Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I've been up since
Speaker 1: like three point thirty this morning because I saw a
Speaker 1: raccoon and barked at him, and then we have to
Speaker 1: go outside and chase the raccoon.
Speaker 2: And that took.
Speaker 1: That just woked me up, and then I just didn't
Speaker 1: get back to sleep. I get it pretty early anyway.
Speaker 2: That's brutal.
Speaker 1: My kid's got to boss them. Mostly, I have always
Speaker 1: been pretty good sleepers. The dogs turn today.
Speaker 2: I feel like we should note that we're in two
Speaker 2: separate places right now.
Speaker 1: We're in two separate places. I'm in the Bloomberg podcast studio,
Speaker 1: which is really cool.
Speaker 2: I'm at home, so I actually feel somewhat prepared for this, which.
Speaker 1: Is oh wow. I don't. It's gonna be great. It's
Speaker 1: gonna be all you.
Speaker 2: I don't feel that prepared. But let's let's dive in. Hello,
Speaker 2: something huge, Oh wait, we have to we have.
Speaker 1: To do you don't have to go ab something huge.
Speaker 2: Happened, something huge, the introduction. People know who we are,
Speaker 2: we speak for ourselves.
Speaker 1: Hello's Somebody's the thodcast, the stuff with the money. I'm mad,
Speaker 1: let's kitty, let's go all.
Speaker 2: Right, let's go Warren Buffett.
Speaker 1: Wow, I tell you it happened over the weekend. Berkshire Hathaway.
Speaker 1: Cheryloy reading Warren Buffer was like, by the way, I'm
Speaker 1: out at the end of the year, and you know,
Speaker 1: as happens on the weekend. I'm like, I got to
Speaker 1: write about this. On Monday, my WORFA was like, this
Speaker 1: really news. It's a ninety four year old man retiring.
Speaker 2: It's like, yeah, it is kind of funny and charming.
Speaker 2: How shocking it was, I mean not shocking, but still
Speaker 2: the only theme. Everyone was surprised, even though we also
Speaker 2: knew who his successor was going to be. Yeah, because
Speaker 2: it's been teased since like twenty twenty one.
Speaker 1: Not to be morbid, but like, if you are well regarded,
Speaker 1: successful person who is working successfully at age ninety four,
Speaker 1: people have a reason not to expect you to retire.
Speaker 1: That's like I'm going to be carried out, you know.
Speaker 1: So it's interesting that is your time.
Speaker 2: But at the same time, I feel like one of
Speaker 2: your legacies will be how well you pick your successor.
Speaker 1: That's true, but you're right, I mean, we knew who
Speaker 1: the successor was, but yeah, it's like having a sort
Speaker 1: of orderly transition is useful.
Speaker 2: I kind of want to talk about Craig Abel. I
Speaker 2: mean not to be disrespectful to Warren Buffett, but he's
Speaker 2: interesting in that he doesn't have much of an investing background.
Speaker 2: Like you think about do you think about Charlie Munger,
Speaker 2: you think about Warren Buffett, you think about fantastic investors,
Speaker 2: And he doesn't necessarily have that resume. He's more of
Speaker 2: an operator, like a business operator.
Speaker 1: It's so unique to have a big company that is
Speaker 1: sort of best known as a vehicle for a guy's
Speaker 1: stock picks, and like the guy who made the stock picks,
Speaker 1: it's really good at making stock picks, right, And so
Speaker 1: it's like there's a lot of value created in that company.
Speaker 1: But also you know, they bought a lot of companies
Speaker 1: that they operate and manage, and it would be surprising
Speaker 1: if they took that giant company and transitioned it to
Speaker 1: like the second greatest stockpicker ever, right, Like it sort
Speaker 1: of makes sense to be like, well, like railroads and transcommusation,
Speaker 1: we should make the CEO a guy who knows how
Speaker 1: to run railroads and hopefully the stock picking will take
Speaker 1: care of itself. But like it would be weird if
Speaker 1: they picked a guy with a stockpicking back gund because
Speaker 1: you'd have to run a company.
Speaker 2: Yeah, that's what he's going to do. I mean, I
Speaker 2: read something I forget who it was from which publication,
Speaker 2: but you know, you think about Berkshire Hathaway. It has
Speaker 2: lessened its reliance on like the insurance side of things.
Speaker 2: It's a lot of the energy business now, and that's
Speaker 2: obviously where greg Abel, that's his sandbox. At the same time, though,
Speaker 2: it is fun to think about what Berkshire Hathaway under
Speaker 2: greg Abel could look like. There's a lot of speculation
Speaker 2: that maybe we could see some spin offs. It's this huge,
Speaker 2: sprawling conglomerate with like four hundred thousand employees. Do you
Speaker 2: start to break things apart a little bit? So far,
Speaker 2: greg Able seems to be saying that obviously they're going
Speaker 2: to continue on the track they're on. But it's fun
Speaker 2: to imagine.
Speaker 1: It's pretty early days for him since.
Speaker 2: He's not in charge, you know, but he's had a
Speaker 2: long time to think about it. And it's true it
Speaker 2: doesn't take over until January first of twenty twenty six,
Speaker 2: but I don't know. I imagine in his idle day dreams,
Speaker 2: he thinks about what he's going to do.
Speaker 1: It is in so many ways a weird company, including
Speaker 1: just being a sprawling conglomerate is not really you know,
Speaker 1: hasn't been in vogue for forty years now. And there
Speaker 1: are a lot of things that Berkshire gets away with
Speaker 1: or like is beloved for because of Warren Buffett's presence.
Speaker 1: But without Warren Buffett's presence, you know, at some point
Speaker 1: someone's gonna be like, wow, we could use capital more efficiently.
Speaker 1: We could you know, have a cleaner story to tell
Speaker 1: toone because the story you tells the investors now was like, ah,
Speaker 1: look it's Warren Buffett, right, but like you can't tell
Speaker 1: that story anymore, and then you have to tell a
Speaker 1: story like you know, ooh or an energy company or whatever. Right,
Speaker 1: you go from having this very straightforward, very widely appealing
Speaker 1: story about Berkshire Hathlo to being like, well, we do
Speaker 1: mobile homes and you know we have candy candy, Yeah,
Speaker 1: we want a big chunk of apple for some reason.
Speaker 1: You know, it's like when it's like all of this
Speaker 1: disparate stuff is stuff that Warren Buffett likes. Everyone, Oh,
Speaker 1: Warren Buffett likes it, but it's like all this disparate
Speaker 1: stuff that Warren Buffett liked a long time ago, then
Speaker 1: it's like a less compelling story.
Speaker 2: Also a question maybe they'll have to confront is you know,
Speaker 2: we don't pay a dividend, which is fine because you
Speaker 2: had Warren Buffett there, But now maybe they'll start paying
Speaker 2: a dividend. I don't know.
Speaker 1: Yeah, it's the thing I think about a lot, right,
Speaker 1: Like I write often a headline, a section header. People
Speaker 1: are worried about stock buybacks, right Like, there's this idea
Speaker 1: that like, either a company allocate's capital, right like, it
Speaker 1: has money and it uses that to invest in building
Speaker 1: factories or buying other companies or doing whatever it does
Speaker 1: with the capital, or it returns the capitol to shareolders
Speaker 1: and says you would do a better job of investing
Speaker 1: this capital than we would. Right Nobody is agitating for
Speaker 1: Berkshire to return capital. The shit sareholders because if you're
Speaker 1: an investor in Berkshire, you're not buying a piece. You're like, oh,
Speaker 1: I'm making you like a very focused bet on like
Speaker 1: energy or whatever. Right You're not like I just want
Speaker 1: like their energy exposure. You're buying because you want Warren
Speaker 1: Buffet exposure. And you're buying it because you're certain that
Speaker 1: Warren Buffett is a better alligator of capital than you are. Right,
Speaker 1: you're buying it because you want Warren Buffett, you know
Speaker 1: who has the giant cash pile. You're willing to wait
Speaker 1: around until he finds what he wants to do with
Speaker 1: that cash pile because you're certain that he's going to
Speaker 1: do a better job invest in that cash pile than
Speaker 1: you are. But like most companies, there's some shareholder agitation
Speaker 1: to say, look, you CEO of a company, if you
Speaker 1: hang on to a lot of cash, you'll probably to
Speaker 1: play it in some wasteful way. You'll probably like do
Speaker 1: some vanity project or like invest in some dumb idea.
Speaker 1: You should returned the cash to shareholders, and the shareolders
Speaker 1: will do a better job of figuring out what to
Speaker 1: do with the cash then you will. Yeah, and once
Speaker 1: Warren Buffet Lelys called those normal pressures kind of come
Speaker 1: into play.
Speaker 2: For those keeping track at home, the cash pile is
Speaker 2: currently a like three hundred and fifty billion dollars, so
Speaker 2: it's quite a bit.
Speaker 1: That's a big dividend.
Speaker 2: I'm interested to see what happens to the shares in general.
Speaker 2: We talk about the so and so premium on the
Speaker 2: show frequently. Usually it's the Elon Musk premium. In this
Speaker 2: case it's the Warren Buffett premium, which ties into the
Speaker 2: discussion over the dividend nicely.
Speaker 1: Yeah, I don't have a great empirical sense of how
Speaker 1: big the Warren Buffet premium is. I've heard people argue
Speaker 1: that it has historically been large and it's smaller now
Speaker 1: because even like three months ago, like you were discounting
Speaker 1: your relatively short period of the Warren Buffett premium, right,
Speaker 1: You're like, well, Warren Buffett will be investing this money
Speaker 1: for some period of time, but not perpetuity. But yeah,
Speaker 1: it's interesting to see what the Buffet premium will sort
Speaker 1: of watch out to be.
Speaker 2: So we're talking about greg Abel, the successor to Moren
Speaker 2: Buffett in Berkshire Hathaway, but perhaps a less formula has
Speaker 2: also emerged this week. Can I guess, please.
Speaker 1: Guess?
Speaker 2: Friend of the show, black Man Bill Ackman. He's executive
Speaker 2: chairman of Howard Hughes. He finally did.
Speaker 1: He's striking while the iron is hot, Like these are
Speaker 1: like simultaneous actions, right, like he like strike his deal
Speaker 1: with Howard Hughes to take like almost control forty.
Speaker 2: Seven of Howard Hughes holdings. So he is weighing plans
Speaker 2: to build and insure expand the real estate company's remit
Speaker 2: and as he stated plenty of times before, he's trying
Speaker 2: to basically model himself after Berkshire, Hathaway become a modern
Speaker 2: day Berkshire. And the timing was interesting. Buffett announced this
Speaker 2: over the weekend and then this news for Bill Ackman
Speaker 2: broke on Monday. So maybe they just guess at the
Speaker 2: time their real rush.
Speaker 1: To get get it done, Like it's like twenty four
Speaker 1: hours to start the new.
Speaker 2: Four hour turnarounds.
Speaker 1: Yeah, it is like Berkshire in the sense that it
Speaker 1: is not an insurance company that he is acquiring control
Speaker 1: of in order to eventually at an insurance company like Berksure.
Speaker 1: Hathway started as a textile company and then like you know,
Speaker 1: a wired insurance and insurance turned out to be a
Speaker 1: big part of Buffet's success, right because you have like
Speaker 1: the sort of like cheap non callable leverage that allows
Speaker 1: you to make a lot of interesting bets. The Lackman
Speaker 1: would also like to do that but acquiring and ensure
Speaker 1: it would be too easy, so he acquired a real
Speaker 1: estate company to build his Berkshire out of. I don't know, Yeah,
Speaker 1: it is interesting to me as a guy who like
Speaker 1: reads and writes about like hedge funds and high ricercy
Speaker 1: trading prims and stuff. How are the eard Warren Buffett
Speaker 1: is for doing this like really old school thing, which
Speaker 1: is like fundamental analysis, long term buy and hold long
Speaker 1: investing in stocks.
Speaker 2: Right.
Speaker 1: I mean he also, you know, as we're talking about,
Speaker 1: like he also runs a conglomerate, right, and there's a
Speaker 1: lot of operating businesses there. But like he's famous for
Speaker 1: being like ooh, I like coke. I'll buy coke and
Speaker 1: coke COO's op. Right, and he holds it for decades.
Speaker 1: And when you look around it like people who are
Speaker 1: financial celebrities these days forty years ago, like Warren Buffett
Speaker 1: was the best of a group of people who are
Speaker 1: competitors in that business. Right, Like you know you would
Speaker 1: comp him to like celebrity mutual fund managers. Right, but
Speaker 1: you look at it like financial celebrities these days, there's
Speaker 1: not a lot of that, you know, It's mostly like
Speaker 1: people who run hedge funds and are not giving you
Speaker 1: long exposure to large cap equities, but that they are
Speaker 1: doing some more complicated, more market neutral, more like alpha
Speaker 1: generating thing. Stockpickers not stock pickers, and certainly not like
Speaker 1: very long term stockpickers. And the guy who has really
Speaker 1: positioned himself as being that is Bill Ackman, right, Like
Speaker 1: you look at his fund and it's you know whatever,
Speaker 1: it's like twelve or fourteen names that don't turn over
Speaker 1: that often, right, And I'll tell you know, they do
Speaker 1: derivative stuff on the side to the kind of like
Speaker 1: smooth returns, but like the main business is like long
Speaker 1: term fundamental stock picking. So it is interesting that he
Speaker 1: wants to get into the Warren Buffett game and he's
Speaker 1: like the only person who's doing the thing that Warren
Speaker 1: Buffett was doing, which I think is you know, kind
Speaker 1: of passe in many respects, but you know, it still
Speaker 1: has an obvious appeal.
Speaker 2: If you thought the Berkshire Hathaway was an unusual company
Speaker 2: not a normal company, boy, do I have a corporate
Speaker 2: structure for you? Open ai.
Speaker 1: See I think that open aa is a normal tech company,
Speaker 1: Like I think open a is totally normal. Open Ai
Speaker 1: is a private tech company that is backed by venture capitalists.
Speaker 1: And also Microsoftware is a big stake and like Softing, Right,
Speaker 1: so the classic capital structure except for Microsoft like venture
Speaker 1: capitalist and has like a giant slug up money from Softing,
Speaker 1: and it is run by a charismatic visionary CEO, Sam Altman,
Speaker 1: And the explicit proposition of the company to like investors is, look,
Speaker 1: we're not going to like be focused on maximizing profits
Speaker 1: for you in the short term. We're not going to
Speaker 1: be run as a business. We have a vision about
Speaker 1: what is good for humanity, and we're going to pursue
Speaker 1: that long term vision. And when I say we, I
Speaker 1: mean Sam Altman has a vision for what is good
Speaker 1: for humanity and he's going to pursue that long term
Speaker 1: vision and shareholders will not have much ability or desire
Speaker 1: to meddle with that in the pursuit of short term profits.
Speaker 1: And that's like very explicitly the proposition that like Facebook
Speaker 1: put in its ip of perspectives, and that has become
Speaker 1: like standard in Silicon Valley, right, It's like what you
Speaker 1: want as a venture capitalist is a visionary CEO with
Speaker 1: a like mission that is not the short term pursuit
Speaker 1: of profit but has some grand vision of like humanity's
Speaker 1: future and you want to invest in that and kind
Speaker 1: of like take your hand off the wheel and let
Speaker 1: the visionary CEO cook. And that's what's happening here. But
Speaker 1: it's like it's like a nonprofit. There's like all this stuff,
Speaker 1: but like that's what's happening, right. Like the news is
Speaker 1: that like open Aye is a nonprofit that controls a
Speaker 1: for profit basically, and they were going to convert to
Speaker 1: being a regular for profit and now they're not, and
Speaker 1: instead they're gonna be you know, there's gonna be like
Speaker 1: a for profit company and it's gonna be pretty normal,
Speaker 1: and it's gonna have shareholders and one of the big
Speaker 1: shareholders will be the open AI nonprofit. But the nonprofit
Speaker 1: will control it, right, it will have I've said it'll
Speaker 1: have super voting shares something that like rhymes with that, right,
Speaker 1: Like maybe it'll have super voting shares. Maybe it'll have
Speaker 1: a contractual right to appoint the board, but it'll appoint
Speaker 1: the board of the for profit. And you know who
Speaker 1: will run the nonprofit, Well, there's a nonprofit board and
Speaker 1: like the board will sort of perpetuate itself, right, Like
Speaker 1: the current board will pick future board members, and like
Speaker 1: the board is like I don't want to say handpicked
Speaker 1: by Sam Altman, but like there was a nonprofit board
Speaker 1: that fired Sam Altman and then he came back, and
Speaker 1: as a condition of him coming back, he fired that
Speaker 1: board and replaced it with his board. So you know,
Speaker 1: who's gonna disagree with his vision of what's best for humanity?
Speaker 1: Like SoftBank probably not so. I just think it's like
Speaker 1: a very normal tech company with like a lot of
Speaker 1: weird like thing. Yeah, it's a story that like you've
Speaker 1: heard before about Facebook.
Speaker 2: You know, I find it a little bit exhausting, Like
Speaker 2: the lip service. Maybe it's not lip service, but that
Speaker 2: these visionary founders pay to like bettering humanity makes a
Speaker 2: little bit more sense when you're talking about the mission
Speaker 2: of open Ai. The mission of Facebook is pretty rich.
Speaker 2: I mean when you phrase it that way, it just
Speaker 2: sounds like another form.
Speaker 1: I believe it in some form, you know, it's.
Speaker 2: It kind of it rhymes with it.
Speaker 1: It's like very grandiose, right, Yeah, it's in many ways
Speaker 1: like one person's idiosyncratic vision of benefiting humanity. Right, there's
Speaker 1: a broad category of ways that AI can go where
Speaker 1: Sam Altman will be like that was great for humanity,
Speaker 1: and everyone else will be like, no, it wasn't right,
Speaker 1: Like that's like a distinctly possible outcome.
Speaker 2: Yeah, so how it stands right now? So Sam Altman
Speaker 2: wanted to completely separate from the nonprofit board his nonprofit
Speaker 2: over verseers. That's not happening. They're now a PBC, which
Speaker 2: it seems like wasn't a common structure until you started
Speaker 2: seeing these AI labs.
Speaker 1: Yeah, there were a bunch of them. Like it's been
Speaker 1: a thing for like more than a decade.
Speaker 2: Nap.
Speaker 1: Yeah, the non open AI AI labs got really into
Speaker 1: being public benefit corporations. The idea of a PBC is
Speaker 1: that you can run the company. The board can run
Speaker 1: a company with like the explicit ability to consider things
Speaker 1: other than shareholders right to consider the good of humanity,
Speaker 1: which I kind of think companies can do. Anyway, I
Speaker 1: don't know how material it is to be a PBC,
Speaker 1: I mean, reading between the lines, just the teeny bit.
Speaker 1: They wanted to be a for profit company where the
Speaker 1: nonprofit board owned a minority of the shares and a
Speaker 1: majority of the directors were elected by normal shareholders, and
Speaker 1: what they have now gotten is that, except that the
Speaker 1: nonprofit board controls the for profit board controls the you know,
Speaker 1: as a majority of voting stake in the for profit company,
Speaker 1: and so it gets to a point the board of
Speaker 1: the for profit company. But it's a pretty minor difference,
Speaker 1: I think, well, sorry, it's not a minor difference. It's
Speaker 1: a minor structural difference. It's a major difference whether the
Speaker 1: company is sort of alter controlled by a board answerable
Speaker 1: to shaholders, or ultimately controlled by a board you know,
Speaker 1: answerable to the good of humanity as somewhat filtered through
Speaker 1: Sam Maltman's visions.
Speaker 2: I don't know. Again, it kind of reminds me of
Speaker 2: ESG because you think about oil companies getting dinged for
Speaker 2: not prioritizing shareholders and starting to like care about the environment.
Speaker 2: Maybe if they were PBCs, they would be insulated from
Speaker 2: those critiques.
Speaker 1: Yeah. I think it'd be hard to convert a whole
Speaker 1: company to a PBC, but it would be interesting to try.
Speaker 2: Yeah, it would be fun. If I were starting a
Speaker 2: company right now, I would probably structure myself as a PBC.
Speaker 2: It seems like it just gives you a layer of protection.
Speaker 1: Yes, yes, exactly like a PBC. This is what I'm
Speaker 1: saying about. Like the vision if you're any like a
Speaker 1: PBC at the margin, makes you less answerable to shareholders
Speaker 1: and gives you more ability to be like, no, we're
Speaker 1: considering other stakeholders or other interests, right, and like that's
Speaker 1: always additive to the flexibility of a CEO and a board.
Speaker 2: Right.
Speaker 1: It always gives you an ability to say no to
Speaker 1: something you don't want to do because you're like, oh,
Speaker 1: we can a difference stakeholder, right, Like it's insulation from pressure, right.
Speaker 1: And it is phrased or interpreted as like, this company
Speaker 1: has more obligations because it has obligations to humanity as
Speaker 1: well as sharelders, But in fact, it means it has
Speaker 1: fewer obligations because it means it doesn't have like a
Speaker 1: binding obligation to shaolders in the same way that a
Speaker 1: regular company does. And like the obligations to humanity are
Speaker 1: not particularly binding, and so you just get to make
Speaker 1: more decisions based on what you want to do rather
Speaker 1: than what the s shelders want. This is my cynical take.
Speaker 2: I like this, so, I mean, I don't know, it's
Speaker 2: just it's a it's humanity is a broad church, and
Speaker 2: what's good for it is open to interpretation.
Speaker 1: I do. I'm gonna say two other things about this.
Speaker 1: So one, I'm saying that open AI is now in
Speaker 1: a position where it can do what it thinks is
Speaker 1: best for humanity based on Sam Waltman's vision or what
Speaker 1: is best for humanity. That's not quite true. So first
Speaker 1: of all, there is a board, and the board you know,
Speaker 1: has to exercise its own independent judgment, and like you know,
Speaker 1: it's not totally under the control of Sam Waldman, who
Speaker 1: is not a sheldering, because only whatever moral power he
Speaker 1: brings to it, and like one board seat, moral power
Speaker 1: is quite big because when he got fired, all the
Speaker 1: board got fired too. But anyway, but the other person
Speaker 1: who has a lot of say over open AI's vision
Speaker 1: for humanity is the Attorney General of the state of California,
Speaker 1: also other attorneys like Delaware, but like largely California. Because
Speaker 1: open a is controlled by a nonprofit, the nonprofit is
Speaker 1: subject to like state attorney general jurisdiction, and the attorney generals,
Speaker 1: particularly of California, had a lot of input into this
Speaker 1: this for profit conversion. And I think still do like
Speaker 1: get to sign off on like the current structure, and
Speaker 1: they presumably have some power going forward. If, like open AI,
Speaker 1: the nonprofit says we are going to appoint Skydeat to
Speaker 1: the board of the public company so it can slay humanity,
Speaker 1: the California Attorney General can be like, no, that's not
Speaker 1: in the best interests of humanities who don't do it right.
Speaker 1: There's some oversight of nonprofits that exists here that wouldn't
Speaker 1: exist if it was just a regular public company. So
Speaker 1: I don't know how that's going to work. I don't
Speaker 1: normally think that's super activist oversight, but because of all
Speaker 1: the weird, you know, stuff that has gone on with
Speaker 1: open AI, you know, you know, the California Attorney General
Speaker 1: is paying close attention, and so there is some opportunity
Speaker 1: for that oversight to matter. The thing I think is
Speaker 1: interesting is, like, you know, I've said, this is a
Speaker 1: normal company with a founder with a vision, blah blah blah.
Speaker 1: But the one thing that makes it not normal is
Speaker 1: that Sam Altman owns zero shares of this company, and
Speaker 1: I don't know how that plays out, right, Like, one
Speaker 1: possibility is that he will get some shares, right, like,
Speaker 1: at some point during this reorganization, he will say, as
Speaker 1: he sort of said before, like in previous iterations, he
Speaker 1: will say, the shareholders, you know, Microsoft SoftBank, However, the
Speaker 1: shows really want me to own stock so that I
Speaker 1: have properly aligned incentives, and so over my objections, I'm
Speaker 1: taking you know, twenty billion dollars worth of open a stock, right, Like,
Speaker 1: that's a pop thing that could happen. But it's hard
Speaker 1: with this reorganization because now there's this two tier structure
Speaker 1: where the nonprofit controls the for profit, and historically open
Speaker 1: ai is nonprofit board has not been allowed to own
Speaker 1: stock in the for profit in order to keep its
Speaker 1: incentives pure, and that reasoning still applies. I don't know
Speaker 1: if they'll still do that, but like it still makes
Speaker 1: sense to say, if you're on the board of the
Speaker 1: nonprofit that is trying to make sure that open ai
Speaker 1: does things that are best for humanity, you shouldn't have
Speaker 1: a huge economic stake in the for profit subsidiary, because
Speaker 1: that would, you know, lead you to make decisions in
Speaker 1: the best interests of profit rather than the best interests
Speaker 1: of humanity. So I think it actually would be kind
Speaker 1: of hard to give him a big slug of stock
Speaker 1: now though I don't really know, and then like, you know,
Speaker 1: how else can he get paid? I mean, my impression
Speaker 1: is that he does not want for material comforts for
Speaker 1: a variety of reasons. You know, he has that a
Speaker 1: career as a you know, founder and venture capitalist before
Speaker 1: open Ai. But he also like you know, like has
Speaker 1: all sorts of stakes and also it's of ai j's
Speaker 1: and business like, there's a lot of ways for Sam
Speaker 1: Altman to fund his lifestyle that are you know, kind
Speaker 1: of float around open ai and compose potential conflicts of interest.
Speaker 1: So it'll be interesting to watch that because he's not
Speaker 1: Mark Zuckerberg er Elon Musk or whatever, where his wealth
Speaker 1: is a you know, twelve digit steak in Open Ai.
Speaker 2: I don't know Sam Almon at all obviously, but I
Speaker 2: do wonder if like he had a time machine and
Speaker 2: he could go back to the founding moments and he
Speaker 2: alone was making the decisions, how would he have set
Speaker 2: open ai up? Would he have just completely skipped all
Speaker 2: this nonprofit drama they're PBC now, But does he wish that,
Speaker 2: you know, he had just founded it or it had
Speaker 2: been founded as a normal company and he was a
Speaker 2: normal startup CEO and it exploded this way.
Speaker 1: It's hard. I think that probably he would have liked
Speaker 1: to skip all this drama and like getting sued by
Speaker 1: Elon Musk and being subject to the oversight of state attorneys.
Speaker 2: General, getting ousted and then brought back in.
Speaker 1: Yeah, getting ousted and brought back happened to a for
Speaker 1: profit ceo as well.
Speaker 2: That's true, and it probably helps with your ORO points.
Speaker 1: Oh yeah, it definitely entrenches his power when he's asked
Speaker 1: it and has to be brought back in twenty four
Speaker 1: hours because like otherwise the company would collapse. Like that
Speaker 1: makes him like pretty essential. But no, I think it
Speaker 1: was a mistake to start it as a nonprofit in
Speaker 1: the sense that they thought it would be less capital
Speaker 1: intensive to build large language models than it was, and
Speaker 1: so they you know, we're like, we're going to do
Speaker 1: this research funded by donations, and then they realized, oh no,
Speaker 1: we need like tens of billions of dollars of donations
Speaker 1: and we're not going to get that, so we have
Speaker 1: to be a for profit. So I think in that
Speaker 1: sense very clearly they would have rather started as a
Speaker 1: more normal company so that they could raise money efficiently
Speaker 1: without getting sued. By Elon Musk. The only caveat to
Speaker 1: that is, like I do think that, like, especially in
Speaker 1: the early days, and I think even a little bit now,
Speaker 1: the overlap between like top AI researchers and people who
Speaker 1: worry about AI alignment is pretty significant. And I think
Speaker 1: early on it was like important to be a nonprofit
Speaker 1: in order to attract people and like motivate people to
Speaker 1: say we're not just like a company, We're building AI
Speaker 1: for the benefit of humanity. I think is good for
Speaker 1: getting researchers. I'm not sure it is anymore. I think
Speaker 1: it was helpful early on, and I'm not sure that
Speaker 1: they would have had the success they have had if
Speaker 1: they are a pure for profit. But you know, there's
Speaker 1: enough like counterexamples where like you know, Google also building ahead,
Speaker 1: so I think probably it would have rather started as
Speaker 1: a for profit.
Speaker 2: One thing I was curious about as I was reading
Speaker 2: one of your columns about this was that this caped
Speaker 2: profit model. The company said that it worked when there
Speaker 2: was really only one company building generative AI, but in
Speaker 2: this era where you have, you know a lot of
Speaker 2: companies who are doing this, that they need to switch
Speaker 2: to the PBC model. I wasn't quite sure how to
Speaker 2: read that, Like, why wouldn't the PBC model make sense
Speaker 2: from the beginning? Why would a capped profit model ever
Speaker 2: make sense?
Speaker 1: I love the cap profit model I've written about Sam
Speaker 1: Alban I've described, but you as a business negging, like
Speaker 1: a lot of what happens at open ai is they're like, oh,
Speaker 1: you know, we're just gonna make too much money and
Speaker 1: it's gonna like destroy the meaning of money. And so
Speaker 1: we're just warning you about that if you invest with us,
Speaker 1: we're gonna give you so much money back that like
Speaker 1: money will lose all meaning. And people are like, oh,
Speaker 1: that sounds really good, right, And so there's a lot
Speaker 1: of ways to express that, and one of them is
Speaker 1: the cap profit be like, guys, I'm really sorry to
Speaker 1: tell you, but once we hit a trillion dollar valuation,
Speaker 1: we can't give you any more money. And people like, wow,
Speaker 1: that sounds pretty good, right. But then, like you know,
Speaker 1: you have all these computing AA companies and they're like, well,
Speaker 1: we're aiming for a ten trillion dollar valuation. You get
Speaker 1: all of it, right, And then it's harder to sort
Speaker 1: of use the cap profit model. But when open ai
Speaker 1: was the only game in town, those warnings were so
Speaker 1: like grandiose that I think they were appealing to investors also,
Speaker 1: like you know, even if they weren't appealing, even they
Speaker 1: were bad people, Well, this is the only game in town.
Speaker 1: Like if you know, if I want AI exposure, I'll
Speaker 1: get this AI exposure up to a cap as opposed
Speaker 1: to nothing. Right, but if they're not the only game
Speaker 1: in town, people rather not of the cap.
Speaker 2: Now they're competing with anthropic to learn like thirty billion
Speaker 2: dollars from soft Bank, so soft Bank would want something cleaner. Yeah, absolutely,
Speaker 2: that makes sense. Shall we take a hard left turn
Speaker 2: and talk about medicaid?
Speaker 1: Right, like the other end of the spectrum.
Speaker 2: What a great racket state governments and hospitals have going on.
Speaker 1: I used to be an equity of his banker, and
Speaker 1: one thing that I did. I'm not going to get
Speaker 1: into the details convertible bond call options over this, but
Speaker 1: like what you do is you're like you go to
Speaker 1: a company and you're like, we're going to sell you
Speaker 1: it's a product, right, and then it costs you like
Speaker 1: sixty million dollars. You're ready to check to us for
Speaker 1: sixty million dollars and the irs will cut your taxes
Speaker 1: by eighty million dollars. And also the product has other
Speaker 1: nice features, but like you know, the IRS will more
Speaker 1: than pay you for the product. This is always true,
Speaker 1: but it is occasionally true sometimes that iOS would pay
Speaker 1: for half of the product. Derote as banker for years
Speaker 1: before I figured out what I was doing, But like
Speaker 1: when you sort of figure out what you're doing, like,
Speaker 1: oh my gosh, Like all products should be like this.
Speaker 1: All products should be like two people get in a
Speaker 1: room and one of them is like, I'm going to
Speaker 1: sell you this thing, and someone else is going to
Speaker 1: pay for it, and then like you know, like you
Speaker 1: have a great time because like you're not like fighting
Speaker 1: to divide the pie because like someone else is like
Speaker 1: providing you the pie. That's what's happening in Medicaid, right, So,
Speaker 1: like what I wrote about this week is like there's
Speaker 1: a Times article about Republicans in Congress trying to get
Speaker 1: rid of the Medicaid provider tax racket loophole. One state
Speaker 1: government calls it meta scam, but basically the idea is
Speaker 1: like Medicaid is like hospitals or doctors or frequently like
Speaker 1: managed care organizations provide medical care to people who can't
Speaker 1: afford it under or insured under medicaid, and they charge
Speaker 1: the government for that. And typically the way it works
Speaker 1: is that the state government pays some portion of the
Speaker 1: cost and the federal government pays some other portion of
Speaker 1: the cost. It's like, I think it averages to the
Speaker 1: federal government pays sixty percent, the state government pays forty percent,
Speaker 1: and the state is sort of like in charge of
Speaker 1: negotiating with the hospitals. And so someone figured out that
Speaker 1: if the state is paid more, then the federal government
Speaker 1: would match more, and then the state would have, you know,
Speaker 1: a higher cost, but it would get more money from
Speaker 1: the federal government. And then what the state can do
Speaker 1: is it can tax the manage care organizations or the
Speaker 1: hospitals or whoever is provided in care. It can impose
Speaker 1: a special tax on them that takes back the money
Speaker 1: that the state paid. So ultimately the state is paying
Speaker 1: less and the federal government is paying more, and like
Speaker 1: there's like a refund or a payback from the hospitals
Speaker 1: paying the tax to the state. And someone figured this out,
Speaker 1: and someone figured out in the eighties, and like in
Speaker 1: the nineties, Congress passed laws basically regulating how you could
Speaker 1: do this, and the states have gotten better and better
Speaker 1: at gaming the regulations ever since, and they like cheapen
Speaker 1: the cost of Medicaid to the state by like finding
Speaker 1: ways to make the federal government pay more than it's
Speaker 1: supposed to. And now Congress is looking again into eliminating
Speaker 1: that because it does look like cheating.
Speaker 2: Apparently House Speaker Mike Johnson has backed away from this
Speaker 2: because it would be so politically toxic for Republicans in
Speaker 2: swing states.
Speaker 1: Yeah, because it's like a scam. Yeah, but it's a
Speaker 1: scam in the service of providing medical care. Like, it's
Speaker 1: a scam, but it's not like the state governments are
Speaker 1: using it to buy Lamborghinis, right, It's like they're using
Speaker 1: it to provide medical care while like not squeezing their
Speaker 1: budgets too much.
Speaker 2: Right.
Speaker 1: And if you take away this scam, then the states
Speaker 1: that do it have to either like cut back drastically
Speaker 1: on Medicaid or like raise their taxes. And yeah, nobody's
Speaker 1: that excited to do that. And so that's why this
Speaker 1: this scam has persisted because it achieves a basically acceptable
Speaker 1: political outcome. Right, either someone has to pay for this
Speaker 1: care or it has to not be provided and like
Speaker 1: either of those things are sort of toxic, and so
Speaker 1: making the federal government pay for it is kind of
Speaker 1: like the easiest choice, and they're doing it in a
Speaker 1: scammy way. And you could imagine a world in which
Speaker 1: the federal government said, you know, instead of all this
Speaker 1: like gamesmanship, what we're gonna do is federalized medicaid and
Speaker 1: we'll just pay for all of it and will negotiate
Speaker 1: the prices ourselves and it'll be easier. But that doesn't
Speaker 1: seem that likely to happen in the near future, and
Speaker 1: so you.
Speaker 2: Have this scamming no, and in the meantimes, it seems like,
Speaker 2: you know, they're happy to just let this persist as
Speaker 2: it is. It's funny, so forty nine states employ this.
Speaker 2: I mean New Hampshire, I think, is the one that
Speaker 2: calls it meda scam but basically.
Speaker 1: Invented in New Hampshire. Yeah.
Speaker 2: Do you know the one state that does not use
Speaker 2: medicaid providers taxes?
Speaker 1: Isn't it Alaska?
Speaker 2: It is Alaska? And I find that charming. Yeah. I
Speaker 2: was reading a CBS News article about this, and I
Speaker 2: thought this was interesting. I think in the article, one
Speaker 2: of the health providers they talked to said that we're
Speaker 2: still losing money on Medicaid patients, but it goes from
Speaker 2: like sixty percent coverage to eighty percent coverage or how
Speaker 2: much they're actually getting paid. But they quoted a Colorado
Speaker 2: based health system, link in Health saying that it paid
Speaker 2: five hundred thousand dollars in provider taxes, but it netted
Speaker 2: more than three point six million dollars extra from Medicaid
Speaker 2: according to its CEO, which is like fifteen percent of
Speaker 2: its budget.
Speaker 1: And that's how it's supposed to work. Like, the regulations
Speaker 1: around how states are allowed to do this are complicated,
Speaker 1: but the basic idea of the regulations is that if
Speaker 1: you have a provider tax, you're supposed to redistribute money
Speaker 1: from like non Medicaid hospitals to like Medicaid hospitals. So
Speaker 1: it's supposed to actually improve the allocation to Medicaid. Right,
Speaker 1: it can't just be a refund from Medicaid. It has
Speaker 1: to be helpful to the hospitals that tread a lot
Speaker 1: of Medicaid patients. States have found ways to abuse that,
Speaker 1: but that's not even true. But like, that's the basic
Speaker 1: idea is it's supposed to be good for the hospitals
Speaker 1: that treat a lot of Medicaid patients.
Speaker 2: I just like this as an example of a tax
Speaker 2: that hospitals or anyone else is happy to pay.
Speaker 1: I love it as an example of like gams and
Speaker 1: ship right, and like I do the analogy to like
Speaker 1: cope assistance programs, which is like drug companies. If you
Speaker 1: have insurance to buy like traumaceuticals, and you have a
Speaker 1: twenty percent COPE, then a drug company will be like, well,
Speaker 1: we'll make the cost of the drug ten thousand dollars,
Speaker 1: and then you'll have a two thousand dollars cope, and
Speaker 1: we'll just give you the two thousand dollars cope. We'll
Speaker 1: just we'll pay it for you. And then the insurance
Speaker 1: company will pay the drug company eight thousand dollars and
Speaker 1: the drug company will be better off than if it
Speaker 1: had just charged to do a normal and that for
Speaker 1: the drug. And like that's also regulated, but it's also
Speaker 1: like a thing you can do a little bit at
Speaker 1: the margins.
Speaker 2: Right.
Speaker 1: But the other analogy I was thinking of, and this
Speaker 1: is like a tax that people are happy to pay
Speaker 1: sort of is a salt tax deduction. Right, So like
Speaker 1: historically Americans have been able to deduct their state and
Speaker 1: local taxes on their federal taxes. So if you pay
Speaker 1: ten thousand dollars or state taxes, that reduces your federal
Speaker 1: income by ten thousand dollars. And in the first Trump administration,
Speaker 1: I think they capped that at like ten thousand dollars.
Speaker 1: If you make a lot of money and live in
Speaker 1: a high tax state, you can't deduct all of your
Speaker 1: state taxes, and people, you know immediately got to work
Speaker 1: figuring out how to game that. And one classic effort
Speaker 1: that I've written about is that the state could set
Speaker 1: up a charity, right, and the charity is in the
Speaker 1: business just like providing state programs. Right, the charity is
Speaker 1: just an arm of the state, and you can make
Speaker 1: a donation to the charity, and if you make a
Speaker 1: donation to the charity, it's deductible from your federal taxes.
Speaker 1: And it also reduces one for one your state taxes,
Speaker 1: because they'll say, oh, that just counts a state taxes,
Speaker 1: so like, it's not a state tax for federal income
Speaker 1: tax purposes, but it reduces your state taxes. People tried
Speaker 1: that and the irs said no, So that doesn't work.
Speaker 1: But it's a good effort. But the one that I
Speaker 1: really like is if you have business income in that
Speaker 1: pass through a business so like most classically, if you're
Speaker 1: a partner at a law firm, partner at law firm,
Speaker 1: you get your share of the partnership's income just as
Speaker 1: your personal income. Like that's normally how it works, Like
Speaker 1: it just goes on your personal tax return and you
Speaker 1: pay taxes on it. But states figured out that they
Speaker 1: could make the state tax live at the business level.
Speaker 1: So the business pays the state tax, the business can
Speaker 1: deduct the state tax for federal purposes because it's a
Speaker 1: business expense, right, and then you as a partner, get
Speaker 1: lower federal taxes and so like, law firm partners and
Speaker 1: like some other partners of businesses can sometimes avoid the
Speaker 1: state and local tax deduction cap by like a negotiated
Speaker 1: tax that they've worked out with their state. So like,
Speaker 1: there's a lot of this where like state tax authorities
Speaker 1: and people and businesses try to work out ways to
Speaker 1: maximize their own take at the expense of the federal
Speaker 1: tax take. And this is one of them.
Speaker 2: It's just another example of that that game and ship.
Speaker 1: As I started by saying, like this is my career
Speaker 1: for I love I love people. Dividing up text.
Speaker 2: Benefits our listeners can't see. But there's a certain sparkle
Speaker 2: in math. As he describes this, it's.
Speaker 1: Like a lot of tiredness in my eyes. And that
Speaker 1: was The Money Stuff Podcast.
Speaker 2: I'm Matt Luvian and I'm Katie Greifeld.
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