Welcome back everyone. I am Caspian Sea and I'm joined
as usual by my partner in crime. Mr. Bennett Tomlin how are you
today? I'm doing well.
How are you kiss breathing? Heavy trying to set this up here
at home and it's been not the simplest procedure.
It probably won't sound beautiful either.
But My new recording studio is taking longer than expected.
So, we'll make do for now. Today, we're talking about
Michael sailor microstrategy. Not only has Michael gotten into
a bit of hot water in relation to his taxes, but microstrategy
is really not been doing very well over the past year or so, I
don't know. There's a lot of talk about the
history, the current situation and why in a sense, a lot of
this could have been seen when the buying of BTC started So
then it why don't you go ahead and get us started?
Well, I was going to say that I think the most logical place for
us to start is probably with the part about Michael sailu that
our audience is going to know the least about which is his
encounters with the SEC and with microstrategy earlier in the
2000s and you wrote an article about that Cass.
So could you actually give us a little bit of background on
Michael Sailors history before we get The part of the story
where he begins buying absurd amounts of Bitcoin with
leverage, there's a longer version of this.
So I'm going to go ahead and tell the short version because I
think the shorter version can get us started and can get us to
a place where the, the more thorough explanation of what
happened can be understood. But basically microstrategy was
formed in the late 1990s and was a premium stock during the.com
bubble. It, I'm not exactly sure.
Sure, what the exact number was, but it did multiples, and I
think it went up to something like, 350, 400 dollars a share
from. I think it it IPO, dat six
dollars, something like that. There we go.
Now I have it. It went all the way up to three
hundred and thirty, three dollars a share from its IPO
price of $6. So it shot up, it rocketed in up
and price which was a pretty common theme in the late 1990s,
early aughts, unfortunately, What occurred with microstrategy
and Michael sailor was that after this huge uptick in their
price, there was accounting fraud which is a common theme
when it comes to the.com bubble and 1990s, late 1990s, stocks in
general accounting, fraud was rampant.
You look at Enron you look at Worldcom.
This was a price PWC. Pricewaterhousecoopers.
And honestly, they played a bigger factor in role in this
then Mike. Gross strategy.
Nonetheless the price plummeted back down to earth after that
and a lot of the issues were attributed to Michael Sailors,
kind of Reckless Behavior. What they did was they miss
stated their profits and their margins in general during the
1999 quarterly's and it deeply affected their stock.
And up until that point, I believe it was the largest
single-day stock loss. In US history that has been
surpassed now I think by meta actually but in in terms of
value lost but it was one of the largest losses ever we've talked
about. Like, when we did our and Men
episode with David's, Amorous about how part of what Enron was
doing, was getting real Trixie with how they recognized their
revenue, right? To try to recognize Revenue.
That was not as guaranteed as they wanted to pretend it was.
And that was part of what Michael sailor was doing as
well, right? Is that they were recognizing
Revenue. From deals that it just
immediately Bennington. Even deals that had not been
completely signed yet in order to try to maintain the illusion
that they were this profitable Enterprise during the.com
bubble. And I think this is important
now in the context of microstrategy in 2022.
We talked about this a little bit.
When Francine McKenna was on, is that Michael sailor?
Had another little run-in with the SEC recently surrounding his
accounting treatment of his assets again?
Where the SEC had to tell him that the way microstrategy was
trying to report there? Bitcoin Holdings was not
appropriate and that they were going to need to mark them to
Market. And so like right now today on
September 20th, we're looking at microstrategy having Mark to
Market losses on their Bitcoin of about 1.5 billion dollars.
And so I think that it's important to start with that
part of Michael Sailors history. His accounting Shenanigans back
in the.com bubble because the SEC seems concerned that he
might still be up to some accounting Shenanigans.
Yeah. I mean, we might as well get
specific about what he did in the late. 90s.
He left contracts blank so that he could fill them in later.
And basically, reach quarterly estimates, he would count sales
for services sales for software and he would do barter
transactions as sales. So, all of this stuff is, you
know, legally, well one not allowed, but to I think it's
understood. Accountants, should know better
than to allow that kind of Stuff to happen.
So that's what happened in the 90s.
They forced microstrategy to correct those quarterly earnings
once they were restated. They were restated significantly
lower and got rid of almost instantly, got rid of all of
their profits and that nearly bankrupted microstrategy, it
definitely wasn't. Illegal enough to say, Force,
Michael sailor to never work as a, the CEO, or executive of any
form, for a publicly traded company.
It did harm the microstrategy name and then they had to sell
junk bonds to cover the fines and all of that stuff.
So, it wasn't good, it was very Reckless.
And when I wrote my piece, three years ago, 23 years ago now, Oh
my, my point was not that anything.
Michael sailor was going to do anything illegal but that he
clearly had a reckless drive that he was willing to make
careless Reckless kind of decisions to reach whatever
goals, he deemed necessary. So in the context of Michael
sailor, being the kind of person willing to bet it all to reach,
whatever goals, he thinks are necessary.
Let's talk about how he is transformed.
What's ostensibly a business intelligence Corporation into a
leveraged investment vehicle for Bitcoin, where he has converted,
all the spare cash in his company's treasury into Bitcoin.
And has now taken out multiple bonds through multiple different
subsidiaries and stuff to continually double down on this
Bitcoin bet currently mark-to-market down about 1.5
billion dollars but that didn't stop Michael sailor today from
purchasing another 6 million dollars worth.
It's unclear how much a six million dollar purchase is going
to help against 1.5 billion in losses, but Michael sailor will
persist until the heat death of the universe.
Yeah, he's been making some pretty amazing comments over the
course of this. All he also clearly does like a
quota day where he takes from his quoted, a calendar and just
inserts the word Bitcoin into the quote, which is annoying.
But to be fair, he doesn't have very many original thoughts and
so taking it from the calendar helps.
Well, I mean, Let's be fair, though.
Originality, I do think that what he has decided to do with
microstrategy is original. It's awesome.
It is unique. I don't know if it is a good
idea. It's essentially, I mean as you
said, I think microstrategy has become more or less a Bitcoin
ETF. It's it doesn't no one cares
about its business anymore. I was trying to make this point.
To some Bitcoin maximalist. Today, a person who's taking
their excess, individual excess funds that they've been saving
and decides to put them into Bitcoin and is willing to hold
on to that Bitcoin. Let's say forever that they're
going to pass this on to their children or their children's
children, or you know, whatever that's fine.
Like, I'm not going to tell someone, it's like somebody who
it's like Peter Schiff and his gold bet, you know, it's like
okay, like if your only concern in life is inflation or
whatever. I guess you can do whatever you
want. I'm not going to tell you how to
spend your money, but when you're a business and you and
you make this decision to purchase an asset and hold it,
Indefinitely obviously, the goal then is that this asset needs to
appreciate in value either. So you can take out loans
against it or so that you can sell it make a profit and use
the money to reinvest in your company.
But essentially what Michael sailor, I mean, he's taken out
debt against his company but the value of the Bitcoin is not
appreciated. Yeah, yeah.
It's a little bit. Like we talked about with Frank
musi in El Salvador with the Bitcoin Band wear it for a
while. They talked about having like a,
oh, the local small electricity provider be the issuer of the
bond and take on this Bitcoin and what it ended up doing is
fundamentally transforming Leo's balance sheet and so it
effectively became this weird Bitcoin thing.
Instead of really no electricity provider and that's what Michael
sailor has done with microstrategy he's transformed
it into this leverage bet on bitcoin, that isn't an ETF
doesn't follow the same regulations as an ETF.
Isn't a registered like funder that Is ostensibly a business
that has clients and sells software and pays employees but
its balance sheet is overshadowed by this massive
leverage bet on bitcoin and sailor from the position of CEO
is basically argued. This was our only choice we
couldn't reinvest in our business because obviously
Bitcoin is better than our business is effectively what he
said on. Laura shins Unchained podcast a
business has two pieces, your right hand, your left hand, the
right hand is your p&l, your left hand, Your balance sheet,
okay? So you can grow the business by
growing the p&l 20%, a year, or 30 or 50, or 100 percent a year,
if your genius, that's, that's hard.
I mean, you can do it that way. You can also accumulate
shareholder value by growing, the balance sheet by ten twenty,
thirty percent a year. If you told me Bitcoin was going
to grow by 20% a year, I would think.
Well, if you're going to grow by 20% a year, and you have two
billion dollars on your balance sheet, then you're going to
generate four hundred million dollars in.
In investment income or or shareholder wealth in the 12
months. That's a lot easier than
doubling. Well, if we double the revenue,
the company we still couldn't do that.
Right, right. Like we would have to crease the
Revenant accompanied by a factor of five.
Yeah. Okay.
So you know there you can compete that way or compete the
other way. I mean, some people, you know,
some people kind of get Eric to like it's like, you're cheating
by making money and easy way that it would have hurt our
shareholders, for me, to try to use this money to grow
microstrategy, because I can't grow, G.
But Bitcoin is never going to, I don't see.
Bitcoin is having a downturn is another thing.
He said I've done 80% downturn I don't think it's a speculative
asset and I don't think you can. You can quote unquote, take
money off the table. And so I see it is going like up
and up and up forever. And so when you think like that,
technically Superior asset class compared to the dollar, the
Euro, the peso the bowl of are compared to a stock index
compared to Gold compared to Silver compared to everything.
You can conceivably by It is technically thermodynamically
Superior as an asset and when Lake sailor you have enough
shares to vote things however you want.
You end up transforming your publicly traded business
intelligence company into a levered Bitcoin thing and that's
weird that climbs the best crypto last.
Okay what's the second best? There is no second best.
There's no second best crypto acid.
There's a crypto asset is called bit quite right and not only is
it weird but I as I stating again, like businesses need cash
flow, like to be a successful business, you need cash flow.
You need cash in and cash out like even if you're like a lot
of companies operate at a loss for a significant period of
time, right? But what they're doing is
they're making sales, they're doing things that are bringing
in money even if they're costing them money to to bring that
money in. And if you're giving up on your
primary cash flow, and your new purpose is as a vehicle for a,
let's say a commodity, right? We'll call it a commodity, a
vehicle for a commodity. It kind of hog ties you and it
dot. And now you're depending on that
commodity to go up in value because not only are you spot
buying this thing, but you are making levered bets, as you
said, right? Because he is taken out bonds to
accomplish these purchases. Yes, yes.
And like we talked about this a little bit when James safer it
was on discussing the Bitcoin ETF.
We're like the, the scc's failure with microstrategy has
effectively become like at multiple levels.
Right? Like sailor.
Didn't get a dno ban in 2000 and so because of that, he's still
able to be a director and officer of this company, right?
And do all these things. The SEC has not approved.
A spot Bitcoin ETF and So micro strategy becomes a more
compelling option for investors who want spot exposure to
bitcoin despite the fact that it's a dumb way to get that
investment, right? And so like because the SEC has
been trying to use the Bitcoin ETF as leverage so that they can
get surveillance agreements. With all the exchanges and gain
de facto regulatory control over the crypto industry, they have
allowed microstrategy to take this strange position and suck
up this part of the market. Well, still allowing Dealer with
this history of dubious accounting practices to continue
to operate in that way. And so yeah, Seiler says wild,
there is no second best things in Sailor.
Does dumb things but our current Regulatory and enforcement
apparatus has created an environment.
Where sailor doing those things is good for sailor and possibly
good for microstrategy and while not necessarily good for
consumers. It is providing something to
Consumers that there is otherwise no way for them to
necessarily have access. Us too.
Not that I would ever if you want exposure to bitcoin, that
would be the last way. I would suggest you try to seek
it out, but for traditional Finance, folks.
It might in some sense look attractive.
So it is, it is a big regulatory failure.
That's absolutely what it is and I hadn't necessarily considered
that aspect of it, but, but it absolutely is a regulatory
failure and it sucks that. Yeah, the way that traditional
Finance, people have to seek out any exposure to this weather on
the upside or downside is to is to invest in either companies
like microstrategy, which had pivoted from a small but at
least defined business to a commodity holding company or
like, you know, blockchain mining companies which I seem to
fail all the time. So who have to basically
constantly be buying but have to sell high and not sell low.
It has made it incredibly difficult for can traditional
consumers to have that exposure that they would want.
I guess there's more options now with things like Robin Hood and
the gamification of Finance allowing people to have exposure
to just Bitcoin or etherium, or these other other things without
having to buy any ETF or whatever.
But can't I would assume you wouldn't want to have a large
position. On Robin Hood or whatever.
Yeah, I certainly wanted. And yeah, before we move on from
some of these Bitcoin B I just want to really pause and
emphasize for moment, how strange it is that the chief
executive officer at the time and executive chairman of a
corporation said, the best way for us to return Capital to
shareholders is not to do a stock buyback.
We don't think microstrategy is undervalued.
We don't want to buy more of our own stock was not to do it.
Evidence was not to give this cash directly back to Consumers,
was not to invest in growing microstrategy.
He explicitly said he wasn't sure that was a worthwhile thing
to do and was instead for him to go out and purchase Bitcoin to
effectively prop trade the entire corporations, balance
sheet. Well well we have cash.
We're going to have cash. You can't use cash to grow the
company anymore. What can you do with the cash?
You can either buy the stock back, you can dip it in it back
to the shareholders or you can invest it.
What are you going to invested in?
Well, how about an asset inflation hedge that you can't
make any more of pure? Monetary energy was the best way
for him to return Capital to shareholders is effectively what
he said in the unchanging of you and that is a very strange thing
for an executive to say about the corporation, they run.
Like when you really get down to it, it to say that our ability
to produce things to earn value is less than the ability of this
asset to accrue value that no matter how hard we work, we are
worse than this asset is a telling thing for an executive
to say, well, I think what it boils down to is his they's our
convictions that this guy, the reason, our second-best giving
him essentially the benefit of the doubt by saying this is to
suggest that Is religious. He is a religious zealot about
Bitcoin and you know, Faith. Absolutely blinds you.
And so I think The things that come out of his mouth from, you
know, mortgage your house and buy Bitcoin to put in is cyber
when it's all of it. And then and then to continue to
say that stuff while you're being charged with tax fraud,
it's just it's just kind of crazy to me, the amount of
essentially fights Financial advice.
Like I don't know how else to describe it other than He's
basically Financial advice what? He's suggesting.
And yeah, like like you said, it's a guy who says my business
is not as worthwhile as this religion that I follow.
It's like, he doesn't want to be in the publicly traded business
world anymore and who knows maybe with the continuing
devaluation of Bitcoin that could be a very real
possibility? Well, he is no longer the chief
executive of a business intelligence company, right.
He stepped on, to talk about that.
I want to talk about that because I don't think he, I
don't think that. I don't think he stepped down
in. I don't think it was because I
think the reasoning at the time was that he didn't need to be
there for day-to-day operations anymore.
But suspiciously that happened to three weeks before the tax
fraud. I wanted thing was announced and
and yeah I just I just I'm curious if he knew, I'm curious
if he knew what was coming and decided it would be best if he
decides, if he stepped away as CEO.
But I also know that he's still He's the chairman of the board
and holds all the controlling interest of this company so it
really doesn't mean much. No, it really doesn't and let's
talk about the alleged tax evasion for a moment because it
is a fun story. So recently the the Washington
d.c. attorney general announced that they were going after
sailor for possible income tax evasion.
And what's really interesting about it is that it's based on a
whistleblower tip someone in sailors She'll circular,
something like that. Determined, that he was not
paying income taxes in DC, but was spending more than half of
his days there, which means he's supposed to be paying his income
taxes in DC and this person who knows sailor and heard sailor
Bragg allegedly about trying to evade these taxes reported him
in order to get the Whistleblower rewards.
And so now sailor is looking at having going to explain why he
hasn't paid any income taxes in DC and like the last decade and
the additional wrinkle is that there's a whole bunch of other
Silicon Valley, and other billionaires who have moved to
Florida recently in a lot. The same way sailor has and I
wonder how many of them are spending at least half of the
total days of the calendar year at their Florida houses.
Yeah, you gotta have some serious enemies for people to be
willing to take you out or something like that.
So strange to me, because because we keep talking about
this, like, if you're gonna do something illegal, we talked
about it. With, with the North Korea,
what's his name? Thank you, Virgil Griffith, we
talked about it. We've talked about it just just
for all the criminals, he talked about it with them retro.
Old Fowler. And just it's just embarrassing
that these people do these incredibly illegal things in.
Like the one thing you don't do is brag about the illegal things
you're doing, don't brag about it.
Just don't talk about it. And instead they have to talk
about it, they have to it's like that part in The Wire about the
the paper trail is you taking notes on a criminal fucking
conspiracy. Fuck is you thinking, man?
Right? That they all feel compelled and
like we can go back to our Silk Road and we talked about it with
Nicholas Weaver, right? Is that he had this entire log
on his computer describing all of his illegal actions and like
who he was doing them with and like timestamps for all the
illegal things he did and like there were other problems with
that prosecution. Let's not pretend it was perfect
but like There are a shocking number of these individuals who
for example, brag about their new house in DC will claiming to
tax authorities, they live in Florida.
And another great example was like r as lacan with her bag
that it was labeled burner phone.
Like you can't remember that. It's your burner phone, that's
not something. You can't just remember, I mean
it's a pluck with nine cell phones and it was, oh, you know,
I so so that's criminals are clearly sloppy.
Or at least I guess the ones that get caught our sloppy.
We don't know how many are actually doing a really bang-up
job of not announcing their criminal actions and then not
getting caught for them. So so maybe there's plenty of
that going on to and means to those people who can shut their
fucking mouth. We kind of do because every few
years one of their law firms end up having a bunch of their files
turned over to the icij. And then we go, oh my God, all
these people are silently committing tax evasion and all
these other Financial crimes, but they were getting away with
it because they were silent and they continue to get away with
it because our society is structurally bad at Prosecuting,
that kind of thing, right? I think microstrategy and sailor
are a fascinating example of like how how history doesn't
repeat, but it certainly Rhymes and that you didn't need to be a
genius to look at the way. Michael sailor conducted himself
and his business before. All of this Bitcoin, buying
happened to realize that there's probably going to be some issues
down the road here. Even if God bless there, weren't
any the way he goes about doing that.
Business is incredibly Reckless. And that's proven true.
And I just want to emphasize that I think Michael sailor is a
really bad thing for Bitcoin. Like, even ignoring the fact
that he's concentrated this much of the state.
He's become such an important figure head and he says, such
shockingly dumb things. Like we talked about a little
bit back in episode 21. The reason you and I found
Bitcoin interesting and still continue to find Bitcoin.
Interesting. Is that there was this
Compelling in somewhat unique vision of this censorship
resistant transfer of value, right?
And that's a thing that not a lot of other things can claim.
They've got the ability to do and Bitcoins, not Flawless in
that regard, but that's what makes it interesting and
valuable. But Michael sailor in interviews
and stuff tells people who like says that he doesn't care about
that anarcho-capitalist, Stephanie thinks that they
should celebrate. All these institutions coming in
all the crypto Anarchist shall be freaked.
Out that there are some regulations ation and all the
people at BlackRock and pemko and Phi, delta T that have more
money than God will say. Okay, well it's safe.
Now, we might as well buy a hundred billion of it.
Right? What I say to the crypto a
darkest is why don't you just get along with the institutions
in the corporation's for now. Hold your nose and when you've
made billions of dollars or tens of billions take all your money,
buy an island, start your own country and do it your way and
that they're benefiting from Wall Street owning more and more
of the Bitcoin and Just seems so antithetical, to all of the
things that make Bitcoin interesting that all the things
that make Bitcoin potentially worthwhile, Michael Sailors,
stands opposed to basically all of them except tax evasion.
He'll probably start being opposed to more and more stuff
as these charges. Get move forward, maybe but
maybe he'll go full Patrick Byrne and start tweeting about
the Deep State. I I hope so.
So I hope I die do. I hope I hope that is true but I
don't know what the commentary is here.
Other than we have never done a full episode on, Michael sailor.
I don't think either one of us expects him to, you know, do
jail time or expects him to. I don't even think he
necessarily, I don't think he necessarily bankrupts
microstrategy or anything like that.
He brings a lot of attention to himself and it's always for
kind. Of. questionable decision
making, I think, Listen, the shit is cyclical.
There's a good chance. Bitcoin will go back up.
Microstrategy will be back in the green and they'll be okay or
alternatively. It's like as we mentioned,
Michael sailor, has the controlling shares they have
enough assets. They can push their liquidation
price down into the three thousands if they need to if
Michael sailor stays in control and stays committed to bitcoin,
there's no second best he can write it in his As long as it
doesn't hit that liquidation price he might make it out,
okay? It is just I think fundamentally
stupid to transform a business intelligence firm into this
weird special purpose, entity thing for investing in Bitcoin,
it is like regulatory, not how that type of thing is supposed
to be structured. And as a business, it is often
the interests of the thing you're holding can and will
often run like Owner to the interests of growing The Core
Business. And so it's just stupid.
It doesn't mean it's not going to work stupid things, work all
the time. That doesn't mean they're not
stupid, it speaks volumes as to like you said before his
confidence in his own company which is to suggest.
He doesn't have any confidence in it.
That's why he's gone and made it something completely different
than what it it has been for 20 plus years, I would say You're
right in that, maybe it, maybe one day, it has to go.
Private or maybe who knows what ends up happening to it in the
end but you can't as a publicly traded company.
Have that same low time. Preference that bitcoiners
always tell tell everyone else they need to have like oh who
cares? If it's trading it 20,000 right
now. When in 10 years it will be
worth a million or ten million or 100 million.
Well, when you're a business and you have to pay employees, Need
to pay down debts and you have to literally take care of
business every day, not all of your time, preference can be
about what's going to happen in a decade for you as an
individual. It can.
But this is why centering your business around an asset that is
supposed to be the new gold. It's not viable really.
This is a very dumb decision, it's not viable.
I don't know, having some gold or some some Bitcoin or some
whatever some some It in reserves for a company.
I guess, as a hedge could be fine if it's a very small
percentage but that is not. That is not at all.
What is happening here? And yeah, it hasn't worked out
so far. So listen, like Square /, block,
whatever you want to call Jack dorsey's company.
They put a small percentage of their balance sheet in Bitcoin,
they are working on bitcoin. I don't know that it's the best
corporate decision ever but I think it's a totally Sybil one
right Tesla putting their money into Bitcoin a bit more dumb and
a bit less defensible microstrategy.
Like you said, isn't doing that, they are selling millions and
millions of dollars, actively trying to sell another half a
billion dollars in bonds, so that they can continue to just
warp their balance sheet. Yeah, it stinks.
You know what it stinks of is, kind of like a three arrows
Capital supercycle bullshit number has to go up.
And because of that. At faith.
It will go up and that unfortunately isn't how markets
actually work and like in the so in the Lord should interview
that Michael sailor. Did back in at the beginning of
2021. He said like he couldn't even
imagine Bitcoin going through an 80% Draught.
I don't expect an 80% downturn, right?
And we peaked this cycle, it wet 64 and velvety hit a low of like
18 which is like what a 70% draw down.
Like he clearly is not structurally.
Early thinking, he's not thinking clearly and coherently
about the risks and about the about how things could go wrong.
And that's just clear by the amount of embedded, leverage.
She's creating That's it. Yeah, that's the difference.
That's the big difference and I think it is that the advice of
really, unless you know exactly what you're doing and you know
how to hedge. And that's the reason you're
using leverage and options trading.
Then. Okay, that's fine.
But if you're just using leverage to gamble, it's the
same advice. I would give to any person,
which is don't do that. So I think that is the same
advice would go for microstrategy.
It's like, there's no need. There is absolutely no need to
do this. We'll see what happens.
I get bad. I get bad.
Juju about about the future for sailor and microstrategy.
It's going to be a bumpy. A, I'd, I think there's no doubt
about that. Who knows?
If it's a winning ride or not,
but it's going to be a bumpy one.
Join us again. Soon when I leverage my entire
life savings on some Bitcoin to keep this podcast going because
we have no way of doing it. Otherwise, I'm just going to be
doing a highly levered, bet of a minimal amount of money, and
crossing my fingers for the best.
Hopefully SPF buys some Buzz some Bitcoin, please.
Buy some Bitcoin. There is no second best.