Hey Superstonk. As I promised yesterday, the following is the transcript as provided by u/mickben for the Patrick Byrne Interview. Many of us apes don’t like clicking on links so I am posting the transcript in it’s full form. This also helps to ensure that a copy is saved on the sub in case it continues to get scrubbed. I reviewed the transcript and can state that as far as I can tell it is accurate. Obviously given the length of the video I have not verified every word but all of my spot checks were good. Given the length of the video I had to break this up into 3 parts.
Patrick Byrne interview:https://www.youtube.com/watch?v=3XQXPiYDkcI
Full Guide: Thanks u/Idjek 1:01: Byrne discusses his war against naked short selling, and the complex, indirect settlement system 9:45: Mechanics/risk of a short squeeze given the existence of so many naked shorts 13:50: Amazon's competitors tend to get targeted by SHFs... hmm... 21:35 Discusses situation with GME and popkorn 29:49: Discusses T0 blockchain capital market he created and why the SEC isn't happy about it 33:40: Regulatory capture–why regulation doesn't always work like a reasonable person would expect it to 39:40: Talkin bout Gary Gensler 41:54: Theory of dispersed costs and concentrated benefits, public choice theory–big companies spending big money on lobbying to protect policies that benefit them/their industry, at the expense of a huge majority of smaller players (sound familiar...?) 45:45: Chinese diplomat economist talks with Patrick Byrne about FTDs, and then Byrne talks with the Chinese equivalent of the DTCC 10 years later, who says there are no fails in the Chinese stock markets 54:45: Should GME release an NFT to force shorts to close? Bryne suggests they could issue shares on T0 in order to issue a non-fungible dividend 58:12: Recent case against naked short sellers opened by SEC or DOJ, Bryne's involvement with a whistleblower 1:00:06: Hedgies r fuk, and here's why (for context, interviewer is a popkorn stock fan). Bryne then explains how SHFs put pressure on a company they need to kill 1:04:51: The SECs catch-22 argument that issuing an NFT dividend could/may force shorts to close their positions, and that would be illegal manipulation of the stock by the issuer (while SEC simultaneously claims the SHF activity which overshorted the stock in the first place has no effect on the price)
Go back to part 1: Start -23 min 53 Go forward to part 3: 45 min 45 to End
Patrick Byrne Interview Part 2: 23min 53- 45min 45
PATRICK: That's the theory but let me give you something. I fought this fight for 15 years, and I was surprised what happened with "popcorn" because the theory is that at some point that people have to settle their trades. With Overstock, something funny happened. So the SEC in ’05, due to the enormous public pressure, passed a very flimsy regulation against this stuff. It's called Reg SHO and it was as flimsy as they could make it. In fact, it drew widespread criticism and suspicion that what they had done was, in order to allow this to continue, come up with the flimsiest possible rule against it, which is kind of a way of letting something continue so you can't ever really stop it. And that's Reg SHO. They suspended enforcement of Reg SHO twice. They have the authority. It's a terribly flimsy rule, anyway. But they have the authority to say to the company, “We're not even going to protect trading in this company” with that flimsy rule. They did it to overstock.com in the summer of 2019. They created a carve out where the rules on settlement, even the flimsiest guard rail, was let down for the trading in Overstock. The only other time they've done that was they did it to Overstock in like 2009 or 2010, they also suspended enforcement of the rules, so it's just crazy. My point is that we dreamed for years. We knew that there were two or three times many shares of stock held out there as there were underlying shares, and when you looked at the float, the float was actually so tiny. It would have been the biggest short squeeze in history, and they just never so we kept just going to the SEC and saying, “Look, if you just apply the law. We're not asking anything special. Just apply the rules.” And they did this. Well it turned out that because this is allowed, at the heart of our lawsuit, what we discovered is it was responsible for two-thirds of the revenue of Goldman Sachs. Two-thirds of their revenue came from the stock loan desk, which really amounts to turning a blind eye to this kind of mischief.
AL: Yeah.
PATRICK: So it's enormously profitable for Goldman and the major banks, the stock loan business, and the SEC never enforced it. What’s kind of funny, none of this could happen in a blockchain capital market. So I invented this Blockchain capital market called tZERO. It's the first block chain capital market and we started moving our issuing stock there. The SEC came after for us. In other words, they are on the side, it's like some southern town where the sheriff's on the side of the drug dealers. You know, giving them protection and the drug dealers are in your neighborhood and, you keep calling the sheriff for help, he won't help. And then if you go and try to do anything, like you try to put, you know, a fence around your house or something, the sheriff comes and knocks it down because he's really working for the drug dealers.
AL: Yeah, yeah.
PATRICK: It's so corrupt. So that really got me into this whole subject of corruption in the federal government, and that's when I became aware and started forming my theories about that.
AL: With this Citadel and then the market makers because we're- The "popcorn" crowd, including myself, are fighting two people. There’s Citadel the securities company and Citadel the market maker. It’s coming to that point where there’s no way out for them this time. Because that show rule, I don't think it's even in the books. Is it in the books anymore?
PATRICK: Yeah. It's in the books. It’s what's governing everything about Reg SHO.
AL: So what we're seeing is as a behavior by the DTC especially when it comes to capital requirements and margin requirements, right? That’s going up every couple of months now and I see a market correction or a market crash happening in the next maybe 120 days. Some kind of catastrophic event and if that happens, the majority of the collateral that they have is going to be almost completely worthless especially because they’re taking out loans. They don't use their own capital, mind you. They don't use their own money, it's somebody else's money and that's when I realized when this thing happens the correction that's gonna happen this year. Citadel is posing itself with systemic risk, and I mean real risk, because they're gonna default. They're not gonna be able to pay their bills. They’re gonna have to defer to the DTC. DTC is gonna have to start buying shares that are available for purchase and this thing's gonna pop. I knew "popcorn" was a complete winner when the California teachers union bought in. They're the second largest union in the nation-
PATRICK: Yeah.
AL: And the fact that they bought, you know, a crap ton of shares. I was like okay this is actually going to happen. I’m not the only one that sees this, you know.
PATRICK: The thing I will comment on that is you can understand all the laws of economics correctly and be absolutely right. I have a friend, Arab guy, played chess with and I used to. Whenever I started to beat him, I noticed he would like knock a napkin onto the floor and then go to lean and pick it up, and as he did, knocked the chess board over. Just when you think you have these people beat, they change the rules. They change the rules, they knock it over. In our case, you know, it got funny. I invented a blockchain capital market, it's tZERO. It's out there on Wall Street, it's growing like crazy. This blockchain capital market, when we introduced that and we started to move our stock over into it. The SEC, since I got public and some other issues last December 15th, the DOJ and the SEC launched an investigation on me for how I left Overstock two years ago-
AL: Mhm.
PATRICK: Not understanding the fact that the United States government had maybe more of a role in the facts that created that necessity than they're willing to have yet acknowledged. So they want to get me in trouble for leaving Overstock and they're going and saying that the system I created- The thing about Blockchain is there's none of this loosey-goosey-ness. There is just like a token, you know. When I sell you a Bitcoin, you're getting my Bitcoin. It's my Bitcoin moves to your wallet. Well, we could build a stock market just like that and the coins would represent shares of stock so you could use the technology of blockchain of crypto and apply it and build a version of Wall Street that no one could cheat. I thought this was great. I thought the SEC would love this. I thought a bunch of people loved it but, you know, the crooked sheriffs don't want that to happen. All the crooks don't want that to happen, so it meant enormous resistance. Now, I don't know if I’m still under investigation or not. I don't pay any attention. I mean, I’ve gotten so many investigations against me over the last 15 years, I’ve started fighting the system. I don't even know if I’m under investigation anymore now, but they were looking at me saying that creating this Blockchain market and moving Overstock into it was an attempt to manipulate the market. Which is funny because what the blockchain does is it takes out all that slop, all that naked short selling. Why that's so funny is, for decades the SEC has been saying, “Oh, naked short selling doesn't affect the price of the underlying stock. No short selling does. It's just like making a bet in a horserace, it doesn't affect the horse.” The short selling all this stuff doesn't affect the underlying stock, so I invented a system, myself and some colleagues, a Blockchain version of the capital market where none of this craziness can happen anyway and they say that's manipulative. I mean it's so upside-down. They say that, well, if you eliminate this, if you make it impossible for people to do that, that will manipulate the stock up. To which I say, “Wait a second. You're the guys who've been saying for decades that this stuff doesn't affect the price, so why is it that if we move it, that's going to affect the price?” You can't have it both ways, SEC. You can’t have it both ways, DOJ. I got all the SEC statements saying how none of this stuff actually affects the underlying price. So just because I created a system that makes this crazy stuff impossible, how can you tell me that manipulates the price? You're the guys who say this thing doesn't affect that. I just listen to you, SEC. I got it right there off their website. All the explanations about how this naked short selling does not affect the underlying price, so I created a Blockchain system where it couldn't occur, and they say, “Oh, you're trying to manipulate the price.” It's hilarious. These guys, they talking to both sides of the mountain that's because they're all crooks. They're all fucking crooks-
AL: Yeah.
PATRICK: That are trying to get hired at the law firms. So now we get to the subject of regulatory capture. Can we get to some good stuff?
AL: Yeah. Let's get to it
PATRICK: There’s a theory a friend of mine, Milton Friedman, came up with 50 years ago. Fear of regulatory capture, Stigler, Chicago. He said that society sets up regulators to protect us from certain industries but what really happens is those regulators get barred off by the industries that kind of turn against us. The SEC is a paradigmatic example. It was set up to protect us from Wall Street. It's a bunch of Wall Street wannabes who want to get- I shouldn't. Actually I know some people there that I like but I shouldn't criticize government officials like that. I’m sorry. But in general, people understand that if you don’t work there, and you're a good boy, and you regulate nicely, when you’re finished, there's a million dollar job waiting for you up the street at a law firm representing Goldman Sachs to represent them in the same cases that you were just on the other side of. So everybody learns the lesson very early and they're good boys. They'll go after retail people, they'll go after schmucks, but they don't go after the big guys. Because the big guys are future employers and that's regulatory capture, and that's happened to the SEC and as a beautiful example of it. There's a Marxist theory which I subscribed to. He came out of Harvard elite law school, John Hanson, and it's called Critical Legal Studies. You know that movie?
AL: Yeah, yeah.
PATRICK: Well, out of that has grown this theory of deep capture. That it’s not just the regulators, it's the senators, it's the congressmen, it's the-
AL: Fraudulent.
PATRICK: The newspaper, everything is captured, and I’d have to go along with that. Something I did not reveal two years ago when I punched out of Overstock, I punched out in order to go public about my involvement in some certain matters, that we don't have to muddy this conversation up. But I punched out and explained to people that I’d had a connection to Peter Strzok. What I did not explain, at the time, was when Overstock six months before I punched out came under investigation again, the person at the SEC who opened the investigation was a woman named Melissa Hodgman. Melissa Hodgman is Peter Strzok's wife. I got crosswise with Peter Strzok at the FBI and his wife at the SEC opens an investigation on me, which was really intended to keep a knife at my throat to keep me silent, which is one of the reasons I had reached the point I had to say, “Screw this. I got to go public.” And I went public about some things about people.
AL: That's incredible.
PATRICK: You look this up, Melissa Hodgman. Anyone can look this up. Here's another thing about Melissa, who has, I believe, I think they still have an open investigation towards me. I can't wait to get in front of some government officials with a tape running. I just can't wait. I can't wait for that one, but you know they had six investigations against me. Once I got crosswise with Wall Street and started talking about this stuff, they had six investigations against me from the SEC. Three went nowhere and they had to issue letters of like apology, basically. We found nothing and three, they came up with the most trivial, little things they could find that the SEC has ever found. They're coming after me and the woman who started this is Peter Strzok's wife. It was really done because of this mishmash between me and Peter Strzok.
AL: That's incredible. I don't even know what to say right now. Yeah.
PATRICK: This is the other thing I wanted to tell you about Melissa Hodgman. She became an assistant director at the SEC. When Hillary Clinton’s emails-
AL: Yes I remember this.
PATRICK: Got out, the SEC had some corner that they needed to investigate because maybe there's some publicly traded company information or something in there. The SEC investigated. They promoted this woman to assistant or associate director of enforcement, or whatever the title was. So she had the rank to manage that investigation into Hillary, in other words, Peter Strzok's wife managed the SEC investigation into Hillary’s email. And what do you know, didn’t find anything. How odd. Is this corruption sounding to you?
AL: I mean it's just insane.
PATRICK: That she opens an investigation on me to keep me silent, so I won't dish dirt on some mischief Peter's been up to.
AL: We won't bring that up. I will say this much. When I see the new head of the SEC, Gensler, he started about a year ago. He has select mutism. He doesn’t do any work. And he says he’s for the retail investor, he's made some regulatory changes in terms of PYF, payment for water flow and all those things but now-
PATRICK: What did he do on payment for water flow?
AL: They had a huge discussion about should it be outlawed and banned. He’s so full of shit. Guys like Ken Griffin says, “Oh yeah. If you want to get rid of it me. Go right ahead. I mean I don’t need it. It's an expense for me.” Knowing that 70% of his capital, that he makes his revenue comes from front running people and then in their shares. It’s like are you doing anything, Gary, are you asleep? So what's been happening is they've been putting up these posters all around the SEC's headquarters in DC and it’s a missing picture, and it's got Gensler’s face on there. It's like have you seen me. It says I haven’t been to work in years and just making up, you know, stories and stuff and just making it funny. It’s just it's so silly. Where are you Gary Gensler? Why aren't you doing anything?
PATRICK: Gensler doesn't know it, but he's actually a friend of a friend and someone he went to hire actually. I’ve actually heard okay things, that I hear he's smart, and I hear he's not corrupt is what I’ve heard about Gensler.
AL: You think he's a straitlaced?
PATRICK: Well, that's what I’ve been told. He may be, I mean, maybe over his head. It may be too big a problem but it's not that he’s corrupt and I have this one-
AL: He’s a Goldman Guy.
PATRICK: Say again?
AL: He's a Goldman guy.
PATRICK: Then I’m not sure I buy he's not corrupt. They do understand that all the slop in the trading is what really generates the profit, and they hate Blockchain because it takes the slop out, although I understood Gary Gensler is open to blockchain. Everyone's afraid of it because they know it's going to totally shift the profitability of Wall Street. What it really will do is suck out of Wall Street the profitability of, you know, having informational edge and being able to front them.
AL: So, he comes from MIT. They pulled him out of MIT.
PATRICK: That's what I thought, he was an academic. But he was Goldman before MIT?
AL: Yeah, he made it with his brother over there. The two brothers. The two Gensler boys made it. His wife died of cancer. He was at MIT when that happened and then he started teaching a course on blockchain. That's where it started for him and then he started going into the derivatives market after that. In fact, some of his coursework is on YouTube, when you type in Gary Gensler MIT, his entire course is actually listed. You can watch it for free very interesting stuff.
PATRICK: There was a student in the class who was a friend of mine.
AL: Oh, I see. One of the things that I just don't understand is they tweet them, they call the SEC, they send emails, letters, notes. You know, smoke signals, yet he does not act against any of these short sellers and their manipulation or their tactics or anything. There is this thing, it's like what do you do at this point. What do you do?
PATRICK: You know there's another expression in economics. It's one of these things that once you understand it, it explains everything. You see it everywhere, and it's called this theory of dispersed cost and concentrated benefits. Can I take a moment to describe this?
AL: Yes.
PATRICK: [inaudible] government action. So political economy public choice theories, the aero economics, take something like sugar. The average American, my numbers are 15, 20 years out of date, but we were spending, let’s say the price of sugar around the world is 20 cents a pound. But in the United states, we have a tariff on imported sugar and it raises it to 40 cents, so the average American spends an extra 20 cents per pound on sugar. You eat about 75 pounds of sugar a year.
AL: Right.
PATRICK: The average American. When you think of all the bread and everything that, sugar's in everything, even if you're not spooning it into your coffee. So 75 pounds, 20 cents is 15 bucks. So the average American is spending 15 more out of his budget for the sugar and everything than he should in a year. 300 million Americans, that's four or five billion dollars, let's say. So American consumers are four or five billion dollars worse off for that rule that there's a tariff on imported sugar, but that creates several billion dollars of extra profitability, or about a dozen sugar companies in America.
AL: Yeah.
PATRICK: And there's really about three who get the two-thirds of the benefit. And they go to Washington. When I looked at this 15 years ago, they were sprinkling around about 15 million dollars a year around the halls of Washington. By sprinkling 15 million dollars around, they get their tariffs protected and they continue to make their extra 2 billion a year. So it's a system, you might think of it that political mechanisms tend to ratchet this way. When there's a policy that creates a small cost on many people and a concentrated benefit. And that small cost, you're not going to go to congress and lobby to save yourself that 15 bucks a year to get them to get rid of the tariffs. But, it is worth the time of those dozen sugar companies to go to congress and spend 15 million bucks a year, splashing around to keep the tariff in place. So political decisions tend to ratchet and create situations of dispersed cost and concentrated benefit. I would say that what you're describing- Well, the whole SEC regime and regime about stock settlement is another example of that. This fuzziness creates a cost on the market and it comes at small amounts out of all the retail investors in the marketplace and all the investors. It creates a very narrow but enormous benefit, this regulatory regime, that they have in the rules the way they are or not enforcing the rules as you point out, creates an enormous benefit for a small number of guys like Stephen Cohen, Ken Griffith, and the little echo systems around them. So the system lurches from neutral enforcement of the rules to let's not enforce the rules. Let’s create this enormous benefit for the Goldmans and the Ken Griffiths of the world, and it creates costs that are distributed to all the investors in the world, all the other investors who aren't inside the game. That’s the explanation of why the SEC really lets persist this situation and I have one more thing I want to say about that, which is concerning China. Can you give me a minute?
AL: Yeah.
Continue to Part 3
