WEBVTT - Former SEC Chair Gary Gensler Talks SpaceX & Mega IPO Risks 

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>And joining me now for more on this here in

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<v Speaker 2>our Washington, DC studio is Gary Gensler, the former chair

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<v Speaker 2>of the Securities and Exchange Commission. Mister Chairman, welcome back

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<v Speaker 2>to Bloomberg TV and Radio.

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<v Speaker 1>Oh, it's good to be with you, Kayley, It's.

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<v Speaker 2>Good to see you. It strikes me that we did

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<v Speaker 2>see SpaceX debut today after Senator Elizabeth Warren wrote to

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<v Speaker 2>the SEC and requested a delay over concern about the valuation,

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<v Speaker 2>concern about how this could impact retirement accounts. If you

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<v Speaker 2>were still helming the SEC, would you have shared those concerns?

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<v Speaker 2>Would you have let this go forward?

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<v Speaker 1>Other people? We are in this job right now, but

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<v Speaker 1>some of the concerns that I think. She also wrote

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<v Speaker 1>another letter to the index providers, and Romayne was just

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<v Speaker 1>speaking about that. And one of the things is that

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<v Speaker 1>NASDAK made an accommodation. They changed their rules. And for

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<v Speaker 1>your listeners, this is important because it's when to the

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<v Speaker 1>index company niece purchase these securities. And what's interesting is

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<v Speaker 1>at SpaceX they have an arrangement where a lot of

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<v Speaker 1>their insiders and venture capital firms and so forth aren't

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<v Speaker 1>going to have the traditional lock up for one hundred

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<v Speaker 1>and eighty days, so it will be a faster phasing

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<v Speaker 1>of this. And in fact, what will be interesting under

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<v Speaker 1>the Nastak rules, once about a third of the stock

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<v Speaker 1>thirty three percent is no longer locked up, which could

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<v Speaker 1>happen as quickly as July of this year, then they

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<v Speaker 1>count all of it in the index, so all of a

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<v Speaker 1>sudden pop into the Nastik one hundred.

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<v Speaker 2>Well, so let me ask you this as you speak

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<v Speaker 2>to the unique nature of this in so many ways,

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<v Speaker 2>do you see this as being unique to SpaceX and

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<v Speaker 2>an Elon Musk led company and changes being made with

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<v Speaker 2>that in nine or is this really setting new precedent

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<v Speaker 2>and this is the way we're going to see these

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<v Speaker 2>things work going forward.

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<v Speaker 1>Well, we're in this little era of mega IPOs and

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<v Speaker 1>we don't know what will happen with anthropic and open AI.

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<v Speaker 1>We just have this Google offering of eighty five billion.

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<v Speaker 1>That's a sign of this enormous interest in artificial intelligence

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<v Speaker 1>and in this case in space I do think there's

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<v Speaker 1>a shift that's gone on here in this particular offering.

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<v Speaker 1>I mean the valuations, Kaylee, with the nineteen percent pop

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<v Speaker 1>today are about one hundred and twenty times revenues not earnings.

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<v Speaker 2>Now, there's no profit here.

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<v Speaker 1>There's no profit here. And two of the businesses are

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<v Speaker 1>pretty understood, their space launch business and their starlink, which

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<v Speaker 1>is called Connectivity. Those two businesses combined only had about

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<v Speaker 1>sixteen billion dollars in revenues in the last twelve months.

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<v Speaker 1>Their artificial intelligence business dooking it out Grock is not

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<v Speaker 1>currently thought of as one of the leading three. That's Google,

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<v Speaker 1>Open Ai, anthropic, and don't count the Chinese models out.

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<v Speaker 1>So where does that play out over the next two

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<v Speaker 1>to five years And are these valuations taking some of

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<v Speaker 1>those risks in that well?

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<v Speaker 2>And I also wonder how much of the valuation is

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<v Speaker 2>valuing the man at the top and Elon Musk, he's

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<v Speaker 2>going to have eighty five percent of the voting share here.

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<v Speaker 2>There are major governance questions that were raised as this

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<v Speaker 2>company went public. How great of a concern is that

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<v Speaker 2>is that?

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<v Speaker 1>To you? Well, they've also shifted some things. They did

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<v Speaker 1>a little bit of We're not going to be in

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<v Speaker 1>Delaware anymore. We're going to be in Texas, right, We're

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<v Speaker 1>going to be under a little bit different governance and

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<v Speaker 1>they also the Securities and Exchange Commission changed some things

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<v Speaker 1>that shareholders can't sue the company, they have to go

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<v Speaker 1>to arbitration, and so the governance is really shifted, and

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<v Speaker 1>those risks have to be understood by shareholders. I do

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<v Speaker 1>think as you start to see these shares come available

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<v Speaker 1>out of lock up and so forth, you'll see where

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<v Speaker 1>this stock will trade. And your earlier segment said, well,

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<v Speaker 1>it's all about will they deliver on this big commitment

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<v Speaker 1>of the new starship. But I also think the uncertainty

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<v Speaker 1>is about how the shares come out of lock up.

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<v Speaker 1>And there's a lot of venture capitalists that will say, listen,

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<v Speaker 1>I love this, but let me take some risk off

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<v Speaker 1>the page. Right, I mean, this is at one hundred

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<v Speaker 1>and twenty times revenues. Maybe I should take some of

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<v Speaker 1>the profits off the page.

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<v Speaker 2>Well, it's lofty to say the least. Of course, we

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<v Speaker 2>had a sense this was an unusual pricing, not the

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<v Speaker 2>typical discovery process. It was just set, but we did

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<v Speaker 2>have a sense of what the demand would be based

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<v Speaker 2>off of private market behavior and also prediction market behavior.

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<v Speaker 2>I want to talk to you more about the prediction

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<v Speaker 2>market's overall mister Chairman, because we've also seen as maybe

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<v Speaker 2>we're reaching the end of it now open questions to

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<v Speaker 2>whether we reach a themorandum of understanding with Iran, but

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<v Speaker 2>we have frequently seen bets being placed on this conflict

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<v Speaker 2>actually things moving in futures markets. I know the CFTC

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<v Speaker 2>is looking into this, but do you think people should

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<v Speaker 2>be concerned that the US capital markets, which are renowned

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<v Speaker 2>for their transparency, that perhaps some people are getting an

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<v Speaker 2>edge that others don't have.

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<v Speaker 1>I think there are always those concerns with this corner

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<v Speaker 1>of the markets, so called prediction markets, where you can

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<v Speaker 1>effectively make bets on whether the President of the United

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<v Speaker 1>States is going to settle with the Iranians or not,

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<v Speaker 1>or on sports or on politics. It's very hard to

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<v Speaker 1>protect the integrity of the underlying events, and so I

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<v Speaker 1>think that's a challenge. I think that we'll see how

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<v Speaker 1>if investors get burned in those markets, then they'll back away.

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<v Speaker 1>It could also undermine the integrity of our traditional financial markets.

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<v Speaker 1>That's what I would worry about too, if it undermines

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<v Speaker 1>the oil, energy and stock markets.

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<v Speaker 2>Do you believe that ultimately prediction markets should be overseen

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<v Speaker 2>by federal regulators versus the States.

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<v Speaker 1>Well, I just followed an Amacus brief in the Sixth

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<v Speaker 1>Circuit just yesterday, and I think this is settled. Actually

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<v Speaker 1>that at least on sports betting, Congress in twenty ten

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<v Speaker 1>in no way said that sports bets are swaps, nor

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<v Speaker 1>did they say the Commodity Futures Trading Commission, which I

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<v Speaker 1>was proud to run, really is the federal regulator to

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<v Speaker 1>oversee it. I talked a lot about prediction markets and

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<v Speaker 1>with Simon Johnson on this podcast that I have power

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<v Speaker 1>and consequences, but we're I think that the Supreme Court

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<v Speaker 1>will ultimately decide what's going to happen there, but just

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<v Speaker 1>a mere assertion by a federal government actor they control this.

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<v Speaker 1>Thirty nine states, Blue States, Purple states, and Red states

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<v Speaker 1>have taken the other side. When does that happen in America?

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<v Speaker 2>Well, we're seeing things happening in America, like someone becoming

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<v Speaker 2>a trillionaire. Perhaps it's capitalism at its finest. If I

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<v Speaker 2>could just quickly ask you whether it's anthropic or open AI,

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<v Speaker 2>or if Grock eventually gets there. When we see the

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<v Speaker 2>power some of these artificial intelligence models have in the cyberspace, specifically,

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<v Speaker 2>how concerned. Are you that the things that are supporting

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<v Speaker 2>are capitalism the financial markets actually could create great financial

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<v Speaker 2>stability risk.

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<v Speaker 1>I wrote about this years ago. I think it's even

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<v Speaker 1>more of the case now. I think we will have

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<v Speaker 1>a financial stability event and it will ripple through with

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<v Speaker 1>millions of people. Yes, yes, but it might well be

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<v Speaker 1>just that a bunch of banks or trading shops are

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<v Speaker 1>relying on the same model and the model goes offline,

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<v Speaker 1>like in that wonderful romantic comedy when Scarlett Johansson was

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<v Speaker 1>playing the romantic interest. The love interest was a computer,

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<v Speaker 1>yes her, and she goes offline, and so that I

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<v Speaker 1>love romantic comedies. But that's I think the issue. But

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<v Speaker 1>in addition, you're right the thread actors, and they can

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<v Speaker 1>be state thread actors, North Korea, Russia, China, or just

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<v Speaker 1>crypto related ransomware actors. And those ransomware actors they're probing.

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<v Speaker 1>They're probing, they're probing, and I was glad to see

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<v Speaker 1>the anthropic figured out how to control it. In some sense,

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<v Speaker 1>I would say mitigate it, mitigate it. But I think

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<v Speaker 1>the thread actors will use and are using AI to

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<v Speaker 1>probe for vulnerabilities at Blumberg and at Goldman Sachs.

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<v Speaker 2>All right, what an optimistic note to leave things on,

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<v Speaker 2>mister Sherman, thank you for joining us. The former chair

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<v Speaker 2>of the SE see Gary Gensler, and let the record

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<v Speaker 2>show he brought up crypto in this conversation.

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<v Speaker 1>Not I