The Screwed Pooch Edition

Summary

Slate Money – "The Screwed Pooch Edition"

Date: March 19, 2016
Host: Felix Salmon
Co-hosts: Cathy O’Neill, Jordan Weissman

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Overview

This episode of Slate Money dives into three of the week’s most talked-about stories in business and finance:

1. The massive Bangladesh bank hack through the SWIFT system
2. The downfall of pharmaceutical giant Valeant and the investing losses suffered by Bill Ackman
3. Bridgewater hedge fund’s cult-like workplace and leadership succession crisis

With their trademark wit and insight, Felix Salmon, Cathy O’Neill, and Jordan Weissman break down the stories’ mechanics, implications, and the human follies that drive the financial world.

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Main Stories & Key Points

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1. The Bangladesh Bank Heist & the SWIFT Security Failure

[02:38 – 11:18]

• The Heist in Brief:
  Bangladesh’s account at the New York Fed was hacked, resulting in the theft of $81 million via fraudulent SWIFT messages.
• How Central Bank Accounts Work:
  • All foreign currency reserves (other than the US’s own) are stored at the New York Federal Reserve.
  • Countries use the SWIFT network to transfer reserves internationally.
• What Went Wrong:
  • Hackers sent fraudulent instructions via SWIFT, attempting to steal over $1 billion.
  • Only $81 million actually got transferred, due to a critical typo in the word “foundation” (“fandation”) that flagged the transaction ([06:33]).
  • Bangladesh’s manual alert system failed—possibly deliberately—so no one noticed until it was too late.
• Money Laundering via Casinos:
  • Funds ended up laundered in the Philippines, exploiting local casinos’ exemptions from money-laundering laws ([07:11]).
• SWIFT’s Security:
  • The incident revealed the weakest link is often the people, not the technology, with Felix noting:

    “The weakest spot of any security system is the person at the end.” ([10:25] – Cathy paraphrased)

• Aftermath:
  • Bangladesh lost $81 million with little hope of reimbursement ([11:04]).
  • The hack rattled faith in systems thought to be nearly foolproof.

Memorable Quotes:

• “They spelled it ‘fandation’—is this a Nigerian spammer?” – Cathy Weissman ([06:33])
• “The amazing thing is that this is a failure of the SWIFT security system, which almost never happens.” – Felix Salmon ([08:10])

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2. Valeant Pharmaceuticals: A Hedge Fund Hotel Flames Out

[12:35 – 22:16]

• Valeant’s Business Model:
  • Buy up companies, gut R&D, raise drug prices drastically, repeat—financed by heavy debt ([14:14]).
• The Hedge Fund Angle:
  • Big-name funds (notably Bill Ackman’s Pershing Square) loaded up on Valeant shares, seduced by quick-profit financial engineering ([15:01]).
• Distribution Scandal – Philidor:
  • Valeant used a shadow pharmacy (Philidor) to bypass retail limitations and push expensive drugs to patients, charging insurers ([15:19]).
  • Philidor’s questionable licensing and relationships with shell pharmacies drew scrutiny and eventual regulatory investigation.
• Stock Collapse and Consequences:
  • Valeant’s mounting debt, broken business model, and opaque accounting tanked share prices.
  • Ackman lost about $4 billion:

    “Bill lost a billion dollars in a day this week… basically lost $4 billion on this trade.” – Felix Salmon ([12:59], [19:21])

• Industry Fallout:
  • Some fear pharma price-gouging may just become subtler, not stop; regulation is clamping down but the temptation remains ([20:40], [21:04]).
  • A new FDA fast-track for generic drug competitors should help offset price spikes ([21:29]).
• Notable Numbers:
  • Isuprel price: $50 → $2,700, a 54x increase ([17:41])
  • Daraprim: $13.50 → $750 (Martin Shkreli’s infamous spike)

Memorable Quotes:

• “Martin Shkreli was not the first douchebag in pharmaceuticals. It needs to be said.” – Cathy O’Neill ([13:01])
• “If your model is to jack up generic drug prices, you're probably going to piss off someone in the process.” – Jordan Weissman ([16:19])
• “The stock market is saying, well, okay... but you have $30 billion of debt... if you’re not going to jack up all of these prices, how on earth are you going to be able to service the debt?” – Felix Salmon ([19:21])

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3. Bridgewater: The World’s Oddest Hedge Fund

[24:26 – 35:00]

• Bridgewater’s Scale & Quirk:
  • Largest hedge fund in the world, $156 billion under management, 1,500 employees ([25:21]).
• Leadership & Cult of Personality:
  • Founder Ray Dalio’s plan to step back is floundering; the firm’s “crazy, crazy management system” borders on dystopian ([27:00]).
  • All meetings are videotaped; employees must watch and critique videos of each other daily ([27:05]).
  • Former Bridgewater employee James Comey (later FBI Director) left because “the place wasn’t joyful enough for him” ([27:58] – Jordan).
• Succession Struggles:
  • Internal politics (e.g., Dalio vs. Jensen feud, the Apple-imported John Rubenstein) show that succession in such a personality-driven outfit is fraught ([30:30]).
• Transparency, or Surveillance?:
  • 210 written company “principles”; and yet, trading strategies are kept secret among just 10 insiders, with lifetime non-competes ([33:42]).
• Longevity Doubts:
  • The hosts are skeptical Bridgewater will outlast Dalio.

    “Bridgewater is not going to outlast Ray Dalio at all.” – Cathy O’Neill ([35:00])

Memorable Quotes:

• “There’s a culture of calling people out on their mistakes… not that far from the Ferengi Rules of Acquisition.” – Cathy O’Neill ([31:09])
• “It’s a cult. It’s explicitly a cult… They love to hire people straight out of university because they can indoctrinate them.” – Felix Salmon ([28:23])
• “It reminds me of the 19th century industrialists who tried to build company towns so their employees would live to their moral standard.” – Jordan Weissman ([32:28])

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Notable Quotes & Moments with Timestamps

• "They spelled it ‘fandation’—is this a Nigerian spammer?" – Cathy O’Neill ([06:33])
• "The weakest spot of any security system is the person at the end." – Felix Salmon, paraphrasing ([10:25])
• "Martin Shkreli was not the first douchebag in pharmaceuticals. It needs to be said." – Cathy O’Neill ([13:01])
• "If your model is to jack up generic drug prices, you're probably going to piss off someone in the process." – Jordan Weissman ([16:19])
• "Bridgewater is not going to outlast Ray Dalio at all. That's just my prediction." – Cathy O’Neill ([35:00])
• “The company everyone thought would replace Dalio as CEO… ended up being shunted sideways.” – Felix Salmon on Greg Jensen ([29:56])

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The Numbers Round

[36:33 – End]

• Cathy: "Nine" – The number of tech companies where a shareholder proposal pushed for gender pay equity reporting. Discussion about the somewhat symbolic nature of shareholder votes and pushback from companies like Amazon ([36:35]).
• Jordan: "15%" – The share of U.S. wealth held by the top 0.1%, revised downward from Piketty's often-quoted 22%. Discussion covers the variability and fragility of such statistics ([39:32]).
• Felix: "40%" – Only 40% of 18–29-year-olds in the U.S. now say beer is their drink of choice, down from 70% two decades ago. The long-term secular decline in beer preference ([41:45]).

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Final Banter & Closing

[43:58 – End]

• Brief talk about changing beverage preferences, and Cathy’s plan to recover from her mild concussion with a trip to a beer hall—Lederhosen, the unofficial Slate Money bar ([44:08]).
• Invitation for listeners to send in their correspondence and a plug for a potential meetup ([44:24]).

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Tone and Style Notes

Throughout, the tone is sharp, conversational, and filled with banter. The hosts are unafraid to make bold or humorous statements about the follies of finance—whether calling a hedge fund “a cult” or pharma execs “douchebags”—but always grounded in keen financial insight and institutional knowledge.

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For listeners wanting a crash course in how greed, incompetence, and hubris shape real-world financial disasters and excess, this episode is essential and entertaining listening.

Transcript

[A]

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[B]

Hello and welcome to the Screwed Pooch edition of Slate's Money, your guide to the business and finance news of the week. I'm Felix Salmon of Fusion. I am joined, as Always, by Cathy O', Neill, the data scientist and slightly bruised [e-mail] hello, everyone. Kathy's going to be mildly subdued this week.

[C]

Concussion.

[B]

But you were wearing a helmet.

[A]

I was.

[B]

When you fell off your bike. So good for me. With any luck, the legendary math babe brain is not too badly.

[A]

I'm fine.

[B]

Affected. We also have the one and only Jordan Weissman, millennial extraordinaire and Moneybox columnist at Slate.

[C]

Yeah, we're sort of like the NFL today. Like we're just having you play on her.

[A]

It's true.

[C]

Her eyes are a little cl. She's not really following my finger too well right now, but I think she's good enough to take her. She's good. She's good.

[B]

She's good. Like, you know, it'll. We'll. We'll probably get sued by some health and safety thing at some point. We are going to talk this week about Valiant. We haven't talked about Valiant on this show yet, or at least not at any length. But it is one of the most astonishing stories in the stock market. So we're going to talk about them. We're going to talk about. About Bridgewater, which is the biggest hedge fund in the world and is just the locus of crazy.

[A]

I can't wait for that.

[B]

It's gonna be fun. Kathy knows from crazy hedge funds.

[C]

Yes, I do.

[B]

And this place makes D.E. shaw look downright normal.

[A]

It does.

[B]

But first, Jordan, what has been going on in Bangladesh?

[C]

Okay, so Bangladesh. Well, I. They got robbed that's really the only way to put it. Some people managed to steal $81 million from Bangladesh's account at the New York Federal Reserve.

[B]

So just to put this in perspective, every single current country in the world, except for the US has these amazing things called foreign currency reserves. And economists love to pay close attention to foreign currency reserves. And Bangladesh, even though it's quite a small and quite a poor country, has like $29 billion of foreign currency reserves. When you have foreign currency reserves, these are overwhelmingly in dollars. All foreign currency reserves of any country, anywhere in the world are stored in a special bank account at the New York Fed. And of course, the whole point of foreign currency reserves is you can take them out when you need them through the standard SWIFT system of transferring money.

[A]

So wait, back up just a second. I've always wondered this. We don't have any foreign currency reserves.

[C]

In the U.S. no, the U.S. does not, because we are the world's currency.

[B]

The U.S. can't store dollars, Right? It can print dollars.

[C]

Okay.

[B]

I mean, like we could have foreign currency. We could have euros or yen or Canadian dollars. Canadian dollars, exactly. But we don't.

[C]

Well, yeah, you would also, I mean, countries kind of have to consciously accumulate foreign currency reserves. It's basically a part of trade policy. And it's also, it's used in for currency management. If you want to keep your currency at a certain level, it's helpful to have reserves that you can then buy and sell to kind of push around the markets. China, for instance, is famous for doing this.

[A]

Yes, I know about China. Everyone knows about China.

[B]

But let's go back to swift.

[A]

So the second thing is swift. I don't know about you guys, but whenever I go give a talk and I pay for my airplane ticket in advance and then I get paid back, I have to give them all these numbers to get my wire transfer back. And it's these swift. It's a SWIFT system.

[B]

So international. This only when you give talks internationally.

[A]

Yes.

[B]

So basically there are lots of ways of transferring money domestically, and that changes from country to country. There is one way of transferring money internationally and that is Swiss.

[A]

So it makes me actually happy that the Fed actually has to use the same system that I do.

[C]

So this is interesting to me though, because I was reading about how this all went down.

[B]

So what happened? First, let's have some background here.

[C]

So it is a long and complex story that all ends at a casino somehow in order to launder all of this money. But what basically happened was that Bangladesh's account at The New York Fed got hacked. And the way it got hacked was somebody in the Philippines set up a bank account and had the numbers, kind of the password for. Just to simplify that you needed to go and the protocol that you needed to go and send messages to the New York Fed and say, hey, can we withdraw $20 million at a time from this account holding your foreign currency reserves?

[A]

Apparently they were pretending to be Bangladesh.

[B]

They were pretending to be Bangladesh. And in fact, they put in orders for over a billion dollars of transfers out of this account. And thankfully, I guess they managed to catch it before any more than 80 million was.

[C]

But that's actually even. The amazing thing is apparently Bangladesh's like, system, like the system that they used to be alerted was like a manual printer. Like, literally pieces of paper were supposed to come out and tell them, oh, there was an order sent and that malfunctioned. So they just didn't know it was going on. I mean, this is like a bizarrely low tech system for running international.

[A]

They malfunctioned, as I understand it, because they ran out of paper?

[B]

No, they malfunctioned. I mean, it was pretty obviously an inside job in somewhere in Bangladesh. And someone made sure to turn off the printer and to make sure that the notifications wouldn't go through so no one would realize that the bank account was being drained of a billion dollars. This was the plan. It got foiled because they misspelled the name of a foundation.

[C]

They spelled it Fan dation, I think, like with an A instead of an O.

[B]

Is this real? Because this looks like it's misspelled. And that's when they realized what was going on.

[C]

Is this a Nigerian spammer?

[A]

Wait, is that when the Fed realized something was going on?

[B]

This was when the Swift Fed money transfer system. Oh, and plus the other thing was the Bangladeshi started freaking out and calling the Fed and the Fed was like, it's a Saturday, we're totally not answering the phone.

[C]

So the thing about this is eventually the money went through this bank account. It was wired out, it went through a couple more steps, and it ended at this casino in the Philippines where it got turned into cash.

[B]

The reason that got turned into casino chips.

[C]

Casino chips, exactly. Anyway, eventually cash. But what this is causing its own controversy in the Philippines because apparently these casinos have been exempted from money laundering laws. And that's making the. And so a lot of people there are freaking out and saying, literally we are becoming a center for international money laundering because we so poorly police these people.

[A]

Oh, and another thing is that you. We have no reason to believe that the hackers are Filipino. Right, like, because.

[B]

Right, correct.

[A]

It's just they chose the most obvious place to move this money essentially.

[B]

And if you're going to be laundering money, casino chips are a really good way to launder money because they're completely untraceable and none of that.

[C]

This is also how money gets moved out of Macau, in China frequently as they send it over to, I mean, kind of gets spirited out to the casinos there. It gets turned into chips and you can literally carry it out or whatnot. So that's, this is, this is almost a basic pro move if you're a money launderer or something.

[A]

But the thing more pro is that it's their heist. The bank heist is on the fence Fed.

[B]

It's amazing. But the other amazing thing is that this is a failure of the Swift security system, which almost never happens. This is literally the only time I can remember ever hearing about Swift being hacked. It transfers $14 trillion a day or something completely insane like that at incredibly low risk, with incredibly high security. And, and it's like transactions are mostly reversible if you catch them soon enough. And it's this sort of parallel Internet which covers the world and is highly secure and works astonishingly well. And the amazing thing really is not that someone managed the thing, which surprises me is not so much that it's a hack, but rather that it has taken so long and that you know, only some crazy sort of, what seems like completely insane Bangladeshi Central bank is pretty much the only place that you could hack into it from. I mean, if you see the photographs of the central Bangladeshi Central bank governor who resigned sort of sitting cross legged in front of the Central bank building because apparently they can't afford shares or something. I mean, it's a pretty kind of ramshackle place.

[A]

I love your culturally sensitive comments on this, but I just want to say that, you know, we've talked a lot about money and how it's transferred, but isn't the Swift one of those systems whereby you have to wait 24 hours before it's officially transferred?

[B]

No, you do not. Swift is very, very fast.

[C]

Okay, so question, would we all be better off if instead of like Swift, you just had a giant blockchain where everything was tracked and so you'd know exactly where it went to and.

[B]

Well, no, I mean, Swift, Swift is, you know, exactly where it went to. There's no secret about where the money went. You have just as much traceability with Swift as you do with a blockchain.

[C]

Okay. But then once it eventually gets to the casino somewhere, that's.

[B]

Yeah. I mean, once you turn it from Bitcoin into casino chips, it's the same casino chips. Switching to a blockchain doesn't help you there. A blockchain is a kind of database. The Swift database is absolutely robust and they know exactly what happened and when it happened and how it happened.

[C]

But once it gets to the craps tables, that's when everything kind of falls apart.

[A]

I mean, it just goes to show you that, like the people who know about security always say that the weakest spot of any security, security system is the person at the end. Right. So in this case, if a team.

[B]

Of people in Bangladesh who have the codes want to use those codes for nefarious purposes, in a way, it's not the Swift system's fault that they were able to do that.

[C]

Yeah. They just needed the spelling skills as well. That's the key.

[A]

So how much money was actually taken in chips?

[C]

I think 81 million is the total that ended up. It all went so, I mean, it worked.

[A]

Who gets reimbursed?

[C]

You know, I mean, I don't know how does that. I haven't looked if like Bangladesh's foreign currency reserves are down 81 million now.

[B]

I believe they are, yeah. I mean, I mean, the New York Fed isn't going to reimburse them.

[C]

Yeah. I wonder, I kind of wonder what that did to Bangladesh's current. I haven't looked at what if it's done anything to its currency moves. Like, that'd be really sad if, like Bangladesh's currency just kind of nudged a little because of that.

[B]

But anyway, so next we are going to talk about Valeant, but first I need to talk about ZipRecruiter, which is the way that if you want to hire someone to look after your currency, who is trustworthy and who is not going to try and put in a billion dollars of transferring it to the Philippines. What you want is to find the most qualified people anywhere in the world. And the way you do that is you put an ad up using ZipRecruiter because it posts to 100 plus different job sites with a single click. Basically, it's very painless and it's very easy. And there are 4 million resumes on this platform site, so you can be pretty sure you'll find Someone great. Over 400,000 businesses have used it and your business should probably use it too, especially seeing as how you can try ZipRecruiter for free. If you go to ZipRecruiter.com slate money. So go to ZipRecruiter.Com slate money and get instantly matched to candidates from over 4 million resumes, 5 million for free. Cyclicalta.com slatemoney now, my favorite. Everyone's favorite hedge fund manager Is a chap called bill ackman.

[C]

We've talked about bill before on this show in herbalife. We've discussed bill.

[B]

We've definitely talked about bill ackman before. But why is bill ackman in the news, Kathy?

[A]

Well, he's famous this week for defending the company called valiant. Defending its value with a name like valiant. But in spite of all of his confidence, Valiant has been going down a lot.

[B]

A lot.

[C]

Bill lost a billion dollars in a day this week.

[A]

Yeah, yeah. So we talked a lot in this insight money about martin shkreli. But martin shkreli was actually not the first douchebag in pharmaceuticals. It needs to be said.

[B]

So martin shkreli's model of buy up old drugs and then hike the price enormously is. Was actually not martin shkreli's model so much as it was valiant's model. And he thought, that's a good idea. I'll get in on that.

[C]

Valiant taught him everything he knows. But I don't know if they taught him everything they knew. James brown, right?

[A]

No, they were doing a better job of it in the sense they were much less obvious about it. But I'm going to give you guys two statistics. Valiant bought. This is the mo of valiant. They would buy up a company to some extent. They would use their canadian address to be able to pay more because they have a tax advantage. They would plunder the employees of that company that they bought up especially. They would decimate R and D. Any kind of research and development would be gone. They would raise the price of the drugs that that company had sold. And then they would just keep on. Then they would repeat. They would do that to many, many companies.

[B]

And more to the point, in order to buy these companies in the first place, they would pay top dollar and this top dollar by borrowing money.

[A]

That's a really important point.

[B]

So they levered up enormously to grow and grow and grow.

[C]

What's interesting about valeant is they pioneered this model of kind of buy up old drugs, essentially off patent drugs, and then jack up the price. And we'll get into how they did that, because that's actually a source of a lot of their problems. Now, there were some sketchy things going on, but valiant is what happened. When you gave a McKinsey consultant control of a pharmaceutical company, I mean, J. Michael Pearson was a McKinsey consultant who had this idea that pharmaceutical companies should do less pharmaceutical research and just fire scientists and increase drug prices and milk whatever profits they can.

[B]

And it became known as what's known as a hedge fund hotel. It was one of those stocks which is overwhelmingly owned by hedge funds because the hedge funds really love this kind of financial engineering. He stopped being a drug company and start becoming a financial engineering company because you mess around with things like leverage and prices and that kind of stuff.

[C]

And where they ran into problems was, was in distributing these drugs. And this, this is a controversy involving a company called Philador. Essentially, they needed to be able to sell these generic drugs for incredible markups. And how do you do that? I mean, nobody at a Walgreens or cvs, no pharmacist is going to say to their customer, oh yeah, you should pay $800 for this toenail fungus or skin cream or whatever when you can get a $10 version here. So what they did is they crafted this financial relationship that I can barely really explain with a company called Philador. It was a specialty pharmacy. And what Philidor did was it was essentially a mail order operation. Doctors would write a prescription, okay, and the prescription would, that would be filled through Philador and Philadelphia would offer a refund on their copay, essentially so that they wouldn't have to get hit with the giant price of this drug themselves, but the insurance companies would have to pay for it. The problem was that Philidor needed a pharmacy license to do this. So they bought another smaller pharmacy and started using its owner's credentials to do it. When he caught on, this created this massive fight within the company where he started literally withholding money from, like, the checks he was supposed to be sending back to corporate. It became this blow up. Eventually this whole system got exposed. We know the Fed started catching on. The New York Times started catching on. There are now investigations into the system they created. And what the lesson is, I think partly here is that if your model is to jack up generic drug prices, you're probably going to piss off someone in the process. And there's a lot of political risk involved. And that's a lot of what Valiant eventually had to eliminate this relationship it had with Philidor. So its distribution channel died and they couldn't keep jacking up prices on drugs.

[B]

I mean, the Valiant story is much, much bigger than just Philidor. It was symptomatic of much, much Bigger problems than just Philidor. But you're absolutely right. Valeant turned out to be based on a bunch of unsustainable business practices. And then all of its accounting went skew if. And then the CEO went AWOL for a while and then they had to restate a bunch of accounts and then they had a completely disastrous earnings call, complete with 600 million typos and various like basically everything which could go wrong did go wrong. And eventually all of the shareholders who were bought into it just said, we don't have a clue what you're doing anymore. We don't trust you at all. And we're just going to sell this.

[A]

Stuff just to be. Just to give an example to a really concrete example. They bought a company that made this, something called Isuprel, which is used in emergency situations to prevent fatally slow heart attacks. They took it on, it was $50 when they bought it. They raised the price to $2,700, which is a 54%, hundred percent increase in price. To compare that to Martin Shkreli, he did the same kind of thing to an antiparasitic medication called Daraprim, and he moved it from 1350 a dose to 750 a dose, which is 5500%. So it's almost exactly the same thing. That was the mo. But one of the things that Valiant did to echo what you guys are talking about, because the prices got so expensive for this medication, the hospitals simply stopped using it. So he. It didn't really work the way they were expecting it to.

[C]

Well, it did for a while. I mean, they were making massive profits until the wheels started coming off. And again, I think this is why a lot of it is a story about political risk, is that eventually, if you're doing something that is going to enrage literally the entire world and everybody in government, Republicans have been a little nicer to Valiant. I actually watched a hearing where they brought Valiant CEO and Martin Shkreli on and they were a bit kinder to Valiant. But you're opening yourself up to just regulators and prosecutors coming down on you and creating the possibility that everything is going to collapse. It's going to scare off stock. You know, you're going to have to give up certain sales practices. Things are going to start. Things are going to start falling apart eventually.

[B]

And this is exactly what's happened now is that Valeant has $30 billion of debt, which it has issued to fund all of its acquisitions for, but has now sort of seen the light and said to everyone, oh, we're not going to do that model anymore. We're not going to do the jack up prices model. We're going to be a good, honest pharmaceutical company instead. And the stock market is saying, well, okay, that's fine, but you have $30 billion of debt, which was, which you borrowed predicated based on the idea that you could jack up all of these prices. And if you're not going to jack up all of these prices, how on earth are you going to be able to service the debt? Plus the debt has various covenants saying that you need to be able to file certain reports in a timely manner. And since you have no idea what's going on in your accounting, you're not going to be able to do that. So there's a good chance that the equity is worthless and this is hurting. Coming back to Bill Ackman. Bill Ackman invested an absolutely astonishing $4 billion in Valiant stock and options and all of which is worth just a few hundred million. Now he's basically lost $4 billion on this trade if you don't include the 2 billion he made when he teamed up with Valeant to try and buy Allergen. But that's a whole other story.

[C]

To come back to the actual issue of the pharmaceutical industry. Right. And what this means for it. I do wonder if rather than being totally scared away from the model of jacking up drug prices, instead other companies are just going to learn to do it more quietly. Like obviously you can't be Shkreli, like Martin Shkreli.

[B]

No, I mean companies raise prices if they think that's going to make them money. And all pharmaceutical companies have always done that forever.

[C]

But there's, there's been this gradual increase in not just pharmaceuticals. There's been this gradual increase in generic pharmaceutical prices over recent years, not just with Valiant and Shkreli, but just across the industry for various reasons that have to do with consolidation, among other things. But I do think that what you're going to get is companies just being less flagrant about the size of the increases and being vocal about it as the business model.

[A]

So to that end, like the FDA recently changed the rule on getting a review process through. They now have something called a priority or fast track review process for generic drugs that are willing to compete with off patent drugs made by one company. And they're expecting at least 125 drugs to be going on fast track. And that's good news.

[C]

Yeah, this is satisfying. After the Shkreli thing, I wrote a piece basically saying that this is like the One thing the government can do right now to deal with him. Yeah. So it's not very often that you say this is the one thing that the government can do. And then someone goes and does it. It just like it. It made my heart a little bit happy to reuse a phrase. I think I've. I've been dropping the show a bunch.

[B]

The death of Valiant and of Turing Pharmaceuticals and the going to jail of Martin Shkreli and everything else is all going to make the world a better place.

[A]

Thank you, Martin Shkreli.

[B]

Thank you, Bill Ackman, for losing the $4 billion. We're going to move on to Bridgewater. Because if Bill Ackman is losing money, Ray Dalio is losing credibility. There's a segue for you. But first we are going to talk about texture, which is the best way to read magazines. Because the old fashioned way of reading magazines is you go along to a newsstand and you buy this one and you buy that one and you buy the other one. And they're perfectly good magazines, but it adds up. And instead of doing that, what you do is you download this amazing app called texture on your iPad or phone or device, and you read every single magazine in the world, basically for a subscription, which costs less than the price of just buying three magazines at the newsstand. So you can read Esquire, you can read Vogue, you can read gq, you can read Men's fitness, you can read the New Yorker, you can read Consumer Reports. You remember how, like, this is, the weird thing about Consumer Reports is that you want to be able to read all of the back issues because you don't really care about necessarily what they're writing about this month. You care about what they have.

[A]

You care about dishwashers. I have an air conditioner to think about.

[C]

I actually do care about dishwashers right now.

[B]

But with this, you get to search all the back issues. You get to read on subjects across different magazines. You get curators helping you out with all of the best articles in the magazines you might not even have ever heard of. It's a fantastic app. It's called Texture. And of course, because we're awesome, we are going to allow you to try it for free. So what you do is you go to texture.com slatemoney and you'll get a free trial and it's awesome. And by the time it's over, you'll be completely addicted to it. It's a great [e-mail] slatemoney okay, so while Bill Ackman is, I think now more. More investors have lost money with bill ackman and have made money with bill acman.

[A]

Not doing well.

[B]

He's not doing well. Thanks to this valiant, you know, debacle.

[C]

Valiant stand.

[B]

He, you know, this is not the first time he's lost money in a high profile manner. He also lost money on herbalife In a very high profile manner. And he also lost money on target In a very high profile manner.

[C]

Yeah, but herbalife, he at least seemed to be sort of taking a stand for human decency. Like, trying to explain.

[A]

He'd like to think so, yeah.

[C]

I mean, compare. But I mean, yeah, the guy's a.

[B]

Human decency is absolutely the first thing that springs to mind when you think of bill agman.

[C]

I'm not saying he's. I didn't say he was decent. I was saying he was thinking a stand for human deeds.

[B]

So Angman is an activist investor who loves to talk about. Who loves to take large positions in individual stocks. This is basically the complete opposite of ray dalio of bridgewater, who has a much, much bigger fund, the biggest hedge fund in the world. It's $156 billion.

[C]

This guy's huge hands.

[B]

And he is a genius who's very good at just looking at the planet and seeing. Look at seeing how money flows around planet earth in various different ways. And being able to position himself to make lots of money. And he's made money consistently for many, many years. And that's why he has $156 billion under management. He also has 1,500 employees. And what he is trying to do is become. And a few people have tried this in the past with varying degrees of success. Usually near zero. Is. Is to try and transition out of his own hedge fund.

[A]

It's gonna be hard.

[B]

He's like, bridgewater is the thing. And I'm gonna set up this incredibly complex management style so that it can run without me. And he started this in about. About six years ago, in 2010. He's like, within 10 years, I'm gonna be out. And you guys are just gonna run this on your own. And I. I'm. I'm gonna be able to walk away and just see this thing ticking over happily without me. It is not going according to plan.

[A]

And more recently, didn't he say he's, like, never leaving?

[C]

Not until he's, like, immobilized. Basically, he's going to sumner redstone. That's exactly right. He's gonna be reduced to steak and sex before he's Actually.

[B]

Oh, my God.

[C]

Wait, so this.

[B]

Yeah.

[C]

It's interesting, though. He says he's, like, never gonna leave. He's trying to.

[B]

Well, I mean, he's been reported to have said that. It's not like he said that on the record.

[A]

Okay.

[B]

All right. But he's.

[C]

He.

[B]

He's got this crazy, crazy, crazy, crazy management system.

[A]

Yeah, let's talk about that.

[B]

I don't know how many of you guys have. Have seen Black Mirror, and I haven't seen Black Mirror. There's this.

[C]

I've seen the one episode everyone has seen.

[B]

So there's this one episode of Black Mirror where basically you get this little implant behind your eyes and everything you see is recorded and can then be played back. And so there's. You get her sort of perfect recall of everything that's happened, and it's this dystopian, like, dreadful, horrible thing. And Bridgewater seems a little bit like that. All meetings are recorded. Every single employee needs to spend 15 minutes a day watching videos of meetings and then second guessing what people did and making sure that everything was transparent enough. They have votes on whether people are being completely transparent.

[C]

Barron. Here's what summed it up for me. The Wall Street Journal had an article about this recently, which is why we're discussing it now.

[A]

We gotta have that on.

[C]

Yeah, this is a little tidbit. So apparently, James Comey, now the FBI director, worked at Bridgewater for a while, and when he left, he sent out a letter basically saying the place wasn't joyful enough for him. The guy who is going to eventually run the FBI was like, this place is a little too harsh for me, man. There's too much surveillance. It's not. Not enough humor. This is a little intense by my standards.

[A]

I mean, let's face it, it's a cult.

[B]

It is a cult.

[A]

It's explicitly a cult.

[B]

And they love to hire people straight out of university because they can indoctrinate them in the cult. And if you come in mid career, you often don't last long. And even the people who do come in straight from university, 40% of them leave within the first year.

[A]

It's a very high attrition rate.

[C]

Well, so this gets to a question I think Felix wants to discuss, which is like, what the hell is a hedge fund? You know, it's not like they are these private investment firms. They're not like partnerships. I mean, they are partnerships, but they're not like the old Wall street partnerships that were designed to kind of sustain beyond their charismatic founders. So what is It. How. How do you keep a big 1500 person cult of personality running?

[A]

Well, that's exactly right after the culture. It has nothing to do with the hedge fund. It's just a cult of personality. The only reason that it's important that it's a hedge fund is because he's very successful at what he does. So there's so much money on the line.

[C]

But aren't other hedge funds sort of similar in that way? And like, the cult of personality ishness or is. Is there a spectrum of it?

[A]

I mean, of course there's a spectrum, but I guess my point is that when has any cult of personality really lived past its first cult leader? Leaving?

[C]

So how many? How many?

[B]

Well, there's the Mormons, I guess.

[A]

Well, I was gonna say Apple.

[B]

Christianity.

[C]

Christianity, yeah.

[A]

Okay, good point.

[B]

But interesting that you mentioned Apple, because what happened is that the guy everyone thought was going to replace Ray Dalio as CEO, this guy Greg Jensen, ended up being kind of shunted sideways into a less. Oh, can we talk about that CIO role. We can definitely talk about that.

[A]

What happened there?

[B]

But the guy who replaced him, they brought in from outside, and it was John Rubenstein from Apple, the guy who basically invented the Macintosh. And they were like, we're gonna bring in some Apple guy because he understands from cults of personality.

[C]

Is that the theory? Cause, like, what? Yeah, I was wondering about this. Why are Apple people being brought on to run?

[A]

It's a total cult.

[C]

It's just because of the cult.

[A]

They get it.

[C]

Yeah, they get that.

[A]

It's like the details are different.

[C]

Yeah, but. But you're running a different cult is that you're a freelance cult leader.

[A]

So can we talk about the. The fight between Dalio and Jensen?

[B]

Sure. So the fight between Dalio and Jensen. Yeah, which. So this was reported in great detail also by the Wall Street Journal. And I don't think anyone really understands what it was about, but maybe you can take a stab at it.

[A]

No, I mean, all I know about is that they. Okay, so there's a. There's a culture of, like, calling people out on their mistakes. And then people who are like. Or happy with the culture talk about how great it is because it's kind of flat. Like you're allowed, any person's allowed, technically allowed, to call out Ray Dalio himself for being improper and not sticking to the rules.

[B]

210 written principles that everyone has to follow at all points.

[C]

Tell it like it is. Is basically the.

[A]

Like, it's not that far from the Ferengi Rules of acquisition, if you know anything about what I'm talking about. But in any case, Dalio and Jensen. Jensen was the expected next Dalio. They got into some kind of personality problem with each other and they both called each other out at the same time.

[B]

And then there was this big like company wide vote where they would, everyone would watch the videos and try and work out whether this constituted like talking bad about someone behind their back or whatever.

[A]

Because everything is videotaped, so everything. Oh, it's so bizarre.

[C]

So again, I just want to come back to how much crazier is this? An order of magnitude crazier than your typical hedge fund is like two orders of magnitude or is it? Actually I worked at D.E.

[A]

Shaw, so we had like David Shaw, but he wasn't even running the hedge fund by the time I got there. Okay, I mean we had like twice a year meetings where we would listen to him talk about what he was interested in. And he was interested in things like biology and he was worried about, you know, the amount of heat that he was adding to the planet by using all the computers he was using. But then he was like measuring how much value he was giving to the planet over how much heat he was, you know, so he was weird. But we weren't forced to think about his thoughts on a given daily basis. Like Ray Dalio forces people to think the way he thinks. It wasn't explicitly mind control.

[C]

There's something kind of utopian about this. It reminds me almost of like the industrialists of the 19th century who would try to build company towns so that like their employees would live the affordism, live to their moral standard and such.

[A]

Like is absolutely a moral thing.

[B]

It is this, yeah, it's this idea that I am hugely successful and I am successful because I did things in this way and so everyone else should do things in exactly the same way and then they will be successful. This is not by any means universal in hedge funds. So if you go to something like, if you look at someone like Stevie Cohen, he just gives all of his lieutenants enormous amounts of freedom to do anything they want. And then he just pits them against each other and says whoever gets the highest returns will get the most money. And then if you have low returns, you're out.

[C]

It's amazing that that actually comes off as the more humane way to run a hedge fund when you think about it.

[A]

That's true.

[C]

I'm sorry, I think I just blew the levels on my laugh there. I apologize to all the listeners at home. But anyway, by the Way.

[A]

One other tidbit we found out, they actually, in some ways they have complete transparency, like with conversations and stuff. But for the actual dealings of the hedge fund, like the actual trade trading strategies and stuff, it's very secretive.

[B]

There are only 10 people, right?

[A]

10 people in the so called circle of trust. And they sign lifetime non compete agreements, which I've never heard of.

[B]

Is that even enforceable?

[C]

I don't know. It's certainly not. You can't enforce it in California, so you could actually.

[A]

I mean, but it's almost like Scientology at that point, right? You're signing yourself up for life and some kind of like blood pact.

[C]

Well, that. Are you. I mean, I think, like, emotionally it probably feels that way, but I, I assume anybody who signs up for that is either A, just getting so much money it doesn't matter, or B, they, they know it's not actually enforced.

[B]

And of course, you know, for all that the fights are ostensibly about, you know, whether you violated a principle, in fact, we can surmise that they're about money. This is something which came out in the Journal article, is that one of the main reasons why Greg Jensen fell out with Ray Dalio was that Greg Jensen, when markets started weakening, wanted to be able to accumulate Bridgewater stock at lower prices than he'd been paying thereto for. And Ray Dalio was like, I'm not reducing the price of Bridgewater stock. And that was maybe the real reason why there was a fight between them. We can assume that they are all doing just fine.

[A]

Eventually, yes, those 10. Yes. I would also like just to make a prediction that. That Bridgewater is not going to outlast Ray Dalio at all. That's just my prediction.

[C]

I feel like that's. How much, well, how much money are you waging?

[B]

If Ray Dalio fell under a bus tomorrow, it would last like at least a couple years before everything was.

[A]

Yeah, I'll give it two years. Two years.

[C]

Okay. So as soon as he's gone, we're gonna check back on. We'll set a timer.

[B]

Okay, so numbers round next. But first I need to talk about Harry's razors. You know, Harry's razors, they are a great way of shaving. And they're a cheap way of shaving. Much cheaper than the crazy prices that you pay at grocery stores or wherever you normally get your razors. They are made in Germany in a factory which Harry's bought the entire factory. They have five blades. They have been redesigned. They have this really cool new handle now, which doesn't slip it's some kind of super high tech plastic. Over a million guys have already switched over to Harry's because it's a better shave at like half the price of the leading brand. So Instead of paying $32 for an eight pack of blades, for $15, you get a razor, the moisturizing shave cream, three razor blades and actually, never mind, let's make that $10 because you get $5 off your first order with the promo code MONEY. So go to Harry's.com right now. That's H A R R Y S dot com. Enter the code MONEY at checkout and you'll get $5 off. Numbers.

[A]

I got one.

[B]

What's your number?

[A]

It's nine. Just nine. That's the number of companies that were. It's kind of complicated, but there's a place called Aryuna Capital. Have you heard of them? They're an activist investor firm. They're the activist investor arm of the investment firm Baldwin Brothers. They recently are filed shareholder proposals at nine technology firms basically trying to put gender equality pay up to a vote, fresh to the shareholders.

[B]

Okay, what does that mean?

[A]

So basically it doesn't mean that much.

[B]

Because basically what does the motion. What am I voting for if I vote for this?

[A]

Okay, so they. Oh, you're voting for the fact that this company should care about equal pay for men and women.

[C]

When they say care about.

[B]

Is the company out there right now saying we don't care about this? And then they're saying don't vote for this because we don't care? It's just about like whether you care or not.

[A]

Yeah, it's really weird. It sounds like a totally, you know, vapid concept. And in fact, lots of shareholders probably wouldn't care that much about that vote. They wouldn't. They would just.

[B]

Do they care whether their companies care?

[A]

Yeah, exactly. So this weird thing, but it is a way, an indirect way obviously for this activist firm to put pressure on the companies to think about it. And a couple.

[B]

So like in the bathtub or something, they're like, you know, you directors, when you're like, you know, showering under your armpits or whatever, could you just think about gender equality for that?

[C]

There's like one HR minion who's like, all right, you know, you are the.

[B]

Best in the United States.

[A]

Well, you guys might think that, but actually two of those nine companies, intel and Apple, have already said, yeah, you know what, we're all about that. And they came out with these reports about how they do really well with gender equity pay I'm sure they.

[C]

I'm sure their report painted them in fabulous.

[A]

And then versus Amazon, which first of all said, no, we reject this. And they even appealed to the sec, saying, sorry, the proposal that Arunia Capital put forth is, quote, so inherently vague or indefinite that it would impede implementation. We just simply can't do it because it's not precise enough.

[B]

You can't tell me what to think about in the shower, man. That's my personal time.

[C]

Is that not the most Amazon answer ever? It's like there are not enough logistics here.

[A]

Yeah, so anyway, this week the SEC came out and said, sorry, Amazon, it's not really that unclear what the proposal is. So we'll see. It doesn't necessarily mean that the shareholders will care, but it might be on the shareholder vote.

[C]

Interesting. I can't believe they challenged that.

[B]

Jordan, did you. Did you come up with a number?

[C]

I've got a number.

[B]

What's your number?

[C]

My number is.

[A]

Fuck. One second.

[C]

I had it memorized and then I have to pull open. Ah, gosh darn it. Okay, one second. Pulling up my laptop so I can make sure I get it right. Okay, my number is.

[B]

Jordan, Jordan, Jordan, Jordan, Jordan.

[C]

Okay, so my number is about 15%, a little less than 15%, which is how much of America's wealth belongs to the top 0.1%, according to a recent study by a group of economists from the Federal Reserve Board and the University of Pennsylvania. Why am I bringing this up? Well, it's interesting because, yeah, I mean.

[B]

Piketty was like, two years ago, do try to keep her.

[C]

Well, exactly. So Piketty was. Two years ago, some of his colleagues or collaborators, Gabriel Zucman and Emmanuel Saez, came up with their own estimates about wealth inequality around the time capital in the 21st century was coming out. In fact, Piketty later said he liked their estimates better than his own data. And they said that essentially the top 0.1% actually had 1/5, about 22% of the nation's wealth.

[A]

But it's only 15% and according to.

[C]

New one, it's only 15%. Now, why you can. I've spent a lot of time looking at the differences between how they arrive at these numbers, and you can actually track each individual, like alteration to the data that gets you from 15% to 22%. The main lesson here is, I think that these statistics are really, really, really fragile and depend a lot on how the researchers and economists kind of put them together, craft them, a lot of individual decisions they have to make about which data to use, how to treat that data, how to alter that data to make up for its deficiencies. And so when you, you know, talk about inequality and you hear the debate, you just have to remember that a lot of the stuff, these striking statistics are actually sometimes kind of made of glass.

[B]

And the other thing to remember is that individual data points are much less valuable than time series. So you could, you know, I'm sure that the 22% data point and the 15% data point are both at the end of a line which is going up and to the right or down and to the right or whatever it is, but the lines more or less follow each other exactly.

[C]

The 15% number basically shows inequalities gently rising over time but not going hyperbolic, whereas the 22% looks like they're climbing up a mountain.

[A]

I'm going to take you guys with me next time I teach statistics. As my, my co teacher is, I'll.

[B]

Come in and help teach your statistics class with my. As long as I can bring my backgammon set. Because that's everything I learned about statistics, I learned playing backgammon.

[A]

Deal.

[B]

My number is 40%. Talking about statistics. And the thing, when you're in journalism, you often try and look at what happened today or what happened this week and you miss the really big stories because they happen too slowly. So this is a really big story about the way that we live in America, which has happened over the course of the past 20 years. So 20 years ago, if you looked at 18 to 29 year olds in America, 70% of them, you asked them, what's your drink of choice? 70% of them said beer.

[A]

Yum, yum. I love that.

[B]

Today if you ask 18 to 29 year olds in America, what's your drink of choice? 40% of them say beer.

[A]

What do the other 60% say?

[C]

Wine. A lot of wine.

[B]

Cocktails. Vodka.

[C]

Yeah, but we love wine. Basically we're generational winos.

[A]

Did not know that. That surprises me.

[B]

We're in a big, long term secular downtrend for beer and I can't say that's a bad thing.

[C]

No, it's also, it's troublesome, especially for the macro brewers for Anheuser Busch and such, because their market share of that drinking market is falling as well.

[A]

I don't feel sorry for them.

[C]

I mean, I'm not saying other countries.

[A]

Like I was in London a couple weeks ago and it seemed like everyone drank beer.

[B]

And yet, I mean it's happening in most beer drinking countries. Northern Europe has historically been beer drinkers. In southern Europe has historically been wine drinkers, but the amount of wine being drunk in northern Europe, in beer drinking countries like Ireland, Britain, Belgium, Germany has been going steadily up.

[C]

This is why the future of beer is basically in China and Africa and emerging markets where they haven't hit peak suds yet. They haven't gotten blackout drunk on, metaphorically speaking, yet. They can keep going.

[B]

I only ever got really, really, really drunk on beer once, and that was in Germany. But it's easy.

[C]

I know you went to college.

[B]

Yeah, but even in college I was drinking like things which weren't beer.

[C]

That's all right, whatever. You and I had very different teenage years.

[B]

Okay, on which note, we're going to wrap up this episode of Slate Money. Send all, like best wishes, please to Kathy o'.

[A]

Neill. I'm gonna recover in a beer house, so everybody don't worry about me.

[B]

The way you recover after going over the handlebars is by drinking beer. It's always worked for me.

[C]

Can we make Lederhosen the official Slate Money bar?

[A]

It is already the official.

[C]

I would do. We should do a Slate Money meetup at Lederhosen.

[A]

Oh, my God, yes.

[C]

People would love that, I think.

[B]

Come join us at Lederhosen one Friday afternoon with Audrey Quinn, the producer. We will see. We'll see if we can get Steve Lichti to come along. The mysterious Steve Licktide I don't think anyone has ever met. He's the executive producer. Maybe Andy Bowers is the other executive producer who we have met and anyone else from the Panoply network, which is [e-mail] panoply so keep those letters coming to slatemoneylate.com and we'll talk to you next week on Slate Money. Sam.