their debt, what that could be create a tremendous amount of instability.

[Anna Shymansky]

Yeah.

[Felix Salmon]

So this deal is bad for hna. It's really skeevy. Looking for the mooch. Yeah. It hasn't been signed off by Treasury. And without this deal being done, his entire sort of existence in the White House is incredibly sort of tenuous and contingent and weird.

[Anna Shymansky]

I mean, part of me thinks he, you know, he's talking about how he just wants to serve his country and the President. Like, what if he just hangs on as a volunteer?

[Felix Salmon]

Well, I mean, obviously he's not going to. You know, he doesn't care about his salary at the White House. He's not a.

[Anna Shymansky]

But he does need the money from the salary.

[Felix Salmon]

Wealthy man. But he doesn't have the kind of fuck you money that he's going to get if and when this sale closes. Yeah. More interestingly, if the sale is barred by treasury, it's far from clear that there's any an under bidder or that anyone wants Skybridge.

[Jordan Weissman]

I mean, he did say that there were. Yeah, he said there was an auction and that there were actually bids that were higher. And he did that. Yeah, I realize.

[Felix Salmon]

Yeah, like, I mean, like the mooch lies. I mean that's actually his job. Yeah. So, yeah, when he, when he turns around and says, oh, I had higher bids from elsewhere, you're like, no, you didn't. You know, like if you had a higher bid from someone who was much less shady than Ron and hna, you would certainly have taken that.

[Jordan Weissman]

Because this also raises a larger question about what if you have these slightly shady entities taking on Sky Richard that could actually decrease the value of the company? Because if you're a high net worth individual and you're saying, who am I going to be giving my money to in terms of figuring out which funds that are going to be picking, are you going to go to now a firm that's owned by people, you have no idea who they are.

[Anna Shymansky]

Yeah.

[Felix Salmon]

And much more importantly for the people who invest. For the. Yeah, for the people who invest in Skybridge because it gives them access to the top tier hedge fund managers. Well, guess what? The top tier hedge fund managers don't want HNA's money. They don't want investors who they don't know who they are, who are shadowy shell companies called Ron Transatlantic and the top tier hedge funds are already turning around to skybridge and saying, no, actually we don't want your money anymore. Which means that skybridge is just going to get smaller and smaller and more and more irrelevant.

[Anna Shymansky]

Yeah.

[Felix Salmon]

So the story of Skybridge is that it started off as a amazingly productive firm which had great outperformance and then it got bought by Anthony Scaramucci and it kind of plodded along Sort of somewhere below the market and now it's becoming owned by a bunch of shady foreigners and it's going to really underperform and basically over time it's becoming less and less productive. How's that for a segue?

[Anna Shymansky]

Jesus.

[Felix Salmon]

Let's talk about productivity.

[Jordan Weissman]

Yes. So I mean, productivity has been in the air for a while now, especially questions about why productivity growth is so much lower than people would expect.

[Felix Salmon]

I'm blaming the mooch.

[Anna Shymansky]

We should probably just say at the outset what productivity actually is.

[Jordan Weissman]

There are different. And also, frankly, in economics, there are many different types of productivity that you're discussing. But what they're specifically talking about here is labor productivity. So that is output poor per hour of work. So.

[Felix Salmon]

So. And if you're a hedge fund manager, that would basically be your, your alpha that you generate the kind of added value.

[Jordan Weissman]

Well, that's.

[Felix Salmon]

Generate a little.

[Anna Shymansky]

Yeah, well, if you're. And yeah, that's your, I guess your value add there per hour or whatnot. And then if you're, if you're a worker in a Ford factory, it's how much cars you're making per hour.

[Felix Salmon]

Exactly.

[Jordan Weissman]

Right. And when you're talking. Because when you're talking about GDP growth. Yeah. You're factoring in the kind of the amount of capital you have, the amount of labor you have, and then how productive the uses of both of those. And once you get to a certain level in the economy, the only way you can increase GDP growth is by increasing productivity.

[Anna Shymansky]

Yeah.

[Felix Salmon]

And that is basically how the world became rich. Insofar as we now live in a rich world, it is because we are much more productive now than we used to be. And instead of scrambling around in the ground trying to extract potatoes, we are doing like much higher value work creating funds of funds and creating wealth and all of this wonderful stuff. And the problem which everyone has been struggling with for a couple of decades now, is that this productivity growth which made the planet wealthy seems to have disappeared. At least in the.

[Jordan Weissman]

I think what's interesting about the article from the Times that was released this week, which is our, our news hook here.

[Felix Salmon]

We have a news hook.

[Jordan Weissman]

We do.

[Felix Salmon]

And the Times news hook is a paper by the Roosevelt Institute.

[Jordan Weissman]

Yes. As well as an American Enterprise Institute paper, but especially the Roosevelt Institute where they are arguing that we're thinking about this in the wrong way, that it's not that productivity growth is slow, thus GDP growth and wage growth are slow, it's that productivity growth is slow because gdp.

[Anna Shymansky]

Well, sort of.

[Jordan Weissman]

Sort of. Well, it's Demand driven. They're specifically talking about the fact that it's labor market.

[Anna Shymansky]

It's the labor market that's the issue.

[Jordan Weissman]

Slack labor market. Yeah, but, but, but it's entirely based on demand. It's based on the idea that companies do not have to invest in capital. They do not have to invest in labor saving devices because there's depressed demand. Because the slap labor market. So they can meet that depressed demand without investing.

[Felix Salmon]

So the intuition here is basically that wages are flat, as we know, they've basically been flat since the mid-80s. And so businesses know how much labor costs and they're like, okay, fine, that's my labor input and I'll just pay my labor that much. If you have a world like you had in the 70s where you had like massive wage inflation and labor was getting more and more expensive, then that out of necessity you would be forced to try and find labor saving devices and make yourself more productive because otherwise you couldn't afford the labor. Now that you can afford the labor, you're kind of not forced into that inventiveness anymore.

[Anna Shymansky]

Yeah. And so there are a few reasons why it's important. It's actually just. You're bringing up that history of the 70s. There's actually this big. The history of the 70s, and when there was this horrible bout of inflation, there's this mystery people have been trying to solve about productivity growth. During the 80s, there was just this. Or about corporate investment during the 80s, there was this huge spike in corporate investment around 70s, 80s. No one has really ever solved why. There was just this big boom of it. And so this actually kind of plays into that. This idea is like when labor costs are going up, you, you know, you invest and try to essentially buy computers and robots to replace your workers. And this actually gets into kind of a huge macroeconomic argument. And that's one of the reasons I think the Roosevelt guys are interested in it.

[Jordan Weissman]

Well, the Roosevelt guys are interested in it because they're arguing for keeping rates low.

[Anna Shymansky]

Yes. Well, yeah, and I know, like, I know some of them and we've been talking, I've talked to them before about these issues. And you know, it actually, if you think that productivity growth just kind of comes out of nowhere, Right. Like, if it's just like we create inventions, we create the Internet and that boosts productivity, you can't, it doesn't. It's sort of just this magic ingredient you can't really factor into your economic analysis. Right. But if you think that essentially a really tight labor market, really low unemployment Itself actually drives up productivity. That creates all sorts of interesting possibilities about how we frame the economy. And you can start to argue, well, actually, if we have spending policies, right? If we have, like, government spending policies that. Or monetary policies that really, really tighten the labor market and get. Make sure everyone has a job and wages are rising, we're actually also going to grow the economy faster. And there is. There's this argument that actually Bernie Sanders kind of started during his campaign where somebody said that Bernie Sanders policies would set the economy growing about 5% per year. And all the, like, econ nerds, myself included, said, that is ridiculous. And this was one of the theories that was sort of built into that analysis. There's this old thing called Verdun's Law that everyone's like, what the hell is that? And so now people are kind of revisiting this idea is like, well, can we actually make the economy grow faster if we just freaking, you know, put the labor market in a pressure cooker? Would that do it?

[Jordan Weissman]

And Yellen has even, like, she's like, posited what would happen if we just allowed the economy to overheat. Would that actually enable us to meet our inflation target?

[Anna Shymansky]

Yeah. Would it help us meet our inflation targets and just be good for world wealth? And why should we be less inflation phobic? It raises the question, is this 2% inflation target we have, which is really more of a ceiling, it's not even a symmetrical target. Is that keeping us from becoming more productive because it's keeping unemployment too high, or is it keeping the labor market too slack? I mean, it raises all sorts of interesting possibilities about how.

[Felix Salmon]

Yeah, let me just jump in here and ask. I have two mental models of sort of contemporary productivity.

[Jordan Weissman]

Yeah.

[Felix Salmon]

One is a sort of German factory full of extraordinarily expensive robots where there's a relatively small number of humans who are producing incredibly valuable output.

[Anna Shymansky]

Yeah, that's a good model.

[Felix Salmon]

And the second model is basically the one which Apple and Foxconn came up with for the iPhone, which is you get thousands and thousands of human beings on assembly lines to do, like, very shitty, boring work over and over again. A bit like, you know, in an atmosphere which wouldn't have looked out of place in Henry Ford's time. Yeah. And that has obviously been incredibly profitable for both Apple and Foxconn.

[Anna Shymansky]

Yeah.

[Felix Salmon]

I mean, obviously they have very different models of where the productivity comes from, but the latter one would seem to employ more people.

[Jordan Weissman]

Yeah. And I do think this is an interesting example of where I feel like we have every Every day you look at the newspaper there's another article about the robots are taking our jobs, we will have no jobs. And then this would suggest that like we need more robots.

[Anna Shymansky]

That is the counter argument. Yeah, like the productivity. And this is the thing. Every time someone writes one of those futuristic like futurist predictions about how the robots are coming, everyone says where is it in the productivity figures? As for your questions, yeah, I mean squeezing a lot of work out of people is a way is literally they are productive, it does employ more of them, but it's also, you know, a really awful quality of life. And it's. Each of those individual people is not super. Each of those individual people is actually not super productive. You know, they are. The margin that each of those people is adding in value to the product is not a lot. It's Apple makes a profit in the end because they have cheap inputs. But you know, China is trying to move beyond that model of labor that's actually not super high productivity for, for China.

[Felix Salmon]

I mean we should mention just because we are meant to be talking about the business news of the week that Foxconn is now opening a big factory in Wisconsin.

[Anna Shymansky]

Well, supposedly, yeah.

[Felix Salmon]

They've promised to and making TVs and things with an absolutely enormous subsidy from the state of like $30,000 per worker per year or something like that.

[Anna Shymansky]

Yeah, it works out to like $516 I think per resident of the state. Someone was joking. That was enough to buy everyone an iPhone.

[Felix Salmon]

But that's a fascinating move that like, you know, now that the big Chinese, you know, labor heavy manufacturing companies are moving to the United States and seeing that the model works here.

[Anna Shymansky]

Well, so the idea is that if Foxconn comes here, they're going to try and move in this more mechanized direction. A company making LCD screens in America is not going to have that, that rows upon rows of, of low paid workers. That's just because a don't allow it.

[Felix Salmon]

But why would they not do that in China? What's the advantage of doing it in the United States?

[Anna Shymansky]

So this is, this is part of it is that in China. Foxconn has talked for years now about actually moving in a more roboticized direction. They actually have. They've. I can't remember if they bought or started if Hon Hai Precision has its robotics subsidiary. But they are very into the idea of mechanizing their labor force partly because they don't like the idea of having to manage these thousands and thousands of people of human beings essentially. They don't like having to run dorms.

[Jordan Weissman]

And you also get to a point where, again, the diminishing, like, marginal productivity per input of labor, again, like, that's just by definition. Once you get to a certain point, if you add more workers, you. You have smaller and smaller increases in output.

[Anna Shymansky]

Yeah.

[Felix Salmon]

So, but can I just repeat my question?

[Anna Shymansky]

Yeah.

[Felix Salmon]

Which is, if they're doing this in China, why would they want to do it in the United States?

[Anna Shymansky]

Well, once you're heavily. I mean, first off, it's partly a political thing. Foxconn does this around the world. They try to kind of curry favor by promising over promising. And they've done this in so many places now, people started to note that it is literally. I mean, they've promised to open so many factories, it's almost impossible for them to actually follow through on it. So that's why a lot of people are looking askance at this deal. Once you do move in that sort of mechanized direction, once you kind of modernize your manufacturing, it matters less where you are. Right. Because once you just have a bunch of robots doing most of the work and a few highly, relatively highly paid technicians overseeing everything, it's a little less important whether those technicians are paid on a US A Wisconsin salary scale or a Shenzhen salary scale. And so that's because, you know, each of those individual workers, each of those technicians is going to be really productive because he has all the robots supporting him.

[Jordan Weissman]

I would also like to argue that this is not part of, like, China's overall plan. Like, they're really trying to get, like, the entire supply chain onto China and also to move up the supply chain in China. This is, like, one specific example that I do think is probably more politically motivated.

[Felix Salmon]

And just to finish it up, I think it's worth noting that the difference in salary between a technician in Shenzhen and the technician in Wisconsin is actually not as big as you think it is. Like, Shenzhen salaries have come up quite a lot. Wisconsin salaries, as we all know, have been flat for decades, and they're converging.

[Anna Shymansky]

Pretty fast, which is the result of productivity in theory.

[Felix Salmon]

Let's talk about eggs or the lack thereof.

[Anna Shymansky]

Yeah. So, wacky startup drama of the week. In case the White House and Healthcare weren't giving you enough fun to read about, there's been this weird story going on at Hampton Creek, which you probably know as the company that makes vegan mayo and that the. Like that Hellmans and like, the Egg Board essentially tried to. Big egg, Big egg, Big Mayo essentially tried to put out of business by saying that because their product contained no Eggs. They were, you know, marketing it falsely as mayo.

[Felix Salmon]

I have much sympathy with this argument because I'm pro egg.

[Anna Shymansky]

I mean, I'm pro egg.

[Jordan Weissman]

Me too. And also because if you see just mayo, you do not think righteous mayo.

[Anna Shymansky]

Yeah, well, that is what they. Yeah, exactly. Their product is called.

[Jordan Weissman]

You think it's just mayo.

[Anna Shymansky]

It's just as in, like justice mayo. Like, this is Wonder Woman's map. So they've had a whole bunch of controversies recently, but the biggest, the newest story is that their whole board quit. Like the entire. The startup's whole damn board just left in this power struggle.

[Felix Salmon]

And not just the board, but like virtually all of the executives.

[Jordan Weissman]

Yes, well, those that weren't fired.

[Anna Shymansky]

Yeah, the executives all kept getting fired. This is part of why the board ended up leaving.

[Felix Salmon]

The board basically kept on looking at the CEO and saying, you can't just fire every single executive. And he's like, okay, I won't. And then he would go ahead and fire every single executive.

[Anna Shymansky]

So this is okay. So it seems like the conflict within Hampton create the bet, from what I've read on Bloomberg and all the articles about it, is that this guy, Joshua Tetric, has really big ambitions for his company, his vegan foods, you know, egg replacement company. It's just he wants to be one of the first guys to market with lab grown meat. Right. And there was this tension in the company. Should we put more of our resources into, you know, our egg substitutes, which is what we are known for, our mayo, or should we keep going down this moonshot path and try to introduce, you know, try to come up with a product that no one has managed to produce at scale yet? And a lot of his executives are like, we should really focus on the eggs. And he's like, you're fired. And so his board is like, hey, maybe you shouldn't just be firing people. And then unfortunately, the board didn't really have too much power over him because back in 2015, he managed this maneuver where he got them to sign documents basically saying he couldn't be fired and giving him a majority voting share. And they were pissed about that, but signed it anyway. So then after being told he couldn't fire anyone, he went and essentially had a. But he. When.

[Jordan Weissman]

This was amazing.

[Anna Shymansky]

This is. It's almost like one of those stories where a band, like, fires someone by having the drummer show up and then they find someone else is playing their drum set. Like it was that kind of cruelty, what we're about to get to.

[Felix Salmon]

So he had a bunch of magaluf something about Magalu.

[Anna Shymansky]

Yeah, they were off in Spain on a business trip and they said he told these, these are Spain.

[Felix Salmon]

They were in like major.

[Anna Shymansky]

Yeah, Majorca. That's right. And he told them that they were going to meet some investor and they should get ready and should have a conference call and you know, they show equipment, video conferencing. So they arrive at this room and they sit down and the video conference starts and there's no investor and instead it's just like a dude that he had hired to serve them. They're like, you know their severe and.

[Jordan Weissman]

I will take your laptop.

[Anna Shymansky]

Yeah. And tell them basically George Clooney from Up in the Air was there to greet them and tell them they're fired. And the board is sitting there being like they're dealing with like a dog that won't stop eating like, like the roast beef. Like every time he's like, stop eating all the food on the table. And the dog's like, okay, I won't do it again. And then he just keeps going back like, like, you can't keep firing people. And they had this meeting and they freaked out and they tried to give him more money, more capital on the condition that they he kind of stepped back and gave over some of his power. Didn't work. Now the board's gone, this company is losing money left, burning money still $4 million a month supposedly. So I guess I'm looking at all this and thinking, can a startup come back from that?

[Jordan Weissman]

Well, and I also think this is more than just the board leaving because you know, this guy's a difficult personality, keeps firing people. You also have a long history of this company essentially misrepresenting itself.

[Anna Shymansky]

Yes.

[Jordan Weissman]

Pretending that it's a tech company when ultimately it's no different than if I were to start a company where I make vegan cookies and then I try to pretend that, well, maybe I'm going to develop this product that's going to, you know, make cookies that make you live forever and that wouldn't that be great? And okay, people give me money, but I can't actually do that. And that's his thing. And this is all he is, is a cooking company.

[Anna Shymansky]

Well, so I think this is a heavy science. It's.

[Jordan Weissman]

But, but it's not heavy science. That's the thing. When they actually talked to a lot of the scientists that were originally hired, they said we were sitting around doing nothing, this wasn't science. They would actually have them do like fake experiments when the news people came.

[Anna Shymansky]

Interesting.

[Jordan Weissman]

Yeah. Like this and actually also the only product so far that they've had, really, which is this yellow pea substitute for eggs. They didn't even develop it. They had to outsource it to somebody else because they couldn't.

[Anna Shymansky]

Oh, I didn't realize that.

[Felix Salmon]

I loved it. That they. The one great innovation they did manage to come up with was taking all of the money from their VCs, walking into supermarkets and buying their own products in order to like make it look that their sales were higher than they actually were.

[Anna Shymansky]

I wonder if that has something to do with why their gross margins are like, like they're losing $2 for every one, like they sell or something really.

[Jordan Weissman]

Because if you actually looked at their numbers, there was one month where this really vague category they had about which people were like, why is this so high in terms of one of their expenses, which was clearly accounting for this money they were spending buying samples was more than their profits for that month.

[Anna Shymansky]

So this is interesting. So I, I'm trying to now like build this narrative in my head. So what you actually have is an extremely ambitious and hard to control CEO who likes to fire people who don't agree with him, desperately wants to make his non science company that he has sold as a science company into a real innovator, into someone that's at a startup that's going to have one of those breakthrough moonshots. It's going to change the world. Even though really he's just, you know, coming up with products with a pea egg substitute that he got from somebody else. And no one thinks that he's, they're actually capable of doing that. And there's a, there's a fire.

[Felix Salmon]

And he tells him, no, there's a moochangle here. Because like I wrote, one of the reasons why the mooch doesn't like me is because I wrote an article once about him which among other things, accused him of his attitude basically being fake it till you make it. And he was like a fake hedge fund manager long before he was a real hedge fund manager. Yeah, and this is an unbelievably common attitude in Silicon Valley. And we saw it with Theranos most notably, but more generally with just about every single startup in Silicon Valley, they all claim to be crushing it and doing amazingly important and interesting and innovative things in order to get the capital that they need to maybe actually do something important and innovative down the road. And I feel like, although I'm not saying that Hampton Creek is the same as Theranos, I'm saying that like the Deep attitude of what matters is the message more than the reality. Because it's only the message which is going to allow you to realize the reality is just deeply ingrained.

[Anna Shymansky]

What's funny here to me is that the faking it aspect isn't like faking it to consumers. Right. Like they had.

[Jordan Weissman]

Well, there's some of that, there's some mislabeling.

[Anna Shymansky]

There's some mislabeling. But still for the most part, I think people who are into Hampton Creek, especially after all the press it got following its duel with Big Mayo with Big Egg, is that people knew it was a vegan substitute. Like, and it was. They had a product that people liked and were buying. They weren't necessarily doing great financially, but they had a real thing they were selling that was not inherently dishonest. The kind of faking it part was to investors it seems like branding themselves.

[Felix Salmon]

In this sort of as the technology.

[Anna Shymansky]

Exactly. Because you know, which is like it's the Juicero thing to some degree. Except for kind of got like a cracked through a mirror dark.

[Jordan Weissman]

Exactly. Because you're not getting a billion dollars for just a vegan food company. If you say oh, I'm gon like a meat substitute that's going to taste exactly like meat. Well, okay. People get excited about it.

[Felix Salmon]

So I think, I think the end game here is probably that Unilever or Procter and Gamble or someone will wind up or Kraft will wind up buying just mayo and the, you know, one or two successful products that Hampton Creek has for, you know, a reasonable multi million dollar sum.

[Anna Shymansky]

Yeah.

[Felix Salmon]

And then everything else just kind of.

[Anna Shymansky]

Goes away and he never gets his moonshot.

[Jordan Weissman]

Agreed. And just my last point here, just like to say that from reading all about this, I will say that the, the vegan alpha bro may be the worst of all possible types.

[Felix Salmon]

Totally.

[Anna Shymansky]

I, I, I, when I, in my two weeks of trying veganism, which dear listeners, don't do it like, I, I stumbled upon a bunch of vegan workout sites where it was like how to get swole and be vegan. And yes, you are correct.

[Jordan Weissman]

I say this as a vegetarian.

[Felix Salmon]

Yeah, like vegetarians. I can kind of get my brain around the vegetarians, but it's hard.

[Anna Shymansky]

You don't. You spend so much time thinking about what you are, you can and can't eat.

[Jordan Weissman]

And it's also this combination of being a vegan and being this incredibly alpha male that it's not a good combination.

[Felix Salmon]

So and now I'm going to completely change the subject and because this is Slate money, your Guide to business and Finance News of the week. I'm going to talk about baking.

[Anna Shymansky]

Okay.

[Felix Salmon]

I need to talk about this because it's just something which I'm into right now.

[Anna Shymansky]

It's a bonus segment.

[Felix Salmon]

I think it's a bonus segment. It's called Torta de Santiago. I've made it like three times and it's a very forgiving cake. And the wonderful thing about this cake, well, the most wonderful thing about this cake is that it's unbelievably delicious.

[Anna Shymansky]

Okay. It's a good quality. I'm really wondering where this is going. I've many times suggested Slate money become a food show on the side. So I'm good.

[Felix Salmon]

The second interesting thing about this cake, after like serving it to a bunch of people who are all like, oh my God, this is unbelievably delicious, is that it's actually a gluten free, dairy free cake. It only has three ingredients, egg. But the third thing about this cake is that even if you find this amazing holy grail of a gluten free, dairy free, unbelievably delicious cake, it still has egg in it. Egg is one of those three ingredients.

[Jordan Weissman]

Yes.

[Anna Shymansky]

And so this is your way of saying, like, fuck Hampton Creek.

[Jordan Weissman]

Go eggs. Go big eggs.

[Felix Salmon]

Eggs are wonderful things. Eat lots of eggs.

[Anna Shymansky]

Today's episode is brought to you by the Egg Board. We have USDA funding here.

[Felix Salmon]

If Big Egg wants to sponsor Slate money, I'm like, yes, we'll take those egg dollars. I'm totally into that because eggs are delicious. And if you want my Torto de Santiago recipe, just email us on slatemoney.com and I will send you. It's. It's so easy. All you need is a blender and some almonds. Okay.

[Anna Shymansky]

Jesus. We haven't been sponsored yet. Just to be clear.

[Felix Salmon]

Everybody, let's have a numbers round.

[Anna Shymansky]

All right, I'll go first. My number is 19%, which is how much Altria's stock fell Friday morning after the FDA announced it was going to try and reduce the nicotine content in cigarettes to a non addictive level.

[Felix Salmon]

I feel like, you know, the Bloomberg presidency has actually happened and no one noticed.

[Anna Shymansky]

It was so surreal seeing this news because a, it was just, it was out of nowhere and then, or felt out of nowhere and I was like, is this, this is the Trump administration? I still haven't been able to like read up on what internal machinations, what kind of fuck up on the part of, you know, the Trump administrator, like the higher ups. Cuz I'm assuming This is not something that like came out of the White House by any means or anyone the White House would have appointed. But somehow this good thing seems to have happened that like in the year 2017, the FDA has decided to stop cigarette companies from getting poor people addicted to cancer stakes.

[Felix Salmon]

So I think what happened, this is just my theory, I have no evidence for it whatsoever, is that in the past year or two, America as a whole, and Republicans in general have become much more conscious of and sympathetic to the problem of addiction. Yeah, Mostly because of opioids. And it's like addiction isn't happening to other people and black people now it's happening to us. And it's a big problem and we need to do something about it. And once you think of addiction as a disease which needs to be treated rather than like some, like I can be addicted to something if I want because that's freedom, then it follows pretty naturally that you want to do something about nicotine addiction, which is the biggest and most harmful addiction in the country.

[Anna Shymansky]

I mean, it's hard to exaggerate how huge this would be if it really happened because like the big tragedy about smoking America is that rich people stopped doing it and poor people did not. And that just the decline in smoking rates among the wealthier was so much more dramatic than among the lower 50. Lower earning 50% of the population. And so much of our healthcare costs come from these long term chronic conditions. If you end smoking addiction or nicotine addiction, you're probably going to bring down Medicaid costs, you're gonna bring down Medicare costs.

[Jordan Weissman]

Maybe, maybe that's the whole point.

[Anna Shymansky]

Maybe that's the whole point. But I mean there are all sorts of not. You're gonna improve mortality rates. I mean, there are just so many knock on effects.

[Jordan Weissman]

Turns out Bloomberg had a point.

[Anna Shymansky]

Yeah. And so like if this really, if nothing gets in the way here, if somehow the forces of big tobacco don't rally and stop this, this is a. It just strikes me as a great thing. But so we'll see. But it's really a glimmer of good.

[Jordan Weissman]

News, you know, I have a much less happy number. My number is 50,000. So if I were to ask you which country sends the most asylum seekers to the United States, what do you think it is?

[Felix Salmon]

Guatemala?

[Anna Shymansky]

El Salvador?

[Jordan Weissman]

No, it's Venezuela.

[Felix Salmon]

Okay, okay.

[Jordan Weissman]

And I'm specifically bringing this up because tomorrow technically there's supposed to be this constituent assembly to basically create a new constitution where the Maduro administration could then in theory just get rid of everyone in the national assembly take over power even more than they already have. This is a big deal and it's incredibly negative for the country moving forward.

[Anna Shymansky]

Yeah.

[Felix Salmon]

For Venezuela.

[Jordan Weissman]

Yes.

[Anna Shymansky]

Yeah.

[Felix Salmon]

Keep an eye on Venezuela. Yeah. This story is one we are definitely going to revisit. I'm not going to do my incredibly depressing women on boards number because I feel like we've had enough depressing stuff. I'm gonna do the Facebook earnings.

[Anna Shymansky]

Oh, that caused the freak out.

[Felix Salmon]

So here's my number, which is 2 billion.

[Anna Shymansky]

Okay.

[Felix Salmon]

Which is now the number of monthly users that Facebook has around. Well, obviously around the world, because there's literally no country in the world which has 2 billion people in it. The only way you can get to 2 billion is by being around the world. 2 billion is insane. Yeah. You know, given like the sort of basic level of sort of hand eye coordinate, like, you can't use Facebook if you're sort of under the age of five. You can't. You know, you need a basic level of literacy. You need a phone. You know, you need like, I think its penetration is almost universal at this point anyway. It has 2 billion monthly users. And here's, here's one more like throw in number. 3 billion is how much it made in profit in just the second quarter in just three months.

[Anna Shymansky]

Did you see that? There are whispers that Steve Bannon wants to, quote, regulate it like a utility. Not that this will come to pass, but this is what's being reported. It's kind of like his 44% tax rate for the rich. Like other things Steve Bannon has muttered.

[Felix Salmon]

About that it's an insane profitable company. It's making $4 billion a quarter on like 9ish billion dollars of revenue. Like, it's, it's just a license to print money, that company.

[Jordan Weissman]

Sheryl Sandberg.

[Felix Salmon]

Okay, so I, that is it for the main part of the show. We, as I say, we will talk very geeky stuff about sovereign debt, which actually has a Venezuelan angle. Because if. Yeah, and just a hint of how geeky we're going to get here, I will mention that Lee Bukai and Mitu Gulat, really fascinating paper about restructuring Venezuelan sovereign debt this week. So if you want to geek out on sovereign debt, you should read that. But if you don't want to listen to us geeking out about sovereign debt, that is it for us this week. Thank you for listening to Slate Money. Email us on slatemoneylate.com and go listen to the political gabfest. Because even though we listen, we talk every so often about Mooches the political gabfest, which was the original gabfest. The basically the model which Slate Money copied many years ago is the OG Gabfest. And so listen to Emily Bazelon, John Dickerson, and David Plot every week. Their show goes up Thursday afternoons. So many thanks to Dan Schrader, and we will talk to you next week on Slate Money. Oh, look, I got eggs on my plate.

[Anna Shymansky]

I got them.

[Felix Salmon]

Damn right. I got four walls.

[Anna Shymansky]

I live in here.

[Felix Salmon]

Hell, I live in here. Now, this big Jew man uptown, he.

[Anna Shymansky]

Told me one day and said, hey.

[Felix Salmon]

Boy, you looking at a house on the hill that cost $100,000. So. Sadie Blanchard?

[Sadie Blanchard]

Yes.

[Anna Shymansky]

Hi.

[Felix Salmon]

Welcome to.

[Jordan Weissman]

Hi.

[Felix Salmon]

Welcome to the extra special bonus edition of Slate Money. You are. Yeah. You're going to be broadcast to thousands of people. No pressure.

[Sadie Blanchard]

Exciting.

[Felix Salmon]

So explain. Explain who you are and why you want to talk to us.

[Sadie Blanchard]

Yes. So I am the fellow in private law at the center for Private Law at Yale Law School, and I'm researching the role of courts in disputes between foreign sovereign states and their creditors.

[Felix Salmon]

So just like Argentina versus Elliot, everybody's favorite court case, it was all decided by an octogenarian crazy person called Grise.

[Sadie Blanchard]

Grise. Yes.

[Felix Salmon]

And you're like, why is some random old guy at the Southern District of New York suddenly having all of this influence in international geopolitics?

[Sadie Blanchard]

That's right. But my question is even maybe a little bit more esoteric than that in that I actually view that one part of that case as an outlier. So that was a case, that was a decision, this pari passu ruling that people have heard about, that where the court really did have the power to put a lot of pressure on Argentina, but that's usually not the case. So if you look at the more than 10 years that Elliot was suing Argentina before that decision, they chased Argentina all over the world for over a decade, and they got almost nothing. So why did they keep doing it? Is my question. This Paripasso ruling, according to everyone I've talked to, was like a surprise. No one expected it.

[Jordan Weissman]

Yes. This is not normally the way that.

[Felix Salmon]

And so the question is like putting pari passu to one side, why divulture funds take sovereigns to court when it's so difficult to win? Is that the question?

[Sadie Blanchard]

That's the question.

[Felix Salmon]

So, yeah. So the short and simple answer, which I'm sure isn't really going to satisfy you, but it's probably a good place to start, is that bond is just a contract, and contracts are legal documents. And if you want to collect under the terms of a legal document, the only real way you can do that is by using legal mechanisms, that is a court to try and do that. And the weird, wonderful, unique thing about sovereign debt is that because there is no such thing as sovereign bankruptcy, you can just keep on going to courts and getting judgments and getting, you know, whatever you like more or less in perpetuity, because there's no way that any of this debt can ever be discharged in bankruptcy.

[Jordan Weissman]

Yes. And, and I also think it's very important to remember that often when you're suing, you understand that you're not going to be able to reach the sovereign itself. But what you can do is essentially influence third parties, things like clearing houses, trustees, and then that can have a significant impact on pressuring the sovereign and making it more likely that they'll pay.

[Sadie Blanchard]

That's exactly my theory. I'm going to ask you a little bit more about that. When you say influence them, do you mean because the court does have sanctioning power over those third parties or also or instead because the court reveals information about the debtor that then causes those third parties not to want to transact with the, with the state?

[Jordan Weissman]

No, no. It's more just the idea that you sometimes actually have entities that the courts would have like jurisdiction over, and then sometimes you also have entities that they don't, like Euroclear, which is in Brussels. But what the courts will say is, okay, if you violate this, then we can go into the discussion about whether or not I have the power to make this decision. But first you have to violate it. And nobody wants to do that. It becomes a significant risk for all of these third parties so that nobody wants to process these payments. And so then that makes it really restricts access to the capital markets.

[Felix Salmon]

Also if you, I think what this comes into, I think it all basically falls under the general heading of the cost of default. What the vulture fund wants is for it to be very expensive for the sovereign to be in default, which will give the sovereign the incentive that it needs to settle in some way. And the way you make it expensive for a sovereign to be in default is to basically make it really hard for that sovereign to just go about the day to day things that sovereigns do in the world. You don't need to actually win anything in the court. But if you can make it hard for that sovereign to just like do the kind of transactions that all countries do every day, then that's so much of a pain that eventually there's A good chance that the sovereign will come to the negotiating table and say, let's talk about like, can I give you a state owned enterprise or something and we'll call it a deal.

[Anna Shymansky]

Can I ask a question here? Can I clarify? You're talking about how, for instance, going to court can eventually, you know, cut them off from the payment system if they haven't won a judgment. How does, I guess. Can you give me like a concrete example of how that works? Like you have to win a system. Yeah.

[Felix Salmon]

It doesn't need to be that blatant.

[Anna Shymansky]

Okay.

[Felix Salmon]

Which is the point that Anna is making. You don't need to. But in the case of Argentina, we really did have, Argentina was cut off from the payment system and there was this very thermonuclear remedy that Criset came up with. But what we're saying is that the way that most sovereign negotiations work is kind of in the shadow of that threat and that there's a lot of little things which are not big. Like you are cut off from the entire payment system, but you are cut off often from the capital markets. Often it's much, much harder for you to borrow money on the bond markets if you're in default to a vulture fund.

[Jordan Weissman]

Well, exactly. It's going to make it, you know, very, very hard and very, very expensive. If you're going to try to raise in foreign markets. And then that also then increases when you're raising debt in domestic markets, that's going to increase those rates. And then also this is a very expensive process for the sovereigns in terms of other legal things. It also means that when they have to travel, they have to be concerned about assets being seized. So then that makes it complicated. Even trading can be complicated in terms of trying to trade with the US and then there's concerns that some of that money could be seized. This really can put a tremendous amount.

[Felix Salmon]

Of pressure on the kind of things that every government just does as a matter of course. All suddenly need to be lawyered and you wind up paying tens of millions of dollars to Cleary Gottlieb and you end up just basically everything takes much more time and much more lawyers than it would otherwise take. And none of that is money which is going to the vulture fund. And the vulture fund isn't winning in court. But it's still a cost to you and it's still an incentive for you to just settle this thing.

[Anna Shymansky]

Trench warfare.

[Jordan Weissman]

It's important to remember, like when that, you know the issue with Argentina and that, you know, that ship that was seized and like that ship was only worth like $20 million. Like, they didn't really care about getting that ship. You're talking about they're looking at a claim of over a billion dollars. This was just to inconvenience the government.

[Anna Shymansky]

So I.

[Sadie Blanchard]

Right.

[Anna Shymansky]

I have.

[Sadie Blanchard]

Yeah.

[Anna Shymansky]

Oh, I was gonna say, I have another question for you guys. Just from the, I guess from the fund's perspective, I imagine some of this also has to be just like the potential payoff is so high compared to the cost of lawyers.

[Jordan Weissman]

Oh, yeah. I mean, if you're talking it also. Sorry.

[Anna Shymansky]

Oh, no, lawyers aren't for a big fund. Lawyers aren't that expensive.

[Jordan Weissman]

Well, I mean, I mean, even though obviously, like these fees, I'm sure were quite high in the grand scheme of things, if you look at Elliot's ultimate return, it was like 400%. It was a huge return, partially because of the nature of the notes that the interest that accrued was also a lot. So there's a lot of reasons why this actually was ended up, you know, they did very well on this investment despite paying legal fees that long.

[Anna Shymansky]

And so like the possibility of that, even if it's a small percentage chance of getting that kind of return, it still might be worth it if you do it enough time.

[Jordan Weissman]

Right.

[Felix Salmon]

And the other thing which has to be mentioned in the Argentina case is just that the amounts of money were vastly bigger than we'd ever seen in these kind of cases before that. You know, they had a case in Peru years earlier which was just a fraction of that size. And most vulture fund cases, when you're talking about somewhere like the Congo or Nicaragua or Honduras, are going to be just like single digit millions. And so it kind of the reason why Elliot could afford to litigate this so expensively for so long, one of those reasons is just because there was so much debt out there that they could have a massive holding. And then the other thing which you always have to bear in mind is that the costs are asymmetrical, that the government has to lawyer up every single transaction it does everywhere in the world. And that's really expensive. Whereas the vulture fund can just sit there sort of threatening in the principle to maybe attack one of those transactions. And so that doesn't actually cost anything, but you need to, you need to show the willingness to take them to court once or twice, otherwise they won't be scared.

[Jordan Weissman]

Right. And also, if you, depending on where you bought the debt, if then you were, you know, say you bought it at 20, 30 cents and then you're then they're saying, well, if I take part in the exchange, I'm looking at a sev, like a 70% haircut versus if I keep this going, even if I can not get entirely where I want, but still at least get a better return. Again, that's more incentive. You don't necessarily anticipate you're going to be paid out at par.

[Felix Salmon]

Yeah. So I think a lot of people concentrate a little bit too much on the judgments. It's very, very easy. If you take a sovereign to court and the sovereign is in default, it's very easy to get a judgment against the sovereign. And that and a buck fifty will get you on the subway. The judgment in and of itself is very rarely paid. What you don't see in court cases is a country defaults, the vulture takes the country to court, the court lays down a judgment saying, you owe this vulture creditor $10 million. And then the country goes, oh, okay, here's a check for $10 million. What you have is an outstanding judgment. But then armed with that judgment, then you can sort of threaten the debtor in any number of courts around the world.

[Jordan Weissman]

And I think it's also important to remember that this often becomes. Is part of just basic negotiation, that when a country just either is going to default on its debt, or if a country knows that it's going to need to again, like, restructure its debt in some way, the idea is they'll make a first offer and then people will come back with counter offers and you'll. And it's not necessarily every time you expect to have these incredibly difficult legal cases for years and years. Part of it is just the idea that, okay, you'll start here, I'll go here, and will probably come out somewhere in the middle. But if you are a fund and your job is you've invested your client's money, it behooves you to then try to get the best return for your client.

[Sadie Blanchard]

Yeah. So this story you're telling is the litigation as a sanction story. It's the idea that having to go to court at all or having to lawyer up is itself imposing such a big cost on the state that it is it eventually is better off to settle with the creditors. And I don't question that that's part of what's going on. But there's something else going on too. If you think about the Congo case, once the creditors had a judgment in hand, they got discovery all over the world, not only about the Congo's assets, but also about the assets of the leader, the president was found to be engaged in all kinds of corruption. Then the hedge funds, like, leaked the information to Global Witness and caused a big scandal. So I think that's also a part that's been underappreciated of what they're doing. They did something similar in the Argentina case where they were following certain suspicions of corruption going on in Argentina. And they used that to get discovery about straw companies in Nevada that were linked to. And a business associate of the Kirchner administration. So there's this other aspect of finding out things about the people in power that they don't want made public.

[Felix Salmon]

It's really funny you should mention the Congo case, because before they came. Before they went to Global Witness or at the same time as going to Witness Global Witness, they actually came to me with that information many years ago when I was writing for Euromoney. And I wound up writing about the Congo case. And they were really upset with what I wound up writing in the end because. Well, no, because, like, I basically wasn't interested in the, you know, corrupt African dictator is corrupt story. I felt it was like I kind of yawned a little bit at that one. And what they were wanting me to write was basically, you know, Elliot Associates is the crusader for truth and justice. And, you know, look at this evil, corrupt country, which is. Which they're, you know, which is the black hats and Elliot is the white hats. And what I wound up writing was basically, you know, I. The thing they got most upset about in that article and caused them to stop talking to me for like, two years was. And I would never in a million years have expected it, but the thing they got most upset about was when I wrote that they were trying to make money.

[Anna Shymansky]

Yeah.

[Felix Salmon]

And I was like, you're a hedge fund. Your job is to make money. And they got super, super upset. And they would. They basically didn't quite come out and say, no, we're not trying to make money. But they said, no, no, what we're doing here was we're fighting corruption. And we're like, you know, we're like. And I was like. And they were actually bringing RICO cases. They were like. They were trying to bring cases under organized crime statutes to try and, like, extract money from like. Like BNP Paribas. It was bonkers, that case.

[Anna Shymansky]

So, I mean, this kind of gets to kind of a bigger issue, I think, about the way companies and advancers tend to look at law versus the way lawyers look at law, which is. Or a lot of lawyers and legal Scholars especially look at law, which is lawsuits aren't about winning or about getting or even having the right case or knowing that you have the right case or that you're going to prevail. It's just about having enough of an argument that you can lock everyone into court a lot of the time and that you can get to that point where essentially you are then duking it out and imposing these costs on the other side and grinding them down. I mean, it's very a tool.

[Felix Salmon]

It's partly a tool for grinding people down. And that's the kind of Donald Trump sort of approach to litigation, but it's also. It gives you an arena. It gives you, like, four corners within which you can negotiate in the way that if you didn't have the background of a court case, it would actually be more difficult to get everyone in the room and talking to each other and trying to reach a settlement.

[Jordan Weissman]

Exactly.

[Sadie Blanchard]

So why is that true? In a world of creditor committees and all these other frameworks, there has never.

[Felix Salmon]

Ever, ever been a creditor committee that actually worked. I mean, so there have been many creditor committees which have worked in the world of loans. When you had a world which was dominant, when what was known back in the day as LDC lending, lending to less Developed countries, we called them back in the day, and you'd have creditor committees, which would be a bunch of banks, and you'd have Bill Rhodes from Citibank sitting as the chair of the committee, and they would sit around the table, and these negotiations would drag on for a decade. And eventually, after a whole bunch of kicking the can down on the road, they would eventually come to some kind of agreement that was basically how sovereign debt worked for decades, was because it was a loan market rather than the bond market. And then the way that got resolved ultimately in the Brady Plan was by turning all of the loans into bonds. And the reason they turned all the loans into bonds is precisely because everyone was sick of fucking creditor committees. And they were like, if we turn these all into bonds, we're never going to have to deal with the creditor committee ever again, because bondholders are everywhere and they're fungible. And that was largely right. People tried. I remember good old Michael Chamberlain at the emca, the Emerging Market Creditors association, desperately trying to put together a creditors committee for Ecuador. And it was just a complete nothing. Burger.

[Anna Shymansky]

Felix, can you explain a little bit of what exactly a creditor committee is? Because I'm thinking about those in terms of bankruptcy cases almost, but, like, I think I'm. I'm not. I think I'm actually lost here. So what exactly.

[Felix Salmon]

Yeah. Anna, have you ever been on a creditor committee?

[Jordan Weissman]

No.

[Felix Salmon]

Accredited committee is basically just what it says on the tin. And we had one in Greece which was, you know, had a tiny bit of influence perhaps.

[Anna Shymansky]

Okay.

[Felix Salmon]

But basically, it's just the problem with, with a bond default is that you have a very clear debtor who owes money, but you have a very unclear creditor. It's not entirely clear who the debtor should be negotiating with if they want to negotiate, because it's just they sold all of these bonds into the world and they don't know who owns the bonds. And so the way you try to solve that problem is by herding a bunch of cats and getting a bunch of creditors together in a committee, and then you can negotiate with the committee. The problem is they all have different cost bases. They have different.

[Anna Shymansky]

Although I do think it's probably easier to figure out who, like, you knew who had the, you know, who made your loans. That was obvious. So it was like you had the contract.

[Felix Salmon]

And even if they sold the loans, you know, who they sold them to.

[Anna Shymansky]

So it was easy to find the cats.

[Felix Salmon]

And it was a. It was a finite number of cats. It was never more than maybe like a dozen.

[Anna Shymansky]

Okay. And so with bonds, it's a totally different world where it's just securities that are.

[Jordan Weissman]

But I do think, you know, and again, depending on how in the event of a default or, you know, you're going into a restructuring, your strategy is going to be very dependent on your position and your size, or if you can, if you're smaller, if you can potentially align yourself with others, so then you can create a blocking position. And then this also brings up the issue of, like, whether, like, the terms of the contract, if you. If it has collective action clauses, if it doesn't have collective action clauses.

[Felix Salmon]

But then. And so that's the case for what you might call strategic investors who have strategies. At the same time, as we saw in Argentina, there's a bunch of just individual investors, often in this debt. There were thousands of Italians who had Argentine debt, and they were not interested in working out sophisticated strategies. They just wanted their money back.

[Jordan Weissman]

Of course, because when it comes to this type of. You get into the situation where a sovereign defaults, people have invested, as we were just saying, at many different points. So they could have invested at a point where they had no idea that this was going to happen. They. Or they paid close to par, or you could have people who will invest knowing that you're going to be going into restructuring. But the point is you buy it with the idea that you think you can push through a more creditor friendly, ultimate arrangement.

[Sadie Blanchard]

So what is it about going to court that allows it, that makes it easier to get all of these dispersed creditors, you mentioned, coordinated?

[Felix Salmon]

Well, I mean, it does have this kind of, what's the word? Focusing effect. It kind of forces everyone to look at the same issues at the same time in the same place. I mean, I remember in the Argentina case, you know, suddenly like you had gramercy and people like that hiring who was. Was boys. I think.

[Anna Shymansky]

Boy, Schiller.

[Felix Salmon]

It was. Yeah. You know, like to. To come out and start arguing their case. Because even though they weren't a party to the litigation, you know, if you own the debt and if there's a clear venue where the debt is being litigated and these issues are being litigated, that's where you go to work things out. One of the, I mean, the single most idiotic tactical decision that I've seen in the history of sovereign debt defaults was when Ecuador decided to default on its debt in, I want to say, 1998. They did so during the annual meetings of the International Monetary Fund in Washington, which was literally the only time of the year when all of the creditors were in the same place at the same time and could get into a room together and all agree in that room that, yeah, they were going to accelerate the debt, which is what Ecuador didn't want them to do. If they'd done it at any other time of the year, just coordinating all of those creditors to make that decision would have been much, much harder. And what a lawsuit does is it has that kind of coordination effect. It just brings people to the same venue to talk about things.

[Sadie Blanchard]

Okay. So I find that a little bit unsatisfying because with the amount of money at stake and in the world of conference calls, surely they could get together and figure it out if they think, and I do.

[Jordan Weissman]

Ultimately, ultimately, this is why most defaults, most restructurings, you don't have these long legal battles. Yeah, yeah.

[Felix Salmon]

I mean, it's true. You don't hear about the crazy negotiations which happened in, like, Pakistan or Ukraine. You know, these things happen quietly or even so much in Uruguay. You know, you're right that with a bunch of goodwill. And often what you find, though, behind the scenes of those is another venue. Like what you will often find, and Uruguay is a really good example of this, is that when you don't Have a court case when no one's taking the country to court and you don't have an official creditors committee, what you actually have is the US treasury stepping in and doing that coordination role and quietly talking to all of the bondholders and quietly acting as a liaison between the bondholders and the debtor country and trying to work things out. And one of the things that Bukait and Gulati sort of hint at in their paper about Venezuela is that Venezuela's workout is going to be very, very difficult because everyone expected that when Venezuela defaulted, the US treasury would step in and play a major role in working it out. But now the U.S. treasury is, I believe the technical term is a clusterfuck, and it basically just doesn't have that institutional ability anymore.

[Anna Shymansky]

It seems to me like you're. You're saying there needs to be some sort of forcing mechanism.

[Felix Salmon]

What I'm saying is that Sadie has this idea that in principle, with this much money at stake and everyone having Bloombergs and having each other's emails and they should be able to coordinate this shit. Don't we have slack these days? And the short answer to that is no. These people are unbelievably bad at coordinating.

[Jordan Weissman]

Yeah. Although I will say, I mean, I think at the end of the day, ultimately your. Your first instinct is always to not have to litigate this. Maybe, you know, there's a potential of threatening litigation so that everybody can kind of essentially get in the same room. But unless part of your strategy is essentially, you know, that you're going to be able to litigate longer than others are, you're. That is not going to be your first kind of the means you're going to want to use.

[Sadie Blanchard]

And I think, again, coordinating litigation is complicated among many different.

[Felix Salmon]

Oh, that's impossible. That almost never happens. I mean, what we saw in Argentina most famously was what's her face, Zimmerman? Like, totally free riding on Elliot. And the person who made the highest returns on Argentina paid almost nothing in lawyers because she was like, oh, I'll just get Elliot to do all the litigating for me.

[Sadie Blanchard]

Interesting. I know there were some creditors after Elliot got its settlement that tried to come in and say, me too, and the court refused to hear their claim. But I want to with the name of that one you're talking about is Zimmerman.

[Felix Salmon]

It's Andre Schleifer's wife up in Boston.

[Sadie Blanchard]

Okay.

[Felix Salmon]

Anyway, but thank you. Thank you so much for calling us. It's been so much fun, like geeking out about sovereign debt. We love to do this.

[Sadie Blanchard]

Thank you. I appreciate you taking the time.

[Felix Salmon]

Cheers, Sadie.

[Sadie Blanchard]

Okay.

[Anna Shymansky]

Bye.

[Sadie Blanchard]

Bye.

[Felix Salmon]

Bye.