Felix Salmon (2:13)

So I've decided that what we're gonna do is we're gonna kick off this podcast with a little segment about a publicity stunt, because why not? Yeah, yeah. There's. You know those restaurants you go into where they're like, we take Amex and cash only, and it's basically the restaurant being bribed by Amex to refuse to accept visa or MasterCard.

Anna Shymansky (2:36)

Yes, yes.

Felix Salmon (2:37)

Well, now Visa has decided that this kind of stunt is so great an idea that they're going to get in on the act as well. And they have decided to pick. Pick 50 vendors and tell them that what they need to do in order to get $10,000 or however much, some new equipment, some new equipment, a bunch of cash from Visa is to say we're not taking cash.

Anna Shymansky (3:02)

Any cash.

Felix Salmon (3:02)

Any cash. If you want to pay for your sandwich, you need to use some kind of piece of plastic. Now, you know, this is something which I guess we've come across in airline cabins, you know, that's if you want to Norway.

Anna Shymansky (3:17)

Yeah.

Felix Salmon (3:19)

Well, the big cashless society is actually Sweden, the most cashless society in the world. And one of the interesting things about the Sweden story is that it was a very deliberate decision by the Swedish government and the Swedish Central bank to try and turn Sweden into a cashless society. And it worked.

Anna Shymansky (3:37)

Yeah.

Felix Salmon (3:38)

And if you make that kind of top down decision, it can work quite effectively. The other quasi cashless society or the other big society where people can go weeks without using cash, of course, is Kenya, because the M? Pesa payment system, which, you know, everyone has a phone and, and you can use the M? Pesa payment system to pay for just about anything just using your phone. And the M? Pesa payment payment system kind of outpaced the cash payment system in Kenya. So it kind of got there first. Also sort of not government, but a major monopoly which was trusted more than the government in the form of Safaricom, the big telecom operator in Kenya. So again, you basically have this big sort of overarching highly trusted institution saying we are all going to do this and then everyone just does it. The difference, of course, with VISA is they are not a big overarching institution which everyone trusts, but they hate cash. They feel that they're competing with cash, which they are.

Anna Shymansky (4:47)

Yeah, they've said this. It's interesting. Like that is what they. They want to just see cash rid from the world, not for any altruistic reason, but just because they make more money if people are using cards. And so it is better for their business if you are not, you know, paying for your sandwich with greenbacks.

Felix Salmon (5:04)

And because. And one of the interesting things is the VISA was of course part of the great Durbin interchange wars of 2013 or 2009 or whenever it was. I can't even remember when it was. It was. I remember writing about it ad nauseam. But it's interesting to me that Visa in those great interchange wars was fighting for like, Visa should get us a. Should be able to charge a higher slice of transactions. And then the merchants were saying, no, no, no, the amount of money we need to give to Visa should be lower. I mean, it's an obvious sort of line along which these things should be drawn. But if you want your form of payment to be universal.

Anna Shymansky (5:49)

Yeah.

Felix Salmon (5:50)

Then you really should have basically zero cost or at the very least a lower cost than cash.

Jordan Weissman (5:59)

Well, and also if you're going to start competing with other forms of digital payment that at this point are essentially free, that's another consideration they have to make.

Felix Salmon (6:09)

Well, now they aren't. I mean, this is interesting because you know, Apple pay runs on the Visa and MasterCard rails. So, you know, you pay the same interchange fee for Apple pay as you do for anything else. If you're using PayPal or Venmo, which is, you know, Whisper, a subsidiary of PayPal. The, you know, again, most of the time people end up funding that through credit cards. So you use those same credit card Rails. Again, if you're using Bitcoin, God help you if you're one of the three people using Bitcoin. The cost of making a transaction has been going up and up and up and is now like over a dollar. Is it really? So it's not, it's not obvious that there's like a zero cost digital alternative in the payment space perhaps eventually.

Jordan Weissman (7:00)

But I also think it's important to remember that even if there is a cost of a slight cost of using a credit card as opposed to using cash, there's also a tremendous amount of evidence to show that when businesses shift more towards accepting cards, their revenues increase more than offsets the fees that they pay.

Felix Salmon (7:19)

The question is. Well, the question is there are basically two types of cards and especially now that the Durbin act has been signed into law, there's the debit cards and the credit cards. Now Visa can go on either, but the credit card interchange is basically unregulated and is going up and up and up. And the idea of product innovation, if you're a product person at Visa, is to come up with some glamorous new high end type of credit card which will charge like 18, gazillion percent in interchange. And everyone goes, oh, that's a good idea and starts using that because for a, from a consumer point of view, the price doesn't go up if you're using a Visa signature versus a debit card, but the interchange is much, much higher.

Jordan Weissman (8:05)

No, that I, that makes sense. I'm just saying that when people are thinking of, from the business standpoint, whether you're going to accept cash or whether you're going to shift towards accepting cards even on small payments, if that is still netting out positive in terms of increased revenue, even if you have higher exchange. Because even if they are creating some of these newer products that do have these, those higher exchange fees, how many people still though are actually using those cards as opposed to just your garden variety and more and more.

Felix Salmon (8:38)

And plus remember that the garden variety interchange is going up every year as well. So it's, it just, it's this kind of frog boiling exercise where the, you know, Visa and MasterCard just get more and more money every year and, and they, you know, can basically charge what they like and it's very difficult to, there's no, very few market forces which can push back against that.

Anna Shymansky (9:00)

So I mean, I guess that's sort of what worries me here. And you're not gonna be surprised to hear me talk about regulation, cuz that's what I do on this show. But right, like the battle.

Felix Salmon (9:11)

George Orden's the we need more regulation guy and I agree with you on this one.

Anna Shymansky (9:15)

Well, so yeah, that's the thing. Like if you remember the battle over swipe fees in Congress, it was huge. It was one of the biggest lobbying battles Capitol Hill had seen in years, if not decades because it pitted financial services against retail in a really high stakes game. And in the end that didn't even deal with all these issues we're talking about, only kind of dealt with a part of it. And so if you are moving away from cash sort of in this unintentional gradual way where it's not really top down, it's because businesses are making that decision independently. You're eventually potentially left with an oligopoly of companies that run the interchange, interchange market have a ton of power over businesses and consumers, really power over businesses and can just kind of collect rents. It's not economically productive really for anyone. It's not good if credit cards can just gobble up as much of each transaction as they want and you don't necessarily have a Congress that's going to be equipped to deal with it.

Felix Salmon (10:18)

And it's not. And it's not even Congress. The natural regulator for this is the Federal Reserve. And the Federal Reserve unlike almost any other central bank in the world. And it's partly, I think, to do with the fact that we don't really have a Federal, a central bank in America. It's a bit weird. In most countries there's a central bank who's like we're in charge of the money in the system and it's in society's interest for that money to move as frictionlessly as possible. The US is an interesting outlier in this One because it doesn't really have a central bank. It has 12 different Federal Reserve banks. And then there's a board of Governors in Washington and somehow no one feels empowered to go out there and say the entire system nationwide should be frictionless and we should basically regulate the system to ensure that it's as frictionless as it can be.

Jordan Weissman (11:11)

And I don't disagree. And I, and I, I agree with you that in a perfect world we would want a Fed that had the ability to regulate this. Completely agree. Having said that, there is also a significant benefit to society to, towards shifting away from cash and towards more digital payments.

Felix Salmon (11:29)

And that's the subject of a fascinating book by Ken Rogoff who, who's basically saying let's use less cash. Cash breeds all manner of inefficiencies and tax evasion and the legal activity and the more that we can digitize transactions, the better off we'll all be. And this is all true. And you know, and so the question is like how do we get there without just basically writing a trillion dollar check to a few financial services intermediaries?

Jordan Weissman (12:01)

And although I'm not saying I like the idea of writing a check to a few large financial intermediaries, if the ultimate like net benefit to society is greater in the interim, is that the worst thing in the world? Again I'm not saying that in a perfect world we wouldn't have a government that can actually regulate things. But, but in the world we have, if the alternative is sitting with cash or moving towards digital, I think, well I would.

Felix Salmon (12:28)

Plus I would say that the move to digital has been probably more hindered than helped by Visa and MasterCard that you know, the idea that you have a fixed credit card number which you then type in for card not present transactions on the Internet is incredibly inherently insecure and difficult and stupid.

Jordan Weissman (12:51)

And.

Felix Salmon (12:54)

It took a huge amount of pushing and innovation and regulatory kind of willingness to get involved in regulatory battles by Apple basically before we came up with a much more secure and efficient form of paying for things digitally. Because essentially what happens when you pay for something with Apple pay is, is that the credit card number is different on every single transaction so no one can steal your credit card number. And that works well. But that was innovation from Apple, that was not innovation from Visa and MasterCard. Who should have been innovating that?

Jordan Weissman (13:28)

No. And I think this is also where the hope would be that business lobbies that again do benefit from shifting towards taking non cash payments can use their lobbying power potentially against the credit card companies, which I realize we have not quite seen yet. I think that is probably our one.

Felix Salmon (13:45)

Great hope, and I do that. It's just important to make a distinction between cashless and digital because I think that Visa and MasterCard are cashless, but they're not really digital. And one of the more fascinating things that's going on in the world right now is the rise of this company called PAYTM in India, which was kind of pootling along quite happily as an electronic payments and cashless payments service until the demonetization happened. And then two things happened. One demonetization happens that everyone suddenly started using PAYTM because they had no cash. And then the other thing that happened was they got a banking license. And so now like paytm, which is, you know, not a subsidiary of Alibaba, but Alibaba has a big stake in it and SoftBank is, is becoming a, is one of the more interesting stories in terms of like a private sector company which is really taking over a huge amount of the payments layer of an economy.

Anna Shymansky (14:50)

Yeah. I would just say as an addendum, I am skeptical that companies like Visa are really going to be able to drive cash out of the US if only because we're sort of anarchic and people like being able to have their transaction. I mean, it's just easier for a lot of people to use cash given how many unbanked we have and such. But also people just like some degree of privacy and are only becoming more paranoid, I feel like. So that's true.

Felix Salmon (15:15)

Aren't there all these, these surveys showing that like 30% of millennials have paid for with Venmo?

Anna Shymansky (15:20)

I mean, that's. Yes, but you know, you just put drinks next to that. 30% seems low.

Felix Salmon (15:30)

Dan Schrader is, reckons that 30% is low. But Anna, without necessarily. I'm not asking you whether you've paid for drugs with Venmo. A bit late.

Jordan Weissman (15:41)

Just for the record. I have not paid for drugs for Venmo. I don't even drink.

Felix Salmon (15:46)

But you do have, you do have an opinion about paytm.

Jordan Weissman (15:50)

Yes, I, I think that PAYTM offers a lot of opportunity in the emerging market space because you can start to bring. Speaking about the unbanked in India, obviously this is a much, much larger issue. I mean, before demonetization, it was something like 95% of the economy was, was through cash. And the only way to cut down on corruption, cut down on tax evasion, have the ability to also be able to pay out money in terms of, from tax receipts to pay out. You need to get more people into a regulated system. And that is I think what PAYTM.

Felix Salmon (16:29)

Can potentially offer, especially seeing as how the Indian central bank is incredibly forward thinking in this way. It's giving everyone a bank account at birth. It's made the payment system settling like almost instantaneously. In America if we, if I try and pay you money, it normally settles like three days later in an. And here it settles about three seconds later. It's so much more advanced.

Anna Shymansky (16:50)

How could we get that?

Felix Salmon (16:52)

We could, if only the Fed like forced the banks to do it. But the problem is that the banks have no incentive to do that on their own.

Jordan Weissman (17:00)

Right. I will say the one concern for PAYTM is that the, the Central bank of India has also given licenses to a number of other organizations. So it looks like they're, they're going to encounter a bit more competition than M? Pesa did in Kenya, so.

Felix Salmon (17:15)

Absolutely. And that's good because what you don't want is a private monopoly in charge of payments. You know, you don't want M? Pesa being able to charge whatever it wants. The M? Pesa fees were expensive. They've come down a bit. The thing which I find kind of fascinating about PAYTM is that it's clearly like next generation compared to M? Pesa because when M? Pesa launched it was basically, you know, you, old Motorola flip phones, everything was done basically over text messaging. Now everyone has smartphones which can show QR codes and it really vastly expands the potential of what you can do with one of these systems in a way that it's hard to change M? Pesa to do what PAYTM can do. But paytm, because it's starting from scratch, can assume that everyone has a screen on their phone which you didn't really have in the M? Pesa days.

Jordan Weissman (18:06)

Yeah. And I would also say, I think in some ways, at least in the larger cities, you could see some quick adaptation in India, because I was actually in India at the end of December, early January, right after demonetization. And honestly I was shocked by how easily I could get around not having any access to cash.

Felix Salmon (18:24)

As you know, any, any of us who've been to Sweden in the past five years will say the same thing. Like I don't think I've ever seen this Swedish banknote.

Anna Shymansky (18:32)

New York though. Try getting a fucking drink without any.

Felix Salmon (18:36)

I mean these things are path dependent. I think it's very easy to start making sweeping statements about like Sweden is good, Germany is good, like Germany is very, very cash based. Sweden is very, very card based. And so Long as everyone is doing the same thing. It all basically works if, you know, your people in German bars are walking around with these whopping great things full of banknotes and everyone's paying cash, that's efficient. If people in Swedish bars are paying for everything using cards, that's efficient. What's not efficient is when you try and mix the two. And that's actually what we have in America right now. Yes.

Jordan Weissman (19:18)

Because again, we don't like top down regulation at all and thus chaos.

Felix Salmon (19:22)

Okay, so now we're going to walk into a massive buzzsaw of conflict sorta so before we. But we will disclose this and move on. Jordan. What. What are we talking about?

Anna Shymansky (19:38)

Yeah, so we're going to talk about the death of Dev Boot Camp, one of the very first, if not the first, code academies, one of the OGs of that industry, which has for a few years now been owned by Kaplan. And Kaplan's owned by Graham Holdings. Slate is owned by Graham Holdings. On many occasions I have written very vicious things about for profits in general and no one has complained. So we, we're free to say pretty much whatever we want.

Felix Salmon (20:07)

Okay. And actually, weirdly, Kaplan is not a villain in this story.

Anna Shymansky (20:12)

Not really, no. Actually I kind of, I was even trolling message boards last night like to see like if people from Silicon Valley like what their feelings were about Kaplan's role in this. And it was, it was mixed but mostly positive I think.

Felix Salmon (20:24)

So let's like back up a little bit. Anna, what is a coding boot camp and why are people so into them?

Jordan Weissman (20:32)

So a coding boot camp is usually a short term, you know, few weeks, sometimes ranging from 10,000 to $20,000 to teach people coding skills so that they can get entry level jobs in Silicon Valley companies.

Anna Shymansky (20:49)

That is a good summary.

Felix Salmon (20:52)

And Dev Bootcamp was one of the first and was always highly regarded. Yeah, they had very good tuition, they had small class sizes like most of these coding boot camps. There were questions about whether their official statistics on how many graduates wound up getting six figure salaries upon graduation were entirely reliable.

Jordan Weissman (21:15)

Although you could also make the same statement about a lot of regular colleges as well. Oh, you certainly can.

Felix Salmon (21:21)

I mean that absolutely applies to law schools as well. Yes, but the people who graduated from it generally did graduate with monetizable skills. Yes, and that is one of the interesting things about coding bootcamps in general is that people are looking at them and saying, well, they might cost however many thousand dollars, but at the end of it, I have a six figure job ahead of me and that's a good thing. And increasingly, the business model of these things is based on we won't even charge you up front and we'll just take a slice of your salary after you graduate.

Anna Shymansky (21:56)

Yeah. So Dev Bootcamps have been really fascinating to watch over the last few years, and people who are in education policy have been really fascinated by them because they represent this sort of alternative model. Right. That's outside of the accreditation system that we use in the US to kind of regulate colleges and universities. And there's this whole idea that, oh, they can fix our lack of tech skills if you believe we actually have a lack of tech skills. But so I think you've gotten sort of both. You've seen sort of both the, you know, the good side and the bad side of letting the free market try to make a new education model with. With these. They've. They've clearly been something really successful. Dev Boot Camp was, again, highly regarded, and a lot of the spinoff, kind of, you know, companies that followed in its footsteps were successful at getting people into good jobs. I have friends who went to Dev Boot camps and now work at places like Blue Apron or tech firms in Denver are very happy with their lives. And at the same time, there's also just been an explosion of them. There are some that are kind of considered fly by night. Again, there are these questions about their statistics. And so the hope is now that we're going to see sort of a shakeout right in the market, that the ones that are really producing results are going to thrive and continue to grow while the lesser ones kind of collapse.

Felix Salmon (23:12)

And I don't think that's going to happen because Dev Bootcamp is one of the better ones. And I feel that it's collapsed precisely because it's one of the better ones. And it. Because it didn't. It wasn't willing to compromise on cost.

Anna Shymansky (23:28)

That is a scary thing. Exactly, Exactly.

Jordan Weissman (23:30)

Because if you're trying to have quality and accessibility, that's. You can maybe do that. If you're small, you can't scale that.

Felix Salmon (23:37)

And there are two issues here. One is that while in an ideal world, you know, all of these consumers would be highly educated and would be able to intuit which of the boot camps are genuine and which ones are fly by night. The fact is that these things all too often are sold rather than bought. And there's very little reason to believe I've. I've spent some time looking into, like, trying to compare and contrast different coding boot camps. It's really hard. It's really really hard to try and work out who's selling you a better bill of goods and which ones are genuine. And on top of all of that, and partly because it's so hard to tell the difference, the general emerging consensus among people who spent a lot of time looking at this is you're probably best off going to a community college and learning to code there because it's going to cost you less money. You're going to get the same skills.

Jordan Weissman (24:33)

I would agree with that. Although one of the things I will say about these, the dev bootcamps that is good is the opportunity cost is lower in the sense of you're not spending that much time. And although I normally am a big believer in community colleges as opposed to for profit colleges, for this particular skill, spending a few weeks may make more sense.

Anna Shymansky (24:53)

I mean, some of them are six weeks or, you know, are short, some of them are longer. Some of them really like stretch out for a year. I mean, but they do.

Felix Salmon (25:00)

And, but also like community colleges are not standing still here. Like, they're not forcing you to spend two years at college to learn to code. They are moving into this space.

Anna Shymansky (25:09)

Yeah, I think maybe I'm a little bit more optimistic about these than you are, Felix, which is a weird feeling. It's a weird sensation in that, you know, Dev Bootcamp, I think the fact that they spent money to provide a quality education was part of their downfall. It seems. Right. At the same time other people said, you know, and they said themselves, they never found a sustainable business model. That was part, you know, that was part of their statement. They just could not do it. At the same time, they were more of like the cash up front pay, tuition ahead of time school of thought. Whereas you are seeing people or you are seeing dev boot camps trying this, okay, we'll take a portion of your salary after graduation. Which frankly, isn't that different than what the federal government does with student loans and income based repayment. It's just sort of a variation on it. And I think it's actually, it's a good, it's good for consumers in a lot of ways. It's. It kind of protects you from the downside. And so the boot camps that are using that approach, and if they can scale that, I feel kind of okay about them. I feel like that would be a example of good innovation in private higher education.

Felix Salmon (26:14)

At some point in the future we can talk about the many failed experiments of sort of buying and selling equity in college graduates.

Anna Shymansky (26:21)

Oh, absolutely.

Felix Salmon (26:23)

The thing which worries me less of.

Anna Shymansky (26:26)

A fit this Seems like more promising than many of those previous experiments.

Felix Salmon (26:29)

Yes, but it's moving in that direction. And often the people who do get good jobs wind up paying eye watering amounts of money for this credential.

Anna Shymansky (26:41)

Yeah, I think, well, you have to cap it at some point like that. I mean, there are a lot of things you have to do to make it work. And I think, you know, the other aspect of this that makes me a little bit more comfortable is that these, at least up until now, these code academies have tended to cater to a more educated, kind of a savvier, more educated population, a customer base that might be changing given how much they've grown. But it's not the same thing as the for profit industry that was going after people who barely made it out of high, you know, who had barely made it out of high school. I mean, it is, we're talking about a categorically different thing. A lot of. At least up until now, I think. So again, I, you know, I have some faith that this is an example where the free market could find an arrangement to get it to work eventually.

Felix Salmon (27:28)

And what's more, as I say, as the free market. And if the free market does find things which work, many of those things which work will actually trickle down into community colleges and benefit a much broader range of people.

Anna Shymansky (27:44)

Yes, I agree with that.

Jordan Weissman (27:45)

Agreed. Now, Warren Buffett. Yeah.

Felix Salmon (27:47)

What was that?

Jordan Weissman (27:48)

I said Warren Buffett.

Felix Salmon (27:49)

You said Warren Buffett.

Jordan Weissman (27:50)

I did.

Felix Salmon (27:50)

You said Warren Buffett. You said Warren Buffett. What's Warren Buffett up to?

Jordan Weissman (27:55)

So, King B. Yes. Two of our favorite recurring characters, Warren Buffett and Paul Singer, were up to quite a bit this past week. So Warren Buffett made a $9 billion cash bid for Encore, which is this Texas regulated energy utility.

Felix Salmon (28:21)

We're not going to get into the torrid history of Encore, but although it's.

Jordan Weissman (28:25)

Fascinating, let's just say actually, yeah, I mean they were like, it's the biggest LBO in history.

Anna Shymansky (28:29)

As I say, they were a leverage. They are a cautionary tale.

Jordan Weissman (28:31)

They really are.

Felix Salmon (28:32)

So Texas Pacific Group and a few other private equity companies bid, I think it was $45 billion or something, to buy this thing, which is now worth 9 billion or to buy something.

Jordan Weissman (28:44)

Yeah. And the enterprise value is like 18 billion.

Felix Salmon (28:47)

So it gets complicated, there's lots of capital stacks. But basically, once upon a time there was a big bet on gas prices and it failed.

Jordan Weissman (28:55)

And then, yeah, natural gas prices tanked and we had a financial crisis.

Anna Shymansky (28:58)

Yeah. And. But people borrowed a lot of money and that becomes key to this story.

Felix Salmon (29:02)

And so what happens when people borrow a lot of money and that debt winds up going into default is that the debt ends up in the hands of vulture investors.

Anna Shymansky (29:15)

It ends up in the hands of Paul Singer and who?

Felix Salmon (29:18)

There is no greater vulture investor than Mr. Paul Singer, who runs a hedge fund called Elliot Associates, which you might remember from such hits as Argentina, Argentina, Peru and various others. So now this is interesting. Warren Buffett is offering to buy Encore for what looks to me as though it's a positive sum of money. It's greater than zero. Which means presumably that Paul Singer will get paid back.

Jordan Weissman (29:45)

Well, okay, yes, Paul Singer. Okay, here's the issue. When they bought this debt, they bought senior liens, but they also bought a lot of sub debt. And a lot of these are just picks. I mean, this is like very junior debt. And with this $8 billion price, you're looking at a recovery value of like 18 to 24 cents. I don't know what their cost basis was.

Anna Shymansky (30:06)

Okay, I saw it was like 30 cents in some cases.

Felix Salmon (30:08)

Okay, so let's, let's just rewind because I'm going to guess that a lot of people kind of found it difficult to keep up with that one. So first of all, we have to say that when Anna talks about picks, she's not talking about like pick one from three. She's talking about payment in kind. Payment in kind. And we're also talking about structures here where even if you're buying the company, that doesn't mean that the creditors get paid in full. And the ultimate way that this Warren Buffett bid is going to play out basically means that creditors in Paul Singer's situation are going to get less than, what, 30 cents on the dollar? And so Paul Singer is looking at this company and going, I think I can do better than that. In fact, I bought this company on the base. I bought this company's debt on the basis that it was worth more than that. And so he's thinking of actually making his own bid.

Jordan Weissman (31:13)

Yes. And again, he doesn't actually have the money to do it himself, so he's going to have to bring in other people. But I would actually argue that he doesn't actually want to take this over. He is simply putting in a counter bid to try to increase the Berkshire Hathaway. Right.

Felix Salmon (31:28)

Because Elliot Associates is many things, but a long term operator of a regulated utility is not one of them.

Jordan Weissman (31:36)

No, I mean, this is a fantastic asset. I mean, honestly, this was a, this was a smart trade by Elliot and it's a Great purchase by Buffett. Like, this is an example of like the prototypical fantastic distress trade because you have a ring fenced asset which is separate from the bankruptcy of the parent company. It generates tremendous amount of cash. It is very low borrowing costs. It is a stable business. And so, and right now Buffett is potentially getting this at a really attractive price. It is an example of his value investing part.

Felix Salmon (32:10)

And do we know roughly how much Paul Singer paid for his debt, which is now worth 25 cents on the debt?

Jordan Weissman (32:17)

It's going to be a mix because again, he had some of those senior liens and then he had a lot of the sub debt. So obviously the sub debt was going to be less. I don't know exactly. One can guess because his counteroffer is about 300 million more. Also the structure of it is more credit, creditor friendly that you could again guess exactly where his cost basis was. But he's looking for about a 50 cent recovery.

Anna Shymansky (32:40)

So Anna is like really, really into the aesthetics of this deal. Like, you're, it's beautiful. You're admiring as a piece of art. I want to talk about why I find this so entertaining because I just think it's a story that's going to end with Paul Singer getting treated real ugly down in Texas, as they like to say. And so here's the thing. Warren Buffett is getting this great deal because already Texas regulators have rejected 1 purchase offer, 2 purchase offers on this company. Like they've already said, nope, not good. And that's fine. Regulators need to be careful with who runs their utilities. That company is responsible for sending electricity like 10 million Texans. So it's a big deal. Who owns this. So Warren Buffett is marching down there. And first off, Warren Buffett, he knows electricity. He's got an energy unit at Berkshire.

Jordan Weissman (33:29)

Hathaway, significant energy unit.

Anna Shymansky (33:30)

He's got experience in this extremely boring business. Business. It's right up his alley. And also he's Warren fucking Buffett. He walks in and we've talked about this. The Warren fucking Buffett effect is really important for his deal making because he gets that little bit of premium. People know him, they trust him. He is America's billionaire grandpa. Like, he is already well on his way to working this through with regulators. He knows this. He is a known entity to them. All of a sudden you have Paul Singer, a vulture capitalist from New York showing up, who's best known for just trying to throttle developing countries for money in south, you know, in South America. He shows up, he's like, I'm going to put in a counteroffer to drive up Warren Buffett's bid. Like any regulator in Texas is ever going to even humor this guy. It just looks like he's going to end up with a bunch of egg on his face.

Jordan Weissman (34:17)

So I have two thoughts. Okay, so on the one hand, Berkshire Hathaway is definitely more well situated. They were really smart to actually essentially go to the regulators first and get a tacit agreement before they were even going to bankruptcy courts, which is really smart. Now, the other issue, though, that Elliot has a little bit of a trump card is they know Berkshire and Buffett do not like bidding wars. They don't like litigation. And Elliot loves litigation. There's nothing in the world he loves more than litigation. And he also knows that right now, what are Buffett's options? Okay, you can walk away from this deal. Again, this is a fantastic deal. I can go more later about why this is such a fantastic deal, but it's okay. So you can walk away from that, or you could potentially try to force a cram down, which is going to be long, very expensive legal process, or you can up your bid by $300 million. $300 million may sound like a lot of money. We're talking about a $9 billion bid. Honestly, I think Elliot's not in as bad of a position as you said. Having said that, you are right. Also, apparently the advisor that's working with Encore has, like, bad blood.

Anna Shymansky (35:20)

Yes.

Jordan Weissman (35:21)

With. With Singer.

Anna Shymansky (35:22)

So Kirkland and.

Jordan Weissman (35:23)

Exactly.

Anna Shymansky (35:23)

The law firm doesn't like.

Jordan Weissman (35:25)

So it's. I mean, this is where, like, Elliot. Elliot doesn't like Singer. And Elliot, overall, they don't do themselves any favors.

Anna Shymansky (35:31)

Yeah, they're. They're walking down into a hornet's nest just full of angry people who don't like them.

Jordan Weissman (35:36)

Right. And also going into what we were saying before in terms of the history of this and why they're in this situation, it's because of these hedge funds and private equity funds that put so much debt on the parent company. So these regulators are very suspicious of that. And part of the reason those other bids were killed was because they want to make sure that the dividend policy of this company can't be changed and that it can't be saddled with debt.

Felix Salmon (35:59)

And the. And this is the great advantage of Warren Buffett. And this is the bigger picture here is the. Buffett has huge amounts of cash, so he doesn't need to $80 billion. He doesn't need to saddle up businesses with debt. And he has been operating Many wholly owned businesses for many, many years, almost none of which are levered in that way. Because he doesn't need to borrow money because he has this wonderful thing called insurance float, which he can use instead, which is a kind of debt, in that it's a contingent liability, which you, in theory need to pay back, like when people make insurance claims, but in practice, you never need to pay it back. And so he just gets to play around with this huge pool of money. And what's really fascinating is the way in which he has evolved over the past, what, 15 years or so away from buying stocks on the stock market and into buying incredibly regulated industries, not only in energy, but also the big one being in railroads.

Jordan Weissman (37:04)

And there is, again, a very good reason for that part of it is what we just said. He is sitting on so much cash. So right now, again, that's why this makes a lot of sense, because there are, there's nothing in the public markets of value. And I would actually argue over the past 10 years, as we've seen this kind of inflation of asset prices, there just isn't a lot of value. And on top of that, when you're a value investor, when you start to have more and more and more assets under management, that is actually kind of a negative because it's harder to find opportunities for that type of size on the public market. So it's not surprising that you're going to shift into the private market.

Anna Shymansky (37:41)

Well, so the utilities thing also kind of makes sense. Sense just inherently. Right. Because, like, if you're, if you're a value investor and there's not much value on the market, you know, what's, what's your other advantage if you're Warren Buffett? Well, your cost of equity is lower. That's part of the insurance flow. Like you. Or your cost of capital, I'm sorry, is lower. Like, that's, that's his great advantage with running Geico. And so if you walk in and you buy a highly regulated utility, you know that it's never going to, like, go crazy on its returns, but it's still, you're paying. So your, your investment costs so little comparatively that you can do better than most.

Jordan Weissman (38:12)

Totally. And this is actually really important because traditionally insurance companies tend to invest much more in bonds, as I mentioned, because you're trying to offset your liabilities with your assets. But because bond prices have been so low and it's, it's, it's been harder to do that. And then on top of that, now, see, Berkshire is in a unique position because they just. It's such a fantastic business there. Have so much cash, they can invest significantly more aggressively than a lot of other companies. Having said that, this is actually the utility company almost serves as a bond proxy because you're getting these consistent, predictable income generating returns, which can then also offset the volatility of your equity portfolio. Not that there's been a tremendous amount of volatility, but in theory. So again, that's why this makes so much sense. That's why this type of company makes so much sense. And also in the past 10 years, there's been such a push into utilities because bond prices have been so. The yields have been so low. This is, that's why this is such a really fantastic investment.

Anna Shymansky (39:15)

That's like the most wonderful summary of like, just like finances, conception of human beings though, like, your whole company is a bond.

Jordan Weissman (39:23)

To me, it's a bond proxy. No, it's true though.

Anna Shymansky (39:26)

I mean, like, there's not hating, it's just, it's funny. It's all.

Jordan Weissman (39:29)

There's a reason that utility, like equity has been just skyrocketing because again, it's a place where you can get low risk, solid yield.

Felix Salmon (39:39)

Let's have a numbers round. Yeah, I feel like we haven't had a numbers round for a week. We're overdue for a numbers round. Anna, what's your number?

Jordan Weissman (39:48)

My number is 1.6%.

Felix Salmon (39:50)

Okay.

Jordan Weissman (39:51)

That is how much? The Bovespa, the Brazilian stock exchange.

Felix Salmon (39:55)

Oh, my God. Poor Lula going to jail.

Jordan Weissman (39:57)

Oh, yes, yes. So this is a. I just found it amazing. A lot of the headlines which were like, this may affect his ability to run for president.

Felix Salmon (40:06)

And you're like, you think so? Okay. The headline is that Lula, the former president of Brazil, who installed a vaguely independent judiciary, now has been. Is probably regretting the independence of. Because he has been jailed so much easier before. Jailed for nine years for doing what all Brazilian presidents have always done, which is be corrupt and steal lots of money.

Jordan Weissman (40:37)

This was actually a beach house.

Felix Salmon (40:39)

But the stock market in Brazil welcomed this and went up 1.6%.

Jordan Weissman (40:44)

Exactly.

Felix Salmon (40:45)

So there you go.

Anna Shymansky (40:46)

Hey, rule of law.

Felix Salmon (40:48)

Well, it does show that there is a rule of law if you can jail a former president.

Jordan Weissman (40:53)

Right. A very, very popular former president.

Felix Salmon (40:57)

That is a sign that civil society is kind of working.

Jordan Weissman (41:01)

Agreed.

Felix Salmon (41:02)

My number is 8 billion, which is the debt in dollars of Air India, everybody's least favorite airline.

Jordan Weissman (41:13)

Oh, my God. I took Air India last time and it was the worst thing I've ever been on in my life.

Felix Salmon (41:18)

I have taken Air India precisely once. When I first flew to America in 1997, when I kind of moved here, I had a return flight on Air India and it was so bad that I just let my return leg lapse. I was like, I will, I will just never use what happened. Like basically every, every time I flown back to the UK since then, I have bought a ticket from the US to the UK and back so that I never needed, I never needed to use that.

Anna Shymansky (41:51)

What was so awful about Aaron? Like, what was.

Felix Salmon (41:53)

It was a. Okay, so Air India is this big state owned airline. And the reason why I'm mentioning the enormous amount of debt it has and the fact that it's losing money and the fact that it has 27,000 employees who have a. Who love to go on strike about every week. The hilarious thing is that the Indian government has decided it wants to sell Air India. And you're like, who in their right mind would even want a minority stake in this? Just miserable, miserable airline.

Jordan Weissman (42:24)

I have never been on a plane that was so hot. I am always cold. It doesn't matter where I am, I am cold. That plane was like 98 degrees. It was the worst flight experience I've ever had in my life.

Anna Shymansky (42:35)

My turn.

Felix Salmon (42:36)

Your turn.

Anna Shymansky (42:37)

My turn. My number is 11. That's the number of countries that now seem like they're going to try and negotiate tpp, the Trans Pacific Partnership.

Felix Salmon (42:46)

Oh, it's back.

Anna Shymansky (42:47)

It's kind of coming back. It looks like Japan's leading the charge because they really want this thing. It used to be 12. That's because the US was involved. Now we are Trumplandia. So we no longer are involved.

Felix Salmon (42:58)

But it's still not China, right?

Anna Shymansky (43:00)

No, it's not China. It's not China.

Jordan Weissman (43:01)

China was never.

Anna Shymansky (43:01)

No, it never. It never was. But you know what's a little frustrating to me about this is like there is a world where there was a TPP skeptic president who would have actually tried to renegotiate it and maybe get rid of some of the awful things in that deal, like maybe finally taken a stand against, you know, isds, those international, you know, arbitration tribunals that worry so many people that maybe there was a alternate reality where that happened. But instead we got an anti trade isolationist who just has actually given up leadership on this issue. And so it's quite possible that some of the worst things about that deal that really worried people are going to be further entrenched in the global trade system.

Felix Salmon (43:42)

So I think, on which depressing note, we are going to bring this week's edition of Slate Money to a close, I should mention that there is another podcast that you should listen to beyond just Slate Money. First of all, make sure you're subscribed to Slate Money. Leave us reviews on itunes, and be like a Slate Money fan, because we love ourselves more than anyone else. But then go check out Hang up and Listen, which is hosted by Josh Levin and Stefan Fatsis. It posts on Mondays, and you can find it@slate.com hang up. It's sports.

Anna Shymansky (44:20)

It is sportsball. I feel like I should be pitching this. Yeah.

Felix Salmon (44:25)

I mean, Jordan should. Should jump in here because the amount I know about sports is exactly. I know. You know, I know that the main thing I know about this show is that it's. It's talking about sports. And it does not. It is not hosted by Chris Christie.

Anna Shymansky (44:39)

That's. That's true. It is. None of it is not hosted by Chris Christie. If anybody wants to get a good sense of what Felix does know about sports, though, we have a sports edition from years that was absolutely delightful where he kind of revealed he actually knows something about soccer. Like, he doesn't. He kind of likes to pretend he knows absolutely nothing about sportsball, but he does have. He does know a little bit about football.

Felix Salmon (44:59)

Yeah. And I will say go Dulwich Hamlet. I'm a big fan of Dulwich Hamlet Football Club in South London and also Partick Thistle in Glasgow, on that note.

Anna Shymansky (45:11)

But that's delightfully Anglo notes on that.

Felix Salmon (45:14)

Delightful. And I can guarantee you that Dulwich Hamlet and Partick Thistle are two teams which will never, ever be mentioned on Hang up and Listen. But go check out Hang up and Listen and write to us at slate money, slate.com and tell us if you have any questions about the economics of football teams. Apparently, according to Forbes, the Dallas Cowboys are worth $4.2 billion.

Anna Shymansky (45:38)

That's not bad.

Felix Salmon (45:39)

That's a lot of money. There's another extra bonus.

Anna Shymansky (45:41)

You know, Donald Trump had an opportunity to buy them, apparently at one point I just learned. And he. They wouldn't be worth $4.2 billion.

Jordan Weissman (45:47)

Yeah.

Anna Shymansky (45:47)

Though if he had been running them.

Felix Salmon (45:51)

Some other. Maybe eventually. If my Dallas Cowboys article ever comes out, we can talk about the Dallas Cowboys. You have that in the future if you want a treat. But for the time being, thank you for listening. Thank you to Dan Schrader for producing, and we will talk to you next week on Sleet Money. Sam.