Welcome back, everyone. I am Cass PNC.
I'm joined as usual, by my partner in crime, Mr. Bennett
Tomlin. How are you today?
I'm doing pretty well. How are you, Cass?
I'm doing good. It's an early morning here, but
today we're joined by a really special guest, somebody who's
going to be chatting us through some really fun kind of concepts
of fraud, individuals involved that we, I'm surprised we
haven't discussed before. Eric Roche, how are you?
Today, Sir, I'm all right. How are you guys hanging in
there? As you said when we first jumped
on, there's a lot of fraud in the world and it is hard to have
the find the time to to constantly look into it, which
is your job. I reached out to you because
I've been reading some of your Elon Musk work, which has been
incredibly informative. I'm honestly shocked that
Bennett and I have never discussed.
I guess we've never discussed in an episode Elon Musk and our
issues with him. I mean I've made a bunch of
videos. Yes.
Yes, on your personal you and I, who I think we almost equally
don't like this guy have how avoided this topic.
But Eric your work on SpaceX and some of the permitting the
issues around the chemicals and the sheer like I don't give a
shit about these regulations. Right.
Been on the front lines of this. Can you talk about why you're so
into this why you're so fascinated by it.
I. Actually want to start with the
story from 1959. This is actually a piece I'm
working on. We're going to go to the
corporate headquarters of the Chiso Corporation in Myan Mata
province in in Japan in. December of 1959, the CEO of the
Chiso Corporation, which was a chemical company, had a big PR
presentation. The company had just installed a
new water purification system for their wastewater system, and
he famously took a glass of water.
Out of the bottom of this purification vessel and he drank
it as a PR stunt. Just that moment in time is
really interesting for me because it was preceded by
multiple decades of the Chisel Corporation dumping organic
methyl mercury into the Bay of Me and Mata.
It's an organic liquid. It goes to the bottom.
It bio accumulates. As it kind of goes up through
the ecosystems, the bacteria will kind of incorporate the
methyl mercury. It stays in the in the cells and
it will go up to the muscles and then the fish.
Cats started eating it and they started showing weird symptoms
children. I'm sorry, getting sick.
The effects of this disease have gone on there and it's still
actually going on today. The reason that in that moment
in time is so interesting is that is that people knew in
advance that there were problems.
It was very clear this is this was the one kind of chemical
dirty company in the area. And so it was easy for people to
point at it. And what's really interesting
about that? PR event is that that was forced
to be installed because finally government took action, and this
is in 1959, but they actually didn't stop discharging that
chemical for about a decade afterwards.
And what's fascinating about it is that treatment technique that
was basically to get out particulates.
Didn't actually treat the the methyl mercury.
The other reason I bring it up is that for the PR stunt and the
fact it was ineffective and then also the costs over this huge
period of time were were something that shareholders in
the company would have wanted to know.
That's something that we would have wanted to discuss.
And so that's why my, my kind of my my blog is kind of focused on
these kind of ESG topics which has become this really kind of
crudely discussed topic. But really, it's about.
Disclosure and how fraudulent things.
Fraudulent risks can kind of manifest in ways that people
don't understand until after the fact.
That's where I want to start off that discussion.
That's an interesting story you told because I'm imagining this
executive drinking this cup of water to prove it's clean.
And I'm reminded of a more recent political event that kind
of aped that same imagery. And I'm of course thinking of
Barack Obama visiting Flint, MI, after they had completed the
first wave of fixing some of the water issues and they were
holding this big press conference.
And he makes a big deal of getting this glass of water he
says is straight from the tap, and he drinks it up to prove
it's safe. Do you have any thoughts on that
imagery, that parallel imagery between those two?
Well, the reason I brought it up is but is specifically because
of that. Well, there's also an example
where Halliburton executive and I believe Dick Cheney was at
this event as well. They drank basically a diluted
version of the fracking fluid out of out of, you know,
champagne glasses. And I will see it safe.
And it's really fascinating because it's like, can you not
look at, like basically that was the first example of that.
And we keep doing that. And Obama, I think he's kind of
at the inflection point of why we are where we are.
And he's a really great segue into like Musk and and how he's
become kind of untouchable. How are you drinking the glass
of water still, right. Because even if it even if it
had a toxic amount right, methyl mercury is dangerous because it
accumulates slowly over time and then works its way up to the
food chain. So you could drink glass that
has a decent amount of methyl mercury in it and like, that
water isn't going to do anything.
You have to drink that same glass of water.
You have to eat those shellfish or those oysters, you know,
every day for years. And then it builds up kind of
manifests in this debilitating disease that the Obama example
is exactly why I still bring that case up, because it's like,
have we actually learned nothing?
I actually haven't even more recent example of exactly this
same thing, which is crazy, but I don't know if you guys are
familiar. There's a YouTuber named Kyle
Hill who does science, science, YouTube stuff, and he was
invited to Fukushima because as you guys know, they're going to
be releasing this, this radioactive water that they've
accumulated because they've, if anyone is unfamiliar, they've
had to kind of take seawater, pump it into this completely
effed up, clear reactor core, and basically make sure that it
doesn't explode again. And they're storing this water
because they don't want to just pump it straight out into the
ocean. Well, now they're going to be
pumping it straight out into the ocean after they've tried to
kind of dilute it down and ensure that it's not super full
of radiation. But they're getting pushed back
from places like China and South Korea who were saying, hey,
we're not going to eat your fish anymore, we're not going to eat
your food anymore. Like this is unacceptable, what
you're doing. To be fair, I don't think this
is on par with any of the things we've discussed so far.
I'm bringing it up because Kyle Hill went to a Fukushima tour
and they did exactly what you're talking about.
They pulled out bottles of water and said here everyone, look at
this radioactive water. It's not even radioactive.
You guys are fine. Nothing's happening.
You're you're not getting hit. Your Geiger counters aren't
going crazy. Well, it turns out that they're
using plastic bottles. So this is, I think, Theta
radiation. It doesn't go through thick
plastic bottle anyway. Like nobody is drinking it.
Nobody is doing like any of the proof isn't actually proof.
This is actually part of what we're talking about in that this
is just PR shit, whether it's Obama doing it, the Fukushima
plant doing it, or in the 50s. Just so.
So that's the other thing. All right.
So the Fukushima water rights, you look at the data they've
presented, I actually. I think it's probably not a
problem because it's above background that brings with the
question, why do we distrust it? Right.
And the Chisel Corporation is a perfect example.
Like, well, you know, the government's lied about this
before. It's the same thing that leads a
lot of vaccine skepticism. We see about these things don't
just come from nowhere, right. So you see, you know, these
these kinds of paranoias, they they exist as kind of this
legacy of pastimes. People have lied.
And so I think in the, in the specific example of Fukushima,
right, like it's I think it's a foolish PR stunt for the
reasons. That you know I I bring up but
but but if you actually look at the data like as long as the
data is what they're presenting like the radiation is below
background but that skepticism exists because we've been lied
to before. Good to be skeptical, but also
create some of the more dangerous conspiracy type
thinking that that still kind of is pervasive today.
So kind of speaking more to some of those political and societal
features that have gotten us to this point where there's kind of
this disregard for regulations and.
This emphasis on appearance of compliance over compliance
itself, Do you have thoughts and like what specifically have
like, led us to this point? I know you guys had Jim Chanos
on and I remember listening to that episode and it's, I know
he's kind of talked about it before.
I worked for a basically a legacy company that had a lot of
Enron assets, just the physical asset and you talk to people
that were, you know, X Enron employees at the time.
And and I think some of this is, you know, we go back to that,
that 2000s era right from the.com blow up.
I'm kind of through Enron. On there was a real a real
concerted public push to you know finally do something
against wrongdoers and you know say what you will about the you
know George W Bush justice administration they they went
after, you know the head honchos of these companies hard.
And I for myself, you know, kind of fast forwarding to you know
someone I graduated university in 2006.
Right. So I'm I'm.
I was graduated right into the teeth when people really
starting to get laid off going into the, you know, the GFC, you
know, when I was a big Obama supporter at the time, partially
because of like what we need to, you know, we need to do
something about all of this obvious criminality that led to
our entire. Global economic system blowing
up and then nothing happened for me.
That's like the big inflection point that one.
And then kind of a more specific example is that no big executive
right when went to prison for their role in blowing up the US
economy and all the job losses and you know, death that
resulted. I think a more specific example
is like, if you look at like for example, Solyndra as a perfect
example that was a juicy kind of, you know, Republican talking
point against Obama, but really wasn't a good thing for to
happen is that we gave a company.
That had a, a technique for making solar cells.
It wasn't very good, wasn't proven, and they were kind of
just lighting money on fire. And that the US government under
the Department of Energy just handed them $200 million and
they blew up kind of like within a year, right.
And there's all sorts of fraud there that was not really ever
kind of sussed out. And so I point to those things
because I think that was kind of the turning point.
Where we said, you know, fraud will kind of deal with the
consequences when it blows up. We're not going to prosecute,
you know, really the the kind of the big people in charge.
And I think that's been policy through the entire Obama
administration. And then through the Trump
administration, I think it's been kind of continuous.
And I think that's where you see people like your Sam Bakeman
Freeds, you know, your Elon Musk, your Elizabeth Holmes.
A lot of these things kind of stems from that.
I don't want to say like original sin.
I think the inflection point is kind of the beginning of Obama
administration where we said we need to keep.
You know, the economy going forward and we're not going to,
you know, destroy our big companies, our special boys
because it's too difficult to deal with the fallout.
And we're just going to kind of let things just go along.
And I think that's kind of a great explanation of why we are
where we are. Do you think that people like
your Elon Musk's or, you know, your Elizabeth Holmes?
Whatever. Do you think these these people
actually saw that? And we're like, oh, this is an
opportunity have free reign. Like, who cares if I make a
completely false statement about when a product is going to
launch or if it's effective, or if, if I've gotten all the right
permits and stuff, I can just do whatever I want and nothing is
going to happen to me. And great.
I mean, obviously something did happen with Elizabeth Holmes,
but I'm just do you think that there was actually like a click
in their brains to be like, oh fuck, I can commit fraud now.
I think it was an iteration process, if that makes sense,
right. You ratchet up, right.
If you say why I'm gonna take this risk, I'm gonna take this
risk. I'm gonna take this risk.
And then if you never there are any consequences for it.
So I think you know people like, you know, Musk drives me wild.
I can't I can't stand kind of a lot of the things he does.
But like, he's a creation of of that ratcheting.
I point to him because I think he's kind of like the endpoint
or almost like, you know, it's like, well, how can it get more
absurd than this? But it's not like.
He's alone out there, right? Even among people who have not
really been punished, like we talked about, like Travis
Kalaknik's great example at Uber, right?
You know, there were all these regulations and sometimes they
were, you know, really just protection rackets towards, you
know, taxis and bigger cities. But they said we are, we are
literally going to come in and not comply with the rules.
And I dare you to stop us. And they.
Kind of didn't stop them. I think it's just toddler
pushing boundaries or whatever you want to call it.
You know, maybe the Velociraptor and the original Jurassic Park
testing the fence over and over again, right?
And you look for those boundaries.
If there's no punishment for it, then you just keep pushing it
and pushing it and pushing it. And I think that's a great
explanation of why we are where we are.
And that's like a huge part of the crypto story.
You don't have guardrails regulatory or otherwise
institutional and people just keep pushing and and we end up
with Sam Bankman Freed's it's something I haven't thought
about before but I'm actually now curious like as you're
describing this right like we have this kind of golden age of
fraud. We see it play out it takes a
long time as you ratchet, it's ratcheting up right weseethe.com
bubble. We see the 08 financial crisis
and I'm wondering if it was contained, if the massive frauds
were more or less contained to the giant capital capitalistic
country that has always striven for making the most money and
being the most productive. And then crypto kind of has
globalized this fraud in that like it seems like it's
everywhere now. Like this is not.
We've got one coin. We've got like numerous,
numerous frauds that are transpiring in big ways.
Hindenburg Research does really good, really good work on
international fraud, whether it's in India or Europe or
America, right. And and I'm just wondering if
that was that's the inflection point right there is crypto is
like oh now fraud can be global as opposed to or if or if it
again ratchet up iterations of it slowly was going to happen no
matter what? Maybe a little bit of both, but
I mean like let's not forget, right?
I mean if you look at Carson Block, he make his bones, you
know going through like these just hilariously obvious frauds
post GFC in in China because they were just making up just
entire production companies and industrial sectors that didn't
exist, right. I don't know if I would blame.
Name it on crypto. I think crypto is kind of
normalized it. I've seen people that I grew up
with being like, you know, on other social media sites aren't
like on Facebook or Instagram like it's almost like it's been
you've been able to like bootstrap your own like mini
frauds. I think that's, if anything,
that's been probably the innovation of crypto in that.
Sector, One thing that's kind of interesting to me, and we talked
about this when Chenos was on, is that most frauds do kind of
start with small infractions that eventually put you in a
position where you end up making bigger and bigger infractions to
deal with the previous things. That happened.
And sometimes when I'm silly enough to read the replies to
some of your articles and tweets, there's a tendency among
certain sycophants to describe the violations as petty is not
important as insignificant compared to the mission of
SpaceX or Elon or whatever not deserving of consideration.
And I wonder if you think that that kind of cultural belief,
that idea around that type of petty rule breaking.
Creates the kind of culture that eventually leads to, like the
larger macro, really big frauds. I think it does.
So we talk about minor infractions, right?
Think in the United States, one of the cultural touchstones of,
you know, why we have, for example, environmental rules is
that the Cuyahoga River, which runs through Cleveland, was
catching on fire on a regular basis, right.
And that wasn't one incident of someone or one bad person,
right? That's that's decades of
probably small on the margin, right?
Discharges. And they add up over time,
right? And so we have these rules and
you fix stuff and you kind of or you fix stuff or you prove it,
you know greatly. And then it's like, well why
can't we, why can't we ratchet back up and it's like, well the
rules are say no discharges without XYZ and if you say well.
Except for in the case where it's like my my favorite
billionaire wants to do it or whatever, then, then, like if
you're selectively enforcing rules, then they don't
effectively exist. I think there's certainly some
of that. But when it comes to like, what?
What Musk is saying, what people that you know go go out and and
and advocate for them. Social media is like
democratized it right Where it's like used to have like people go
on TV and yell it right or whatever on behalf of the
Heartland Institute or ever, whoever it is.
But now it's just kind of been like spread around.
We talk about Musk like I'm like screaming about like ESG or like
the regulators or whatever. It's like it's like literally
talking points that Koch brothers would use in the 1980s.
You know, they're kind of the, the stereotypical like liberal
bogeyman, although I think they're a little more
complicated than people like to make him out to be.
They had a refinery in Minnesota that basically a big nitrate or
ammonia ongoing discharge for years plumes and the cost to
install I think was like a distillation unit or some some
sort of separator unit to be able to you know.
Prevent this kind of underground plume of discharge would would
cost like say $200 million federal fines were like would
Max out at like $10 million a year and they would say, well,
you know, I could spend this money on this equipment or I
could just pay the fine. Right.
And they made a rational argument, well, I'm just going
to pay the fine because there's no other consequence, right.
There's no like escalation that doesn't get into like criminal
stuff because there's too many layers of separation and Co
companies too. I mean, I don't want to say to
their credit at some point they're like, well, this is
actually there's. There's externalities we haven't
thought about. You know, reputational risks
like this can start to create other types of fraud.
Turns out companies that say, you know, screw off to the
rules, they tend to actually perform worse economically.
There's some studies on there, that company and even the Koch
brothers themselves kind of walk back that aggressive stance, but
it's kind of. Coming back and just really
interesting to see it from like kind of the original, like
greenwashing, yes, soaking up ESG dollars type of guy in Musk.
So I I find it really fascinating.
But it's cyclical. These types of issues kind of
express themselves in different ways as we go forward in time.
We had this last launch of the Starship or whatever they're
calling it and it exploded and kind of sent debris across a
widespread area in Texas. And as as Bennett was suggesting
here we had sink a fans and and and other people who were just
kind of like what's the big deal?
Like chill out man. It's just an explosion just some
normal like plastics in the air whatever.
Like they're just like metal and like who cares.
Whereas you were pointing to some serious issues that could
be going on. Plus you pointed to serious
issues with the launch site itself that need to be like,
definitely need to be fixed and should have been fixed long
before this launch took place. Right.
But I don't know if you got to see this, but there was a piece
of footage floating around featuring Elon Musk at the All
In Summit, And one of the things they were asking about was like,
OK, so you guys have put this star, this Starship back up and
you're ready to launch again. Why haven't you launched it yet?
When are you going to launch this thing?
And he's like, well, we're just waiting for the FAA to approve
it. There's no pushback after that,
right? The excuses.
Oh, well, they're, they haven't approved it yet.
Like, this is on the government. It's not on me.
But nobody's asking why aren't they letting you launch it yet?
It's just fascinating to me that, like, the questioning
stops with like, I blame the government and everyone's like,
Oh yeah, me too. Right, Right.
Do you want to go into why they're not letting him?
Oh, yeah. You want to like?
Yeah, sure. The whole thing was just
incredible to hear for me. Well, first of all, that site
should have not been approved in the manner it was in the 1st
place. And there's some real issues
that the the basics were is that you know when they're first
getting approval to kind of upgrade the site to be able to
launch the biggest rocket in history, they went through and
they they did a a process under a law called NEPA which.
Napa has its problems, but it is what it is.
Asks you if your if your project is going to have a significant
impact to the environment, you have to go through this very
long process. If it's going to only have a
less than significant impact, you can do a bridge process.
And so this rocket, right, which we've already seen some of the
fallouts for the law requires you just disclose the impacts.
And So what they did is, is they effectively greenwashed or kind
of minimize the actual impact. So they could claim that this
would be an insignificant impact, which is.
Kind of laughable on its face when you look at it and the
reason is their launch site is on like it's under 20 acres
surrounded by land that is, you know, protected wildlife
habitat, it's beaches that is used for the public.
It's owned by the state of Texas and the federal government, They
don't own the land that they're kind of impacting.
If you if you compare it to like one of the big rocket launch
sites at Kennedy Space Center, like the actual launch site is
like something like, you know, 5 to 10 times bigger by area,
right. And that's area that's totally
controlled. And then those externalities on
top of the rocket spill out over into more area that's owned by
NASA. And what So what what SpaceX is
doing is they've got this little postage stamp kind of that's
surrounded by land that they don't own or control and they're
kind of spilling their externalities on it and they're
not doing a great job of disclosing it.
I knew the reason when they did this first launch the the kind
of one of the big issues was that they didn't have kind of
the flowing water deluge or systems to manage and channel
that the the flames, they were just launching off what you call
like a milk stool stool. All these people on the Internet
were like, well, of course they don't need this deluge system or
this, you know, flame diverter system because, you know, SpaceX
has the smartest engineers in the world.
And so why would they. And I looked at, well, they
would have these extra permitting requirements.
Then they said they wouldn't do this and and this would take
them years to get approval. And the reason they're doing it
is for expediency. It's not because they've
actually sat through and modeled it.
And I had people screaming at me, you know, before the launch.
And then sure enough, the launch happened.
And they to be clear, you know, you know, Cass, you brought up,
you know, the the rocket exploding.
The issue was with with the rocket exploding was that the
the system to automatically terminate the rocket didn't fire
off. But but exploding in the air was
actually kind of a known and expected outcome.
So I'm not actually shocked by that part, but the actual
impacts on the ground for them, like blasting this launchpad
right into smithereens. They sent just like tons of
debris out into the wetlands, into this protected area, kind
of a big cloud of dust, made it into, you know, a city that's
like 5 miles away, is that those impacts were as a result of not
building the infrastructure they should have had, which is, you
know, kind of this water deluge system and this flame diverter
system. And they didn't disclose that as
a possible outcome. So in this, in this document,
when they were getting authorization, they didn't ever
describe, you know, these area impacts to this very sensitive
wetland. Right.
A lot of the area kind of for context, people like, oh, it's
just rocks or dirt, is that it's a, you know, an algal wetland.
And so you've got this thin algae crust that can take
decades to form. So what they did, what is their
impacts were not properly modeled, they weren't properly
disclosed. And then when they, you know,
kind of mess up, they're like, well, we're just going to rush
back to launch. And and part of the problem is
that one of the solutions that they did implement for this
upcoming launches, you know this, this water dilute system
which they should have had. But it turns out that the water
that's coming off this, which is what we would call, you know,
industrial treatment water, is now just being allowed to just
run directly into a wetland that's protected under the Clean
Water Act. And they've not gotten a permit
for it. They need to have one, but they
haven't. So it's just this kind of
ongoing, you know, whack A mole. If they picked a site that was
inappropriately sized and set up for what they wanted to do, and
instead of addressing it years ago, how do we develop this site
in a way that is consistent with our peers?
And it's legal. They're just like, well, let's
try this. Let's try this, right.
Let's try this. And when someone holds them up
and says no, the law clearly says you must do XYZ.
And that's when Musk takes a Twitter and just starts
screaming at people. And I don't ultimately know if
there will be a hold up from it. There should be, but that's, I
mean, I guess that's kind of the that's kind of the short and
dirty explanation of of kind of what's going on and why it's a
problem. Much as Bennett and I don't like
Elon Musk, it seems like you're even admitting here that, like,
this isn't a Musk issue. This is like a regulatory issue.
This is this has very little to do with like.
While Musk might be the one breaking the rules, if they're
not going to do anything about it, it doesn't really matter if
he's breaking the rules, right? That's actually a great way to
put it. He doesn't in such an outrageous
manner that it's almost like I'm glad that he's there.
Because you know if and when there's a big consequence from
something that he does, then we can point to that.
There are plenty of executives, including at companies that are
well run, that I would invest it.
They don't have the public's best interest at heart, right?
But they they know well enough. But at least pretend to play the
game on the surface and kind of Musk is unique because he he's
he really is like I'm not even going to play the game and so
it's kind of helped him be able to like kind of bully people
into into giving way to him. I think when there is blowback,
I think it'll be bad for him because the reason that
companies right do fraud and kind of a grandeur level, like
the CEO isn't going out and saying hey you need to do this
fraud right. The CEO says I need you to make
numbers this this quarter and I don't care how it happens and it
gets down to the you know the director level and the VP level
and then the operating manager is like, well I I have to make
the numbers or I'm going to get fired.
I'm not going to get my bonus and they'll do ply chain fraud
or they'll they'll break the law.
You know they'll they they won't get a regulatory clearance to do
something. The the CEO is kind of buffered
himself from that and that's kind of the way that they're set
up. But Musk does not believe in
doing that. I kind of weirdly respect him
for it, but that's kind of his whole thing, right?
So he's he's short circuited, that whole process, which is
probably good for him in the short term, but may not be so
great when there's kind of consequences down the road.
It was funny listening to you talk about that and executives
insulating themselves because in coverage of some of the like
organized crime families in America after like Rudy started
going after them with Rico and stuff, you saw many of the
leaders take more deliberate steps to try to distance.
Themselves from like, the orders that were being given and stuff
like that, so that it would be harder to pin any particular
crimes on them. And so that was just a funny
analog that popped into my head when you were telling that story
that Musk instead insists on getting down there and dirty in
the trenches. Not a direct analog, obviously.
Musk isn't running an organized crime family.
Presumably juries would be out on that.
No, no that's that. That is not a presumption I
would make, although I have described as going on a multi
decade crime spree which I think is supported by fact.
Yeah, I feel. Justified One of the things that
we kind of danced around was we were talking about kind of
unequal enforcement of these rules.
And that's often kind of my worry here.
Because when you have certain regulations and they end up
applied so unequally, the unequalness is often a like
point of contention where you worry that resulting in
equalness is due to grift, graft or other forms of corruption.
Right. And like, I think that that can
be seen sometimes in Musk's actions.
Where because of his size, his wealth, the number of
corporations he runs in, like how connected he is.
I think that some regulators and prosecutors are reticent to go
after him because he represents like the case.
If you go after Musk, there's a good chance that's the case that
defines your career. And if you lose it, you're
always going to be the guy who lost going after Musk and
couldn't even prove he did this. Do you have any thoughts on like
the interaction between like these unequal enforcement of
these laws and regulations and how it interacts with like these
different types of companies? Yep.
And so I've worked, I've worked in an industry and I've also
been a regulator myself, a Clean Air Act regulator.
And what you see is, is really interesting, is this dynamic.
The government doesn't like to be the one that like executes a
company, puts it out of business.
If it's like, you know, doing well, that's kind of true across
the board. And so that's why small
companies, especially very small companies kind of get special
protections and a lot of rules where they actually get these,
you know, special assistance programs.
I don't actually entirely disagree with it, but there, but
there's, you know, they get kind of some leeway before they they
get in trouble. And then the large companies
what happens is that a lot of times the regulations kind of
turn into taxes, right. And so we see right, you know
your Facebook, you know you have to pay $500 million, you have to
pay you know billions and billions of dollars at times.
And these companies are making so much money that it's like
well this is just the regulatory tax companies in the middle
struggle with that a little bit more because they can get you
know they can have big enough operations to cause issue where
where a regulator will feel like they need to go after them and
the and the medium sized company doesn't really have the
resources or the lobbying power to prevent it.
And so they get themselves into trouble where they they can be
put out of business by the government.
But I think ultimately it's that this is, and this is kind of
what I talked about that kind of like Obama neoliberal framework
is that we want to do all these great things we don't want to be
responsible for like killing our innovators.
And I think Musk has really weaponized that.
And he's been like, you know, he goes into things and he's like
he's like got it. You know, he's got a suicide
vest on, right. It's like if you go after me at
all, I'm going to just, you know, you're going to blow up my
company. Like, let's, let's see you do
it. And I think he's kind of had
that attitude, which is pretty unique because he has this
scale. But like, you couldn't levy,
right? For example, if you were to levy
a, I don't know, a 5 or $10 billion fine against Google,
like they would be really mad about it.
They'd obviously fight it, but they could just pay it, right?
If you were to levy A5 or $10 billion penalty against Tesla,
like, they would have to raise more money.
They would be like, functionally insolvent, right?
And so, like, there's like this, this disconnect between the size
of their market capitalization and the impacts they have on
kind of how investors, you know, interface with Tesla versus the
actual economic realities of how much profit they're generating.
So there's a lot of interesting dynamics.
But yeah, it's basically that the government doesn't want to
just be responsible for killing companies.
And so they kind of let them hopefully just blow up, do their
own fraud and they come in afterwards and then, you know,
slap the cuffs on on on the guy in charge, right.
I mean, like, you know, FTX, you don't get a better example of
that, right? You let him blow up and that's
like, well, this, this this bad terrible guy, he's he's the one
we're going to slap the cuffs on him and now we're all good.
It's been that way for a long time.
But I would say kind of that that 08 to to 2010 era really is
when it just kind of became formalized and then Musk is just
kind of a natural progression from that.
As you're explaining this, all I keep thinking about in my head
is one of the ways that Elon Musk has managed to keep his
company's solvent and profitable is by accepting a shit ton of
government money, right. Like whether it's subsidies for
electric vehicles or we're talking about Starlink where
they are accepting government contracts and space.
Where they're accepting government contracts, and I
think I just checked and SpaceX made $55 million profit on $1.5
billion revenue last quarter. He's making money from the
government. So I can only assume, and maybe
this is presumptuous of me, but I can only assume that the
government really doesn't want to be embarrassed by somebody
that they're constantly providing money to to keep his
his enormous corporations propped up.
And while he attacks them, he constantly is attacking Biden or
the Democrats or whoever he wants to attack at that moment.
It sure seems like he's more than willing to accept money
from them to keep his companies going.
And I I'm just curious if you think that plays a role these
government contracts in oh absolutely it does.
And and to be clear to to to characterize from what we've
seen from Spacex's own financials, they are not
anywhere close to being profitable.
They lump payments in and out to kind of either show like they'll
selectively say oh we were cash flow positive for the year.
They'll say it in like middle of quarter one or whatever.
You're right for some bills have to go out the door and then
profits you can do a lot of stuff.
The interesting thing with with with Tesla is that they did
become you know decently profitable.
I think it's at the expense of of releasing more models in the
future and I don't think it's going to just be failable going
for. But they were able to generate,
you know, they generated billions of dollars in profits.
SpaceX has absolutely not. They've incinerated I I've
estimated somewhere around 10 billion in in invested in
capital and then you know several billion in in contract
payments upfront. So it's actually really
interesting because because not only is Musk relying on them for
their kind of top line, but like he's also reliant on this, this
ecosystem that allows that that I guess rewards people to
continue to pump capital into companies that don't return that
capital ever. It's all connected, right.
It's like Musk is is paid at both ends and it's I I'm amazed
has been able to get away with it.
But it's kind of as I, as I said, I kind of appreciate him
for it because it kind of shows how farcical that whole circular
economy is and then you see it from like every type of
regulator, right. So if you look at you know FCC
guys that are these really up and coming attorneys, they go
around and they turn into corporate counsel and then if a
good enough government gig shows up and presidential
administration they'll they'll get that job.
And it's this this door and you see it, it's in, it's very true
in in in the FCC, FAA, FDA. And and as long as someone's
exploiting that you're going to have these kind of bureaucratic
you know enforcement mechanism, they're going to grind to a halt
until the public says we have to actually do something about it.
I think that's I would like to think that that we're at that at
the kind of Nexus or or the peak of that.
But I've been surprised before. So it could just continue on
forever or for a lot longer than I would like.
And kind of like you mentioned we saw.
Forms of backsliding under Obama and then again under Trump,
under both the different parties and like my entire lifetime,
basically growing up to this point, I've been hearing the
narrative from at least one group that often in our society
the role of these regulations. Is for existing players by
coopting the regulatory process to create barriers for new
entries and what are basically just costs for themselves that
they can afford to pay to try to like reduce their competition
and make it so that they have more control over the industry.
In view of that argument and what you know about regulations
and regulators, what do you view is the appropriate role of
regulations and regulators? What should they be trying to
do? There's some truth to that?
Absolutely. I kind of struggle with it
because it has to be kind of both ways, right?
And so one example is there was an EPA rule that was being
updated back in like 2015 or something like that that had to
do with a certain very specific type of organic pesticide
manufacturing process. It had to do with the Clean Air
Act control mechanisms for if you had a scrubber behind a
relief valve or. And so it was just kind of
really esoteric process. And there's only like there's
only like 6 or 7 plants in the US produce this stuff.
And so the EPA started like suggesting rules and then
they're like, oh, actually we need to bring the companies that
actually produce this product in to make sure that we're not
going to make just like a burdensome rule where it says
you must do, you know, this exact thing with your, you know,
pressure relief systems or whatever.
And that's actually not a bad thing like that's a good thing
because then you're you're like you're saying well we want to
make sure that it's not emitting these hazardous chemicals but
also we want to make sure that you can actually functionally
run the plant. And so there's there's good
reasons to do that but it's kind of taken on its head and and and
what that that is exactly what happens is that you know
companies will will lobby for more regulations to create
protectionism. That's something that does
happen. And so to find a balance between
that is really hard. It's not always perfect, but
that's why a lot of things need to be disclosed better to the to
the public, you know, kind of both the rulemaking themselves
and then kind of required disclosures from company through
mechanisms like ESG reporting and stuff like that.
And I think that there needs to just be more openness about how
it happens. It works both ways and there is
a way to kind of over regulate and and stifle competition.
But then also you have to realize that when people say
this that a lot of times they are complaining because it is
going to be a cost to them. I guess for like, yeah,
rulemaking, I would rather that you know, kind of on the
regulatory front, I would rather regulators and this is how kind
of regulators operate. They do treat it like they're
like collecting their toll or their tax and that's not how it
should be. It should be, you know, there
should be some flexibility within the kind of outlines of
the rule where you know there's there's different ways to to
comply with like an end emission standard or whatever.
I'm fine with that. But what what regulators need to
do is that when you really step out of bounds and when you
really mess up that the regulator should not be afraid
to go and just lock the head off of that company.
And I think that's something that we have not been able to
do. One other thing that that, you
know, before we move on to the next thing is that there's been
this talk that like, you know, you know, these regulations are
just killing progress in the US and killing industrial, you
know, progress in the US And that's simply not true because
you can look at USGDP growth. But even more telling is if you
actually look at a graph of liquid natural gas LNG exports
since like 2010, every single one of those plants that exports
liquid natural gas has to go through this very burdensome
NEPA approval process through FERC.
The the energy Regulatory Commission that actually kind of
got a lot of teeth post Enron for a very good reason.
But they they have to go through this process.
And so it's been every single year we've been able to increase
and increase and increase exports.
And so people act like it's just killing progress.
It's just if you look at any sort of metric that would that
would be like number of widgets produced, number of you know
barrels of oil produced, all these other all these other
metrics that would be an indication to prove their point.
It just doesn't. It doesn't, it doesn't flesh
itself out. Any explanation for kind of
shortfalls can almost always be explained by labor costs which
are higher in the US And so that that's that's kind of where I'm
at on it. One kind of interesting
regulatory thing that has been discussed a lot recently.
Because of my job, I end up having to watch a lot of
congressional hearings, which I don't recommend if you enjoy
your sanity. And one of the things that keeps
coming up in the hearings I have to listen to is discussion of
the SEC's new ESG disclosure rules and whether or not those
are going to fundamentally bankrupt the entire global
financial system as soon as they go into place.
Do you have thoughts on these proposed disclosures?
And what they mean in terms of like ESG and what ESG is
supposed to be accomplishing. Yeah, yes, the ESG question, but
I mean like that's that's the, I mean that I named my publication
that before it became such a hot button topic.
So the first thing that I will say is that ESG reporting was
basically revolutionized by oil companies who didn't want to
lose their investment dollars from big state pension funds.
And so oil companies have been doing this for 12 years and they
do, they do a really good job for the most part of disclosing
these risks. I'm not saying that the business
is fundamentally right, there's not a lot of greenwashing.
They absolutely do that but it but in terms of the expectations
under that rule, they have met this requirement for eight years
and medium size oil companies have done it.
Small oil companies have done it and it is not that burdensome.
It is a Nexus For more information to the public.
So I'm all for it on a logistical basis.
I think any complaints about it they don't want to disclose more
risks, more investing risks to the public.
That is what it comes down to. And you know I saw for example
like you know Carson Block who I really respect kind of went on
this like anti ESG tirade which I agree with in a way because
it's like when you kind of characterize this is like an ESG
stock or whatever or you say it's like a green stock that
creates a great opportunity for fraud to come in which we've
seen like I mean like over and over and over again.
I started with Solyndra that's it's, it's it's a tale as old as
time. Things like ESG scores or ESG
rankings or ESG funds, those are ways to collect fees.
But the actual reporting itself, all we're talking about and this
is what I am super for is we need to disclose risks.
We need to disclose you know, risk related to our supply
chain, right. How many are we doing?
Anything about the, you know, the child slave laborers you
know, Nestle Corporation, are we like and what are we doing?
Have we reduced those numbers? What are we doing to address it?
Because these those types of risks and even things like
diversity that people like really melt down about companies
with high levels of diversity. Guess what, you know, especially
across the management, they have less complaints of sexual
harassment, they have less complaints of of of, of racial
abuse and those things can cost real money.
And so my whole argument is like a lot of the ESG stuff, you know
when it comes down to like the rankings or the discussion
points about it, it's very there's really good points that
it's being misused. But at the but at a fundamental
level, all this stuff is is to disclose risks.
That will actually truly impact the financial performance of
these equities going forward. And I think there's some, it's
it's not perfect, it's not great, but there's some real
strengths to it. And if you're an investor, I
don't care if you're, you know, as right wing as they come, more
ESG disclosures just mean more information for you to make good
investment based on and I'm all for that.
I always will be. So that's kind of where I stand
on. It for me, what was most
interesting about it is like you said, most of these disclosures,
many of these things that they're going to be.
Has to disclose. Many of these corporations have
already been disclosing, perhaps not included in their SEC forms
about risk, but in other investor communications or other
things like that. And so what's been kind of
frustrating for me watching it has been the political message
making around it, how the rhetoric has developed around it
and how. It has become like this divisive
issue, despite just being a disclosure requirement, like
even just being asked to disclose certain information,
has become this kind of huge sticking point that blows up for
months, probably going to be years, before it finally gets
implemented officially in that kind of political situation
where we have. At least the way I see it, and
you may disagree with this characterization, like the Obama
administration was really weak on enforcement against white
collar criminals. Basically across the board you
see this criminally, I think Jesse Eisinger does a good job
of describing some of this and like the chicken shit club and
stuff like that. And you see it regulatorily
across the financial regulatory agencies and stuff like that.
Well, also as you mentioned like in the case of Solyndra,
creating these very capital rich programs that had a high risk of
corruption or misuse. Then I look at like the Trump
administration and across there my impression was it was
basically all about reducing or eliminating as many regulations
as possible will also not enforcing and as many of the
existing regulations as you can. So when you have kind of that
political landscape or even disclosure requirements become
discussed as if they represent a potential threat to the
stability of the global financial system.
How do you create meaningful useful or good regulations.
I don't know. And that's been that's been
really the the problem is that we've we've relied on right.
You talk about environmental regulations like you're talking
about the last time there was a major amendment to the Clean Air
Act for example was in like 92 right 1992.
And so people will complain about rules but like the Clean
Air Act specifies mechanisms that the EPA must take every
single five years. They must update these standards
every single year. They're not allowed to backtrack
or whatever. And so people complain about
these mechanisms they put in place, but there's been
regulatory inaction for decades. Right.
And so you're letting these systems that are that truly are
imperfect and then probably sometimes do stifle innovation,
sometimes probably are overly strict and then also don't
enforce well enough where they should in certain cases.
Like, we don't have an actual federal congressional signed
standard on greenhouse gas, so we've had to shoehorn it into
the Clean Air Act or it doesn't really belong.
Yeah, we need regulatory reform. Yeah, we need to rewrite all
this stuff. But I don't know because it's
kind of been politically untenable.
It's like every single politician is kind of OK with
allowing these bureaucratic systems to claw along because
they have worked well enough. And so then you scream about
stuff anytime there's a new rule or you eliminate a rule and it's
just it turns into just a rhetoric that doesn't make any
sense. It's just red meat.
And that's what a lot of this anti ESG stuff is.
It's just it's red meat. I think the ESG rankings are
bad. I think the way it's marketed
does allow greenwashing frauds to suck up capital.
It shouldn't. I agree with that 100%.
But at the end of the day, if you're talking about like
disclosures like that's that's not, I mean like that is not
going to tank the global economy, it just turns into just
shit flinging and that's that's what kind of rulemaking has been
in Congress for. You know, really probably since
you could argue since Obamacare was passed.
That's probably a great, great time that there is a a huge
regulation that was passed that was really contentious and was
pushed forward and since then it's been plugging holes in the
dams. If we go, if you're yelling
about ESG disclosures, like wrecking the global economy, it
just like that's not, that's not an honest argument.
It just isn't. Now, what about the argument
that it's a secret way to turn the United States communist?
Is that a serious argument? No it's not.
I mean, as you know I mean it just it's so funny because I've
I've. I reach out to people that I've,
I've talked to and and pretty smart people and they're just
like, you know what about BlackRock?
What about this? What about whatever?
And I'm like, yeah, I don't like those guys either.
So in ESG is a way for people to collect fees.
And so like if you look it as a way to like collect fees, like,
yeah, I mean like you're going to push for it.
Yeah. The whole, like communist or
whatever. It's like, no, we've had all
sorts of regulatory controls on market disclosures and they've
been updated with time. It's just exhausting to respond
to there. There are great critiques of how
ESG has been kind of marketed and implemented.
I'll scream them from the rooftops, but I just the
rhetoric itself is just doesn't match what we actually see, I
guess. On this point, though, what kind
of ended up getting me to reach out to you, Eric, was that I was
thinking again about this golden age of fraud concept that Jim
Chanos has put forward that we are in this time period where
it's almost like everyone who can do fraud and make and make
money on it is just going for it, right?
There's nothing to impede that process.
There's no obstacles to just going out.
And committing the fraud. And I just started thinking to
myself like it doesn't seem like it's slowing down.
It doesn't seem like even we have the collapse of FTX, we
have SBF, we have all the all these like very intense large
criminal enterprises getting shut down on their own accord.
Like nobody did anything to stop SBF.
He fucked up. And I I think to myself like.
This isn't going to end now this is going to end up being like
it's already been a generation that has had to deal with this
golden age of fraud. Is it going to be another
generation and the generation after that?
Like what is the optimistic and the pessimistic view here of how
we're how this plays out and and I'd like I'd love to hear your
both, both both sides of this argument from you.
I'll start with the pessimistic one and it is that it has gone
on I think a lot longer than people would have expected
having worked in energy and specifically in oil and I moved
to Houston in in 2015. I think that I think the debt
blow up at the end of 2015 and into 2016 should have been a
wake up call. There were these kind of knock
on impacts from from from credit blow ups, right.
You had you had companies that were going out and they were
raising junk debt right to fund EMP projects that were like at
best break even on returning the money for these junk bonds.
And that was before you considered how far these how
quickly the levels from the frack wells would drop off and
would would the duration did not match for the for the well life
versus the bonds you were taking out but even if even if it did
like it didn't even like include like corporate costs right.
So all your SG and A, you know, your MA or your executive
compensation, all that stuff wasn't even.
So like the the entire scheme wasn't your expected value of
return, but like always be negative if you're buying these
bonds and yet they still happen, right.
And so a lot of these started to to roll over and blow up and I
was like OK, we need to have like a reset and a lot of this
stuff and it didn't happen like there was like a mild reset and
we basically went back to status quo.
You look at the Fed balance sheet, you look at the
coordination between, you know, central bankers and basically
that this, this monetary relief that'll just like we're not
going to allow a huge blow up. And I don't think you're going
to get regulatory change without a huge blow up.
And so I think I think that it should have happened back then,
it probably should have happened a few times and hasn't happened
means that we can ratchet up and we can, we can kind of globalize
or we can wallpaper over these these kind of systemic risks
that are tied to fraud. I think, I think that can go on
a lot longer than anyone would like to admit because we've gone
through a few possible credit cycles where they've been
wallpapered over. So that's that's against the
pessimistic view. The optimistic view is that
they're called Black Swan events for a reason and I'm not hoping
for a Black Swan event, right, because you don't.
There's always pain that comes with kind of economic broiling,
but I think that is the opportunity for a moment of
clarity and to be able to go after the types of people that
perpetuate these frauds because they do cause harm when they
unwind. They cause, they cause harm the
whole way, but that harm isn't obvious until it unwinds.
So I don't like the positive case is that there's like a big
blow up, which is maybe not positive.
But in terms of going forward, if we have another, if we have
another GFC type thing and you see people, you know doing
something like on Occupy Wall Street or whatever and there
isn't major regulatory reform, we're hosed.
But that's that's both I guess the positive and the negative
prediction. They're they're the same thing,
I think. I appreciate that.
I think that's a pretty level headed response if still
unfortunate. Eric, is there anything else you
want to leave us with before we we sign off here in terms of
whether it's about Elon or the global, the global financial
system or fraud or whatever? Is there anything you you care
to say as we as we sign off here, There's so much public
record out there that you can dig into and learn about stuff
that's going on. If there's one positive thing,
especially in the US, is that we have really great public
disclosure laws and sometimes they're a little bit hard to get
around, but you can find all sorts of cool stuff and you can
learn things about how the world works.
I always encourage people to do that because a lot of times, you
know, fraud happens because we don't understand how, you know,
companies operate, how governments operate, how
individuals operate. And we we have so many tools
available that are free and that's kind of my passion is to
teach people about that. And so always you can always
e-mail or whatever because I I I think I think there are some
positives out there and I think some of the public disclosure
rules and and especially in the US you can find all sorts of
interesting stuff out. I encourage anyone to become
their own researcher. One thing I really appreciate
about the crypto community is that they do, they do like, they
don't necessarily do a good job of regulating, but when it comes
to like doing kind of forensic investigations, they do a really
good job. And I really enjoy watching that
play out. So there are other avenues you
could do that kind of stuff. I think that's a really
beautiful note to go out on actually.
And I think I agree with you 100%.
I think Bennett and I have both learned about so much just by
having to explore corporate filings and history of for
executives and all this stuff that I I didn't know how to do
this five years ago and now I I love doing it.
So I I agree with you 100% on that.
If anyone doesn't already follow Eric.
Obviously go follow him on Twitter, ESG Hound and if you
can also check out his sub stack which is unbelievably
informative and fantastic and I think, yeah, I think that's
going to do it. Thank you for joining us, Eric.
Thank you for having me. I really appreciate it.