E78: VC fund metrics that matter, private market update, recession, student loans, Bill Hwang arrest

1. 0:00 – 4:32

   Bestie intros

   1. DFDavid Friedberg0:00

      Is there gonna be an open mic night in (beep) ?

   2. JCJason Calacanis0:03

      We were gonna have you speak, Friedberg, but we realize you're not capable, so...

   3. DSDavid Sacks0:07

      We want the show to be entertaining.

   4. JCJason Calacanis0:08

      (laughs) Yeah, it's not, no, that's not personal, Friedberg. (laughs)

   5. DFDavid Friedberg0:12

      You guys are missing out. I'll tell you guys what makes my stand-up comedy so good.

   6. JCJason Calacanis0:15

      Oh, God, here we go.

   7. DFDavid Friedberg0:16

      Oh, my God, we're back on this. Jesus Christ. It's my creative sensibility. So if I have some time to prep and write my script and read my own creative insights...

   8. JCJason Calacanis0:26

      Yeah, okay, bring one joke next week.

   9. DFDavid Friedberg0:28

      J-Cal, for all the time we've spent together on this podcast, you know so little about me. It's so, it's so depressing, I gotta be honest.

   10. JCJason Calacanis0:35

       Well, you know, here's the thing about friendship, it's a two-way street. You gotta open up a little bit.

   11. DFDavid Friedberg0:39

       We gotta go out and get drunk one night.

   12. JCJason Calacanis0:40

       Absolutely.

   13. DSDavid Sacks0:41

       (laughs)

   14. NANarrator0:42

       Let your winner slide. Rain Man, David Sachs. I'm going all in. And I said. We opened source it to the fans and they have just gone crazy with it. Love you guys. Queen of quinoa. I'm going all in.

   15. JCJason Calacanis0:58

       I just wanna give a shout out to this guy, Andrew Lacy.

   16. DFDavid Friedberg1:01

       Okay.

   17. JCJason Calacanis1:01

       Okay?

   18. DFDavid Friedberg1:02

       Shout out.

   19. JCJason Calacanis1:02

       He is the CEO of a company called Prenuvo.

   20. DFDavid Friedberg1:06

       Oh, yeah.

   21. JCJason Calacanis1:06

       Can you just flash it on the screen?

   22. DFDavid Friedberg1:08

       Prenuvo.

   23. JCJason Calacanis1:09

       I went to Prenuvo, and what they do is they do a head-to-toe MRI scan in 45 minutes and they use a bunch of machine learning and image recognition to help a radiologist interpret these MRIs in real time beside you. It's a service that you have to pay a few thousand dollars for. There's a location in Silicon Valley in Redwood City, and a couple of others. And we mentioned it, but the reason I'm bringing this up is he sent me an email yesterday and he said, "I just wanna thank you and the Besties for mentioning Prenuvo-" Mm. "... because we had a bunch of people come." Mm-hmm. And he said, "We found no less than 11-" 11. "... life-saving diagnoses." 11.

   24. DFDavid Friedberg1:49

       11 people.

   25. JCJason Calacanis1:50

       11 individual listening to the pod-

   26. DFDavid Friedberg1:53

       Pod saves lives.

   27. JCJason Calacanis1:54

       ... went to Prenuvo after hearing about it, had a head-to-toe MRI, found, you know, all, all kinds of issues-

   28. DFDavid Friedberg2:02

       Yeah.

   29. JCJason Calacanis2:02

       ... from brain tumor and brain cancer to stomach cancer and other things, and, uh, was able to get the care that they needed.

   30. DFDavid Friedberg2:10

       Amazing.
2. 4:32 – 29:37

   Understanding VC fund metrics that matter, state of private markets

   1. DFDavid Friedberg4:32

      Uh, lots going on-

   2. JCJason Calacanis4:33

      Did you guys read my... Did you, did you read my annual letter, any of you three assholes?

   3. DFDavid Friedberg4:36

      I, uh, I saw your commentary.

   4. JCJason Calacanis4:37

      No, that's a no, that's a no.

   5. DFDavid Friedberg4:38

      (laughs)

   6. JCJason Calacanis4:38

      I get it, I get it.

   7. DSDavid Sacks4:39

      I reviewed the table where you listed all your results, and I actually sent it to my team. I was like, "This is a really nice way of summarizing, you know, a firm's results over, you know, a long period of time." 'Cause you had every fund and your totals and, uh, and all, and all the key metrics.

   8. JCJason Calacanis4:55

      Well, can I talk about that for a second?

   9. DFDavid Friedberg4:57

      Yes, please.

   10. JCJason Calacanis4:57

       You know what's in- what's incredible about what you're saying, Sachs, is I, I was interested in a bunch of other funds that I'm invested in and their returns. And then I've also seen a bunch of leaked fundraising decks of all kinds of other firms-

   11. DFDavid Friedberg5:10

       Hm.

   12. JCJason Calacanis5:10

       ... from growth stage to crossover to PE, and it's incredible that they are not standardized, right?

   13. DFDavid Friedberg5:16

       Mm.

   14. JCJason Calacanis5:16

       Some people only show gross IRR, some people show net IRR. Some people don't show the total value of the paid in capital, which means, you know, you, if you have $100 fund, what is the total value of all of its holdings? Some people don't show DPI, which is distributions of paid in capital, which means, okay, for every dollar you've taken in, how many dollars have you sent out? If you don't show all of them, what was shocking to me is how much you can kind of sh- hide and play-

   15. DFDavid Friedberg5:44

       Yes.

   16. JCJason Calacanis5:44

       ... and manipulate the numbers. And one of the most crazy things that I saw is that there are these late-stage funds that write into their fundraising decks, that what they actually use are l- lines of credit to juice IRR.

   17. DFDavid Friedberg5:58

       Oh.

   18. JCJason Calacanis5:58

       So what they do is if they're about to do a deal, they'll actually get a loan from a bank-... put that money into a company, wait until it's about to get marked up, and then what they do is they actually call that original money from their LPs-

   19. What?

   20. ... and pay back their capital call line of credit. So what does it do? It inflates IRR. But this is why if you d- if you see the other numbers, it still shows that it's kind of like, you know, not doing much of anything. So if you ever see multi-hundred percent IRRs or high huge IRRs with zero-

   21. Mm-hmm.

   22. ... DPI and a marginal TVPI, it's folks that are playing games to trick LPs. Just a heads-up to everybody.

   23. That is so weird. So what you're saying is, just to summarize for people who might not understand, hey, we get judged on the rate of return each year. So if the stock market does 7 or 8%, we're expected to do triple that, so we gotta hit 20, 25% each year. Now, the clock starts ticking when the money gets called from the LPs, the partners-

   24. Correct.

   25. ... and gets put into the company. So if you invest in year two of your fund, you pull the money down from the LPs, you put it into YouTube, whatever it is. What you're saying is, they will take a loan against that future money from a bank at an absurdly low interest rate, let's say 1% or 2%.

   26. Correct.

   27. They make the YouTube investment.

   28. Correct.

   29. Then two years later, YouTube has a price round that marks it up 20X. Then they put your cash in, in year three of the fund, year two-

   30. And pay back the loan.
3. 29:37 – 44:56

   Recession possibilities, Q1 negative growth

   1. JCJason Calacanis29:37

      So, adding to these headwinds, I think we, um, we've been talking about the possibility of a recession for those, uh, um, new to the- (laughs) to the concept of recession if you're under the age of 30 and haven't really lived through one as an adult. It's two quarters, th- the official definition, two quarters of negative growth of the GDP. Well, it turns out, uh, US GDP fell 1.4% in Q1. Uh, and, uh, Q4 we had a 6.9% growth rate. Q1 was the weakest since the spring of 2020 when COVID hit.

   2. Nick, cue the clip where Sacks and I, uh, basically said this may happen in January of this year.

   3. CPChamath Palihapitiya30:15

      So the concern is that, you know, with the losses we're seeing and, I mean, every day it just keeps, uh, you see more red, that this could turn into a recession. You know, popping of bubbles is usually followed by, uh, by recessions or... So I think, you know, the fortunes of the economy could turn really quickly here and, uh-

   4. JCJason Calacanis30:34

      That is, that is the marginal risk. The marginal risk is actually for a recession. David is saying something really important. The risk, in my opinion, is not of runaway inflation anymore. The Fed is now in this really delicate situation where China cut rates last week. We have an FOMC meeting, the Open Markets Committee that sets rates, on Wednesday, I think, of this coming week. What is he supposed to do? The risk is to a recession, because if we over-correct...

   5. Yes.

   6. ... and the leading indicators all around the world tell us that their economies are weak, then inflation may have actually been much more transitory than we thought. And right now, we have to decide because if we over-correct, we are gonna plunge the United States economy into a recession.

   7. There's a lot of data here and, and obviously, uh, this is w- when this data is always in the rearview mirror. So obviously, we're talking about Q1. It takes my while to collect this data, and there's a lot of different factors going on at the same time, obviously COVID and obviously supply chains. Consumer spending rose at a 2.7% annual rate in Q1, a slight acceleration from Q4. There was also a 9.2% rise in business spending. So we have a lot of spending going on. Who knows if that is spending that actually occurred in the previous quarters and because of supply chains, like people's cars are being delivered or people's machines and manufacturing equipment, uh, is being delivered now.

   8. We had negative GDP in Q1 for a whole host of reasons-

   9. Yeah.

   10. ... that could effectively be summarized by the fact that we are still trying to restart an economy at the tail end of a pandemic and we're doing it in fits and starts. And so we have these small bursts of incredible GDP, which we had last year, and then contractions in the economy.

   11. Right.

   12. The thing that's always been true about the United States is that we are a consumer-driven economic engine, which means that as long as people feel confident and they're buying things, the economy tends to do well and we tend to move forward as a society. When consumer confidence ebbs and people contract their spending, we are in, uh, a world of hurt. The last couple of years, we've had a lot of consumer savings, right? We've had a lot of money that's been pent up in the system, whether it's stimulus checks or, you know, loan forgiveness, or all of this stuff has allowed people to feel much richer. And as a result, they started to spend in dribs and drabs. The problem now is that because prices are so high, all of those savings have largely been depleted. I just sent you guys a text in the group chat of what consumer spending looks like, and consumer savings rather, and it tells a really, really scary story, which is that the savings boom is largely over. Personal savings rate fell to 6.2% in March, the lowest since 2013. And so what does that mean? Well, it means that the setup is there for, um, us to sort of really contract what we are able to spend as a society. So I think now the odds even push further in this direction that we could have more quarters of negative GDP, and all of a sudden, we're back to what we talked about before, which is a 2019-like scenario where the government, or the Fed specifically, races forward to tackle inflation. And in 2018 and '19, it turned out to be a head fake. And by the way, in 2019, the stock market ended up more than 30%, up 32% or something like that. Crazy numbers. Here, and by the way, back then in 2019, China turned over. It looked like it was gonna be, uh, a fast-moving economic recovery for China, and instead they, they sort of slowed down. We have the same thing here. We have a quarter of negative GDP. We have China in lockdowns. We have every company that's, that's in the manufacturing supply chain ecosystem telling the world that we don't really know what this is gonna look like. Intel today actually said there's gonna be shortages in chips through 2024. So I think, uh, I think it- it- it could be, uh, a very difficult path ahead for the Fed. How do you raise rates 400 basis points into, uh, into a slowing economy? You could raise basis points 75, you know, 75 bips, maybe 100 bips, but it gives them very little freedom to operate without r- really tanking the economy.

   13. CPChamath Palihapitiya34:52

       There's also another point to highlight here, which is, um, in some of this data that was released, um, there was a strong indication that there are real in- issues right now with inventories. I don't know if you guys have tried to buy an appliance or a car lately, um, or a piece of furniture, but like-

   14. JCJason Calacanis35:12

       I tried in the Q4 to buy a car and it was absurd.

   15. CPChamath Palihapitiya35:15

       I mean, right now there's like one-year delays to get a friggin' couch. I mean, like everything in the s- in the global supply chain somewhat related to the kind of big inflationary pressure that hit us at the end of last year and then everyone placed orders. All the factories kind of had to produce a lot. They all couldn't keep up. Through to what's going on in China right now where there's lockdowns and factories are shut down. I have several businesses in the hardware space that are actively searching and frantically trying to find components, suppliers, specific parts. Even basic raw materials like aluminum are very hard to get ahold of. Um, and so there's also a very challenging inventory and supply chain problem. When that happens, I can't actually wire money and buy aluminum because I'm waiting for aluminum to show up. I can't wire and buy the- the microchips I want. I can't wire money to my car dealership and buy money. So that doesn't get credited on the GDP counter because those sales didn't close that quarter. And as we saw with Amazon recently and others, uh, and Apple has just said that they're expecting, I think, close to a $10 billion hit this quarter because of supply chain issues.A lot of folks want to spend. The spending interest is there, the capital flows are there. It's just that the supply chain is clogged up and we're so dependent on getting atoms and molecules moved around, and they're all kind of held up in different places, that folks simply can't get their purchases in. And so the revenue triggers don't get hit, and so the numbers don't look good from a growth perspective, but it doesn't necessarily mean that the demand isn't there. This is a, a significant inventory problem and supply chain problem that's, that's driving a lot of this, uh, um, this adversity right now in the market, it seems.

   16. JCJason Calacanis36:53

       Uh, and interestingly, you-

   17. CPChamath Palihapitiya36:54

       And by the way, that doesn't, that doesn't mean... Sorry. That doesn't mean that we're not gonna have a recession, because, you know, we're not, when I'm not able to spend money on Apple, Apple's spending less on their suppliers, and they're spending less on their suppliers, so there is a, a trickling effect of capital flows and, and the recessionary effect may be hit. But, you know, there is capital and there is demand, uh, for consumption. Uh, it's just that, that we're really clogged up right now.

   18. JCJason Calacanis37:14

       Well, and, and the consumer confidence index has been on a bit of a rollercoaster. We were at 130 before the pandemic. For the year of the pandemic, we were down in the high 80s, 87, 88, 89. We rocketed back up, um, you know, in 2021. People started to feel like, "Oh, we've got these, uh, vaccines. Things are gonna go back to normal." Rocket back up to 128. And it's been a slow tick down, uh, to where we're now at 107. And so I think consumers don't know what to think. They don't know to, if, uh, you know, inflation is transitory. They don't know if gas is gonna be $7 or $4. They don't know if they should spend a big, uh, do, spend on a big vacation or not. And so this, I think, in terms of people's planning, I, I don't know if people can plan how, their own personal budgets, right? And, and I think that's, on the confidence thing to Chamath's point, we need to have a predictable economy, uh, uh, you know, and it, it can't be this, um, schizophrenic, uh, to use a term. Sacks, what, what do you, what do you think about what we're seeing here in terms of... We- we're obviously either in a recession or dip, you know, dancing around it. We're basically, you know, on the edge of the cliff right now, I think is probably the most accurate.

   19. DSDavid Sacks38:30

       I tweeted in February, "Hey, anyone notice that we've just entered a recession?" And I got dunked on by all the professional economists and, you know, all these people, but-

   20. JCJason Calacanis38:38

       The experts?

   21. DSDavid Sacks38:38

       ... we could... The experts.

   22. JCJason Calacanis38:40

       The experts. Yes, exactly.

   23. Correct.

   24. DSDavid Sacks38:41

       And now it's like, the data just came out, negative 1.5% economic growth in Q1, so what I wrote at the time was exactly right. And, you know, I don't know how the thread, the Fed threads this needle. I mean, we've got a slowing economy with negative GDP growth. You've got, inflation is still rampant. Um, it's not as, I don't think it's gonna be as high as last year just because we're lapping a much bigger number from last year. So on a year over year basis, the comps are, are, you know, you start at a higher price level. But inflation's still there, so, you know, I don't know how, what you do about that. Um, it's, it's a really tough situation. And when you have this kind of wealth destruction in the stock market, I mean, you know, and we, uh, there was a good tweet that, um, Chamath, you shared, we should put it up on the screen. I mean, so much, uh, uh, like wealth has been destroyed. You don't necessarily see it if you just look at the big cap indices, but you look at all the engines of prosp- sort of growth and prosperity, the small caps, the recent IPOs, the growth stocks, they've been absolutely hammered. It really hasn't been this bad since the dot-com crash of 2000. Like, and, and not just the, like, April period, but like, all the way in October where it kept going. And then, uh, the 2008-

   25. JCJason Calacanis39:55

       Great Recession.

   26. DSDavid Sacks39:56

       Yeah, the 2008 real estate crash. So we're already, like top three worst situations for growth stocks in the last 20 years. And when you have that kind of like, wealth destruction, it eventually trickles down to the economy because people just feel, you know, companies start cutting budgets, people have less money. Uh, the sp-

   27. JCJason Calacanis40:15

       That's-

   28. DSDavid Sacks40:15

       People, the spending goes down.

   29. JCJason Calacanis40:17

       That dynamic that, that we're referring to in this tweet, in that image, is called dispersion, which means, you know, people may be, may be confused when you hear, why are all these stocks down so much, but the, the indices are not down as much? And it's exactly for the reason that David just said, which is that, um, underneath the surface, the mega-cap techs consume so much of the market cap of these indices. So, you know, the Googles-

   30. Apple.
4. 44:56 – 1:09:52

   Student loan forgiveness, fixing the underlying system, solutions

   1. JCJason Calacanis44:56

      is not what they're good at.

   2. CPChamath Palihapitiya44:56

      Well, I think there's also another, I mean, just to counter that, there's, there's also this other issue of not just incentives, but when they create, uh, a f- a free capital that then allows a market to find a way to take advantage of that free capital. And that's effectively what we've seen happen with Medicare, Medicaid, as well as with the student loan program. And, um, you know, I, I, I don't know if we're going to get to the student loan program today, but I think, you know, to your point, Chamath, one of the things that's happened with the cost of education in this country is that the federal program, which was, uh, you know, and I, I took a bunch of notes here to talk about this today, but the federal government began guaranteeing student loans in 1965, it's called the Federal Family Education Loan Program. And that program made capital available for students to borrow to spend on universities or, or, um, uh, whatever education they want to go, go get, um, uh, of their own choice. And the idea being that that will give them the ability to go make more income and, and extend their careers and, and educate the workforce. And the problem is that when that capital was made available, a lot of private universities started to emerge and private for-profit colleges started to emerge. And in the years since that that program was introduced, I just want to give you guys some crazy statistics. So in nine, the 1969, '70 era, the cost for a public four-year college was 1,200 bucks a year, that's room, board, tuition and fees. And in 2020 that cost rose to $21,000. And here's the, the, uh, uh, the other crazy stat for private four-year college in 1970, 2,500 a year, 2019, 2020, $46,000 a year. And so that capital basically allowed these for-profit, um, organizations or these organizations that try to grow their endowments, which are effectively like for-profits to charge any price they wanted and the consumer, the student would be able to get free capital to fund that quote unquote education because it was available to them for free from the federal government. And so the federal government created a bubble in education cost, and that bubble in education cost has now overburdened 15% of American adults with student loans that many of which would, they would never be able to pay back. And now we're in this really awkward situation of saying, "Hey, maybe we should forgive those loans because it's unfair that people are burdened by this." And, um, and doing so obviously doesn't solve the fundamental problem, which is that making those loans available in the first place creates an inflationary bubble effect in the end asset. And the end asset in this case is education, but we've seen the same thing with housing, and we've seen the same thing with pharmaceutical drugs and medical care and other services. So any place where the federal government steps in and says, "I will provide a backstop, I will provide free capital to support and create a quote unquote incentive for this market to accelerate," you end up with these inflationary bubbles

   3. JCJason Calacanis47:50

      You're going to have people game the system, right? You get whatever University of Phoenix types and, and y- even the large, uh-

   4. Hey, Jacob, before you-

   5. ... universities raising, uh, tuition to absurd things and people take these loans, Chamath, before their frontal lobes (laughs) are even fully developed and they have long term, uh, understanding of the ramifications of this. So where do you stand on this, Chamath? Yeah.

   6. So there's a, there's an interesting article in The Atlantic about-

   7. Yeah.

   8. ... who really wins when you forgive student loan debt. And I, and I just pulled out some facts, so I'm just going to look down here and read them just so I get them right. It said in the article, "13% of the US population carries federal student loan debt. Grad students account for 37% of that federal student loan dollars. Currently, it's 1.6 trillion of total s- total student debt versus about 10 trillion of mortgage debt."So the average debt has gone from about 25K in 2012 to 37K in 2022. So, you know, almost a 50% increase in a decade. The majority of student debt is held by white borrowers. Only 23% of Black Americans age 24 or greater have a college degree in 2019. So the majority of the Black population would not be directly benefited by student loan forgiveness. In 2020, the median weekly earnings for someone without a high school diploma was $619. For those with some college but no degree, that number was $877. For those with a bachelor's degree, it was $1,305, and that number continues to grow for master's and professional degrees and, and PhDs. Interestingly, the last two points, the Gallup, uh, organization, who, who ran a poll, is unable, quote, "To report the percentage of Americans who have mentioned student debt or student debt cancellation, because it hasn't garnered enough mentions to do so." In 2022, according to the article, across four Gallup polls, quote, "Just one respondent mentioned student debt as the most important problem facing the nation." Unquote. And then last thing, uh, is here is that 43% of the 2020 Biden electorate graduated from a four-year college or university versus 36% of Democrats in 2012. So, you know, one of the takeaways is that this may be an issue that affects a certain percentage of the Dems who went to college, but it may not represent a plurality of all Democrats, and it doesn't rel- represent, you know, a majority of all Americans.

   9. They sure are vocal though, to your point, I think.

   10. Yeah.

   11. CPChamath Palihapitiya50:32

       I mean, look, th- th- this is... I, I think that there are two motivations, uh, political motivations for doing this now. They're, they're pretty obvious. Um, and then I, I just want to say three things on, on kind of the concern about this, a- and why I feel very strongly that if we don't fix the underlying system, you cannot forgive student loans. You have to fix the system before forgiving student loans.

   12. JCJason Calacanis50:56

       Fix it first. What's the number one fix, Friedberg?

   13. CPChamath Palihapitiya50:58

       So, well, so, so let me just say the two motivations. The two motivations, number one, this is a stimulus. So this morning, the Biden administration said that they were thinking about taking executive action to make the first $10,000 of student loans forgiven. So if you do the math across 43 million people, that's a roughly half trillion dollar forgiveness. What happens? That half trillion dollars, much like we saw last year, becomes a stimulus payment. It is money that people now have that they didn't have before, it is capital that they... or freedom from debt that they didn't have before, and it will stimulate the economy. So there is a very, um, uh, important economic incentive here to do this, which is, if we do it, it will be stimulating to the economy and, um, people will spend more and the economy will grow.

   14. JCJason Calacanis51:40

       By the way, that's a, that's a 2.5% boost to GDP.

   15. CPChamath Palihapitiya51:43

       Right. So half a trillion dollars of free money just flushes into the system. The second thing is that it will help in the midterms, is their point of view, right? So they've obviously done the-

   16. JCJason Calacanis51:51

       Buying votes.

   17. CPChamath Palihapitiya51:51

       They've done the polling here, right? And, and it's like, "Hey, when I was in junior high, the kid that ran for class president was like, 'I'm gonna make everything in the vending machine free.'" Guess what? That kid got voted in. So, you know, the idea that you're just gonna give everyone free... give your, your loans back to you for free, everyone's like, "My gosh, this is the best thing ever. Elizabeth Warren, you're a genius. You know, Bernie Sanders, you're a genius. Joe Biden, you're a genius. Let's say yes." Um, and so they believe through polling that this is gonna help, um, help them in the midterms. Um, but the challenge is, if we don't solve the problem, if there's no standard of value of an education, if there's no standard around whether or not a specific accredited university increases your income and earning potential as an individual or increases the opportunity for you as an individual, you are wasting money. You are giving-

   18. JCJason Calacanis52:37

       Absolutely.

   19. CPChamath Palihapitiya52:37

       ... federal dollars to private companies who are profiteering from that, and the individuals are not gonna benefit from it. And I think that, that we're seeing this... Sorry. A- and we're seeing this structurally continue in a lot of other places where the federal government doesn't hold itself accountable to the standards of how their stimulus is meant to benefit the individuals that it is being funded for. The individuals are not getting a good education in many cases, they're not earning more by getting this education. Chamath's data speaks to the average, but a large percentage of people go to crappy universities that don't improve their earnings potential, and then the federal government says, "Here's this free money." That private university just made a bunch of money and no one's better off. And guess who's ended up paying for it? Taxpayers are gonna end up paying that private company a bunch of money because we're gonna forgive all the loans.

   20. JCJason Calacanis53:22

       Okay.

   21. CPChamath Palihapitiya53:22

       And so we have to have a standard around whether or not a dollar should be loaned to pay for education at a specific university by having that university prove that it improves the potential. And by the way, if you stop the federal student loan program today, fewer people would go to college. And if fewer people went to college, guess what would happen? Colleges would drop their tuition. The reason they're able to raise-

   22. JCJason Calacanis53:43

       Supply and demand. Yeah.

   23. CPChamath Palihapitiya53:44

       Supply and demand. And the reason they're able to raise their tuition is 'cause there's so much demand 'cause there's free money. And so if we actually saw the federal loan program cut back or put these standards in place, the cost of tuition would actually decline and profiteering would decline. People would get a better education and the taxpayers would be better off. End of diatribe. Sorry.

   24. JCJason Calacanis54:01

       No, no. I, I, it... I think it's completely legitimate, Sax. We talked on a previous episode about how people make things like immigration, uh, you know, such a charged philosophical debate when there are point-based systems being used in Canada, Australia, and other places that make it much more logical. Do you think the, the solution here is, to Friedberg's point, of just... A- and I'm interpreting Friedberg's point as what is the value of this degree? Nursing? Great. Nurses can take out 100% of their loans because we know there's a nursing shortage. Uh, you know, philosophy graduate students maybe can't take out more than $5,000 in debt 'cause we don't-

   25. CPChamath Palihapitiya54:36

       Yeah.

   26. JCJason Calacanis54:36

       ... see a bunch of job openings for that.

   27. CPChamath Palihapitiya54:38

       Getting a history degree at Trump University is a lot different than getting a nursing degree.

   28. JCJason Calacanis54:42

       So Sax, what's the solution here? Uh, and then we'll...... like, give you your, um, your, uh, swing at bat in terms of buying votes.

   29. DSDavid Sacks54:52

       Yeah. I mean, look, I-

   30. JCJason Calacanis54:52

       Let's go solution first before we go partisan.
5. 1:09:52 – 1:19:08

   Archegos founder Bill Hwang arrested and charged with fraud and racketeering

   1. JCJason Calacanis1:09:52

      Um, speaking about crazy, uh, we talked about Bill Hwang, uh, and his, uh-

   2. CPChamath Palihapitiya1:09:56

      (laughs)

   3. JCJason Calacanis1:09:56

      (laughs)

   4. CPChamath Palihapitiya1:09:56

      That's your transition? That's your transition?

   5. JCJason Calacanis1:09:59

      Sorry. I just... they- they can't all be as elegant, uh, and smooth.

   6. CPChamath Palihapitiya1:10:03

      Jake, here's Jake Hell, he's looking at the agenda for today, and he sees Bill Hwang, and he's like, "Okay, how do I do this? How do I do this?"

   7. JCJason Calacanis1:10:08

      The Hwanger. The Hwanger.

   8. CPChamath Palihapitiya1:10:10

      Right, yeah. Okay, crazy-

   9. JCJason Calacanis1:10:10

      I mean, call him the Hwanger.

   10. CPChamath Palihapitiya1:10:12

       Crazy, the- the linkage is craziness. Okay, go. I mean-

   11. JCJason Calacanis1:10:14

       No, no, no, no. No, no, hold on. The- the linkage is, uh, trillions and billions.

   12. CPChamath Palihapitiya1:10:18

       Yeah.

   13. JCJason Calacanis1:10:19

       Trillions and billions.

   14. CPChamath Palihapitiya1:10:19

       Link, speaking of trillions and billions.

   15. JCJason Calacanis1:10:21

       Speaking of trillion dollar mistakes, um (laughs) -

   16. CPChamath Palihapitiya1:10:23

       We got a-

   17. JCJason Calacanis1:10:24

       ... Hwang and his CFO were arrested on Wednesday and charged with racketeering, wire fraud, and conspiracy. Uh, we talked about this when it happened. Uh, his, uh, firm, Archegos, I think is how it's pronounced.

   18. Archegos, Archegos, Archegos.

   19. Archegos. His poorly named firm, uh, and family office, we covered this in real time back on episode 28, uh, they famously lost $20 billion over two days, uh, when they were margin called, uh, back in March of 2021. Uh, he worked at Tiger Management, yada yada. And it was at the time reported that they were trading billions of dollars at over 5X leverage. According to the SEC complaint, at its peak, the firm was managing 36 billion with 160 billion of exposure, which is 4.5 times leverage. But Archegos, or however it's pronounced, started with only 1.5 billion in assets in March of 2020. So Hwang flipped 1.5 billion in capital into 160 billion of exposure in 12 months, essentially trading somewhere in the neighborhood of 100 to one at its peak, according to this complaint. Um, a bunch of banks have lost money because they were supporting this. Credit Suisse lost 5.5 billion, Morgan Stanley lost a billion, UBS, 774 million. The New York Times described it as, quote, "Orchestrating a stock manipulation scheme that relied on them masking and concealing the enormous risk they had taken." Chamath, you had some thoughts on this, I think.

   20. So first, I think we should probably explain how he did this, right?

   21. Yes.

   22. So, um-

   23. That's every- that's everybody's question, is how did the banks let this happen? So explain.

   24. Well- well, I think first it's, what's the mechanism? So, you know, there are ways in capital markets to take really extreme bets. This way is called what's called a total return swap. And so the basic way that this works is you have two people on- on each side of a trade, and what you basically say is, "Let's agree on what's called a reference asset." So I'll just use an example. Let's just say it's, um, uh, I think Discovery was one of the companies that they were trading. So Discovery Communications. Let's look at- let's- that's the reference asset, that stock. And what I'm going to do is buy protection, and what you're going to do is, um, sell protection. And essentially, what happens is as the stock goes up and down, you're going to net the difference between these two people and when you do it that way via a derivative, so what it- what it forces the person to do, the bank in this case, is to go out and buy the stock, okay?... so that they are hedged in case the price goes up a lot because they have to pay that difference, in this case to, uh, Bill Hwang. And if the price goes down, Bill Hwang has to pay th- that difference back to the bank. So what happened is that he went to three different banks, Morgan Stanley, Goldman Sachs, and Credit Suisse, and effectively what he did was he bought ... h- he made these bets across a handful of names, but he did it with so much leverage that he ended up owning 60 or 70% of some of these companies. And in March of last year when the stock market turned over, um, he owed them enormous amounts of money, so much so that these banks had to unwind these trades, which caused further downdrafts in the stock and almost spilled over to the broader stock market. Jason, the- the numbers from the SEC complaint are pretty crazy. As of March 31st of 2020, they had 1.6 billion invested on a gross exposure of 10.2 billion, which th- what that means is they were able to go and lever up this 1.6 billion to behave in the market as if they had 10.2 billion. By January 1st of 2021, so nine months later, they had $7.7 billion of invested capital so they'd done really well, right? They'd- they'd made 70% on this 10 billion. But they levered that up again and so they had gross exposure of $54 billion. And then just, uh, I think three months later by March 22nd, they had $36 billion of invested capital, meaning they had $36 billion of cash. This guy had taken 1.6 and spun it up to 36 billion and-

Episode duration: 1:51:39